<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
( x ) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to_______________
Commission file number 1-4324
------
ANDREA ELECTRONICS CORPORATION
------------------------------------
(Exact name of registrant as specified in its charter)
New York 11-0482020
--------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11-40 45th Road, Long Island City, New York 11101
------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
1-800-442-7787
--------------------------------------------------------------
(Registrant's telephone number, Including area code)
Indicate by check mark whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date. 3,767,197.
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PART I - FINANCIAL INFORMATION
ANDREA ELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION> ASSETS
September 30, 1996 December 31, 1995
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,762,452 $ 3,400,829
Investment securities 193,324 99,223
Accounts receivable - trade, net of allowance
for doubtful accounts of $32,183 1,600,516 1,045,922
Inventories 4,671,266 1,122,993
Prepaid expenses and other current assets 103,300 189,494
---------- ----------
Total current assets 8,330,858 5,858,461
---------- ----------
PROPERTY, PLANT AND EQUIPMENT - net of
accumulated depreciation of $968,803 and
$849,228, respectively 620,758 691,498
OTHER ASSETS 1,151 1,151
---------- ----------
Total assets $ 8,952,767 $ 6,551,110
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capital lease obligations $ 11,443 $ 39,243
Trade accounts payable 117,640 254,643
Accrued salaries and wages payable 98,060 50,571
Other current liabilities 12,992 197,485
---------- ----------
Total current liabilities 240,135 541,942
---------- ----------
CAPITAL LEASE OBLIGATIONS,
net of current maturities -- 5,388
CONVERTIBLE DEBENTURES, net 1,737,978 2,000,000
OTHER LIABILITIES 35,120 38,500
---------- ----------
Total liabilities 2,013,233 2,585,830
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock: $.50 par value;
authorized: 10,000,000 shares;
issued and outstanding: 3,767,197 and
3,286,860 shares, respectively 1,883,599 1,643,430
Additional paid-in capital 8,458,371 4,542,592
Accumulated deficit (3,402,436) (2,220,742)
---------- ----------
Total shareholders' equity 6,939,534 3,965,280
---------- ----------
Total liabilities and shareholders' equity $ 8,952,767 $ 6,551,110
========== ==========
</TABLE>
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ANDREA ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
ANDREA ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Sales $ 2,745,095 $ 1,403,091 $ 5,489,504 $ 4,064,042
Cost of sales 1,585,646 799,993 3,767,308 2,217,786
---------- ---------- ---------- ----------
Gross profit 1,159,449 603,098 1,722,196 1,846,256
---------- ---------- ---------- ----------
Research and development 177,843 355,769 700,676 1,218,231
General, administrative and selling expenses 713,281 786,338 2,112,288 1,580,662
---------- ---------- ---------- ----------
Operating income (loss) 268,325 (539,009) (1,090,768) (952,637)
---------- ---------- ---------- ----------
Other income (expense)
interest income 9,731 33,360 38,432 140,294
interest (expense) (50,553) (841) (305,016) (2,845)
rent & miscellaneous 58,858 9,133 175,658 180,404
---------- ---------- ---------- ----------
18,036 41,652 (90,926) 317,853
---------- ---------- ---------- ----------
Earnings (loss) before provision (credit)
for corporate income tax 286,361 (497,357) (1,181,694) (634,784)
Income tax provision -- -- -- --
---------- ---------- ---------- ----------
Net earnings (loss) $ 286,361 $ (497,357) $(1,181,694) $ (634,784)
========== ========== ========== ==========
Net earnings (loss) per common
and common equivalent share $ .08 $ (.16) $ (.34) $ ( .21)
Weighted average number of
shares outstanding 3,669,526 3,201,461 3,490,238 3,078,738
</TABLE>
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<TABLE>
ANDREA ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
For the Nine Months Ended
September 30,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,181,694) $ (634,784)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 425,154 85,830
(Increase) decrease in:
Investment Securities (94,101) --
Accounts receivable (554,594) (660,514)
Inventories (3,548,274) (299,233)
Prepaid expenses and other current assets 86,194 7,008
Increase (decrease) in:
Trade accounts payable (137,003) 68,085
Accrued salaries and wages payable 47,489 --
Other current liabilities (184,493) (3,514)
---------- ----------
Net cash used in operating activities (5,141,322) (1,437,122)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (164,273) (60,565)
---------- ----------
Net cash used in investing activities (164,273) (60,565)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of capital lease obligations (33,188) (8,623)
Net Proceeds from Convertible Debentures 3,455,000 --
Exercise of stock options 245,406 448,218
---------- ----------
Net cash provided by financing activities 3,667,218 439,595
---------- ----------
Net decrease in cash and cash equivalents (1,638,377) (1,058,092)
Cash and cash equivalents - beginning 3,400,829 3,313,043
---------- ----------
Cash and cash equivalents - end $ 1,762,452 $ 2,254,951
========== ==========
Supplemental disclosures
Cash paid:
Interest $ 162 $ 2,845
Income Taxes $ -- $ --
Interest expense paid in common stock $ 304,853 $ --
</TABLE>
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<TABLE>
ANDREA ELECTRONICS CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<CAPTION>
Additional Total
Shares Common Paid-In Accumulated Shareholders'
Outstanding Stock Capital (Deficit) Equity
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 3,286,860 $1,643,430 $4,542,592 $(2,220,742) $ 3,965,280
Exercise of Stock
Options 162,500 81,250 164,156 - 245,406
Issuance of Common Stock
due to conversion of
debentures and accrued
interest thereon 317,837 158,919 3,751,623 - 3,910,542
Net loss - - - (1,181,694) (1,181,694)
Balance at
September 30, 1996
(Unaudited) 3,767,197 $1,883,599 $8,458,371 $(3,402,436) $ 6,939,534
</TABLE>
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Notes to Financial Statements
1. In the opinion of the management of Andrea Electronics Corporation ("Andrea
Electronics" or the "Company"), the accompanying unaudited financial statements
contain all adjustments necessary to present fairly the Company's financial
position as of September 30, 1996 and the results of operations and cash flows
for the three months and nine months ended September 30, 1996 and 1995. The
results of operations for the three and nine months ended September 30, 1996
are not necessarily indicative of the results to be expected for the full year
ending December 31, 1996. Additionally, it should be noted that the
accompanying financial statements do not purport to be a complete disclosure in
conformity with generally accepted accounting principles. These statements
should be read in conjunction with the Company's audited financial statements
for the fiscal year ended December 31, 1995 and included in the annual report
on Form 10K.
2. In December, 1994, a subpoena duces tecum was issued to the Company by the
United States Department of Defense, Office of the Inspector General, seeking
certain documents pertaining to contracts relating to audio frequency
amplifiers. Documents responding to the subpoena were delivered by the Company
in the first quarter of 1995 and to date no claim has been made or threatened
against the Company in connection with this matter. The Company is unable to
determine at this point if any such claim will be made or to what extent, if
any, such claim could have on the financial position of the Company.
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Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
Andrea Electronics' mission is to provide state-of-the-art communications
products for the "voice interface" markets that are rapidly emerging from the
convergence of the telecommunications and computer industries and for the
defense electronics markets that are requiring increasingly higher quality
voice communications products. The Company's strategy for serving these
markets is to leverage its expertise in audio communications technology,
including its patented Active Noise Cancellation (ANC) and Active Noise
Reduction (ANR) technology (together referred to as "Andrea
Anti-Noise(Registered Trademark) technology") and to develop, manufacture, and
market, either directly or through licensees, a line of Andrea
Anti-Noise(Registered Trademark) headsets, handsets and other communication
devices to cost-effectively enhance voice communications for end users of the
growing number of new, voice-based computer and computer telephony applications
and interfaces.
Examples of these applications and interfaces include: Internet and other
computer-based speech, telephony and communications; multi-point conferencing;
multi-player Internet and CD ROM interactive games; speech recognition; ;
multimedia; military and industrial communications; and other applications and
interfaces that incorporate natural language processing. The Company believes
that end users of these applications and interfaces will require high quality
microphone and earphone products that enhance voice transmission, particularly
to and from noisy environments, for use with personal computers, business and
residential telephones, military headsets, cellular and other wireless
telephones, personal communication systems, and avionics communications
systems.
An important element of the Company's strategy for expanding the channels
of distribution and broadening the base of users for its ANC and ANR products
is its set of collaborative arrangements with several hardware OEMs, software
publishers, distributors, and retailers actively engaged in the various markets
in which the Company's ANC and ANR products have application. Under some of
these arrangements, the Company supplies its products for sale by the
collaborative partners. Under others, the collaborative partners supply the
Company with software that the Company sells with its ANC and ANR products. In
addition to these collaborative marketing arrangements, the Company is also
seeking to increase its own direct marketing efforts.
In 1995, the Company entered into a Procurement Agreement with
International Business Machines ("IBM") covering the supply of Andrea
Anti-Noise(Registered Trademark) computer headsets to IBM for sale with certain
IBM products. During the nine months ended September 30, 1996 (the "1996 First
Nine Months"), IBM purchased Andrea Anti-Noise(Registered Trademark) computer
headsets for inclusion with its VoiceType(Registered Trademark) speech
recognition products, and during the three months ended September 30, 1996 (the
"1996 Third Quarter"), the Company began shipping Andrea Anti-Noise(Registered
Trademark) computer headsets for inclusion with all shrink-wrapped copies of
IBM's OS/2 "Merlin" software product.
During the 1996 Third Quarter, the Company entered into additional OEM
relationships with, and began shipping Andrea Anti-Noise(Registered Trademark)
computer headsets to, Packard Bell NEC, Inc., Kurzweil Applied Intelligence,
Inc. ("Kurzweil"), Lucent Technologies Inc. and FICOMP, Inc.
Following the 1996 Third Quarter, the Company has entered into several
additional collaborative arrangements. These include the following:
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* a licensing agreement with the Microsoft Corporation ("Microsoft")
covering the distribution by the Company of Microsoft NetMeeting(Registered
Trademark) Internet and Intranet conferencing software with the Company's
Andrea Anti-Noise(Registered Trademark) retail line of ANC PC Headsets and
Handsets (this agreement replaced the Company's prior licensing agreement with
Microsoft for Microsoft's MSPhone and MSVoice computer telephony and speech
recognition software); and
* expansion of the Company's agreement with Kurzweil to cover the
distribution by the Company of a special version of Kurzweil
VoicePad(Registered Trademark) for Windows(Registered Trademark) with the
Company's Andrea Anti-Noise(Registered Trademark) retail line of ANC PC
Headsets and Handsets.
Under the Company's License and Technical Support Agreement with
BellSouth Products, Inc. ("BellSouth"), a subsidiary of Bell South
Telecommunications Inc., the Company had granted BellSouth certain exclusive
license rights for a period of three years covering the incorporation of the
Company's Andrea Anti-Noise(Registered Trademark) ANC technology into
BellSouth's residential and small business telephones and an exclusive right to
distribute these telephones in the United States, Canada, Mexico, South America
and Israel. BellSouth has informed the Company that to date it has not
incorporated the Anti-Noise(Registered Trademark) technology into any of these
products and, accordingly, will not retain exclusive rights under the terms of
the Agreement. The Company has, therefore, begun to explore collaborative
arrangements covering the licensing of its Andrea Anti-Noise(Registered
Trademark) technology to certain other major telecommunications equipment
manufacturers. No assurance can be given that the Agreement with BellSouth
will result in any revenues to the Company or that the Company will succeed in
entering into any arrangements with other telecommunications equipment
manufacturers.
Consistent with the Company's results of operations for the 1996 First Nine
Months, the Company expects that, as a result of its collaborative arrangements
and its own direct marketing efforts, sales of its Anti-Noise(Registered
Trademark) products for the year ending December 31, 1996 will evidence
substantial growth over the year ended December 31, 1995.
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The Company outsources the manufacture of its ANC and ANR products for
its OEM, consumer and commercial customers. The Company also manufactures and
distributes intercom systems and related components for military applications
("Traditional Military Products") and industrial applications ("Traditional
Industrial Products"; together with Traditional Military Products, "Traditional
Products"). In contrast to the outsourced manufacture of its ANC and ANR
products for the non-military market, the Company has historically manufactured
its Traditional Products in its own facility. The Company is engaged in
developing a new line of products for military use that incorporate ANC and ANR
technology and anticipates that it will manufacture these new military
products through both outsourcing and self-manufacturing.
The interim results of operations of the Company presented in this report
are not necessarily indicative of the actual sales or results of operations
realized for the full year.
VoiceType(Registered Trademark) is a registered trademark of IBM;
Windows(Registered Trademark)and NetMeeting(Registered Trademark) are
registered trademarks of Microsoft; and VoicePad(Registered Trademark) is a
registered trademark of Kurzweil.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain information contained in this Management's Discussion and Analysis
of Financial Condition and Results of Operations for the 1996 Third Quarter and
the 1996 First Nine Months are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Act"), which became
law in December 1995. In order to obtain the benefits of the "safe harbor"
provisions of the Act for any such forward-looking statements, the Company
wishes to caution investors and prospective investors about the following
significant factors, which, among others, have in some cases affected the
Company's actual results and are in the future likely to affect the Company's
actual results and cause them to differ materially from those expressed in any
such forward-looking statements. These factors include:
* the rate at which the Company's Anti-Noise(Registered Trademark)
technology is accepted by the diverse range of users and applications within
the global communications and informatics marketplace;
* the ability of the Company to maintain a competitive position for its
Anti-Noise(Registered Trademark) products in terms of technical specifications,
quality, price, reliability and service;
* the on-going ability of the Company to enter into and maintain
collaborative relationships with larger companies in the fields of
telecommunications, computer manufacturing, software design and publishing,
Internet and online services, defense-related manufacturers and system
providers, and retail and direct marketing distributors; and
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* in the event that the Company does experience continued significant
growth in demand for its Anti-Noise(Registered Trademark) technology, the
ability of the Company to raise sufficient external capital to fund the working
capital requirements for meeting such demand.
The failure of the Company to surmount the challenges posed by any one or
more of these factors could have a material adverse effect on the Company's
results of operations and growth.
RESULTS OF OPERATIONS
Sales
Sales for the 1996 Third Quarter were $2,745,095, an increase of 96% over
the three months ended September 30, 1995 (the "1995 Third Quarter"). Sales
for the 1996 First Nine Months were $5,489,504, an increase of 35% over the
nine months ended September 30, 1995 (the "1995 First Nine Months"). The
increase in sales during the 1996 Third Quarter reflected an approximate 6%
decrease in sales of Traditional Military Products from the 1995 Third Quarter
to $1,317,646, or 48% of total sales for the 1996 Third Quarter, offset by an
increase in sales of industrial and commercial products from an insignificant
amount for the 1995 Third Quarter to $1,427,449, or 52% of sales for the 1996
Third Quarter. Most of this increase in industrial and commercial products was
attributed to an increase in sales of the Company's Andrea
Anti-Noise(Registered Trademark) products. The increase in total sales during
the 1996 First Nine Months reflects the growth of sales of the Company's Andrea
Anti-Noise(Registered Trademark) products, offset by the 29% decrease in sales
of the Company's Traditional Products during the 1996 First Nine Months. Sales
of Andrea Anti-Noise(Registered Trademark) products were immaterial during the
comparable 1995 periods.
Cost of Sales
Cost of sales as a percentage of sales for the 1996 Third Quarter
increased to approximately 58% from 57% for the 1995 Third Quarter. Cost of
sales as a percentage of sales for the 1996 First Nine Months increased to
approximately 69% from approximately 55% for the 1995 First Nine Months. The
increase in the cost of sales as a percentage of sales for the 1996 First Nine
Months was due to a decrease in production capacity utilization for the
Company's Traditional Products arising from lower sales and the costs
associated with the initial production runs of new Andrea Anti-Noise(Registered
Trademark) computer products in the first six months of 1996. The comparison
of the 1996 Third Quarter with the 1995 Third Quarter reflects the increase in
sales volume of the Company's Andrea Anti-Noise(Registered Trademark) products
offset by a slight decrease in sales volume of the Company's Traditional
Products.
Research and Development
Research and development expenses decreased 50% to $177,843 in the 1996
Third Quarter from $355,769 in the 1995 Third Quarter, and decreased
approximately 43% to $700,676 in the 1996 First Nine Months from $1,218,231 in
the 1995 First Nine Months. These decreases in research and development
expenses for the 1996 Third Quarter and 1996 First Nine Months are attributable
to increased allocation of engineering and technician time associated with the
natural migration from design and development to production in connection with
the commercialization of the Company's Andrea Anti-Noise(Registered Trademark)
products.
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General, Administrative and Selling Expenses
General, administrative and selling expenses decreased 9% to $713,281 for
the 1996 Third Quarter from $786,338 for the 1995 Third Quarter, but increased
nearly 34% to $2,112,288 for the 1996 First Nine Months from $1,580,662 for the
1995 First Nine Months. The increase for the 1996 First Nine Months reflects
increased business development, promotional, marketing and sales expenses, as
well as costs associated with the addition of sales representative expenses to
market, promote and support Andrea Anti-Noise(Registered Trademark) products in
personal computer magazines, on the Internet, at major trade shows, to major
retail superstores, and to potential customers for personal computer,
telecommunications and military electronics applications.
Operating Income/Loss
Operating income for the 1996 Third Quarter was $268,325 compared to an
operating loss of $539,009 for the 1995 Third Quarter. The Company's operating
loss for the 1996 First Nine Months was $1,090,768 compared to $952,637 for the
1995 First Nine Months. These changes in operating loss reflect the factors
discussed above.
Other Income(Expense)
Other income for the 1996 Third Quarter was $18,036 compared to other
income of $41,652 for the 1995 Third Quarter. Other expense for the 1996 First
Nine Months was $90,926 compared to other income of $317,853 for the 1995 First
Nine Months. The decrease in other income for the 1996 Third Quarter and
reversal for the 1996 First Nine Months from that for the 1995 First Nine
Months were due to an increase in interest expense to $50,553 for the 1996
Third Quarter from $841 for the 1995 Third Quarter and an increase in interest
expense to $305,016 for the 1996 First Nine Months from $2,845 for the 1995
First Nine Months. These increases reflect accrued interest on the Company's
convertible subordinated debentures and amortization of the placement fee
associated with the issuance of the Company's convertible subordinated
debentures in April 1996 and August 1996. During the 1996 Third Quarter,
$1,050,000 in face value of the Company's convertible subordinated debentures
were converted and the related accrued interest was paid in common stock of the
Company. Interest income for the 1996 Third Quarter and the 1996 First Nine
Months decreased due to a decrease in the Company's average cash position
during those periods in order to fund the increased working capital and
production requirements associated with filling orders for the Company's
Anti-Noise(Registered Trademark) products from IBM and other OEMs and computer
retailers.
Net earnings/(loss)
Net earnings for the 1996 Third Quarter was $286,361, compared to a net
loss of $497,357 for the 1995 Third Quarter. Net loss for the 1996 First Nine
Months was $1,181,694, compared to a net loss of $634,784 for the 1995 First
Nine Months. The levels of net earnings in the 1996 Third Quarter and net loss
for the 1996 First Nine Months reflect principally the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Working capital (total current assets less total current liabilities) at
September 30,1996 was $8,090,723 compared to $5,316,519 at December 31,1995.
The increase in working capital reflects an increase in total current assets of
$2,472,397 and a decrease in total current liabilities of $301,807. The
increase in total current assets reflects a decrease in cash of $1,638,377, an
increase in investment securities of $94,101, an increase in accounts
receivable of $554,594, an increase in inventory of $3,548,274, and a decrease
of $86,194 in prepaid expenses and other current assets.
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The decrease in cash of $1,638,377 reflects $5,141,322 of net cash used in
operating activities and $164,273 of cash used in investing activities,
partially offset by an increase in cash from financing activities of
$3,667,218. The principal operating activity for which cash was used was the
increase in inventory of Andrea Anti-Noise(Registered Trademark) computer
headsets. The increase in inventory of $3,548,274 primarily resulted from the
acquisition of $2,140,412 of long lead components and parts for Andrea
Anti-Noise(Registered Trademark) products and an increase in work-in-process
and finished goods inventory of $1,361,373 for the Andrea Anti-Noise(Registered
Trademark) products. Management anticipates that this inventory will cover
anticipated sales during the last quarter of 1996 and a significant portion of
anticipated sales during the first quarter of 1996. The cash used in investing
activities was for the acquisition of equipment, primarily tooling and molds
for Andrea Anti-Noise(Registered Trademark) products.
The decrease in prepaid expenses and other current assets includes the
expensing of prepaid advertising, property taxes and prepaid insurance
premiums.
The decrease in current liabilities primarily reflects a $137,003 decrease
in trade accounts payable and a decrease of $184,493 in other current
liabilities. The decrease in trade accounts payable is associated with
payments for acquisition of raw materials for the Andrea Anti-Noise(Registered
Trademark) products. The decrease in other current liabilities includes
$167,500 for the settlement of a previously disclosed complaint by a former
employee of the Company.
Demand for Andrea Anti-Noise(Registered Trademark) products has required
the Company to raise additional working capital to support its production
operations. Since December 1995, the Company has raised additional working
capital through the issuance of convertible subordinated debentures. In
addition, the Company has been exploring various forms of bank and other debt
and equity financing. The Company believes that its ability to remedy its
existing accumulated deficit will depend on profitable growth from the sale of
its Andrea Anti-Noise(Registered Trademark) products. Notwithstanding growth
in sales of Andrea Anti-Noise(Registered Trademark) products during the 1996
First Nine Months, no assurance can be given that demand will continue to
increase for these products or any of the Company's other products or, that if
such demand does increase, that the Company will be able to obtain the
necessary working capital to increase production and marketing resources to
meet such demand on favorable terms or at all.
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit
Number Description
4.1 Securities Purchase Agreement, dated as of August 7, 1996, relating to
the sale of the Registrant's 10% Convertible Subordinated Debentures due
February 9, 1998 (with forms of Debenture and Registration Rights Agreement
attached)
11 Computation of Fully Diluted Earnings Per Common Share
27 Financial Data Schedule
(b) Reports on Form 8-K.
On August 14, 1996, the Registrant filed a report on Form 8-K to report
that, on August 7, 1996, the Registrant issued and sold in an offshore
transaction $1,687,500 aggregate principal amount of its 15% Convertible
Subordinated Debentures due February 9, 1998.
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SIGNATURES
In accordance with the requirements of Section 13 and 15(d) of the Exchange
Act, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ANDREA ELECTRONICS CORPORATION
/s/ John N. Andrea Co-President November 13, 1996
------------------------
John N. Andrea
/s/ Patrick D. Pilch Executive Vice President, November 13, 1996
-------------------- and Chief Financial Officer
Patrick D. Pilch
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<PAGE> 15-A
EXHIBIT 4.1
SECURITIES PURCHASE AGREEMENT
between
ANDREA ELECTRONICS CORPORATION
and
EACH OF THE PURCHASERS EXECUTING A
COUNTERPART OF THE SIGNATURE PAGE HERETO
dated as of
August 7, 1996
<PAGE> 15B
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of August
7, 1996, between ANDREA ELECTRONICS CORPORATION, a New York corporation (the
"Company"), and each purchaser executing a counterpart of the signature page
hereto (each, a "Purchaser" and collectively, the "Purchasers").
W I T N E S S E T H :
WHEREAS, the Company proposes to issue and sell to the Purchasers, and
the Purchasers desire to purchase from the Company, an aggregate of U.S.
$1,687,500 aggregate principal amount of the Company's 10% Convertible
Subordinated Debentures Due February 9, 1998 (the "Notes"), on the terms and
subject to the conditions set forth herein.
NOW THEREFORE, in consideration of the premises, the representations,
warranties, covenants and agreements contained herein, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, intending to be legally bound hereby, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. Certain Definitions. For purposes of this Agreement,
the following terms shall have the following meanings:
"Affiliate" of a Person means a Person that directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control with, the first mentioned Person. The term "control" (including
the terms "controlling," "controlled by" and "under common control with") means
the possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, whether through the
ownership of voting securities, by contract, or otherwise.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of
corporate stock, including each class of common stock and preferred stock of
such Person.
"Closing" has the meaning set forth in Section 2.02.
"Commission" means the United States Securities and Exchange
Commission.
"Common Stock" means the common stock, $.50 par value per share, of
the Company.
"Conversion Shares" means the shares of Common Stock issuable upon
conversion of the Notes.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Governmental Authority" means any federal, state or other political
subdivision thereof and any agency or other entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"Institutional Accredited Investor" means an institution that is an
"accredited investor" within the meaning of paragraphs (1), (2), (3) or (7) of
Rule 501(a) of Regulation D under the Securities Act.
"Legend" has the meaning set forth in Section 4.02(h).
"Material Adverse Effect" has the meaning set forth in Section 3.01.
"Non-U.S. Person" means a Person that is not a U.S. Person.
<PAGE> 15C
"Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, joint stock company,
Governmental Authority or other entity of any kind.
"Registration Rights Agreement" means that certain Registration Rights
Agreement substantially in the form of Exhibit B hereto, dated as of the date
hereof, between the Company and Purchaser, as such Registration Rights
Agreement may be modified or amended from time to time pursuant to its terms.
"SEC Reports" means the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 and the Company s Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996.
"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.
<PAGE> 15D
ARTICLE II
SALE AND PURCHASE
SECTION 2.01. Agreement to Sell and to Purchase; Purchase Price. On
the terms and subject to the conditions set forth in this Agreement, the
Company hereby agrees to issue and sell to the Purchasers, and the Purchasers
hereby agree to purchase and accept from the Company, an aggregate of U.S.
$1,687,500 aggregate principal amount of Notes at a purchase price equal to
88.8888% of the aggregate principal amount thereof, payable in immediately
available funds (the "Purchase Price"). A copy of the form of Note is attached
as Exhibit A hereto and the terms thereof are hereby expressly incorporated by
reference herein.
SECTION 2.02. Closing. The closing of the sale and purchase of the
Notes (the "Closing") shall be deemed to take place concurrently with the
execution and delivery of this Agreement by the parties hereto. At the
Closing, the following closing transactions shall take place, each of which
shall be deemed to occur simultaneously with the Closing: (i) the Company shall
execute, issue and deliver the Notes to the Purchasers; (ii) the Purchasers
shall pay the Purchase Price by wire transfer to the account designated by the
Company in writing prior to the Closing; (iii) the Company shall pay the
expenses set forth in Section 6.02 hereof by wire transfer to the account
designated by the Purchasers in writing prior to the Closing; provided that if
the Company and the Purchasers so agree, such expenses may be netted against
the Purchase Price; (iv) the Company and the Purchasers shall execute and
deliver the Registration Rights Agreement; (v) the Company shall deliver to the
Purchasers a certificate executed by the secretary of the Company, signing in
such capacity, dated the date of the Closing (A) certifying that attached
thereto are true and complete copies of the resolutions duly adopted by the
Board of Directors of the Company authorizing the execution and delivery of the
Transaction Documents and the consummation of the transactions contemplated
thereby (including, without limitation, the issuance and sale of the Notes and
the reservation and issuance of the Conversion Shares upon conversion of the
Notes), which authorization shall be in full force and effect on and as of the
date of such certificate, and (B) certifying and attesting to the office,
incumbency, due authority and specimen signatures of each Person who executed
any Transaction Document for or on behalf of the Company; and (vi) Brown &
Wood, as counsel to the Company, shall deliver to the Purchasers an opinion,
dated the date of the Closing and addressed to the Purchasers, in form and
substance acceptable to the Purchasers.
<PAGE> 15E
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As a material inducement to the Purchasers to purchase the Notes, the
Company hereby represents and warrants to the Purchasers that on and as of the
date hereof:
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
3,654,583 shares were issued and outstanding as of August 6, 1996. Except as
set forth in the SEC Reports, the Company has no other authorized, issued or
outstanding equity securities or securities containing any equity features, or
any other securities convertible into, exchangeable for or entitling any person
to otherwise acquire any other securities of the Company containing any equity
features. All of the outstanding shares of Capital Stock of the Company have
been duly and validly authorized and issued, and are fully paid and
nonassessable. The Notes and all of the Conversion Shares have been duly and
validly authorized. When issued against payment therefor as provided in this
Agreement, the Notes will be validly issued and will constitute valid and
enforceable obligations of the Company, enforceable against the Company
<PAGE> 15F
in accordance with their terms (subject to the effects of applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally and by general principles of
equity). When issued upon conversion of the Notes, the Conversion Shares will
be validly issued, fully paid and nonassessable, free and clear all preemptive
rights, claims, liens, charges, encumbrances and security interests of any
nature whatsoever. A sufficient number of shares of Common Stock has been duly
reserved and will remain available for issuance upon conversion of the Notes.
Except as set forth in the SEC Reports, there are no outstanding options,
warrants, agreements, conversion rights, subscription rights, preemptive
rights, rights of first refusal or other rights or agreements of any nature
outstanding to subscribe for or to purchase any shares of Capital Stock of the
Company or any other securities of the Company of any kind, other than options
to purchase Common Stock granted under the Company's 1991 Performance Equity
Plan. Except as otherwise requied by law, there are no restrictions upon the
voting or transfer of any shares of the Company's Capital Stock pursuant to the
Company's organizational and other governing documents or any agreement or
other instruments to which the Company is a party or by which the Company or
its properties or assets are bound. There are no agreements or other
obligations (contingent or otherwise) that may require the Company to
repurchase or otherwise acquire any shares of its Capital Stock.
SECTION 3.03. Authorization; Enforceability. The Company has the
corporate power and authority to execute, deliver and perform the terms and
provisions of each of the Transaction Documents, and has taken all necessary
corporate action to authorize the execution, delivery and performance by it of
each of the Transaction Documents and to consummate the transactions
contemplated thereby. No other corporate proceedings on the part of the
Company are necessary and no consent of the shareholders of the Company is
required for the valid execution and delivery by the Company of the Transaction
Documents and the performance and consummation by the Company of the
transactions contemplated thereby. The Company has duly executed and delivered
each of the Transaction Documents. The Transaction Documents constitute the
legal, valid and binding obligations of the Company, enforceable against the
Company in accordance with their respective terms, except as enforceability
may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the enforcement of creditors' rights
generally and by general principles of equity.
SECTION 3.04. No Violation; Consents.
(a) The execution, delivery and performance by the Company of the
Transaction Documents and the consummation of the transactions contemplated
thereby do not and will not (i) contravene the applicable provisions of any
law, statute, rule, regulation, order, writ, injunction, judgment or decree of
any court or Governmental Authority to or by which the Company or any of its
property or assets is bound, (ii) violate, result in a breach of or constitute
(with due notice or lapse of time or both) a default or give rise to an event
of acceleration under any contract, lease, loan or credit agreement, mortgage,
security agreement, trust indenture or other agreement or instrument to which
the Company is a party or by which it is bound or to which any of its
properties or assets is subject, nor result in the creation or imposition of
any lien, security interest, charge or encumbrance of any kind upon any of the
properties, assets or Capital Stock of the Company, or (iii) violate any
provision of the organizational and other governing documents of the Company.
(b) No consent, approval, authorization or order of, or filing or
registration with, any court or Governmental Authority or other Person is
required to be obtained or made by the Company for the execution, delivery and
performance of the Transaction Documents or the consummation of any of the
transactions contemplated thereby, except for those consents or authorizations
previously obtained and those filings previously made.
SECTION 3.05. Securities Act Representations. The Company is a
"reporting issuer" as that term is defined in Rule 902(l) of Regulation S under
the Securities Act. No form of general or public solicitation or advertising
was used by the Company or any Person acting on its behalf in connection with
the offer or sale of the Notes. Neither the Company nor any Person acting on
its behalf has (i) offered Notes to any Person (including Purchaser) in the
United States or offered or sold Notes to or for the account or benefit of any
U.S. Person or (ii) made any "directed selling efforts" (as defined in Rule
902(b) of Regulation S under the Securities Act) in the United States with
respect to the Notes. The Company has not sold and will not sell any Notes in
this offering other than the Notes being sold to the Purchasers hereunder.
Assuming the accuracy of the Purchasers' representations pursuant to Section
4.02 hereof, the sale of the Notes hereunder is, and the issuance of the
Conversion Shares upon conversion of the Notes will be, exempt from the
registration requirements of the Securities Act.
SECTION 3.06. Solvency; No Default. (a) The Company is, and upon
giving effect to the transactions contemplated hereby will be, Solvent (as
defined below). "Solvent" means that, as of the date of determination, (i) the
then fair saleable value of the assets of the Company exceeds the then total
amount of its debts and other liabilities (including any guarantees and other
contingent, subordinated, unmatured or unliquidated liabilities whether or not
reduced to judgment, disputed or undisputed, secured or unsecured), (ii) the
Company has sufficient funds and cash flow to pay its liability on its existing
and anticipated debts as they become absolute and matured, (iii) final
judgments against the Company in pending or threatened actions for money
damages will not be rendered at a time when, or in an amount such that the
Company will be unable to satisfy any such judgments promptly in accordance
with their terms (taking into account the maximum reasonable amount of such
judgments in any such actions (other than amounts that would be remote) and the
earliest reasonable time at which such judgments would be rendered), and (iv)
the Company does not have unreasonably small capital with which to engage in
its present or anticipated business.
(b) The Company is not, and immediately after the consummation of
the transactions contemplated hereby will not be, in default under or with
respect to its organizational and other governing documents, or any provision
of any security issued by the Company, or of any agreement, instrument or other
undertaking to which the Company is a party or by which it or any of its
property or assets is bound which, either individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect.
<PAGE> 15G
SECTION 3.07. No Brokers. No broker, finder, agent or similar
intermediary is entitled to any broker's, finder's, placement or similar fee or
other commission in connection with the transactions contemplated hereby based
on any agreement, arrangement or understanding with the Company.
SECTION 3.08. Financial Condition; No Adverse Changes. (a) The
audited financial statements of the Company and the related notes thereto as at
December 31, 1995 reported on by Arthur Andersen LLP, independent accountants,
copies of which have heretofore been furnished to the Purchasers, present
fairly the financial condition, results of operations and cash flows of the
Company at such date and for the periods set forth therein. The unaudited
balance sheets, statements of operations and statements of cash flows at and
for the period ended March 31, 1996 (such audited and unaudited financial
statements, collectively, the Financial Statements ), copies of which have
heretofore been furnished to the Purchasers, present fairly the financial
condition, results of operations and cash flows of the Company at such date and
for the periods set forth therein. The Financial Statements, including the
related schedules and notes thereto (if any), have been prepared in accordance
with generally accepted accounting principles as set forth in the opinions and
pronouncements of the Accounting Principles Board of American Institute of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board as in effect on the date of the Closing, applied on
a consistent basis (except for changes concurred in by the Company's
independent public accountants) unless otherwise expressly stated therein.
During the period from March 31, 1996 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 March 31, 1996, there has been no development or event,
nor any prospective development or event known to the Company, or any
litigation, proceeding or other action seeking an injunction or other
restraining order, damages or other relief from a court or administrative
agency of competent jurisdiction pending or, to the best knowledge of the
Company, threatened, or any action of any Governmental Authority, which has had
or could reasonably be expected to have a Material Adverse Effect.
SECTION 3.09. Use of Proceeds; Federal Regulations. No part of the
net proceeds from the sale of the Notes will be used for any purpose which
violates the provisions of Regulation G, T, U or X of the Board of Governors of
the Federal Reserve System.
SECTION 3.10. Disclosure. The representations and warranties of the
Company in this Agreement and the statements contained in the SEC Reports and
the schedules, certificates and exhibits furnished to the Purchasers by or on
behalf of the Company in connection herewith do not contain any untrue
statement of a material fact and do not omit to state any material fact
necessary to make the statements herein or therein not misleading. The Company
hereby acknowledges that the Purchasers are and will be relying on the SEC
Reports and the Company's representations, warranties and covenants contained
herein in making an investment decision with respect to the Notes and
Conversion Shares and will be relying thereon (together with future reports
filed with the Commission) in connection with any transfer of Notes and
Conversion Shares.
<PAGE> 15H
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each Purchaser hereby acknowledges, represents and warrants to the
Company as follows:
SECTION 4.01. Authorization; Enforceability; No Violations.
(a) Such Purchaser is a bank or corporation, duly organized or
incorporated (as the case may be), validly existing and in good standing under
the laws of the jurisdiction of its organization or incorporation, and has all
requisite corporate power and authority to execute, deliver and perform the
terms and provisions of this Agreement and has taken all necessary corporate
action to authorize the execution, delivery and performance by it of this
Agreement and to consummate the transactions contemplated hereby.
(b) The execution, delivery and performance by such Purchaser of
this Agreement and the consummation by such Purchaser of the transactions
contemplated hereby do not and will not violate any provision of (i) such
Purchaser's organizational documents and (ii) any law, statute, rule,
regulation, order, writ, injunction, judgment or decree to which such Purchaser
is subject. Such Purchaser has duly executed and delivered this Agreement.
Assuming the due execution hereof by the Company, this Agreement constitutes
the legal, valid and binding obligation of such Purchaser, enforceable against
such Purchaser in accordance with its terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally and by
general principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law).
SECTION 4.02. Securities Act Representations; Legends.
(a) Such Purchaser understands that (i) the offering and sale
of the Notes to be issued and sold hereunder is intended to be exempt from the
registration requirements of the Securities Act; (ii) neither the Notes nor the
Conversion Shares have been registered under the Securities Act or any other
applicable securities laws and such securities may be resold only if registered
under the Securities Act or if an exemption from such registration requirements
is available; and (iii) except to the extent provided in the Registration
Rights Agreement, the Company is not required to register any resale of the
Notes or the Conversion Shares under the Securities Act.
(b) The Notes to be acquired by such Purchaser pursuant to this
Agreement are being acquired for its own account, for investment purposes, and
not with a view to, or for sale in connection with, any distribution thereof or
of Conversion Shares issuable upon conversion of the Notes in violation of the
Securities Act or any other securities laws which may be applicable.
(c) Such Purchaser is not an affiliate of the Company (as such
term is defined in the Securities Act).
(d) Such Purchaser is a Non-U.S. Person.
(e) Such Purchaser (i) has sufficient knowledge and experience in
financial and business matters so as to be capable of evaluating the merits and
risks of its investment in the Notes and Purchaser is capable of bearing the
economic risks of such investment, including a complete loss of its investment
in the Notes; (ii) believes that its investment in the Notes is suitable for it
based upon its objectives and financial needs, and such Purchaser has adequate
means for providing for its current financial needs and business contingencies
and has no present need for liquidity of investment with respect to the Notes;
(iii) has no present plan, intention or understanding and has made no
arrangement to sell the Notes or the Conversion Shares at any predetermined
time or for any predetermined price; (iv) has not purchased, sold or entered
into, and has no present intention to and will not, for so long as it owns any
Notes or Conversion Shares, purchase, sell or enter into, any put option, short
position or similar arrangement with respect to the Common Stock, or any
intention to settle any such option, position or understanding with any
Conversion Shares.
<PAGE> 15I
(f) No oral or written representations have been made to such
Purchaser by or on behalf of the Company in connection with the offering and
sale of the Notes hereunder other than those set forth in the SEC Reports, the
Notes or as set forth herein, and such Purchaser is not subscribing for the
Notes as a result of, or in response to, any advertisement, article, notice or
other communication published in any newspaper, magazine or similar media or
broadcast over television or radio, or presented at any seminar or meeting.
(g) At the time the buy order for the Notes being purchased
hereunder was originated, such Purchaser was outside of the United States.
(h) Such Purchaser acknowledges that Regulation S under the
Securities Act restricts the transferability in the United States of
securities, such as the Notes and Conversion Shares, issued in reliance upon
the exemption from the registration requirements of the Securities Act provided
by Regulation S thereunder, and that, subject to Section 5.02 below, the
certificates representing the Notes and the Conversion Shares will bear a
legend in substantially the following form by which such Purchaser and each
subsequent holder of such securities will be bound (the "Legend"):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH
SECURITIES LAWS. BY ACQUIRING THE SECURITIES REPRESENTED BY THIS CERTIFICATE,
THE HOLDER (1) REPRESENTS THAT EITHER (X) IT IS NOT A U.S. PERSON AND HAS
ACQUIRED THIS SECURITY IN AN OFFSHORE TRANSACTION OR (Y) IT IS A PERSON
DESCRIBED IN CLAUSE (B) WHICH HAS ACQUIRED THIS SECURITY SUBSEQUENT TO THE DATE
OF ORIGINAL ISSUANCE THEREOF; (2) AGREES THAT IT WILL NOT OFFER, SELL, PLEDGE
OR OTHERWISE TRANSFER THIS SECURITY OR ANY SECURITIES ISSUABLE UPON THE
CONVERSION HEREOF EXCEPT (A) TO ANDREA ELECTRONICS CORPORATION (THE "COMPANY")
OR ANY SUBSIDIARY THEREOF, (B) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN
THE MEANING OF PARAGRAPHS (1), (2), (3) OR (7) OF RULE 501(a) UNDER THE
SECURITIES ACT THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR
THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT
PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH,
ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, (C) OUTSIDE THE UNITED
STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE
SECURITIES ACT, (D) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, OR (E) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT; AND (3) AGREES THAT
IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY OR ANY SECURITY ISSUED
UPON CONVERSION HEREOF IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT
OF THIS LEGEND. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN
MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF REGISTRATION UNDER THE SECURITIES ACT OR UNLESS
SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. IN
CONNECTON WITH ANY SUCH PROPOSED TRANSFER, THE COMPANY MAY REQUIRE THAT THE
PROPOSED TRANSFEROR AND TRANSFEREE FIRST FURNISH THE COMPANY SUCH CERTIFICATES
AND REPRESENTATIONS AS THE COMPANY MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH
TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT
SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED
HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON"
HAVE THE RESPECTIVE MEANINGS ASSIGNED TO THEM IN REGULATION S UNDER THE
SECURITIES ACT.
(i) Such Purchaser acknowledges that as the Common Stock is
currently listed on a national securities exchange, Rule 144A under the
Securities Act may not be available with respect to resales of the Notes or the
Conversion Shares.
SECTION 4.03. No Brokers. No broker, finder, agent or similar
intermediary is entitled to any broker's, finder's, placement or similar fee or
other commission in connection with the transactions contemplated hereby based
on any agreement, arrangement or understanding with such Purchaser.
<PAGE> 15J
ARTICLE V
COVENANTS OF THE COMPANY
SECTION 5.01. Exemption from Registration.
The Company will not make any offer to sell, solicit any offer to buy,
agree to sell or sell any security or right to acquire any security, except at
such time and in such manner so as not to cause the loss of any of the
exemptions for the offer and sale of the Notes hereunder and for the issuance
of Conversion Shares upon conversion of the Notes from the registration
requirements under the Securities Act or under the securities or "blue sky"
laws of any jurisdiction in which such offer, sale or issuance is made.
Without limiting the generality of the foregoing, the Company will not make any
offer to sell, solicit any offer to buy, agree to sell or sell any securities
similar in tenor to the Notes or any Common Stock or right to acquire any
securities similar in tenor to the Notes or any Common Stock during the period
commencing the date of the Closing and ending one hundred and eighty (180) days
thereafter, except for the shares of Common Stock issuable upon conversion of
(i) the Notes or (ii) the Company's 15% Convertible Subordinated Debentures Due
October 16, 1997.
SECTION 5.02 Special Transfer Provisions. (a) 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):
(i) With respect to any such proposed transfer of Notes
or Conversion Shares to any Institutional Accredited Investor that is a U.S.
Person, the Company or any transfer agent then acting with respect to the Notes
or the Common Stock, as the case may be, shall register the transfer whether or
not such Notes or Conversion Shares bear the Legend, if the proposed transferee
has delivered to the Company or the transfer agent, as appropriate, a
certificate containing certain representations with respect to such proposed
transferee's status as an Institutional Accredited Investor and with respect to
compliance with applicable provisions of the Securities Act (substantially in
the form Exhibit C hereto).
(ii) With respect to any such proposed transfer of Notes
or Conversion Shares to any Non-U.S. Person, the Company or any transfer agent
then acting with respect to the Notes or the Common Stock, as the case may be,
shall register the transfer whether or not such Notes or Conversion Shares bear
the Legend, if the proposed transferee has delivered to the Company or the
transfer agent, as appropriate, a certificate containing certain
representations with respect to such proposed transferee's status as a Non-U.S.
Person and with respect to compliance with the provisions of Regulation S under
the Securities Act (substantially in the form of Exhibit C hereto).
(iii) Upon the transfer as provided in paragraphs (i) and
(ii) above of Notes or Conversion Shares not bearing the Legend, the Company or
the transfer agent, as the case may be, shall deliver certificates for such
securities that do not bear the Legend. Upon the transfer of Notes or
Conversion Shares bearing the Legend, the Company or the transfer agent, as the
case may be, shall deliver only certificates for such securities bearing the
Legend unless (A) such transfer is after the date which is three (3) years from
the date of the Closing (or such other date as may be required pursuant to Rule
144 under the Securities Act (or similar successor provision) as in effect from
time to time); (B) there is delivered to the Company or the transfer agent, as
the case may be, a certificate of the transferor substantially in the form of
Exhibit D to the effect that neither the Legend nor the related restrictions on
transfer are required in order to maintain compliance with the provisions of
the Securities Act; or (C) such Notes or Conversion Shares have been sold
pursuant to an effective registration statement under the Securities Act.
(b) Except as expressly provided in paragraph (a) above, unless
otherwise required by applicable law or regulation, no other deliveries shall
be required of a Purchaser in connection with any proposed transfer of Notes or
Conversion Shares, notwithstanding anything contained in the Notes or
Conversion Shares.
<PAGE> 15K
SECTION 5.03. Rules 144; Current Information. For so long as any
Notes or Conversion Shares are outstanding, the Company will (i) file all
reports required to be filed by it under the Securities Act and the Exchange
Act and will take such further actions as any Purchaser may reasonably request,
all to the extent required from time to time to enable such Purchaser to sell
Notes and Conversion Shares without registration under the Securities Act
pursuant to the safe harbors and exemptions provided by Rule 144, under the
Securities Act, as such rules may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission, and (ii) furnish each
Purchaser with all reports, proxy statements and registration statements which
the Company files with the Commission or distributes to its securityholders
pursuant to the Securities Act and the Exchange Act at the times of such
filings and distributions. Upon the request of any Purchaser, the Company will
deliver to such Purchaser a written statement as to whether it has complied
with the foregoing requirements.
SECTION 5.04. Reservation of Conversion Shares. The Company shall
at all times reserve and keep available, free from preemptive rights, out of
its authorized but unissued shares of Common Stock or its issued shares of
Common Stock held in its treasury, or both, sufficient shares of Common Stock
to provide for the issuance of the Conversion Shares from time to time as the
Notes become convertible pursuant to their terms.
SECTION 5.05. Stock Listing. The Company shall endeavor to have the
Conversion Shares approved for listing, prior to issuance, upon the American
Stock Exchange or upon such other national securities exchange or the Nasdaq
National Market or any similar system of automated dissemination of securities
prices upon which the Common Stock is listed or traded at the time of issuance
of such Conversion Shares.
ARTICLE VI
MISCELLANEOUS
SECTION 6.01. Press Releases and Disclosure. No party hereto shall
issue any press release or make any other public disclosure related to this
Agreement or any of the transactions contemplated hereby without the prior
written approval of the other party hereto, except as may be necessary or
appropriate in the opinion of the party seeking to make disclosure to comply
with the requirements of applicable law or stock exchange rules (provided that,
unless otherwise required by applicable law, regulation, order or the like, or
agreed to between the parties, (i) no Exchange Act filing shall disclose more
than the title and amount of securities issued, the conversion formula,
including the minimum and maximum conversion prices, and the intended use of
proceeds, and (ii) no press release shall disclose more than the title and
amount of securities issued, a general description of the conversion formula
but without specifying the minimum and maximum conversion prices, and the
intended use of proceeds, and provided further that in no event shall the
identity of a Purchaser be disclosed without such Purchaser's prior written
consent unless such disclosure is required by applicable law, regulation, order
or the like, in which event the Company shall, prior to complying with such
law, regulation, order or the like, give written notice to Purchaser so as to
allow Purchaser to contest such disclosure). If any such press release or
public disclosure is so required, the party making such disclosure shall
consult with the other party prior to making such disclosure, and the parties
shall use all reasonable efforts, acting in good faith, to agree upon a text
for such disclosure which is satisfactory to all parties.
SECTION 6.02. Expenses. Except as otherwise expressly provided for
herein, the Company will pay all of its and all of the Purchasers' expenses
(including attorneys' fees and expenses) up to $20,000 in connection with the
negotiation of the Transaction Documents, the performance of the obligations of
each thereunder, and the consummation of the transactions contemplated thereby
(whether consummated or not). Such Purchasers' expenses shall be payable at
the Closing and may be netted against the Purchase Price otherwise payable by
the Purchasers.
<PAGE> 15L
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 LLP, One World
Trade Center, New York, New York 10048, Attention: Alan L. Jakimo, Esq.,
Facsimile No.: (212) 839-5599; and (ii) if to a Purchaser, to such Purchaser's
address set forth on its counterpart signature page hereto. Notice shall be
deemed given on the date of service or transmission if personally served or
transmitted by telegram, telex or facsimile. Notice otherwise sent as provided
herein shall be deemed given on the third business day following the date
mailed or on the next business day following delivery of such notice to a
reputable air courier service.
SECTION 6.04. Entire Agreement. This Agreement (together with the
other Transaction Documents and all other documents delivered pursuant hereto
and thereto) constitutes the entire agreement of the parties with respect to
the subject matter hereof and supersedes all prior and contemporaneous
agreements, representations, understandings, negotiations and discussions
between the parties, whether oral or written, with respect to the subject
matter hereof.
SECTION 6.05. Amendment and Waiver. This Agreement may not be
amended, modified, supplemented, restated or waived except by a writing
executed by the party against which such amendment, modification or waiver is
sought to be enforced. Waivers may be made in advance or after the right
waived has arisen or the breach or default waived has occurred. Any waiver may
be conditional. No waiver of any breach of any agreement or provision herein
contained shall be deemed a waiver of any preceding or succeeding breach
thereof nor of any other agreement or provision herein contained. No waiver or
extension of time for performance of any obligations or acts shall be deemed a
waiver or extension of the time for performance of any other obligations or
acts.
SECTION 6.06. Assignment; No Third Party Beneficiaries. This
Agreement and the rights, duties and obligations hereunder may not be assigned
or delegated by either the Company, on the one hand, or a Purchaser, on the
other hand, without the prior written consent of the other parties hereto;
provided that a Purchaser may assign or delegate its rights, duties and
obligations hereunder to any Affiliate of such Purchaser. Except as provided
in the preceding sentence, any purported assignment or delegation of rights,
duties or obligations hereunder made without the prior written consent of the
other parties hereto shall be void and of no effect. This Agreement and the
provisions hereof shall be binding upon and shall inure to the benefit of each
of the parties and their respective successors and permitted assigns. This
Agreement is not intended to confer any rights or benefits on any Persons other
than as set forth above.
SECTION 6.07. Severability. This Agreement shall be deemed
severable, and the invalidity or unenforceability of any term or provision
hereof shall not affect the validity or enforceability of this Agreement or of
any other term or provision hereof. Furthermore, in lieu of any such invalid
or unenforceable term or provision, the parties hereto intend that there shall
be added as a part of this Agreement a provision as similar in terms to such
invalid or unenforceable provision as may be possible and be valid and
enforceable.
SECTION 6.08. Further Assurances. Each party hereto, upon the
request of any other party hereto, shall do all such further acts and execute,
acknowledge and deliver all such further instruments and documents as may be
necessary or desirable to carry out the transactions contemplated by this
Agreement.
<PAGE> 15M
SECTION 6.09. Titles and Headings. Titles, captions and headings of
the sections of this Agreement are for convenience of reference only and shall
not affect the construction of any provision of this Agreement.
SECTION 6.10. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY,
INTERPRETED UNDER, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE
STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED WITHIN THE
STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS-OF-LAW THEREOF.
SECTION 6.11. Counterparts. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original, all of which
taken together shall constitute one and the same instrument.
[signature page follows]
<PAGE> 15N
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by the undersigned, thereunto duly authorized, as of the date first
set forth above.
ANDREA ELECTRONICS CORPORATION
By:
Name: Patrick Pilch
Title: Executive Vice President,
Chief Financial Officer
[NAME OF PURCHASER]
By:
Name:
Title:
Purchaser's Address for Notices
Pursuant to Section 6.03:
Attention:
Facsimile No.:
<PAGE> 15O
EXHIBIT C
CERTIFICATE OF TRANSFER
In connection with the transfer of certain 10% Convertible
Subordinated Debentures Due February 9, 1998 (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 August 7, 1996 and the last date on which such
Debentures (or any predecessor securities) or such Shares, as the case may be,
were owned by the Company or any affiliate of the Company, the undersigned
confirms that such Debentures or Shares, as the case may be, are being
transferred:
CHECK ONE BOX BELOW
[ ] (a) pursuant to offers and sales to non-U.S. persons that
occur outside of the United States within the meaning
of Regulation S under the Securities Act of 1933, as
amended;
[ ] (b) to an institutional accredited investor (as defined
in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act of 1933, as amended) that has furnished
to the Company a signed letter containing certain
representations and agreements (the form of which
letter is attached hereto);
[ ] (c) to the Company.
Dated:
Signature
Signature
<PAGE> 15P
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 10% Convertible Subordinated Debentures
Due February 9, 1998 (the Debentures ) of Andrea Electronics Corporation (the
Company ) or the shares of Common Stock, par value $.50 per share (the
Shares ), of the Company into which such Debentures are convertible. For
purposes of this letter, the term Securities shall mean the Debentures or the
Shares, as the case may, that are the subject of such proposed transfer.
The undersigned hereby confirms that:
(i) the undersigned is an institutional accredited investor (as
defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933, as
amended (the Securities Act ), an Institutional Accredited Investor );
(ii) (A) any purchase of the Securities by the undersigned will be
for the undersigned s own account or for the account of one or more other
Institutional Accredited Investors for each of which the undersigned exercises
sole investment discretion or (B) the undersigned is a bank , within the
meaning of Section 3(a)(2) of the Securities act, or a savings and loan
association or other institution described in Section 3(a)(5)(A) of the
Securities Act that is acquiring the Securities as fiduciary for the account of
one or more institutions for which the undersigned exercises sole investment
discretion;
(iii) the undersigned has such knowledge and experience in financial
and business matters that the undersigned is capable of evaluating the merits
and risks of purchasing the Securities; and
(iv) the undersigned is not acquiring the Securities with a view to
the distribution thereof or with any present intention of offering or reselling
the Securities, except as permitted below; provided that the disposition of the
undersigned s property and property of any accounts for which the undersigned
is acting as fiduciary shall remain at all times within its control.
The undersigned understand that the proposed transfer of the
Securities does not involve any public offering within the United States within
the meaning of the Securities Act and that such proposed transfer of the
Securities has not been registered under the Securities Act or any applicable
state securities laws, and the undersigned agrees, on its own behalf and on
behalf of each account for which the undersigned acquires any Securities, that
such Securities may be resold or otherwise transferred only (a) to the Company
or any subsidiary thereof, (b) inside the United States to an Institutional
Accredited Investor that, prior to such transfer furnishes to the Company a
signed letter contain the same representations and agreements relating to the
restriction on transfer of such Securities set forth herein, (c) outside the
United States in a transaction meeting the requirements of Rule 904 under the
Securities Act, (d) pursuant to an exemption from registration provided by Rule
144 under the Securities Act (if applicable) or (e) pursuant to a registration
statement which has been declared effective under the Securities Act. The
undersigned agrees that any such transfer of Securities referred to in this
paragraph shall be in accordance with applicable securities laws of any State
of the United States or any other applicable jurisdiction and in accordance
with the legends set forth on the Securities. The undersigned further agrees
to provide any person purchasing any of the Securities from the undersigned a
notice advising such purchaser that resales of such Securities are restricted
as stated herein. The undersigned understands that the registrar and transfer
agent for the Securities (which in the case of the Debentures shall be the
Company) will not be required to accept for registration or transfer any
Securities, except upon presentation of evidence satisfactory to the Company
that the foregoing restrictions on transfer have been complied with. The
<PAGE> 15Q
undersigned further understands that any Securities will be in the form of
definitive physical certificates and that such certificates will bear a legend
or legends (unless the sale of the Securities has been registered under the
Securities Act) reflecting the substance of this paragraph.
The undersigned acknowledges that the Company, others and you will
rely upon the undersigned s confirmations, acknowledgements and agreements set
forth herein, and the undersigned agrees to notify you promptly in writing if
any of its representations or warranties herein ceases to be accurate and
complete.
(Name of Purchaser)
By:
Name:
Title:
Address:
<PAGE> 15R
EXHIBIT D
Seller Representation Letter
(for resales into the U.S. pursuant to Section 5.02(c) of the
Securities Purchase Agreement)
Andrea Electronics Corporation
11-40 45th Road
Long Island City, Ne York 11101
Attention: Chief Financial Officer
Re: 10% Convertible Subordinated Debentures Due February 9, 1998
(the Debentures ) of Andrea Electronics Corporation (the
Company ); Shares of Common Stock, par value $.50 per share,
of the Company into which the Debentures are Convertible (the
Shares ; and together with the Debentures, the Securities )
Ladies and Gentlemen:
In order to effect the transfer of certain Securities by the
undersigned the Transferor ) without registration under the U.S. Securities
Act of 1933, as amended (the Securities Act ) and to have the legend removed
from the Securities, the Transferor represents, warrants and acknowledges to
the Company that:
A. the Transferor has not been engaged as a distributor or dealer by the
Company or anyone else in respect of the Securities, and is not
receiving a selling commission fee or other renumeration, with respect
to the Securities Purchase Agreement pursuant to which the Debentures
were originally issued and sold (the Securities Purchase Agreement )
or otherwise in connection with any purchaser and/or sale of the
Securities;
B. neither the Transferor nor any person acting for the Transferor has
conducted any general solicitation relating to the offer and sale of
the Securities in the United States;
C. the Transferor understands that the transfer of the Securities to the
Purchase on the books of the Company is to be made in reliance on the
specific exemptions from the registration requirements of the United
States federal securities laws and any applicable state securities
laws ( State Acts ) listed in the attachment hereto and that the
Company is relying upon the truth and accuracy of, and the
Transferor s compliance with, the representations, warranties,
agreements, acknowledgments and understandings set forth herein in
order to determine the availability of such exemptions and the
eligibility of the Transferor to sell, transfer or otherwise dispose
of the Securities;
D. the Transferor is not transferring the Securities to settle any put
option, short position or other similar instrument or position with
respect to the Shares of securities of the same class as the Shares;
E. assuming that the Debentures were originally issued in compliance with
Regulation S under the Securities Act, upon consultation with counsel,
the Transferor believes that the sale, transfer or other disposition
of the Securities in respect of which this letter is being provided is
not in violation of the Securities Act, the U.S. Securities Exchange
Act of 1934, as amended, any applicable State Acts or other rules and
regulations of the U.S. Securities Exchange Commission and any state
securities commissions promulgated under any of the foregoing; and
<PAGE> 15S
F. the representations and warranties made by the Transferor to the
Company at the time that the Transferor acquired the Securities remain
true and correct.
Transferor:
(Name of Transferor)
By:
Name:
Title:
<PAGE> 15T
EXHIBIT A
ANDREA ELECTRONICS CORPORATION
10% CONVERTIBLE SUBORDINATED DEBENTURE DUE FEBRUARY 9, 1998
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH
SECURITIES LAWS. BY ACQUIRING THE SECURITIES REPRESENTED BY THIS CERTIFICATE,
THE HOLDER (1) REPRESENTS THAT EITHER (X) IT IS NOT A U.S. PERSON AND HAS
ACQUIRED THIS SECURITY IN AN OFFSHORE TRANSACTION OR (Y) IT IS A PERSON
DESCRIBED IN CLAUSE (B) WHICH HAS ACQUIRED THIS SECURITY SUBSEQUENT TO THE DATE
OF ORIGINAL ISSUANCE THEREOF; (2) AGREES THAT IT WILL NOT OFFER, SELL, PLEDGE
OR OTHERWISE TRANSFER THIS SECURITY OR ANY SECURITIES ISSUABLE UPON THE
CONVERSION HEREOF EXCEPT (A) TO ANDREA ELECTRONICS CORPORATION (THE "COMPANY")
OR ANY SUBSIDIARY THEREOF, (B) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN
THE MEANING OF PARAGRAPHS (1), (2), (3) OR (7) OF RULE 501(a) UNDER THE
SECURITIES ACT THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR
THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT
PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH,
ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, (C) OUTSIDE THE UNITED
STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE
SECURITIES ACT, (D) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, OR (E) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT; AND (3) AGREES
THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY OR ANY SECURITY
ISSUED UPON CONVERSION HEREOF IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE
EFFECT OF THIS LEGEND. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED,
ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION UNDER THE
SECURITIES ACT OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO,
SUCH REGISTRATION. IN CONNECTON WITH ANY SUCH PROPOSED TRANSFER, THE COMPANY
MAY REQUIRE THAT THE PROPOSED TRANSFEROR AND TRANSFEREE FIRST FURNISH THE
COMPANY SUCH CERTIFICATES AND REPRESENTATIONS AS THE COMPANY MAY REASONABLY
REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION
FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED
STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE MEANINGS ASSIGNED TO THEM IN
REGULATION S UNDER THE SECURITIES ACT.
Certificate No. U.S. $
FOR VALUE RECEIVED, ANDREA ELECTRONICS CORPORATION, a corporation duly
organized and existing under the laws of the State of New York (the
"Company"), hereby promises to pay to , or
registered assigns, the principal sum of $ on February 9, 1998,
and to pay interest thereon in the manner set forth on the reverse hereof
from August 7, 1996 at the rate of 10% 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: August 7, 1996 ANDREA ELECTRONICS CORPORATION
By:
Name: Patrick Pilch
Title: Executive Vice President,
Chief Financial Officer
<PAGE> 15U
- REVERSE OF DEBENTURE -
ANDREA ELECTRONICS CORPORATION
10% CONVERTIBLE SUBORDINATED DEBENTURE DUE FEBRUARY 9, 1998
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 10% Convertible Subordinated
Debentures Due February 9, 1998 in an aggregate face amount of $1,687,500.
2. INTEREST. The Company promises to pay interest on the principal
amount of this Debenture at the rate of 10% per annum. Interest on this
Debenture will accrue from August 7, 1996 until payment in full of the
principal amount hereof has been made or duly provided for and will be based on
the actual number of days and months elapsed and computed on a 360-day year
consisting of twelve 30-day months. Interest shall be payable in arrears on
the earlier to occur of (i) the date of conversion to Common Stock (as defined
in Section 4 below) as provided herein of all or a portion of this Debenture
(if this Debenture shall be converted in part, then interest only with respect
to the portion of this Debenture so converted shall be payable at such time)
and (ii) February 9, 1998 (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) $12.075 (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 $5.75 (the "Minimum Conversion
Price"). The "Closing Price" with respect to the per share price of Common
<PAGE> 15V
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 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-half of the aggregate 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) and (ii) up to the
entire original principal amount of this Debenture into Common Stock at any
time beginning 180 days following the date of original issuance of this
Debenture (or any predecessor security). The last date on which this Debenture
may be converted is three (3) business days prior to the Maturity Date.
Subject to the foregoing, the Holder may convert a portion of this Debenture
into Common Stock at any time if the portion converted (exclusive of accrued
interest with respect thereto) is equal to or exceeds $10,000.
Notwithstanding any other provision of this Section 4, as of any date
prior to the Maturity Date, the aggregate number of shares of Common Stock into
which this Debenture, all other Debentures and all other securities convertible
into Common Stock held by the Holder of this Debenture and its affiliates shall
be convertible, together with the shares of Common Stock then beneficially
owned (as defined in the U.S. Securities Exchange Act of 1934, as amended) by
such Holder and its affiliates, shall not exceed 4.9% of the total outstanding
shares of Common Stock as of such date.
(b) Mechanics of Conversion. To convert this Debenture (or a
portion thereof) the Holder must (i) complete and sign the Notice of Conversion
set forth as Exhibit A to this Debenture (the "Notice of Conversion") and
deliver the Notice of Conversion to the Company as herein provided and (ii) on
or prior to the date on which delivery of Common Stock is required to be made
hereunder, (x) deliver this Debenture, duly endorsed, to the Company and (y)
pay any transfer or similar tax if required. The Holder shall surrender this
Debenture and the Notice of Conversion to the Company (with an advance copy by
facsimile of the Notice of Conversion). The date on which Notice of Conversion
is given (the Date of Conversion ) shall be deemed to be the date of receipt
by the Company of the facsimile of the Notice of Conversion, provided that this
Debenture is received by the Company within five (5) business days thereafter.
The Company shall not be obligated to cause the transfer agent for the Common
Stock (the "Transfer Agent") to issue certificates evidencing the shares of
Common Stock issuable upon such conversion unless either this Debenture has
been received by the Company or, if this Debenture has been lost, stolen or
destroyed, the Holder executes an agreement satisfactory to the Company to
indemnify the Company from any loss incurred by it in connection with this
Debenture.
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
<PAGE> 15W
(10) business days after the Date of Conversion, the Notice of Conversion shall
become null and void.
Following conversion of this Debenture, or a portion thereof, the
principal, together with the interest payable on this Debenture, or portion
thereof so converted, will be deemed paid in full and satisfied, and such
Debenture or portion thereof will no longer be outstanding. In the event this
Debenture is converted in part, the Company will issue to the Holder a new
Debenture in a principal amount equal to the portion of this Debenture not
converted.
(c) Reservation of Stock Issuable Upon Conversion. The Company
shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock or shares of Common Stock held in treasury, or
both, solely for the purpose of effecting the conversion of this Debenture,
such number of shares of Common Stock as shall from time to time be sufficient
to effect the conversion of the Debentures and all other securities of the
Company convertible or exchangeable into Common Stock.
(d) Adjustment to Maximum Conversion Price and Minimum
Conversion Price.
(i) If, prior to the conversion of the entire principal
amount of this Debenture, the number of outstanding shares of Common Stock is
increased by a stock split, stock dividend of shares of Common Stock or other
shares of capital stock, reclassification or other similar event, the Maximum
Conversion Price and Minimum Conversion Price shall be proportionately reduced,
or if the number of outstanding shares of Common Stock is decreased by a
combination or reclassification of shares or other similar event, the Maximum
Conversion Price and Minimum Conversion Price shall be proportionately
increased, in each case, such that the Holder of this Debenture will have the
right to receive upon conversion of this Debenture the number of shares of
Common Stock (or other shares of Capital Stock) of the Company (notwithstanding
the limitation set forth in the third paragraph of Section 4(a)) which such
Holder would have been entitled to receive had the Holder converted this
Debenture immediately prior to such action.
(ii) If, prior to the conversion of the entire principal
amount of this Debenture, there shall be any merger, consolidation, exchange of
shares, recapitalization, reorganization or other similar event (a "Conversion
Reclassification Event"), as a result of which shares of Common Stock of the
Company shall be changed into the same or a different number of shares of the
Company or the same or another class or classes of stock or securities of the
Company or another entity, then the Holder of this Debenture shall thereafter
have the right to receive upon conversion of this Debenture, upon the basis and
the terms and conditions specified herein, such shares of stock and/or
securities as may be issued or payable with respect to or in exchange for the
number of shares of Common Stock immediately theretofore receivable upon the
conversion of this Debenture (irrespective of the limitations set forth in
Section 4(a)) had such Conversion Reclassification Event not taken place, and
in any such case appropriate provisions shall be made with respect to the
rights and interests of the Holder of this Debenture such that the provisions
hereof (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
<PAGE> 15X
Holder as contemplated by this Debenture. In the event that within 15 days of
any such event, the Company and the Holder do not reach an agreement as to the
appropriate adjustment, the Company shall retain, and pay for, a nationally
recognized investment bank or accounting firm to determine the appropriate
adjustment as soon as possible, but in any event not later than 45 days from
the date of such event.
No adjustment shall be required for cash dividends or
distributions except to the extent that any such cash dividend or distribution
made on any date would, upon payment, cause the aggregate fair market value (as
determined in good faith by the Board of Directors, whose determination shall
be conclusive) of all such dividends and distributions which have occurred on
such date and during the 365-day period immediately preceding such date (other
than any dividends or distributions in respect of which an adjustment to the
Maximum Conversion Price and the Minimum Conversion Price pursuant to this
Section 4(d) had previously been made) exceed the product of (x) .20 times (y)
the Closing Price on the record date for such most recent dividend or
distribution times (z) the number of shares of Common Stock outstanding on such
date.
(iv) In the event that the Company shall at any time after
the date of the issuance of this Debenture (A) issue shares of Common Stock
without consideration (other than in the form of a dividend) or at a price per
share less than the Closing Price on the date of issue, (B) issue options,
rights or warrants to subscribe for or purchase Common Stock (or securities
convertible into Common Stock) without consideration or at a price per share
(or having a conversion price per share, if a security convertible into Common
Stock) less than the Closing Price of the Common Stock on the date of issue or
(C) in the case of securities convertible into Common Stock having a conversion
price less than the Closing Price of the Common Stock on the date of
conversion, the Maximum Conversion Price and the Minimum Conversion Price to be
in effect after the date of such issuance shall be adjusted by multiplying each
of the Maximum Conversion Price and the Minimum Conversion Price in effect
immediately prior to the date of such issuance by a fraction, of which the
numerator shall be the number of shares of Common Stock outstanding on the date
of such issuance plus the number of shares of Common Stock which the aggregate
offering price of the total number of shares of Common Stock so to be issued
(or the aggregate initial conversion price of the convertible securities so to
be issued) would purchase at the Closing Price on the date of such issue and of
which the denominator shall be the number of shares of Common Stock outstanding
on the date of such issuance plus the number of additional shares of Common
Stock to be issued (or into which the convertible securities so to be issued
are initially convertible). In case the subscription price for such securities
may be paid in a consideration part or all of which shall be in a form other
than cash, the value of such consideration shall be as determined in good faith
by the Board of Directors of the Company, whose determination shall be
conclusive. Such adjustment shall be made successively whnever the date of
such issuance is fixed and, in the event that such shares or option, rights or
warrants (or portions thereof) expire without being issued, each of the Maximum
Conversion Price and the Minimum Conversion Price shall again be adjusted to
reflect such occurrence.
(v) If any adjustment under this Section 4(d) would create
a fractional share of Common Stock or a right to acquire a fractional share of
Common Stock, such fractional share shall be disregarded and the number of
shares of Common Stock issuable upon conversion shall be the next higher number
of shares.
5. SUBORDINATION.
(a) The Company, for itself, its successors and assigns, covenants
and agrees, and the Holder of this Debenture, by acceptance hereof, covenants
and agrees, that payment of the principal of and interest on this Debenture is
hereby expressly subordinated, to the extent and in the manner hereinafter set
forth, in right of payment to the prior payment in full of all Senior
Indebtedness. "Senior Indebtedness" means the principal of, premium, if any,
and unpaid interest on (i) indebtedness of the Company (including indebtedness
of others guaranteed by the Company), other than this Debenture, whether
outstanding on the date of original issuance of this Debenture or hereafter
<PAGE> 15Y
created, incurred, assumed, or guaranteed, (A) for money owing to banks, (B)
for money borrowed from other than banks or (C) arising under a lease of
property, equipment or other assets, which indebtedness, pursuant to generally
accepted accounting principles then in effect, is classified upon the balance
sheet of the Company as a liability of the Company, unless in the instrument
creating or evidencing the same or pursuant to which the same is outstanding it
is provided that such indebtedness is not superior in right of payment to this
Debenture, and (ii) renewals, extensions, modifications and refundings of any
such indebtedness.
(b) Upon any distribution of assets of the Company upon any
dissolution, winding up, liquidation or reorganization of the Company, whether
in bankruptcy, insolvency, reorganization or receivership proceedings or upon
an assignment for the benefit of creditors or any other marshalling of the
assets and liabilities of the Company or otherwise the holders of all Senior
Indebtedness shall be entitled to receive payment in full of the principal
thereof, premium, if any, and the interest due thereon before the Holder of
this Debenture is entitled to receive any payment of principal or interest on
this Debenture; and in the event that, notwithstanding the foregoing, any
payment or distribution of assets of the Company of any kind or character,
whether in cash, property or securities, shall be received by the Holder of
this Debenture before all Senior Indebtedness is paid in full, such payment or
distribution shall be paid over to the holders of such Senior Indebtedness or
their representative or to the trustee under any indenture or agreement under
which any instruments evidencing any of such Senior Indebtedness may have been
issued, ratably as aforesaid, for application to the payment of all Senior
Indebtedness remaining unpaid until all such Senior Indebtedness shall have
been paid in full, after giving effect to any concurrent payment or
distribution to the holders of such Senior Indebtedness.
Subject to the payment in full of all Senior Indebtedness, the Holder
of this Debenture shall be subrogated to the rights of the holders of Senior
Indebtedness to receive payments or distributions of the Company applicable to
Senior Indebtedness until the principal of and interest on this Debenture shall
be paid in full and no such payments or distributions to the Holder of this
Debenture of cash, property or securities otherwise distributable to the Senior
Indebtedness shall, as between the Company, its creditors other than the
holders of Senior Indebtedness, and the Holder of this Debenture, be deemed to
be a payment by the Company to or on account of this Debenture. It is
understood that the provisions of this Section 5 are and are intended solely
for the purpose of defining the relative rights of the Holder of this 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 the 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.
<PAGE> 15Z
7. DENOMINATIONS. Debentures (and any Debenture issued in exchange,
upon transfer or upon conversion) may be issued in a minimum principal amount
of $100,000 (or such lesser amount upon a conversion in part of a Debenture
provided such lesser amount represents such Holder s entire holding of
Debentures).
8. EVENTS OF DEFAULT.
(a) An "Event of Default" under this Debenture occurs if:
(1) the Company defaults in effecting a conversion of this
Debenture in accordance with the provisions hereof and such default continues
for a period of 10 days;
(2) the Company defaults in the payment of the principal
of or interest on this Debenture when the same becomes due and payable;
(3) the Company fails to comply in any material respect
with any of its agreements in this Debenture or the provisions of the
Securities Purchase Agreement (the "Securities Purchase Agreement") or the
Registration Rights Agreement, each dated as of the date of the original
issuance of this Debenture between the Company and the original Holder of this
Debenture (other than those referred to in clauses (1) and (2) above) and such
failure continues for 30 days after the notice specified below;
(4) indebtedness of the Company or any subsidiary is not
paid within any applicable grace period after maturity or is accelerated by the
holders thereof because of a default, the total amount of such indebtedness
unpaid or accelerated exceeds $1,000,000 and such default continues for 10 days
after the notice specified below;
(5) the Company or any subsidiary pursuant to or within
the meaning of any federal or state bankruptcy, insolvency or other law for the
relief of debtors ("Bankruptcy Law"):
(A) commences a voluntary case or proceeding;
(B) consents to the entry of an order for relief
against it in an involuntary case or proceeding;
(C) consents to the appointment of any receiver,
trustee, assignee, liquidator, custodian or similar official under any
Bankruptcy Law (a "Custodian") of it or for any substantial part of its
property; or
(D) makes a general assignment for the benefit of
its creditors;
or takes any comparable action under any foreign laws relating to insolvency;
(6) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(A) is for relief against the Company or any
subsidiary in an involuntary case or proceeding;
(B) appoints a Custodian of the Company or any
subsidiary or for any substantial part of its property; or
(C) orders the winding up or liquidation of the
Company or any subsidiary;
or similar relief is granted under any foreign laws and the order or decree
remains unstayed and in effect for 60 days; or<PAGE>
<PAGE> 15AA
(7) any final judgment or decree for the payment of money
in excess of $1,000,000 (to the extent not covered by insurance) is rendered
against the Company or any subsidiary and is not discharged and either (A) an
enforcement proceeding has been commenced by any creditor upon such judgment or
decree or (B) there is a period of 60 days following such judgment during which
such judgment or decree is not discharged, waived or the execution thereof
stayed and, in the case of (B), such default continues for 10 days after the
notice specified below.
The foregoing will constitute Events of Default whatever the reason
for any such Event of Default and whether it is voluntary or involuntary or is
effected by operation of law or pursuant to any judgment, decree or order of
any court or any order, rule or regulation of any administrative or
governmental body.
A default under clause (3), (4) or (7) above is not an Event of
Default until the Holder of this Debenture notifies the Company of such default
and the Company does not cure such default within the time specified after
receipt of such notice. Such notice must specify the default, demand that it
be remedied and state that such notice is a "Notice of Default".
The Company shall deliver to the Holder of this Debenture, within 30
days after the occurrence thereof, written notice of any event which with the
giving of notice, the lapse of time or both would become an Event of Default
under clause (3), (4) or (7) above, its status and what action the Company is
taking or proposes to take with respect thereto.
(b) If an Event of Default (other than an Event of Default
specified in clauses (5) or (6) above) occurs and is continuing, the Holder of
this Debenture may declare the principal of and accrued interest on this
Debenture to be immediately due and payable and upon such declaration, such
principal and interest shall be due and payable immediately. If an Event of
Default specified in clauses (5) or (6) above occurs, the principal of and
interest on this Debenture shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Holder of this
Debenture.
9. NO AMENDMENT. No provision of this Debenture may be amended, altered
or modified without the written agreement of the Holder and the Company.
10. NO VOTING RIGHTS. This Debenture shall not entitle the Holder hereof
to any of the rights of a stockholder of the Company, including without
limitation, the right to vote, to receive dividends and other distributions, or
to attend any meetings of stockholders or any other proceedings of the Company.
11. LOST OR DESTROYED DEBENTURE. If this Debenture shall be mutilated,
lost, stolen or destroyed, the Company shall execute and deliver, in exchange
and substitution for and upon cancellation of a mutilated Debenture, or in lieu
of or in substitution for a lost, stolen or destroyed Debenture, a new
Debenture for the principal amount of this Debenture so mutilated, lost, stolen
or destroyed but only upon receipt of evidence of such loss, theft or
destruction of such Debenture, and of the ownership thereof, and indemnity, if
requested, all reasonably satisfactory to the Company.
12. SALES IN COMPLIANCE WITH APPLICABLE LAW. The Holder of this
Debenture, by acceptance hereof, agrees that it will not offer, sell or
otherwise dispose of this Debenture or the shares of Common Stock issuable upon
conversion hereof except under circumstances which will not result in a
violation of the Securities Act of 1933, as amended (the "Securities Act"),
including Regulation S promulgated under the Securities Act, or any applicable
state blue sky laws relating to the sale of securities and the Holder agrees to
provide the Company with such documentation as the Company shall deem necessary
in accordance with this Debenture and the Securities Purchase Agreement to
demonstrate that such offer, sale or disposition complies with applicable
securities laws.
<PAGE> 15BB
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.
<PAGE> 15CC
EXHIBIT A
ANDREA ELECTRONICS CORPORATION - NOTICE OF CONVERSION
10% CONVERTIBLE SUBORDINATED DEBENTURE DUE FEBRUARY 9, 1998
(To be executed by the Holder in order to convert the Debenture or portion
thereof)
The undersigned hereby irrevocably elects to convert [the entire principal
amount] [$ principal amount] of Debenture No. _________ into
shares of Common Stock, $.50 par value (the "Common Stock"), of Andrea
Electronics Corporation (the "Company") as of the Date of Conversion (which
shall be the date of receipt by facsimile by the Company of this Notice of
Conversion). If shares are to be issued in the name of a person other than the
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates as reasonably requested by
the Company or its Transfer Agent. No fee will be charged to the Holder for
any conversion, except for transfer taxes, if any.
The undersigned represents and warrants that all offers and sales by the
undersigned of the shares of Common Stock issuable to the undersigned upon
conversion of the Debenture shall be made in compliance with, pursuant to an
exemption from registration under the Securities Act. The undersigned also
represents and warrants that the number of shares of Common Stock to be
received upon conversion, together with the shares of Common Stock beneficially
owned by the undersigned (and its affiliates) on the Date of Conversion, do not
exceed 4.9% of the outstanding shares of Common Stock of the Company (as set
forth in the Company's most recent filing with the Securities and Exchange
Commission unless the Company shall notify the Holder that a lesser number of
shares is outstanding).
If the stock certificate is to be made out in another person's name, fill in
the form below:
(Print or type other person's name, address and zip code)
(Insert assignee s U.S. social security or tax identification number, if any)
Conversion calculations:
Date of Conversion
Applicable Conversion Price
$
Total number of shares
(assuming interest payable Accrued Interest
in shares)
[Name of Holder]
By:
Name:
Title:
<PAGE> 15DD
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)
<PAGE> 15EE
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated
as of August 7, 1996 is made and entered into between ANDREA ELECTRONICS
CORPORATION, a New York corporation ("AEC"), and the Purchaser executing a
signature page hereto (the "Purchaser").
WHEREAS, AEC and the Purchasers have entered into that certain
Securities Purchase Agreement, dated as of the date hereof (the "Subscription
Agreement"), pursuant to which AEC has issued to the Purchasers U.S. $1,687,500
aggregate principal amount of its 10% Convertible Subordinated Debentures Due
February 9, 1998 (the Notes ), which Notes, together with, in certain
circumstances, accrued interest thereon, are convertible into such number of
shares Common Stock, $.50 par value per share, of AEC as are specified in the
Notes (the Convertible Shares );
WHEREAS, pursuant to the terms of, and in partial
consideration for, the Purchaser's agreement to enter into the Subscription
Agreement, the Company has agreed to provide the Purchaser with certain
registration rights with respect to the Conversion Shares (as defined below);
NOW, THEREFORE, in consideration of the premises, the
representations, warranties, covenants and agreements contained herein and in
the Subscription Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, intending to be
legally bound hereby, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. Definitions. Capitalized terms defined in the
Subscription Agreement shall have the same meanings herein as are ascribed to
them therein. In addition, the following terms shall have the meanings
ascribed to them below:
"Registrable Securities" means all of the Convertible Shares
and any other securities issued or issuable upon conversion of the Notes as
provided therein (together, the Conversion Shares ) until (i) a registration
statement under the Securities Act covering the offering of such Conversion
Shares has been declared effective by the Commission and such Conversion Shares
have been disposed of pursuant to such effective registration statement, (ii)
such Conversion Shares are sold under circumstances in which all of the
applicable conditions of Rule 144 (or any similar provision then in force)
under the Securities Act ( Rule 144 ) are met, (iii) such Conversion Shares
have been otherwise transferred and AEC has delivered a new certificate or
other evidence of ownership for such securities not bearing a restrictive
legend or (iv) such time as, in the opinion of counsel to the Company, which
counsel shall be acceptable to the Purchasers in their sole discretion, such
Conversion Shares may be sold without any time, volume or manner limitation
pursuant to Rule 144(k) (or any similar provision then in effect) under the
Securities Act.
"Triggering Date" means any date after December 20, 1996 on
which the Purchaser reasonably determine, based on the advice of counsel, that
it would be inadvisable to transfer any Conversion Shares without registration
under the Securities Act or that such Conversion Shares cannot be freely
transferred without registration under circumstances in which a restrictive
legend cannot be removed.
"Underwriter" means a securities dealer who purchases any
Registrable Securities as principal in an underwritten offering and not as part
of such dealer's market-making activities.
<PAGE> 15FF
ARTICLE II
REGISTRATION RIGHTS
SECTION 2.1. Demand Registration.
(a) Request for Registration. At any time and from time to
time on and after a Triggering Date and subject to the terms and conditions
hereof, the Purchaser may make a written request to AEC to file with the
Commission a registration statement and such other documents, including a
prospectus, as may be necessary in order to comply with the provisions of the
Securities Act so as to permit a public offering and sale of up to all of the
Registrable Securities issued and issuable upon conversion of the Notes. The
request described in this paragraph (a) is hereinafter referred to as a "Demand
Registration." The Purchaser shall have the right to withdraw its request for
a Demand Registration by giving written notice to AEC of its request to
withdraw at any time prior to effectiveness of the registration statement
therefor; provided that in the event of such withdrawal, the Purchaser shall be
responsible for all fees and expenses (including fees and expenses of its
counsel) incurred by the Purchaser prior to such withdrawal; and provided
further that the Purchaser may make, in the aggregate, not more than three (3)
requests for a Demand Registration hereunder. Any request to effect a Demand
Registration shall specify the amount of Registrable Securities proposed to be
sold and shall also specify the intended method of disposition thereof. Within
ten (10) days following any such Demand Registration request, AEC shall notify
any other holders of Registrable Securities of such request. Within fifteen
(15) days following the date of such notice, any such other holder of
Registrable Securities covered by such Demand Registration request shall notify
AEC as to whether such holder desires to include any Registrable Securities
held by such holder in the aggregate Registrable Securities covered by such
Demand Registration request. Whether or not any holder of Registrable
Securities elects to include any Registrable Securities in such Demand
Registration, such Demand Registration shall be counted as one of the three
Demand Registration requests permitted hereunder as to such holder. There
shall be permitted hereunder only one Demand Registration request during any
twelve (12) month period. The minimum aggregate number of Registrable
Securities that must be covered by any registration statement prepared in
response to a Demand Registration request shall be 100,000 Convertible Shares
(or the equivalent amount of Conversion Shares).
(b) Effective Registration. A registration will not be
deemed to have been effected as a Demand Registration unless and until it has
been declared effective by the Commission and AEC has complied in all material
respects with its obligations under this Agreement with respect thereto unless
failure to obtain effectiveness is due to acts or omissions to act by the
Purchaser or any holder of Registrable Securities; provided that if, after it
has become effective, the offering of securities pursuant to such registration
is or becomes the subject of any stop order, injunction or other order or
requirement of the Commission or any other governmental or administrative
agency, or if any court prevents or otherwise limits the sale of such
securities pursuant to the registration, such registration will be deemed not
to have been effected as to the shares subject to such stop order, injunction,
other order, requirement or limitation unless such stop order, injunction,
other order, requirement or limitation is rescinded or the issuance of such
stop order, injunction, other order, requirement or limitation is imposed in
response to an act or omission on the part of one or more holders of
Registrable Securities the offering of which is the subject of such
registration. If (i) a registration requested pursuant to this Section 2.1 is
deemed not to have been effected and such failure to have been effected is not
the result of any act or omission of any holder of Registrable Securities the
offering of which is covered by the registration or (ii) with respect to an
offering of Registrable Securities on a continuous basis pursuant to Rule 415
under the Securities Act, the registration requested pursuant to this Section
2.1 does not remain effective for a period of at least twenty-four (24) months
beyond the effective date thereof (excluding for purposes of this calculation
any period during which the effectiveness of such registration is subject to a
stop order, injunction or other order or requirement of the Commission or any
other governmental or administrative agency or during which any court prevents
or otherwise limits the sale of securities pursuant to such registration) or,
<PAGE> 15GG
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 mre of the Registrable Securities the
offering of which is covered by such registration, then AEC shall continue to
be obligated to effect such registration pursuant to this Section 2.1 (and such
registration shall not count toward the three Demand Registration requests
permitted pursuant to Section 2.1(a)).
(c) Selection of Underwriter. If the Purchaser so elects,
the offering of Registrable Securities pursuant to a Demand Registration shall
be in the form of an underwritten offering, in which case AEC and the Purchaser
shall jointly select one or more nationally recognized firms of investment
bankers to act as the lead managing Underwriter or Underwriters in connection
with such offering.
(d) Deferral. Notwithstanding the foregoing, if AEC shall
furnish to the Purchaser in response to the Purchaser's request for a Demand
Registration a certificate signed by the Chairman, President and Chief
Executive Offer of AEC stating that the Board of Directors of AEC has, by duly
authorized resolution, determined in good faith that it would be seriously
detrimental to AEC and its shareholders for such registration statement to be
filed and it is therefore essential to defer the filing of such registration
statement, AEC shall have the right to defer such filing for a period of not
more than ninety (90) days after receipt of the request for a Demand
Registration. The Purchaser acknowledges that it would be seriously
detrimental to AEC and its shareholders for such registration statement to be
filed and therefore essential to defer such filing if, among other things, such
filing would impose an undue burden upon the ability of AEC to proceed with any
reorganization, merger, consolidation or acquisition of the securities or
assets of another firm or corporation or disposition of the securities or
assets of AEC or a public offering by AEC of Common Stock or other securities
of AEC registered under the Securities Act which, in each case, is material to
AEC (a "Material Transaction"). If AEC shall have delivered the certificate
referred to above and thereafter shall have entered into a definitive agreement
or filed a registration statement or a proxy statement in connection with a
Material Transaction, AEC shall, upon written notice to the Purchaser, have the
right to defer the filing of the registration statement requested to be filed
by the Purchaser for whatever additional time period (but in no event longer
than forty-five (45) days) from the expiration of the initial ninety (90)-day
extension period referred to above as is reasonably necessary to enable AEC to
satisfy its disclosure obligations under the Securities Act in such
registration statement with respect to the Material Transaction. AEC may not
utilize this rigt to defer the filing of a registration statement more than
once in any twelve (12)-month period.
SECTION 2.2. Reduction of Offering.
(a) AEC may include in a Demand Registration pursuant to
Section 2.1 hereof Common Stock for the account of AEC and for the account of
any other person or entity who holds Common Stock on the same terms and
conditions as the Registrable Securities to be included therein; provided,
however, that (i) if the managing Underwriter or Underwriters of any
underwritten offering described in Section 2.1 shall have informed AEC in
writing that it is their opinion that the total number of shares of Common
Stock which the Purchaser, AEC and any other Persons or entities desiring to
participate in such registration intend to include in such offering is such as
to materially and adversely affect the success of such offering, then the
number of shares of Common Stock to be offered for the account of AEC and for
the account of all such other Persons and entities (other than the Purchaser)
participating in such registration shall be reduced or limited pro rata in
proportion to the respective number of shares of Common Stock requested to be
registered by AEC and such other Persons and entities to the extent necessary
to reduce the respective total number of shares of Common Stock requested to be
included in such offering to the number of shares of Common Stock recommended
by such managing Underwriters, and (ii) if the offering is not underwritten, no
other person or entity, including AEC, shall be permitted to offer securities
under any such Demand Registration unless the Purchaser consents to the
inclusion of such securities therein.
<PAGE> 15HH
ARTICLE III
REGISTRATION PROCEDURES
SECTION 3.1. Filings; Information. Whenever AEC is required to
effect or cause the registration of Registrable Securities pursuant to Section
2.1, AEC will use its reasonable efforts to effect the registration of such
Registrable Securities in accordance with the intended method of disposition
thereof as quickly as practicable, and in connection with any such request:
(a) AEC will as expeditiously as possible (and in no event
more than forty-five (45) days from the date of receipt of written request from
the Purchaser pursuant to Section 2.1(a) to register Registrable Securities)
prepare and file with the Commission a registration statement on Form S-3 (if
use of such form is then available to AEC pursuant to the rules of the
Commission and, if not, on such other form promulgated by the Commission for
which AEC then qualifies and which counsel for AEC shall deem appropriate and
which form shall be available for the sale of the Registrable Securities to be
registered thereunder in accordance with the provisions of this Agreement and
in accordance with the intended method of such Registrable Securities), and use
commercially reasonable efforts to cause such filed registration statement to
become and remain effective (pursuant to Rule 415 under the Securities Act or
otherwise), and AEC will as expeditiously as possible prepare and file with the
Commission such amendments and supplements to such registration statement and
the prospectus used in connection therewith as may be necessary to keep such
registration statement effective, for a period of not less than: (i) twenty
four (24) consecutive months, or (ii) with respect to an underwritten offering
of Registrable Securities, ninety (90) days after the commencement of the
distribution of all Registrable Securities covered by such registration
statement (but not before the expiration of the period referred to in Section
4(3) of the Securities Act and Rule 174 thereunder, if applicable) and comply
with the provisions of the Securities Act with respect to the disposition of
all securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the Purchaser set forth
in such registration statement.
(b) AEC will, prior to filing a registration statement or
prospectus or any amendment or supplement thereto, furnish to the Purchaser,
one firm of counsel representing the Purchaser, and each Underwriter, if any,
of the Registrable Securities covered by such registration statement copies of
such registration statement as proposed to be filed, together with exhibits
thereto, which documents will be subject to review and approval by the
foregoing, and thereafter furnish to the Purchaser, its counsel and each
Underwriter, if any, for their review and comment such number of copies of such
registration statement, each amendment and supplement thereto (in each case
including all exhibits thereto and documents incorporated by reference
therein), the prospectus included in such registration statement (including
each preliminary prospectus) and such other documents or information as the
Purchaser, counsel or each Underwriter may reasonably request in order to
facilitate the disposition of the Registrable Securities.
(c) After the filing of the registration statement, AEC
will promptly notify the Purchaser of any stop order issued or threatened by
the Commission in connection therewith and take all reasonable actions required
to prevent the entry of such stop order or to remove it if entered.
(d) AEC will use its reasonable efforts to (i) register or
qualify such Registrable Securities under such other securities or blue sky
laws of such jurisdictions in the United States as the Purchaser may reasonably
(in light of its intended plan of distribution) request, and (ii) cause such
Registrable Securities to be registered with or approved by such other
governmental agencies or authorities in the United States as may be necessary
by virtue of the business and operations of AEC and do any and all other acts
and things that may be reasonably necessary or advisable to enable the
Purchaser to consummate the disposition of the Registrable Securities; provided
that AEC will not be required to (A) qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
paragraph (d), (B) subject itself to taxation in any such jurisdiction or (C)
consent or subject itself to general service of process in any such
jurisdiction.
<PAGE> 15II
(e) AEC will immediately notify the Purchaser upon the
occurrence of any of the following events in respect of a registration
statement or related prospectus in respect of an offering of Registrable
Securities; (i) receipt of any request for additional information by the
Commission or any other federal or state governmental authority during the
period of effectiveness of the registration statement for amendments or
supplements to the registration statement or related prospectus; (ii) the
issuance by the Commission or any other federal or state governmental authority
of any stop order suspending the effectiveness of the registration statement or
the initiation of any proceedings for that purpose; (iii) receipt of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose; (iv) the happening of any event which makes any statement made in the
registration statement or related prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect
or which requires the making of any changes in the registration statement,
related prospectus or documents so that, in the case of the registration
statement, it will not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading, and that in the case of the related
prospectus, it will not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; and (vi) AEC s reasonable determination that a
post-effective amendment to the registration statement would be appropriate;
and AEC will promptly make available to the Purchaser any such supplement or
amendment to the related prospectus.
(f) AEC will enter into customary agreements (including,
if applicable, an underwriting agreement in customary form and which is
reasonably satisfactory to AEC) and take such other actions as are reasonably
required in order to expedite or facilitate the disposition of such Registrable
Securities (the Purchaser may, at its option, require that any or all of the
representations, warranties and covenants of AEC or to or for the benefit of
such Underwriters also be made to and for the benefit of the Purchaser).
(g) AEC will make available to the Purchaser (and will
deliver to Purchasers's counsel) and each Underwriter, if any, subject to
restrictions imposed by the United States federal government or any agency or
instrumentality thereof, copies of all correspondence between the Commission
and AEC, its counsel or auditors and will also make available for inspection by
the Purchaser, any Underwriter participating in any disposition pursuant to
such registration statement and any attorney, accountant or other professional
retained by the Purchaser or such Underwriter (collectively, the "Inspectors"),
all financial and other records, pertinent corporate documents and properties
of AEC (collectively, the "Records") as shall be reasonably necessary to enable
them to exercise their due diligence responsibility, and cause AEC's officers
and employees to supply all information reasonably requested by any Inspectors
in connection with such registration statement. Records which AEC determines,
in good faith, to be confidential and which it notifies the Inspectors are
confidential shall not be disclosed by the Inspectors unless (i) the disclosure
of such Records is necessary to avoid or correct a misstatement or omission in
such registration statement or (ii) the disclosure or release of such Records
is requested or required pursuant to oral questions, interrogatories, requests
for information or documents or a subpoena or other order from a court of
competent jurisdiction or other process; provided that prior to any disclosure
or release pursuant to clause (ii), the Inspectors shall provide AEC with
prompt notice of any such request or requirement so that AEC may seek an
appropriate protective order or waive such Inspectors' obligation not to
disclose such Records; and, provided further, that if failing the entry of a
protective order or the waiver by AEC permitting the disclosure or release of
such Records, the Inspectors, upon advice of counsel, are compelled to disclose
such Records, the Inspectors may disclose that portion of the Records which
counsel has advised the Inspectors that the Inspectors are compelled to
disclose. The Purchaser agrees that information obtained by it solely as a
result of such inspections (not including any information obtained from a third
<PAGE> 15JJ
party who, insofar as is known to the Purchaser after reasonable inquiry, is
not prohibited from providing such information by a contractual, legal or
fiduciary obligation to AEC) shall be deemed confidential and shall not be used
by it as the basis for any market transactions in the securities of AEC or its
Affiliates unless and until such information is made generally available to the
public. The Purchaser further agrees that it will, upon learning that
disclosure of such Records is sought in a court of competent jurisdiction, give
notice to AEC and allow AEC, at its expense, to undertake appropriate action to
prevent disclosure of the Records deemed confidential.
(h) AEC will furnish to the Purchaser and to each
Underwriter, if any, a signed counterpart, addressed to the Purchaser or such
Underwriter, of (1) an opinion or opinions of counsel to AEC, and (2) a comfort
letter or comfort letters from AEC's independent public accountants, each in
customary form and covering such matters of the type customarily covered by
opinions or comfort letters, as the case may be, as the Purchaser or the
managing Underwriter therefor reasonably requests.
(i) AEC will otherwise comply with all applicable rules
and regulations of the Commission, including, without limitation, compliance
with applicable reporting requirements under the Exchange Act, and will make
available to its securityholders, as soon as reasonably practicable, an
earnings statement covering a period of twelve (12) months, beginning within
three (3) months after the effective date of the registration statement, which
earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act.
(j) AEC will (i) if the Common Stock shall be listed on
the New York Stock Exchange or the American Stock Exchange at the time of
effectiveness of such registration statement, use commercially reasonable
efforts to cause all such Registrable Securities to be listed on such exchange
(if the listing of such Registrable Securities is then permitted under the
rules of such exchange) and, if not, (ii) use commercially reasonable efforts
to secure designation of all such Registrable Securities covered by such
registration statement as a NASDAQ "national market system security" within the
meaning of Rule 11Aa2-1 of the Commission, and, in the case of clause (ii)
above, to arrange for at least two market makers to register as such with
respect to such Registrable Securities with the National Association of
Securities Dealers, Inc. (the "NASD").
(k) AEC will appoint a transfer agent and registrar for
all such Registrable Securities covered by such registration statement not
later than the effective date of such registration statement.
(l) In connection with an underwritten offering, AEC will
participate, to the extent reasonably requested by the managing Underwriter for
the offering or the Purchaser, in customary efforts to sell the securities
under the offering, including, without limitation, participating in "road
shows"; provided that AEC shall not be obligated be to participate in more than
one such offering in any twelve (12)-month period and any such participation by
AEC shall be at the expense of the managing Underwriter or the Purchaser unless
AEC shall also be offering securities in such underwritten offering.
AEC may require the Purchaser to promptly furnish in writing
to AEC such information regarding the distribution of the Registrable
Securities as AEC may from time to time reasonably request and such other
information as may be legally required in connection with such registration
including, without limitation, all such information as may be requested by the
Commission or the NASD. If the Purchaser fails to provide such information
requested in connection with such registration within ten (10) business days
after receiving such written request, then AEC may cease pursuit of such
registration, and the Demand Registration request in respect of which such
registration was being pursued shall count toward the limit of three Demand
Registration requests hereunder.
<PAGE> 15KK
The Purchaser agrees that, upon receipt of any notice from AEC
of the happening of any event of the kind described in Section 3.1(e) hereof,
the Purchaser will forthwith discontinue disposition of Registrable Securities
pursuant to the registration statement covering such Registrable Securities
until the Purchaser's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 3.1(e) hereof, and, if so directed by AEC,
the Purchaser will deliver to AEC all copies, other than permanent file copies
then in the Purchaser's possession, of the most recent prospectus covering such
Registrable Securities at the time of receipt of such notice. In the event AEC
shall give such notice, AEC shall extend the period during which such
registration statement shall be maintained effective (including the period
referred to in Section 3.1(a) hereof) by the number of days during the period
from and including the date of the giving of notice pursuant to Section 3.1(e)
hereof to the date when AEC shall make available to the Purchaser a prospectus
supplemented or amended to conform with the requirements of Section 3.1(e)
hereof.
SECTION 3.2. Registration Expenses. In connection with any Demand
Registration, AEC shall pay the following registration expenses incurred in
connection with the registration thereunder (the "Registration Expenses"): (i)
all registration and filing fees, (ii) fees and expenses of compliance with
securities or blue sky laws (including reasonable fees and disbursements of
counsel in connection with blue sky qualifications of the Registrable
Securities), (iii) printing expenses, (iv) AEC's internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), (v) the fees and expenses incurred in
connection with the listing of the Registrable Securities, (vi) reasonable fees
and disbursements of counsel for AEC and customary fees and expenses for
independent certified public accountants retained by AEC (including the
expenses of any comfort letters or costs associated with the delivery by
independent certified public accountants of a comfort letter or comfort letters
requested pursuant to Section 3.1(h) hereof), (vii) the fees and expenses of
any special experts retained by AEC in connection with such registration and
(viii) reasonable fees and expenses of one firm of counsel for the Purchaser
retained as the Purchaser's counsel with respect to such Demand Registration.
AEC shall have no obligation to pay any underwriting fees, discounts or
commissions attributable to the sale of Registrable Securities, or the cost of
any special audit required by the Purchaser, such costs to be borne by the
Purchaser.
ARTICLE IV
INDEMNIFICATION AND CONTRIBUTION
SECTION 4.1. Indemnification by AEC. AEC agrees to indemnify and
hold harmless the Purchaser, its partners, Affiliates, officers, directors,
employees and duly authorized agents, and each Person or entity, if any, who
controls the Purchaser within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act, together with the partners, Affiliates,
officers, directors, employees and duly authorized agents of such controlling
Person or entity (collectively, the "Controlling Persons"), from and against
any loss, claim, damage, liability, reasonable attorneys' fees, costs or
expenses and costs and expenses of investigating and defending any such claim
(collectively, "Damages"), joint or several, and any action in respect thereof
to which the Purchaser, its partners, Affiliates, officers, directors,
employees and duly authorized agents, and any such Controlling Person may
become subject under the Securities Act or otherwise, insofar as such Damages
(or proceedings in respect thereof) arise out of, or are based upon, any untrue
statement or alleged untrue statement of a material fact contained in any
registration statement or prospectus relating to the Registrable Securities or
any preliminary prospectus, or arises out of, or are based upon, any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as the same are based upon information furnished in writing to AEC by
the Purchaser or an Underwriter expressly for use therein, and shall reimburse
the Purchaser, its partners, Affiliates, officers, directors, employees and
duly authorized agents, and each such Controlling Person for any legal and
other expenses reasonably incurred by the Purchaser, its partners, Affiliates,
officers, directors, employees and duly authorized agents, or any such
Controlling Person in investigating or defending or preparing to defend against
<PAGE> 15LL
any such Damages or proceedings; provided, however, that AEC shall not be
liable to the Purchaser to the extent that any such Damages arise out of or are
based upon an untrue statement or omission made in any preliminary prospectus
if (i) the Purchaser failed to send or deliver a copy of the final prospectus
with or prior to the delivery of written confirmation of the sale by the
Purchaser to the Person asserting the claim from which such Damages arise, and
(ii) the final prospectus would have corrected such untrue statement or alleged
untrue statement or such omission or alleged omission; provided further,
however, that AEC shall not be liable in any such case to the extent that any
such Damages arise out of or are based upon an untrue statement or alleged
untrue statement or omission or alleged omission in any prospectus if (x) such
untrue statement or omission or alleged omission is corrected in an amendment
or supplement to such prospectus, and (y) having previously been furnished by
or on behalf of AEC with copies of such prospectus as so amended or
supplemented, the Purchaser thereafter fails to deliver such prospectus as so
amended or supplemented prior to or concurrently with the sale of a Registrable
Security to the Person asserting the claim from which such Damages arise. AEC
also agrees to indemnify any Underwriters of the Registrable Securities, their
officers and directors and each Person or entity who controls such Underwriters
on customary terms.
SECTION 4.2. Indemnification by the Purchaser. The Purchaser agrees
to indemnify and hold harmless AEC, its partners, Affiliates, officers,
directors, employees and duly authorized agents and each Person or entity, if
any, who controls AEC within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, together with the partners, Affiliates,
officers, directors, employees and duly authorized agents of such controlling
Person, to the same extent as the foregoing indemnity from AEC to the
Purchaser, but only with reference to information related to the Purchaser or
its plan of distribution, furnished in writing by the Purchaser or on the
Purchaser's behalf expressly for use in any registration statement or
prospectus relating to the Registrable Securities, or any amendment or
supplement thereto, or any preliminary prospectus. In case any action or
proceeding shall be brought against AEC or its partners, Affiliates, officers,
directors, employees or duly authorized agents or any such controlling Person
or its partners, Affiliates, officers, directors, employees or duly authorized
agents, in respect of which indemnity may be sought against the Purchaser, the
Purchaser shall have the rights and duties given to AEC, and AEC or its
partners, Affiliates, officers, directors, employees or duly authorized agents,
or such controlling Person, or its partners, Affiliates, officers, directors,
employees or duly authorized agents, shall have the comparable rights and
duties given to the Purchasers by Section 4.1. The Purchaser also agrees to
indemnify and hold harmless any Underwriters of the Registrable Securities with
reference to the same information as to which it agrees to indemnify AEC
referenced above, their officers and directors and each Person who controls
such Underwriters on customary terms. AEC shall be entitled to receive
indemnities on customary terms from Underwriters, selling brokers, dealer
managers and similar securities industry professionals participating in the
distribution, to the same extent as provided above, with respct to information
so furnished in writing by such persons specifically for inclusion in any
prospectus or registration statement.
SECTION 4.3. Conduct of Indemnification Proceedings. Promptly after
receipt by any person or entity in respect of which indemnity may be sought
pursuant to Section 4.1 or 4.2 (an "Indemnified Party") of notice of any claim
or the commencement of any action, the Indemnified Party shall, if a claim in
respect thereof is to be made against the person or entity against whom such
indemnity may be sought (an "Indemnifying Party"), notify the Indemnifying
Party in writing of the claim or the commencement of such action; in the event
an Indemnified Party shall fail to give such notice as provided in this Section
4.3 and the Indemnifying Party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was materially
prejudiced by the failure to give such notice, the indemnification provided for
in Section 4.1 or 4.2 shall be reduced to the extent of any actual prejudice
resulting from such failure to so notify the Indemnifying Party; provided, that
the failure to notify the Indemnifying Party shall not relieve it from any
liability which it may have to an Indemnified Party otherwise than under
Section 4.1 or 4.2. If any such claim or action shall be brought against an
Indemnified Party, and it shall notify the Indemnifying Party thereof, the
<PAGE> 15MM
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 proceeding in respect of which the Indemnified
Party is or could have been a party and indemnity could have been sought
hereunder by such Indemnified Party, unless such settlement includes an
unconditional release of such Indemnified Party from all liability arising out
of such claim or proceeding. Whether or not the defense of any claim or action
is assumed by the Indemnifying Party, such Indemnifying Party will not be
subject to any liability for any settlement made without its consent, which
consent will not be unreasonably withheld.
SECTION 4.4. Contribution. If the indemnification provided for in
this Article IV is unavailable to the Indemnified Parties in respect of any
Damages referred to herein, then each Indemnifying Party, in lieu of
indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such Damages (i) as between
AEC and the Purchaser on the one hand and the Underwriters on the other, in
such proportion as is appropriate to reflect the relative benefits received by
AEC and the Purchaser on the one hand and the Underwriters on the other from
the offering of the Registrable Securities, or if such allocation is not
permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits but also the relative fault of AEC and the
Purchaser on the one hand and of the Underwriters on the other in connection
with the statements or omissions which resulted in such Damages, as well as any
other relevant equitable considerations, and (ii) as between AEC on the one
hand and the Purchaser on the other, in such proportion as is appropriate to
reflect the relative fault of AEC and of the Purchaser in connection with such
statements or omissions, as well as any other relevant equitable
considerations. The relative benefits received by AEC and the Purchaser on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total proceeds from the offering (net of underwriting
discounts and commissions but before deducting expenses) received by AEC and
the Purchaser bear to the total underwriting discounts and commissions received
by the Underwriters, in each case as set forth in the table on the cover page
of the prospectus. The relative fault of AEC and the Purchaser on the one hand
and of the Underwriters on the other shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied byAEC and the Purchaser or by the Underwriters. The
relative fault of AEC on the one hand and of the Purchaser on the other shall
be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by such party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
<PAGE> 15NN
AEC and the Purchaser agree that it would not be just and
equitable if contribution pursuant to this Section 4.4 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an Indemnified Party as a result of
the Damages referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such Indemnified Party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 4.4, no Underwriter shall be required to contribute
any amount in excess of the amount by which the total price at which the
Registrable Securities underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission, and the Purchaser shall in no event
be required to contribute any amount in excess of the amount by which the total
price at which the Registrable Securities of the Purchaser were offered to the
public (less underwriting discounts and commissions) exceeds the amount of any
damages which the Purchaser has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
ARTICLE V
MISCELLANEOUS
SECTION 5.1. Term. The registration rights provided to the holders
of Registrable Securities hereunder shall terminate on August 7, 1999;
provided, however, that the provisions of Article IV hereof shall survive any
termination of this Agreement.
SECTION 5.2. Rule 144. AEC covenants that it will file all reports
required to be filed by it under the Securities Act and the Exchange Act and
that it will take such further action as holders of Registrable Securities may
reasonably request, all to the extent required from time to time to enable the
Purchaser to sell Registrable Securities without registration under the
Securities Act within the limitation of the exemptions provided by (a) Rule
144, as such Rule may be amended from time to time, or (b) any similar rule or
regulation hereafter adopted by the Commission. If at any time AEC is not
required to file such reports, it will, upon the request of any holder of
Registrable Securities, make publicly available other information so long as
necessary to permit sales pursuant to Rule 144. Upon the request of the
Purchaser, AEC will deliver to the Purchaser a written statement as to whether
it has complied with such requirements.
SECTION 5.3. Restrictions on Sale by AEC and Others. AEC agrees and
it shall use its best efforts to cause its affiliates to agree (i) not to
effect any public sale or distribution of any securities similar to those being
registered in accordance with Section 2.1 hereof, or any securities convertible
into or exchangeable or exercisable for such securities, during the thirty (30)
days prior to, and during the period beginning on the effective date of any
registration statement (except as part of such registration statement) until
all of the Registrable Securities offered thereof have been sold if, and to the
extent, reasonably requested by the managing Underwriter or Underwriters in the
case of an underwritten public offering, provided, however, that such period
shall not exceed ninety (90) days, and (ii) to use commercially reasonable
efforts to ensure that any agreement entered into after the date hereof shall
contain a provision under which holders of such securities agree not to effect
any sale or distribution of any such securities during the periods described in
(i) above, in each case including a sale pursuant to Rule 144 under the
Securities Act (except as part of any such registration, if permitted);
provided, however, that the provisions of this Section 5.3 shall not prevent
(x) the conversion or exchange of any securities pursuant to their terms into
or for other securities or (y) the issuance of any securities to employees of
AEC or pursuant to any employee plan.
<PAGE> 15OO
SECTION 5.4. Amendment and Modification. Any provision of this
Agreement may be waived, provided that such waiver is set forth in a writing
executed by the party against whom the enforcement of such waiver is sought.
The provisions of this Agreement, including the provisions of this sentence,
may not be amended, modified or supplemented, and waivers or consents to
departures from the provisions hereof may not be given, unless AEC has obtained
the written consent of the holders of a majority of the then outstanding
Registrable Securities. Notwithstanding the foregoing, the waiver of any
provision hereof with respect to a matter that relates exclusively to the
rights of holders of Registrable Securities whose securities are being sold
pursuant to a registration statement and does not directly or indirectly affect
the rights of other holders of Registrable Securities may be given by holders
of at least a majority of the Registrable Securities being sold by such
holders; provided that the provisions of this sentence may not be amended,
modified or supplemented except in accordance with the provisions of the
immediately preceding sentence. No course of dealing between or among any
Person having any interest in this Agreement will be deemed effective to
modify, amend or discharge any part of this Agreement or any rights or
obligations of any person under or by reason of this Agreement.
SECTION 5.5. Successors and Assigns; Entire Agreement. This
Agreement and all of the provisions hereof shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns.
The Purchaser may assign its rights under this Agreement to any subsequent
holder of Notes or Conversion Shares, provided that AEC shall have the right to
require any holder of Registrable Securities to execute a counterpart of this
Agreement as a condition to such holder's claim to any rights hereunder. This
Agreement, together with the Subscription Agreement and the Notes sets forth
the entire agreement and understanding between the parties as to the subject
matter hereof and merges and supersedes all prior discussions, agreements and
understandings of any and every nature among them.
SECTION 5.6. Separability. In the event that any provision of this
Agreement or the application of any provision hereof is declared to be illegal,
invalid or otherwise unenforceable by a court of competent jurisdiction, the
remainder of this Agreement shall not be affected except to the extent
necessary to delete such illegal, invalid or unenforceable provision unless
that provision held invalid shall substantially impair the benefits of the
remaining portions of this Agreement.
SECTION 5.7. Notices. All notices, demands, requests, consents,
approvals or other communications required or permitted to be given hereunder
or which are given with respect to this Agreement shall be in writing and shall
be personally served or deposited in the mail, registered or certified, return
receipt requested, postage prepaid, or delivered by reputable air courier
service with charges prepaid, or transmitted by hand delivery, telegram, telex
or facsimile, addressed as set forth below, or to such other address as such
party shall have specified most recently by written notice: (i) if to the
Company, to: Andrea Electronics Corporation,
11-40 45th Road, Long Island City, New York 11101, Attention: Patrick Pilch,
Facsimile No.: (718) 784-8457; with copies
(which shall not constitute notice) to: Brown & Wood LLP, One World Trade
Center, New York, New York 10048, Attention: Alan L. Jakimo, Esq., Facsimile
No.: (212) 839-5599; and (ii) if to the Purchaser, to the Purchaser's address
set forth on its counterpart signature page hereto. Notice shall be deemed
given on the date of service or transmission if personally served or
transmitted by telegram, telex or facsimile. Notice otherwise sent as provided
herein shall be deemed given on the third business day following the date
mailed or on the second business day following delivery of such notice by a
reputable air courier service.
<PAGE> 15PP
SECTION 5.8. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAW OF THE STATE OF NEW YORK, WITHOUT
GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
SECTION 5.9. Headings. The headings in this Agreement are for
convenience of reference only and shall not constitute a part of this
Agreement, nor shall they affect their meaning, construction or effect.
SECTION 5.10. Counterparts. This Agreement may be executed in
multiple counterparts, each of which shall be deemed to be an original
instrument and all of which together shall constitute one and the same
instrument.
SECTION 5.11. Further Assurances. Each party shall cooperate and
take such action as may be reasonably requested by another party in order to
carry out the provisions and purposes of this Agreement and the transactions
contemplated hereby.
SECTION 5.12. Remedies. In the event of a breach or a threatened
breach by any party to this Agreement of its obligations under this Agreement,
any party injured or to be injured by such breach will be entitled to specific
performance of its rights under this Agreement or to injunctive relief, in
addition to being entitled to exercise all rights provided in this Agreement
and granted by law. The parties agree that the provisions of this Agreement
shall be specifically enforceable, it being agreed by the parties that the
remedy at law, including monetary damages, for breach of any such provision
will be inadequate compensation for any loss and that any defense or objection
in any action for specific performance or injunctive relief that a remedy at
law would be adequate is waived.
[signature page follows]
<PAGE> 15QQ
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by the undersigned, thereunto duly authorized, as of
the date first set forth above.
ANDREA ELECTRONICS CORPORATION
By:
Name: Patrick Pilch
Title: Executive Vice President,
Chief Financial Officer
[NAME OF PURCHASER]
By:
Name:
Title:
Purchaser's Address for Notices
Pursuant to Section 5.7:
Attention:
Facsimile No.:
<PAGE> 16
EXHIBIT 11
ANDREA ELECTRONICS CORPORATION
COMPUTATION OF FULLY DILUTED EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
1996 1995
<S> <C> <C>
EARNINGS
Pro forma income (loss) applicable
to common stock* $(1,181,694) $ (137,427)
SHARES
Weighted average number of common
shares outstanding 3,490,238 3,078,738
Assuming conversion of options and warrants 597,934 788,057
Pro forma shares 4,088,172 3,866,795
Fully diluted income (loss)
per common share $ (.29) $ (.16)
</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 16
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,762,452
<SECURITIES> 193,324
<RECEIVABLES> 1,632,699
<ALLOWANCES> 32,183
<INVENTORY> 4,671,266
<CURRENT-ASSETS> 8,330,858
<PP&E> 1,589,561
<DEPRECIATION> 968,803
<TOTAL-ASSETS> 8,952,767
<CURRENT-LIABILITIES> 240,135
<BONDS> 1,737,978
0
0
<COMMON> 1,883,599
<OTHER-SE> 5,055,935
<TOTAL-LIABILITY-AND-EQUITY> 8,952,767
<SALES> 5,489,504
<TOTAL-REVENUES> 5,489,504
<CGS> 3,767,308
<TOTAL-COSTS> 3,767,308
<OTHER-EXPENSES> 2,598,874
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 305,016
<INCOME-PRETAX> (1,181,694)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,181,694)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,181,694)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.29)
</TABLE>
