<PAGE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
( x ) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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: 4,038,277.
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PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS.
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
ASSETS (unaudited) (audited)
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,693,743 $ 921,065
Marketable securities 197,606 197,697
Accounts receivable, net of allowance
for doubtful accounts of $52,521
and $32,183, respectively 3,415,419 2,678,449
Inventories, net 3,824,393 4,774,175
Deferred income taxes 1,044,783 1,222,000
Prepaid expenses and other current assets 269,266 132,691
----------- -----------
Total current assets 10,445,210 9,926,077
PROPERTY, PLANT AND EQUIPMENT, net 873,606 868,173
----------- -----------
Total assets $11,318,816 $10,794,250
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capital
lease obligations $ 4,685 $ 4,685
Trade accounts payable 515,882 822,400
Accrued salaries and wages payable 30,310 62,920
Other current liabilities 193,956 199,998
----------- -----------
Total current liabilities 744,833 1,090,003
CONVERTIBLE DEBENTURES, net 2,201,786 2,157,786
OTHER LIABILITIES 34,295 38,500
----------- -----------
Total liabilities 2,980,914 3,286,289
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock, $.50 par value; authorized:
10,000,000 shares; issued and outstanding;
3,942,197 and 3,792,197 shares,
respectively 1,971,099 1,896,099
Additional paid-in capital 8,303,321 8,154,821
Accumulated deficit (1,936,518) (2,542,959)
----------- -----------
Total shareholders' equity 8,337,902 7,507,961
----------- -----------
Total liabilities and shareholders' equity $11,318,816 $10,794,250
=========== ===========
</TABLE>
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ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1997 1996
<S> <C> <C>
Sales $ 5,384,269 $ 1,749,883
Cost of sales 3,195,908 1,281,297
----------- -----------
Gross profit 2,188,361 468,586
Research and development expenses 152,824 284,883
General, administrative and selling expenses 1,253,074 646,742
----------- -----------
Operating income (loss) 782,463 (463,039)
----------- -----------
Other income (expense)
Interest income 19,048 18,329
Interest (expense) (66,527) (79,495)
Rent & miscellaneous 57,750 46,296
----------- -----------
10,271 (14,870)
----------- -----------
Income (loss) before provision for income taxes 792,734 (477,909)
Provision for income taxes (186,293) --
----------- -----------
Net income (loss) $ 606,441 $ (477,909)
=========== ===========
Net income (loss) per common and
common equivalent share $ .16 $ (.15)
=========== ===========
Weighted average number of common and
common equivalent shares outstanding 3,792,197 3,290,322
=========== ===========
</TABLE>
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ANDREA ELECTRONICS CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Total
Shares Common Paid-In (Accumulated Shareholders'
Outstanding Stock Capital Deficit) Equity
----------- ------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 3,792,197 $ 1,896,099 $ 8,154,821 $(2,542,959) $ 7,507,961
Exercise of Stock
Options 150,000 75,000 148,500 0 223,500
Net income -- -- -- 606,441 606,441
--------- ----------- ----------- ----------- -----------
Balance at
March 31, 1997
(Unaudited) 3,942,197 $ 1,971,099 $ 8,303,321 $(1,936,518) $ 8,337,902
========= =========== =========== =========== ===========
</TABLE>
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ANDREA ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1997 1996
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 606,441 $ (477,909)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Investment securities 91 --
Depreciation and amortization 101,400 26,509
Deferred income taxes 177,217 --
(Increase) decrease in:
Accounts receivable (736,970) 49,448
Inventories 949,782 (1,679,485)
Prepaid expenses and other current assets (136,575) (70,745)
Trade accounts payable (306,518) (143,358)
Accrued salaries and wages payable (32,610) (16,909)
Other current and long term liabilities (10,247) (101,054)
----------- -----------
Net cash provided by (used in)
operating activities 612,011 (2,413,503)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant
and equipment (62,833) (48,834)
----------- -----------
Net cash used in investing activities (62,833) (48,834)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of capital lease obligations -- (30,966)
Exercise of stock options 223,500 16,156
----------- -----------
Net cash provided by (used in)
financing activities 223,500 (14,810)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 772,678 (2,477,147)
CASH AND CASH EQUIVALENTS - beginning of period 921,065 3,400,829
----------- -----------
CASH AND CASH EQUIVALENTS - end of period $ 1,693,743 $ 923,682
=========== ===========
</TABLE>
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Notes to Financial Statements
- - -----------------------------
1. Presentation - In the opinion of 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 March 31, 1997, and the
results of operations and cash flows for the three months ended March 31,
1997 and 1996. The results of operations for the three months ended
March 31, 1997 are not necessarily indicative of the results to be
expected for the full year ending December 31, 1997. 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, 1997 and included in the annual report on Form 10-K.
2. Recently Issued Accounting Pronouncement - In March 1997, the
Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings Per Share. This statement
establishes standards for computing and presenting earnings per share
("EPS"), replacing the presentation of currently required EPS with a
presentation of Basic EPS. For entities with complex capital structures,
the statement requires the dual presentation of both Basic EPS and Diluted
EPS on the face of the statement of operations. Under this new standard,
Basic EPS is computed based on weighted average shares outstanding and
excludes any potential dilution; Diluted EPS reflects potential dilution
from the exercise or conversion of securities into common stock or from
other contracts to issue common stock and is similar to the currently
required fully diluted EPS. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997, including
interim periods, and earlier application is not permitted. When adopted,
the Company will be required to restate its EPS data for all prior periods
presented. The Company does not expect the impact of the adoption of this
statement to be material to previously reported EPS amounts.
3. Litigation - 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.
OVERVIEW
Andrea Electronics Corporation's mission is to provide state-of-the-art
communications products for the "voice interface" markets that are
rapidly emerging from the convergence of the telecommunications and
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 the applications and interfaces include: Internet and
other computer-based speech; telephony 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.
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 markets, 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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain information contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations for the three
months ended March 31, 1997 (the "1997 First Quarter") are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933,
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as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. The words "believe", "expect", "anticipate", and similar
expressions identify forward-looking statements. In order to obtain the
benefits of these "safe harbor" provisions 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 could cause them
to differ materially from those expressed in any such forward-looking
statements. These factors include:
first, the rate at which the Company's Anti-Noise/Registered
Trademark/ technology is accepted by the diverse range of users and
applications within the global communications and informatics marketplace;
second, the ability of the Company to maintain a competitive position
for its Anti-Noise/Registered Trademark/ products in terms of technical
specifications, quality, price, reliability, and service;
third, the ongoing ability of the Company to enter into and maintain
collaborative relationships with larger companies in the fields of
telecommunications, computer manufacturing, software design and publishing,
Internet and online services, defense-related manufacturers and system
providers, and retail and direct marketing distributors; and
fourth, in the event that the Company experiences 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 1997 First Quarter were $5,384,269, an increase of 208%
over the three months ended March 31, 1996 (the "1996 First Quarter"). The
increase in sales during the 1997 First Quarter reflected an approximate
462% increase in sales of Andrea Anti-Noise/Registered Trademark/ products
to $4,324,477 or 80% of total sales and an approximate 8% increase in sales
of the Company's Traditional Military Products to $1,059,792 or 20% of
total sales. During the 1997 First Quarter, sales of the Company's computer
headsets to International Business Machines Corporation ("IBM") and certain of
IBM's affiliates, distributors, licensees, and integrators accounted for 66%
of the Company's total sales. While no assurance can be given, the Company
anticipates that IBM's two-year procurement agreement with the Company,
executed in June 1995, will be renewed.
Cost of Sales
Cost of sales as a percentage of sales for the 1997 First Quarter
decreased to 59% from 73% for the 1996 First Quarter. The decrease in the
cost of sales as a percentage of sales for the 1997 First Quarter can be
attributed to a more efficient utilization of production capacity and the
allocation of fixed overhead over a larger quantity of units sold in the
1997 First Quarter, compared to higher costs associated with the initial
production runs of new Andrea Anti-Noise/Registered Trademark/ computer
products during the 1996 First Quarter.
Research and Development
Research and development expenses decreased 46% to $152,824 for the
1997 First Quarter from $284,883 for the 1996 First Quarter. The decrease
in research and development expenses for the 1997 First Quarter are
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attributable to increased allocations of engineering and technician time to
production costs and decreased allocations of engineering and technician
time to design and development, reflecting the migration of the Company's
Andrea Anti-Noise/Registered Trademark/ products from design and
development to commercial production.
General, Administrative and Selling Expenses
General, administrative and selling expenses increased 94% to
$1,253,074 for the 1997 First Quarter from $646,742 for the 1996 First
Quarter. The increase for the 1997 First Quarter reflects increased
business development, promotional, marketing and sales expenses to promote,
distribute and develop product and technology awareness and acceptance,
primarily related to the ANC and ANR product lines. As a percentage of
sales, however, general, administrative and selling expenses decreased to
23% for the 1997 First Quarter from 37% for the 1996 First Quarter.
Other Income (Expense)
Other income for the 1997 First Quarter was $10,271 compared to other
expense of $14,870 for the 1996 First Quarter. This change is primarily
attributed to a decrease in interest expense to $66,527 for the 1997 First
Quarter from $79,495 for the 1996 First Quarter, and an increase in rent
and miscellaneous income to $57,750 for the 1997 First Quarter from $46,296
for the 1996 First Quarter. The decrease in interest expense during the
1997 First Quarter compared to the 1996 First Quarter is primarily
attributed to a lower effective interest rate on the outstanding
convertible debentures. The increase in rent and miscellaneous income
during the 1997 First Quarter is attributed to an escalation of rent to the
Company's tenant under the terms of a lease agreement.
Provision for Income Taxes
The provision for income taxes of $186,293 in the 1997 First Quarter
represents an effective tax rate of 23.5%, which is comprised of tax
expense at the Company's combined statutory rate of approximately 42%,
partially offset by a reduction in the Company's reserve on previously
generated, fully-reserved deferred income tax assets in light of
management's expectations as to future profitability. No income tax
benefit was recorded in the 1996 First Quarter, as the Company had not yet
achieved profitable performance. The Company was, at that time, providing
a full reserve against deferred income tax assets.
Net Income (Loss)
Net income for the 1997 First Quarter was $606,441, compared to a net
loss of $477,909 for the 1996 First Quarter. The level of net income for
the 1997 First Quarter and net loss for the 1996 First Quarter reflect
principally the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at March 31, 1997 was $9,700,377 compared to
$8,836,074 at December 31, 1996. The increase in working capital reflects
an increase in total current assets of $519,133 and a decrease in total
current liabilities of $345,170. The increase in total current assets
primarily reflects an increase in cash of $772,678, an increase in accounts
receivable of $736,970, a decrease in inventory of $949,782, a decrease in
deferred income taxes of $177,217 and an increase of $136,575 in prepaid
expenses and other current assets.
The increase in cash of $772,678 reflects $612,011 of net cash
provided by operating activities and $223,500 of cash provided by financing
activities, partially offset by an increase in cash used in investing
activities of $62,833. The principal operating activity from which cash was
generated was the decrease in inventory of Andrea Anti-Noise/Registered
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Trademark/ computer headsets. The cash provided by financing activities
resulted from the exercise of stock options. The cash used in investing
activities was for the acquisition of equipment, primarily tooling and
molds for Andrea Anti-Noise/Registered Trademark/ products.
The increase in prepaid expenses and other current assets includes the
recognition of increased premiums for prepaid property taxes and insurance.
The decrease in the deferred tax asset represents realization of
previously unrecognized benefit as a result of ordinary income, as well as
a reduction of the valuation allowance on previously-reserved deferred tax
assets in light of the Company's profitability over recent quarters and the
expectation of realizing those assets through continued earnings.
The decrease in current liabilities primarily reflects a $306,518
decrease in trade accounts payable, a $32,610 decrease in accrued salaries
and wages payable and a $6,042 decrease in other current liabilities. The
decrease in trade accounts payable primarily reflects differences in the
timing related to both the payments for and the acquisition of raw
materials for the Andrea Anti-Noise/Registered Trademark/ products.
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
other bank debt and equity financing. The Company believes that its
ability to remedy its existing accumulated deficit will depend primarily on
the profitable growth of its Andrea Anti-Noise/Registered Trademark/
products. Notwithstanding growth in sales of Andrea Anti-Noise/Registered
Trademark/ products during the 1997 First Quarter, 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
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11 Computation of Fully Diluted Earnings Per Common Share
27 Financial Data Schedule
(b) Reports on Form 8-K.
The registrant did not file any reports on Form 8-K during the
three month period ended March 31, 1997.
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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 May 13, 1997
- - ------------------
John N. Andrea
/s/ Patrick D. Pilch Executive Vice President, May 13, 1997
- - -------------------- and Chief Financial Officer
Patrick D. Pilch
Page 12
EXHIBIT 11
<TABLE>
ANDREA ELECTRONICS CORPORATION
Computation of Fully Diluted Earnings Per Common Share
<CAPTION>
For the Three Months Ended
March 31,
1997 1996
----------- -----------
<S> <C> <C>
EARNINGS
Pro forma income (loss) applicable to common stock* $ 606,441 $ (477,909)
=========== ===========
SHARES
Weighted average number of common shares outstanding 3,792,197 3,290,322
Assuming conversion of options and warrants 626,851 776,909
----------- -----------
Pro forma shares 4,419,048 4,067,230
=========== ===========
Fully diluted income (loss) per common share $ .14 $ (.12)
=========== ===========
* 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, for the period
ended March 31, 1996, it is contrary to paragraph 40 of APB Opinion No. 15 because it produces
anti-dilutive results.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<S> <C>
<CASH> $ 1,693,743
<SECURITIES> 197,606
<RECEIVABLES> 3,467,940
<ALLOWANCES> 52,521
<INVENTORY> 3,824,393
<CURRENT-ASSETS> 10,445,210
<PP&E> 1,997,557
<DEPRECIATION> 1,123,951
<TOTAL-ASSETS> 11,318,816
<CURRENT-LIABILITIES> 744,833
<BONDS> 2,201,786
0
0
<COMMON> 1,971,099
<OTHER-SE> 6,366,803
<TOTAL-LIABILITY-AND-EQUITY> 11,318,816
<SALES> 5,384,269
<TOTAL-REVENUES> 5,384,269
<CGS> 3,195,908
<TOTAL-COSTS> 3,195,908
<OTHER-EXPENSES> 1,405,898
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,479
<INCOME-PRETAX> 792,734
<INCOME-TAX> 186,293
<INCOME-CONTINUING> 606,441
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 606,441
<EPS-PRIMARY> .16
<EPS-DILUTED> .14
</TABLE>
