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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________ to ____________
Commission file number 1-4324
ANDREA ELECTRONICS CORPORATION
--------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 11-0482020
- --------------------------------- -----------------------------------
(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
11-40 45th Road,Long Island City, New York 11101
- ------------------------------------------ --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 800-442-7787
------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value American Stock Exchange
$.50 per share
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by checkmark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. (X)
As of March 27, 1996, the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $29,222,901.75
(based on the closing sale price on the American Stock Exchange).
The number of shares outstanding of the registrant's common stock as of
March 27, 1996 was 3,343,650.
DOCUMENTS INCORPORATED BY REFERENCE
The information required in Part III by Items 10, 11 and 12 is
incorporated by reference to the registrant's proxy statement in connection
with the annual meeting of shareholders to be held on June 20, 1996, which
will be filed by the registrant within 120 days after the close of its fiscal
year.
EXHIBIT INDEX ON PAGE 18
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TABLE OF CONTENTS
PAGE
TITLE PAGE 1
PART I 3-10
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ITEM 1. BUSINESS 3-9
ITEM 2. PROPERTIES 9
ITEM 3. LEGAL PROCEEDINGS 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
PART II 10-16
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 10
ITEM 6. SELECTED FINANCIAL DATA 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11-16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 16
PART III 16
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 16
ITEM 11. EXECUTIVE COMPENSATION 16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT 16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 16
PART IV 17-18
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K 17-18
Page 2
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PART I
ITEM 1. BUSINESS
CORPORATE HISTORY
Since its organization in 1934, Andrea Electronics Corporation (the
"Company") has been engaged in the design, development and production of
electronic audio systems, intercommunication systems and related equipment.
The Company's products include its traditional products for military and
industrial applications and its newer Andrea Anti-Noise/(Registered
Trademark)/ products for voice-activated computing, telecommunications and
computer/Internet communications. Marketing of Andrea Anti-Noise/(Registered
Trademark)/ products began during 1995. The Company has developed its Andrea
Anti-Noise/(Registered Trademark)/ technology in response to the decline
during the past several years in its sales of traditional products that has
resulted from the overall reduced requirements of the United States
Department of Defense and reduced industrial demand. While sales of the
Company's traditional products still provide a majority of its revenue, the
Company believes that its Andrea Anti-Noise/(Registered Trademark)/ products,
consisting of products for both military and nonmilitary applications, will
become its primary source of revenue during the next several years.
STRATEGY
The Company's strategy is focused on applying its expertise in voice-
based audio technology to developing and commercializing a line of Andrea
Anti-Noise/(Registered Trademark)/ products for emerging computer and
telecommunication applications such as voice-driven interfaces and Internet-
based telephony. The Company believes that these applications require the
enhanced levels of voice quality, intelligibility and reliability that are
cost-effectively provided by its patented Andrea Anti-Noise/(Registered
Trademark)/ technology. In order to achieve widespread adoption of its
Andrea Anti-Noise/(Registered Trademark)/ technology, the Company seeks to
collaborate with large enterprises in telecommunications, computer
manufacturing and software publishing. These arrangements are expected to
allow the Company to leverage its research and development resources and
direct sales efforts. See "Collaborative Arrangements".
The success of the Company's strategy will depend on its ability to
increase sales of it first Andrea Anti-Noise/(Registered Trademark)/ product,
the ANC-100 Computer Headset, commercially introduce additional Andrea Anti-
Noise/(Registered Trademark)/ products, maintain the competitiveness of its
Andrea Anti-Noise/(Registered Trademark)/ technology through further research
and development, and achieve widespread adoption of these products and
technology. No assurance can be given that the Company will be able to
accomplish these objectives. See "Competition".
ANDREA ANTI-NOISE/(REGISTERED TRADEMARK)/ PRODUCTS
Andrea Anti-Noise/(Registered Trademark)/ products include headsets,
handsets and microphones, both for direct sale to end-users and in kit form
for original equipment manufacturers. These products are designed to
transmit voice signals with the high level of quality, intelligibility and
reliability required by the broad range of emerging voice-based applications
in computing and telecommunications. The markets and applications within
these markets include the following:
Personal Computer, Work Station and Computer-based Telephony
Applications
- Speech Recognition for Word Processing, Database and Similar
Applications
- Educational Software
- Multimedia
- Computer Telephony
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- Speech over the Internet
- Voice-activated Interactive Games
Consumer, Residential and Commercial Telephony Applications
- Wire-based Telecommunications
- Cellular and other Wireless Telecommunications
Commercial, Industrial and Military Communications Applications
- Avionics
- Ground Transportation Communications
- Warehouse and Factory Communications
Andrea Anti-Noise/(Registered Trademark)/ products embody the Company's
active noise cancellation ("ANC"), active noise reduction ("ANR"), and noise
reduction ("NR") technologies. ANC microphone technology enhances the
quality of a speaker's voice in environments having relatively high levels
of ambient background noise. ANR earphone technology enhances the quality
of speech heard by a listener in extremely noisy environments, particularly
those characterized by low frequency sounds, such as those in aircraft,
automobiles, trucks and other ground transportation equipment, machine rooms,
and factories. NR earphone technology provides some, but not all, of the
benefits of ANR earphone technology.
PERSONAL COMPUTER, WORK STATION AND COMPUTER-BASED TELEPHONY PRODUCTS
Andrea Anti-Noise/(Registered Trademark)/ products have been designed
for voice-based computer applications and computer-based telephony across a
broad range of hardware and software platforms. Andrea Anti-
Noise/(Registered Trademark)/ products that are designed for voice-activated
computer interfaces to operate application software, such as word processors,
database managers, educational software, multimedia and games, can also be
used for Internet telephony. These products incorporate the Company's ANC
microphone technology to cancel ambient noise in a range of increasingly
noisy environments, from homes and offices to factory floors.
Andrea Anti-Noise/(Registered Trademark)/ ANC-100 Computer Headset. The
ANC-100 is a lightweight, uniquely styled product that has a single, high
fidelity earphone to which is attached a dual-function boom microphone. The
earphone is designed to be comfortably worn on the ear or to be placed on a
desktop mount. When worn, the microphone is used in the near field mode;
when placed in the desktop mount, the microphone is used in the far field
mode. The suggested retail price of the ANC-100 is $59.95.
Andrea Anti-Noise/(Registered Trademark)/ANC 200 Computer Handset. This
product consists of a high fidelity earphone and microphone system that
closely resembles the traditional telephone handset. The ANC 200, however,
offers features such as near field and far field use and an "on/mute"
function.
Andrea Anti-Noise/(Registered Trademark)/ANC 500 Computer Headset. This
product consists of a headband with a boom microphone and earphone.
During 1995 the Company commenced sales of the ANC 100 and also entered
into a procurement agreement with International Business Machines Corporation
("IBM") relating to the procurement of ANC 100 products by IBM. While no
assurance can be given, the Company plans to begin selling the ANC 200 and
ANC 500 during 1996. See "Collaborative Arrangements".
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CONSUMER, RESIDENTIAL AND COMMERCIAL TELEPHONY PRODUCTS
The Company has developed two Andrea Anti-Noise/(Registered Trademark)/
products for various applications in telephony: the ANC Telecommunications
Kit; and the ANC 321 - Public Payphone Transmitter Module. Each of these
products has been designed for enhancing voice intelligibility in high noise
environments, such as train stations, airports and city streets. The ANC
Telecommunications Kit is a customized kit for business, residential and
cellular telephones. The ANC 321 - Public Payphone Transmitter Module isa
kit containing a module that can be easily retrofitted into public payphone
handsets. While the Company has not achieved any sales of these two
products, during 1995 the Company licensed certain of its ANC technology to
BellSouth Products, Inc. ("BellSouth"), a subsidiary of BellSouth
Telecommunications, Inc., for use in residential and small business
telephones. See "Collaborative Arrangements".
COMMERCIAL, INDUSTRIAL AND MILITARY COMMUNICATIONS APPLICATIONS
The Company has developed two Andrea Anti-Noise/(Registered Trademark)/
products for various communications applications in commerce, industry and
the military: ANR Headphone Kits and ANR/ANC Headset Systems. The ANR
Headphone Kit is a lightweight, open backed headphone for use in high noise
environments, for example, airplane cabins, to reduce ambient noise and offer
improved audio listening. The Company has sold a limited number of these
kits to a major producer of headphones. The ANR/ANC Headset System is a high
performance communication headset system with both ANR earphone technology
and ANC microphone technology. This product is designed to be adapted to
customer specifications for use in extreme high noise environments, such as
in aircraft, manufacturing and warehouse facilities, and military vehicles.
The Company is currently collaborating with Northrop Grumman Corporation
("Northrop Grumman") to develop military and commercial versions of the
ANR/ANC Headset Systems. See "Collaborative Arrangements".
COLLABORATIVE ARRANGEMENTS
One of the elements of the Company's strategy is to promote widespread
adoption of its Andrea Anti-Noise/(Registered Trademark)/ technology by
partnering with large enterprises in telecommunications, computer
manufacturing, software publishing, and defense systems. The Company has
entered into such arrangements with IBM, BellSouth and Northrop Grumman and
is currently discussing additional arrangements with several major personal
computer companies, software companies, consumer electronic companies and
electronic and computer retailers. No assurance can be given that any of
these discussions will result in any definitive agreements.
IBM Procurement Agreement. In June 1995, the Company executed a
procurement agreement with IBM for the Company's Andrea Anti-
Noise/(Registered Trademark)/ products for the personal computer market.
This agreement contains a non-obligatory, two-year procurement schedule for
approximately $14 million in Andrea Anti-Noise/(Registered Trademark)/
products. Under the agreement, the Company granted IBM certain exclusive
worldwide distribution rights to market, sell, distribute and support Andrea
Anti-Noise/(Registered Trademark)/ products in the personal computer market
and the Company retained the right to distribute these products under the
Company's label to the retail market for personal computers. The Company
began delivery under this agreement in the second quarter of 1995. Sales to
IBM during the first six months under the Agreement, while significant to
the Company, did not meet the established thresholds for IBM to retain its
exclusivity. The Company has, therefore, broadened its sales and marketing
efforts of its Andrea Anti-Noise/(Registered Trademark)/ products to include
all major computer hardware and software manufacturers and providers. Except
for the original exclusivity provisions, Andrea's procurement agreement
remains in place with IBM. Orders from and shipments to IBM under this
procurement agreement for 1996 delivery have substantially increased from
those in 1995.
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BellSouth License Agreement. In October 1995, the Company entered into
a License and Technical Support Agreement with BellSouth. Under the
Agreement, the Company has granted BellSouth certain license rights for a
period of three years covering the incorporation of the Company's Andrea
Anti-Noise(Registered Trademark) ANC technology into residential and small
business telephones and an exclusive right to distribute these telephones to
residential and small business end users in the United States, Canada,
Mexico, South America and Israel. To maintain the exclusivity of these
distribution rights, BellSouth must meet certain minimum production
requirements. The minimum aggregate royalties payable to Andrea over the
three year term of the Agreement if these minimum production requirements are
met would be $7 million. Under the Agreement, Andrea is obligated to furnish
BellSouth with certain engineering and technical support relating to ANC
technology. The introduction of BellSouth telephones incorporating ANC
technology was first announced in September 1994. While the Company
anticipates a substantial increase in licensing revenue from its agreement
with BellSouth, no assurance can be given that this increase will occur.
Northrop Grumman Agreement. In 1993, the Company entered into an
agreement with Grumman Aerospace (subsequently acquired by Northrop Grumman)
for the development of military and commercial ANR/ANC headsets. Under the
Agreement, Northrop Grumman has exclusive worldwide rights to market the
developed ANR/ANC headsets to U.S. and non-U.S. military markets. The
Company's goal with respect to this collaboration is to qualify the developed
ANR/ANC headsets for sale to the U.S. and, eventually, non-U.S. armed forces.
The Company originally had anticipated completion of the initial product
qualification process under its collaborative relationship with Northrop
Grumman during the first half of 1996. This qualification process, however,
has been delayed, and although the process is continuing, no assurance can
be given that it will be completed or, if so, as to the approximate date of
such completion. Moreover, while the Company anticipates that it will
realize a signficant increase in sales revenue from military demand for ANR
and ANC technology, no assurance can be given that such an increase will
occur or, if it does, as to the timing of such increase.
TRADITIONAL PRODUCTS AND GOVERNMENT CONTRACTS
The Company's traditional products have historically included intercom
systems and related components, such as headsets, amplifiers, electronic
control boxes and panels, and wiring harnesses, for military and industrial
applications. The prices of these components range from $100 to $6,000. As
a result of the overall decline in procurement by the United States Department
of Defense and decline in industrial demand during the past several years, most
of the Company's recent sales of its traditional products have been replacement
components for existing intercom systems and equipment previously sold by the
Company. The Company anticipates a downward trend in sales of its
traditional products in both absolute and relative terms. See "Management's
Discussion and Analysis of Financial Position and Results of Operations".
Unfilled orders under government prime contracts and subcontracts may
be terminated at the convenience of the government under the provisions of
statutes or regulations applicable to defense procurement contracts. In the
event of such termination, the Company is entitled to reimbursement for costs
incurred plus a percentage of profit. Sales under defense procurement
contracts are also subject, in certain instances, to price redetermination
proceedings. In the opinion of the Company, such proceedings, if any, would
not have a material effect upon the earnings of the Company.
PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY RIGHTS
The Company relies on a combination of patents, trade secrets, copyright
and trademark law, nondisclosure agreements with its employees, licensees and
potential licensees, limited access to and distribution of its proprietary
information, and other measures to protect its intellectual property and
proprietary rights. There can be no assurance, however, that the steps taken
by the Company to protect its intellectual property will prevent
misappropriation or circumvention of the Company's intellectual property.
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The Company has been granted two patents in the United States covering
its Andrea Anti-Noise/(Registered Trademark)/ technology. The first covers
adaptive noise cancellation and speech enhancement systems and apparatus.
The second covers noise cancellation apparatus for telephony products and
applications. Both of these patents expire in 2012. The Company has also
been granted corresponding patents on the inventions covered by its two U.S.
patents in certain other countries. In addition, the Company has also filed
a number of applications in the U.S. and other countries for patents on other
inventions in the field of noise cancellation and noise reduction technology.
These applications are currently pending, and no assurance can be given that
patents will be issued with respect to them or future patent applications
filed by the Company. Numerous patents have been granted in the fields of
noise cancellation, noise reduction and computer voice recognition, and the
Company expects that products in these fields will increasingly be subject
to such claims as the number of products and competitors in these fields
grows and the functionality of products overlap. Moreover, the laws of other
countries do not protect the Company's proprietary rights to its technologies
to the same extent as do the laws of the United States. There can be no
assurance that any patents issued to the Company will provide it with
competitive advantages or will not be infringed, challenged, invalidated or
circumvented by others, that the patents or proprietary rights of others will
not have an adverse effect on the ability of the Company to do business, that
the Company will be able to obtain licenses to patents of others, if needed,
on terms acceptable to the Company or at all, or that the Company will be
able to develop additional patentable technology that may be needed to
commercialize successfully its existing technologies. The Company is also
subject to the risk of adverse claims and litigation alleging infringement
of the proprietary rights of others. Litigation to establish the validity
of patents, to assert infringement claims against others and to defend
against patent infringement claims can be expensive and time-consuming, even
if the outcome is favorable to the Company.
In connection with marketing its noise cancellation and noise reduction
technologies, the Company has obtained the following trademarks in the years
indicated: "Andrea Anti-Noise" (1994); "QuietWare" (1995); and "Technology
Enhancing Communication" (1995). The duration of each of these trademarks
is ten years following receipt, but it is renewable.
RESEARCH AND DEVELOPMENT
The Company considers its Andrea Anti-Noise/(Registered Trademark)/
technology to be of substantial importance to its competitiveness in the
markets in which this technology has application. To maintain its
competitiveness in each of these markets, the Company has organized its
research and development efforts using a market and applications approach for
meeting the requirements of new and existing customers. Consistent with this
approach, the Company's engineering staff interacts closely with the
Company's sales and marketing personnel and, frequently, directly with
customers. The engineering staff is responsible for the research and
development of new products and designs, and the improvement of current
products. Since 1991, substantially all of the Company's research and
development has been in support of developing Andrea Anti-Noise/(Registered
Trademark)/ technology and applications engineering. In 1995, the Company
expended $976,344 for research and development of new products, designs,
systems and product enhancement. Of these expenses, the Company was
reimbursed $38,000. The level of research and development expense in 1995
represented a decline from $1,422,310 of such expenses in 1994, as products
were commercially introduced in 1995 and were no longer in the research and
development phase of their respective life cycles. The Company expects
research and development expenses to increase as it seeks to broaden its
Andrea Anti-Noise/(Registered Trademark)/ products. No assurance can be
given that the Company will be successful in these efforts. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
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SALES AND MARKETING
The Company employs its own sales staff as well as outside sales
representative organizations to market both its traditional intercom products
and its Andrea Anti-Noise/(Registered Trademark)/ products. Traditional
intercom products are marketed to original equipment manufacturers, military
organizations and industrial customers. Andrea Anti-Noise/(Registered
Trademark)/ products are marketed to original equipment manufacturers of
computers, telecommunications equipment and defense systems, software
publishers, retailers and end-users. In addition, under its current
collaborative agreements, the Company's collaborative partners have various
manufacturing, marketing and sales rights to the products covered by the
respective agreements. The Company's collaborative arrangement with IBM
covers the non-exclusive marketing and sale by IBM of Andrea Anti-
Noise/(Registered Trademark)/ products to the personal computer market; the
Company's collaborative arrangement with BellSouth covers the exclusive
manufacturing, marketing and sale by BellSouth of Andrea Anti-
Noise/(Registered Trademark)/ products for use in residential and small
business sold into certain nations; and the collaborative arrangement with
Northrop Grumman covers the development of ANC/ANR headsets for military and
commercial use. While no assurance can be given, the Company anticipates
that it will enter into additional collaborative arrangements for its Andrea
Anti-Noise/(Registered Trademark)/ products. Market acceptance of the Andrea
Anti-Noise/(Registered Trademark)/ products is critical to the success of the
Company.
MANUFACTURING AND ASSEMBLY
The Company conducts assembly operations at its facility in New York
and through subcontractors. Traditional intercom products are assembled by
the Company from purchased components. During initial production runs of
Andrea Anti-Noise/(Registered Trademark)/ products, these products will
also be assembled by the Company at its New York facility from purchased
components. As sales of any particular Andrea Anti-Noise/(Registered
Trademark)/ product increases, assembly operations will be transferred to a
subcontractor in Asia. Assembly of the ANC-100 Computer Headset is currently
performed by this subcontractor.
Certain highly specialized components for the Company's traditional
intercom products sold for military and industrial use have limited sources
of supply, the availability of which can affect particular projects of the
Company. The Company does not believe, however, that its earnings have been,
or will be, materially affected if such components were unavailable.
Most of the components for the Andrea Anti-Noise/(Registered Trademark)/
products are available from several sources and are not characteristically
in short supply. However, certain more specialized components for the Andrea
Anti-Noise/(Registered Trademark)/ products, such as microphones, are
available from a limited number of suppliers and subject to long lead times.
While the Company has to date been able to obtain sufficient supplies of these
more specialized components, no assurance can be given that it will continue
to be able to do so. Shortages of or interruptions in the supply of these more
specialized components could have a material adverse effect on the Company's
sales of Andrea Anti-Noise/(Registered Trademark)/ products.
COMPETITION
The markets into which the Company sells its traditional line of
military and industrial products and into which the Company sells its Andrea
Anti-Noise/(Registered Trademark)/ products are highly competitive.
Competition in these markets is based on varying combinations of product
features, quality and reliability of performance, price, sales, marketing and
technical support, ease of use, compatibility with evolving industry
standards and other systems and equipment, name recognition, and development
of new products and enhancements. Most of the Company's current and
potential competitors in these markets have significantly greater financial,
marketing, technical and other resources than the Company. Consequently,
these competitors may be able to respond more quickly to new or emerging
technologies and changes in
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customer requirements, or to devote greater resources to the development,
marketing and sale of their products than the Company. No assurance can
be given that one or more of these competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technology.
In the markets for its traditional products, the Company often competes
with major defense electronics corporations as well as smaller manufacturing
firms which specialize in supplying to specific military initiatives.
The Company's performance in this market is further subject to several
factors, including dependence on government appropriations, the time
required for design and development, the complexity of product design,
the rapidity with which product designs and technology become obsolete,
the intense competition for available business, and the acceptability of
manufacturing contracts by government inspectors. In the markets for Andrea
Anti-Noise/(Registered Trademark)/ products, purchasers include: original
equipment manufacturers and distributors in the personal computer and
telecommunications industry and the industrial and avionics communications
industry; military procurement organizations; and direct end users such as
individuals and corporations.
The Company believes that its ability to compete successfully will
depend upon its capability to develop and maintain advanced technology,
develop proprietary products, attract and retain qualified personnel, obtain
patent or other proprietary protection for its products and technologies, and
manufacture, assemble and successfully market products, either alone or
through third parties.
EMPLOYEES
The Company employed 81 persons at December 31, 1995, of which 60 were
production workers and technicians, 7 were members of the engineering staff,
and 14 were concerned with administrative and sales duties. None of the
employees are unionized or covered by a collective bargaining agreement. The
Company believes that it generally enjoys good relations with its employees.
ITEM 2. PROPERTIES
The Company owns and occupies the building located at 11-40 45th Road,
Long Island City, New York 11101. The machinery and equipment used by the
Company are maintained in good operating condition and are considered to be
adequate for the business as presently conducted. It is the opinion of
management that the property, plant and equipment are adequately covered by
insurance. As part of the Company's expense reduction program, the Company,
as lessor, entered into a five-year lease agreement in May 1991 for
approximately one-third of its premises at $184,800 per annum. In January
1996, the lessee exercised its renewal option for an additional five years
at the initial annual rate of $231,000 with a 5% annual escalation for the
remainder of the renewal term. See Note 7(b) to the notes to the financial
statements for further information concerning property, plant and equipment.
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ITEM 3. LEGAL PROCEEDINGS
On December 3, 1990, a complaint was filed against the Company by an
individual (the "Plaintiff") in the Suffolk County Supreme Court (the
"Court") alleging wrongful discharge by the Company in violation of his
employment agreement. The complaint seeks damages relating to loss of
salary, past bonuses, lost commissions, unused sick pay and a reimbursement
of a bank loan. In August 1992, the Plaintiff moved for partial summary
judgment on three causes of action. On January 28, 1993, his motion was
granted with respect to two causes of action pursuant to which the Plaintiff
sought damages in the approximate amount of $186,000. The court, however,
in granting the Plaintiff's motion, did not make a determination as to the
amount of damages and directed that a trial be held on the issue of damages.
On February 21, 1996, the Company settled this case for $167,500, including
the amount of the expired capital lease of $27,588 described in Note 8 to the
financial statements. The additional amount of $139,912 due this individual
under the settlement was charged to operations in 1995 and is included in
other current liabilities at December 31, 1995.
In December, 1994, a subpoena duces tecum was issued to the Company by
the United States Department of Defense, Office of the Inspector General,
seeking certain documents pertaining to contracts relating to audio frequency
amplifiers. Documents responding to the subpoena were delivered in January
1995 and to date no claim has been made or threatened against the Company in
connection with this matter. The Company is unable to determine at this
point if any such claim will be made or to what extent, if any, such claim
could have an effect on the financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is listed on the American Stock Exchange
under the symbol "AND". The tables below set forth the high and low sales
prices for the Company's Common Stock as reported by the American Stock
Exchange. On March 27, 1996 there were approximately 518 holders of record
of the Company's Common Stock.
Quarter Ended High Low
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March 31, 1994 26 7/8 15 1/4
June 30, 1994 21 9 7/8
September 30, 1994 27 5/8 11 5/8
December 31, 1994 28 1/4 18 1/4
March 31, 1995 26 5/8 18
June 30, 1995 26 3/4 15 1/2
September 30, 1995 22 1/2 16 1/4
December 31, 1995 18 3/4 11 3/8
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No dividends were paid in 1995 or 1994. The above prices have been
adjusted to reflect a five-for-one stock split effected in the form of a 400%
stock dividend to stockholders of record on May 21, 1993.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
SALES $5,440,792 $3,278,100 $6,527,972 $3,363,675 $2,440,288
COST OF SALES 3,190,226 2,394,828 3,903,585 3,144,228 2,609,488
---------- ---------- ---------- ---------- ---------
GROSS PROFIT (LOSS) 2,250,566 883,272 2,624,387 219,447 (169,200)
RESEARCH AND DEVELOPMENT 976,344 1,422,310 720,278 460,752 115,728
GENERAL, ADMINISTRATIVE
AND SELLING EXPENSES 2,925,460 1,995,434 1,412,270 661,161 518,774
---------- ---------- ---------- ---------- ---------
INCOME (LOSS) FROM
OPERATIONS (1,651,238) (2,534,472) 491,839 (902,446) (803,702)
OTHER INCOME 375,323 234,636 240,454 217,800 62,236
---------- ---------- ---------- ---------- ---------
INCOME (LOSS) BEFORE
PROVISION (CREDIT) FOR
INCOME TAXES (1,275,915) (2,299,836) 732,293 (684,666) (741,466)
PROVISION (CREDIT) FOR
INCOME TAXES - - - - 55,000 6,000 (251,000)
---------- ---------- ---------- ---------- ---------
NET INCOME (LOSS) $(1,275,915) $(2,299,836) $677,293 $(690,666) $(490,466)
========== ========== ========== ========== =========
PRIMARY EARNINGS PER SHARE (.41) (.83) .20 (.27) (.96)
CAPITAL LEASES $ 5,388 $ 17,044 $ 31,823 $ 78,056 $ 21,206
LONG-TERM OBLIGATIONS 2,038,500 38,500 38,500 38,500 38,500
RETAINED EARNINGS
(DEFICIT) $ (2,220,742) $ (944,827) $ 1,355,009 $ 1,694,260 $2,384,926
---------- ---------- ---------- ---------- ---------
TOTAL ASSETS $ 6,551,110 $ 5,016,581 $ 3,356,579 $ 2,457,872 $2,979,433
---------- ---------- ---------- ---------- ---------
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Andrea Electronics Corporation is an end user-focused, applications-
driven technology company. During its six decades of operations, the Company
believes that it has compiled a record of audio excellence in radio,
television, military communications, and most recently, telecommunications
and personal computer communications. Today, the Company's mission is to
provide state-of-the-art communications products for the "voice interface"
markets that are emerging from the convergence of the telecommunications and
personal computer industries. Applications that exemplify this convergence
include computer telephony, speech recognition, speech over the Internet with
additional extensions to multimedia, voice dictation, voice interactive games
and educational software. The Company believes that end users of these and
other voice-driven applications will require microphone and earphone products
that provide high levels of voice quality, particularly, in noisy
environments, for use with personal computers, business and residential
telephones, military headsets, cellular and other wireless telephones, and
avionics communications systems. While no assurance can be given, the
Company believes that its Active Noise Cancellation and Active Noise
Page 11
<PAGE>
Reduction technologies will allow the Company to meet the demand for such
products.
The Company's product development and marketing strategy seeks to
leverage its own research and development resources and direct marketing and
sales staff by seeking collaborative relationships with large enterprises in
the personal computer, telecommunications, software publishing, and defense
industry. Reflecting the implementation of this strategy, the Company began
to distribute its Andrea Anti-Noise/(Registered Trademark)/ Products to the
personal computer and electronics retail and direct market during the second
half of 1995, executed a procurement agreement with IBM Corporation in June
1995, began a collaborative relationship with BellSouth Products, Inc. in
1994 and entered into a licensing and technical support agreement with
BellSouth in October 1995, and began a collaborative relationship with
Grumman Aerospace Corporation (subsequently acquired by Northrop Grumman
Corporation) in 1993. Following the expiration of the exclusivity provisions
of the IBM agreement in December 1995, the Company has extended its sales and
marketing efforts to include all major computer hardware and software
manufacturers and providers. See "Part Item 1-Business-Collaborative
Arrangements".
While the demand for its traditional intercom products by the military
market has declined, the Company believes that there are a significant number
of military applications for its ANC and ANR headsets and communications
systems. A primary purpose of the Company's collaborative relationship with
Northrop Grumman is to develop products specifically for these applications.
The Company believes that these new ANC/ANR products and systems, together
with other ANC microphone products that are being marketed to the U.S.
military under other initiatives, can be marketed to new military customers
as well as the Company's traditional military customers. The Company
originally had anticipated completion of the initial product qualification
process under the collaborative relationship with Northrop Grumman during the
first half of 1996. This qualification process, however, has been delayed,
and although the process is continuing, no assurance can begiven that it will
be completed or, if so, the approximate date of such completion.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Sales
Sales for the year ended December 31, 1995 were $5,440,792, an increase
of nearly 66% over sales of $3,278,100 for the year ended December 31, 1994.
The increase was attributed partially to a significant and unexpected
increase in demand for the Company's traditional military business lines and
to the introduction of the Company's Anti-Noise/(Registered Trademark)/
products. The increase for the year ended December 31, 1995 in sales to the
Company's customer base for its traditional military products has been
contrary to the downward trend in the Company's sales to this market in
recent years resulting from decreases in military appropriations by the U.S.
government. Management does not believe that the increase for the year ended
December 31, 1995 in sales of its traditional products to its military
customer base reflects a reversal of this downward trend in demand for these
products. While the sales of the Company's Anti-Noise/(Registered Trademark)/
products have not comprised a significant portion of total sales of the
Company, management does anticipate an increase in sales of these products
to military and industrial, personal
Page 12
<PAGE>
computer and telecommunications markets. No assurance can be given, however,
that sales of these new products will increase.
For the year ended December 31, 1995, sales from government orders
through both prime and subcontracted orders was $2,436,715, or 45% of sales,
compared to $662,525, or 20% of sales for the year ended December 31, 1994.
For the year ended December 31, 1995, sales from industrial/commercial orders
constituted $3,004,077, or 55% of sales, compared to $2,615,575, or 80% of
sales for the year ended December 31, 1994.
Cost of Sales
Cost of sales as a percentage of sales for the year ended December 31,
1995 decreased to 59% from 73% for the year ended December 31, 1994. The
marked decrease in cost of sales as a percentage of sales for the year ended
December 31, 1995 reflects the results of a cost-cutting and operating
efficiency improvement program implemented by the Company at the end of the
first quarter of 1994.
Research and Development
Research and development expenses for the year ended December 31, 1995
decreased 31% to $976,344 from $1,422,310. The decrease in research and
development expenses can be attributed to the progression of products and
designs of Andrea Anti-Noise/(Registered Trademark)/ products from the
conceptual, prototype, and market test phases into final production release.
Management believes that the decrease in research and development is
temporary and that research and development will increase as the Company
further develops and augments it Andrea Anti-Noise/(Registered Trademark)/
technology and product line.
General, Administrative and Selling Expenses
General, administrative and selling expenses for the year ended December
31, 1995 increased 47% to $2,925,460 from $1,995,434 for the year ended
December 31, 1994. The increase for the year ended December 31, 1995
reflects the marketing and sales expenses such as advertising, packaging, and
promotional expenses associated with the Company's introduction of its Anti-
Noise/(Registered Trademark)/ products to the direct and consumer
electronics retail and catalog markets as well certain non-recurring expenses
related to the agreements with IBM and BellSouth. In addition, an amount
of $139,912 was included in general, administrative and selling expenses for
the year ended December 31, 1995 reflecting the settlement on February 21,
1996 of certain litigation with a former employee of the Company. The total
amount of the settlement was $167,500, including the $139,912 amount and an
additional $27,588 in respect of the expired capital lease described in Note
8 to the financial statements. See "Part I-Item 3-Legal Proceedings". The
Company expects to increase recurring general, administrative and selling
expenses in order to support its sales of its Andrea Anti-Noise/(Registered
Trademark)/ products. The Company plans to introduce additional Anti-
Noise(Registered Trademark) products during 1996 and plans to support these
product introductions with advertising and promotional efforts.
Operating loss
Operating loss for the year ended December 31, 1995 decreased 35% to
$1,651,238 from $2,534,472 for the year ended December 31, 1994. This
decline in operating loss reflects the increase in sales and the improvement
in cost of sales for the year ended December 31, 1995.
Other Income
Other income for the year ended December 31, 1995 increased 60% to
$375,323 from $234,636 for the year ended December 31, 1994. The increase
in other income can be attributed an increase of $101,420 in interest income
resulting from the Company's average higher cash levels and cash equivalents
throughout the year ended December 31, 1995, compared to the year ended
December 31, 1994. These higher levels of cash and cash equivalents
reflected the proceeds to the Company from financings in 1994 and 1995. Rent
and miscellaneous income increased by $41,805 for the year ended December 31,
1995 compared to the year ended December 31, 1994. Of this increase, $38,000
represents reimbursement for research and development performed by the
Company.
Page 13
<PAGE>
Net loss
Net loss for the year ended December 31, 1995 was $1,275,915 compared
to a net loss of $2,299,836 for the year ended December 31, 1994. This
reduction in net loss reflects principally the factors described above.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Sales
Sales for the year ended December 31, 1994 were $3,278,100, a decrease
of 50% from sales of $6,527,972 for the year ended December 31, 1993. The
decrease was attributed to a decrease in new orders for the Company's
traditional products due to the reduced requirements of the United States
Department of Defense for these products combined with the overall general
decline in industrial demand for these products.
For the year ended December 31, 1994, sales from government orders
through both prime and subcontracted orders was $662,525, or 20% of sales,
compared to $2,758,113, or 42% of sales for the year ended December 31, 1993.
For the year ended December 31, 1994, sales from industrial/commercial orders
was $2,615,575, or 80% of sales, compared to $3,769,859, or 58 %, for the
comparable period in year ended December 31, 1993. Sales of Andrea Anti-
Noise products were immaterial during both years.
Cost of Sales
Cost of sales as a percentage of sales for the year ended December 31,
1994 increased to 73% from 60% for the year ended December 31, 1993. The
increase in cost of sales as a percentage of sales for the year ended
December 31, 1994 can be attributed to higher per unit expense allocations
resulting from the decrease in new orders for the Company's traditional
products. Due to this decrease in orders, the Company reduced its work force
at the end of the first quarter 1994. Additionally, the Company increased
its reserve for obsolete inventory by $200,000 as a result of the decline in
new orders for the Company's traditional products.
Research and Development
Research and development expenses for the year ended December 31, 1994
increased 97% to $1,422,310 from $720,278 for the year ended December 31,
1993. The increase can be attributed to the Company's increased activity in
the development and design of Andrea Anti-Noise/(Registered Trademark)/
products.
General, Administrative and Selling Expenses
General, administrative and selling expenses for the year ended December
31, 1994 increased 41% to $1,995,434 from $1,412,310 for the year ended
December 31, 1993. The increase reflects the hiring of additional sales and
sales support personnel, increased promotional and marketing expenses to
support the Company's presence at computer trade shows and increased travel
expense for sales and marketing personnel to potential customers, all in
anticipation of the commercial introduction of Andrea Anti-Noise/(Registered
Trademark)/ products.
Operating loss
Operating loss for the year ended December 31, 1994 was $2,534,472
compared to a $677,293 profit for the year ended December 31, 1993. This
operating loss reflects the significant decrease in sales and the
deterioration in cost of sales for the year ended December 31, 1994.
Other Income
Other income for the year ended December 31, 1994 decreased 2% to
$234,636 from $240,454 for the year ended December 31, 1993. In 1993, the
Company participated in an energy saving and cost improvement program
Page 14
<PAGE>
provided by a local electric utility company and received approximately
$46,000 in rebates for participation in this program. This difference is
reflected in rent and miscellaneous income for the year ended December 31,
1994 and for the year ended December 31, 1993. This decrease was partially
offset by an increase in interest income for the year ended December 31, 1994
to $58,044 from $23,591 for the year ended December 31, 1993.
Net loss/ Net Income
Net loss for the year ended December 31, 1994 was $2,299,836 compared
to $677,293 in net income for the year ended December 31, 1993, reflecting
the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Working capital (total current assets less total current liabilities)
at December 31, 1995 was $5,316,519 compared to $4,091,123 at December 31,
1994. This increase in working capital as of December 31, 1995 reflects an
increase in current assets of $1,495,666 and an increase in current
liabilities of $270,270 during the year ended December 31, 1995. The
increase in current assets reflects an increase in cash of $87,786, an
increase in marketable securities of $10,098, an increase in net accounts
receivable of $476,417, an increase in inventory of $855,090 and an increase
in prepaid expenses and other current assets of $66,275.
The increase in cash of $87,786 reflects net cash used in operating
activities of $2,287,924 and net cash used in investing activities for the
acquisition of equipment (including production tooling and molds and
computers in support of the Andrea Anti-Noise/(Registered Trademark)/
products) of $161,341, offset by the receipt of $2,000,000 in proceeds from
the issuance of convertible debentures and $551,830 from the sale of Common
Stock pursuant to the exercise of stock options.
The increase in accounts receivable reflects shipments of Andrea Anti-
Noise/(Registered Trademark)/ products including military ANC headsets of
$368,000. The increase in inventory of $855,090 reflects an increase of
$615,125 for raw materials purchased for the Company's Anti-Noise/(Registered
Trademark)/ products and an increase of $100,053 almost entirely for personal
computer communication and telephony applications. The Company has sourced
long lead-time items in anticipation of sales of its Anti-Noise/(Registered
Trademark)/ products in 1996.
The increase in prepaid expenses and other current assets includes
$40,139 in prepaid advertising at December 31, 1995 which represents costs
for media services purchased but not yet performed.
The increase in total current liabilities reflects an increase of
$112,196 in trade accounts payable and an increase in other current
liabilities of $194,626, partially offset by a decrease in accrued salaries
and wages payable of $33,429. The increase in trade accounts payable was due
primarily to a build up of raw materials inventory for the Company's Andrea
Anti-Noise/(Registered Trademark)/ products while the increase in other
current liabilities includes an accrual of $139,912 as described in described
in Note 8 to the financial statements.
Management believes that the Company's financial condition is adequate
to support the Company's current level of operations and demand for
resources. The Company expects 1996 expenditures on research and development
to be at least those in 1995 and anticipates a significant increase in
general, administrative and selling expenses in 1996 to advertise, promote,
market, sell, distribute and service the Company's Andrea Anti-
Noise/(Registered Trademark)/ products and technologies.
The Company is not currently committed to any material capital
expenditures. In the event, however, that the Company experiences a
significant increase in demand for its Andrea Anti-Noise/(Registered
Trademark)/ products, the Company will need to raise additional working
capital to support production operations. In addition, the Company
believes that its ability to remedy its existing retained earnings deficit
will depend on profitable growth from the sale of its Andrea Anti-
Noise/(Registered Trademark)/ products and any future equity financings.
While the Company has been exploring various forms of debt and equity
financing, no assurance can be given that, if the Company needs to raise
additional capital, it will be able to do so on favorable terms or at all.
No assurances can be given that demand will increase for any of the Company's
products or, that if such demand does increase, that the Company will be
able to obtain the necessary working capital to increase production and
marketing resources to meet such demand.
Page 15
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedule listed in item 14(a)(1) and
(2) are included in this Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 5, 1995, the Company filed a report on Form 8-K to report that,
on May 4, 1995, the Company dismissed Raich Ende Malter Lerner & Co. as its
independent accountants and subsequently engaged Arthur Andersen LLP as its
new independent accountants for its fiscal year ending December 31, 1995.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item 10 as to directors and
executive officers is incorporated by reference to the information captioned
"Election of Directors" included in the Company's definitive proxy statement
in connection with the meeting of shareholders to be held on June 20, 1996.
The information regarding compliance with Section 16 of the Securities and
Exchange Act of 1934 and the Rules promulgated thereunder is incorporated by
reference therein to the Company's definitive proxy statement in connection
with the meeting of shareholders to be held on May 16, 1996.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item 11 is incorporated by
reference to the information captioned "Election of Directors - Executive
Compensation" included in the Company's definitive proxy statement in
connection with the meeting of shareholders to be held on June 20, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item 12 is incorporated by
reference to the information captioned "Voting Securities" included in the
Company's definitive proxy statement in connection with the meeting of
shareholders to be held on June 20, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
None.
Page 16
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The following financial statements of Andrea Electronics Corporation,
the notes thereto, the related report thereon of independent public
accountants, and financial statement schedules are filed under item 8 of this
Report.
Page
----
Reports of Independent Public Accountants F-1
Balance Sheets at December 31, 1995 and 1994 F-3
Statements of Operations for the years ended
December 31, 1995, 1994, 1993 F-4
Statements of Shareholders' Equity for the
three years ended December 31, 1995 F-5
Statements of Cash Flows for the years ended
December 31, 1995, 1994, 1993 F-6
Notes to Financial Statements F-7
(2) INDEX TO FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants on Schedule S-1
Schedule II - Valuation and Qualifying Accounts S-2
(3) EXHIBITS
See (c) below.
(b) REPORTS ON FORM 8-K
On October 20, 1995, the Registrant filed a report on Form 8-K to report
that, on October 3, 1995, the Registrant entered into a License and Technical
Support Agreement with BellSouth Products, Inc. ("BellSouth"), a subsidiary
of BellSouth Telecommunications Inc., relating to the Registrant's grant to
BellSouth of certain license rights covering the incorporation of Andrea
Anti-Noise(Registered Trademark) Active Noise Cancellation ("ANC") technology
into residential and small business telephones.
On December 28, 1995, the Registrant filed a report on Form 8-K to
report that, on December 22, 1995, the Registrant issued and sold in an
offshore transaction $2,198,000 aggregate principal amount of its
15% Convertible Subordinated Debentures due June 23, 1997 (the "Debentures").
(c) EXHIBITS
Exhibit
No. Description
3.1 Amended and Restated Certificate of
Incorporation of Registrant
Page 17
<PAGE>
(incorporated by reference to Exhibit 3.1 of
the Registrant's Form 10-K to December 31, 1992)
3.2 Amended By-Laws of Registrant (incorporated by
reference to Exhibit 3.2 of the Registrant's
Form 10-K for December 31, 1992)
4.1 Securities Purchase Agreement, dated as of December
22, 1995, relating to the sale of the Registrant's
15% Convertible Subordinated Debentures due 1997
(with form of Debenture attached thereto)
4.2 Registration Rights Agreement, dated as of December
22, 1995, relating to registration rights granted to
the holders of the Registrant's 15% Convertible
Subordinated Debentures due 1997
10.1 1991 Performance Equity Plan (incorporated by reference to
Exhibit 10.1 of the Registrant's Form 10-K for December 31, 1991)
10.2* Procurement Agreement, dated June 16, 1995, by and between
International Business Machines Corporation and the Registrant
(incorporated by reference to Exhibit 10.1 of the Registrant's
Form 10-Q for the Three Months ended June 30, 1995)
10.3** Memorandum of Agreement, dated as of September 14, 1993, by
and between Grumman Aerospace Corporation and the Registrant
10.4** License and Technical Support Agreement, dated as of October 3,
1995, by and between BellSouth Products, Inc. and the Registrant
11 Computation of Fully Diluted Earnings for Common Share
21 Subsidiaries of Registrant
23.1 Independent Auditors' Consent
23.2 Independent Auditors' Consent
27 Financial Data Schedule
______________
* Certain portions of this Agreement have been accorded confidential
treatment.
** The Registrant has requested confidential treatment of certain
portions of this Agreement.
(d) Financial Statement Schedules
See Item 14(a)(2).
Page 18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- ----------------------------------------
To Andrea Electronics Corporation:
We have audited the accompanying balance sheet of Andrea Electronics
Corporation (a New York corporation) as of December 31, 1995 and the related
statements of operations, shareholders' equity and cash flows for the year
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Andrea Electronics
Corporation as of December 31, 1995, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Melville, New York
February 21, 1996
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To Andrea Electronics Corporation:
We have audited the accompanying balance sheet of Andrea Electronics
Corporation as of December 31, 1994 and the related statements of
income, shareholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Andrea
Electronics Corporation as of December 31, 1994, and the results of
its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
RAICH ENDE MALTER LERNER & CO.
East Meadow, New York
February 2, 1995
F-2
<PAGE>
ANDREA ELECTRONICS CORPORATION
------ ----------- -----------
BALANCE SHEETS
------- ------
<TABLE>
<CAPTION>
December 31,
------------------------------
1995 1994
-------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $3,400,829 $3,313,043
Marketable securities 99,223 89,125
Accounts receivable, net of allowance
for doubtful accounts of $32,183 and
$69,771, respectively 1,045,922 569,505
Inventories, net 1,122,993 267,903
Prepaid expenses and other current assets 189,494 123,219
-------------- -------------
Total current assets 5,858,461 4,362,795
PROPERTY, PLANT AND EQUIPMENT, net 691,498 652,635
OTHER ASSETS 1,151 1,151
-------------- -------------
Total assets $6,551,110 $5,016,581
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
----------- --- ------------- ------
CURRENT LIABILITIES:
Current maturities of capital lease
obligations $ 39,243 $ 42,366
Trade accounts payable 254,643 142,447
Accrued salaries and wages payable 50,571 84,000
Other current liabilities 197,485 2,859
-------------- -------------
Total current liabilities 541,942 271,672
CAPITAL LEASE OBLIGATIONS,
net of current maturities 5,388 17,044
CONVERTIBLE DEBENTURES, net (Note 5) 2,000,000 -
OTHER LIABILITIES 38,500 38,500
-------------- -------------
Total liabilities 2,585,830 327,216
-------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Common stock, $.50 par value; authorized:
10,000,000 shares; issued and
outstanding: 3,286,860 and 3,016,360
shares, respectively 1,643,430 1,508,180
Additional paid-in capital 4,542,592 4,126,012
Accumulated deficit (2,220,742) (944,827)
-------------- -------------
Total shareholders' equity 3,965,280 4,689,365
Total liabilities and
shareholders' equity $6,551,110 $5,016,581
============== =============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
ANDREA ELECTRONICS CORPORATION
------ ----------- -----------
STATEMENTS OF OPERATIONS
---------- -- ----------
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1995 1994 1993
<S> <C> <C> <C>
SALES $5,440,792 $3,278,100 $6,527,972
COST OF SALES 3,190,226 2,394,828 3,903,585
---------- ---------- ----------
Gross profit 2,250,566 883,272 2,624,387
RESEARCH AND DEVELOPMENT EXPENSES 976,344 1,422,310 720,278
GENERAL, ADMINISTRATIVE AND SELLING
EXPENSES 2,925,460 1,995,434 1,412,270
---------- ---------- ----------
Income (loss) from operations (1,651,238) (2,534,472) 491,839
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income 159,464 58,044 23,591
Interest (expense) (10,746) (8,208) (13,678)
Rent and miscellaneous income 226,605 184,800 230,541
---------- ---------- ----------
375,323 234,636 240,454
---------- ---------- ----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES (1,275,915) (2,299,836) 732,293
PROVISION FOR INCOME TAXES - - 55,000
----------- ----------- ----------
NET INCOME (LOSS) $(1,275,915) $(2,299,836) $ 677,293
========== ========== ==========
PRIMARY EARNINGS (LOSS) PER SHARE $ (.41) $ (.83) $ .20
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
ANDREA ELECTRONICS CORPORATION
------ ----------- -----------
STATEMENTS OF SHAREHOLDERS' EQUITY
---------- -- ------------- ------
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
--- --- ----- ----- ----- -------- --- ----
<TABLE>
<CAPTION>
Retained
Additional Earnings Total
Shares Common Paid-In (Accumulated Shareholders'
Outstanding Stock Capital Deficit) Equity
----------- ----- ------- -------- ------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1992 2,541,360 $1,270,680 $ 59,206 $ 677,716 $ 2,007,602
Net income - - - 677,293 677,293
----------- --------- --------- --------- ---------
BALANCE, December 31, 1993 2,541,360 1,270,680 59,206 1,355,009 2,684,895
Issuance of common stock 475,000 237,500 4,066,806 - 4,304,306
Net loss - - - (2,299,836) (2,299,836)
----------- --------- --------- --------- ---------
BALANCE, December 31, 1994 3,016,360 1,508,180 4,126,012 (944,827) 4,689,365
Exercise of stock options 270,500 135,250 416,580 - 551,830
Net loss - - - (1,275,915) (1,275,915)
----------- --------- --------- --------- ---------
BALANCE, December 31, 1995 3,286,860 $1,643,430 $4,542,592 $(2,220,742) $3,965,280
=========== ========= ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
ANDREA ELECTRONICS CORPORATION
------ ----------- -----------
STATEMENTS OF CASH FLOWS
---------- -- ---- -----
<TABLE>
<CAPTION>
For the Years Ended
December 31,
--------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,275,915) $(2,299,836) $ 677,293
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 112,380 126,271 120,145
(Increase) decrease in:
Accounts receivable, net (476,417) 680,951 (678,622)
---------- ---------- ----------
Inventories, net (855,090) 248,829 189,188
Prepaid expenses and other
current assets (66,275) 11,052 (58,696)
Increase (decrease) in:
Trade accounts payable 112,196 (261,810) 242,984
Other current liabilities 161,197 (52,686) 22,214
---------- ---------- ----------
Net cash provided by (used in)
operating activities (2,287,924) (1,547,229) 514,506
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable
securities - 114,091 105,108
Purchases of property, plant and
equipment (161,341) (36,852) (121,424)
---------- ---------- ----------
Net cash provided by (used in)
investing activities (161,341) 77,239 (16,316)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligations (14,779) (46,234) (43,784)
Net proceeds from convertible
debentures (Note 5) 2,000,000 - -
Issuance of common stock 551,830 4,304,306 -
Net cash provided by (used in) --------- ---------- ----------
financing activities 2,537,051 4,258,072 (43,784)
---------- ---------- ----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 87,786 2,788,082 454,406
CASH AND CASH EQUIVALENTS,
beginning of year 3,313,043 524,961 70,555
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of year $3,400,829 $3,313,043 $ 524,961
========== ========== ==========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest $ 10,746 $ 8,208 $ 22,690
========== ========== ==========
Income taxes $ 1,400 $ 3,134 $ 62,783
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
ANDREA ELECTRONICS CORPORATION
------ ----------- -----------
NOTES TO FINANCIAL STATEMENTS
----- -- --------- ----------
DECEMBER 31, 1995
-------- --- ----
1. ORGANIZATION AND BUSINESS:
------------ --- --------
Andrea Electronics Corporation (the "Company") was founded and
incorporated in the state of New York in 1934 by Frank A. D. Andrea,
an electrical engineer, inventor and innovator in the development of
radio and television products in the United States. The Company's
primary focus was the consumer radio and television market, and with
the advent of the Second World War, the Company expanded its market to
include applications for the U.S. military. Since then, the Company
continues to do business in electronic audio systems,
intercommunication systems and related equipment for airborne, mobile
and naval applications to military and industrial companies. In 1991,
the Company extended its product development for active noise
reduction into the field of active noise cancellation and formed an
active noise cancellation division for the purpose of engaging in the
design, development, production and marketing of active noise
cancellation and digital audio systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------- -- ----------- ---------- --------
Cash and Cash Equivalents
- ---- --- ---- -----------
Cash and cash equivalents include cash and highly liquid investments
with original maturities of three months or less.
Marketable Securities
- ---------- ----------
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". In connection with the adoption of this
pronouncement, marketable securities used as part of the Company's
asset management that may be sold in response to changes in interest
rates, prepayments, and other factors have been classified as
available-for-sale. Such securities are reported at fair value, with
unrealized gains and losses excluded from earnings and reported in a
separate component of stockholders' equity (on an after-tax basis).
Gains and losses on the disposition of securities are recognized on
the specific identification method in the period in which they occur.
There were no sales of securities in 1995, and sales of securities
were $114,091 in 1994. The cumulative effect of the adoption of this
pronouncement at January 1, 1994 was not material to the financial
statements. At December 31, 1995 and 1994, the book value of the
Company's one marketable security approximated fair value. This
security matures on July 28, 2007.
Inventories
- -----------
Inventories are stated at the lower of cost (on a first-in, first-out)
or market basis.
F-7
<PAGE>
Property, Plant and Equipment
- --------- ----- --- ---------
Property, plant and equipment is stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are
provided using the straight-line and accelerated methods over the
estimated useful-lives of the assets which are as follows:
Building 25 years
Building improvements 10 - 32 years
Machinery and equipment 3 - 7 years
Expenditures for maintenance and repairs which do not materially
prolong the normal useful life of an asset are charged to operations
as incurred. Additions and improvements which substantially extend
the useful lives of the properties are capitalized. Upon sale or
other disposition of assets, the cost and related accumulated
depreciation and amortization are removed from the accounts and the
resulting gain or loss, if any, is reflected in the statement of
operations.
Revenue Recognition
- ------- -----------
Revenue and profits on fixed price and cost reimbursement type
contracts are recognized using the unit-of-delivery method. Other
revenue is recognized upon the transfer of title.
Concentration of Credit Risk
- ------------- -- ------ ----
The Company is a manufacturer of audio communications equipment for
several industries. During 1995, the Company primarily sold to the
United States Government. Sales to the federal government comprised
approximately 41% and 19% of the total accounts receivable at December
31, 1995 and 1994, respectively, and approximately 45%, 20% and 42% of
the total sales for the years ended December 31, 1995, 1994 and 1993,
respectively.
Use of Estimates
- --- -- ---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Income Taxes
- ------ -----
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
This pronouncement established financial accounting and reporting
standards for the effects of income taxes that result from the
Company's activities during the current and preceding years. It
requires an asset and liability approach for financial accounting and
reporting for income taxes.
The provision for income taxes is based upon income after adjustment
for those permanent items which are not considered in the
determination of taxable income. Deferred taxes result when the
Company charges deductions or recognizes revenue for income tax
purposes in a different year than for financial reporting purposes.
F-8
<PAGE>
Dividends
- ---------
No cash dividends were declared or paid during the years ended
December 31, 1995, 1994 and 1993.
Primary Earnings (Loss) Per Share
- ------- -------- ------ --- -----
Primary earnings (loss) per share is based on the weighted average
number of common shares outstanding during each year after giving
effect to dilutive stock options and warrants considered to be common
stock equivalents. Fully diluted earnings per share are not
materially different from primary earnings per share. For the years
ended December 31, 1995, 1994 and 1993, the weighted average number of
common shares and common equivalent shares outstanding were 3,129,540,
2,767,387 and 3,432,931, respectively.
Stock Dividend
- ----- --------
In 1993, the Board of Directors of the Company approved a five-for-one
stock split in the form of a 400% dividend to stockholders which was
effected on June 2, 1993. All information contained in the
accompanying financial statements and notes thereto has been
retroactively restated to give effect to this transaction.
Research and Development
- -------- --- -----------
Research and development costs are charged to operations when
incurred.
Advertising Expenses
- ----------- --------
The Company charges all media costs of newspaper and magazine
advertisements to expense when advertisements are run. Prepaid
advertising at December 31, 1995 and 1994, which represents costs for
media services purchased but not yet run, is included in prepaid
expenses and other current assets in the amounts of $40,139 and $0,
respectively.
Fair Value of Financial Instruments
- ---- ----- -- --------- -----------
The Company calculates the fair value of financial instruments and
includes this additional information in the notes to financial
statements when the fair value is different than book value of those
financial instruments. When the fair value approximates book value,
no additional disclosure is made. The Company uses quoted market
prices whenever available to calculate these fair values. When quoted
market prices are not available, the Company uses standard pricing
models for various types of financial instruments which take into
account the present value of estimated future cash flows. At December
31, 1995, the carrying value of all financial instruments approximated
fair value (Note 5).
Reclassification
- ----------------
Certain prior year amounts have been reclassified to conform with the
current year presentation.
F-9
<PAGE>
Recently Issued Accounting Standards
- -------- ------ ---------- ---------
During March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of". This statement establishes financial
accounting and reporting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used, and for long-lived assets and
certain identifiable intangibles to be disposed of. This statement is
effective for financial statements for fiscal years beginning after
December 15, 1995, although earlier application is encouraged.
In November 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation". This statement
establishes a fair value based method of accounting for an employee
stock option or similar equity instrument but allows companies to
continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees". Companies
electing to remain with the accounting under APB Opinion No. 25 must,
however, make pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting defined in SFAS
No. 123 had been applied. These disclosure requirements are effective
for years beginning after December 15, 1995. Management intends to
continue accounting for its stock-based compensation plans under the
accounting prescribed by APB Opinion No. 25.
3. INVENTORIES:
-----------
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1994
---- ----
<S> <C> <C>
Raw materials $1,230,805 $615,680
Work-in-process 133,942 52,223
Finished goods 18,334 -
---------- --------
1,383,081 667,903
Less: reserve for obsolescence 260,088 400,000
---------- --------
$1,122,993 $267,903
========== ========
F-10
<PAGE>
4. PROPERTY, PLANT AND EQUIPMENT:
--------- ----- --- ---------
Property, plant and equipment consisted of the following:
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1994
------------- ------------
<S> <C> <C>
Land $ 109,000 $ 109,000
Building 453,000 453,000
Building improvements 372,928 372,928
Machinery and equipment 605,798 444,457
------------- ------------
1,540,726 1,379,385
Less: accumulated depreciation 849,228 726,750
------------- ------------
$ 691,498 $ 652,635
============= ============
</TABLE>
5. CONVERTIBLE DEBENTURES:
----------- ----------
On December 22, 1995, the Company issued $2,198,000 of 15% Convertible
Subordinated Debentures (the "Debentures") due on June 23, 1997. The
bonds are convertible into shares of the Company's common stock at a
price which shall be the lesser of (i) $12.375 per share (the maximum
conversion price) and (ii) the closing price, which is defined as the
last reported bid price for a given day on the exchange the Company's
common stock is listed. In no event will the conversion price be less
than $5.625 per share (the minimum conversion price). Conversion of
these Debentures into the Company's common stock can, at the holder's
option, be effected in increments of $549,500 beginning 45 days
following the date of original issuance and on each of the succeeding
30 day interim periods. Conversion of any remaining principal amount
can occur at any time after 135 days and through maturity. The
Debentures are subordinated in right of payment to all future senior
indebtedness, as incurred by the Company. At December 31, 1995, this
obligation is reflected net of an unamortized discount of $198,000.
6. RETIREMENT PLAN:
---------- ----
The Company has a defined contribution profit sharing plan which is
qualified under Section 401(k) of the Internal Revenue Code and is
available to substantially all of its employees. The Company's
contributions, which serve to match a portion of participant
contributions, were $91,225, $89,352 and $71,639 for 1995, 1994 and
1993, respectively.
7. TAXES:
-----
Provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Federal $ - $ - $ 5,000
New York State (5,000) (3,000) 43,000
New York City 5,000 3,000 7,000
------------ ----------- -----------
$ - $ - $ 55,000
============ =========== ===========
F-11
<PAGE>
A reconciliation between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate to earnings
(loss) before income taxes is as follows:
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1995 1994 1993
---------- ----------- ----------
<S> <C> <C> <C>
Provision (benefit) at stated tax rates $(434,000) $(781,000) $ 249,000
Benefit of loss carryforward - - (244,000)
Loss without tax benefit 434,000 781,000 -
State and local taxes -
net of federal income tax benefit - - 50,000
---------- ---------- ----------
Provision for income taxes $ - $ - $ 55,000
========== =========== ==========
</TABLE>
At December 31, 1995, the Company had net operating loss carryforwards
of approximately $3,600,000 expiring in varying amounts beginning in
2006 through 2010. A full valuation allowance has been provided
against any deferred tax assets which might result from the
utilization of these net operating loss carryforwards due to
uncertainty as to the amount and timing of future earnings.
8. LEASES:
------
Capital Leases
- ------- ------
The Company is obligated under two capital leases for the purchase of
machinery and equipment. Effective March 1990, the Company suspended
payments on one of the leases pending the ultimate resolution of the
legal proceeding described in Note 9. The other capital lease bears
interest at 15.7% and expires in May of 1997. The following is a
schedule of the future minimum capital lease payments:
<TABLE>
<CAPTION>
<S> <C>
Expired $27,588
1996 13,512
1997 5,599
-------
46,699
Less: amount representing interest (2,068)
-------
$44,631
=======
</TABLE>
Property Lease
- -------- -----
Effective January 30, 1996, the Company, as lessor, amended a tenant's
lease for the rental of approximately one-third of its building. The
new lease, expiring on May 31, 2001, requires a rental payment of
approximately $243,000 for fiscal 1996, with a 5% annual escalation
for the remainder of the lease term. The agreement in effect for
1995, 1994 and 1993 required annual rentals of approximately $184,800.
The tenant pays one-third of increases in real estate taxes over the
base year and pays 100% of its proportionate share of operating
expenses.
F-12
<PAGE>
9. COMMITMENTS AND CONTINGENCIES:
----------- --- -------------
Development and License Agreement
- ----------- --- ------- ---------
Effective September 1, 1995, the Company entered into a development
and license support agreement with a certain manufacturer in the
telecommunications industry. The agreement requires the Company to
grant to the licensee a nontransferable license to produce certain
intellectual properties, as defined in the agreement. The license is
exclusive until December 31, 1996, and during each subsequent year,
the license remains exclusive provided that the minimum production of
the licensed products for the prior year was achieved. In exchange
for the license, the Company will receive royalties for each product
manufactured.
Procurement Agreement
- ----------- ---------
Effective June 16, 1995, the Company entered into a procurement
agreement with a certain manufacturer in the computer technology
industry. The agreement provided the manufacturer the exclusive
worldwide right to market, sell, distribute and support the Andrea
Microphone Products with certain of its own personal computer
products. Effective December 16, 1995, the manufacturer did not meet
the specific purchasing requirements and, as a result, lost their
exclusivity under this agreement. The Company continues to produce
and sell to this manufacturer under the terms of the agreement, but is
not obligated under the exclusivity clause.
Legal Proceedings
- ----- -----------
On December 3, 1990, a complaint was filed against the Company by an
individual (the "Plaintiff") in the Suffolk County Supreme Court (the
"Court") alleging wrongful discharge by the Company in violation of
his employment agreement. The complaint seeks damages relating to
loss of salary, past bonuses, lost commissions, unused sick pay and a
reimbursement of a bank loan. In August 1992, the Plaintiff moved for
partial summary judgment on three causes of action. On January 28,
1993, his motion was granted with respect to two causes of action
pursuant to which the Plaintiff sought damages in the approximate
amount of $186,000. The court, however, in granting the Plaintiff's
motion, did not make a determination as to the amount of damages and
directed that a trial be held on the issue of damages. On February
21, 1996, the Company settled this case for $167,500, including the
amount of the expired capital lease of $27,588 described in Note 8.
The additional amount due the Plaintiff under the settlement was
charged to operations in 1995 and is included in other current
liabilities at December 31, 1995.
In December 1994, a subpoena was issued to the Company by the United
States Department of Defense, Office of the Inspector General, seeking
certain documents pertaining to contracts relating to audio frequency
amplifiers. Documents responding to the subpoena were delivered in
January 1995 and to date, no claim has been made or threatened against
the Company in connection with this matter. The Company is unable to
determine at this point if any such claim will be made or to what
extent, if any, such claim could have an impact on the financial
position of the Company.
Letters of Credit
- ------- -- ------
Letters of credit are issued by the Company during the ordinary course
of business through a major domestic bank as required by certain
vendor contracts. As of December 31, 1995, the Company had
outstanding letters of credit of approximately $920,000, which are
fully collateralized by cash held with the same bank.
F-13
<PAGE>
10. STOCK PLANS:
----- -----
Options
- -------
On December 31, 1991, the Board of Directors of the Company adopted
the 1991 Performance Equity Plan ("1991 Plan"), which was approved by
shareholders. The 1991 Plan authorizes the granting of awards, the
exercise of which would allow up to an aggregate of 1,000,000 shares
of the Company's common stock to be acquired by the holders of said
awards. The awards can take the form of stock options, stock
appreciation rights, restricted stock, deferred stock, stock reload
options or other stock-based awards. Awards may be granted to key
employees, officers, directors and consultants. On September 12, 1994,
the Board of Directors of the Company approved an increase of the
number of shares available for grant under the 1991 Plan to 1,500,000
shares, which subsequently was approved by the shareholders of the
Company.
Activity in the 1991 Plan was as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Outstanding at beginning of period 1,233,000 1,000,000 920,000
Granted 137,500 273,000 80,000
Exercised (270,500) - -
Canceled (35,000) (40,000) -
--------- --------- ---------
Outstanding at end of period 1,065,000 1,233,000 1,000,000
========== ========== ==========
Range of Exercise Prices $16.00-$19.25 $ 12.00 $4.55-$7.60
============= ========== ===========
</TABLE>
Warrants
- --------
In connection with an overseas equity offering in 1994, the Company
has issued 5 year warrants to purchase 23,750 shares of common stock
at prices of $9.84 to $10.98 per share. These warrants expire on June
15, 1999.
F-14
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULE
----- -- --------- --------- --------
Report of Independent Public Accountants on Schedule S-1
Schedule II - Valuation and Qualifying Accounts S-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
------ -- ----------- ------ ----------- -- --------
To Andrea Electronics Corporation:
We have audited in accordance with generally accepted auditing
standards, the financial statements of Andrea Electronics Corporation
included in this filing and have issued our report thereon dated
February 21, 1996. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The
schedule listed in the accompanying index is presented for purposes of
complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audit of the basic
financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein
in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Melville, New York
February 21, 1996
S-1
<PAGE>
ANDREA ELECTRONICS CORPORATION
------ ----------- -----------
SCHEDULE II
-------- --
VALUATION AND QUALIFYING ACCOUNTS
--------- --- ---------- --------
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
January 1, costs and other December 31,
1995 expenses accounts Deductions 1995
---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 69,771 $ 30,000 $ - $ 67,588 $ 32,183
Inventory reserve 400,000 - - 139,912 260,088
</TABLE>
S-2
<PAGE>
<PAGE>
SIGNATURES
In accordance with the requirements of the Section 13 and 15(d) of the
Exchange Act, the Registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ANDREA ELECTRONICS CORPORATION
By: /s/ Frank A.D. Andrea, Jr.
------------------------------------
Date: March 27, 1996 Frank A.D. Andrea, Jr.
Chairman of the Board
and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capabilities
and on the dates indicated.
/s/ Frank A.D. Andrea, Jr. Chairman of the Board March 27, 1996
- ------------------------------
Frank A.D. Andrea, Jr. and Chief Executive Officer
/s/ Patrick D. Pilch Executive Vice President March 27, 1996
- -------------------------
Patrick D. Pilch and Chief Financial Officer
/s/ John N. Andrea Co-President March 27, 1996
- --------------------
John N. Andrea
/s/ Douglas J. Andrea Co-President March 27, 1996
- -------------------------
Douglas J. Andrea
/s/ Jeffrey S. Gosman Vice President, March 27, 1996
- -------------------------
Jeffrey S. Gosman Controller
and Secretary
/s/ Christopher Dorney Director March 27, 1996
- -------------------------
Christopher Dorney
/s/ George Feinman Director March 27, 1996
- --------------------
George Feinman
/s/ Scott Koondel Director March 27, 1996
- --------------------
Scott Koondel
/s/ Paul M. Morris Director March 27, 1996
- --------------------
Paul M. Morris
<PAGE>
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
3.1 Amended and Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 of the Registrant's
Form 10-K to December 31, 1992)
3.2 Amended By-Laws of Registrant (incorporated by reference to
Exhibit 3.2 of the Registrant's Form 10-K for December 31, 1992)
4.1 Securities Purchase Agreement, dated as of December 22, 1995,
relating to the sale of the Registrant's 15% Convertible Subordinated
Debentures due 1997 (with form of Debenture attached thereto)
4.2 Registration Rights Agreement, dated as of December 22, 1995,
relating to registration rights granted to the holders of the
Registrant's 15% Convertible Subordinated Debentures due 1997
10.1 1991 Performance Equity Plan (incorporated by reference to
Exhibit 10.1 of the Registrant's Form 10-K for December 31, 1991)
10.2* Procurement Agreement, dated June 16, 1995, by and between
International Business Machines Corporation and the Registrant
(incorporated by reference to Exhibit 10.1 of the Registrant's
Form 10-Q for the Three Months ended June 30, 1995)
10.3** Memorandum of Agreement, dated as of September 14, 1993, by
and between Grumman Aerospace Corporation and the Registrant
10.4** License and Technical Support Agreement, dated as of October 3,
1995,
by and between BellSouth Products, Inc. and the Registrant
11 Computation of Fully Diluted Earning for Common Share
21 Subsidiaries of Registrant
23.1 Independent Auditors' Consent
23.2 Independent Auditors' Consent
27 Finacial Data Schedule
______________
* Certain portions of this Agreement have been accorded confidential
treatment.
** The Registrant has requested confidential treatment of certain portions
of this Agreement.
<PAGE>
EXHIBIT 4.1
<PAGE>
SECURITIES PURCHASE AGREEMENT
-----------------------------
SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of December
22, 1995, between ANDREA ELECTRONICS CORPORATION, a New York corporation (the
"Company"), and SOCIETE GENERALE, a bank existing under the laws of France
("Purchaser").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue and sell to Purchaser, and
Purchaser desires to purchase from the Company, U.S. $2,198,000 aggregate
principal amount of the Company's 15% Convertible Subordinated Debentures Due
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.
1
<PAGE>
"Non-U.S. Person" means a Person that is not a U.S. Person.
"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, 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, 1994, the Company's Quarterly Reports on Form 10-Q
for the fiscal quarters ended March 31, June 30, and September 30, 1995, the
Company's Current Reports on Form 8-K dated May 5, 1995 and October 20, 1995
and the Company's Proxy Statement dated May 4, 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, (i) the
Company hereby agrees to issue and sell to Purchaser, and Purchaser
hereby agrees to purchase and accept from the Company, 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 Purchaser; (ii) Purchaser 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 Purchaser in writing prior to the Closing; provided that if the
--------
Company and Purchaser so agree, such expenses may be netted against the
Purchase Price; (iv) the Company and Purchaser shall execute and deliver
the Registration Rights Agreement; (v) the Company shall deliver to Purchaser
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,
2
<PAGE>
as counsel to the Company, shall deliver to Purchaser an opinion, dated
the date of the Closing and addressed to Purchaser, in form and substance
acceptable to Purchaser.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
As a material inducement to Purchaser to purchase the Notes, the Company
hereby represents and warrants to Purchaser that on and as of the date
hereof:
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
3,201,461 shares are outstanding. 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 of 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. Except as otherwise required 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.
3
<PAGE>
SECTION 3.04. NO VIOLATION; CONSENTS. (a) The execution, delivery
----------------------
and performance by the Company of the Transaction Documents and the consum-
mation 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 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(1) 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 Purchaser hereunder. Assuming the accuracy of
Purchaser's 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, 1994 reported on by Raich Ende Malter Lerner & Co.,
independent accountants, copies of which have heretofore been furnished
to Purchaser, present fairly the financial condition, results of operations
and cash flows of the Company at such dates and for the periods set forth
4
<PAGE>
therein. The unaudited balance sheets, statements of operations, and cash
flows for the period ended September 30, 1995 (such audited and unaudited
financial statements collectively, the "Financial Statements"), copies of which
have heretofore been furnished to Purchaser, present fairly the financial
condition and results of operations and cash flows as at such dates and for
the periods set forth therein. All of 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 September 30, 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 September 30, 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 Purchaser 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 Purchaser is and will be relying on the SEC
Reports and the Company's representations, warranties and covenants contained
herein in making its 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 PURCHASER
-------------------------------------------
Purchaser hereby acknowledges, represents and warrants to the Company as
follows:
SECTION 4.01. AUTHORIZATION; ENFORCEABILITY; NO VIOLATIONS. (a)
--------------------------------------------
Purchaser is a bank, duly organized, validly existing and in good standing
under the laws of France 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 Purchaser of
this Agreement and the consummation by Purchaser of the transactions
contemplated hereby do not and will not violate any provision of (i)
Purchaser's organizational documents and (ii) any law, statute, rule,
regulation, order, writ, injunction, judgment or decree to which Purchaser
is subject. Purchaser has duly executed and delivered this Agreement.
Assuming the due execution
5
<PAGE>
hereof by the Company, this Agreement constitutes the legal, valid and binding
obligation of Purchaser, enforceable against 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) Purchaser
---------------------------------------
understands that (i) the offering and sale of the Notes to be issued and sold
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 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) Purchaser is not an affiliate of the Company (as such term is
defined in the Securities Act).
(d) Purchaser is a Non-U.S. Person.
(e) 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 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 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 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, Purchaser was outside of the United States.
(h) Purchaser acknowledges that Regulation S of 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 Purchaser and each subsequent
holder of such securities will be bound (the "Legend"):
"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
6
<PAGE>
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 CONNECTION 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) 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
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
7
<PAGE>
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 the Notes.
SECTION 5.02. SPECIAL TRANSFER PROVISIONS. The following provisions
---------------------------
shall apply with respect to any proposed transfer of Notes or
Conversion Shares 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):
(a) 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 B hereto).
(b) 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 B
hereto).
(c) Upon the transfer as provided in paragraphs (a) and (b) 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 (i) 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); (ii) 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 C 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 (iii) such
Notes or Conversion Shares have been sold pursuant to an effective
registration statement under the Securities Act.
SECTION 5.03. RULE 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 Purchaser may reasonably request,
all to the extent required from time to time to enable 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 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 Purchaser, the
Company will deliver to 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
<PAGE>
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 ANNOUNCEMENTS. No party hereto shall
--------------------------------
issue any press release or make any other public announcement 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. If
any such press release or public announcement 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 Purchaser's
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 Purchaser's expenses
shall be payable at the Closing and may be netted against the Purchase Price
otherwise payable by the Purchaser.
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: Patrick Pilch,
Facsimile No.: (718) 784-8457; with copies (which shall not constitute
notice) to: Brown & Wood, One World Trade Center, New York, New York 10048,
Attention: Alan L. Jakimo, Esq., Facsimile No.: (212) 839-5599; and (ii) if
to Purchaser, to: Societe Generale, Tour Societe Generale, 17 Cours Valmy,
Paris, La Defense 92987, France, Attention: Marc Litzler, Facsimile No.:
(011) 33-1-42134770; with copies (which shall not constitute notice) to: (l)
Societe Generale Securities Corporation, 1221 Avenue of the Americas, New
York, New York 10020, Attention: Guillaume Pollet, Facsimile No. (212) 278-
5467; and (2) Dorsey & Whitney P.L.L.P., 350 Park Avenue, New York, New York
10022, Attention: J. Eric Maki, Esq., Facsimile No.: (212) 888-0018. 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.
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
9
<PAGE>
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 Purchaser,
on the other hand, without the prior written consent of the other party
hereto; provided that Purchaser may assign or delegate its rights,
--------
duties and obligations hereunder to any Affiliate of 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 party 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
------------
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
<PAGE>
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:
----------------------------------------
Title:
----------------------------------------
SOCIETE GENERALE
By:
----------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
11
<PAGE>
EXHIBIT A
---------
ANDREA ELECTRONICS CORPORATION
------------------------------
15% CONVERTIBLE SUBORDINATED DEBENTURE DUE 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 (l), (2), (3) OR (7) OF RULE
50l(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 CONNECTION 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. ____ 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 Societe Generale, or registered
assigns, the principal sum of $__________ on June 23, 1997, and to pay
interest thereon in the manner set forth on the reverse hereof from December
22, 1995 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: ANDREA ELECTRONICS CORPORATION
By:
------------------------------
Name: Patrick Pilch
Title: Executive Vice President,
Chief Financial Officer
<PAGE>
REVERSE OF DEBENTURE
ANDREA ELECTRONICS CORPORATION
------------------------------
15% CONVERTIBLE SUBORDINATED DEBENTURE DUE 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 Debenture Due 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 December 22, 1995 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) June 23, 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) $12.375 (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 $5.625 (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
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
2
<PAGE>
ANDREA ELECTRONICS CORPORATION
------------------------------
15% CONVERTIBLE SUBORDINATED DEBENTURE DUE 1997
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 and all other Debentures 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.
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.
3
<PAGE>
ANDREA ELECTRONICS CORPORATION
------------------------------
15% CONVERTIBLE SUBORDINATED DEBENTURE DUE 1997
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 this Debenture 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 (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
4
<PAGE>
ANDREA ELECTRONICS CORPORATION
------------------------------
15% CONVERTIBLE SUBORDINATED DEBENTURE DUE 1997
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 this Agreement (i) 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, or (ii) 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, 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
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.
-------------
(i) 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 (a) 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, (i) for money
owing to banks, (ii) for money borrowed from other than banks or (iii) arising
under a lease of property,
5
<PAGE>
ANDREA ELECTRONICS CORPORATION
------------------------------
15% CONVERTIBLE SUBORDINATED DEBENTURE DUE 1997
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 (b) renewals, extensions, modifications and refundings of
any such indebtedness.
(ii) 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
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.
6
<PAGE>
ANDREA ELECTRONICS CORPORATION
------------------------------
15% CONVERTIBLE SUBORDINATED DEBENTURE DUE 1997
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 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;
(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;
7
<PAGE>
ANDREA ELECTRONICS CORPORATION
------------------------------
15% CONVERTIBLE SUBORDINATED DEBENTURE DUE 1997
(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 clause (5) or (6) above occurs, the principal of and interest on
this Debenture shall ipso facto 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.
8
<PAGE>
ANDREA ELECTRONICS CORPORATION
------------------------------
15% CONVERTIBLE SUBORDINATED DEBENTURE DUE 1997
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.: 718-784-8457, 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 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.
9
<PAGE>
EXHIBIT A
ANDREA ELECTRONICS CORPORATION - NOTICE OF CONVERSION
-----------------------------------------------------
15% CONVERTIBLE SUBORDINATED DEBENTURE DUE 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)
10
<PAGE>
ANDREA ELECTRONICS CORPORATION
------------------------------
15% CONVERTIBLE SUBORDINATED DEBENTURE DUE 1997
Conversion calculations: ______________________________
Date of Conversion
-----------------------------
Applicable Conversion Price
_________________________________ _____________________________
Total number of shares Accrued Interest
(assuming interest payable
in shares) Name of Holder
By: ________________________
Name:
Title:
11
<PAGE>
ANDREA ELECTRONICS CORPORATION
------------------------------
15% CONVERTIBLE SUBORDINATED DEBENTURE DUE 1997
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>
EXHIBIT B
CERTIFICATE OF TRANSFER
In connection with the transfer of certain 15% Convertible Subordinated
Debentures Due 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 December 22, 1995 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
13
<PAGE>
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 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 be, 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 understands 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 containing the same representations and
agreements relating to the restrictions 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
14
<PAGE>
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, acknowledgments 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: __________________________
___________________________________
15
<PAGE>
Exhibit C
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 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:
1. the Transferor has not been engaged as a distributor or dealer by the
Company or anyone else, and is not receiving a selling commission fee or
other remuneration, 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
purchase and/or sale of the Securities;
2. 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;
3. the Transferor understands that the transfer of the Securities to the
Purchaser 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") specified 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;
4. 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;
5. 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 the rules and regulations
of the U.S. Securities Exchange Commission and any state securities
commissions promulgated under any of the foregoing; and
6. 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:
__________________________________
Dated: _________________ By:_______________________________
Name: ____________________________
Title: ___________________________
16
<PAGE>
<PAGE>
EXHIBIT 4.2
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of
December 22, 1995 is made and entered into between ANDREA ELECTRONICS
CORPORATION, a New York corporation ("AEC"), and SOCIETE GENERALE, a bank
organized and existing under the laws of France ("SoGen").
WHEREAS, AEC and SoGen have entered into that certain Securities
Purchase Agreement, dated as of December 22, 1995 between AEC and SoGen (the
"Subscription Agreement") pursuant to which AEC has issued to SoGen
$2,198,000 aggregate principal amount of its 15% Convertible Subordinated
Debentures Due 1997 (the "Notes"), which Notes, together with, in certain
circumstances, accrued interest thereon, are convertible into such number of
shares of 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, SoGen's agreement to enter into the Subscription Agreement, the Company
has agreed to provide SoGen 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 SoGen in its 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.
1
<PAGE>
"Triggering Date" means any date after February 5, 1996 on which
SoGen reasonably determines, based on the advice of its counsel,
that it would be inadvisable for SoGen 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.
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, SoGen 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." SoGen 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, SoGen shall be
--------
responsible for all fees and expenses (including fees and expenses of
its counsel) incurred by SoGen prior to such withdrawal; and
provided further that SoGen 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).
2
<PAGE>
(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 SoGen 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 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 SoGen pursuant to Section 2.1(a)).
(c) Selection of Underwriter. If SoGen 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 SoGen
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 SoGen in response to SoGen's request for a Demand Registration
a certificate signed by the Chairman, President and Chief Executive
Officer 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
3
<PAGE>
to defer such filing for a period of not more than ninety (90) days
after receipt of the request for a Demand Registration. SoGen
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
SoGen, have the right to defer the filing of the registration statement
requested to be filed by SoGen 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 SoGen, 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 SoGen) 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 SoGen consents to the inclusion of such securities
therein.
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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
SoGen 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
SoGen 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 SoGen, one firm
of counsel representing SoGen, 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 SoGen, 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
SoGen, counsel or each Underwriter may reasonably request in order to
facilitate the disposition of the Registrable Securities.
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<PAGE>
(c) After the filing of the registration statement, AEC
will promptly notify SoGen 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 SoGen may reasonably (in light of
SoGen's 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 SoGen 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.
(e) AEC will immediately notify SoGen 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 SoGen 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
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disposition of such Registrable Securities (SoGen 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 SoGen).
(g) AEC will make available to SoGen (and will deliver to its
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 SoGen, any
Underwriter participating in any disposition pursuant to such registration
statement and any attorney, accountant or other professional retained by
SoGen 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.
SoGen agrees that information obtained by them solely as a result
of such inspections (not including any information obtained from a third
party who, insofar as is known to SoGen 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 transactions in the securities of AEC
or its Affiliates unless and until such information is made generally
available to the public. SoGen further agrees that they 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 SoGen and to each Underwriter, if any, a
signed counterpart, addressed to SoGen 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 SoGen or the managing Underwriter therefor
reasonably requests.
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<PAGE>
(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 SoGen, 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 SoGen unless
AEC shall also be offering securities in such underwritten
offering.
AEC may require SoGen 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 SoGen 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.
SoGen 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, SoGen
will forthwith discontinue disposition of Registrable Securities pursuant to
the registration statement covering such Registrable Securities until SoGen's
receipt of the copies of the supplemented or amended
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<PAGE>
prospectus contemplated by Section 3.1(e) hereof, and, if so directed by
AEC, SoGen will deliver to AEC all copies, other than permanent file copies
then in SoGen's possession, of the most recent prospectus covering such
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 SoGen 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 SoGen retained as SoGen'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 SoGen,
such costs to be borne by SoGen.
ARTICLE IV
INDEMNIFICATION AND CONTRIBUTION
SECTION 4.1. INDEMNIFICATION BY AEC. AEC agrees to indemnify and hold
----------------------
harmless SoGen, its partners, Affiliates, officers, directors,
employees and duly authorized agents, and each Person or entity, if any, who
controls SoGen 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 SoGen, 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
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<PAGE>
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 SoGen or an
Underwriter expressly for use therein, and shall reimburse SoGen, its
partners, Affiliates, officers, directors, employees and duly authorized
agents, and each such Controlling Person for any legal and other expenses
reasonably incurred by SoGen, 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
-------- -------
SoGen 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) SoGen failed to send or deliver a copy of the final prospectus with or
prior to the delivery of written confirmation of the sale by SoGen 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 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, SoGen 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 SOGEN. SoGen 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 SoGen, but
only with reference to information related to SoGen or its plan of
distribution, furnished in writing by SoGen or on SoGen'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 SoGen, SoGen 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
SoGen by Section 4.1. SoGen also agrees to indemnify and hold
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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 respect 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 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
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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 SoGen 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 SoGen 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 SoGen 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 SoGen
on the other, in such proportion as is appropriate to reflect the relative
fault of AEC and of SoGen in connection with such statements or omissions, as
well as any other relevant equitable considerations. The relative benefits
received by AEC and SoGen 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 SoGen 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
SoGen 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 by AEC and SoGen or by
the Underwriters. The relative fault of AEC on the one hand and of SoGen 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 SoGen 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
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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 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 SoGen 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 SoGen were
offered to the public (less underwriting discounts and commissions) exceeds
the amount of any damages which SoGen 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 December 22, 1998;
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 SoGen 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 SoGen, AEC will deliver to SoGen 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
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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
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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
the Company 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 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. SoGen 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
14
<PAGE>
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.: (718)
784-8457; with copies (which shall not constitute notice) to: Brown & Wood,
One World Trade Center, New York, New York 10045, Attention: Alan L. Jakimo,
Esq., Facsimile No.: (212) 839-5599; and (ii) if to Purchaser, to: Societe
Generale, Tour Societe Generale, 17 Cours Valmy, Paris, La Defense 92987,
France, Attention: Marc Litzler, Facsimile No.: (011) 33-1-42134770; with
copies (which shall not constitute notice) to: (1) Societe Generale
Securities Corporation, 1221 Avenue of the Americas, New York, New York
10020, Attention: Guillaume Pollet, Facsimile No.: (212) 278-5467 and (2)
Dorsey & Whitney P.L.L.P., 350 Park Avenue, New York, New York 10022,
Attention: J. Eric Maki, Esq., Facsimile No.: (212) 888-0018. 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 any
------------
number of 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 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
15
<PAGE>
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)
16
<PAGE>
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:
Title:
SOCIETE GENERALE
By:
----------------------------------------
Name:
Title:
17
<PAGE>
EXHIBIT 10.3
<PAGE>
MEMORANDUM OF AGREEMENT
This Memorandum of Agreement (hereinafter the "Agreement") is made and
entered into effective as of the 14th day of September, 1993 by and between
Grumman Aerospace Corporation, a corporation organized and existing under the
laws of the State of New York, having an office at Bethpage, New York 11714-
3592 (hereinafter called "Grumman") and the Andrea Electronics Corporation
("AEC"), a corporation organized and existing under the laws of the State of
New York, having an office at 11-40 45th Road, Long Island City, New York
11101, and cancels and supersedes the Memorandum of Agreement between the
parties dated 3/30/93.
W I T N E S S E T H:
WHEREAS, Grumman is a supplier of major equipment for the U.S.
Government, including electronic communications equipment; and
WHEREAS, AEC is a designer of certain communications headset components,
NOW, THEREFORE, Grumman and AEC do hereby mutually agree as follows:
ARTICLE 1: Purpose
-------
1.1 The purpose of this Agreement is to set forth the terms and
conditions under which Grumman and AEC will cooperate in the design,
development, testing, marketing and manufacturing of Headset Systems.
ARTICLE 2: Definitions
-----------
As used herein, the following terms shall have the following
meaning:
2.1 "Technical Data" shall mean technical data as defined in FAR
352.227-7013 produced as a result of this Agreement or used
in its performance.
2.2 "ANC" shall mean the "Active Noise Cancellation" component of
the Headset System.
2.3 "ANR" shall mean the "Active Noise Cancellation" component of
the Headset System.
2.4 "Headset System" shall mean a complete headset system which
contains the Underlying Technology and the Application
Technology.
2.5 "Engineering Prototype" shall mean the Headset Systems which
AEC shall produce for qualification testing pursuant to the
terms below.
1
<PAGE>
2.6 "Underlying Technology" shall refer to AEC's ANR and ANC
designs existing at the time of this Agreement.
2.7 "Application Technology" shall refer to the design of the
Engineering Prototype and further improvements approved by the
Technical Design Authority.
2.8 "Data Package" shall mean such technical information in
recorded form sufficient to enable Grumman or its suppliers to
manufacture end items or components of the Underlying
Technology.
2.9 "Technical Design Authority" is defined as the responsibility
for the adequacy and sufficiency of the Headset System design.
ARTICLE 3: Relationship of the Parties
---------------------------
3.1 This Agreement is not intended to constitute, create, give
effect to or otherwise recognize a joint venture, partnership, or formal
business entity of any kind between the parties hereto, and the rights and
obligations of the parties shall not be construed as providing for the
sharing of profits or losses arising out of the efforts of either of the
parties.
3.2 Neither party shall have any authority to act for or to bind
the other party in any respect whatsoever, nor, except as otherwise
specifically provided herein, to incur any debts or liabilities in the name
of or on behalf of the other party hereto.
3.3 Except as otherwise specifically provided for herein, nothing
contained in this Agreement shall preclude either party hereto from engaging
in its normal outside marketing efforts in connection with the offering for
sale or the sale of its products and/or services or from soliciting or
accepting any contract or subcontract from any third party for any program or
project.
3.4 Except as otherwise provided herein, each party hereto shall
be responsible for its own costs and expenses incurred in discharging the
obligations set forth herein.
3.5 Neither party shall have any liability to the other party for
delayed performance in carrying out its obligations under this Agreement
provided that the party who has incurred the delayed performance has been
diligent in its efforts to perform the obligations assumed by it under this
Agreement.
3.6 The parties recognize and agree that the work to be conducted
hereunder may have general applicability to various future projects either
for the Government or for other third parties. In discharging their
respective obligations under this Agreement, Grumman and AEC warrant to each
other that no portion of the work to be done under this Agreement is
otherwise required of either of them as an element of performance under any
existing contract which they may have with any other parties, including the
United States Government.
2
<PAGE>
ARTICLE 4: Design Obligations of AEC
-------------------------
4.1 AEC shall perform all necessary design and development work to
produce a quantity of (Confidential Treatment) Engineering Prototypes which
meet the requirements of Exhibit A hereto. The Prototypes shall be the joint
property of Grumman and AEC. Grumman's use of the Prototypes shall be
limited to testing, evaluation, marketing and loan to potential customers.
4.2 The work described in 4.1 shall be performed in accordance
with the schedule specified in the Statement of Work and attached hereto as
Exhibit B.
4.3 AEC shall be responsible for the qualification testing of the
Engineering Prototypes in accordance with the Product Function Specification
attached hereto as Exhibit A.
4.4 Grumman shall be responsible for having the headsets placed
upon the U.S. Qualified Parts List ("QPL"). AEC shall be responsible for
maintaining all required internal procedures, processes and controls to
support the QPL process.
ARTICLE 5: Design Obligations of Grumman
-----------------------------
5.1 Grumman shall assist AEC in upgrading its quality assurance
system standards to those of MIL-Q-9850 and/or ISO 9000/Q-90.
5.2 Grumman shall supply AEC with reasonable and necessary support
in the qualification testing of the Engineering Prototypes.
ARTICLE 6: Design Funding
--------------
6.1 Grumman and AEC shall jointly fund the design of the
Engineering Prototypes according to a (Confidential Treatment) ratio.
Maximum total funding by Grumman shall not exceed (Confidential Treatment)
("Grumman Funding"). The Grumman Funding shall be distributed in accordance
with the Purchase Order attached hereto as Exhibit C. AEC shall thereafter
continue its funding until successful completion of its design obligations.
AEC shall segregate all its design costs and shall provide Grumman with a
monthly accounting of same. The books and records of AEC relating to this
Agreement shall be available for inspection by Grumman upon prior written
notice to AEC at reasonable times during the course of this Agreement and for
three years thereafter.
6.2 Grumman and AEC each represent and warrant that the sources of
funding that they will use to fund the Project shall not result in the grant
to the United States Government or to any third party of any rights in the
Projects, including rights in the Engineering Prototypes or in any of the
Technical Data.
ARTICLE 7: Design Rights
-------------
3
<PAGE>
7.1 AEC represents and warrants that it has full rights and title
to the Underlying Technologies and has the authority to enter into this
Agreement. All rights to the Underlying Technologies and the Application
Technology are and shall remain the property of AEC. AEC hereby grants to
Grumman, subject to Article 14.6 herein, in consideration of Grumman's
Funding provided hereunder, exclusive worldwide rights to market the
Application Technology for the foreign and domestic, direct and indirect,
military sales market, all as defined in Article 8.1(a).
7.2 Upon qualification of the Engineering Prototypes, Grumman
shall be the Technical Design Authority. No changes to the Headset System
design may thereafter be made without prior written approval of Grumman.
7.3 Inventions conceived jointly by employees of both parties
during work under this Agreement and patents arising from such joint
inventions shall be the joint property of Grumman and AEC, and shall be
available to be utilized by the parties hereto only with prior consultation
and agreement between the parties hereto. The parties agree to select
mutually acceptable patent attorneys to file and prosecute United States
Patent applications based on such joint patentable inventions and to share
equally the cost of such services and expenses reasonably incurred by such
attorneys, and, without further compensation, to give such attorneys all
reasonable assistance, to cause all necessary papers to be executed and do
all things that may reasonably be required to obtain United States patents on
such joint inventions. The cost of filing and prosecuting patent
applications on joint inventions shall be shared equally between the parties
and each party shall cooperate with the other in providing technical
information and assistance necessary for filing and prosecuting such
applications.
7.4 If either party elects not to continue prosecution of any
application it has shared in filing pursuant to this Article, then it shall
promptly notify the other party in writing of such election, giving said
other party the right to take over such prosecution at its sole expense. The
party who decides not to file or prosecute such application shall assign its
interest therein to the other party but shall retain a royalty-free, non-
exclusive license, without the right to grant sublicenses, under any patent
issuing thereon.
7.5 Except as otherwise provided in Article 7.1, each party shall
retain the exclusive right and ownership of all intellectual property owned
by it, and nothing contained in this Agreement shall be construed as giving
either party a license in, to or under any technical information, trade
secrets, designs or inventions whether or not patented or patentable, which
are owned or controlled by the other party hereto.
ARTICLE 8: Production
----------
8.1 The parties anticipate that production of the Headset System
demonstrated and qualified by the Engineering Prototypes may be marketable to
the U.S. Government and others on a variety of programs. In the event an
opportunity for such a production sale arises, the parties agree as follows:
4
<PAGE>
(a) AEC agrees to sell the Headset System and its
components exclusively to Grumman for all U.S. domestic military sales, all
U.S. foreign military sales, and all direct foreign sales for military
purposes; provided, however, that the foregoing shall not be construed to
include AEC's existing customers as set forth on Exhibit D attached hereto
and made a part hereof. For the purposes of this Agreement, U.S. military
sales shall be deemed to include the Advanced Research Project Agency
(A.R.P.A.).
(b) Grumman agrees that when it receives an RFP which
contains a headset requirement which could be fulfilled by the Headset
System, AEC shall be a preferred supplier for said requirement subject to
customer approval and negotiation by the parties of a mutually acceptable
team agreement.
ARTICLE 9: Protection of Proprietary Information
-------------------------------------
9.1 During the term of this Agreement, Grumman and AEC may
disclose to each other certain technical or business information which each
party considers to be its valuable proprietary property. All such
information shall hereinafter be collectively referred to as "Proprietary
Information." All Technical Data as defined by this Agreement shall be
considered to be Proprietary Information. Proprietary Information disclosed
by one party to the other will be clearly marked with a label such as
"Proprietary" or "Confidential". Proprietary Information which is orally
disclosed will be followed-up by the disclosing party within ten (10)
businesses days with a written description of the Proprietary Information
which is clearly labeled "Proprietary" or "Confidential."
9.2 A recipient of Proprietary Information shall protect the
Proprietary Information against unauthorized disclosure or use for any
purpose other than that stated in this Agreement, using the same degree of
care, but not less than a reasonable degree of care, as the recipient uses to
protect its own Proprietary Information of a like nature.
9.3 This Agreement imposes no obligation upon a recipient with
respect to any Proprietary Information disclosed under this Agreement which:
(a) was in the recipient's possession before receipt from the discloser; or
(b) is or becomes a matter of public knowledge through no fault of the
recipient; or (c) is rightfully received by the recipient from a third party
without a duty of protection; or (d) is independently developed by the
recipient; or (e) is disclosed by recipient with the discloser's prior
written approval.
9.4 Each party hereto warrants that it has the right to make the
disclosures that it makes under this Agreement and that all such disclosures
are at the sole discretion of the disclosing party.
9.5 Proprietary Information disclosed under this Agreement shall
be retained in confidence by the recipient for a period of (Confidential
Treatment) years from the effective date of this Agreement. During such
period the receiving party shall use the Proprietary Information of the
disclosing party received hereunder only in carrying out the activities
required to complete the Project and shall disclose such Proprietary
Information only to those of its employees having a justified need to know
with respect to completion of the Project.
5
<PAGE>
9.6 Disclosure of Proprietary Information of either party
hereunder to a subcontractor shall only be done after the subcontractor has
entered into a written agreement obligating him to protect the disclosure of
Proprietary Information of the other party hereto under terms and conditions
similar to those contained herein.
9.7 Disclosure of Proprietary Information directly or
indirectly to the United States Government shall only be made under
conditions obligating the receiving party to protect the Proprietary
Information to the extent permitted under the applicable Federal Acquisition
Regulations. The disclosing party shall insure that all applicable
requirements for marking of Proprietary Information under the Federal
Acquisition Regulations have been fully complied with prior to the delivery
of Proprietary Information directly or indirectly to the United States
Government.
ARTICLE 10: Patent Indemnity
----------------
10.1 AEC shall at its expense defend, indemnify and hold Grumman
and its customers harmless against any claim of patent, trademark, copyright
or trade secret infringement arising from the Underlying Technology and the
Application Technology provided that timely notice of such claim is given to
AEC.
ARTICLE 11: Successor in Interest; Additional Data Rights
---------------------------------------------
11.1 AEC hereby grants to Grumman a right of first refusal to
purchase the Application Technology in the event AEC receives a firm offer
for same from another party. AEC promises to provide Grumman with prompt
written notice ("AEC Notice") of any such offers and Grumman shall have a
period of (Confidential Treatment) thereafter to provide AEC with written
notice of its exercise of the right of first refusal upon the same terms and
conditions of the firm offer as set forth in the AEC Notice.
11.2 Upon delivery of the Engineering Prototypes, AEC shall
immediately place into escrow pursuant to an escrow agreement mutually
acceptable to the parties hereto with a mutually-agreeable escrow agent a
complete copy of the Data Package. Grumman shall have access to the Data
Package upon the occurrence of one of the following events:
(a) If AEC is in default on a current Grumman procurement
requirement, Grumman (i) shall be deemed to have a fully paid-
up license to manufacture the Underlying Technology using the
Data Package, and to sell the manufactured products to meet
the contractual requirements of that procurement and (ii)
shall pay to AEC a royalty of (Confidential Treatment) on
each Headset System manufactured by Grumman. Payment of the
royalty shall be made within (Confidential Treatment) after
receipt by Grumman of payment for such headset but in no event
no later than (Confidential Treatment) after such headset is
manufactured pursuant to this Article 11.2(a).
6
<PAGE>
(b) AEC or a successor in interest thereto repudiates or
breaches this Agreement in which event Grumman shall
be deemed to have a fully paid-up, irrevocable world
wide non-exclusive license to use the Data Package to
manufacture and sell Headset Systems and/or components
thereof which incorporate the Underlying Technology and
shall pay to AEC the royalty as set forth in clause (a) above.
ARTICLE 12: Press Releases
--------------
12.1 Neither party shall, without the other party's prior written
consent, issue any news releases, advertisements, publicity or promotional
material regarding the subject of this Agreement including the denial or
confirmation of its existence. Notwithstanding the foregoing, Grumman hereby
recognizes that such press release is subject to the requirements and
approval of the American Stock Exchange.
ARTICLE 13: Notices
-------
13.1 Any notice required or permitted by this Agreement shall be
written and shall be delivered personally or by first class mail or fax
addressed to the recipient at the addresses set forth below or to such
changed address as a party may from time to time specify in writing for such
purpose.
If to Grumman:
Grumman Space and Electronics
Aerospace & Electronics Group
Great River, New York
Attn:
Telephone No.
Telecopier No.
If to AEC:
Andrea Electronics Corporation
11-40 45th Road
Long Island City, New York 11101
Attn: (Confidential Treatment)
Telephone No.: (718) 729-8500
Telecopier No.: (718) 729-8500
Mailed notices shall be deemed received five (5) days after mailing, fax
notices shall be deemed received twelve (12) hours after sending, but this
provision shall not be interpreted as relieving the notifying party from
accomplishing actual notice during normal business hours within a reasonable
time after such mailing or fax transmission.
ARTICLE 14: Termination and Refund
----------------------
7
<PAGE>
14.1 For the purposes of termination, this Agreement is divided
into three Phases as follows:
Phase 1 - Ends (Confidential Treatment) when AEC submits
System prices to Grumman at PDR.
Phase 2 - Ends (Confidential Treatment) ARO when AEC delivers
functional test items.
Phase 3 - Ends at delivery of all Prototypes.
14.2 At the end of Phase 1, Grumman shall have the option to
terminate this Agreement upon ten days' written notice to AEC in the event
the Headset System price exceeds the target production price of (Confidential
Treatment).
14.3 Within (Confidential Treatment) of the end of Phase 2, Grumman
shall have the option to terminate the Agreement upon (Confidential
Treatment) written notice to AEC in the event the functional test items fail
to meet the performance specification after Grumman/AEC-conducted testing and
AEC cannot demonstrate a degree of probability satisfactory to Grumman that
the Engineering Prototypes will meet the performance specification upon
delivery.
14.4 In the event of a termination in accordance with 14.2 or 14.3,
or in the event that the Engineering Prototypes do not comply with the
specification such that military sales contemplated hereunder are not, in the
opinion of Grumman, feasible, (Confidential Treatment) of the amount of
Grumman's share expended to date by AEC shall be refunded to it as
hereinafter provided. AEC shall pay Grumman a (Confidential Treatment)
royalty from the commercial sales of the Headset System until such time that
the refund is paid in full, but no later than (Confidential Treatment) years
from the date of this Agreement.
14.5 Unless terminated earlier or otherwise extended by the
parties, this Agreement shall terminate six years after the effective date
hereof; provided, however, in the event that Grumman desires to terminate
this Agreement as permitted hereunder prior to such six-year period, AEC
shall have a (Confidential Treatment) period to cure any deficiencies.
Grumman shall have the option, at its sole discretion, to extend this
Agreement for an additional six-year period subject to mutually agreeable
pricing terms.
14.6 In the event that the headsets are not placed upon the QPL in
accordance with Article 4.4 herein within (Confidential Treatment) after
Phase 3, or in the event of a breach by Grumman of Articles 6.1, 7.3, 7.5 or
9, AEC shall have the option to terminate this Agreement upon
(Confidential Treatment) notice to Grumman. In such event, Grumman shall
have a (Confidential Treatment) period to cure any deficiencies.
14.7 Upon termination, all rights and obligations of the parties
except those contained in Articles 7.3, 7.4, 7.5, 9, 10 and 14.4
shall cease.
8
<PAGE>
ARTICLE 15: Miscellaneous Provisions
------------------------
15.1 This Agreement may not be assigned or otherwise transferred by
either party, in whole or in part, without the prior written consent of the
other party.
15.2 This Agreement constitutes the entire agreement between
Grumman and AEC with respect to the subject matter hereof and supersedes all
prior agreements both written and oral. No modification of this Agreement
shall be valid unless it is in writing and is signed by officers of the
parties hereto.
15.3 The failure to enforce any of the terms and conditions of this
Agreement by either one of the parties hereto shall not be deemed a waiver of
any of the rights and privileges under this Agreement, or a waiver of the
right to thereafter claim damages for deficiencies resulting from any
misrepresentation, breach, warranty, or non-fulfillment of any obligation of
the other party hereto.
15.4 In the event that any one or more of the provisions of this
Agreement for any reason shall be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality, or
unenforceability shall not affect any other provision of this Agreement, and
this Agreement shall be construed as if such invalid, illegal or
unenforceable provisions had never been contained herein.
15.5 The rights and remedies set forth in the Agreement are in
addition to and may modify but are not in substitution for those provided in
law and equity. This Agreement shall be governed by and construed according
to the domestic, substantive laws of the State of New York. All jurisdiction
and venue shall lie in the State of New York, County of Nassau or County of
Queens, including the U.S. Federal Courts therein.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed below by their duly authorized representatives as of the day and
year first above written.
GRUMMAN AEROSPACE CORPORATION ANDREA ELECTRONICS CORPORATION
AEROSPACE & ELECTRONICS GROUP
By: (Confidential Treatment) By: /s/ John N. Andrea
---------------------------- ---------------------------
John N. Andrea
Title: President
-------------------------
Date: 9-23-93 By: /s/ Douglas J. Andrea
--------------------------- --------------------------
Douglas J. Andrea
Title: Co-Presidents
------------------------
9
<PAGE>
<PAGE>
EXHIBIT 10.4
<PAGE>
LICENSE AND TECHNICAL SUPPORT AGREEMENT
This License and Technical Support Agreement, effective as of October 3,
1995 (the "Effective Date"), by and between ANDREA ELECTRONICS CORPORATION, a
New York corporation, with an address of 11-40 45th Road, Long Island City,
New York 11101 ("LICENSOR"), and BellSouth Products, Inc., a Georgia
corporation, with an address of Suite 1750, 3000 Riverchase Galleria,
Birmingham, Alabama ("LICENSEE"; together with the LICENSOR, the "Parties";
each of the Parties singly, a "Party").
WHEREAS, LICENSOR is the owner of all right, title and interest in the
Licensed Intellectual Property (herein defined);
WHEREAS, LICENSOR desires to grant to LICENSEE, and LICENSEE desires to
obtain from LICENSOR, certain license rights under the Licensed Intellectual
Property;
WHEREAS, LICENSOR desires to furnish to LICENSEE, and LICENSEE desires
to obtain from LICENSOR, certain technical support in respect of LICENSEE's
exploitation of the license rights granted hereunder; and
WHEREAS, LICENSOR and LICENSEE desire to set forth herein the terms and
conditions under which such license rights will be granted and technical
support provided;
NOW, THEREFORE, in consideration of the premises and mutual covenants
and agreements contained herein, and other good and valuable consideration,
the sufficiency of which is hereby affirmed, the Parties agree as follows:
ARTICLE I
DEFINITIONS
The following terms shall have the meanings ascribed thereto.
1.1 AFFILIATE. The term "Affiliate" shall mean any corporation, company,
---------
partnership, joint venture and/or firm which controls, is controlled
by, or is under common control with, a Party. For purposes of this
definition, "control" shall mean (a) in the case of corporate entities,
direct or indirect ownership of at least fifty percent (50%) or, if less than
fifty percent (50%), the maximum percentage, as allowed by applicable law, of
the stock or participating shares entitled to vote for the election of
directors; and (b) in the case of non-corporate entities, direct or indirect
ownership of at least fifty percent (50%) or, if less than fifty percent
(50%), the maximum percentage, as allowed by applicable law, of the equity
interest with the power to direct the management and policies of such
non-corporate entity.
1.2 DESIGNATED SUBLICENSEES. The term "Designated Sublicensees" shall have
-----------------------
the meaning given thereto in Section 2.2.
1.3 EFFECTIVE DATE. The term "Effective Date of this Agreement" shall have
--------------
the meaning given thereto in the first paragraph of this Agreement.
1.4 IMPROVEMENTS. The term "Improvements" shall mean any improvement to the
------------
Licensed Apparatus and/or the Licensed Technology, including, without
limitation, the application or installation of such Licensed Apparatus or
Licensed Technology to or in telephones or any other product.
1
<PAGE>
1.5 LICENSE QUARTER. The term "License Quarter" shall mean each calendar
---------------
year during the term of this Agreement, except that the first License
Quarter hereunder shall be deemed to begin on the Effective Date and
end on March 31, 1996.
1.6 LICENSE YEAR. The term "License Year" shall mean each calendar year
------------
during the term of this Agreement, except that the first License
Year hereunder shall be deemed to begin on the Effective Date and end on
December 31, 1996.
1.7 LICENSED APPARATUS. The term "Licensed Apparatus" shall mean the
------------------
apparatus claimed in the Licensed Patent.
1.8 LICENSED COPYRIGHTS. The term "Licensed Copyrights" shall mean any and
-------------------
all copyrights owned by Licensor on materials relating to the
Licensed Intellectual Property.
1.9 LICENSED INFORMATION MATERIALS. The term "Licensed Information
------------------------------
Materials" shall mean any and all writings and other manifestations
(whether in written, electronic or other form) covering or relating to the
Licensed Apparatus, the Licensed Patent, and/or the Licensed Technology,
including, without limitation, drawing packages, diagrams, blueprints, plans,
schematics, specifications, engineering data, parts lists, and quality and
performance standards in respect of the Licensed Technology.
1.10 LICENSED INTELLECTUAL PROPERTY. The term "Licensed Intellectual
------------------------------
Property" shall mean, collectively, the Licensed Patent, the
Licensed Mark, the Licensed Information Materials, the Licensed Technology
and the Licensed Copyrights.
1.11 LICENSED MARKS. The term "Licensed Marks" shall mean "Andrea Anti-
--------------
Noise," or any other trademark set forth in Schedule 1.13 hereto as
such Schedule 1.13 may be amended by Licensor from time to time by written
notice to Licensee.
1.12 LICENSED PATENT. The term "Licensed Patent" shall mean U.S. Letters
---------------
Patent No. 5,381,473 ("Noise cancellation apparatus"), any reissue
patent or reexamination certificate therefrom, and any and all non-U.S.
counterparts to such U.S. Letters Patent and/or reissue patent therefrom.
1.13 LICENSED PRODUCTS. The term "Licensed Products" shall mean Telephones
-----------------
provided to an end user that is a residence or a Small Business;
provided, however, that such term shall not include, unless otherwise agreed
to in writing by the Parties under a separate agreement, cellular telephones
or personal communications services (PCS) telephones.
1.14 LICENSED TECHNOLOGY. The term "Licensed Technology" shall mean
-------------------
information, knowledge, techniques, trade secrets and know-how
relating to the inventions claimed in the Licensed Patent and methods and
processes for manufacturing the Licensed Apparatus.
1.15 LICENSED TERRITORY. The term "Licensed Territory" shall mean the
------------------
United States, Canada, Mexico, South America and Israel. The list
of specific territories comprising the Licensed Territory may, from time to
time during the term of this Agreement, be amended upon the mutual agreement
of the Parties.
1.16 MINIMUM PRODUCTION. The term "Minimum Production" in respect of any
------------------
specified period during the term of this Agreement shall mean the
unit amount of Licensed Products specified herein that must be manufactured
during such period in order for LICENSEE to maintain exclusivity of the
license rights granted hereby.
2
<PAGE>
1.17 SMALL BUSINESS. The term "Small Business" shall mean any
--------------
for-profit or not-for-profit corporation, partnership or other
entity employing not more than ten persons.
1.18 TELEPHONE. The term "Telephone" shall mean any device consisting of
---------
at least a handset, a dialing mechanism and that contains a means of
interconnecting such device to the carrier providing service to an end user.
ARTICLE II
GRANT OF LICENSE
2.1 GRANT.
-----
Subject to the terms and conditions herein and to the payment of
royalties as set forth herein, LICENSOR grants to LICENSEE a nontransferable
license under each of the following items of Licensed Intellectual Property,
in each case having the scope and degree of exclusivity or non-exclusivity so
specified:
(a) under the Licensed Patent, on a non-exclusive basis, to make and
have made, anywhere in the world, Licensed Apparatus for incorporation into
Licensed Products;
(b) under the Licensed Patent and within the Licensed Territory, (i) on
an exclusive basis, to distribute, have distributed, sell and have sold
Licensed Apparatus incorporated into Licensed Products provided to an end
user that is a residence, and (ii) on an exclusive basis, to distribute, have
distributed, sell and have sold Licensed Apparatus incorporated into Licensed
Products provided to an end user that is a Small Business, in each case
subject to Section 2.3;
(c) under the Licensed Technology, on a non-exclusive basis, to use,
apply and practice such Licensed Technology anywhere in the world in order to
exercise the licenses granted under clauses (a) and (b) of this Section 2.1;
(d) under the Licensed Marks within the Licensed Territory, on an
exclusive basis subject to Section 2.3, to place the Licensed Marks in a form
and location to be designated by LICENSOR on Licensed Products containing
Licensed Apparatus for sale and distribution; and
(e) under the Licensed Copyrights within the Licensed Territory, on an
exclusive basis subject to Section 2.3, to print, publish and sell the works
covered thereby in connection with the sale and distribution of Licensed
Products containing Licensed Apparatus.
Andrea reserves the right to license, market, make or have made and
distribute, anywhere in the world, Licensed Apparatus for Telephones and any
other products other than Licensed Products.
2.2 SUBLICENSE RIGHTS.
-----------------
The license granted herein shall include the right of LICENSEE to
sublicense certain manufacturers and distributors designated by LICENSEE and
approved by LICENSOR ("Designated Sublicensees"), provided that each such
Designated Sublicensee shall execute a written sublicense agreement to be
bound by the same terms and conditions of this Agreement as if such
Designated Sublicensee were a party hereto and provided further that LICENSEE
shall pay any royalties due hereunder on account of the activities of any
such Designated Sublicensee and shall be accountable to LICENSOR for
compliance by any Designated Sublicensee with all the terms and conditions of
this Agreement. Any sublicenses granted hereunder shall terminate upon the
termination of the license granted to LICENSEE hereunder. A copy
3
<PAGE>
of each sublicense granted hereunder shall be provided to LICENSOR promptly
following the execution thereof.
2.3 REQUIREMENT FOR EXCLUSIVITY.
---------------------------
The license granted hereunder shall be exclusive for the first License
Year, and during each subsequent License Year, such license shall remain
exclusive provided that the Minimum Production of Licensed Products specified
herein for the immediately prior License Year was achieved during such prior
License Year.
2.4 RESTRICTIONS ON LICENSE.
-----------------------
The license rights granted hereunder do not include: any rights to
make, use or sell Licensed Apparatus other than for incorporation into
Licensed Products; any rights to incorporate Licensed Apparatus into any
product not bearing the Licensed Mark and the "BellSouth" mark; any rights to
use the Licensed Mark on products not containing the Licensed Apparatus; and
any rights to reverse engineer the Licensed Apparatus or the Licensed
Technology. Nothing in this Agreement shall prevent or exclude LICENSOR from
using its service marks or trademark(s) on or in connection with goods or
services manufactured and/or marketed by LICENSOR.
2.5 IMPROVEMENTS.
------------
LICENSEE, its agents, employees, manufacturers, contractors, vendors,
and affiliates shall not make any Licensed Apparatus or Licensed Product or
publish and distribute any unless pursuant to this Agreement and, shall in no
event reverse engineer the Licensed Apparatus or the Licensed Technology.
Notwithstanding the provisions of the immediately preceding sentence, in the
event that LICENSEE develops any Improvements, the Parties shall jointly and
severally own all intellectual property rights in, to and under each such
Improvement, including, without limitation all patent rights therein, and the
Parties shall execute any and all instruments necessary or advisable to
reflect such joint and several ownership, and each Party shall bear one-half
of the cost and expense of securing, protecting and enforcing such
intellectual property rights in, to and under such Improvement, including,
without limitation, executing or having employees execute patent applications
and assignment documents to reflect such joint and several ownership. With
respect to each such Improvement, LICENSEE shall promptly notify LICENSOR of
the conception, creation, invention and/or reduction to practice of such
Improvement and of any like event relating to such Improvement.
ARTICLE III
ROYALTIES
3.1 ROYALTY RATE.
------------
LICENSEE agrees that it shall pay to LICENSOR a royalty of (Confidential
Treatment), payable in United States dollars, for each Licensed Product
manufactured by LICENSEE or any Designated Sublicensee under the license
rights granted under this Agreement.
3.2 WHEN DUE AND PAYABLE.
--------------------
Royalties shall be due and owing to LICENSOR upon the manufacture of
each Licensed Product and shall be paid in accordance with Section 4.1.
4
<PAGE>
3.3 MINIMUM PRODUCTION.
------------------
For each of the first three License Years the Minimum Production in
units shall be as set forth below:
License Year Minimum Production
------------ ------------------
First (Confidential Treatment) units
Second (Confidential Treatment) units
Third (Confidential Treatment) units
In the event that LICENSEE fails to meet the minimum production requirements
for any License Year, then in order for LICENSEE to maintain its rights
hereunder, LICENSEE shall pay to LICENSOR, by the (Confidential Treatment)
following the end of such License Year, a royalty equal to the royalty that
would have been paid hereunder if such minimum production requirements had
been satisfied, after crediting against such obligation the amount of any
other royalties paid to LICENSOR in respect of such License Year on or before
such date. In the event that the Parties agree upon any extension of this
Agreement, the Parties shall thereupon agree upon the Minimum Production in
respect of each License Year during such extension.
ARTICLE IV
REPORTS, PAYMENTS AND RECORDS
4.1 ACCOUNTING AND PAYMENT SCHEDULE.
-------------------------------
Payment and financial accounting shall be on a quarterly basis.
LICENSEE will deliver to LICENSOR on the (Confidential Treatment) next
succeeding each License Quarter during the term of this Agreement a report in
writing setting forth the quantity of Licensed Products manufactured during
such period and will accompany such report with an appropriate payment of
royalties due for such period in United States dollars. Payments which are
delayed beyond the (Confidential Treatment) after the end of the period in
respect of which they became due shall be subject to (Confidential Treatment)
per annum interest charge.
4.2 MAINTENANCE OF RECORDS BY LICENSEE.
----------------------------------
LICENSEE will keep accurate records, certified by LICENSEE at the
request of LICENSOR, showing the information relating to the manufacture of
Licensed Apparatus and Licensed Products by LICENSEE and each Designated
Sublicensee during each License Quarter during the term of this Agreement and
in reliance upon which information LICENSEE determines the payment of
royalties due under this Agreement in respect of such License Quarter.
4.3 LICENSOR'S RIGHT TO AUDIT; ERRORS IN PAYMENT.
--------------------------------------------
LICENSEE will permit a person appointed by LICENSOR and reasonably
acceptable to LICENSEE to audit the records referred to in Section 4.2 in
order to verify the quarterly royalty reports made by LICENSEE to LICENSOR.
Unless otherwise provided, LICENSOR shall bear the expense of each such
audit. In the event that any such audit shows an underpayment of
(Confidential Treatment), LICENSEE shall promptly remit to LICENSOR the
amount of such underpayment, with interest thereon at a rate of (Confidential
Treatment) per annum on the overdue balance from the date on which such
payment should have been paid, plus the fees and costs of such audit.
5
<PAGE>
ARTICLE V
TECHNICAL SUPPORT FROM LICENSOR
5.1 DISCLOSURE OF LICENSED TECHNOLOGY.
---------------------------------
Promptly after the Effective Date, LICENSOR, at LICENSOR's expense, will
furnish to LICENSEE a copy of the Licensed Information Materials reasonably
needed by LICENSEE in order to manufacture Licensed Apparatus for
incorporation into Licensed Products.
5.2 SUPPORT TO LICENSEE.
-------------------
LICENSOR, at LICENSOR's expense, will supply to LICENSEE, at LICENSEE's
request, reasonable engineering and other technical support, including
personnel, with respect to the Licensed Intellectual Property and the
incorporation of the Licensed Apparatus into Licensed Products.
ARTICLE VI
OBLIGATIONS AND ACTIONS OF LICENSEE
6.1 MARKETING.
---------
LICENSEE shall use its best efforts to promote, market, sell and
distribute the Licensed Products. Each Licensed Product shall be marked to
indicate that it is covered by the Licensed Patent and shall also bear the
Licensed Mark, which such markings shall be in accordance with standards
established by LICENSOR in its sole discretion. In addition, each Licensed
Product shall bear the "BellSouth" mark.
6.2 USE OF LICENSED MARK.
--------------------
LICENSEE shall not place the Licensed Mark or any service and/or
trademark of LICENSOR or any confusingly similar mark or name on any product
not constituting a Licensed Product. LICENSEE shall not use the Licensed
Mark, any other service or trademark of LICENSOR, or LICENSOR's name in
advertising, promotional material or packaging without LICENSOR's prior
written consent.
6.3 RECOGNITION OF LICENSOR'S RIGHTS.
--------------------------------
LICENSEE recognizes and agrees that, as between the Parties, (a)
LICENSOR retains the sole and exclusive right, title and interest to the
Licensed Intellectual Property except for the exclusive rights granted
hereunder to LICENSEE to sell and distribute Licensed Apparatus incorporated
into Licensed Products under the Licensed Mark in the Licensed Retail
Residential Market, and the non-exclusive rights granted hereunder to
LICENSEE to sell and distribute Licensed Apparatus incorporated into Licensed
Products under the Licensed Mark in the Licensed Retail Non-Residential
Market and the Licensed Non-Retail Residential Market; (b) LICENSEE has no
right to make, use or sell the Licensed Apparatus and no right to use any
Licensed Intellectual Property except as strictly provided in this Agreement;
(c) any goodwill created in or associated with the Licensed Apparatus
resulting from the sale of Licensed Products shall inure to the benefit of
both Parties, and any goodwill associated with the Licensed Mark employed in
connection or associated with the Licensed Products shall inure to the sole
benefit of LICENSOR; and (d) any and all license rights granted to LICENSEE
hereunder shall terminate immediately upon the termination of this Agreement.
6
<PAGE>
6.4 NO CONTEST OF LICENSOR'S RIGHTS.
-------------------------------
LICENSEE agrees that it will not challenge during the term of this
Agreement, shall not contest, in any forum, the validity or scope of the
Licensed Patent, the Licensed Mark, the Licensed Copyrights, or any
registration or application therefor, or LICENSOR's right to use and
ownership thereof.
6.5 ASSISTANCE IN PROSECUTING RIGHTS IN LICENSED INTELLECTUAL PROPERTY.
------------------------------------------------------------------
LICENSEE agrees that it will, at LICENSOR's reasonable cost and expense
and upon LICENSOR's request, for the sole benefit of LICENSOR, assist in the
prosecution of any application or registration for any patent, trademark or
copyright relating to the Licensed Intellectual Property and the Licensed
Technology, in bringing or prosecuting any action or suit against third
parties for patent, trademark, services mark, trade dress or copyright
infringement or unfair competition or related causes of action, which
assistance shall include, without limitation, execution of such documents,
instruments and other papers relating thereto as may be reasonably necessary
or desirable.
6.6 INFRINGEMENT BY THIRD PARTIES.
-----------------------------
LICENSEE shall give to LICENSOR prompt written notice of any
infringement or potential infringement of the Licensed Intellectual Property
by third parties of which LICENSEE obtains knowledge or of which LICENSEE is
aware. LICENSOR, in its sole and absolute discretion, may take whatever
steps it deems necessary or advisable to stop any such infringement or
potential infringement, but shall not be obliged to commence any such
proceedings against the infringer or potential infringer. In the event that
LICENSOR decides to commence any such proceedings, LICENSOR shall be
responsible for any legal costs incurred in respect thereof and shall be
entitled to retain any damages recovered therefrom.
6.7 ACTIONS IN GENERAL.
------------------
Licensee shall at all times conduct its business in a lawful manner and
in a manner which will not discredit LICENSOR or the Licensed Intellectual
Property, and will not otherwise impair the goodwill in the Licensed
Intellectual Property and, LICENSEE shall be solely responsible for
compliance with all laws and regulations that relate to the sale,
distribution or promotion of the Licensed Products in accordance with this
Agreement.
ARTICLE VII
CONFIDENTIALITY
7.1 CONFIDENTIAL AND PROPRIETARY INFORMATION.
----------------------------------------
Each Party acknowledges that it has already received, is presently
receiving, and expects to continue to receive during the term of this
Agreement confidential proprietary information from the other Party. Such
information includes, but is not limited to, trade secrets, know-how,
inventions, techniques, processes, programs, schematics, data, drawing
packages, diagrams, blueprints, plans, specifications, engineering data,
parts lists, quality and performance standards, customer lists, financial
information, and sales and marketing plans that are clearly identified as
being confidential. Each Party, at all times, both during the term of this
Agreement and for a period of (Confidential Treatment) years after its
termination, (a) shall keep in confidence and trust all such proprietary
information, (b) shall not use such information other than as permitted under
the terms of this Agreement and specifically shall not reverse engineer any
7
<PAGE>
proprietary information of the other Party, and (c) shall not disclose
any proprietary information of the other Party, without prior
written consent of the other Party. Each Party shall similarly bind its
Affiliates, agents, employees, manufacturers, contractors and vendors who
shall only have access based on their need to know such information. Upon
termination of this Agreement, each Party will immediately return to the
other Party all documents and media (and all copies thereof) containing any
confidential proprietary information of the other Party.
7.2 EXCLUSION.
---------
The obligations pursuant to Section 7.1 shall not apply to information
that the receiving Party can demonstrate by clear and convincing evidence:
(a) was in the possession of, or was known by, the receiving Party prior to
its receipt from the disclosing Party and was not subject to any other
obligation of confidentiality; (b) is or becomes public knowledge without
fault of the receiving Party; (c) was received by the receiving Party from a
source, other than the disclosing Party, who disclosed the information not in
violation of any confidentiality restriction; (d) is independently developed
by the receiving Party not in violation of any confidentiality restriction
and by persons who did not have access to the confidential information; or
(e) is disclosed by the receiving Party pursuant to any statute, regulation,
or order of a court of competent jurisdiction, provided that the receiving
Party previously notifies the disclosing Party to permit the taking of
appropriate protective measures.
ARTICLE VIII
TERM, RENEWAL, TERMINATION AND CANCELLATION
8.1 TERM.
----
Unless sooner terminated, this Agreement shall commence on the Effective
Date hereof and shall terminate on December 31, 1998.
8.2 RENEWAL.
-------
This Agreement may be renewed for an additional one year term or as
mutually agreed to by the Parties and negotiated in good faith, provided that
LICENSEE submits to LICENSOR written notice of its desire to renew not less
than (Confidential Treatment) prior to the date that this Agreement would
otherwise terminate. Unless otherwise modified by mutual written agreement
of the Parties, the terms and conditions hereof shall apply to any such
renewal of this Agreement. LICENSOR agrees during the term of this Agreement
and any renewal thereof, not to grant any licenses to third parties that
would cause the license granted hereunder to become non-exclusive.
8.3 TERMINATION.
-----------
(a) FOR BANKRUPTCY OR INSOLVENCY. If LICENSEE becomes bankrupt or
insolvent, or files a petition in bankruptcy, or, if the business of LICENSEE
shall be placed in the hands of a receiver, assignee or trustee for the
benefit of creditors, whether voluntarily or involuntarily, this Agreement
and the license and rights herein granted shall automatically and immediately
terminate. If LICENSOR becomes bankrupt or insolvent, or files a petition in
bankruptcy, or, if the business of LICENSOR shall be placed in the hands of a
receiver, assignee or trustee for the benefit of creditors, whether
voluntarily or involuntarily, this Agreement and the license and rights
herein granted shall continue in accordance with the terms hereof.
8
<PAGE>
(b) FOR UNAUTHORIZED ASSIGNMENT OR TRANSFER. Any purported
assignment or transfer of this Agreement or of any license, right or
obligation hereunder by LICENSEE without the prior written consent of
LICENSOR, shall cause this Agreement and the license and rights herein
granted to automatically and immediately terminate.
(c) FOR BREACH BY LICENSEE. In the event that LICENSEE breaches this
Agreement by making, using, selling or distributing Licensed Products other
than as provided under this Agreement, including, without limitation, by (i)
reverse engineering any of the Licensed Apparatus or the Licensed Technology,
(ii) selling or distributing Licensed Products outside the Licensed Territory
or in a non-retail market in the Licensed Territory for non-residential use,
or without bearing an appropriate patent mark in respect of the Licensed
Patent and the Licensed Mark, or relabeled or private labeled without
Licensee's service or trademark(s), or (iii) employing the Licensed Mark or
any confusingly similar mark or name on any product other than a Licensed
Product, then this Agreement and the license and rights herein granted shall
automatically and immediately terminate; provided, however, that in the event
of a breach covered by clauses (ii) or (iii) of this Section 8.3(c), LICENSEE
shall have a period of (Confidential Treatment) following written notice of
such breach to LICENSOR, which such notice shall be required hereunder, to
cure such breach.
(d) FOR MATERIAL BREACH. Subject to Section 8.3(c), upon any material
breach or default of this Agreement by either Party, the other Party shall
have the right to terminate/cancel the Agreement (and to terminate/cancel the
license and rights herein granted) on (Confidential Treatment) written notice
to the breaching/defaulting Party. Such termination/cancellation shall
become effective at the expiration of such (Confidential Treatment), unless
the breaching/defaulting Party has cured the breach or default prior to the
expiration of such (Confidential Treatment) or has in good faith initiated
and is continuing to pursue efforts to cure such breach or default, provided
that any such cure shall be completed by the expiration of (Confidential
Treatment) following such written notice to the breaching/defaulting Party.
8.4 EFFECT OF TERMINATION.
---------------------
Upon any termination/cancellation of this Agreement, all use by LICENSEE
of the Licensed Intellectual Property shall immediately cease. Accordingly,
upon any termination/cancellation of this Agreement, LICENSEE shall, without
limitation, cease all sales, distribution, marketing and promotion of
Licensed Products; provided, however, that LICENSEE shall have the right to
liquidate in a manner consistent with the terms and conditions of this
Agreement any Licensed Products then in its finished goods inventory and the
obligation of LICENSEE to pay royalties to LICENSOR hereunder in respect of
Licensed Products not theretofore satisfied shall automatically and
immediately mature.
8.5 RIGHTS SURVIVING TERMINATION.
----------------------------
Termination/cancellation shall not relieve either Party from any
obligations that mature prior to the effective date of such
termination/cancellation. Termination/cancellation rights provided herein
are in addition to any other rights and remedies available to the Parties.
8.6 TERMINATION OF SUBLICENSES.
--------------------------
Every sublicense granted hereunder, if not sooner terminated according
to any other provisions of this Agreement, shall terminate with
termination/cancellation of this Agreement.
9
<PAGE>
ARTICLE IX
REPRESENTATIONS AND WARRANTIES
9.1 LICENSOR'S REPRESENTATIONS AND WARRANTIES.
-----------------------------------------
LICENSOR represents and warrants that:
(a) to the best of its knowledge, the manufacture, use, sale and/or
distribution of the Licensed Products 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, execution and
delivery of this Agreement by LICENSOR and the performance of LICENSOR's
obligations hereunder has been taken; and
(c) the entry into this Agreement by LICENSOR does not violate any
contract, agreement or arrangement of any kind between LICENSOR and any third
party.
LICENSOR makes no warranties or representations as to the validity or scope
of the Licensed Patent. LICENSOR makes no agreement to bring or prosecute
actions or suits against third parties for patent, trademark, service mark,
trade dress or copyright infringement or for unfair competition or related
causes of action.
9.2 LICENSEE'S REPRESENTATIONS AND WARRANTIES.
-----------------------------------------
LICENSEE represents and warrants that:
(a) all corporate action necessary for the authorization, execution 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.
ARTICLE X
DISCLAIMERS AND LIMITATIONS; INDEMNITIES
10.1 DISCLAIMERS AND LIMITATIONS OF LICENSOR.
---------------------------------------
(a) PRODUCT WARRANTY. LICENSOR makes no warranty or representation
with respect to the Licensed Products or any telephone containing any
Licensed Apparatus, manufactured in whole or in part by or for LICENSEE.
LICENSEE AND LICENSEE'S AFFILIATES, CUSTOMERS, CONTRACTORS, MANUFACTURERS AND
VENDORS SHALL BE SOLELY RESPONSIBLE FOR THE SELECTION, INSTALLATION, LICENSE,
EFFICIENCY AND SUITABILITY OF THE LICENSED PRODUCTS OR LICENSED APPARATUS AND
LICENSOR MAKES NO WARRANTY AND SHALL HAVE NO LIABILITY THEREFOR, AND LICENSOR
EXPLICITLY MAKES NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR
WITNESS FOR ANY PARTICULAR PURPOSE, EVEN IF LICENSOR HAS BEEN MADE AWARE OF
SUCH PURPOSE.
10
<PAGE>
(b) LIMITATION OF LIABILITY.
(i) IN NO EVENT SHALL LICENSOR BE LIABLE TO LICENSEE, DESIGNATED
SUBLICENSEES OR END USERS OF LICENSED PRODUCTS OR LICENSED APPARATUS FOR ANY
DAMAGES RESULTING FROM OR RELATED TO THE MANUFACTURE OR ANY USE OR ANY
FAILURE OF ANY LICENSED PRODUCT OR LICENSED APPARATUS, INCLUDING WITHOUT
LIMITATION ANY PERSONAL INJURY OR PRODUCT LIABILITY CAUSE OF ACTION, OR
DAMAGES RESULTING FROM ANY DELAY OF LICENSOR IN THE PERFORMANCE OF THIS
AGREEMENT.
(ii) IN NO EVENT SHALL LICENSOR BE LIABLE TO LICENSEE, DESIGNATED
SUBLICENSEE OR END USER FOR ANY INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES
OR LOST PROFITS, ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE
PERFORMANCE OR BREACH THEREOF, EVEN IF LICENSOR HAS BEEN ADVISED OF THE
POSSIBILITY THEREOF. LICENSOR'S LIABILITY HEREUNDER, IF ANY, SHALL IN NO
EVENT EXCEED THE TOTAL OF THE AMOUNTS PAID TO LICENSOR HEREUNDER BY LICENSEE.
(iii) LICENSEE HEREBY EXPRESSLY INDEMNIFIES AND HOLDS HARMLESS
LICENSOR FOR THAT WHICH LICENSOR IS EXPRESSLY NOT WARRANTING OR LIABLE FOR IN
SECTIONS 10.1(a), 10.1(b)(1), 10.1(b)(2) and 10.1(b)(3).
10.2 INDEMNITY.
---------
LICENSOR will indemnify and hold LICENSEE harmless from and against any
cost, expense or loss relating to any claim that the practice of the Licensed
Intellectual Property by the LICENSEE violated the intellectual property
rights of any third party.
ARTICLE XI
MISCELLANEOUS
11.1 NOTICES.
-------
All notices and other communications required or permitted under this
Agreement will be in writing, and will be deemed given: (a) when delivered
personally; (b) when sent by confirmed telefax or facsimile transmission; (c)
one (1) day after having been sent by commercial overnight courier with
written verification of receipt; or (d) five (5) days after having been sent
by registered or certified airmail, return receipt requested, postage
prepaid, or upon actual receipt thereof, whichever first occurs. All
communications will be sent to the receiving party's address as specified
below or to such other address that the receiving party may have provided for
purpose of receiving notices hereunder.
If to LICENSOR: Andrea Electronics Corporation
11-40 45th Road
Long Island City, NY 11101
Attn: (Confidential Treatment)
If to LICENSEE: BellSouth Products, Inc.
Suite 1750, 3000 Riverchase Galleria
Birmingham, Alabama 35244
Attn: (Confidential Treatment)
11
<PAGE>
11.2 ENTIRE AGREEMENT; AMENDMENT.
---------------------------
Upon execution by both Parties, this Agreement shall constitute the
entire agreement between the Parties with respect to the subject matter set
forth herein and merges all prior and contemporaneous communications. This
Agreement shall not be waived, changed or modified except by a written
agreement dated subsequent to the Effective Date and signed on behalf of
LICENSOR and LICENSEE by their respective duly authorized representatives.
Any statement appearing as a restrictive endorsement on a check or other
instrument which purports to modify a right, obligation or liability of
either Party shall be of no force and effect, and the payee Party shall be
free to negotiate such check notwithstanding such void endorsement.
11.3 SEVERABILITY.
------------
If any provision of this Agreement shall be found or be held to be
invalid or unenforceable in any jurisdiction in which this Agreement is being
performed, the remainder of this Agreement shall be valid and enforceable,
and the Parties shall negotiate, in good faith, a substitute, valid and
enforceable provision which most nearly effects the Parties' intent in
entering into this Agreement.
11.4 WAIVER.
------
No delay in or failure to enforce any provisions or exercise any right
or remedy accruing upon any breach or default of any obligation hereunder
shall be construed as a waiver of any such provision, right or remedy or
acquiescence in any such breach or default, nor shall it operate as a waiver
of any prior or subsequent breach or default of the same, similar, or
different nature; or, to in any way affect the validity of this Agreement or
any provision hereof or the right of any Party to thereafter enforce each and
every provision of this Agreement. No waiver of any breach, default,
noncompliance or nonfulfillment of any of the provisions of this Agreement
shall be effective unless set forth in a written instrument executed by the
Party against whom or which enforcement of such waiver is sought; and no
waiver of any such breach, default, noncompliance or nonfulfillment shall be
construed or deemed to be a waiver of any other or subsequent breach,
default, noncompliance or nonfulfillment.
11.5 REMEDIES.
--------
The Parties acknowledge and agree that (i) LICENSOR would be irreparably
injured in the event of a breach by LICENSEE of any of its obligations
hereunder giving rise to automatic/immediate termination for breach under
Section 8.3 hereof, (ii) monetary damages would not be an adequate remedy for
any such breach, and (iii) LICENSOR shall be entitled to equitable relief
(including, without limitation, injunction and specific performance), in
addition to any other remedy that it may have, in the event of such breach.
It is also agreed that the existence of any claims which LICENSEE may have
against LICENSOR, whether under this Agreement or otherwise, shall not be a
defense to the enforcement by LICENSOR of any of its rights under this
Section. It is also agreed that no remedy made available to any Party by any
of the provisions of this Agreement is intended to be exclusive of any other
remedy, and each and every remedy shall be cumulative and shall be in
addition to every other remedy given hereunder or now or hereafter existing
at law or in equity or by statute or otherwise.
11.6 HEADINGS.
--------
The Section headings used in this Agreement are intended for convenience
only and shall not be deemed to supersede or modify any provisions.
12
<PAGE>
11.7 BINDING EFFECT, ASSIGNMENT.
--------------------------
The rights, obligations, duties and agreements of the Parties shall
inure to and be binding upon the Parties, together with their respective
successors and assigns; provided, however, that neither this Agreement nor
any license, right or obligation hereunder shall be assignable or
transferable in any manner (including, without limitation, in insolvency
proceedings, by mergers, by acquisition, by purchase, by operation of law or
otherwise) by LICENSEE without the prior written consent of LICENSOR. Any
such purported assignment or transfer shall be void without such consent;
and, automatic and immediate termination pursuant to Section 8.3(b) shall
occur.
11.8 RELATIONSHIP OF PARTIES.
-----------------------
Nothing in this Agreement shall be deemed or construed to state or
imply: that either Party is an agent or legal representative of the other
Party; or that either Party is authorized hereunder to assume or to create
any obligations, express or implied, on behalf of or in the name of the other
Party or to bind the other Party in any manner; or that any joint venture or
partnership between the Parties is hereby created or formed; but rather, that
the Parties remain independent contractors with respect to each other.
11.9 COUNTERPARTS.
------------
This Agreement may be executed in counterparts each of which shall
constitute one and the same instrument.
11.10 GOVERNING LAW.
-------------
Notwithstanding that either Party may do business or be located or have
one or more locations outside of the State of New York, or that any
performance of any obligations pursuant hereto occurs outside of the State of
New York, this Agreement shall be construed, governed and enforced in
accordance with the laws of the State of New York applicable to contracts
wholly executed and wholly to be performed therein, except that matters
arising under United States patent law shall be interpreted, construed and
governed in accordance therewith.
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
executed in counterparts by its duly authorized representative as of the
Effective Date first above-written.
ANDREA ELECTRONICS CORPORATION BELLSOUTH PRODUCTS, INC.
By: /s/ Frank A.D. Andrea, Jr. By: /s/ (Confidential Treatment)
---------------------------- --------------------------------
Frank A.D. Andrea, Jr. (Confidential Treatment)
Chairman and Chief Executive Officer President
13
<PAGE>
EXHIBIT 11
ANDREA ELECTRONICS CORPORATION
COMPUTATION OF FULLY DILUTED EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION> For the Years Ended
December 31,
------------------------------
1995 1994
------------ ------------
<S> <C> <C>
EARNINGS
Pro forma income (loss) applicable to common stock* $(1,275,915) $(2,299,836)
============ ============
SHARES
Weighted average number of common shares outstanding 3,129,540 2,767,387
Assuming conversion of options and warrants 1,065,000 1,044,238
------------ ------------
Pro forma shares 4,194,540 3,811,625
Fully diluted income (loss) per common share $ (.30) $ (.60)
============ ============
</TABLE>
* Entire proceeds of assumed conversion of options were used to purchase
treasury shares; therefore, no adjustments are necessary in computing pro
forma loss applicable to common stock.
This calculation is submitted in accordance with Regulation S-B, Item
601(b)(11) although it is contrary to paragraph 40 of ABP Opinion No. 15
because it produces anti-dilutive results.
<PAGE>
<PAGE>
Exhibit 21
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
Andrea ANC Manufacturing Inc. Delaware
Andrea Direct Marketing Inc. Delaware
Andrea Marketing Inc. Delaware
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 33-84092.
ARTHUR ANDERSEN LLP
Melville, New York
March 29, 1996
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Shareholders
of Andrea Electronics Corporation
11-40 45th Road
Long Island City, New York
We consent to the incorporation by reference in Registration Statement No.
33-
84092 on Form S-8 of Andrea Electronics Corporation of our report dated
February 2, 1995, appearing in the Annual Report on Form 10-K of Andrea
Electronics Corporation for the year ended December 31, 1995.
/s/ RAICH ENDE MALTER LERNER & CO.
RAICH ENDE MALTER LERNER & CO.
Certified Public Accountants
East Meadow, New York
March 29, 1996
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-END] DEC-31-1995
[CASH] $3,400,829
[SECURITIES] 99,223
[RECEIVABLES] 1,045,922
[ALLOWANCES] 32,183
[INVENTORY] 1,122,993
[CURRENT-ASSETS] 5,858,461
[PP&E] 1,540,726
[DEPRECIATION] 849,228
[TOTAL-ASSETS] 6,551,110
[CURRENT-LIABILITIES] 541,942
[BONDS] 2,000,000
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 1,643,430
[OTHER-SE] 2,321,850
[TOTAL-LIABILITY-AND-EQUITY] 6,551,110
[SALES] 5,440,792
[TOTAL-REVENUES] 5,440,792
[CGS] 3,190,226
[TOTAL-COSTS] 7,092,030
[OTHER-EXPENSES] (386,069)
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 10,746
[INCOME-PRETAX] (1,275,915)
[INCOME-TAX] 0
[INCOME-CONTINUING] 0
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (1,275,915)
[EPS-PRIMARY] (.41)
[EPS-DILUTED] (.30)
</TABLE>
