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, 1998
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)
45 Melville Park Road, Melville, New York 11747
- -------------------------------------------- ----------
(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. 11,105,730
<PAGE>
ITEM 1 - FINANCIAL STATEMENTS
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS September 30, December 31,
1998 1997
-------------- -------------
(unaudited) (audited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 8,155,496 $ 2,059,338
Marketable securities - 102,717
Accounts receivable, net 4,289,676 4,568,433
Inventories, net 8,017,441 5,766,927
Deferred income taxes 909,569 909,569
Prepaid expenses and other current assets 1,548,697 1,023,661
------------ ------------
Total current assets 22,920,879 14,430,645
PROPERTY, PLANT AND EQUIPMENT, net 1,177,659 1,022,342
DEFERRED INCOME TAXES 897,046 897,046
OTHER ASSETS 2,049,818 1,439,151
INTANGIBLE ASSET 26,845,616 -
------------ ------------
Total assets $53,891,018 $17,789,184
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 1,527,209 $ 966,783
Current portion of long term debt 1,051,518 -
Other current liabilities 2,202,725 483,731
Convertible notes - current portion 1,193,472
------------ ------------
Total current liabilities 4,781,452 2,643,986
CONVERTIBLE NOTES, net 10,116,088 -
LONG TERM DEBT 1,104,457 -
OTHER LIABILITIES 38,500
------------ ------------
Total liabilities 16,001,997 2,682,486
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock, $.50 par value; authorized: 15,000,000
shares; issued and outstanding: 11,105,730 and
8,706,692 shares, respectively 5,552,865 4,353,346
Additional paid-in capital 34,595,924 9,881,915
Retained earnings (deficit) (2,259,768) 871,437
------------ ------------
Total shareholders' equity 37,889,021 15,106,698
------------ ------------
Total liabilities and shareholders' equity $53,891,018 $17,789,184
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
---------------------------------- ---------------------------------
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------------- ---------------------------------
1998 1997 1998 1997
----------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
SALES $ 5,341,719 $ 7,210,911 $ 14,187,148 $ 18,676,055
COST OF SALES 3,466,280 4,247,121 9,040,435 11,022,262
------------- ------------- ------------- -------------
Gross Profit 1,875,439 2,963,790 5,146,713 7,653,793
RESEARCH AND DEVELOPMENT EXPENSES 369,806 189,798 1,359,905 431,431
GENERAL, ADMINISTRATIVE AND SELLING 3,302,466 1,679,168 8,592,915 4,478,410
------------- ------------- ------------- -------------
EXPENSES
Income (loss) from operations (1,796,833) 1,094,824 (4,806,107) 2,743,952
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE)
Interest income 113,554 10,889 186,870 52,173
Interest expense (326,816) (71,314) (436,935) (198,221)
Rent and miscellaneous income - 62,940 1,924,967 178,723
------------- ------------- ------------- -------------
(213,262) 2,515 1,674,902 32,675
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAX BENEFIT (2,010,095) 1,097,339 (3,131,205) 2,776,627
INCOME TAX (PROVISION) BENEFIT (329,043) 471,000 - 76,189
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ (1,681,052) $ 1,568,339 $ (3,131,205) $ 2,852,816
============= ============= ============= =============
PER SHARE INFORMATION:
Net income (loss) per share
Basic $ (.15) $ .19 $ (.31) $ .36
============= ============= ============= =============
Diluted $ (.15) $ .17 $ (.31) $ .33
============= ============= ============= =============
Shares used in computing net income (loss) per share:
Basic 11,105,730 8,212,850 10,130,198 7,992,196
============= ============= ============= =============
Diluted 11,105,730 9,244,113 10,130,198 8,708,335
============= ============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
----------------- ---------------- ----------------- ------------------ ---------------
Retained Total
Shares Additional Earnings Shareholders'
Outstanding Common Stock Paid-In Capital (Deficit) Equity
----------------- ---------------- ----------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, $ 8,706,692 $ 4,353,346 $ 9,881,915 $ 871,437 $ 15,106,698
1997
Exercise of stock options, net 343,000 171,500 915,541 - 1,087,041
of related costs
Issuance of common stock for
acquisition, net of
related costs 1,818,000 909,000 22,519,781 - 23,428,781
Conversion of Convertible
Debentures 238,038 119,019 1,278,687 - 1,397,706
Net Loss - - - (3,131,205) (3,131,205)
------------ ----------- ------------ ----------- ------------
BALANCE, September 30,
1998 (Unaudited) $ 11,105,730 $ 5,552,865 $ 34,595,924 $(2,259,768) $ 37,889,021
============ =========== ============ =========== ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
--------------------------------------
For the Nine Months Ended
September 30,
--------------------------------------
1998 1997
-------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ (3,131,205) $ 2,852,816
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,149,619 261,568
Gain on sale of building (1,864,767) -
Deferred income taxes - (84,615)
Non-cash interest on convertible debt 315,018 198,221
Changes in assets and liabilities, excluding effects of acquisition:
Accounts receivable 299,974 (2,784,762)
Inventories (2,221,891) (863,996)
Prepaid expenses and other current assets (2,509,517) (508,412)
Other assets (610,667) -
Trade accounts payable 459,489 1,074,745
Other current and long term liabilities 500,382 (65,022)
----------- -----------
Net cash provided by (used in) operating activities (5,613,565) 80,543
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (773,400) (102,844)
Proceeds from sale of building 2,282,563 -
(Purchases) maturities of investment securities 102,717 97,427
Acquisition of business, net of cash acquired (947,276)
----------- -----------
-
Net cash used in investing activities 664,604 (5,417)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from convertible debentures 10,000,000 -
Payments on long term debt (41,922) -
Exercise of stock options 1,087,041 1,963,881
----------- -----------
Net cash provided by financing activities 11,045,119 1,963,881
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,096,158 2,039,007
CASH AND CASH EQUIVALENTS - beginning of period 2,059,338 921,065
----------- -----------
CASH AND CASH EQUIVALENTS - end of period $ 8,155,496 $ 2,960,072
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Conversion of debt into common stock $ 1,397,706 $ 434,636
Issuance of notes payable for acquisition $ 1,564,000 -
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Notes to Consolidated Financial Statements
I. Basis of Presentation. The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries (collectively, "Andrea
Electronics" or the "Company"). All intercompany balances and transactions have
been eliminated in consolidation.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
results of operations for any interim period are not necessarily indicative of
the results to be expected for the fiscal year. For further information, refer
to the consolidated financial statements and accompanying footnotes included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
II. Stock Split. On September 2, 1997, the Company's Board of Directors
authorized a two-for-one stock split effected in the form of a 100% stock
dividend that was distributed on September 17, 1997 to shareholders of record
on September 10, 1997. All share and per share data included in the
accompanying financial statements have been restated to reflect the stock split
for all periods presented.
III. Earnings Per Common Share. Effective December 31, 1997, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share". Basic net income per common share ("Basic EPS") is computed by
dividing net income by the weighted average number of common shares
outstanding. Diluted net income per common share ("Diluted EPS") is computed by
dividing net income by the weighted average number of common shares and
dilutive common share equivalents and convertible securities then outstanding.
SFAS No. 128 requires the presentation of both Basic EPS and Diluted EPS on the
face of the consolidated statements of operations. The impact of the adoption
of this statement was not material to all previously reported EPS amounts.
The following chart provides a reconciliation of information used in
calculating the per share amounts for the three months ended September 30, 1998
and 1997:
<TABLE>
<CAPTION>
Net Income Net Income (Loss) Per
(Loss) Shares Share
--------------- ----------- -----------------------
<S> <C> <C> <C> <C>
1998
Net loss ($1,681,052) 11,105,730 Basic $ (.15)
Effect of dilutive employee stock options - -
---------- ---------
11,105,730 Diluted $ (.15)
========== =========
1997
Net Income $1,568,339 8,212,850 Basic $ .19
Effect of dilutive employee stock options 1,031,263 (.02)
---------- ---------
9,244,113 Diluted $ .17
========== =========
</TABLE>
The following chart provides a reconciliation of information used in
calculating the per share amounts for the nine months ended September 30, 1998
and 1997:
<TABLE>
<CAPTION>
Net Income Net Income (Loss) Per
(Loss) Shares Share
--------------- ----------- ------------------------
<S> <C> <C> <C> <C>
1998
Net loss ($3,131,205) 10,130,198 Basic $ (.31)
Effect of dilutive employee stock options
- -
---------- ---------
10,130,198 Diluted $ (.31)
========== =========
1997
Net Income $2,852,816 7,992,196 Basic $ .36
Effect of dilutive employee stock options 716,139 (.03)
---------- ---------
8,708,335 Diluted $ .33
========== =========
</TABLE>
IV. Comprehensive Income - In the first quarter of 1998, the Company adopted
SFAS No. 130, "Reporting Comprehensive Income", which requires companies to
report all changes in equity during a period, except those resulting from
investment by owners and distribution to owners, in a financial statement for
the period in which they are recognized. Comprehensive income is the total of
net income and all other nonowner changes in equity (or other comprehensive
income) such as unrealized gains/losses on securities available-for-sale,
foreign currency translation adjustments and minimum pension liability
adjustments. Comprehensive and other comprehensive income must be reported on
the face of the annual financial statements or, in the case of interim
reporting, in the footnotes to the financial statements. For 1997, and for the
quarters ended September 30, 1998 and 1997, the Company's operations did not
give rise to items includible in comprehensive income which were not already
included in net income (loss). Therefore, the Company's comprehensive income
(loss) is the same as its net income (loss) for all periods presented.
V. Derivatives - In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
The Statement establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. This Statement is effective for fiscal years beginning after
June 15, 1999. A company may also implement the Statement as of the beginning
of any fiscal quarter after issuance (that is, fiscal quarters beginning June
16, 1998 and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS
No. 133 must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued, acquired,
or substantively modified after December 31, 1997. While the Company operates
in international markets, it does so presently without the use of derivatives
and therefore this new pronouncement is not applicable.
VI. Debt Financing. On September 23, 1997, the Company entered into an $8
million credit facility with a financial institution consisting of a revolving
loan based on eligible accounts receivable and inventory, as defined. The
facility, together with the Company's availability under commercial letters of
credit, approximates $10 million. The agreement automatically renews on an
annual basis unless terminated by either party, as provided in the agreement.
The facility is subject to normal banking terms and conditions, including
financial covenant compliance, and at September 30, 1998, there were no
outstanding amounts under the agreement.
VII. Procurement Agreement. In August 1997, the Company entered into an
agreement with International Business Machines and its subsidiaries ("IBM") to
produce and procure certain products, as defined. The agreement continues in
full force and effect unless terminated earlier for material breach by either
party, as defined. For the three and nine month periods ending September 30,
1998, sales of the Company's computer headsets and related products to IBM and
certain of IBM's affiliates, distributors, licensees, and integrators accounted
for approximately 58% and 55%, respectively, of the Company's total net sales.
VIII. Convertible Notes. On June 10, 1998, the Company issued and sold in a
private placement, $10.753 million aggregate principal amount of 6% Convertible
Notes ("Notes") due June 10, 2000. The Notes will be convertible into shares of
the Company's common stock at a conversion price equal to the average of the
two lowest closing prices of the Common Stock during the 30 trading days
preceding any date of conversion, subject to a maximum conversion price of
$16.125 per share. The Notes became convertible on the earlier of October 8,
1998 and the effectiveness of a registration statement under the Securities Act
of 1933, as amended, covering the sale of the shares of Common Stock into which
the Notes are convertible, which registration statement was declared effective
on October 8, 1998. At the option of the Company, interest is payable in the
form of cash or shares of Common Stock at the conversion price then in effect.
The maximum number of shares issuable upon conversion is 2,100,000 shares. The
Company is using the $10 million in net proceeds from the issuance of the Notes
for costs associated with technology acquisition and development, tooling
costs, relocation costs, a new management information system and general
working capital requirements. As of November 11, 1998, $1,753,000 of the Notes,
together with related accrued interest, was converted into approximately
397,000 shares of the Company's common stock.
IX. Acquisition - On May 5, 1998, the Company acquired all of the outstanding
shares of capital stock of Lamar Signal Processing, Ltd. ("Lamar"), an Israeli
corporation engaged in the development of digital signal processing (DSP) noise
cancellation microphone solutions for voice-driven interfaces covering a wide
range of audio and acoustic applications. The consideration paid by the Company
for the acquisition of Lamar was 1,800,000 shares of restricted common stock
and $3,000,000. Of the 1,800,000 shares, one-third becomes freely transferable
on the first anniversary of the closing, an additional one-third on the second
anniversary and the last one-third on the third anniversary. Of the aggregate
cash consideration to be paid by the Company, $1,000,000 was paid on May 5,
1998, $500,000 was paid on November 5, 1998, and the remainder is payable in
three equal installments on each of the twelve, twenty-four and thirty-six
month anniversaries of the closing. The acquisition was accounted for under the
purchase method of accounting and, accordingly, the operating results of Lamar
have been included in the consolidating operating results since the date of
acquisition. The acquisition resulted in goodwill of approximately $27.6
million, which is included in intangible assets in the accompanying
consolidated balance sheet and is being amortized over a 15-year period.
The pro forma results listed below, for the nine months ended September 30,
1998, reflect purchase price accounting adjustments, consisting primarily of
amortization of goodwill using a 15-year amortization period and interest
expense on the discounted value of the $2 million in notes payable, assuming
the acquisition occurred at the beginning of each period presented. Pro forma
sales amounts would not be materially different from the historical results
reported herein:
<TABLE>
<CAPTION>
1997 1998
------------ -------------
<S> <C> <C>
Net Income (loss) $ 951,368 $(3,829,244)
Net Income (loss) per share:
Basic $ .10 $ (.35)
Diluted $ .09 $ (.35)
Shares used in computing net income (loss) per share:
Basic 9,810,196 10,962,615
Diluted 10,526,335 10,962,615
</TABLE>
X. Reclassifications. Certain prior year amounts have been reclassified to
conform to the current year presentation.
<PAGE>
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-activated, natural language-driven,
"human/machine 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 communication products. The Company's strategy for serving these markets
is to leverage its expertise in audio communications technology, including its
patented Andrea Anti-Noise/Registered Trademark/ Active Noise Cancellation
("ANC") and Andrea Anti-Noise/Registered Trademark/ Active Noise Reduction
("ANR") technologies, and to continue developing, manufacturing and marketing 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. In addition, to extend the Company's position in
technology enhancing communications, the Company has begun to develop its
Andrea DSP products based on digital signal processing technology. In order to
complement internal efforts surrounding DSP development, on May 5, 1998, the
Company acquired Lamar Signal Processing, Ltd. ("Lamar"), an Israeli
corporation engaged in the development of DSP noise cancellation microphone
solutions for voice-driven interfaces covering a wide range of audio and
acoustic applications.
Examples of the applications and interfaces for which Andrea Anti-Noise/
Registered Trademark/ products provide benefit 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.
High quality audio communication technologies will also be required for
emerging "far field" voice applications, ranging from continuous speech
dictation, to multiparty video teleconferencing and collaboration, to natural
language-driven interfaces for automobiles, home and office automation and
other machines and devices into which voice-controlled microprocessors are
expected to be introduced during the next several years.
An important element of the Company's strategy for expanding the channels of
distribution and broadening the base of users for its products is its set of
collaborative arrangements with software publishers, distributors and retailers
actively engaged in the various markets in which the Company's products have
application, and with hardware OEMs. 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 includes with its products. In addition, the Company is also increasing
its own direct marketing efforts.
The Company outsources the manufacturing of Andrea Anti-Noise /Registered
Trademark/products for its OEM, consumer and commercial customers. The Company
also manufactures and distributes intercom systems and related components for
military applications and industrial applications ("Traditional Military
Products"). In contrast to the outsourced manufacturing of its Andrea
Anti-Noise/ Registered Trademark/products for the non-military markets, the
Company continues to manufacture its Traditional Military Products in its own
facility. To the extent that the Company succeeds in developing a new line of
products for military use that incorporates ANC and ANR technology, management
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 to be
realized for the full year.
<PAGE>
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 and nine months
ended September 30, 1998 (the "1998 Third Quarter" and the "1998 First Nine
Months") are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, 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 Andrea Anti-Noise/Registered Trademark/ products in terms of
technical specifications, quality, price, reliability and service and
to develop similarly competitive Andrea DSP products, which ability
will require the Company to have sufficient funds to expend on
research and development;
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 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 first three months ended September 30, 1998 (the "1998 Third
Quarter") were $5,341,719, a decrease of 26% over the three months ended
September 30, 1997 (the "1997 Third Quarter"). Sales for the 1998 First Nine
Months were $14,187,148, a decrease of 24% over the Nine Months ended September
30, 1997 (the "1997 First Nine Months"). These decreases in sales over both the
three-month and nine-month periods primarily reflect a shift in product mix to
lower-priced and lower-margin products to original equipment manufacturers
(OEMs). On a per unit sales basis, the Company realized a 7% increase from the
1997 Third Quarter; this was offset, however, by the aforementioned product
mix, reflecting an approximate 32% decrease in per unit sales prices for the
same period. The decrease in sales during the 1998 Third Quarter reflected an
approximate 30% decrease in sales of Andrea Anti-Noise/Registered Trademark/
products to $4,334,137, or 81% of total sales, and an approximate 4% decrease
in sales of the Company's Traditional Military Products, to $1,007,582, or 19%
of total sales. The decrease in sales during the 1998 First Nine Months
reflected an approximate 28% decrease in sales of Andrea Anti-Noise/Registered
Trademark/ products to $10,971,971, or 77% of total sales, and an approximate
5% decrease in sales of the Company's Traditional Military Products to
$3,215,177, or 23% of total sales. During the 1998 First Nine Months, sales of
the Company's computer headsets to IBM and certain of IBM's affiliates,
distributors, licensees and integrators accounted for approximately 55% of the
Company's total sales.
<PAGE>
Management believes that the general slowing of PC sales growth rates during
the 1998 First Nine Months contributed to the weaker demand for the Company's
products. In addition, increases in investments in both time and money have
been required to not only gain entry for the Company's microphone products into
retail outlets, but also to maintain a positive retail sell-through position of
these products. Management expects, however, that the Company will continue
increasing its presence among the top office/computer superstores during the
fourth quarter of 1998 through increased product offerings among existing
stores. Since the fourth quarter of 1997, the Company has established product
presence in five of its targeted superstores including CompUSA, Staples,
Computer City and, most recently, OfficeMax. During the 1998 First Nine Months,
total sales to retailers approximated 8% of Andrea Anti-Noise/Registered
Trademark/ products. Retail sales during the 1997 First Nine Months were
nominal.
Cost of Sales
Cost of sales as a percentage of sales for the 1998 Third Quarter and the 1998
First Nine Months increased to 65% from 64% over the 1997 Third Quarter and
1997 First Nine Months. These increases in cost of sales related to product
sales during the 1998 Third Quarter and the 1998 First Nine Months are
primarily a result of the shift in product mix described above in "Sales".
Research and Development
Research and development expenses increased to $369,806 for the 1998 Third
Quarter from $189,798 for the 1997 Second Quarter. These increases are
primarily a result of the Company's continuing efforts to develop its digital
signal processing technology, coupled with efforts in computer/telephony
headset technologies, which efforts are anticipated to result in six new
computer/telephony products by the end of 1998. In addition, the 1998 First
Nine Months included research and development activities at the Company's
wholly-owned subsidiary, Andrea Digital Technologies ("ADT"), which was
established during the second quarter of 1998. Research efforts at ADT are
primarily focused on the pursuit of commercializing a natural language-driven
human/machine interface by developing optimal far-field microphone solutions
for various voice-driven interfaces, incorporating the digital
super-directional array microphone technology ("DSDA") obtained through the
recent acquisition of Lamar Signal Processing, Ltd. ("Lamar") in early May of
1998. Correspondingly, the activities of Lamar, since the date of acquisition,
accounted for approximately 22% and 10% of the total research and development
expenses for the 1998 Third Quarter and the 1998 First Nine Months,
respectively. Management believes that the acquisition of Lamar significantly
reinforces the Company's position in digital signal processing by broadening
its exposure to other industries, including the consumer electronics and
professional audio markets, among others. Considering all of the foregoing,
through the 1998 Third Quarter, total research and development expenses
approximate 123% of the entire research and development expense for fiscal
1997. Management anticipates continued significant research and development
expenses as the year progresses, with particular emphasis on digital signal
processing efforts.
General, Administrative and Selling Expenses
General, administrative and selling expenses increased 97% to $3,302,466 for
the 1998 Third Quarter from $1,679,168 for the 1997 Third Quarter. General,
administrative and selling expenses increased 92% to $8,592,915 for the 1998
First Nine Months from $4,478,410 for the 1997 First Nine Months. These
increases, primarily attributable to the ANC/ANR product lines and the recent
acquisition of Lamar, reflect significant increased business development
expenses relating to existing and prospective collaborative arrangements with
hardware OEMs, software publishers and developers, distributors and retailers.
The Company also incurred increased promotional, marketing and sales expenses
to promote product awareness and acceptance of the ANC/ANR product lines,
particularly in the retail marketplace, and incurred significant expenses with
developing global expansion efforts. Also included in general, administrative
and selling expenses for the 1998 Third Quarter and 1998 First Nine Months is
goodwill amortization of approximately $460,000 and $750,000, respectively,
related to the acquisition of Lamar.
Other Income (Expense)
Other income for the 1998 First Nine Months was $1,674,902 compared to other
income of $32,675 for the 1997 First Nine Months. This change is primarily
attributable to the net gain on the sale of the Company's corporate
headquarters during the 1998 First Nine Months of $1,864,767, offset by
interest expense of $436,935, primarily related to the convertible notes issued
and sold on June 10, 1998.
Provision for Income Taxes
The income tax benefit of $329,043 in the 1998 Third Quarter results in neither
a provision nor a benefit for the full nine-month period, due to the normal
assessment of the Company's deferred tax assets and related reserves. The
Company will be continually re-assessing its reserves on deferred income tax
assets as the year progresses. The realization of most of the remaining
reserved deferred tax assets (excluding those generated and partially reserved
in the 1998 First Nine Months), if and when realized, will not result in a tax
benefit in the consolidated statement of operations, but will result in an
increase in additional paid in capital as they are related to tax benefits
associated with the exercise of stock options.
Net Income (Loss)
Net loss for the 1998 Third Quarter was $1,681,052, compared to net income of
$1,568,339 for the 1997 Third Quarter. Net loss for the 1998 First Nine Months
was $3,131,205, compared to net income of $ 2,852,816 for the 1997 First Nine
Months. The levels of net loss for the 1998 Third Quarter and 1998 First Nine
Months principally reflect the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds have historically been, and are
expected to continue to be, cash flow from operations and borrowings provided
by certain financial institutions. At September 30, 1998, the Company had cash
and cash equivalents of $8,155,496 compared with $2,059,338 at December 31,
1997. The significant increase since December 31, 1997 is primarily a result of
the Company's issuance and sale, in a private placement, of $10.75 million
aggregate principal amount of 6% Convertible Notes ("Notes"). The Company is
using the $10 million in net proceeds from the issuance of the Notes for costs
associated with technology acquisition and development, tooling costs,
relocation costs, a new management information system and general working
capital requirements. In connection with the acquisition of Lamar, of the
aggregate cash consideration to be paid by the Company, $1,000,000 was paid on
May 5, 1998, the closing date, $500,000 was paid on November 5, 1998, and the
remainder is payable in three equal installments on each of the twelve,
twenty-four and thirty-six month anniversaries of the closing.
Working capital at September 30, 1998 was $18,139,427 compared to $11,786,659
at December 31, 1997. The increase in working capital reflects an increase in
total current assets of $8,490,234, offset by an increase in total current
liabilities of $2,137,466. The increase in total current assets reflects an
increase in cash of $6,096,158, a decrease in marketable securities of
$102,717, a decrease in accounts receivable of $278,757, an increase in
inventory of $2,250,514 and an increase of $525,036 in prepaid expenses and
other current assets. The increase in current liabilities reflects a $560,426
increase in trade accounts payable, an increase in the current portion of long
term debt of $1,051,518, a $1,193,472 decrease in convertible debentures (which
debentures were converted to equity during the 1998 First Quarter) and a
$1,718,994 increase in other current liabilities.
The increase in cash of $6,096,158 reflects $5,613,565 of net cash used in
operating activities, $664,604 of net cash provided by investing activities and
$11,045,119 of cash provided by financing activities. The cash used in
operating activities, excluding non-cash charges, is primarily attributable to
the $3,131,205 net loss in the 1998 First Nine Months, coupled with an increase
in inventory of the Company's Anti-Noise/Registered Trademark/computer headsets
in anticipation of future sales. Other contributing factors include increases
in prepaid expenses and other assets. The cash provided by investing activities
is primarily attributable to the sale of the Company's primary operating
facility in Long Island City, New York, offset by the cash consideration paid
upon closing of the acquisition of Lamar. Also contributing to the offset were
increases in capital expenditures consisting of the ongoing upgrade of
manufacturing dies and molds for Andrea Anti-noise/Registered Trademark/
products and investments in the Company's existing information systems. In
connection with the sale of the Company's primary operating facility, rent
expense associated with the new leased facility will approximate $550,000 per
year, notwithstanding cost of living adjustments. The net cash provided by
financing activities resulted from the issuance and sale of the Notes and the
exercise of employee stock options.
The decrease in accounts receivable primarily reflects the decrease in sales
during the 1998 First Nine Months coupled with rigorous collection procedures.
Generally, the Company collects receivables from sales within three months.
The increase in prepaid expenses and other current assets primarily includes
the recognition of increased premiums for prepaid property taxes and insurance,
prepaid moving costs, increased fulfillment costs associated with expansion
efforts as well as increases in other service costs related to future quarters.
The increase in other assets represents increases in patent and trademark costs
associated with the Company's proprietary technology, as well as the
establishment of an escrow account in connection with the sale of the Company's
primary operating facility.
The increase in trade accounts payable and other current liabilities primarily
reflects differences in the timing related to both the payments for and the
acquisition of raw materials as well as for other services in connection with
ongoing efforts related to the Andrea Anti-Noise/Registered Trademark/ products
and recently acquired DSDA technology. The increase in the current portion of
long term debt represents the current portion of debt recorded as a result of
the acquisition of Lamar. The majority of this balance is comprised of $1
million in cash consideration due on the six and twelve month anniversaries of
the closing. The remaining $1 million in cash consideration due on the
twenty-four and thirty-six month anniversaries of the closing are recorded as
long term debt on the accompanying consolidated balance sheet.
Demand for Andrea Anti-Noise/Registered Trademark/ products has required the
Company to raise additional working capital to support its production
operations. In addition, the acquisition of Lamar will require the Company to
provide working capital to support Lamar in order to enable it to pay its
obligations as they become due. In December 1995, April 1996 and August 1996,
the Company raised additional working capital through the issuance of
convertible subordinated debentures. On June 10, 1998, as described above, the
Company raised $10 million through the issuance and sale of the Notes. In
addition, the Company entered into a revolving credit agreement in September
1997 that provides maximum borrowings of up to $10 million based on eligible
accounts receivable and inventory, as defined. Notwithstanding the
significance of sales of Andrea Anti-Noise/Registered Trademark/ products
during the 1998 First Nine Months, no assurance can be given that demand will
continue for these products or any of the Company's other products, including
future products related to the recently acquired DSDA technology, if
developed, or, that if such demand does exist, 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.
YEAR 2000 COMPLIANCE PLAN
In anticipation of the year 2000, the Company has developed and begun to
implement a plan to ensure that all of its information systems are able to
properly recognize and handle dates after December 31, 1999. The Company's
significant management information systems consist of its financial and
inventory systems. These systems are currently being upgraded with a recently
acquired software package, with a scheduled implementation date of January
1999. All of the Company's material hardware, including its AS/400 mainframe,
telephone systems and networks are being tested for year 2000 compliance. In
addition, the Company is in the process of contacting all of its major
customers, suppliers and vendors to inquire about year 2000 compliance. With
respect to significant future system hardware or software purchases and/or
modifications, the Company will conduct similar testing prior to
implementation in an effort to ensure year 2000 compliance. Currently, the
Company does not anticipate any material deficiencies and, further, does not
anticipate difficulty or significant additional expense in achieving full
year 2000 capability. The cost of the upgrade to the Company's management
information systems is not expected to exceed $1 million, which upgrade will
achieve several objectives, including, among others, satisfaction of the year
2000 computing requirements.
Although the Company believes that it will have its own systems compliant in
January, 1999 there can be no assurances that it will be able to do so, nor can
there be any assurances that, even if the Company completes its year 2000
compliance plan in a timely manner, the systems, when actually implemented in
full, will work properly independently or in conjunction with the systems of
any business partner. In addition, the Company would continue to bear the risk
of a material adverse affect if any of its business partners do not
appropriately address their own year 2000 compliance issues. Although the
Company believes that its major customers will be year 2000 compliant, the
Company is still in the process of reviewing the compliance programs of
suppliers and service vendors. There can be no assurance that such other
companies will achieve year 2000 compliance or that any conversions by such
companies to become year 2000 compliant will be made in a timely manner.
Failure of these companies to become year 2000 compliant in a timely manner
could have a material adverse effect on the Company's financial condition or
results of operations. If the Company's suppliers and vendors are not year 2000
compliant, the Company may have to arrange for alternative sources of supply
for inventory procurement and contract manufacturers in the fall of 1999 in
preparation for the year 2000. The Company does not have any other contingency
plans with respect to other problems that could arise in its business as a
result of the year 2000. Any of these could have a material adverse effect on
the Company's financial condition or results of operations.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit
Number Description
3 Amended By-Laws of the Registrant
27 Financial Data Schedule
(b) Reports on Form 8-K.
During the three-month period ended September 30, 1998, the registrant
filed the following Current Reports on Form 8-K on the indicated dates: (i) on
July 17, 1998, the registrant amended its Current Report on Form 8-K dated May
8, 1998 (the "Report") to include the financial statements and pro forma
financial information which were omitted from the Report, as initially filed,
in accordance with Item 7(a)(4) of Form 8-K; and (ii) on August 4, 1998, for
the purpose of announcing that the registrant released financial information
with respect to the three and six month periods ended June 30, 1998, and for
the purpose of announcing the sale of the registrant's 6% Convertible Notes due
June 10, 2000.
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 and 15(d) of the
Exchange Act, the Registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ANDREA ELECTRONICS CORPORATION
/s/ John N. Andrea Co-President November 13, 1998
- ---------------------------
John N. Andrea
/s/ Patrick D. Pilch Executive Vice President, November 13, 1998
- ---------------------------
Patrick D. Pilch and Chief Financial Officer
<PAGE>
Amended as of April 3, 1998
BY-LAWS OF
ANDREA ELECTRONICS CORPORATION
ARTICLE I
OFFICES
The principal office of the Corporation shall be at 45 Melville Park
Road, Melville, New York 11747, or at such other place as the Board of
Directors may from time to time direct. The Corporation may also establish and
have such other offices or places, within or outside the State of New York or
any place in the world, as may from time to time be designated by the Board of
Directors.
ARTICLE II
SHAREHOLDERS
2.1. Share Certificates. The certificates of stock of the Corporation
shall be numbered and shall be entered in the books of the Corporation as they
are issued. They shall exhibit the holder's name and number of shares, set
forth any other information prescribed by the New York Business Corporation Law
("Business Corporation Law") and by any other applicable provision of law, and
shall be signed by the President or a Vice President and the Secretary or an
Assistant Secretary of the Corporation. Certificates may be sealed with the
seal of the Corporation or a facsimile thereof. The signatures of the President
or a Vice President and the Secretary or an Assistant Secretary upon a
certificate may be facsimiles if the certificate is manually signed on behalf
of a transfer agent or a registrar. In case any officer who has signed or whose
facsimile signature has been placed upon such certificate shall have ceased to
be such officer before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer at the date of its
issuance. The Board of Directors may appoint banks or trust companies as
transfer agent and as registrar of stock until otherwise ordered by the Board
of Directors. After the appointment of such transfer agent and registrar, no
certificate issued to represent the Corporation's stock shall be binding upon
the Corporation or have any validity unless signed by such transfer agent and
by such registrar, or their respective successors as may be appointed by the
Board of Directors.
No certificate shall be issued for any share until such share is fully
paid, except as otherwise provided in the New York Business Corporation Law.
2.2. Fractional Share Interests or Scrip. The Corporation may, when
necessary or desirable in order to effect share transfers, share distributions
or reclassifications, mergers, consolidations or reorganizations, issue a
fraction of a share, make arrangements or provide reasonable opportunity for
any person entitled to a fractional interest in a share to sell such fractional
interest or to purchase such additional fractional interests as may be
necessary to acquire a full share, pay in cash the fair value of fractions of a
share as of the time when those entitled to receive such fractions are
determined, or issue scrip in registered or bearer form, over the manual or
facsimile signature of an officer of the Corporation or its agent, which shall
entitle the holder to receive a certificate for a full share upon the surrender
of such scrip aggregating a full share. A certificate for a fractional share
shall, but scrip shall not unless otherwise provided therein, entitle the
holder to exercise voting rights, to receive dividends thereon and to
participate in any of the assets of the Corporation in the event of
liquidation.
The Board of Directors may cause scrip to be issued subject to the
condition that it shall become void if not exchanged for certificates
representing full shares before a specified date, or subject to the condition
that the shares for which scrip is exchangeable may be sold by the Corporation
and the proceeds thereof distributed to the holders of scrip, or subject to any
other conditions which the Board of Directors may deem advisable. Such
conditions shall be stated or fairly summarized on the face of the certificate.
2.3. Share Transfers. Upon compliance with any provisions restricting
the transferability of shares that may be set forth in the Certificate of
Incorporation, these By-Laws, or any written agreement in respect thereof,
transfers of shares of the Corporation shall be made only on the books of the
Corporation by the registered holder thereof, or by his attorney thereunto
authorized by power of attorney duly executed and filed with the Secretary of
the Corporation, or with a transfer agent or a registrar and on surrender of
the certificate or certificates for such shares properly endorsed and the
payment of all taxes thereon, if any. Except as may be otherwise provided by
law, the person in whose name shares stand on the books of the Corporation
shall be deemed the owner thereof for all purposes as regards the Corporation;
provided that whenever any transfer of shares shall be made for collateral
security, and not absolutely, such fact, if known to the Secretary of the
Corporation, shall be so expressed in the entry of transfer.
2.4. Record Date for Shareholders. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or entitled to receive payment of any dividend, or in
order to make a determination of shareholders for any other purpose, the Board
of Directors of the Corporation may fix in advance a date as the record date
for any such determination of shareholders, such date in any case to be not
more than fifty days and, in case of a meeting of shareholders, not less than
ten days prior to the date on which the particular action, requiring such
determination of shareholders, is to be taken. If no record date is fixed for
the determination of shareholders entitled to notice of or to vote at a meeting
of shareholders, or shareholders entitled to receive payment of a dividend, the
day next preceding the day which notice of the meeting is given or if no notice
is given, the day on which the meeting is held shall be the record date for
determination of shareholders. The record date for determining shareholders for
any other purpose shall be the date on which the resolution of the Board of
Directors relating thereto is adopted. When a determination of shareholders
entitled to vote at any meeting of shareholders has been made as provided in
this section, the determination shall apply to any adjournment thereof, unless
the Board of Directors fixes a new record date under this section for the
adjourned meeting.
2.5. Meaning of Certain Terms. As used herein in respect of the right
to notice of a meeting of shareholders or a waiver thereof or to participate or
vote thereat or to consent or dissent in writing in lieu of a meeting, as the
case may be, the term "share" or "shares" or "shareholder" or "shareholders"
refers to an outstanding share or shares and to a holder or holders of record
of outstanding shares when the Corporation is authorized to issue only one
class of shares, and said reference is also intended to include any outstanding
share or shares and any holder or holders of record of outstanding shares of
any class upon which or upon whom the Certificate of Incorporation confer such
rights where there are two or more classes or series of shares or upon which or
upon whom the Business Corporation Law confers such rights notwithstanding that
the Certificate of Incorporation may provide for more than one class or series
of shares, one or more of which are limited or denied such rights thereunder.
ARTICLE III
MEETINGS OF SHAREHOLDERS
3.1. Annual Meetings.
3.1.1. Date. The annual meeting of the shareholders of the
Corporation for the election of the Board of Directors and for the
transaction of such other business as may properly come before such
meeting shall be held on such date and at such time as may be
determined by the Board of Directors.
3.1.2. Purpose. At each annual meeting, the shareholders
shall elect the members of the Board of Directors for the succeeding
year. At any such annual meeting any proper business properly brought
before the meeting may be transacted. To be properly brought before an
annual meeting, business must be (i) specified in the notice of the
meeting (or any supplement thereto) given by or at the direction of
the Board of Directors, (ii) otherwise properly brought before the
meeting by or at the direction of the Board of Directors or (iii)
otherwise properly brought before the meeting by a shareholder. For
business to be properly brought before an annual meeting by a
shareholder, the shareholder must have given written notice thereof,
either by personal delivery or by United States mail, postage prepaid,
to the Secretary of the Corporation, not later than 90 days in advance
of such meeting. Any such notice shall set forth as to each matter the
shareholder proposes to bring before the annual meeting (i) a brief
description of the business desired to be brought before the meeting
and the reasons for conducting such business at the meeting and, in
the event that such business includes a proposal-to amend either the
Certificate of Incorporation or By-Laws of the Corporation, the
language of the proposed amendment, (ii) the name and address of the
shareholder proposing such business, (iii) a representation that the
shareholder is a holder of record of stock of the Corporation entitled
to vote at such meeting and intends to appear in person or by proxy at
the meeting to propose such business, and (iv) any material interest
of the shareholder in such business. No business shall be conducted at
an annual meeting of shareholders except in accordance with this
paragraph, and the chairman of any annual meeting of shareholders may
refuse to permit any business to be brought before an annual meeting
without compliance with the foregoing procedures.
3.1.3. Nominations for Directors. Nominations for the
election of directors may be made by the Board of Directors or by any
shareholder entitled to vote for the election of directors. Any
shareholder entitled to vote for the election of directors at a
meeting may nominate a person or persons for election as directors
only if written notice of such shareholder's intent to make such
nomination is given, either by personal delivery or by United States
mail, postage prepaid, to the Secretary of the Corporation not later
than (i) with respect to an election to be held at an annual meeting
of shareholders, 90 days in advance of such meeting, and (ii) with
respect to an election to be held at a special meeting of shareholders
for the election of directors, the close of business on the seventh
day following the date on which notice of such meeting is first given
shareholders. Each such notice shall set forth: (a) the name and
address of the shareholder who intends to make the nomination and the
person or persons to be nominated; (b) a representation that the
shareholder is a holder of record of stock of the Corporation entitled
to vote at the meeting and intends to appear in person or by proxy at
the meeting to nominate the person or persons specified in the notice;
(c) a description of all arrangements or understandings between the
shareholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or
nominations are to be made by the shareholder; (d) such other
information regarding each nominee proposed by the shareholder as
would have been required to be included in a proxy statement filing
pursuant to the proxy rules of the Securities and Exchange Commission
had each nominee been nominated, or intended to be nominated, by the
Board of Directors; and (e) the consent of each nominee to serve as a
Director of the Corporation if so elected. The chairman of any meeting
of shareholders to elect directors and the Board of Directors may
refuse to acknowledge the nomination of any person not made in
compliance with the foregoing procedure.
3.2. Special Meetings. A special meeting of the shareholders may be
called at any time by the President, any Vice President or the Board of
Directors, and shall be called by the President or a Vice President upon the
written request of shareholders of the Corporation pursuant to Section 603 of
the Business Corporation Law.
3.3. Place of Meetings. The meetings of the shareholders of the
Corporation shall be held at its principal office in the State of New York or
at such other place within or without the State of New York as shall be
designated by the Board of Directors.
3.4. Notice of Meetings. Except as otherwise required by statute,
notice of each meeting of the shareholders, whether annual or special, shall be
in writing over the name of the President or the Secretary. Such notice shall
state the place, day and hour of the meeting, and, in the case of a special
meeting, the purpose or purposes for which the meeting is called. A copy of
such notice shall be served, either personally or by mail at the direction of
the President or the officer calling the meeting to each shareholder, upon each
shareholder of record entitled to vote at such meeting not less than ten days
(or not less than any such other minimum period of days as may be prescribed by
the Business Corporation Law) nor more than fifty days before such meeting. The
notice of any annual or special meeting shall also include, or be accompanied
by, any additional statements, information, or documents prescribed by statute.
If mailed, such notice shall be deemed to be delivered when deposited in the
United States mail addressed to the shareholder at his address as it appears on
the stock transfer books of the Corporation, with postage thereon prepaid.
Attendance of a shareholder at a meeting shall constitute a waiver of notice of
the meeting, except where the shareholder attends the meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of
any business because the meeting was not lawfully called or convened. Whenever
any notice is required to be given to any shareholder, a waiver thereof in
writing signed by him or his authorized attorney-in-fact, whether before or
after such meeting, shall be the equivalent to the giving of such notice. When
a meeting is adjourned to another time or place, it shall not be necessary to
give any notice of the adjourned meeting if the time and place to which the
meeting is adjourned are announced at the meeting at which the adjournment is
taken, and at the adjourned meeting any business may be transacted that might
have been transacted on the original date of the meeting. If, however, the
Board of Directors shall fix a new record date for the adjourned meeting,
notice of the adjourned meeting shall be given each shareholder of record of
the new record date.
3.5. Quorum. At all meetings of the shareholders the presence in
person or by proxy of the holders of record of a majority of the shares then
issued and outstanding and entitled to vote shall be necessary and sufficient
to constitute a quorum for the transaction of business. After a quorum has been
established at a shareholders' meeting, the subsequent withdrawal of
shareholders, so as to reduce the number of shareholders at the meeting below
the number required for a quorum, shall not affect the validity of any action
taken at the meeting or any adjournment thereof. In the absence of a quorum, a
majority in interest of the shareholders entitled to vote, present in person or
by proxy, may adjourn the meeting. At any such adjourned meeting at which a
quorum may be present, any business may be transacted which might have been
transacted at the meeting as originally called.
3.6. Inspectors of Election. The Board of Directors shall appoint two
persons, who need not be shareholders, to act as Inspectors of Election at all
meetings of the shareholders until the close of the next annual meeting. No
candidate for the office of director shall act as an Inspector of Election. If
there be a failure to appoint Inspectors, or if any Inspector appointed be
absent or refuse to act, or if his office becomes vacant, the Board of
Directors present at the meeting may choose temporary Inspectors of the number
required. The Inspectors appointed to act at any meeting of the Board of
Directors, before entering upon the discharge of their duties, shall be sworn
faithfully to execute the duties of Inspectors at such meeting with strict
impartiality, and according to the best of their ability.
3.7. Voting. Each shareholder entitled to vote in accordance with the
terms of the Certificate of Incorporation and in accordance with the provisions
of these By-Laws shall be entitled to one vote, in person or by proxy, for each
share of stock entitled to vote held by such shareholder, but no proxy shall be
voted after eleven months from its date unless such proxy provides for a longer
period. Every proxy shall be signed by the shareholder or by his duly
authorized attorney-in-fact, and filed with the Secretary of the Corporation.
Upon the demand of any shareholder, the vote for directors and the vote upon
any question before the meeting, shall be by ballot. At all meetings of the
shareholders, all matters shall be decided by a vote of a majority of the
number of shares of stock present in person or represented by proxy at such
meeting, except as otherwise provided in these By-Laws or by the Certificate of
Incorporation or the laws of the State of New York.
3.8. Voting List. The officer or agent having charge of the stock
transfer books for shares of the Corporation shall make a complete list, in
alphabetical order, of the shareholders entitled to vote at such meeting or any
adjournment thereof, with the address of and the number and class and series,
if any, of the shares held by each. Such list shall be produced at the meeting
upon the request thereat or prior thereto of any shareholder. The original
stock transfer book shall be prima facie evidence as to who are the
shareholders entitled to examine such list or transfer books or to vote at any
meeting of shareholders.
3.9. Waiver of Irregularities. All informalities and irregularities in
calls, notices of meeting and in the manner of voting, form of proxy,
credentials, and methods of ascertaining those present, shall be deemed waived
if no objection is made thereto at the meeting.
ARTICLE IV
BOARD OF DIRECTORS
4.1. General Powers and Qualifications. The property, affairs and
business of the Corporation shall be managed by the Board of Directors. The
Board of Directors may exercise all of the powers of the Corporation, except
such as are by law or by the Certificate of Incorporation or by these By-Laws
expressly conferred upon or reserved to the shareholders.
4.2. Number, Election and Term of Office. Until changed as hereinafter
provided, the number of directors shall be not less than three (3) nor more
than nine (9) as may be from time to time fixed by resolution of the Board of
Directors, but no decrease in the number of directors shall have the effect of
shortening the term of an incumbent director. Subject to the provisions of
Section 4.4.2 of this Article IV, the directors shall be elected annually by
the shareholders entitled to vote at the annual meeting of shareholders, by a
plurality of the votes at such election. Each director (whether elected at an
annual meeting or to fill a vacancy or otherwise) shall continue in office
until the annual meeting of shareholders held next after his election and until
his successor shall have been elected and qualified or until his earlier death,
resignation or removal in the manner hereinafter provided.
4.3. Meetings.
4.3.1. Time. Meetings shall be held at such time as the Board
of Directors shall fix, except that the first meeting of a newly
elected Board of Directors shall be held as soon after its election as
the directors may conveniently assemble.
4.3.2. Place. Meetings shall be held at such place, (within
or without the State of New York) as shall be fixed by the Board of
Directors.
4.3.3. Call. Special meetings of the Board of Directors may
be called by the Chairman of the Board, if any, the President, any
Vice President, or any two directors.
4.3.4. Notice. No notice shall be required for regular
meetings for which the time and place have been fixed. Written, oral
or any other mode of notice of the time and place shall be given for
special meetings no less than two days before the day on which the
meeting is to be held. Unless otherwise provided herein, the notice or
a waiver of notice of any meeting need not specify the business to be
transacted or the purposes of the meeting. Attendance of a director at
a meeting shall constitute a waiver of notice of such meeting and a
waiver of any and all objections to the place of the meeting, the time
of the meeting, or the manner in which it has been called or convened,
except when a director states, at the beginning of the meeting, any
objection to the transaction of business because the meeting is not
lawfully called or convened. A director may waive notice of a meeting,
before or after such meeting, in writing or by telegraph, radio, cable
or telecopy.
4.3.5. Telephonic Participation. Members of the Board of
Directors may participate in a meeting of said Board by means of a
conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other at
the same time, and participation by such means shall be deemed to
constitute presence in person at a meeting.
4.3.6. Chairman of the Meeting. Meetings of the Board of
Directors shall be presided over by the following directors in the
order of seniority and if present and acting: Chairman of the Board,
if any, the President, or any other director chosen by the Board.
4.3.7. Quorum. The presence, at any meeting, of a majority of
the total number of directors constituting the entire Board of
Directors shall be necessary and sufficient to constitute a quorum of
the transaction of business; and except as otherwise required by
statute, the Certificate of Incorporation or these By--Laws, the act
of a majority of the directors present at a meeting at which a quorum
is present shall be the act of the Board of Directors. In the absence
of a quorum, a majority of the directors present at the time and place
of any meeting may adjourn such meeting. Notice of any adjourned
meeting need not be given to the directors who were not present at the
time of the adjournment.
4.4. Resignations, Vacancies and Removal.
4.4.1. Resignation. Any director may resign at any time by
giving written notice of such resignation to either the Board of
Directors, the President, a Vice President, the Secretary, or an
Assistant Secretary of the Corporation. Unless otherwise specified
therein, such resignation shall take effect upon receipt thereof by
the Board of Directors or by any such officer.
4.4.2. Vacancies. If any vacancy shall occur among the
directors by reasons of death, resignation, disqualification, removal
with cause or by reason of an increase in the number of directors or
otherwise, such vacancy may be filled by a majority vote of the
remaining directors, though less than a quorum. Any such vacancy and a
vacancy resulting from a removal without cause may also be filled by a
majority of the shareholders present and entitled to vote at any
meeting held during the existence of such vacancy, provided that the
notice of such meeting shall have mentioned such vacancy or expected
vacancy.
4.4.3. Removal. Any or all of the directors may be removed
with cause, by the majority vote of the class of stock by which he
was elected.
4.5. Written Action. Any action required to be taken at a meeting of
directors, or any action which may be taken at a meeting of directors or a
committee thereof, if any, may be taken without a meeting if a consent in
writing, setting forth the action so to be taken, shall be signed by all of the
directors or all the members of the committee, as the case may be, and is filed
in the minutes of the proceedings of the Board or of the committee, as the case
may be.
4.6. Compensation. The directors shall receive such compensation for
their services as may be authorized by resolution of the Board of Directors,
which compensation may include an annual fee and reimbursement for actual
expenses incurred in connection with the attendance at regular or special
meetings of the Board or any committee thereof. Nothing herein contained shall
be construed to preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor.
4.7. Committees. By resolutions adopted by a majority of the Board of
Directors then in office, the Board may designate an executive committee and
one or more other committees, each such committee to consist of three or more
directors of the Corporation. The executive committee shall have and may
exercise all the powers and authority of the Board in the management of the
business and affairs of the Corporation (except as otherwise expressly limited
by statute). Each such committee shall have such of the powers and authority of
the Board as may be provided from time to time in resolutions adopted by a
majority of the Board then in office.
4.8. Chairman of the Board. The Board of Directors may elect a
Chairman of the Board who may be designated as an officer of the Corporation as
provided in these By-Laws to perform such duties and have such responsibilities
as from time to time may be assigned to him by the Board of Directors.
ARTICLE V
OFFICERS
5.1. Titles. The officers of the Corporation shall include, if and
when designated by the Board of Directors, the Chairman of the Board, the Chief
Executive Officer(s), the President(s), one or more Vice Presidents, the Chief
Operating Officer, the Chief Financial Officer, the Secretary, the Treasurer,
one or more Assistant Secretaries and Assistant Treasurers, and such other
officers and agents as may be appointed from time to time by the Board of
Directors.
5.2. Election, Term of Office and Qualifications. Each officer
specifically designated in Section 5.1 of this Article V shall be chosen by the
Board of Directors and shall hold his office until his successor shall have
been duly chosen and qualified or until his death or until he shall resign or
shall have been removed.
5.3. Removal, Resignations and Vacancies.
5.3.1. Removal. Any officer may be removed either with or
without cause by vote of a majority of the Board of Directors then in
office.
5.3.2. Resignations. Subject to any employment agreement with
the Corporation to the contrary, any officer may resign at any time by
giving written notice of-such resignation to the Board of Directors or
to the President, a Vice President, the Secretary or an Assistant
Secretary. Unless otherwise specified therein, such resignation shall
take effect upon receipt thereof by the Board of Directors or by the
President, a Vice President, the Secretary or an Assistant Secretary.
5.3.3. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause may be
filled for the unexpired portion of the term by a majority of the
directors then in office, although less than a quorum.
5.4. The Chairman of the Board. The Chairman of the Board, when
present, shall preside at all meetings of the shareholders and the Board of
Directors. The Chairman of the Board shall perform other duties and have such
other powers as the Board of Directors shall designate from time to time. If
there is no President, then the Chairman of the Board shall also serve as Chief
Executive Officer of the Corporation and shall have the powers and duties
prescribed in Section 5.5 of this Article V.
5.5. The President. The President, unless otherwise determined by the
Board of Directors, shall be the Chief Executive Officer of the Corporation.
Subject to the supervision and direction of the Board of Directors, he shall be
responsible for managing the affairs of the Corporation. He shall have
supervision and direction of all of the other officers of the Corporation and
shall have the powers and duties usually and customarily associated with the
office of the President. He shall preside at meetings of the shareholders and
the Board of Directors, unless the Chairman of the Board has been appointed and
is present.
5.6. The Chief Operating Officer. The Chief Operating Officer, when
present, shall be responsible for the day-to-day operations of the Corporation.
He shall perform other duties and have such other powers as the Chief Executive
Officer or the Board of Directors shall designate from time to time.
5.7. The Vice Presidents. The Vice Presidents shall have such powers
and duties as may be delegated to them by the President or by the Board of
Directors.
5.8. The Chief Financial Officer, Treasurer and Assistant Treasurer.
5.8.1. The Chief Financial Officer. The Chief Financial
Officer shall have the custody of the corporate funds and securities,
and shall deposit or cause to be deposited under his direction all
moneys and other valuable effects in the name and to the credit of the
Corporation in such depositories as may be designated by the Board of
Directors or pursuant to authority granted by it. He shall keep or
cause to be kept the books of account of the Corporation in a thorough
and proper manner and shall render statements of the financial affairs
of the Corporation in such form and as often as required by the
President or by the Board of Directors. The Chief Financial Officer
shall have such other powers and duties as may be delegated to him by
the President.
5.8.2. Treasurer. The Treasurer shall perform duties commonly
incident to his office and, in case of the absence of the Chief
Financial Officer, perform the duties and exercise the powers of the
Chief Financial Officer, and shall have such other powers and duties
as may be delegated to him by the President.
5.8.3. Assistant Treasurer. The Assistant Treasurer shall, in
case of the absence of the Treasurer, perform the duties and exercise
the powers of the Treasurer, and shall have such other powers and
duties as may be delegated to him by the President.
5.9. Secretary and Assistant Secretary.
5.9.1. Secretary. The Secretary shall attend all meetings of
the Board of Directors and of the shareholders, and shall record the
minutes of all proceedings in a book to be kept for that purpose. He
shall perform like duties for the committees of the Board when
required. The Secretary shall give, or cause to be given, notice of
meetings of the shareholders, of the Board of Directors and of the
committees of the Board. He shall keep in safe custody the seal of the
Corporation, and when authorized by the President, an Executive Vice
President or a Vice President, shall affix the same to any instrument
requiring it, and when so affixed it shall be attested by his
signature or by the signature of an Assistant Secretary. He shall have
such other powers and duties as may be delegated to him by the
President.
5.9.2. Assistant Secretary. The Assistant Secretary shall, in
case of the absence of the Secretary, perform the duties and exercise
the powers of the Secretary, and shall have such other powers and
duties as may be delegated to him by the President.
5.10. Additional Officers. Each other officer (including, if
designated as such, the Chairman of the Board) appointed by the Board shall
hold office for such period, have such authority and perform such duties as
directed by the Board of Directors.
5.11. Compensation. The salaries or other compensation of the officers
shall be fixed from time to time by the Board of Directors, and no officer
shall be prevented from receiving such salary or other compensation by reason
of the fact that he is also a director of the Corporation.
ARTICLE VI
CORPORATE SEAL
The corporate seal shall have inscribed thereon the name of the
Corporation and shall be in such form and contain such other words and/or
figures as the Board of Directors shall determine or the law require.
ARTICLE VII
FISCAL YEAR
The fiscal year of the Corporation shall be as determined from time to
time by resolution duly adopted by the Board of Directors.
ARTICLE VIII
INDEMNIFICATION
Each director or officer who the Corporation is empowered to indemnify
pursuant to the provisions of Section 722 of the Business Corporation Law (or
any similar provision or provisions of applicable law at the time in effect)
shall be indemnified by the Corporation to the full extent permitted thereby.
The foregoing right of indemnification shall not be deemed to be exclusive of
any other such rights to which those directors and officers seeking
indemnification from the Corporation may be entitled, including, but not
limited to, any rights of indemnification to which they may be entitled
pursuant to any agreement, insurance policy, other by-law or charter provision,
vote of shareholders or directors, or otherwise. No repeal or amendment of this
Article VIII shall adversely affect any rights of any person pursuant to this
Article VIII which existed at the time of such repeal or amendment with respect
to acts or omissions occurring prior to such repeal or amendment.
ARTICLE IX
AMENDMENTS
9.1. Shareholders. These By-Laws may be altered or amended by a
majority of the holders of the outstanding voting stock of the Corporation
present in person or by proxy at any annual or special meeting of the
shareholders.
9.2. Board of Directors. These By-Laws may be altered or amended by a
majority of the Board of Directors then in office to the full extent permitted
by law or regulation. If any By-Law resulting in impending election of
directors is adopted, amended or repealed by the Board of Directors, there
shall be set forth in the notice of the next meeting of shareholders for the
election of directors the By-Law so adopted, amended or repealed, together with
a concise statement of the changes made.
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