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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________ to ____________
Commission file number 1-4324
ANDREA ELECTRONICS CORPORATION
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(Exact name of registrant as specified in its charter)
New York 11-0482020
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(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
11-40 45th Road, Long Island City, New York 11101
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 800-442-7787
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, par value American Stock Exchange
$.50 per share
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. ( )
As of March 30, 1998, the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $175,477,430
(based on the closing sale price on the American Stock Exchange).
The number of shares outstanding of the registrant's common stock as of
March 30, 1998 was 9,053,230.
DOCUMENTS INCORPORATED BY REFERENCE
The information required in Part III by Items 10, 11, 12, and 13 is
incorporated by reference to the registrant's proxy statement in connection
with the annual meeting of shareholders to be held on June 18, 1998, which
will be filed by the registrant within 120 days after the close of its
fiscal year.
EXHIBIT INDEX ON PAGE 21
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TABLE OF CONTENTS
PAGE
TITLE PAGE 1
PART I 3-12
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ITEM 1. BUSINESS 3-11
ITEM 2. PROPERTIES 12
ITEM 3. LEGAL PROCEEDINGS 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
PART II 12-19
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 12
ITEM 6. SELECTED FINANCIAL DATA 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14-19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 20
PART III 20-21
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 20
ITEM 11. EXECUTIVE COMPENSATION 20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT 20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 20
PART IV 21-23
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K 21
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PART I
ITEM 1. BUSINESS
Overview
Andrea Electronics Corporation (together with its subsidiaries, the
"Company" or "Andrea") is engaged in the development, manufacture and
marketing of its Andrea Anti-Noise/(Registered Trademark)/ family of
electronic headsets and handsets with noise canceling and noise reducing
features. Noise cancellation enhances voice-activated computing,
computerized speech recognition, and computer and Internet telephony.
The Company believes that its noise cancellation products, which were
commercially introduced in 1995, have become leading products for these
applications because Andrea noise cancellation products generate the high
levels of voice quality, intelligibility and reliability required by these
applications and are very competitively priced. Noise reduction enhances
the quality of sound heard in noisy environments and can also be used as
a means of environmental sound control. One of the Company's newest headsets
combines its active noise cancellation technology with its Andrea QuietWare/
(Registered Trademark)/ active noise reduction technology. The Company is
also developing a new line of Andrea DSP/(Trademark)/ products with digital
signal processing features to further its role in technology enhanced
communications.
The Company has been engaged in the electronic communications industry
since 1934. For three decades prior to the Company's entry into the
voice-activated computing market in the 1990's, its primary business was
selling intercom systems for military and industrial use. The Company
continues to manufacture replacement parts for these systems, but does not
expect revenue from this business to be material. The Company is, however,
seeking to apply its knowledge of the military and industrial markets to
develop applications of its Andrea Anti-Noise technologies for these markets.
No assurance can be given that these efforts will succeed, and the Company
does not expect any material revenues from such new products for the
foreseeable future.
Strategy
The Company's strategy is to maintain and extend its lead in noise
cancellation and noise reduction technologies and products. The Company
intends to continue to broaden its Andrea Anti-Noise product line with its
existing Andrea Anti-Noise technologies and to introduce new products based
on digital signal processing technology currently under development by the
Company.
To leverage its research and development resources and direct sales
efforts, the Company collaborates with large enterprises in software
publishing and computer manufacturing and is seeking to increase on a global
scale its relationships with large retail chains and distributors.
The success of the Company's strategy will depend on its ability to
increase sales of its line of existing Andrea Anti-Noise products, introduce
additional Andrea Anti-Noise products and new Andrea DSP products, maintain
the competitiveness of its technologies through further research and
development, and achieve widespread adoption of its products and
technologies. No assurance can be given that the Company will be able to
accomplish these objectives. See "Collaborative Arrangements" and
"Competition."
Andrea Anti-Noise Products
Andrea Anti-Noise products include headsets, handsets and microphones,
for sale directly to end-users, through distributors and value-added
resellers, and in kit form to original equipment manufacturers, software
publishers, Internet Service Providers, and Internet Content Developers.
These products are designed to transmit voice signals with the high level of
quality, intelligibility and reliability required by the broad range of
emerging voice-based applications in computing and telecommunications.
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Additionally, the Company has designed and produced accessories that enhance
the performance and integration of the personal computer and Andrea
Anti-Noise products. The markets and applications for and to which Andrea
Anti-Noise products and peripherals are marketed and sold include the
following:
Personal Computer, Work Station, and Computer-based and
Internet-based Telephony Applications
- Speech Recognition for Word Processing, Database, and Similar
Applications
- Educational Software
- Multimedia
- Computer Telephony
- Speech over the Internet
- Voice-activated Interactive Games
Consumer, Residential, and Commercial Telephony Applications
- Wire-based Telecommunications
- Cellular and other Wireless Telecommunications
Commercial, Industrial, and Military Communications Applications
- Avionics
- Ground Transportation Communications
- Warehouse and Factory Communications
Andrea Anti-Noise products embody the Company's active noise cancellation
("ANC") and noise cancellation ("NC") microphone technologies and active
noise reduction ("ANR") earphone technologies. ANC microphone technology
significantly enhances the quality of a speaker's voice, particularly in
those environments where the speaker is surrounded by high levels of ambient
background noise. ANR earphone technology enhances the quality of speech and
audio heard by a listener in extremely noisy environments, particularly those
characterized by low frequency sounds, such as those in aircraft,
automobiles, trucks and other ground transportation equipment, machine rooms,
and factories.
PERSONAL COMPUTER, WORK STATION, AND COMPUTER-BASED AND INTERNET-BASED
TELEPHONY PRODUCTS
Andrea Anti-Noise products have been designed for voice-based computer
applications and computer-based telephony across a broad range of hardware
and software platforms. These products have been designed for
voice-activated computer interfaces to operate application software, such as
word processors, database managers, educational software, multimedia, and
games, as well as for Internet and Intranet voice communications. The
following products incorporate the Company's NC or ANC microphone
technologies to cancel ambient noise in a range of different environments,
including homes, mobile computing environments, offices, and factories. Also
included in the following list are several accessories that enhance the
performance and integration of the personal computer and Andrea Anti-Noise
products.
Andrea Anti-Noise ANC-100 Computer Headset. The ANC-100 is a
lightweight, uniquely styled product that has a single, high fidelity
earphone to which is attached a dual-function boom ANC microphone. The
earphone is designed to be comfortably worn on the ear or to be placed on a
desktop mount. When the headset is worn, the microphone is used in the near
field mode; when the headset is placed on the desktop mount, the microphone
is used in the far field mode. The suggested retail price of the ANC-100 is
$59.95.
Andrea Anti-Noise ANC-200 Computer Handset. The ANC-200 consists of a
high fidelity earphone and ANC microphone system that closely resembles the
traditional telephone handset. The ANC-200, however, offers features such as
near field and far field use and an "on/mute" function. The suggested retail
price of the ANC-200 is $49.95.
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Andrea Anti-Noise ANC-300 Hand-held Microphone. The ANC-300 is a
dual-function ANC hand-held microphone with both near field and far field
capabilities. Near field operation is utilized when holding the ANC-300; far
field operation can be achieved by setting the microphone in an accompanying
stand for amplified desktop performance. The suggested retail price of the
ANC-300 is $39.95.
Andrea Anti-Noise ANC-500 Computer Headset. The ANC-500 consists of a
headband with a boom ANC microphone and earphone and an "on/mute" switch.
The suggested retail price of the ANC-500 is $54.95.
Andrea Anti-Noise ANC-550 Computer Headset. The ANC-550 consists of a
stereo headset with a boom ANC microphone and an "on/mute" switch. The
suggested retail price of the ANC-550 is $64.95.
Andrea Anti-Noise ANC-600 Computer Headset. The ANC-600 is an active
noise canceling monaural headset with an ultra-flex boom microphone. Its
durable headband and "on/mute" switch differentiate this product. This
headset can be used on either the left or right side of the head. The
suggested retail price of the ANC-600 is $79.95.
Andrea Anti-Noise ANC-650 Computer Headset. The ANC-650 is an active
noise canceling stereo headset with an ultra-flex boom microphone. Like the
ANC-600, it has a durable headband and "on/mute" switch, and can be used on
either the left or right side of the head. The suggested retail price of the
ANC-650 is $89.95.
Andrea Anti-Noise QW-1000 Computer Headset. The QW-1000 is an Andrea
QuietWare active noise reduction headphone system with a small external audio
amplifier. Its superior stereo sound capabilities differentiate this
product. The suggested retail price of the QW-1000 is $69.95.
Andrea Anti-Noise QW-1000ANC Computer Headset. The QW-1000ANC combines
Andrea QuietWare active noise reduction with Andrea active noise cancellation
headset. This product, like the QW-1000, is differentiated by its stereo
sound capabilities, "on/mute" switch and small external audio amplifier, and
also includes an ultra-flex boom microphone. The suggested retail price of
the QW-1000ANC is $99.95
Andrea Anti-Noise NC-6 Computer Headset. The NC-6 consists of a
back-of-the-head headband with a flex boom NC microphone. The NC-6 is a
microphone-only headset. The suggested retail price of the NC-6 is $12.95.
Andrea Anti-Noise NC-8 Computer Headset. The NC-8 is a lightweight,
uniquely styled headset consisting of a headband with an around-the-ear style
mount, and a flex boom NC microphone. The NC-8 is offered only as an OEM
product.
Andrea Anti-Noise NC-10 Computer Headset. The NC-10 is a miniature
ear-bud headset with a flex boom NC microphone. The suggested retail price
of the NC-10 is $19.95.
Andrea Anti-Noise NC-12 Computer Headset. The NC-12 is a monaural
in-ear headset consisting of a headband with a flex boom NC microphone. The
suggested retail price of the NC-12 is $14.95.
Andrea Anti-Noise NC-14 Computer Headset. The NC-14 is a dual in-ear
headset consisting of a headband with a flex boom NC microphone. The
suggested retail price of the NC-14 is $19.95.
Andrea Anti-Noise NC-50 Computer Headset. The NC-50 consists of a
headband with a boom NC microphone and earphone. The suggested retail price
of the NC-50 is $29.95.
Andrea Anti-Noise NC-65 Computer Headset. The NC-65 is a stereo headset
with a flex boom NC microphone. Its durable headband and higher quality
stereo sound features differentiate this headset. The suggested retail price
of the NC-65 is $34.95.
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Andrea Anti-Noise NC-80 Computer Headset. The NC-80 consists of a
headband with a boom NC microphone and earphone. This headset can be used on
either the left or right side of the head. The suggested retail price of the
NC-80 is $19.95.
Andrea Anti-Noise NC-100 Computer Headset. The NC-100 is a lightweight,
uniquely styled product that has a single, high fidelity earphone to which is
attached a dual-function boom NC microphone. The earphone is designed to be
comfortably worn on the ear or to be placed on a desktop mount. When the
NC-100 is worn, the microphone is used in the near field mode; when the
NC-100 is placed on the desktop mount, the microphone is used in the far
field mode. The NC-100 is offered only as an OEM product.
Andrea Anti-Noise NC-150 Computer Headset. The NC-150 is an ultralight,
stereo headset with a flexible NC boom microphone. The suggested retail
price of the NC-150 is $29.95.
Andrea APS-100 Auxiliary Power Supply. The APS-100 consists of a module
housing which holds two "AAA" batteries supplying three volts of power to the
headsets or handsets described above and two female inputs from the headset
and handset connectors and male output plugs to the personal computer. The
APS-100 is used when the computer microphone input has either no power or
insufficient power for correct microphone operation. The suggested retail
price of the APS-100 is $19.95.
Andrea MC-100 Multimedia Audio Controller. The MC-100 consists of a
module housing that connects a PC headset or handset with a PC multimedia
speaker system thereby allowing a user to conveniently switch between the
headset/handset and the speaker system. The suggested retail price of the
MC-100 is $34.95.
Andrea M-20 PC Mini Microphone. The M-20 is a desktop, omni-directional
condenser microphone, which includes a monitor mount and lapel clip. The
suggested retail price of the M-20 is $12.95.
Andrea M-150 Stereo PC Headset. The M-150 is a stereo PC headset with
flexible boom microphone and wide-frequency stereo headphones. The suggested
retail price of the M-150 is $19.95.
Andrea AWS-100 Wireless Voice Solutions Microphone. The AWS-100 is an
ultralight one-half duplex headmounted microphone only product. The
suggested retail price of the AWS-100 is $99.00 (without the rechargeable
battery pack) and $149.00 (with the rechargeable battery pack).
The Company markets all of the above products to end users through
computer products distributors and value-added resellers, original equipment
manufacturers and to publishers. Commercial sales of Andrea Anti-Noise
products began with the ANC-100 in 1995. See "Collaborative Arrangements".
CONSUMER, RESIDENTIAL AND COMMERCIAL TELEPHONY PRODUCTS
As part of the Company's initial Andrea Anti-Noise development program
it created two products for various applications in telephony: the ANC
Telecommunications Kit and the ANC 321 Public Payphone Transmitter Module.
Each of these products was designed to enhance voice intelligibility in high
noise environments, such as train stations, airports and city streets. The
ANC Telecommunications Kit is a customized kit for business, residential and
cellular telephones. The ANC 321 Public Payphone Transmitter Module is a kit
containing a module that can be easily retrofitted into public payphone
handsets. In 1995, the Company licensed certain of this ANC technology to a
subsidiary of BellSouth Products, Inc. for use in residential and small
business telephones. This license, which expires at the end of 1998, was not
utilized by the licensee and consequently became non-exclusive. The Company
does not expect to receive any revenue under this license.
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COMMERCIAL, INDUSTRIAL AND MILITARY COMMUNICATIONS APPLICATIONS
The Company has developed two Andrea Anti-Noise products for various
communications applications in commerce, industry and the military: ANR
Headphone Kits and ANR/ANC Headset Systems. The ANR Headphone Kit is a
lightweight, open backed headphone for use in high-noise environments, such
as airplane cabins, to reduce ambient noise and offer improved audio
characteristics. Although the Company sold a limited number of these kits to
a major producer of headphones, it does not expect any material revenue from
these kits for the foreseeable future. The ANR/ANC Headset System is a high
performance communication headset system with both ANR earphone technology
and ANC microphone technology. This product is designed to be adapted to
customer specifications for use in extreme, high noise environments, such as
in aircraft, manufacturing and warehouse facilities, and military vehicles.
The Company has been collaborating with Northrop Grumman Corporation
("Northrop Grumman") to develop military and commercial versions of the
ANR/ANC Headset Systems, but does not expect any material revenue from these
products for the foreseeable future. See "Collaborative Arrangements."
Collaborative Arrangements
An important element of the Company's strategy is to promote widespread
adoption of its Andrea Anti-Noise technology through collaborative
arrangements with market and technology leaders. The Company has entered
into several collaborative and distribution arrangements with software
publishers and hardware manufacturers relating to the marketing and sale of
Andrea Anti-Noise products. These companies include, among others:
International Business Machines Corporation ("IBM"); Microsoft Corporation
("Microsoft"); Lernout & Hauspie, Inc. ("Lernout & Hauspie", formerly
Kurzweil Applied Intelligence, Inc.); Dragon Systems, Inc. ("Dragon Sytems");
Voxware, Inc. ("Voxware"); The Learning Company, Inc. ("The Learning
Company"); Mplayer; Packard Bell NEC; Lucent Technologies Inc.; and FICOMP,
Inc. The Company has also established direct arrangements with large
electronic and computer retail chains in the United States, including CompUSA
and Staples, as well as with certain major distributors in Europe and the
Americas. The Company is currently discussing additional arrangements with
other software companies, several major personal computer companies, consumer
electronic manufacturers, and electronic and computer retailers. No
assurance can be given that any of these discussions will result in any
definitive agreements.
IBM Procurement Agreement. In June 1995, the Company executed a
two-year procurement agreement with IBM covering the purchase by IBM of
certain Andrea Anti-Noise products for the personal computer market. In
1997, the Company and IBM executed a new, expanded procurement agreement
covering additional Andrea Anti-Noise products. During 1996 and 1997, sales
of the Company's computer headsets to IBM and certain of IBM's affiliates,
distributors, licensees, and integrators accounted for 46% and 56%,
respectively, of the Company's total sales. In addition, in 1997 the Company
entered into a Revolving Loan and Security Agreement with IBM Credit
Corporation ("IBM Credit") under which the Company may borrow up to $8
million against eligible accounts receivable and inventory. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Microsoft License Agreement. In October 1996, the Company entered into
a licensing agreement with Microsoft covering the distribution by the Company
of Microsoft NetMeeting/(Registered Trademark)/ Internet and Intranet
conferencing software with the Andrea Anti-Noise retail line of ANC headsets
and handsets. This agreement replaced the Company's prior licensing agreement
with Microsoft for Microsoft's MS Phone/(Registered Trademark)/ and
MSVoice/(Registered Trademark)/ computer telephony and speech recognition
software. In April 1997, the Company signed a similar licensing agreement
with Microsoft allowing the Company to sell Microsoft's NetMeeting
2.0/(Registered Trademark)/Internet and Intranet conferencing software with
Andrea Anti-Noise headsets. Andrea Anti-Noise headsets have been endorsed
and recommended by Microsoft's NetMeeting Group. In August 1997, Microsoft
recommended Andrea's ANC headsets for use with Internet Explorer 4.0 and, in
addition, Microsoft's Windows Hardware Qualifications Lab certified Andrea
ANC products for use with Windows 95/(Registered Trademark)/ and Windows NT
/(Registered Trademark)/.
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Lernout & Hauspie Agreement. In September 1996, the Company entered into
an agreement with Kurzweil Applied Intelligence, Inc., a predecessor of
Lernout & Hauspie, covering the distribution by the Company of a special
version of Kurzweil VoicePad/(Registered Trademark)/ for Windows/(Registered
Trademark)/ with the Andrea Anti-Noise retail line of ANC headsets and
handsets. In December 1997, this arrangement was complemented with a joint
licensing and marketing agreement with Lernout & Hauspie under which Lernout
& Hauspie bundles various Andrea Anti-Noise products with Lernout & Hauspie
continuous speech recognition software products, including
VoiceXpress/(Registered Trademark)/ and VoiceCommands/(Registered
Trademark)/). In addition, Lernout & Hauspie resells various Andrea
Anti-Noise products through its direct sales group to OEM, corporate and
retail customers for use with Lernout & Hauspie's speech recognition
dictation, voice verification and telecommunications software programs.
Voxware Agreement. In April 1996, the Company entered into an agreement
with Voxware, a developer of advanced voice-processing software for
multimedia computing, Internet, and communications applications covering the
distribution by the Company of Voxware's TeleVox/(Registered Trademark)/
Internet telephony software with the Andrea Anti-Noise family of computer
headsets and handsets.
The Learning Company Agreement. In November 1996, the Company entered
into an agreement with The Learning Company to provide Andrea microphones
with The Learning Company's educational CD-ROM products "Interactive Reading
Journey 1" and "Interactive Reading Journey 2".
Northrop Grumman Agreement. In 1993, the Company entered into a six-year
agreement with Grumman Aerospace Corporation (subsequently acquired by
Northrop Grumman) for the development and marketing of ANR/ANC headsets for
military applications. Under this agreement, Northrop Grumman has exclusive
worldwide rights to market these headsets to U.S. and non-U.S. military
markets. The first headset developed under this agreement was targeted at
one of the U.S. military procurement programs on which Northrop Grumman is a
contractor. During the second half of 1997, after various product
qualification testing, Northrop Grumman submitted a purchase order to the
Company for a very limited number of these headsets for further testing for a
second program with which Northrop Grumman is involved and indicated that it
would not proceed with the Andrea headset for the first program. The Company
does not anticipate any material revenue from sales of these headsets for the
foreseeable future.
Traditional Products and Government Contracts
The Company's traditional products include intercom systems and related
components, such as headsets, amplifiers, electronic control boxes and
panels, and wiring harnesses, for military and industrial applications. The
prices of these components range from $100 to $6,000. As a result of the
overall decline in procurement by the United States Department of Defense and
the decline in industrial demand for these traditional products during the
past ten years, most of the Company's recent sales of its traditional
products have been replacement components for existing intercom systems and
equipment previously sold by the Company. The Company anticipates a downward
trend in sales of its traditional products in both absolute and relative
terms.
Unfilled orders under government prime contracts and subcontracts may be
terminated at the convenience of the government under the provisions of
statutes or regulations applicable to defense procurement contracts. In the
event of such termination, the Company is entitled to reimbursement for
costs incurred plus a percentage of profit. Sales under defense procurement
contracts are also subject, in certain instances, to price redetermination
proceedings. In the opinion of the Company, such proceedings, if any, would
not have a material effect upon the earnings of the Company.
Patents, Trademarks, and Other Intellectual Property Rights
The Company relies on a combination of patents, patent applications,
trade secrets, copyrights, trademarks, nondisclosure agreements with its
employees, licensees and potential licensees, limited access to and
dissemination of its proprietary information, and other measures to protect
its intellectual property and proprietary rights. There can be no assurance,
<PAGE> 9
however, that the steps taken by the Company to protect its intellectual
property will prevent misappropriation or circumvention of the Company's
intellectual property.
Since the beginning of 1997, the Company has been granted four patents
in the United States covering its Andrea Anti-Noise technology. The first
covers a noise cancellation apparatus and expires in 2014. The second covers
a noise cancellation and noise reduction apparatus and expires in 2015. The
third covers a noise cancellation headset for use with a stand or worn on the
ear and expires in 2015. The fourth covers a design for a tethered media
communication handset with controls and expires in 2010. In addition, the
Company was granted three patents outside the United States. The first and
second are in Canada and Mexico, covering a design for an untethered
communications/media handset. They expire in 2007 and 2001, respectively.
The third is in Taiwan covering a design for a boom microphone headset, and
it expires in 2005. There are other U.S. and non-U.S. applications currently
pending, and no assurance can be given that patents will be issued with
respect to them or that future patent applications filed by the Company.
Numerous patents have been granted in the fields of noise cancellation,
noise reduction, computer voice recognition and related subject matter. The
Company expects that products in these fields will increasingly be subject to
claims under these patents as the numbers of products and competitors in
these fields grow and the functionality of products overlap. Moreover, the
laws of other countries do not protect the Company's proprietary rights to
its technologies to the same extent as the laws of the United States. There
can be no assurance that any patents issued to the Company will provide it
with competitive advantages or will not be infringed, challenged,
invalidated, or circumvented by others, that the patents or proprietary
rights of others will not have an adverse effect on the ability of the
Company to do business, that the Company will be able to obtain licenses to
patents of others, if needed, on terms acceptable to the Company or at all,
or that the Company will be able to develop additional patentable technology
that may be needed to commercialize successfully its existing technologies.
The Company is also subject to the risk of adverse claims, interference
proceeds before the U.S. Patent and Trademark Office, oppositions to patent
applications outside the United States, and litigation alleging infringement
of the proprietary rights of others. Litigation to establish the validity of
patents, to assert infringement claims against others, and to defend against
patent infringement claims can be expensive and time-consuming, even if the
outcome is favorable to the Company.
The Company markets its products under several trademarks, including,
among others, Andrea AntiNoise. During 1997, the Company obtained a trademark
for "Technology Enhancing Communications" for consumer electronics,
specifically devices utilizing noise cancellation technology. The duration
of the registration is ten years and is renewable indefinitely for ten-year
periods.
Research and Development
Andrea Anti-Noise technology is substantially important to the Company's
competitiveness. To maintain its competitiveness, the Company has organized
its research and development efforts using a market and applications approach
for meeting the requirements of new and existing customers. Under this
approach, the Company's engineering staff interacts closely with the
Company's sales and marketing personnel and, frequently, directly with
customers. The engineering staff is responsible for the research and
development of new products and the improvement of existing products. Since
1991, substantially all of the Company's research and development has been
focused on developing Andrea Anti-Noise technology and applications
engineering. In 1997, the Company expended $1,106,880 for research and
development of new products and product enhancements, representing a 12%
increase from $988,483 in 1996. The Company expects research and development
expenses to increase as it seeks to broaden its line of products and to
develop Andrea DSP technology and products. No assurance can be given that
the Company will be successful in these efforts. See "Part II- Item
7-Management's Discussion and Analysis of Financial Condition and Results of
Operations".
<PAGE> 10
Sales and Marketing
The Company employs its own marketing and sales staff as well as outside
sales representative organizations to market Andrea Anti-Noise products and
Andrea's traditional intercom products. In addition to the Company's direct
marketing and sales efforts, Andrea Anti-Noise products are also marketed
through software publishers, distributors in the personal computer,
telecommunications equipment, computer and consumer electronic retailers, and
original equipment manufacturers. Under current collaborative agreements,
the Company's collaborative partners have various manufacturing, marketing,
and sales rights to the products covered by the respective agreements. While
no assurance can be given, the Company anticipates that it will enter into
additional collaborative arrangements for its Andrea Anti-Noise and Andrea
DSP products. Market acceptance of the Andrea Anti-Noise and Andrea DSP
products is critical to the success of the Company. Traditional intercom
products are marketed to original equipment manufacturers, military
organizations, and industrial customers.
Manufacturing and Assembly
The Company conducts assembly operations at its facility in New York and
through subcontractors. During initial production runs of Andrea Anti-Noise
products, the products are assembled by the Company at its New York facility
from purchased components. As sales of any particular Andrea Anti-Noise
product increase, assembly operations are transferred to a subcontractor in
Asia. Most of the components for the Andrea Anti-Noise products are
available from several sources and are not characteristically in short
supply. However, certain more specialized components for the Andrea
Anti-Noise products, such as microphones, are available from a limited number
of suppliers and subject to long lead times. While the Company has, to date,
been able to obtain sufficient supplies of these more specialized components,
no assurance can be given that it will continue to be able to do so.
Shortages of, or interruptions in, the supply of these more specialized
components could have a material adverse effect on the Company's sales of
Andrea Anti-Noise products.
Traditional intercom products are assembled by the Company at its New
York facility from purchased components. Certain highly specialized
components for the Company's traditional intercom products sold for military
and industrial use have limited sources of supply, the availability of which
can affect particular projects of the Company. The Company does not believe,
however, that its earnings have been, or will be, materially affected if such
components were unavailable.
Competition
The markets into which the Company sells its Andrea Anti-Noise products
and its traditional line of military and industrial products are highly
competitive. Competition in these markets is based on varying combinations
of product features, quality and reliability of performance, price, sales,
marketing and technical support, ease of use, compatibility with evolving
industry standards and other systems and equipment, name recognition, and
development of new products and enhancements. Most of the Company's current
and potential competitors in these markets have significantly greater
financial, marketing, technical, and other resources than the Company.
Consequently, these competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements, or to devote
greater resources to the development, marketing, and sale of their products
than the Company. No assurance can be given that one or more of these
competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology.
In the markets for its traditional products, the Company often competes
with major defense electronics corporations as well as smaller manufacturing
firms which specialize in supplying to specific military initiatives. The
Company's performance in this market is further subject to several factors,
including dependence on government appropriations, the time required for
design and development, the complexity of product design, the rapidity with
which product designs and technology become obsolete, the intense competition
for available business, and the acceptability of manufacturing contracts by
government inspectors.
<PAGE> 11
The Company believes that its ability to compete successfully will depend
upon its capability to develop and maintain advanced technology, develop
proprietary products, attract and retain qualified personnel, obtain patent
or other proprietary protection for its products and technologies, and
manufacture, assemble and successfully market products, either alone or
through third parties.
Employees
The Company employed 93 persons at December 31, 1997, of which 55 were
production workers and technicians, 13 were members of the engineering staff,
and 25 were concerned with administrative and sales duties. None of the
employees are unionized or covered by a collective bargaining agreement. The
Company believes that it generally enjoys good relations with its employees.
- ----------------
"Andrea Anti-Noise", "Andrea QuietWare", and "Technology Enhancing
Communications" are registered trademarks of the Company. "Andrea DSP" is a
trademark of the Company. "NetMeeting", "NetMeeting 2.0", "MS Phone",
"MSVoice", "Windows", "Windows 95" and "Windows NT" are registered trademarks
of Microsoft. "VoiceXpress" and "VoiceCommands" are registered trademarks of
Lerner & Hauspie. "VoicePad" is a registered trademark of Kurzweill Applied
Intelligence. "TeleVox" is a registered trademakr of Voxware.
<PAGE> 12
ITEM 2. PROPERTIES
The Company currently owns and occupies the building located at 11-40
45th Road, Long Island City, New York 11101. The Company leases
approximately one-third of these premises and receives rental income of
$243,000 per annum, subject to annual adjustment. The machinery and
equipment used by the Company are maintained in good operating condition and
are adequate for the business of the Company as presently conducted. In
addition, it is the opinion of management that the Company's property, plant
and equipment are adequately covered by insurance.
The Company intends to sell the building located at 11-40 45th Road,
Long Island City, and relocate to a larger leased facility in Suffolk County
on Long Island, New York (the "New Facility"). The lease expense associated
with the New Facility is anticipated to range between $450,000 to $550,000
per year. The proceeds from the sale of the building is anticipated to range
between $2 million and $2.2 million, net of applicable taxes. The sale of
the building is expected to close during the first quarter of 1998 and the
relocation to the New Facility is anticipated to occur during the second
quarter of 1998. See Notes 5 and 9 to the Consolidated Financial Statements
of the Company for further information concerning property, plant and
equipment.
ITEM 3. LEGAL PROCEEDINGS
In December, 1994, a subpoena duces tecum was issued to the Company by
the United States Department of Defense, Office of the Inspector General,
seeking certain documents pertaining to contracts relating to audio frequency
amplifiers. Documents responding to the subpoena were delivered in January
1995. On August 12, 1997, the Company and claimant reached an agreement to
settle certain claims relating to the contracts for an amount that was not
material to the Company's results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's stock is listed on the American Stock Exchange under the
symbol "AND". The table below sets forth the high and low sales prices for
the Company's Common Stock as reported by the American Stock Exchange. On
March 16, 1997, there were approximately 494 holders of record of the
Company's Common Stock.
QUARTER ENDED HIGH LOW
March 31, 1996 10 3/8 5 1/4
June 30, 1996 10 11/16 6 7/16
September 30, 1996 7 3/8 5
December 31, 1996 7 7/16 5 1/4
March 31, 1997 7 1/2 4 15/16
June 30, 1997 6 7/8 5 1/16
September 30, 1997 34 1/4 5 7/8
December 31, 1997 29 1/8 16 1/8
No dividends were paid in 1997 or 1996. The above prices have been
adjusted to reflect a two-for-one stock split effected in the form of a 100%
stock dividend to stockholders of record on September 10, 1997 and paid on
September 17, 1997.
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data in the following table has been derived from
the Company's audited financial statements for each of the years in the
five-year period ended December 31, 1997.
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Sales $26,429,804 $ 9,244,109 $ 5,440,792 $ 3,278,100 $6,527,972
Cost of Sales 16,077,801 5,913,091 3,190,226 2,394,828 3,903,585
----------- ----------- ----------- ----------- ----------
Gross Profit 10,352,003 3,331,018 2,250,566 883,272 2,624,387
Research and Development 1,106,880 988,483 976,344 1,422,310 720,278
General, Administrative
and Selling Expenses 5,753,130 3,872,919 2,925,460 1,995,434 1,472,270
----------- ----------- ----------- ----------- ----------
Income (Loss) from
Operations 3,491,993 (1,530,384) (1,651,238) (2,534,472) 491,839
Other Income (Expense) 76,864 (13,833) 375,323 234,636 240,454
----------- ----------- ----------- ----------- ----------
Income (Loss) Before
Provision (Benefit)
for Income Taxes 3,568,857 (1,544,217) (1,275,915) (2,299,836) 732,293
Provision (Benefit) for
Income Taxes 154,461 (1,222,000) - - 55,000
----------- ----------- ----------- ----------- ----------
Net Income (Loss) $ 3,414,396 $ (322,217) $(1,275,915) $(2,299,836) $ 677,293
=========== =========== =========== =========== ==========
Basic Earnings Per Share $ .42 $ (.05) $ (.20) $ (.42) $ .27
Diluted Earnings Per Share $ .39 $ (.05) $ (.20) $(.42) $ .20
BALANCE SHEET DATA
Long Term Capital Lease
Obligations $ - $ - $ 5,388 $ 17,044 $ 31,823
Long Term Obligations,
including current
portions $ 38,500 $ 2,196,286 $ 2,038,500 $ 38,500 $ 38,500
Retained Earnings
(Deficit) $ 871,437 $(2,542,959) $(2,220,742) $ (944,827) $ 1,355,009
Total Assets $17,789,184 $10,794,250 $ 6,551,110 $ 5,016,581 $ 3,356,579
</TABLE>
<PAGE> 14
ITEM 7. 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 Active Noise Cancellation ("ANC")
and Andrea Anti-Noise Active Noise Reduction ("ANR") technologies, and to
continue developing, manufacturing and marketing a line of Andrea Anti-Noise
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.
Examples of the applications and interfaces for which Andrea Anti-Noise
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 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 seeking to increase its own direct marketing efforts.
The Company outsources the manufacturing of Andrea Anti-Noise 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 products for the non-military markets, the Company continues to
manufacture its Traditional Products in its own facility. To the extent that
the Company succeeds in developing a new line of products for military use
that incorporate ANC and ANR technology, management anticipates that it will
manufacture these new military products through both outsourcing and
self-manufacturing.
<PAGE> 15
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 year ended
December 31, 1997 and other items set forth in this Report on Form 10K 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:
- -the rate at which the Company's Anti-Noise technology is accepted by the
diverse range of users and applications within the global communications and
informatics marketplace;
- -the ability of the Company to maintain a competitive position for its Andrea
Anti-Noise 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;
- -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
- -in the event that the Company experiences continued significant growth in
demand for Andrea Anti-Noise products, 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
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Sales
Sales for the year ended December 31, 1997 were $26,429,804, an increase
of 186% over sales of $9,244,109 for the year ended December 31, 1996. The
increase primarily reflects increasing market acceptance of Andrea Anti-Noise
products for providing the technology enhanced audio signals required for
voice-driven computer applications, coupled with new product launches that
were particularly strong in the latter half of 1997 due to retail
introduction of several of the Company's products. For the year ended
December 31, 1997, sales from Andrea Anti-Noise products comprised
approximately 85% of total sales, while sales from the Company's traditional
military products comprised approximately 15% of total sales.
Cost of Sales
Cost of sales as a percentage of sales for the year ended December 31,
1997 decreased to 61% from 64% for the year ended December 31, 1996. The
improvement during 1997 principally reflects the efficiencies resulting from
the Company's continuing efforts to globalize its sourcing and manufacturing
activities, as well as maximizing the benefits of shifts in product mix.
Also contributing to the improvement is the higher gross margins realized as
a result of the retail introduction of the Company's products during the
latter half of 1997.
<PAGE> 16
Research and Development
Research and development expenses for the year ended December 31, 1997
increased 12% to $1,106,880 from $988,483 for the year ended December 31,
1996. This increase is primarily related to technological investments that
resulted in 12 new product launches during 1997. Management believes
increases in research and development will continue throughout 1998, with the
expectation of several new product launches in order to continue providing
state-of-the-art communications products for the various voice interface
markets.
General, Administrative and Selling Expenses
General, administrative and selling expenses for the year ended December
31, 1997 increased 49% to $5,753,130 from $3,872,919 for the year ended
December 31, 1996. This increase, primarily attributable to Andrea Anti-Noise
products, reflects increased business development expenses related to
existing and prospective collaborative arrangements with hardware OEMs,
software publishers, distributors and retailers. In addition, the Company
incurred increased promotional, marketing and sales expenses to promote
product awareness and acceptance of the Andrea AntiNoise product line. As a
percentage of sales, however, general, administrative and selling expenses
decreased to 22% for the year ended December 31, 1997 from 42% for the year
ended December 31, 1996. In light of the Company's intention to introduce
and support additional product launches during 1998, the Company expects to
at least maintain and likely increase general, administrative and selling
expenses, in terms of both absolute dollars and relative percentage of sales.
Other Income (Expense)
Other income for the year ended December 31, 1997 was $76,864 compared
to Other expense of $13,833 for the year ended December 31, 1996. This
change is primarily attributable to decreases in interest expense as a result
of conversion rights exercised during 1997, and the lower effective interest
rate on the outstanding convertible debentures during fiscal 1997.
Provision for Income Taxes
The income tax expense of $154,461 for the year ended December 31, 1997
resulted from the effect of a provision for income taxes at the Company's 42%
effective income tax rate, substantially offset by a reduction in the
Company's reserve on previously-generated, fully-reserved deferred income tax
assets. As a part of the normal assessment of the Company's reserves,
management determined that it has become more likely than not that a portion
of the previously-reserved deferred tax assets will be realized and has,
accordingly, reduced the valuation allowance on those previously reserved
deferred tax assets. This determination is based on the Company's
profitability in recent quarters and the impact of the sales performance of
its products. Realization of remaining reserved deferred tax assets at
December 31, 1997, 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. The income tax benefit of $1,222,000 for
the year ended December 31, 1996 represented benefit generated from the 1996
loss as well as a reduction of the valuation allowance on previously reserved
deferred tax assets at December 31, 1996 (see Note 8 to the financial
statements).
Net Income (Loss)
Net income for the year ended December 31, 1997 was $3,414,396, compared
to a net loss of $322,217 for the year ended December 31, 1996. The
improvement principally reflects the factors described above.
<PAGE> 17
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Sales
Sales for the year ended December 31, 1996 were $9,244,109, an increase
of nearly 70% over sales of $5,440,792 for the year ended December 31,1995.
The increase was attributable to a sharp increase in demand for Andrea
Anti-Noiseproducts. This increase was partially offset by an expected
decrease in sales of the Company's traditional military products. Sales of
Andrea Anti-Noise products comprised a majority portion of total sales of the
Company in 1996, and, while no assurance can be given, management anticipates
another increase in sales of these products in 1997. For the year ended
December 31, 1996, sales from the Company's Anti-Noise product line comprised
approximately 68% of total sales while sales from the Company's traditional
military products comprised approximately 42% of total sales.
Cost of Sales
Cost of sales as a percentage of sales for the year ended December 31,
1996 increased to 64% from 59% for the year ended December 31, 1995. The
increase in cost of sales as a percentage of sales for the year ended
December 31, 1996 reflects increased costs associated with initial production
runs in the Company's New York facilities of Andrea Anti-Noise products
introduced during the first six months of 1996.
Research and Development
Research and development expenses for the year ended December 31, 1996
increased 1% to $988,483 from $976,344 for the year ended December 31, 1995.
Management believes that research and development will increase as the
Company further develops and augments it Andrea Anti-Noise technology and
product lines.
General, Administrative and Selling Expenses
General, administrative and selling expenses for the year ended December
31, 1996 increased 32% to $3,872,919 from $2,925,460 for the year ended
December 31, 1995. The increase for the year ended December 31, 1996
reflects the marketing and sales expenses, such as advertising, packaging and
promotional expenses, associated with the Company's marketing, introduction,
and promotion of Andrea Anti-Noise products to OEMs, distributors,
value-added resellers and end users.
Operating loss
Operating loss for the year ended December 31, 1996 decreased 7% to
$1,530,384 from $1,651,238 for the year ended December 31, 1995. This
decline in operating loss reflects the increase in sales for the year ended
December 31, 1996, offset by the 32% increase in general, administrative and
selling expenses associated with increased business development and marketing
expenses.
Other Income Expense
Other expense for the year ended December 31, 1996 was $13,833 versus
Other income of $375,323 for the year ended December 31, 1995. This reversal
resulted from an increase of $282,544 in interest expense associated with the
Company's subordinated convertible debentures and the decrease in interest
income of $101,865 resulting from the Company's average lower cash and cash
equivalents throughout the year ended December 31, 1996, compared to the year
ended December 31, 1995. These lower levels of cash and cash equivalents
reflected the increased use of cash by the Company to secure components and
supplies for the manufacture of Anti-Noise products.
Net loss
Net loss for the year ended December 31, 1996 was $322,217 compared to a
net loss of $1,275,915 for the year ended December 31, 1995. This reduction
in net loss reflects principally the factors described above and the income
tax benefit associated with (a) the current year loss and (b) changes in the
reserves provided against previous income tax benefits.
<PAGE> 18
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 December 31, 1997, the Company had
cash and cash equivalents of $2,059,338 compared with $921,065 at December
31, 1996. The Company expects to realize cash proceeds during the second
quarter of 1998 from the sale of its facility in Long Island City, New York.
See "Item 2. Properties."
Working capital at December 31, 1997 was $11,786,659 compared to
$8,836,074 at December 31, 1996. The increase in working capital reflects an
increase in total current assets of $4,504,568 offset by an increase in total
current liabilities of $1,553,983. The increase in total current assets
principally reflects an increase in cash of $1,138,273, an increase in
accounts receivable of $1,889,984, an increase in inventory of $992,752, an
decrease in deferred income taxes of $312,431 and an increase of $890,970 in
prepaid expenses and other current assets. The increase in current
liabilities principally reflects a $144,383 increase in trade accounts
payable, a $1,193,472 increase in convertible debentures and a $225,742
increase in other current liabilities.
The increase in cash of $1,138,273 reflects $799,829 of net cash used in
operating activities, $308,259 of cash used in investing activities and
$2,246,361 of cash provided by financing activities. The principal operating
activities, excluding non-cash charges, for which cash was used were the
increases in inventory and accounts receivable as a result of the significant
demand for the Company's Andrea Anti-Noise products. The cash used in
investing activities is a result of the maturity of one of the Company's
marketable securities, offset by capital expenditures, primarily comprised of
the ongoing upgrade of manufacturing dies and molds for Andrea Anti-Noise
products, as well as investments in the Company's existing information
systems. The cash provided by financing activities resulted from the
exercise of stock options.
The increase in accounts receivable primarily reflects the significant
increase in sales during 1997. Generally, the Company collects receivables
from sales within three months.
The increase in prepaid expenses and other current assets primarily
includes increases in deferred advertising costs, as well as the recognition
of increased premiums for prepaid property taxes and insurance, increased
fulfillment costs associated with global marketing and sales expansion, and
increases in other service costs related to future periods.
The increase in deferred tax assets represents a further 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 Company will be
continually re-assessing its remaining reserves on deferred income tax assets
as the year progresses.
The increase in trade accounts payable primarily reflects differences in
the timing related to both the payments for and the acquisition of raw
materials for Andrea Anti-Noise products.
Demand for Andrea Anti-Noise products has required the Company to raise
additional working capital to support its production operations. In December
1995, April 1996 and August 1996, the Company raised additional working
capital through the issuance of convertible subordinated debentures. In
addition, the Company entered into a revolving credit agreement in September
1997 that provides maximum borrowings of up to $8 million based on eligible
accounts receivable and inventory, as defined. At December 31, 1997, there
were no borrowings outstanding under this facility.
Notwithstanding growth in sales of Andrea Anti-Noise products during the
year ended December 31, 1997, no assurance can be given that demand will
continue to increase for these products or any of the Company's other
products or, that if such demand does increase, that the Company will be able
to obtain the necessary working capital to increase production and marketing
resources to meet such demand on favorable terms, or at all.
<PAGE> 19
In July 1996, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus on Issue 96-14, "Accounting for the Costs
Associated with Modifying Computer Software for the Year 2000," which
requires that costs associated with modifying computer software for the Year
2000 be expensed as incurred. The Company believes, based upon its internal
reviews and other factors, that future external and internal costs to be
incurred relating to the modification of internal-use software for the Year
2000 will not have a material effect on the Company's results of operations
or financial position.
<PAGE> 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedule listed in Item 14(a)(1) and (2)
are included in this Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 as to directors and executive
officers is incorporated by reference to the information captioned
"Election of Directors" included in the Company's definitive proxy
statement in connection with the meeting of shareholders to be held on June
18, 1998. The information regarding compliance with Section 16 of the
Securities and Exchange Act of 1934 and the Rules promulgated thereunder is
incorporated by reference therein to the Company's definitive proxy
statement in connection with the meeting of shareholders to be held on June
18, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference
to the information captioned "Election of Directors - Executive
Compensation" included in the Company's definitive proxy statement in
connection with the meeting of shareholders to be held on June 18, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference
to the information captioned "Security Ownership" included in the Company's
definitive proxy statement in connection with the meeting of shareholders
to be held on June 18, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In 1996, the Company formed Andrea Military Communications, LLC
("AMC"), a Delaware limited liability company, in which the Company has a
72.7% equity interest. The purpose of AMC is to collaborate with Northrop
Grumman in accordance with the Company's agreement with Northrop Grumman
relating to the qualification for military sales and subsequent marketing
of headsets that incorporate Andrea Anti-Noise technology to military
customers. Among the members of AMC is a corporation owned by Christopher
Dorney, a director of the Company. In exchange for this corporation acting
as a manager of AMC through Mr.Dorney, this corporation was granted a 13.6%
equity interest in AMC. In addition, commencing upon the award of a contract
for the purchase of the headsets from Northrop Grumman to AMC, this
corporation will receive an annual base compensation of $125,000, plus
monetary or other compensation sufficient to provide insurance and other
benefits to Mr. Dorney equivalent to those of the officers of the Company,
plus an annual bonus in a range between 0% and 40% of the base compensation.
Also immediately upon the award of such purchase contract, this corporation
will be awarded warrants to purchase 50,000 shares of Andrea Common Stock at
an exercise price of $10.00 per share, which warrants will vest at an annual
rate of 20% beginning on the first anniversary of the date of the award. No
assurance can be given that the headsets that are the subject of the
agreement with Northrop Grumman will be qualified for purchase by the
military or that a contract for the purchase of the headsets will be awarded
by Northrop Grumman to AMC. See "Part I-Item 1-Business-Collaborative
Arrangements-Northrop Grumman Agreement".
During 1997 the Company paid an aggregate of $194,206 to Digital
Technologies, Inc., a software development company of which Gary A. Jones, a
director of the Company, is the President. Of this amount, approximately 90%
was for software development fees and approximately 10% was for reimbursable
expenses.
<PAGE> 21
Certain other information required by this Item 13 is incorporated by
reference to the information captioned "Certain Relationships and Related
Party Transactions" included in the Company's definitive proxy statement
in connection with the meeting of shareholders to be held on June 18, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The following financial statements of Andrea Electronics Corporation,
the notes thereto, the related reports thereon of independent public
accountants, and financial statement schedules are filed under Item 8 of
this Report.
Page
----
Reports of Independent Public Accountants F-1
Consolidated Balance Sheets at December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity for the
three years ended December 31, 1997 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
(2) INDEX TO FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants on Schedule S-1
Schedule II - Valuation and Qualifying Accounts S-2
(3) EXHIBITS
See (c) below.
(b) REPORTS ON FORM 8-K
On October 21, 1997, the Registrant filed a Current Report on Form 8-K
relating to the Registrant's press release, dated October 21, 1997,
containing financial information of the Registrant with respect to the
quarter ended September 30, 1997.
(c) EXHIBITS
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 of the Registrant's
Form 10-K for the year ended December 31, 1992)
3.2 Certificate of Amendment of the Restated Certificate of
Incorporation of Registrant
3.3 Amended By-Laws of Registrant (incorporated by reference to
Exhibit 3.2 of the Registrant's Form 10-Q for the three months
ended March 31, 1996)
<PAGE> 22
4.1 Securities Purchase Agreement, dated as of December 22, 1995,
relating to the sale of the Registrant's 15% Convertible
Subordinated Debentures due 1997 (with form of Debenture attached
thereto) (incorporated by reference to Exhibit 4.1 of the
Registrant's Form 10-K for the year ended December 31, 1995)
4.2 Registration Rights Agreement, dated as of December 22, 1995,
relating to registration rights granted to the holders of the
Registrant's 15% Convertible Subordinated Debentures due 1997
(incorporated by reference to Exhibit 4.2 of the Registrant's Form
10-K for the year ended December 31, 1995)
4.3 Securities Purchase Agreement, dated as of April 16, 1996,
relating to the sale of the Registrant's 15% Convertible
Subordinated Debentures due October 16, 1997 (with forms of
Debenture and Registration Rights Agreement attached thereto)
(incorporated by reference to Exhibit 4.1 of the Registrant's Form
10-Q for the Six Months ended June 30, 1996)
4.4 Securities Purchase Agreement, dated as of August 7, 1996,
relating to the sale of the Registrant's 10% Convertible
Subordinated Debentures due February 9, 1998 (with forms of
Debenture and Registration Rights Agreement attached thereto)
(incorporated by reference to Exhibit 4.1 of the Registrant's Form
10-Q for the Nine Months ended September 30, 1996)
10.1 1991 Performance Equity Plan, as amended (incorporated by
reference to Exhibit 4 of Registrant's Registration Statement on
Form S-8, No. 333-45421, filed February 2, 1998)
10.2* Procurement Agreement, dated June 16, 1995, by and between
International Business Machines Corporation and the Registrant
(incorporated by reference to Exhibit 10.1 of the Registrant's
Form 10-Q for the Three Months ended June 30, 1995)
10.3* Memorandum of Agreement, dated as of September 14, 1993, by and
between Grumman Aerospace Corporation and the Registrant
(incorporated by reference to Exhibit 10.3 of the Registrant's
Form 10-K for the year ended December 31, 1995)
10.4* License and Technical Support Agreement, dated as of October 3,
1995, by and between BellSouth Products, Inc. and the Registrant
(incorporated by reference to Exhibit 10.4 of the Registrant's
Form 10-K for the year ended December 31, 1995)
10.5* Software License Bundling Agreement, dated as of March 29,
1996, by and between Voxware, Inc., and the Registrant (incorporated
by reference to Exhibit 10.1 of the Registrant's Form 10-Q for the
Six Months ended June 30, 1996)
10.6 Employment Agreement, dated as of January 1, 1998, by and between
John N. Andrea and the Registrant
10.7 Employment Agreement, dated as of January 1, 1998, by and between
Douglas J. Andrea and the Registrant
10.8 Employment Agreement, dated as of January 1, 1998, by and between
Patrick D. Pilch and the Registrant
10.9** Direct Sales and License Agreement, dated as of October 13, 1997,
by and between Lernout & Hauspie Speech Products and the Registrant
10.10** Production Procurement Agreement, dated as of June 11, 1997, by and
between International Business Machines Corporation and the
Registrant
10.11 Revolving Loan and Security Agreement, dated as of September 23,
1997, by and between IBM Credit Corporation and the Registrant
21 Subsidiaries of Registrant
<PAGE> 23
23 Consent of Independent Public Accountants
27 Financial Data Schedule
- ---------------
* Certain portions of this Agreement have been accorded confidential
treatment.
** Confidential treatment has been requested for certain portions of
this Agreement.
(d) Financial Statement Schedules
See Item 14(a)(2).
INDEX TO FINANCIAL STATEMENTS
Page
----
Reports of Independent Public Accountants F-1
Consolidated Balance Sheets at December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity for the
three years ended December 31, 1997 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
<PAGE> 24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Andrea Electronics Corporation:
We have audited the accompanying consolidated balance sheets of Andrea
Electronics Corporation (a New York corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Andrea Electronics
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Melville, New York
January 27, 1998
F-1
<PAGE> 25
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
December 31,
------------------------------------
ASSETS 1997 1996
------ ------ ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,059,338 $ 921,065
Marketable securities 102,717 197,697
Accounts receivable, net of allowance for
doubtful accounts of $52,251 4,568,433 2,678,449
Inventories, net 5,766,927 4,774,175
Deferred income taxes 909,569 1,222,000
Prepaid expenses and other current assets 1,023,661 132,691
--------------- ---------------
Total current assets 14,430,645 9,926,077
PROPERTY, PLANT AND EQUIPMENT, net 1,022,342 868,173
DEFERRED INCOME TAXES 897,046 -
OTHER ASSETS 1,439,151 -
--------------- ---------------
Total assets $ 17,789,184 $ 10,794,250
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capital lease obligations $ - $ 4,685
Trade accounts payable 966,783 822,400
Accrued salaries and wages payable 57,991 62,920
Convertible debentures, net (Note 6) 1,193,472 -
Other current liabilities 425,740 199,998
--------------- ---------------
Total current liabilities 2,643,986 1,090,003
CONVERTIBLE DEBENTURES, net (Note 6) - 2,157,786
OTHER LIABILITIES 38,500 38,500
--------------- ---------------
Total liabilities 2,682,486 3,286,289
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY:
Common stock, $.50 par value; authorized:
10,000,000 shares; issued and
outstanding: 8,706,692 and 7,584,394
shares, respectively 4,353,346 3,792,197
Additional paid-in capital 9,881,915 6,258,723
Retained earnings (accumulated deficit) 871,437 (2,542,959)
--------------- ---------------
Total shareholders' equity 15,106,698 7,507,961
--------------- ---------------
Total liabilities and shareholders' equity $ 17,789,184 $ 10,794,250
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
F-2
<PAGE> 26
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
SALES $ 26,429,804 $ 9,244,109 $ 5,440,792
COST OF SALES 16,077,801 5,913,091 3,190,226
------------- ------------- -------------
Gross profit 10,352,003 3,331,018 2,250,566
RESEARCH AND DEVELOPMENT EXPENSES 1,106,880 988,483 976,344
GENERAL, ADMINISTRATIVE AND SELLING EXPENSES 5,753,130 3,872,919 2,925,460
------------- ------------- -------------
Income (loss) from operations 3,491,993 (1,530,384) (1,651,238)
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 64,873 57,599 159,464
Interest expense (228,029) (293,290) (10,746)
Rent and miscellaneous income 240,020 221,858 226,605
------------- ------------- -------------
76,864 (13,833) 375,323
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAX PROVISION
(BENEFIT) 3,568,857 (1,544,217) (1,275,915)
INCOME TAX PROVISION (BENEFIT) (Note 8) 154,461 (1,222,000) -
------------- -------------- -------------
NET INCOME (LOSS) $ 3,414,396 $ (322,217) $ (1,275,915)
============= ============= =============
PER SHARE INFORMATION (Note 3):
Net Income (Loss) Per Share:
Basic $ .42 $ (.05) $ (.20)
============= ============= =============
Diluted $ .39 $ (.05) $ (.20)
============= ============= =============
Shares used in computing net income (loss) per share:
Basic 8,148,153 7,129,534 6,259,080
============= ============= =============
Diluted 8,862,263 7,129,534 6,259,080
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE> 27
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
-------------------------------------------
<TABLE>
<CAPTION>
Retained
Additional Earnings Total
Shares Common Paid-In (Accumulated Shareholders'
Outstanding Stock Capital Deficit) Equity
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE,
December 31, 1994 6,032,720 $ 3,016,360 $ 2,617,832 $ (944,827) $ 4,689,365
Exercise of stock options,
net of related costs 541,000 270,500 281,330 - 551,830
Net loss - - - (1,275,915) (1,275,915)
--------- ----------- ---------- ------------ ----------
BALANCE,
December 31, 1995 6,573,720 3,286,860 2,899,162 (2,220,742) 3,965,280
Conversion of convertible
debentures 635,674 317,837 3,267,905 - 3,585,742
Exercise of stock options,
net of related costs 375,000 187,500 91,656 - 279,156
Net loss - - - (322,217) (322,217)
--------- ----------- ---------- ------------ ----------
BALANCE,
December 31, 1996 7,584,394 3,792,197 6,258,723 (2,542,959) 7,507,961
Conversion of convertible
debentures 189,548 94,774 1,108,521 - 1,203,295
Exercise of stock options,
net of related costs 932,750 466,375 2,514,671 - 2,981,046
Net income - - - 3,414,396 3,414,396
--------- ------------- ---------- ------------- ---------
BALANCE,
December 31, 1997 8,706,692 $ 4,353,346 $ 9,881,915 $ 871,437 $15,106,698
========= ============ =========== ============= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 28
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,414,396 $ (322,217) $ (1,275,915)
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Non-cash interest expense on
convertible debentures 203,204 162,543 -
Depreciation and amortization 322,499 353,308 112,380
Barter transaction (750,000) - -
Deferred income taxes 154,461 (1,222,000) -
(Increase) decrease in:
Accounts receivable, net (1,889,984) (1,632,527) (476,417)
Inventories, net (1,492,752) (3,651,182) (855,090)
Prepaid expenses and other current assets (714,399) 57,954 (66,275)
Other assets (439,151) - -
Increase in:
Trade accounts payable 144,383 567,757 112,196
Other current liabilities 247,514 14,862 161,197
--------------- ------------- --------------
Net cash used in operating activities (799,829) (5,671,502) (2,287,924)
--------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities - (98,474) -
Proceeds from sale of marketable securities 100,000 - -
Purchases of property, plant and equipment (408,259) (393,998) (161,341)
--------------- ------------- --------------
Net cash used in investing activities (308,259) (492,472) (161,341)
--------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligations (4,685) (39,946) (14,779)
Net proceeds from convertible debentures
(Note 6) - 3,445,000 2,000,000
Issuance of common stock upon exercise of
stock options, net of related costs 2,251,046 279,156 551,830
--------------- ------------- --------------
Net cash provided by financing activities 2,246,361 3,684,210 2,537,051
--------------- ------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,138,273 (2,479,764 87,786
CASH AND CASH EQUIVALENTS, beginning of year 921,065 3,400,829 3,313,043
--------------- ------------- --------------
CASH AND CASH EQUIVALENTS, end of year $ 2,059,338 $ 921,065 $ 3,400,829
=============== ============= ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Conversion of convertible debentures and
related accrued interest into common stock
(Note 6) $ 1,203,295 $ 3,585,742 $ -
=============== ============= ==============
Cash paid for:
Interest $ - $ - $ 10,746
=============== ============= ==============
Income taxes $ 5,200 $ 3,145 $ 1,400
=============== ============= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 29
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1997
-----------------
1. ORGANIZATION AND BUSINESS:
-------------------------
Andrea Electronics Corporation (together with its subsidiaries, the "Company")
was founded and incorporated in the state of New York in 1934 by Frank A. D.
Andrea, an electrical engineer, inventor and innovator in the development of
radio and television products in the United States. The Company's primary
focus was the consumer radio and television market and, with the advent of the
Second World War, the Company expanded its market to include applications for
the U.S. military. Since then, the Company continues to do business in
electronic audio systems, intercommunication systems and related equipment for
airborne, mobile and naval applications to military and industrial companies.
In 1991, the Company extended its product development for active noise
reduction ("ANR") into the field of active noise cancellation ("ANC") and
formed an active noise cancellation division for the purpose of engaging in
the design, development, production and marketing of active noise cancellation
and digital audio systems. In 1995, the Company formed three wholly-owned
subsidiaries, ANC Manufacturing, Inc., Andrea Marketing, Inc. and Andrea
Direct Marketing, Inc., each for the purpose of expanding the Company's
efforts in the active noise cancellation/reduction markets. In 1996, the
Company formed Andrea Military Communications, LLC for purposes of expanding
the Company's efforts in the military communications market.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Principles of Consolidation
- ---------------------------
The financial statements include the accounts of the Company and its
subsidiaries. All intercompany balances and transactions have been eliminated
in consolidation.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include cash and highly liquid investments with
original maturities of three months or less.
Marketable Securities
- ---------------------
The Company accounts for investments according to the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Accordingly, marketable securities
used as part of the Company's asset management that may be sold in response to
changes in interest rates, prepayments, and other factors have been classified
as available-for-sale. Such securities are reported at fair value, with
unrealized gains and losses excluded from earnings and reported in a separate
component of stockholders' equity (on an after-tax basis). Gains and losses on
the disposition of securities are recognized on the specific identification
method in the period in which they occur. Sales of securities were $100,000 in
1997. There were no sales of securities in 1996 and 1995. At December 31, 1997
and 1996, the carrying values of the Company's marketable securities
approximate fair value. The securities mature as follows:
1996 1997
---- ----
Within 1 year $ 100,000 $ -
After 5 years through 10 years 97,697 102,717
----------- -----------
$ 197,697 $ 102,717
=========== ===========
F-6
<PAGE> 30
Inventories
- -----------
Inventories are stated at the lower of cost (on a first-in, first-out) or
market basis.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment is stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are provided using
straight-line and accelerated methods over the estimated useful-lives of the
assets which are as follows:
Building 25 years
Building improvements 10 - 32 years
Machinery and equipment 3 - 7 years
Expenditures for maintenance and repairs which do not materially prolong the
normal useful life of an asset are charged to operations as incurred.
Additions and improvements which substantially extend the useful lives of the
assets are capitalized. Upon sale or other disposition of assets, the cost and
related accumulated depreciation and amortization are removed from the
accounts and the resulting gain or loss, if any, is reflected in the statement
of operations.
Intangible Assets
- -----------------
Patents and trademarks associated with the Company's proprietary technology
are carried at cost less accumulated amortization which is calculated on a
straight-line basis over the estimated useful lives of the assets, not to
exceed 17 years. The recoverability of carrying values of intangible assets is
evaluated on a recurring basis. Patents and trademarks approximated $415,000
and $0 at December 31, 1997 and 1996, respectively, and are included in other
assets on the accompanying consolidated balance sheets.
Revenue Recognition
- -------------------
Revenue is recognized upon shipment and acceptance of goods.
Barter Transaction
- ------------------
The Company records barter transactions at the estimated fair market value of
the services received. Barter revenue from a barter transaction approximated
$1,250,000 during 1997. The value received in this transaction has been
recorded as a deferred charge, $250,000 included in prepaid and other current
assets and $1,000,000 included in other assets. This charge will be amortized
over the lesser of the period of benefit or the program period, not to exceed
five years. The Company did not engage in any barter transactions during 1996
or 1995.
Concentration of Credit Risk
- ----------------------------
The Company is a manufacturer of audio communications equipment for several
industries. During 1997, the Company primarily generated sales from its noise
canceling and active noise canceling products as well as through sales of its
military products to the federal government. Sales of noise canceling and
active noise canceling products to one customer and accounted
for approximately 51% and 45% of total accounts receivable at December 31,
1997 and 1996, respectively, and approximately 56%, 46% and 3% of the
total sales for 1997, 1996 and 1995, respectively. Sales of its military
products aggregated approximately 10% and 19% of the total accounts
receivable at December 31, 1997 and 1996, respectively, and approximately
15%, 42% and 45% of the total sales for the three years ended December 31,
1997, 1996 and 1995, respectively.
F-7
<PAGE> 31
Income Taxes
- ------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". This pronouncement established financial
accounting and reporting standards for the effects of income taxes that result
from the Company's activities during the current and preceding years. It
requires an asset and liability approach for financial accounting and
reporting for income taxes.
The provision for income taxes is based upon income after adjustment for those
permanent items which are not considered in the determination of taxable
income. Deferred taxes result when the Company recognizes revenue or expenses
for income tax purposes in a different year than for financial reporting
purposes.
Accounting for Long-Lived Assets
- --------------------------------
The Company accounts for long-lived assets according to the provisions of SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", which requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset in question may not be recoverable. The
adoption of SFAS No. 121, in 1996, did not have a material effect on the
Company's results of operations, cash flows or financial position.
Stock-Based Compensation
- ------------------------
In 1996, the Company adopted the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), by continuing to apply the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," while providing the required pro forma
disclosures as if the fair value method had been applied (see Note 11).
Research and Development
- ------------------------
The Company expenses all research and development costs as they are incurred.
Advertising Expenses
- --------------------
The Company charges all media costs of newspaper and magazine advertisements
to expense when advertisements are run. Prepaid advertising at December 31,
1997 and 1996, which represents costs for media services purchased but not yet
run, is included in prepaid expenses and other current assets in the
accompanying consolidated balance sheets.
Fair Value of Financial Instruments
- -----------------------------------
The Company calculates the fair value of financial instruments and includes
this additional information in the notes to financial statements when the fair
value is different than book value of those financial instruments. When the
fair value approximates book value, no additional disclosure is made. The
Company uses quoted market prices whenever available to calculate these fair
values. When quoted market prices are not available, the Company uses standard
pricing models for various types of financial instruments which take into
account the present value of estimated future cash flows. At December 31, 1997
and 1996, the carrying value of all financial instruments approximated fair
value.
F-8
<PAGE> 32
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.
Reclassification
- ----------------
Certain prior year amounts have been reclassified to conform with the current
year presentation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. NET INCOME (LOSS) PER SHARE:
---------------------------
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share". Basic net income (loss) per common share ("Basic EPS") is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding. Diluted net income (loss) per common share ("Diluted EPS") is
computed by dividing net income (loss) 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 twelve months ended December 31,
1997. No information is presented for 1996 or 1995 as those
calculations would present anti-dilutive results:
Net Net Income
Income Shares Per Share
------ ------ ----------
Basic EPS
- ---------
Net income $ 3,414,396 8,148,153 $ .42
Effect of dilutive
employee stock options - 714,110 (.03)
-------------- ----------- -------
Diluted EPS
- -----------
Net income $ 3,414,396 8,862,263 $ .39
============== =========== =======
Diluted EPS for 1996 and 1995 is the same as Basic EPS for those years, as the
inclusion of the impact of stock options, warrants and convertible securities
then outstanding would be anti-dilutive.
F-9
<PAGE> 33
4. INVENTORIES, NET:
----------------
Inventories, net consists of the following:
December 31,
----------------------------
1997 1996
----------- -----------
Raw materials $2,438,290 $2,048,253
Work-in-process 276,745 120,610
Finished goods 3,332,403 2,870,905
----------- -----------
6,047,438 5,039,768
Less: reserve for
obsolescence 280,511 265,593
----------- -----------
$5,766,927 $4,774,175
=========== ===========
5. PROPERTY, PLANT AND EQUIPMENT, NET:
----------------------------------
Property, plant and equipment, net consists of the following:
December 31,
----------------------------
1997 1996
----------- ----------
Land $ 109,000 $ 109,000
Building 453,000 453,000
Building improvements 372,928 387,978
Machinery and equipment 1,406,389 984,746
---------- ----------
2,341,317 1,934,724
Less: accumulated depreciation 1,318,975 1,066,551
---------- ----------
$1,024,008 $ 868,173
========== ==========
6. CONVERTIBLE DEBENTURES, NET:
---------------------------
Convertible debentures, net, consists of the following:
December 31,
----------------------------
1997 1996
----------- -----------
Series B Debentures (a) $ - $ 612,276
Series C Debentures (b) 1,193,472 1,545,510
----------- -----------
$ 1,193,472 $ 2,157,786
=========== ===========
(a) On April 16, 1996, the Company issued $2,198,000 of 15% Convertible
Subordinated Debentures (the "Series B Debentures") due on October 16,
1997. The bonds and the related accrued interest were convertible into
shares of the Company's common stock at a price of the lesser of (i)
$14.438 per share (the maximum conversion price) and (ii) the closing
price, which is defined as the last reported bid price for a given day on
the exchange the Company's common stock is listed. In no event was the
conversion price to be less than $6.563 per share (the minimum conversion
price). During 1996, $1,550,000 of the Series B Debentures, together with
related accrued interest, were converted into the Company's common stock
and during 1997, the remaining $648,000 of the Series B Debentures,
together with related accrued interest, were converted into the Company's
common stock.
F-10
<PAGE> 34
(b) On August 7, 1996, the Company issued $1,687,500 of 10% Convertible
Subordinated Debentures (the "Series C Debentures") due on February 9,
1998. The bonds and the related accrued interest are convertible into
shares of the Company's common stock at a price of the lesser of (i)
$12.075 per share (the maximum conversion price) and (ii) the closing
price, which is defined as the last reported bid price for a given day on
the exchange the Company's common stock is listed. In no event will the
conversion price be less than $5.75 per share (the minimum conversion
price). Conversion of these Series C Debentures into the Company's common
stock can, at the holder's option, be effected in an amount of up to
$843,750 beginning 135 days following the date of original issuance and up
to the entire original principal amount beginning 180 days following the
date of original issuance through maturity. These Series C Debentures are
subordinated in right of payment to all future senior indebtedness, as
incurred by the Company. During 1997, $437,500 of the Series C Debentures,
together with the related accrued interest, were converted into the
Company's common stock. At December 31, 1997, the remaining obligation
from converted debentures is recorded net of an unaccreted discount of
$56,528.
7. RETIREMENT PLAN:
---------------
The Company has a defined contribution profit sharing plan which is qualified
under Section 401(k) of the Internal Revenue Code and is available to
substantially all of its employees. The Company's contributions, which serve
to match a portion of participant contributions, were $161,203, $110,831 and
$91,225 for 1997, 1996 and 1995, respectively.
8. TAXES:
-----
Income tax provision (benefit) consists of the following:
Year Ended December 31,
----------------------------------------
1997 1996 1995
---------- ----------- --------
Federal:
Current $ - $ - $ -
Deferred 1,213,411 (525,000) -
State and Local:
Current - - -
Deferred 285,509 (144,000) -
Adjustment to valuation
allowance related to opening
net deferred tax assets (1,344,459) (553,000) -
---------- ----------- ---------
$ 154,461 $(1,222,000) $ -
========== =========== =========
A reconciliation between the provision (benefit) for income taxes and the
amount computed by applying the statutory Federal income tax rate to income
(loss) before income taxes is as follows:
Year Ended December 31,
------------------------------------------
1997 1996 1995
---------- ------------- -----------
Tax provision (benefit) at
statutory rate $1,213,411 $ (525,000) $(434,000)
Loss without tax benefit - - 434,000
State and local taxes 285,509 (144,000) -
Change in valuation allowance
for opening net deferred
tax assets (1,344,459) (553,000) -
---------- ----------- ---------
$ 154,461 $(1,222,000) $ -
========== =========== =========
F-11
<PAGE> 35
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset, net, at December 31, 1997 and 1996, are as
follows:
1997 1996
---- ----
Allowance for doubtful accounts $ 22,000 $ 22,000
Reserve for obsolescence 118,000 112,000
NOL carryforward 2,147,000 3,000,000
--------------- ---------------
2,287,000 3,134,000
Less: valuation allowance (480,385) (1,912,000)
--------------- ---------------
Deferred tax asset, net $ 1,806,615 $ 1,222,000
=============== ===============
At December 31, 1997, the Company had net operating loss and credit
carryforwards of approximately $4,400,000 expiring in varying amounts
beginning in 2006 through 2010. In 1997 and 1996, management of the Company
determined that, more likely than not, a portion of its previously-reserved
deferred tax assets would be realized and, accordingly, reduced the related
valuation allowance. The reduction in the valuation allowance is included in
the income tax provision (benefit) in the accompanying consolidated statement
of operations for 1997 and 1996, as well as in additional paid-in capital at
December 31, 1997, for the portion of those deferred tax assets ($730,000)
which are related to tax benefits associated with the exercise of stock
options. The determination that the net deferred tax asset of $1,806,615 at
December 31, 1997 is realizable is based on the Company's profitability during
1997, and the continued positive impact of the sales performance of its
products. The remaining fully-reserved deferred tax assets, all of which are
related to tax benefits associated with the exercise of stock options, will
not result in a tax benefit in the consolidated statements of operations in
future periods but, rather, will result in further increases to additional
paid in capital, if and when realized.
9. PROPERTY LEASE:
--------------
Effective January 30, 1996, the Company, as lessor, amended a tenant's lease
for the rental of approximately one-third of its building. The lease, expiring
on May 31, 2001, requires annual rental payments of approximately $240,000.
The agreement in effect for 1995 and 1994 required annual rentals of
approximately $184,800. The tenant pays one-third of increases in real estate
taxes over the base year and pays its entire proportionate share of operating
expenses.
10. COMMITMENTS AND CONTINGENCIES:
-----------------------------
Legal Proceedings
- -----------------
In December 1994, a subpoena was issued to the Company by the United States
Department of Defense, Office of the Inspector General, seeking certain
documents pertaining to contracts relating to audio frequency amplifiers. On
August 12, 1997, the Company and claimant reached an agreement to settle
certain claims relating to the contracts for an amount that was not material
to the Company's results of operations.
Letters of Credit
- -----------------
Letters of credit are issued by the Company during the ordinary course of
business through a major domestic bank as required by certain vendor
contracts. As of December 31, 1997, the Company had outstanding letters of
credit of approximately $900,000, which are fully collateralized by cash held
with the same bank.
F-12
<PAGE> 36
Line of Credit
- --------------
On September 30, 1997, the Company entered into an $8,000,000 credit facility
(the "Agreement") with a financial institution consisting of a revolving loan
based on eligible accounts receivable and inventory, as defined, with an
interest rate of the prime rate + .75% on any amounts outstanding. The
Agreement matures on September 23, 1998 and 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. At December 31, 1997, there were no outstanding
borrowings under the Agreement.
11. STOCK PLANS:
-----------
Options
- -------
On December 31, 1991, the Board of Directors of the Company adopted the 1991
Performance Equity Plan ("1991 Plan"), which was approved by shareholders. The
1991 Plan authorizes the granting of awards, the exercise of which would allow
up to an aggregate of 1,000,000 shares of the Company's common stock to be
acquired by the holders of those awards. The awards can take the form of stock
options, stock appreciation rights, restricted stock, deferred stock, stock
reload options or other stock-based awards. Awards may be granted to key
employees, officers, directors and consultants. On September 12, 1994, the
Board of Directors of the Company approved an increase of the number of shares
available for grant under the 1991 Plan to 1,500,000 shares, which
subsequently was approved by the shareholders of the Company. Stock options
granted to employees and directors under the 1991 Plan were granted for terms
of up to 10 years at an exercise price equal to the market value at the date
of grant and are exercisable in whole or in part at stated times from the date
of grant up to four years from the date of grant. At December 31, 1997,
625,500 stock options granted to employees and directors were exercisable.
The Company accounts for equity-based awards granted to employees and
directors under APB Opinion No. 25, under which no compensation cost has been
recognized for stock options granted at market value (Note 2). Had
compensation cost for these stock options been determined consistent with SFAS
No. 123, the Company's net income (loss) and net income (loss) per share would
have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss): As Reported $ 3,414,396 $ (322,217) $ (1,275,915)
Pro Forma 1,526,874 (1,093,868) (1,569,716)
Basic net income (loss) per share: As Reported $.42 $(.05) $(.20)
Pro Forma .19 (.16) (.25)
Diluted net income (loss) per share: As Reported $.39 $(.05) $(.20)
Pro Forma .17 (.16) (.25)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995, and additional awards in future years are anticipated.
F-13
<PAGE> 37
Option activity in the 1991 Plan during 1997, 1996 and 1995 is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of period 2,200,250 $3.41 2,130,000 $4.12 2,466,000 $2.81
Granted 720,000 6.97 445,250 5.51 275,000 3.94
Exercised (932,750) 3.21 (375,000) .75 (541,000) 1.02
Canceled (162,750) .68 - - (70,000) .68
--------- --------- ---------
Outstanding at end
of period 1,824,750 5.57 2,200,250 3.41 2,130,000 4.12
========= ========= =========
Exercisable at end
of year 625,500 4.68 1,442,000 1.83 1,527,750 .82
========= ========= =========
Weighted average
fair value of
options granted $5.38 $4.07 $6.62
===== ===== =====
</TABLE>
The fair value of the stock options granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions:
1997 1996
---- ----
Expected life (years) 7.5 7.5
Risk-free interest rates 6.87% 6.90%
Volatility 74% 69%
Dividend yield 0% 0%
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- -------------------------
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
at Remaining Exercise at
Exercise
Range of Exercise Prices 12/31/97 Contractual Life Price 12/31/97 Price
------------------------ ----------- ---------------- -------- -----------
- ---------
<S> <C> <C> <C> <C> <C>
$ 0.68 to $ 1.02 349,500 4.49 .68 224,500 .68
1.03 to 3.48 - - - - -
3.49 to 5.24 41,500 8.58 5.00 4,750 5.00
5.25 to 7.88 1,188,750 7.93 5.67 351,250 5.67
7.89 to 11.84 145,000 7.33 8.95 45,000 8.95
11.85 to 16.75 100,000 9.66 16.75 - -
--------- ---- ----- ---------- -------
.68 to 16.75 1,824,750 6.98 5.57 625,500 4.68
========= ==== ===== ========== =======
</TABLE>
F-14
<PAGE> 38
Warrants
- --------
In connection with an overseas equity offering in 1994, the Company issued 5
year warrants to purchase 47,500 shares of common stock at prices of $4.92 to
$5.49 per share. During 1997, 5,000 of these warrants were exercised into an
equivalent number of common shares. During 1996, 50% of the original number of
warrants were converted into an equal number of options at an equivalent
value. As of December 31, 1997, all of these 23,750 options are exercisable,
and will expire on July 30, 2006. As of December 31, 1997, 18,750 of the
warrants are exercisable and will expire on June 15, 1999.
F-15
<PAGE> 39
INDEX TO FINANCIAL STATEMENT SCHEDULE
-------------------------------------
Report of Independent Public Accountants on Schedule S-1
Schedule II - Valuation and Qualifying Accounts S-2
<PAGE> 40
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
----------------------------------------------------
To Andrea Electronics Corporation:
We have audited in accordance with generally accepted auditing standards, the
financial statements of Andrea Electronics Corporation included in this filing
and have issued our report thereon dated January 27, 1998. Our
audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of valuation and qualifying accounts
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Melville, New York
January 27, 1998
S-1
<PAGE> 41
ANDREA ELECTRONICS CORPORATION
------------------------------
SCHEDULE II
-----------
VALUATION AND QUALIFYING ACCOUNTS
---------------------------------
<TABLE>
<CAPTION>
Charged to Charged to
Balance at Costs and Other Balance at
1997 January 1 Expenses Accounts Deductions December 31
---- --------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts $ 52,521 $ - $ - $ - $ 52,521
========= ========== ========= ======== ==========
1996
----
Allowance for doubtful
accounts $ 32,183 $ 51,483 $ - $ 31,145 $ 52,521
========= ========== ========= ======== ==========
1995
----
Allowance for doubtful
accounts $ 69,771 $ 30,000 $ - $ 67,588 $ 32,183
========= ========== ========= ======== ==========
</TABLE>
S-2
<PAGE> 42
SIGNATURES
In accordance with the requirements of the Section 13 and 15(d) of the
Exchange Act, the Registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ANDREA ELECTRONICS CORPORATION
By: /s/ Frank A.D. Andrea, Jr.
------------------------------------
Date: March 31, 1998 Frank A.D. Andrea, Jr.
Chairman of the Board
and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capabilities
and on the dates indicated.
/s/ Frank A.D. Andrea, Jr. Chairman of the Board March 31, 1998
- ------------------------- and Chief Executive Officer
Frank A.D. Andrea, Jr.
/s/ Patrick D. Pilch Executive Vice President March 31, 1998
- ------------------------- and Chief Financial Officer
Patrick D. Pilch
/s/ John N. Andrea Co-President March 31, 1998
- -------------------------
John N. Andrea
/s/ Douglas J. Andrea Co-President March 31, 1998
- -------------------------
Douglas J. Andrea
/s/ Richard A. Maue Vice President, March 31, 1998
- ------------------------- Controller
Richard A. Maue and Secretary
/s/ Christopher Dorney Director March 31, 1998
- -------------------------
Christopher Dorney
/s/ Gary A. Jones Director March 31, 1998
- -------------------------
Gary A. Jones
/s/ Scott Koondel Director March 31, 1998
- -------------------------
Scott Koondel
/s/ Paul M. Morris Director March 31, 1998
- -------------------------
Paul M. Morris
<PAGE> 43
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 of the Registrant's
Form 10-K for the year ended December 31, 1992)
3.2 Certificate of Amendment of the Restated Certificate of
Incorporation of Registrant
3.3 Amended By-Laws of Registrant (incorporated by reference to
Exhibit 3.2 of the Registrant's Form 10-Q for the three months
ended March 31, 1996)
4.1 Securities Purchase Agreement, dated as of December 22, 1995,
relating to the sale of the Registrant's 15% Convertible
Subordinated Debentures due 1997 (with form of Debenture attached
thereto) (incorporated by reference to Exhibit 4.1 of the
Registrant's Form 10-K for the year ended December 31, 1995)
4.2 Registration Rights Agreement, dated as of December 22, 1995,
relating to registration rights granted to the holders of the
Registrant's 15% Convertible Subordinated Debentures due 1997
(incorporated by reference to Exhibit 4.2 of the Registrant's Form
10-K for the year ended December 31, 1995)
4.3 Securities Purchase Agreement, dated as of April 16, 1996,
relating to the sale of the Registrant's 15% Convertible
Subordinated Debentures due October 16, 1997 (with forms of
Debenture and Registration Rights Agreement attached thereto)
(incorporated by reference to Exhibit 4.1 of the Registrant's Form
10-Q for the Six Months ended June 30, 1996)
4.4 Securities Purchase Agreement, dated as of August 7, 1996,
relating to the sale of the Registrant's 10% Convertible
Subordinated Debentures due February 9, 1998 (with forms of
Debenture and Registration Rights Agreement attached thereto)
(incorporated by reference to Exhibit 4.1 of the Registrant's Form
10-Q for the Nine Months ended September 30, 1996)
10.1 1991 Performance Equity Plan, as amended (incorporated by
reference to Exhibit 4 of Registrant's Registration Statement on
Form S-8, No. 333-45421, filed February 2, 1998)
10.2* Procurement Agreement, dated June 16, 1995, by and between
International Business Machines Corporation and the Registrant
(incorporated by reference to Exhibit 10.1 of the Registrant's
Form 10-Q for the Three Months ended June 30, 1995)
10.3* Memorandum of Agreement, dated as of September 14, 1993, by and
between Grumman Aerospace Corporation and the Registrant
(incorporated by reference to Exhibit 10.3 of the Registrant's
Form 10-K for the year ended December 31, 1995)
10.4* License and Technical Support Agreement, dated as of October 3,
1995, by and between BellSouth Products, Inc. and the Registrant
(incorporated by reference to Exhibit 10.4 of the Registrant's
Form 10-K for the year ended December 31, 1995)
10.5* Software License Bundling Agreement, dated as of March 29,
1996, by and between Voxware, Inc., and the Registrant (incorporated
by reference to Exhibit 10.1 of the Registrant's Form 10-Q for the
Six Months ended June 30, 1996)
10.6 Employment Agreement, dated as of January 1, 1998, by and between
John N. Andrea and the Registrant
10.7 Employment Agreement, dated as of January 1, 1998, by and between
Douglas J. Andrea and the Registrant
<PAGE> 44
10.8 Employment Agreement, dated as of January 1, 1998, by and between
Patrick D. Pilch and the Registrant
10.9** Direct Sales and License Agreement, dated as of October 13, 1997,
by and between Lernout & Hauspie Speech Products and the Registrant
10.10** Production Procurement Agreement, dated as of June 11, 1997, by and
between International Business Machines Corporation and the
Registrant
10.11 Revolving Loan and Security Agreement, dated as of September 23, 1997,
by and between IBM Credit Corporation and the Registrant
21 Subsidiaries of Registrant
23 Independent Auditors' Consent
27 Financial Data Schedule
- ---------------
* Certain portions of this Agreement have been accorded confidential
treatment.
** Confidential treatment has been requested for certain portions of
this Agreement.
EXHIBT 3.2
CERTIFICATE OF AMENDMENT
OF THE
RESTATED CERTIFICATE OF INCORPORATION
OF
ANDREA ELECTRONICS CORPORATION
UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW
OF THE STATE OF NEW YORK
WE, THE UNDERSIGNED, Douglas J. Andrea and Richard A. Maue, being the
Co-President and the Secretary, respectively, of Andrea Electronics
Corporation, do hereby certify and set forth:
(1) The name of the corporation is Andrea Electronics Corporation
(hereinafter, the "Corporation").
(2) The Certificate of Incorporation of the Corporation was filed with
the Department of State on March 15, 1934, under the name "F. A. D. Andrea,
Inc.", and was restated and amended in that certain Restated Certificate of
Incorporation filed with the Department of State on May 27, 1992, under the
Corporation's current name.
(3) Article Third of the Restated Certificate of Incorporation of the
Corporation is hereby amended and restated for the purpose of increasing the
number of authorized shares of the Corporation's common stock, par value $.50
per share, from 10,000,000 shares to 15,000,000 shares, and the text of said
Article Third is hereby restated and amended to read as set forth below in
full:
"THIRD: The aggregate number of shares which the Corporation
shall have the authority to issue is 15,000,000 shares, each with a
par value of fifty cents ($.50) per share."
(4) This Amendment to the Restated Certificate of Incorporation of the
Corporation was authorized by a resolution of the Board of Directors of the
Corporation duly adopted on April 1, 1997 and by a resolution of the
shareholders of the Corporation duly adopted on June 19, 1997.
IN WITNESS WHEREOF, the undersigned have executed and signed this
Certificate on the 19th day of August, 1997.
ANDREA ELECTRONICS CORPORATION
/s/ Douglas J. Andrea
--------------------------------
Douglas J. Andrea, Co-President
/s/ Richard A. Maue
--------------------------------
Richard A. Maue, Secretary
ANDREA ELECTRONICS CORPORATION
EMPLOYMENT AGREEMENT
This AGREEMENT is made effective as of January 1, 1998 by and between
Andrea Electronics Corporation (the "Company"), a New York corporation and
John N. Andrea (the "Executive").
WHEREAS, the Company wishes to assure itself of the services of the
Executive for the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the Company
on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. DUTIES AND RESPONSIBILITIES
---------------------------
The Executive shall serve as Co-President of the Company, and shall have
such commensurate responsibilities, duties and authority as may from time to
time be assigned to the Executive by the Board of Directors of the Company
(the "Board"). The Executive shall devote substantially all his time, energy
and skill during reasonable business hours to the service of the Company.
The Executive's office shall be located at the Company's headquarters, which
shall be located at 11-40 45/th/ Road, Long Island City, New York.
2. TERM OF AGREEMENT
-----------------
The Company shall employ the Executive and the Executive shall serve as
a full-time employee of the Company for a term of three (3) years from the
date hereof (the "Employment Period"). The Employment Period and this
Agreement shall be automatically extended for an additional one (1) year term
following the expiration of each Employment Period unless either the Company
or the Employee notifies the other in writing at least thirty (30) days prior
to such expiration that the Employment Period and this Agreement shall not be
so extended. Further, if employment is terminated for any reason other than
death, such termination will not result in the expiration of the term of this
Agreement.
3. COMPENSATION DURING TERM OF AGREEMENT
-------------------------------------
(a) Base Salary
-----------
The Company shall pay the Executive a salary of not less than
$200,000 (the "Base Salary"). Base Salary shall include any amounts of
compensation deferred by the Executive under any employee benefit plan
maintained by the Company. Such Base Salary shall be payable weekly. The
Executive's Base Salary shall be reviewed annually. Such review shall be
conducted by a Compensation Committee designated by the Board, and the Board
shall increase the Executive's Base Salary by a Cost of Living Allowance
("COLA") percentage and a 7% merit increase based on performance as
determined by the Board. The increased Base Salary shall become the "Base
Salary" for purposes of this Agreement. In addition to the Base Salary
provided in this Section 3(a), the Company shall also provide the Executive,
at no cost to the Executive, with all such other benefits as are provided
uniformly to permanent full-time employees of the Company.
(b) Short-Term Incentive Compensation Program
-----------------------------------------
The Executive shall participate in the Company's Short-Term
Incentive Compensation Program. Annual cash awards ("Short-Term Awards")
under this program will be based on the achievement of performance goals,
both corporate (80%) and individual (20%), expressed as a percentage of the
Executive's Base Salary adopted on or after the date of this Agreement.
Performance measures will include sales from new sources and operating
income. Performance goals, measures and annual awards will be determined by
the Compensation Committee and approved by the Board. The Company will pay
the Short-Term Award to the Executive within 60 days following the last day
of the Company's fiscal year.
(c) Long-Term Incentive Compensation Program
----------------------------------------
In addition to the Base Salary and Short-Term Award, the Executive
shall be entitled to participate, during the Employment Period, in the Long-
Term Incentive Compensation Program. Long-term cash or equity-based awards
("Long-Term Awards") may include (i) stock options, (ii) stock appreciation
rights, (iii) restricted stock, (iv) deferred stock, (v) stock reload options
and/or (vi) other stock-based awards.
(d) The Company will provide the Executive with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which the
Executive was participating or otherwise deriving benefit from immediately
prior to the beginning of the term of this Agreement, and the Company will
not, without the Executive's prior written consent, make any changes in such
plans, arrangements or perquisites which would adversely affect the
Executive's rights or benefits thereunder. Without limiting the generality
of the foregoing provision of this Section 3(d), the Executive will be
entitled to participate in or receive benefits under any employee benefit
plans including, but not limited to, retirement plans, supplemental
retirement plans, pension plans, profit-sharing plans, health-and-accident
plans, medical coverage or any other employee benefit plan or arrangement
made available by the Company in the future to its senior executives and key
management employees, subject to and on a basis consistent with the terms,
conditions and overall administration of such plans and arrangements.
(e) In addition to the Base Salary provided for by Section 3(a) and
other compensation provided for by Sections 3(b), (c) and (d) hereof, the
Company shall pay or reimburse the Executive for all reasonable travel and
other reasonable expenses incurred by the Executive performing his
obligations under this Agreement and may provide such additional compensation
in such form and such amounts as the Board may from time to time determine.
4. TERMINATION OF EMPLOYMENT
-------------------------
(a) Death or Disability:
-------------------
This Agreement shall terminate automatically upon the Executive's
death. The Company may terminate this Agreement, after having established
the Executive's Disability (pursuant to the definition of "Disability" set
forth below), by giving to the Executive written notice of its intention to
terminate the Executive's employment. In such a case, this Agreement (but
not the Executive's employment with the Company) shall terminate effective on
the 90th day after receipt of such notice (the "Disability Effective Date"),
provided that, within 90 days after such receipt, the Executive shall fail to
return to full-time performance of the Executive's duties. For purposes of
this Agreement, "Disability" means disability which, after the expiration of
more than 52 weeks after its commencement, is determined to be total and
permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative (such
agreement upon acceptability not to be withheld unreasonably).
(b) Cause:
-----
The Company may terminate the Executive's employment for Cause (as
defined below). For purposes of this Agreement, "Cause" means:
(i) an act or acts of dishonesty (other than insubstantial or
inadvertent acts) taken by the Executive at the expense of the
Company;
(ii) repeated material violations by the Executive of the
Executive's obligations under Section 1 of this Agreement; or
(iii) the conviction of the Executive of a felony.
(c) Good Reason:
-----------
The Executive's employment may be terminated by the Executive
for Good Reason (as defined below). For purposes of this Agreement, "Good
Reason" means:
(i) (A) the assignment to the Executive of any duties inconsistent
in any respect with the Executive's position (including status,
offices, titles, and reporting requirements), authority, duties or
responsibilities as contemplated by Section 1 of this Agreement or
(B) any other action by the Company which results in a diminishment
in such position, authority, duties or responsibilities, other than
an insubstantial and inadvertent action which is remedied by the
Company promptly after receipt of notice thereof given by the
Executive;
(ii) any failure by the Company to comply with any of the
provisions of Section 3 of this Agreement, other than an
insubstantial and inadvertent failure which is remedied by the
Company promptly after receipt of notice thereof given by the
Executive;
(iii) the Company's requiring the Executive to be based at any
office or location more than 50 miles from that at which the
Executive is based at the Effective Date, except for travel
reasonably required in the performance of the Executive's
responsibilities;
(iv) any purported termination by the Company of the
Executive's employment other than as permitted by this Agreement,
it being understood that any such purported termination shall not
be effective for any purpose of this Agreement; or
(v) any failure by the Company to comply with and satisfy Section
15 of this Agreement.
(d) Effect of Termination:
---------------------
Termination shall not affect any rights which the Executive may have under
any other program or arrangement.
5. OBLIGATIONS OF THE COMPANY UPON TERMINATION
-------------------------------------------
(a) Death
-----
If the Executive's employment is terminated by reason of the
Executive's death, this Agreement shall terminate without further obligations
to the Executive's legal representatives under this Agreement other than
those
obligations accrued hereunder at the date of the Executive's death. Anything
in this Agreement to the contrary notwithstanding, the Executive's family
shall be entitled to receive benefits at least equal to those provided by the
Company to surviving families of executives of the Company under such plans,
programs and policies relating to family death benefits, if any, as in effect
at any time during the 90-day period immediately preceding the Effective
Date, or if more favorable to the Executive and/or the Executive's family, as
in effect at any time thereafter with respect to other key executives and
their families.
(b) Disability
----------
If this Agreement is terminated by reason of the Executive's
Disability, the Executive shall be entitled after the Disability Effective
Date
to receive disability and other benefits at least equal to those provided by
the Company to disabled employees and/or their families in accordance with
such plans, programs and policies relating to disability, if any, as in
effect
during the 90-day period immediately preceding the Effective Date or, if more
favorable to the Executive and/or the Executive's family, as in effect at any
time thereafter with respect to other key executives and their families.
(c) Cause
-----
If the Executive's employment shall be terminated for Cause,
the Company shall pay the Executive his full Base Salary through the Date of
Termination (as defined below) at the rate in effect at the time Notice of
Termination (as defined below) is given and shall have no further obligations
to the Executive under this Agreement. In addition, the Executive shall be
afforded the opportunity to convert any term policies insuring the
Executive's
health or life which are owned by the Company to individual policies, where
permitted by the terms of such policies.
(d) Good Reason; Other Than for Cause
---------------------------------
If, during the Employment Period, the Company shall terminate
the Executive's employment other than for Cause, or the employment of the
Executive shall be terminated by the Executive for Good Reason, the Company
shall pay to the Executive a sum equal to (i) the amount of the remaining
salary payments that the Executive would have earned if he continued his
employment with the Company during the remaining unexpired term of this
Agreement at the Executive's Base Salary at the Date of Termination;
(ii) the average of the amount of bonus and any other compensation paid to
the
Executive during the term of this Agreement times the remaining number of
years
of this Agreement and any fraction thereof; and (iii) an amount equal to the
average of the annual contributions that were made on the Executive's behalf
to any employee benefit plans of the Company during the term of this
Agreement
times the remaining number of years of this Agreement and any fraction
thereof.
At the election of the Executive, which election is to be made within thirty
(30) days of the Date of Termination, such payments shall be made in a lump
sum or paid monthly during the remaining term of this Agreement following the
Executive's termination. In the event that no election is made, payment to
the Executive will be made on a monthly basis during the remaining term of
this Agreement. Such payments shall not be reduced in the event the
Executive obtains other employment following termination of employment.
The Company will continue life, medical, dental and disability
coverage substantially identical to the coverage maintained by the Company
for
the Executive prior to his termination, except to the extent such coverage
may
be changed in its application to all Company employees on a nondiscriminatory
basis. Such coverage shall cease upon the expiration of the remaining term
of this Agreement.
The Executive will be entitled to receive benefits due him
under or
contributed by the Company on his behalf pursuant to any retirement,
incentive, profit sharing, bonus, performance, disability or other employee
benefit plan maintained by the Company on the Executive's behalf to the
extent such benefits are not otherwise paid to the Executive under a separate
provision of this Agreement.
(e) Election
--------
In the event that the Executive is receiving monthly payments
pursuant to Section 4(d) hereof, on an annual basis, thereafter, between the
dates of January 1 and January 31 of each year, the Executive shall elect
whether the balance of the amount payable under this Agreement at that time
shall be paid in a lump sum or on a pro rata basis. Such election shall be
irrevocable for the year for which such election is made.
6. CHANGE IN CONTROL
-----------------
(a) For purposes hereof, a "change in control" shall be defined
as:
(i) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) (a "Person") of
beneficial ownership (within the meaning of Rule 13D-3 promulgated
under the Exchange Act) of 20% or more of either (A) the then
outstanding shares of common stock of the Company (the "Outstanding
Company Common Stock") or (B) the combined voting power of the then
outstanding voting securities of the Company entitled to vote
generally in the election of Directors (the "Outstanding Company
Voting Securities"); provided, however, that for purposes of this
subsection (i), the following acquisitions shall not constitute a
Change of Control: (1) any acquisition directly from the Company,
(2) any acquisition by the Company, (3) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by
the Company or any corporation controlled by the Company or (4) any
acquisition by any corporation pursuant to a transaction which
complies with clauses (A), (B) and (C) of subsection (iii) below;
or
(ii) Individuals who, as of the date hereof, constitute the
Board of Directors of the Company (the "Incumbent Board") cease for
any reason to constitute at least a majority of the Incumbent
Board, provided, however, that any individual becoming a director
subsequent to the date hereof whose election or nomination for
election by the Company's shareholders was approved by a vote of at
least a majority of the directors then comprising the Incumbent
Board, shall be considered as though such individual were a member
of the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of
an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person
other than the Incumbent Board; or
(iii) Consummation of a reorganization, merger, consolidation
or sale or other disposition of all or substantially all of the
assets of the Company (a "Business Combination"), in each case,
unless, following such Business Combination, (A) all or
substantially all of the individuals and entities who were the
beneficial owners of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, respectively, immediately
prior to such Business Combination beneficially own, directly or
indirectly, more than 60% of the then outstanding shares of common
stock and the combined voting power, respectively, of the then
outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without
limitation, a corporation which as a result of such transaction
owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately
prior to such Business Combination of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (B) no Person (excluding any
employee benefit plan (or related trust) of the Company or such
corporation resulting from such Business Combination) beneficially
owns, directly or indirectly, 20% or more of, respectively, the
then outstanding shares of common stock of the corporation
resulting from such Business Combination or the combined voting
power of the then outstanding voting securities of such corporation
except to the extent that such ownership existed prior to the
Business Combination, and (C) at least a majority of the members of
the board of directors of the corporation resulting from such
Business Combination were members of the Incumbent Board at the
time of the execution of the initial agreement, or of the action of
the Incumbent Board, providing for such Business Combination; or
(iv) approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
(b) Upon the occurrence of a Change in Control, the Company shall
pay the Executive, or in the event of his subsequent death, his beneficiary
or beneficiaries, or his estate, as the case may be, a sum equal to the
greater of the payments due for the remaining term of this Agreement or three
(3) times the Executive's average annual compensation for the five (5)
preceding taxable years. Such annual compensation shall include any
commissions, bonuses, pension and profit sharing plan benefits, severance
payments, retirement benefits, director or committee fees and fringe benefits
paid or to be paid to the Executive during such years. At the election of
the Executive, which election is to be made within thirty (30) days of the
Change in Control, such payment may be made in a lump sum or paid in equal
monthly installments during the thirty-six (36) months following the
Executive's termination. In the event that no election is made, payment to
the Executive will be made on a monthly basis during the thirty-six (36)
months following the Executive's termination.
(c) All restrictions on the restricted stock then held by the
Executive will lapse immediately, incentive stock options and stock
appreciation rights then held by the Executive will become immediately
exercisable, and any performance shares or units then held by the Executive
will vest immediately, in full, in the event of a Change in Control.
(d) Upon the occurrence of a Change in Control, the Executive will
be entitled to receive benefits due him under or contributed by the Company
on his behalf pursuant to any retirement, incentive, profit sharing, bonus,
performance, disability or other employee benefit plan maintained by the
Company on the Executive's behalf to the extent such benefits are not
otherwise paid to the Executive under a separate provision of this Agreement.
(e) Upon the occurrence of a Change in Control followed by the
Executive's termination of employment, the Company will cause to be continued
life, medical, dental and disability coverage substantially identical to the
coverage maintained by the Company for the Executive prior to his severance,
except to the extent that such coverage may be changed in its application for
all Company employees on a nondiscriminatory basis. Such coverage and
payments shall cease upon the expiration of thirty-six (36) full calendar
months following the Date of Termination.
(f) In the event that the Executive is receiving monthly payments
pursuant to Section 5(b) hereof, on an annual basis, thereafter, between the
dates of January 1 and January 31 of each year, the Executive shall elect
whether the balance of the amount payable under the Agreement at that time
shall be paid in a lump sum or on a pro rata basis pursuant to such section.
Such election shall be irrevocable for the year for which such election is
made.
(g) Any and all payments to be made to the Executive under this
Agreement or otherwise as a result of a Change in Control whether in the
nature of severance payments, liquidated damage payments, compensation or
other payments (all of the foregoing being hereinafter referred to as "Change
in Control Payments"), shall be made free and clear of, and without deduction
or withholding for or on account of, any tax which may be payable under
Section 4999 of the Internal Revenue Code of 1986 (the "Code"), now or
hereafter imposed, levied, withheld or assessed (such amounts being
hereinafter referred to as the "Excise Taxes"). If, notwithstanding the
foregoing provision, any Excise Taxes are withheld from any Change in Control
Payments made or to be made to the Executive, the amounts so payable to the
Executive shall be increased to the extent necessary to yield to the
Executive (after payment of any tax which may be payable under Section 4999
of the Code) the full amount which he is entitled to receive pursuant to the
terms of this Agreement or otherwise without regard to liability for any
Excise Taxes and any other Federal, State, FICA/Medicare and unemployment
taxes thereon. In the event any Excise Taxes are now or hereafter imposed,
levied, assessed, paid or collected with respect to the Change of Control
Payments made or to be made to the Executive, Excise Taxes and any other
Federal, State, FICA/Medicare and unemployment taxes thereon shall be paid by
the Company or, if paid by the Executive, shall be reimbursed to the
Executive by the Company upon its receipt of satisfactory evidence of such
payment having been made.
7. NOTICE
------
(a) Any purported termination by the Company or by the Executive
shall be communicated by Notice of Termination to the other party hereto.
For purposes of this Agreement, a "Notice of Termination" shall mean a
written notice which shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the
Notice of Termination (which, in the case of a termination for Cause, shall
not be less than thirty (30) days from the date such Notice of Termination is
given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other
party that a dispute exists concerning the termination, the Date of
Termination shall be the date on which the dispute is finally determined,
either by mutual written agreement of the parties, by a binding arbitration
award or by a final judgment, order or decree of a court of competent
jurisdiction (the time for appeal therefrom having expired and no appeal
having been perfected) and provided further that the Date of Termination
shall be extended by a notice of dispute only if such notice is given in good
faith and the party giving such notice pursues the resolution of such dispute
with reasonable diligence. Notwithstanding the pendency of any such dispute,
the Company will continue to pay the Executive his full compensation in
effect when the notice giving rise to the dispute was given (including, but
not limited to, Base Salary) and continue him as a participant in all
compensation, benefit and insurance plans in which he was participating when
the notice of dispute was given, until the dispute is finally resolved in
accordance with this Agreement. Amounts paid under this Section are in
addition to all other amounts due under this Agreement and shall not be
offset against or reduce any other amounts due under this Agreement.
8. POST-TERMINATION OBLIGATIONS
----------------------------
(a) All payments and benefits to the Executive under this
Agreement shall be subject to the Executive's compliance with Section 8(b),
hereof during the term of this Agreement and for one (1) full year after the
expiration or termination hereof.
(b) The Executive shall, upon reasonable notice, furnish such
information and assistance to the Company as may reasonably be required by
the Company in connection with any litigation in which it or any of its
subsidiaries or affiliates is, or may become, a party.
9. NON-COMPETITION
---------------
(a) Upon any termination of the Executive's employment hereunder
pursuant to Section 6 hereof, the Executive agrees not to compete with the
Company for a period of one (1) year following such termination in any city,
town or county in which the Company has an office or has filed an application
for regulatory approval to establish an office, determined as of the
effective date of such termination, except as agreed to pursuant to a
resolution duly adopted by the Board. The Executive agrees that during such
period and within said cities, towns and counties, the Executive shall not
work for or advise, consult or otherwise serve with, directly or indirectly,
any entity whose business materially competes with the depository, lending or
other business activities of the Company. The parties hereto, recognizing
that
irreparable injury will result to the Company, its business and property in
the event of the Executive's breach of this Section 9(a) agree that in the
event of any such breach by the Executive, the Company will be entitled, in
addition to any other remedies and damages available, to an injunction to
restrain the violation hereof by the Executive, the Executive's partners,
agents, servants, employers, employees and all persons acting for or with the
Executive. The Executive represents and admits that in the event of the
termination of his employment pursuant to Section 6 hereof, the Executive's
experience and capabilities are such that the Executive can obtain employment
in a business engaged in other lines and/or of a different nature than the
Company, and that the enforcement of a remedy by way of injunction will not
prevent the Executive from earning a livelihood. Nothing herein will be
construed as prohibiting the Company from pursuing any other remedies
available to the Company for such breach or threatened breach, including the
recovery of damages from the Executive.
(b) The Executive recognizes and acknowledges that the knowledge
of the business activities and plans for business activities of the Company
is a valuable, special and unique asset of the business of the Company. The
Executive will not, during or after the term of his employment, disclose any
knowledge of the past, present, planned or considered business activities of
the Company or affiliates thereof to any person, firm, corporation, or other
entity for any reason or purpose whatsoever. Notwithstanding the foregoing,
the Executive may disclose any concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Company.
In the event of a breach or threatened breach by the Executive of the
provisions of this Section 9(b), the Company will be entitled to an
injunction restraining the Executive from disclosing, in whole or in part,
the knowledge of the past, present, planned or considered business activities
of the Company, or from rendering any services to any person, firm,
corporation or other entity to whom such knowledge, in whole or in part, has
been disclosed or is threatened to be disclosed. Nothing herein will be
construed as prohibiting the Company from pursuing any other remedies
available to the Company for such breach or threatened breach, including the
recovery of damages from the Executive.
10. NO ATTACHMENT
-------------
(a) Except as required by law, no right to receive payments under
this Agreement shall be subject to anticipation, commutation, alienation,
sale, assignment, encumbrance, charge, pledge, or hypothecation, or to
execution, attachment, levy or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to affect any such action
shall be null, void and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit
of, the Executive and the Company and their respective successors and
assigns.
11. MODIFICATION AND WAIVER
-----------------------
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have
been waived, nor shall there be any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party
charged with such waiver or estoppel. No such written waiver shall be deemed
a continuing waiver unless specifically stated therein, and each such waiver
shall operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future as to any act
other than that specifically waived.
12. SEVERABILITY
------------
If, for any reason, any provision of this Agreement or any part of
any provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not so held
invalid, and each such other provision and part thereof shall, to the full
extent consistent with law, continue in full force and effect.
13. HEADINGS FOR REFERENCE ONLY
---------------------------
The headings of sections and paragraphs herein are included solely
for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
14. ARBITRATION
-----------
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the Executive
within fifty (50) miles from the location of the Company's executive office,
in accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrators' award in any court
having jurisdiction, provided, however, that the Executive shall be entitled
to seek specific performance of his right to be paid until the Date of
Termination during the pendency of any dispute or controversy arising under
or in connection with this Agreement.
In the event any dispute or controversy arising under or in
connection with the Executive's termination is resolved in favor of the
Executive, whether by judgment, arbitration or settlement, the Executive
shall be entitled to the payment of all back-pay, including salary, bonuses
and any other cash compensation, fringe benefits and any compensation and
benefits due the Executive under this Agreement.
15. PAYMENT OF LEGAL FEES
---------------------
All reasonable legal fees and other expenses paid or incurred by
the Executive pursuant to any dispute or question of interpretation relating
to this Agreement shall be paid or reimbursed by the Company if the Executive
is successful pursuant to a legal judgment, arbitration or settlement.
16. SUCCESSOR TO THE COMPANY
------------------------
The Company shall require any successor or assignee, whether direct
or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Company, expressly and
unconditionally, to assume and agree to perform the Company's obligations
under this Agreement, in the same manner and to the same extent that the
Company would be required to perform if no such succession or assignment had
taken place.
17. UNFUNDED AGREEMENT SUBJECT TO CLAIMS OF COMPANY CREDITORS
---------------------------------------------------------
The Company's obligation under this Agreement will be unfunded and
the Executive will not have any claims or rights superior to those of any
general creditor of the Company.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed and its seal to be affixed hereunto by its duly authorized
officer and its directors, and the Executive has signed this
Agreement, on the 1st day of January, 1998.
ANDREA ELECTRONICS CORPORATION
By: /s/ Douglas J. Andrea
-------------------------------
Name: Douglas J. Andrea
Title: Co-President
By: /s/ John N. Andrea
-------------------------------
John N. Andrea
ANDREA ELECTRONICS CORPORATION
EMPLOYMENT AGREEMENT
This AGREEMENT is made effective as of January 1, 1998 by and between
Andrea Electronics Corporation (the "Company"), a New York corporation and
Douglas J. Andrea (the "Executive").
WHEREAS, the Company wishes to assure itself of the services of the
Executive for the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the Company
on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. DUTIES AND RESPONSIBILITIES
---------------------------
The Executive shall serve as Co-President of the Company, and shall have
such commensurate responsibilities, duties and authority as may from time to
time be assigned to the Executive by the Board of Directors of the Company
(the "Board"). The Executive shall devote substantially all his time, energy
and skill during reasonable business hours to the service of the Company.
The Executive's office shall be located at the Company's headquarters, which
shall be located at 11-40 45/th/ Road, Long Island City, New York.
2. TERM OF AGREEMENT
-----------------
The Company shall employ the Executive and the Executive shall serve as
a full-time employee of the Company for a term of three (3) years from the
date hereof (the "Employment Period"). The Employment Period and this
Agreement shall be automatically extended for an additional one (1) year term
following the expiration of each Employment Period unless either the Company
or the Employee notifies the other in writing at least thirty (30) days prior
to such expiration that the Employment Period and this Agreement shall not be
so extended. Further, if employment is terminated for any reason other than
death, such termination will not result in the expiration of the term of this
Agreement.
3. COMPENSATION DURING TERM OF AGREEMENT
-------------------------------------
(a) Base Salary
-----------
The Company shall pay the Executive a salary of not less than
$200,000 (the "Base Salary"). Base Salary shall include any amounts of
compensation deferred by the Executive under any employee benefit plan
maintained by the Company. Such Base Salary shall be payable weekly. The
Executive's Base Salary shall be reviewed annually. Such review shall be
conducted by a Compensation Committee designated by the Board, and the Board
shall increase the Executive's Base Salary by a Cost of Living Allowance
("COLA") percentage and a 7% merit increase based on performance as
determined by the Board. The increased Base Salary shall become the "Base
Salary" for purposes of this Agreement. In addition to the Base Salary
provided in this Section 3(a), the Company shall also provide the Executive,
at no cost to the Executive, with all such other benefits as are provided
uniformly to permanent full-time employees of the Company.
(b) Short-Term Incentive Compensation Program
-----------------------------------------
The Executive shall participate in the Company's Short-Term
Incentive Compensation Program. Annual cash awards ("Short-Term Awards")
under this program will be based on the achievement of performance goals,
both corporate (80%) and individual (20%), expressed as a percentage of the
Executive's Base Salary adopted on or after the date of this Agreement.
Performance measures will include sales from new sources and operating
income. Performance goals, measures and annual awards will be determined by
the Compensation Committee and approved by the Board. The Company will pay
the Short-Term Award to the Executive within 60 days following the last day
of the Company's fiscal year.
(c) Long-Term Incentive Compensation Program
----------------------------------------
In addition to the Base Salary and Short-Term Award, the Executive
shall be entitled to participate, during the Employment Period, in the Long-
Term Incentive Compensation Program. Long-term cash or equity-based awards
("Long-
Term Awards") may include (i) stock options, (ii) stock appreciation rights,
(iii) restricted stock, (iv) deferred stock, (v) stock reload options and/or
(vi) other stock-based awards.
(d) The Company will provide the Executive with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which the
Executive was participating or otherwise deriving benefit from immediately
prior to the beginning of the term of this Agreement, and the Company will
not, without the Executive's prior written consent, make any changes in such
plans, arrangements or perquisites which would adversely affect the
Executive's rights or benefits thereunder. Without limiting the generality
of the foregoing provision of this Section 3(d), the Executive will be
entitled to participate in or receive benefits under any employee benefit
plans including, but not limited to, retirement plans, supplemental
retirement plans, pension plans, profit-sharing plans, health-and-accident
plans, medical coverage or any other employee benefit plan or arrangement
made available by the Company in the future to its senior executives and key
management employees, subject to and on a basis consistent
with the terms, conditions and overall administration of such plans and
arrangements.
(e) In addition to the Base Salary provided for by Section 3(a) and
other compensation provided for by Sections 3(b), (c) and (d) hereof, the
Company shall pay or reimburse the Executive for all reasonable travel and
other reasonable expenses incurred by the Executive performing his
obligations under this Agreement and may provide such additional compensation
in such form and such amounts as the Board may from time to time determine.
4. TERMINATION OF EMPLOYMENT
-------------------------
(a) Death or Disability:
This Agreement shall terminate automatically upon the Executive's
death. The Company may terminate this Agreement, after having established
the Executive's Disability (pursuant to the definition of "Disability" set
forth below), by giving to the Executive written notice of its intention to
terminate the Executive's employment. In such a case, this Agreement (but
not the Executive's employment with the Company) shall terminate effective on
the 90th day after receipt of such notice (the "Disability Effective Date"),
provided that, within 90 days after such receipt, the Executive shall fail to
return to full-time performance of the Executive's duties. For purposes of
this Agreement, "Disability" means disability which, after the expiration of
more than 52 weeks after its commencement, is determined to be total and
permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative (such
agreement upon acceptability not to be withheld unreasonably).
(b) Cause:
-----
The Company may terminate the Executive's employment for Cause (as
defined below). For purposes of this Agreement, "Cause" means:
(i) an act or acts of dishonesty (other than insubstantial or
inadvertent acts) taken by the Executive at the expense of the
Company;
(ii) repeated material violations by the Executive of the
Executive's obligations under Section 1 of this Agreement; or
(iii) the conviction of the Executive of a felony.
(c) Good Reason:
-----------
The Executive's employment may be terminated by the Executive for
Good Reason (as defined below). For purposes of this Agreement, "Good
Reason"
means:
(i) (A) the assignment to the Executive of any duties inconsistent
in any respect with the Executive's position (including status,
offices, titles, and reporting requirements), authority, duties
or responsibilities as contemplated by Section 1 of this Agreement
or (B) any other action by the Company which results in a
diminishment in such position, authority, duties or
responsibilities,
other than an insubstantial and inadvertent action which is
remedied
by the Company promptly after receipt of notice thereof given by
the
Executive;
(ii) any failure by the Company to comply with any of the
provisions of Section 3 of this Agreement, other than an
insubstantial and inadvertent failure which is remedied by the
Company promptly after receipt of notice thereof given by the
Executive;
(iii) the Company's requiring the Executive to be based at any
office or location more than 50 miles from that at which the
Executive is based at the Effective Date, except for travel
reasonably required in the performance of the Executive's
responsibilities;
(iv) any purported termination by the Company of the
Executive's employment other than as permitted by this Agreement,
it being understood that any such purported termination shall not
be effective for any purpose of this Agreement; or
(v) any failure by the Company to comply with and satisfy Section
15 of this Agreement.
(d) Effect of Termination:
Termination shall not affect any rights which the Executive
may have under any other program or arrangement.
5. OBLIGATIONS OF THE COMPANY UPON TERMINATION
-------------------------------------------
(a) Death
-----
If the Executive's employment is terminated by reason of the
Executive's death, this Agreement shall terminate without further obligations
to the Executive's legal representatives under this Agreement other than
those
obligations accrued hereunder at the date of the Executive's death. Anything
in this Agreement to the contrary notwithstanding, the Executive's family
shall be entitled to receive benefits at least equal to those provided by the
Company to surviving families of executives of the Company under such plans,
programs and policies relating to family death benefits, if any, as in effect
at any time during the 90-day period immediately preceding the Effective
Date, or if more favorable to the Executive and/or the Executive's family, as
in effect at any time thereafter with respect to other key executives and
their families.
(b) Disability
----------
If this Agreement is terminated by reason of the Executive's
Disability, the Executive shall be entitled after the Disability Effective
Date to receive disability and other benefits at least equal to those
provided
by the Company to disabled employees and/or their families in accordance with
such plans, programs and policies relating to disability, if any, as in
effect
during the 90-day period immediately preceding the Effective Date or, if more
favorable to the Executive and/or the Executive's family, as in effect at any
time thereafter with respect to other key executives and their families.
(c) Cause
-----
If the Executive's employment shall be terminated for Cause, the
Company shall pay the Executive his full Base Salary through the Date of
Termination (as defined below) at the rate in effect at the time Notice of
Termination (as defined below) is given and shall have no further obligations
to the Executive under this Agreement. In addition, the Executive shall be
afforded the opportunity to convert any term policies insuring the
Executive's
health or life which are owned by the Company to individual policies, where
permitted by the terms of such policies.
(d) Good Reason; Other Than for Cause
---------------------------------
If, during the Employment Period, the Company shall terminate
the
Executive's employment other than for Cause, or the employment of the
Executive
shall be terminated by the Executive for Good Reason, the Company shall pay
to the Executive a sum equal to (i) the amount of the remaining salary
payments
that the Executive would have earned if he continued his employment with the
Company during the remaining unexpired term of this Agreement at the
Executive's Base Salary at the Date of Termination; (ii) the average of the
amount of bonus and any other compensation paid to the Executive during the
term of this Agreement times the remaining number of years of this Agreement
and any fraction thereof; and (iii) an amount equal to the average of the
annual contributions that were made on the Executive's behalf to any employee
benefit plans of the Company during the term of this Agreement times the
remaining number of years of this Agreement and any fraction thereof. At the
election of the Executive, which election is to be made within thirty (30)
days of the Date of Termination, such payments shall be made in a lump sum or
paid monthly during the remaining term of this Agreement following the
Executive's termination. In the event that no election is made, payment to
the Executive will be made on a monthly basis during the remaining term of
this Agreement. Such payments shall not be reduced in the event the
Executive obtains other employment following termination of employment.
The Company will continue life, medical, dental and disability
coverage substantially identical to the coverage maintained by the Company
for the Executive prior to his termination, except to the extent such
coverage may be changed in its application to all Company employees
on a nondiscriminatory basis. Such coverage shall cease upon the expiration
of the remaining term of this Agreement.
The Executive will be entitled to receive benefits due him under or
contributed by the Company on his behalf pursuant to any retirement,
incentive, profit sharing, bonus, performance, disability or other employee
benefit plan maintained by the Company on the Executive's behalf to the
extent such benefits are not otherwise paid to the Executive under a separate
provision of this Agreement.
(e) Election
--------
In the event that the Executive is receiving monthly payments
pursuant to Section 4(d) hereof, on an annual basis, thereafter, between the
dates of January 1 and January 31 of each year, the Executive shall elect
whether the balance of the amount payable under this Agreement at that time
shall be paid in a lump sum or on a pro rata basis. Such election shall be
irrevocable for the year for which such election is made.
6. CHANGE IN CONTROL
-----------------
(a) For purposes hereof, a "change in control" shall be defined
as:
(i) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) (a "Person") of
beneficial ownership (within the meaning of Rule 13D-3 promulgated
under the Exchange Act) of 20% or more of either (A) the then
outstanding shares of common stock of the Company (the "Outstanding
Company Common Stock") or (B) the combined voting power of the then
outstanding voting securities of the Company entitled to vote
generally in the election of Directors (the "Outstanding Company
Voting Securities"); provided, however, that for purposes of this
subsection (i), the following acquisitions shall not constitute a
Change of Control: (1) any acquisition directly from the Company,
(2) any acquisition by the Company, (3) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by
the Company or any corporation controlled by the Company or (4) any
acquisition by any corporation pursuant to a transaction which
complies with clauses (A), (B) and (C) of subsection (iii) below;
or
(ii) Individuals who, as of the date hereof, constitute the
Board of Directors of the Company (the "Incumbent Board") cease for
any reason to constitute at least a majority of the Incumbent
Board, provided, however, that any individual becoming a director
subsequent to the date hereof whose election or nomination for
election by the Company's shareholders was approved by a vote of at
least a majority of the directors then comprising the Incumbent
Board, shall be considered as though such individual were a member
of the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of
an actual or threatened election contest with respect to the
election
or removal of directors or other actual or threatened solicitation
of
proxies or consents by or on behalf of a Person other than the
Incumbent Board; or
(iii) Consummation of a reorganization, merger, consolidation
or sale or other disposition of all or substantially all of the
assets of the Company (a "Business Combination"), in each case,
unless, following such Business Combination, (A) all or
substantially all of the individuals and entities who were the
beneficial owners of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, respectively, immediately
prior to such Business Combination beneficially own, directly or
indirectly, more than 60% of the then outstanding shares of common
stock and the combined voting power, respectively, of the then
outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without
limitation, a corporation which as a result of such transaction
owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately
prior to such Business Combination of the Outstanding Company
Common Stock and Outstanding Company Voting Securities, as the case
may be, (B) no Person (excluding any employee benefit plan (or
related trust) of the Company or such corporation resulting from
such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such
Business Combination or the combined voting power of the then
outstanding voting securities of such corporation except to the
extent that such ownership existed prior to the Business
Combination, and (C) at least a majority of the members of the
board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the
Incumbent Board, providing for such Business Combination; or
(iv) approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
(b) Upon the occurrence of a Change in Control, the Company shall
pay the Executive, or in the event of his subsequent death, his beneficiary
or beneficiaries, or his estate, as the case may be, a sum equal to the
greater of the payments due for the remaining term of this Agreement or three
(3) times the Executive's average annual compensation for the five (5)
preceding taxable years. Such annual compensation shall include any
commissions, bonuses, pension and profit sharing plan benefits, severance
payments, retirement benefits, director or committee fees and fringe benefits
paid or to be paid to the Executive during such years. At the election of
the Executive, which election is to be made within thirty (30) days of the
Change in Control, such payment may be made in a lump sum or paid in equal
monthly installments during the thirty-six (36) months following the
Executive's termination. In the event that no election is made, payment to
the Executive will be made on a monthly basis during the thirty-six (36)
months following the Executive's termination.
(c) All restrictions on the restricted stock then held by the
Executive will lapse immediately, incentive stock options and stock
appreciation rights then held by the Executive will become immediately
exercisable, and any performance shares or units then held by the Executive
will vest immediately, in full, in the event of a Change in Control.
(d) Upon the occurrence of a Change in Control, the Executive will
be entitled to receive benefits due him under or contributed by the Company
on his behalf pursuant to any retirement, incentive, profit sharing, bonus,
performance, disability or other employee benefit plan maintained by the
Company on the Executive's behalf to the extent such benefits are not
otherwise paid to the Executive under a separate provision of this Agreement.
(e) Upon the occurrence of a Change in Control followed by the
Executive's termination of employment, the Company will cause to be continued
life, medical, dental and disability coverage substantially identical to the
coverage maintained by the Company for the Executive prior to his severance,
except to the extent that such coverage may be changed in its application for
all Company employees on a nondiscriminatory basis. Such coverage and
payments shall cease upon the expiration of thirty-six (36) full calendar
months following the Date of Termination.
(f) In the event that the Executive is receiving monthly payments
pursuant to Section 5(b) hereof, on an annual basis, thereafter, between the
dates of January 1 and January 31 of each year, the Executive shall elect
whether the balance of the amount payable under the Agreement at that time
shall be paid in a lump sum or on a pro rata basis pursuant to such section.
Such election shall be irrevocable for the year for which such election is
made.
(g) Any and all payments to be made to the Executive under this
Agreement or otherwise as a result of a Change in Control whether in the
nature of severance payments, liquidated damage payments, compensation or
other payments (all of the foregoing being hereinafter referred to as "Change
in Control Payments"), shall be made free and clear of, and without deduction
or withholding for or on account of, any tax which may be payable under
Section 4999 of the Internal Revenue Code of 1986 (the "Code"), now or
hereafter imposed, levied, withheld or assessed (such amounts being
hereinafter referred to as the "Excise Taxes"). If, notwithstanding the
foregoing provision, any Excise Taxes are withheld from any Change in Control
Payments made or to be made to the Executive, the amounts so payable to the
Executive shall be increased to the extent necessary to yield to the
Executive (after payment of any tax which may be payable under Section 4999
of the Code) the full amount which he is entitled to receive pursuant to the
terms of this Agreement or otherwise without regard to liability for any
Excise Taxes and any other Federal, State, FICA/Medicare and unemployment
taxes thereon. In the event any Excise Taxes are now or hereafter imposed,
levied, assessed, paid or collected with respect to the Change of Control
Payments made or to be made to the Executive, Excise Taxes and any other
Federal, State, FICA/Medicare and unemployment taxes thereon shall be paid
by the Company or, if paid by the Executive, shall be reimbursed to the
Executive by the Company upon its receipt of satisfactory evidence of such
payment having been made.
7. NOTICE
------
(a) Any purported termination by the Company or by the Executive
shall be communicated by Notice of Termination to the other party hereto.
For purposes of this Agreement, a "Notice of Termination" shall mean a
written notice which shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the
Notice of Termination (which, in the case of a termination for Cause, shall
not be less than thirty (30) days from the date such Notice of Termination is
given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other
party that a dispute exists concerning the termination, the Date of
Termination shall be the date on which the dispute is finally determined,
either by mutual written agreement of the parties, by a binding arbitration
award or by a final judgment, order or decree of a court of competent
jurisdiction (the time for appeal therefrom having expired and no appeal
having been perfected) and provided further that the Date of Termination
shall be extended by a notice of dispute only if such notice is given in good
faith and the party giving such notice pursues the resolution of such dispute
with reasonable diligence. Notwithstanding the pendency of any such dispute,
the Company will continue to pay the Executive his full compensation in
effect when the notice giving rise to the dispute was given (including, but
not limited to, Base Salary) and continue him as a participant in all
compensation, benefit and insurance plans in which he was participating when
the notice of dispute was given, until the dispute is finally resolved in
accordance with this Agreement. Amounts paid under this Section are in
addition to all other amounts due under this Agreement and shall not be
offset against or reduce any other amounts due under this Agreement.
8. POST-TERMINATION OBLIGATIONS
----------------------------
(a) All payments and benefits to the Executive under this
Agreement shall be subject to the Executive's compliance with Section 8(b),
hereof during the term of this Agreement and for one (1) full year after the
expiration or termination hereof.
(b) The Executive shall, upon reasonable notice, furnish such
information and assistance to the Company as may reasonably be required by
the Company in connection with any litigation in which it or any of its
subsidiaries or affiliates is, or may become, a party.
9. NON-COMPETITION
---------------
(a) Upon any termination of the Executive's employment hereunder
pursuant to Section 6 hereof, the Executive agrees not to compete with the
Company for a period of one (1) year following such termination in any city,
town or county in which the Company has an office or has filed an application
for regulatory approval to establish an office, determined as of the
effective date of such termination, except as agreed to pursuant to a
resolution duly adopted by the Board. The Executive agrees that during such
period and within said cities, towns and counties, the Executive shall not
work for or advise, consult or otherwise serve with, directly or indirectly,
any entity whose business materially competes with the depository, lending or
other business activities of the Company. The parties hereto, recognizing
that irreparable injury will result to the Company, its business and property
in the event of the Executive's breach of this Section 9(a) agree that in the
event of any such breach by the Executive, the Company will be entitled, in
addition to any other remedies and damages available, to an injunction to
restrain the violation hereof by the Executive, the Executive's partners,
agents, servants, employers, employees and all persons acting for or with the
Executive. The Executive represents and admits that in the event of the
termination of his employment pursuant to Section 6 hereof, the Executive's
experience and capabilities are such that the Executive can obtain employment
in a business engaged in other lines and/or of a different nature than the
Company, and that the enforcement of a remedy by way of injunction will not
prevent the Executive from earning a livelihood. Nothing herein will be
construed as prohibiting the Company from pursuing any other remedies
available to the Company for such breach or threatened breach, including the
recovery of damages from the Executive.
(b) The Executive recognizes and acknowledges that the knowledge
of the business activities and plans for business activities of the Company
is a valuable, special and unique asset of the business of the Company. The
Executive will not, during or after the term of his employment, disclose any
knowledge of the past, present, planned or considered business activities of
the Company or affiliates thereof to any person, firm, corporation, or other
entity for any reason or purpose whatsoever. Notwithstanding the foregoing,
the Executive may disclose any concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Company.
In the event of a breach or threatened breach by the Executive of the
provisions of this Section 9(b), the Company will be entitled to an
injunction restraining the Executive from disclosing, in whole or in part,
the knowledge of the past, present, planned or considered business activities
of the Company, or from rendering any services to any person, firm,
corporation or other entity to whom such knowledge, in whole or in part, has
been disclosed or is threatened to be disclosed. Nothing herein will be
construed as prohibiting the Company from pursuing any other remedies
available to the Company for such breach or threatened breach, including the
recovery of damages from the Executive.
10. NO ATTACHMENT
-------------
(a) Except as required by law, no right to receive payments under
this Agreement shall be subject to anticipation, commutation, alienation,
sale, assignment, encumbrance, charge,
pledge, or hypothecation, or to execution, attachment, levy or similar
process or assignment by operation of law, and any attempt, voluntary or
involuntary, to affect any such action shall be null, void and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit
of, the Executive and the Company and their respective successors and
assigns.
11. MODIFICATION AND WAIVER
-----------------------
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have
been waived, nor shall there be any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party
charged with such waiver or estoppel. No such written waiver shall be deemed
a continuing waiver unless specifically stated therein, and each such waiver
shall operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future as to any act
other than that specifically waived.
12. SEVERABILITY
------------
If, for any reason, any provision of this Agreement or any part of
any provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not so held
invalid, and each such other provision and part thereof shall, to the full
extent consistent with law, continue in full force and effect.
13. HEADINGS FOR REFERENCE ONLY
---------------------------
The headings of sections and paragraphs herein are included solely
for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
14. ARBITRATION
-----------
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the Executive
within fifty (50) miles from the location of the Company's executive office,
in accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrators' award in any court
having jurisdiction, provided, however, that the Executive shall be entitled
to seek specific performance of his right to be paid until the Date of
Termination during the pendency of any dispute or controversy arising under
or in connection with this Agreement.
In the event any dispute or controversy arising under or in
connection with the Executive's termination is resolved in favor of the
Executive, whether by judgment, arbitration or settlement, the Executive
shall be entitled to the payment of all back-pay, including salary, bonuses
and any other cash compensation, fringe benefits and any compensation and
benefits due the Executive under this Agreement
15. PAYMENT OF LEGAL FEES
---------------------
All reasonable legal fees and other expenses paid or incurred by
the Executive pursuant to any dispute or question of interpretation relating
to this Agreement shall be paid or reimbursed by the Company if the Executive
is successful pursuant to a legal judgment, arbitration or settlement.
16. SUCCESSOR TO THE COMPANY
------------------------
The Company shall require any successor or assignee, whether direct
or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Company, expressly and
unconditionally, to assume and agree to perform the Company's obligations
under this Agreement, in the same manner and to the same extent that the
Company would be required to perform if no such succession or assignment had
taken place.
17. UNFUNDED AGREEMENT SUBJECT TO CLAIMS OF COMPANY CREDITORS
---------------------------------------------------------
The Company's obligation under this Agreement will be unfunded and
the Executive will not have any claims or rights superior to those of any
general creditor of the Company.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed and its seal to be affixed hereunto by its duly authorized
officer and its directors, and the Executive has signed this
Agreement, on the 1st day of January, 1998.
ANDREA ELECTRONICS CORPORATION
By: /s/ John N. Andrea
--------------------------------
Name: John N. Andrea
Title: Co-President
By: /s/ Douglas Andrea
--------------------------------
Douglas J. Andrea
ANDREA ELECTRONICS CORPORATION
EMPLOYMENT AGREEMENT
This AGREEMENT is made effective as of January 1, 1998 by and between
Andrea Electronics Corporation (the "Company"), a New York corporation and
John N. Andrea (the "Executive").
WHEREAS, the Company wishes to assure itself of the services of the
Executive for the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the Company
on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. DUTIES AND RESPONSIBILITIES
---------------------------
The Executive shall serve as Co-President of the Company, and shall have
such commensurate responsibilities, duties and authority as may from time to
time be assigned to the Executive by the Board of Directors of the Company
(the "Board"). The Executive shall devote substantially all his time, energy
and skill during reasonable business hours to the service of the Company.
The Executive's office shall be located at the Company's headquarters, which
shall be located at 11-40 45/th/ Road, Long Island City, New York.
2. TERM OF AGREEMENT
-----------------
The Company shall employ the Executive and the Executive shall serve as
a full-time employee of the Company for a term of three (3) years from the
date hereof (the "Employment Period"). The Employment Period and this
Agreement shall be automatically extended for an additional one (1) year term
following the expiration of each Employment Period unless either the Company
or the Employee notifies the other in writing at least thirty (30) days prior
to such expiration that the Employment Period and this Agreement shall not be
so extended. Further, if employment is terminated for any reason other than
death, such termination will not result in the expiration of the term of this
Agreement.
3. COMPENSATION DURING TERM OF AGREEMENT
-------------------------------------
(a) Base Salary
-----------
The Company shall pay the Executive a salary of not less than
$200,000 (the "Base Salary"). Base Salary shall include any amounts of
compensation deferred by the Executive under any employee benefit plan
maintained by the Company. Such Base Salary shall be payable weekly. The
Executive's Base Salary shall be reviewed annually. Such review shall be
conducted by a Compensation Committee designated by the Board, and the Board
shall increase the Executive's Base Salary by a Cost of Living Allowance
("COLA") percentage and a 7% merit increase based on performance as
determined by the Board. The increased Base Salary shall become the "Base
Salary" for purposes of this Agreement. In addition to the Base Salary
provided in this Section 3(a), the Company shall also provide the Executive,
at no cost to the Executive, with all such other benefits as are provided
uniformly to permanent full-time employees of the Company.
(b) Short-Term Incentive Compensation Program
-----------------------------------------
The Executive shall participate in the Company's Short-Term
Incentive Compensation Program. Annual cash awards ("Short-Term Awards")
under this program will be based on the achievement of performance goals,
both corporate (80%) and individual (20%), expressed as a percentage of the
Executive's Base Salary adopted on or after the date of this Agreement.
Performance measures will include sales from new sources and operating
income. Performance goals, measures and annual awards will be determined by
the Compensation Committee and approved by the Board. The Company will pay
the Short-Term Award to the Executive within 60 days following the last day
of the Company's fiscal year.
(c) Long-Term Incentive Compensation Program
----------------------------------------
In addition to the Base Salary and Short-Term Award, the Executive
shall be entitled to participate, during the Employment Period, in the Long-
Term Incentive Compensation Program. Long-term cash or equity-based awards
("Long-Term Awards") may include (i) stock options, (ii) stock appreciation
rights, (iii) restricted stock, (iv) deferred stock, (v) stock reload options
and/or (vi) other stock-based awards.
(d) The Company will provide the Executive with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which the
Executive was participating or otherwise deriving benefit from immediately
prior to the beginning of the term of this Agreement, and the Company will
not, without the Executive's prior written consent, make any changes in such
plans, arrangements or perquisites which would adversely affect the
Executive's rights or benefits thereunder. Without limiting the generality
of the foregoing provision of this Section 3(d), the Executive will be
entitled to participate in or receive benefits under any employee benefit
plans including, but not limited to, retirement plans, supplemental
retirement plans, pension plans, profit-sharing plans, health-and-accident
plans, medical coverage or any other employee benefit plan or arrangement
made available by the Company in the future to its senior executives and key
management employees, subject to and on a basis consistent with the terms,
conditions and overall administration of such plans and arrangements.
(e) In addition to the Base Salary provided for by Section 3(a) and
other compensation provided for by Sections 3(b), (c) and (d) hereof, the
Company shall pay or reimburse the Executive for all reasonable travel and
other reasonable expenses incurred by the Executive performing his
obligations under this Agreement and may provide such additional compensation
in such form and such amounts as the Board may from time to time determine.
4. TERMINATION OF EMPLOYMENT
-------------------------
(a) Death or Disability:
-------------------
This Agreement shall terminate automatically upon the Executive's
death. The Company may terminate this Agreement, after having established
the Executive's Disability (pursuant to the definition of "Disability" set
forth below), by giving to the Executive written notice of its intention to
terminate the Executive's employment. In such a case, this Agreement (but
not the Executive's employment with the Company) shall terminate effective on
the 90th day after receipt of such notice (the "Disability Effective Date"),
provided that, within 90 days after such receipt, the Executive shall fail to
return to full-time performance of the Executive's duties. For purposes of
this Agreement, "Disability" means disability which, after the expiration of
more than 52 weeks after its commencement, is determined to be total and
permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative (such
agreement upon acceptability not to be withheld unreasonably).
(b) Cause:
-----
The Company may terminate the Executive's employment for Cause (as
defined below). For purposes of this Agreement, "Cause" means:
(i) an act or acts of dishonesty (other than insubstantial or
inadvertent acts) taken by the Executive at the expense of the
Company;
(ii) repeated material violations by the Executive of the
Executive's obligations under Section 1 of this Agreement; or
(iii) the conviction of the Executive of a felony.
(c) Good Reason:
-----------
The Executive's employment may be terminated by the Executive
for Good Reason (as defined below). For purposes of this Agreement, "Good
Reason" means:
(i) (A) the assignment to the Executive of any duties inconsistent
in any respect with the Executive's position (including status,
offices, titles, and reporting requirements), authority, duties or
responsibilities as contemplated by Section 1 of this Agreement or
(B) any other action by the Company which results in a diminishment
in such position, authority, duties or responsibilities, other than
an insubstantial and inadvertent action which is remedied by the
Company promptly after receipt of notice thereof given by the
Executive;
(ii) any failure by the Company to comply with any of the
provisions of Section 3 of this Agreement, other than an
insubstantial and inadvertent failure which is remedied by the
Company promptly after receipt of notice thereof given by the
Executive;
(iii) the Company's requiring the Executive to be based at any
office or location more than 50 miles from that at which the
Executive is based at the Effective Date, except for travel
reasonably required in the performance of the Executive's
responsibilities;
(iv) any purported termination by the Company of the
Executive's employment other than as permitted by this Agreement,
it being understood that any such purported termination shall not
be effective for any purpose of this Agreement; or
(v) any failure by the Company to comply with and satisfy Section
15 of this Agreement.
(d) Effect of Termination:
---------------------
Termination shall not affect any rights which the Executive may have under
any other program or arrangement.
5. OBLIGATIONS OF THE COMPANY UPON TERMINATION
-------------------------------------------
(a) Death
-----
If the Executive's employment is terminated by reason of the
Executive's death, this Agreement shall terminate without further obligations
to the Executive's legal representatives under this Agreement other than
those
obligations accrued hereunder at the date of the Executive's death. Anything
in this Agreement to the contrary notwithstanding, the Executive's family
shall be entitled to receive benefits at least equal to those provided by the
Company to surviving families of executives of the Company under such plans,
programs and policies relating to family death benefits, if any, as in effect
at any time during the 90-day period immediately preceding the Effective
Date, or if more favorable to the Executive and/or the Executive's family, as
in effect at any time thereafter with respect to other key executives and
their families.
(b) Disability
----------
If this Agreement is terminated by reason of the Executive's
Disability, the Executive shall be entitled after the Disability Effective
Date
to receive disability and other benefits at least equal to those provided by
the Company to disabled employees and/or their families in accordance with
such plans, programs and policies relating to disability, if any, as in
effect
during the 90-day period immediately preceding the Effective Date or, if more
favorable to the Executive and/or the Executive's family, as in effect at any
time thereafter with respect to other key executives and their families.
(c) Cause
-----
If the Executive's employment shall be terminated for Cause,
the Company shall pay the Executive his full Base Salary through the Date of
Termination (as defined below) at the rate in effect at the time Notice of
Termination (as defined below) is given and shall have no further obligations
to the Executive under this Agreement. In addition, the Executive shall be
afforded the opportunity to convert any term policies insuring the
Executive's
health or life which are owned by the Company to individual policies, where
permitted by the terms of such policies.
(d) Good Reason; Other Than for Cause
---------------------------------
If, during the Employment Period, the Company shall terminate
the Executive's employment other than for Cause, or the employment of the
Executive shall be terminated by the Executive for Good Reason, the Company
shall pay to the Executive a sum equal to (i) the amount of the remaining
salary payments that the Executive would have earned if he continued his
employment with the Company during the remaining unexpired term of this
Agreement at the Executive's Base Salary at the Date of Termination;
(ii) the average of the amount of bonus and any other compensation paid to
the
Executive during the term of this Agreement times the remaining number of
years
of this Agreement and any fraction thereof; and (iii) an amount equal to the
average of the annual contributions that were made on the Executive's behalf
to any employee benefit plans of the Company during the term of this
Agreement
times the remaining number of years of this Agreement and any fraction
thereof.
At the election of the Executive, which election is to be made within thirty
(30) days of the Date of Termination, such payments shall be made in a lump
sum or paid monthly during the remaining term of this Agreement following the
Executive's termination. In the event that no election is made, payment to
the Executive will be made on a monthly basis during the remaining term of
this Agreement. Such payments shall not be reduced in the event the
Executive obtains other employment following termination of employment.
The Company will continue life, medical, dental and disability
coverage substantially identical to the coverage maintained by the Company
for
the Executive prior to his termination, except to the extent such coverage
may
be changed in its application to all Company employees on a nondiscriminatory
basis. Such coverage shall cease upon the expiration of the remaining term
of this Agreement.
The Executive will be entitled to receive benefits due him
under or
contributed by the Company on his behalf pursuant to any retirement,
incentive, profit sharing, bonus, performance, disability or other employee
benefit plan maintained by the Company on the Executive's behalf to the
extent such benefits are not otherwise paid to the Executive under a separate
provision of this Agreement.
(e) Election
--------
In the event that the Executive is receiving monthly payments
pursuant to Section 4(d) hereof, on an annual basis, thereafter, between the
dates of January 1 and January 31 of each year, the Executive shall elect
whether the balance of the amount payable under this Agreement at that time
shall be paid in a lump sum or on a pro rata basis. Such election shall be
irrevocable for the year for which such election is made.
6. CHANGE IN CONTROL
-----------------
(a) For purposes hereof, a "change in control" shall be defined
as:
(i) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) (a "Person") of
beneficial ownership (within the meaning of Rule 13D-3 promulgated
under the Exchange Act) of 20% or more of either (A) the then
outstanding shares of common stock of the Company (the "Outstanding
Company Common Stock") or (B) the combined voting power of the then
outstanding voting securities of the Company entitled to vote
generally in the election of Directors (the "Outstanding Company
Voting Securities"); provided, however, that for purposes of this
subsection (i), the following acquisitions shall not constitute a
Change of Control: (1) any acquisition directly from the Company,
(2) any acquisition by the Company, (3) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by
the Company or any corporation controlled by the Company or (4) any
acquisition by any corporation pursuant to a transaction which
complies with clauses (A), (B) and (C) of subsection (iii) below;
or
(ii) Individuals who, as of the date hereof, constitute the
Board of Directors of the Company (the "Incumbent Board") cease for
any reason to constitute at least a majority of the Incumbent
Board, provided, however, that any individual becoming a director
subsequent to the date hereof whose election or nomination for
election by the Company's shareholders was approved by a vote of at
least a majority of the directors then comprising the Incumbent
Board, shall be considered as though such individual were a member
of the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of
an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person
other than the Incumbent Board; or
(iii) Consummation of a reorganization, merger, consolidation
or sale or other disposition of all or substantially all of the
assets of the Company (a "Business Combination"), in each case,
unless, following such Business Combination, (A) all or
substantially all of the individuals and entities who were the
beneficial owners of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, respectively, immediately
prior to such Business Combination beneficially own, directly or
indirectly, more than 60% of the then outstanding shares of common
stock and the combined voting power, respectively, of the then
outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without
limitation, a corporation which as a result of such transaction
owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately
prior to such Business Combination of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (B) no Person (excluding any
employee benefit plan (or related trust) of the Company or such
corporation resulting from such Business Combination) beneficially
owns, directly or indirectly, 20% or more of, respectively, the
then outstanding shares of common stock of the corporation
resulting from such Business Combination or the combined voting
power of the then outstanding voting securities of such corporation
except to the extent that such ownership existed prior to the
Business Combination, and (C) at least a majority of the members of
the board of directors of the corporation resulting from such
Business Combination were members of the Incumbent Board at the
time of the execution of the initial agreement, or of the action of
the Incumbent Board, providing for such Business Combination; or
(iv) approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
(b) Upon the occurrence of a Change in Control, the Company shall
pay the Executive, or in the event of his subsequent death, his beneficiary
or beneficiaries, or his estate, as the case may be, a sum equal to the
greater of the payments due for the remaining term of this Agreement or three
(3) times the Executive's average annual compensation for the five (5)
preceding taxable years. Such annual compensation shall include any
commissions, bonuses, pension and profit sharing plan benefits, severance
payments, retirement benefits, director or committee fees and fringe benefits
paid or to be paid to the Executive during such years. At the election of
the Executive, which election is to be made within thirty (30) days of the
Change in Control, such payment may be made in a lump sum or paid in equal
monthly installments during the thirty-six (36) months following the
Executive's termination. In the event that no election is made, payment to
the Executive will be made on a monthly basis during the thirty-six (36)
months following the Executive's termination.
(c) All restrictions on the restricted stock then held by the
Executive will lapse immediately, incentive stock options and stock
appreciation rights then held by the Executive will become immediately
exercisable, and any performance shares or units then held by the Executive
will vest immediately, in full, in the event of a Change in Control.
(d) Upon the occurrence of a Change in Control, the Executive will
be entitled to receive benefits due him under or contributed by the Company
on his behalf pursuant to any retirement, incentive, profit sharing, bonus,
performance, disability or other employee benefit plan maintained by the
Company on the Executive's behalf to the extent such benefits are not
otherwise paid to the Executive under a separate provision of this Agreement.
(e) Upon the occurrence of a Change in Control followed by the
Executive's termination of employment, the Company will cause to be continued
life, medical, dental and disability coverage substantially identical to the
coverage maintained by the Company for the Executive prior to his severance,
except to the extent that such coverage may be changed in its application for
all Company employees on a nondiscriminatory basis. Such coverage and
payments shall cease upon the expiration of thirty-six (36) full calendar
months following the Date of Termination.
(f) In the event that the Executive is receiving monthly payments
pursuant to Section 5(b) hereof, on an annual basis, thereafter, between the
dates of January 1 and January 31 of each year, the Executive shall elect
whether the balance of the amount payable under the Agreement at that time
shall be paid in a lump sum or on a pro rata basis pursuant to such section.
Such election shall be irrevocable for the year for which such election is
made.
(g) Any and all payments to be made to the Executive under this
Agreement or otherwise as a result of a Change in Control whether in the
nature of severance payments, liquidated damage payments, compensation or
other payments (all of the foregoing being hereinafter referred to as "Change
in Control Payments"), shall be made free and clear of, and without deduction
or withholding for or on account of, any tax which may be payable under
Section 4999 of the Internal Revenue Code of 1986 (the "Code"), now or
hereafter imposed, levied, withheld or assessed (such amounts being
hereinafter referred to as the "Excise Taxes"). If, notwithstanding the
foregoing provision, any Excise Taxes are withheld from any Change in Control
Payments made or to be made to the Executive, the amounts so payable to the
Executive shall be increased to the extent necessary to yield to the
Executive (after payment of any tax which may be payable under Section 4999
of the Code) the full amount which he is entitled to receive pursuant to the
terms of this Agreement or otherwise without regard to liability for any
Excise Taxes and any other Federal, State, FICA/Medicare and unemployment
taxes thereon. In the event any Excise Taxes are now or hereafter imposed,
levied, assessed, paid or collected with respect to the Change of Control
Payments made or to be made to the Executive, Excise Taxes and any other
Federal, State, FICA/Medicare and unemployment taxes thereon shall be paid by
the Company or, if paid by the Executive, shall be reimbursed to the
Executive by the Company upon its receipt of satisfactory evidence of such
payment having been made.
7. NOTICE
------
(a) Any purported termination by the Company or by the Executive
shall be communicated by Notice of Termination to the other party hereto.
For purposes of this Agreement, a "Notice of Termination" shall mean a
written notice which shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the
Notice of Termination (which, in the case of a termination for Cause, shall
not be less than thirty (30) days from the date such Notice of Termination is
given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other
party that a dispute exists concerning the termination, the Date of
Termination shall be the date on which the dispute is finally determined,
either by mutual written agreement of the parties, by a binding arbitration
award or by a final judgment, order or decree of a court of competent
jurisdiction (the time for appeal therefrom having expired and no appeal
having been perfected) and provided further that the Date of Termination
shall be extended by a notice of dispute only if such notice is given in good
faith and the party giving such notice pursues the resolution of such dispute
with reasonable diligence. Notwithstanding the pendency of any such dispute,
the Company will continue to pay the Executive his full compensation in
effect when the notice giving rise to the dispute was given (including, but
not limited to, Base Salary) and continue him as a participant in all
compensation, benefit and insurance plans in which he was participating when
the notice of dispute was given, until the dispute is finally resolved in
accordance with this Agreement. Amounts paid under this Section are in
addition to all other amounts due under this Agreement and shall not be
offset against or reduce any other amounts due under this Agreement.
8. POST-TERMINATION OBLIGATIONS
----------------------------
(a) All payments and benefits to the Executive under this
Agreement shall be subject to the Executive's compliance with Section 8(b),
hereof during the term of this Agreement and for one (1) full year after the
expiration or termination hereof.
(b) The Executive shall, upon reasonable notice, furnish such
information and assistance to the Company as may reasonably be required by
the Company in connection with any litigation in which it or any of its
subsidiaries or affiliates is, or may become, a party.
9. NON-COMPETITION
---------------
(a) Upon any termination of the Executive's employment hereunder
pursuant to Section 6 hereof, the Executive agrees not to compete with the
Company for a period of one (1) year following such termination in any city,
town or county in which the Company has an office or has filed an application
for regulatory approval to establish an office, determined as of the
effective date of such termination, except as agreed to pursuant to a
resolution duly adopted by the Board. The Executive agrees that during such
period and within said cities, towns and counties, the Executive shall not
work for or advise, consult or otherwise serve with, directly or indirectly,
any entity whose business materially competes with the depository, lending or
other business activities of the Company. The parties hereto, recognizing
that
irreparable injury will result to the Company, its business and property in
the event of the Executive's breach of this Section 9(a) agree that in the
event of any such breach by the Executive, the Company will be entitled, in
addition to any other remedies and damages available, to an injunction to
restrain the violation hereof by the Executive, the Executive's partners,
agents, servants, employers, employees and all persons acting for or with the
Executive. The Executive represents and admits that in the event of the
termination of his employment pursuant to Section 6 hereof, the Executive's
experience and capabilities are such that the Executive can obtain employment
in a business engaged in other lines and/or of a different nature than the
Company, and that the enforcement of a remedy by way of injunction will not
prevent the Executive from earning a livelihood. Nothing herein will be
construed as prohibiting the Company from pursuing any other remedies
available to the Company for such breach or threatened breach, including the
recovery of damages from the Executive.
(b) The Executive recognizes and acknowledges that the knowledge
of the business activities and plans for business activities of the Company
is a valuable, special and unique asset of the business of the Company. The
Executive will not, during or after the term of his employment, disclose any
knowledge of the past, present, planned or considered business activities of
the Company or affiliates thereof to any person, firm, corporation, or other
entity for any reason or purpose whatsoever. Notwithstanding the foregoing,
the Executive may disclose any concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Company.
In the event of a breach or threatened breach by the Executive of the
provisions of this Section 9(b), the Company will be entitled to an
injunction restraining the Executive from disclosing, in whole or in part,
the knowledge of the past, present, planned or considered business activities
of the Company, or from rendering any services to any person, firm,
corporation or other entity to whom such knowledge, in whole or in part, has
been disclosed or is threatened to be disclosed. Nothing herein will be
construed as prohibiting the Company from pursuing any other remedies
available to the Company for such breach or threatened breach, including the
recovery of damages from the Executive.
10. NO ATTACHMENT
-------------
(a) Except as required by law, no right to receive payments under
this Agreement shall be subject to anticipation, commutation, alienation,
sale, assignment, encumbrance, charge, pledge, or hypothecation, or to
execution, attachment, levy or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to affect any such action
shall be null, void and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit
of, the Executive and the Company and their respective successors and
assigns.
11. MODIFICATION AND WAIVER
-----------------------
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have
been waived, nor shall there be any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party
charged with such waiver or estoppel. No such written waiver shall be deemed
a continuing waiver unless specifically stated therein, and each such waiver
shall operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future as to any act
other than that specifically waived.
12. SEVERABILITY
------------
If, for any reason, any provision of this Agreement or any part of
any provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not so held
invalid, and each such other provision and part thereof shall, to the full
extent consistent with law, continue in full force and effect.
13. HEADINGS FOR REFERENCE ONLY
---------------------------
The headings of sections and paragraphs herein are included solely
for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
14. ARBITRATION
-----------
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the Executive
within fifty (50) miles from the location of the Company's executive office,
in accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrators' award in any court
having jurisdiction, provided, however, that the Executive shall be entitled
to seek specific performance of his right to be paid until the Date of
Termination during the pendency of any dispute or controversy arising under
or in connection with this Agreement.
In the event any dispute or controversy arising under or in
connection with the Executive's termination is resolved in favor of the
Executive, whether by judgment, arbitration or settlement, the Executive
shall be entitled to the payment of all back-pay, including salary, bonuses
and any other cash compensation, fringe benefits and any compensation and
benefits due the Executive under this Agreement.
15. PAYMENT OF LEGAL FEES
---------------------
All reasonable legal fees and other expenses paid or incurred by
the Executive pursuant to any dispute or question of interpretation relating
to this Agreement shall be paid or reimbursed by the Company if the Executive
is successful pursuant to a legal judgment, arbitration or settlement.
16. SUCCESSOR TO THE COMPANY
------------------------
The Company shall require any successor or assignee, whether direct
or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Company, expressly and
unconditionally, to assume and agree to perform the Company's obligations
under this Agreement, in the same manner and to the same extent that the
Company would be required to perform if no such succession or assignment had
taken place.
17. UNFUNDED AGREEMENT SUBJECT TO CLAIMS OF COMPANY CREDITORS
---------------------------------------------------------
The Company's obligation under this Agreement will be unfunded and
the Executive will not have any claims or rights superior to those of any
general creditor of the Company.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed and its seal to be affixed hereunto by its duly authorized
officer and its directors, and the Executive has signed this
Agreement, on the 1st day of January, 1998.
ANDREA ELECTRONICS CORPORATION
By: /s/ Douglas J. Andrea
-------------------------------
Name: Douglas J. Andrea
Title: Co-President
By: /s/ John N. Andrea
-------------------------------
John N. Andrea
EXHIBIT 10.9
CONFIDENTIAL TREATMENT REQUESTED FOR
PORTIONS OF THIS DOCUMENT
DIRECT SALES AND LICENSE AGREEMENT
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. & ANDREA ELECTRONICS CORPORATION
THIS DIRECT SALE AND LICENSE AGREEMENT (this "Agreement") is made as of the
13/th/ day of October 1997 by and between Lernout & Hauspie Speech Products
and its subsidiaries, a Belgian corporation (hereinafter referred to as
"L&H") and Andrea Electronics Corporation, a New York corporation
(hereinafter, together with its wholly-owned subsidiaries, collectively
referred to as "AEC").
1 CONSIDERATION. The parties are entering into this Agreement for and in
consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged.
2 BACKGROUND. L&H develops, markets, licenses and supports automated
speech recognition software programs, among them, the software programs
identified in Schedule 2.1(a) attached hereto, the most recent versions
of which software programs as of the date hereof are referred to as the
"Software". AEC develops, markets and sells, among other products,
personal computer based headsets, including, among others, the headsets
identified in Schedule 2.1(b), each of which such identified headsets is
referred to singly as a "Headset" and collectively as the "Headsets".
L&H desires to sell headsets bundled with various Kurzweil, a division
of Lernout & Hauspie, dictation and voice command software products and
on a stand-alone basis to L&H end-users. AEC desires to sell headsets
to L&H for bundling with Kurzweil, a division of Lernout & Hauspie,
dictation and voice command software products and for resale to L&H end-
users in accordance with the terms and conditions of this agreement.
3 DIRECT SALES.
3.1 Headsets. AEC hereby agrees on the terms set forth herein to sell
Headsets to L&H for resale by L&H only to L&H Customers.
3.2 Trade Names, Trade Marks and Copyrighted Materials. AEC hereby
grants to L&H a non-transferable, non-exclusive, right and license
during the term of this Agreement to use the trade names, trade
marks and copyrighted materials of AEC identified in Schedule 3.2
attached hereto (the "AEC Names, Marks and Materials") in
connection with the resale, distribution, marketing and promotion
of the Headsets to L&H customers as provided herein. Such
activities as are licensed under this Section 3.2 are referred to
as the "Licensed Activities".
3.3 Product Warranty. Subject to the provisions of this Agreement
relating to customer service to be provided by L&H for Headsets
purchased by L&H, AEC hereby agrees that L&H shall have the right
to pass on to L&H customers the product warranty that AEC
ordinarily and customarily provides to purchasers of such Headsets
and set forth in Schedule 3.3 attached hereto (such product
warranty in such form being referred to as the "Product Warranty").
3.4 Export. The parties anticipate that Kurzweil, a division of
Lernout & Hauspie, may, from time to time, request AEC to ship
Headsets purchased by L&H under this Agreement to locations
specified by Kurzweil, a division of Lernout & Hauspie. L&H agrees
that it shall not itself or request AEC or any other party to ship,
directly or indirectly, Headsets or other materials provided by AEC
hereunder to any country for which the United States requires an
export license or other governmental approval at the time of such
export.
3.5 Resale Restrictions. For the term of this agreement, Kurzweil, a
division of Lernout & Hauspie will not market, promote, distribute
or sell any headsets other than the Headsets purchased hereunder.
Kurzweil, a division of Lernout & Hauspie, further agrees that
resales by it of Headsets shall not vary substantially from the
manufacturer's suggested retail prices set forth in Schedule
2.1(b).
3.5.1 Price/Performance Protection: AEC understands that Kurzweil,
a division of Lernout & Hauspie will continue its evaluation
of microphones in all form factors, including headsets. If
Kurzweil, a division of Lernout & Hauspie, finds a microphone
exceeding the price/performance of the NC80 or NC8, L&H will
notify AEC of said finding, and grant AEC a grace period of
(CONFIDENTIAL TREATMENT REQUESTED) days to provide a
microphone of equivalent price/performance. If AEC is unable
to provide a microphone of equivalent price/performance within
the grace period, Kurzweil, a division of Lernout & Hauspie,
will be entitled to purchase, market, promote and sell
microphones from other vendors on a non-exclusive basis.
4 PURCHASE ORDERS, PURCHASE PRICE AND PAYMENT.
4.1 Minimum Amount. Each order for Headsets under this Agreement shall
be for a minimum of (CONFIDENTIAL TREATMENT REQUESTED) Headsets and
shall be set forth in writing and delivered to AEC.
4.2 Purchase Price. L&H shall pay to AEC for each Headset purchased by
L&H under this Agreement the purchase price set forth in Schedule
2.1(b) for such Headset,which such purchase price is quoted FOB
Hong Kong. AEC agrees that the price provided by AEC to L&H under
this Agreement for each Headset model set forth in Schedule 2.1(b)
will not exceed (CONFIDENTIAL TREATMENT REQUESTED).
4.3 Delivery. In accordance with schedule 4.3 attached hereto, all
deliveries of Headsets covered by any purchase order received by
AEC from L&H under this Agreement shall be made in bulk, FOB
Shipping Point by the (CONFIDENTIAL TREATMENT REQUESTED) day after
receipt by AEC of such purchase order. All deliveries hereunder
shall be in bulk form and shall be made as L&H shall specify to
AEC.
4.4 Payment. Payment of the purchase price for Headsets purchased by
L&H under this Agreement shall be made NET (CONFIDENTIAL TREATMENT
REQUESTED) days by L&H following the date of delivery. Payment
shall be made in U.S. dollars. Any payments made after the due
date shall bear interest at a rate of (CONFIDENTIAL TREATMENT
REQUESTED) per month.
5 DISTRIBUTION AND PROMOTIONAL LITERATURE.
5.1 Distribution to L&H Customers. (CONFIDENTIAL TREATMENT REQUESTED)
5.2 Promotional Literature. (CONFIDENTIAL TREATMENT REQUESTED)
6 PACKAGING.
6.1 Responsibility. L&H shall be responsible for the packaging of the
Headsets purchased by L&H hereunder for resale to L&H Customers.
6.2 Approval by AEC. Prior to their use in connection with resales by
L&H to L&H Customers, all packaging of Headsets sold by AEC for
resale hereunder shall be submitted to AEC for review by AEC. AEC
shall have the right to prohibit the use of any portion of such
packaging that AEC reasonably believes could damage AEC's or the
Headset's image or customer appeal or that is misleading about the
capabilities, use or function of the Headsets, or the rights in the
technology comprising the Headsets or the AEC Marks, Names and
Materials.
6.3 Product Warranty. All packaging of Headsets distributed by L&H
shall include a written copy of the Product Warranty.
6.4 Not A Sale. None of the information or promotional materials
concerning the Headsets shall state or imply that the intellectual
property of AEC comprising the Headsets is being sold outright to
L&H or any manufacturer, distributor, reseller or end-user, but
shall in all cases refer to the grant of "a license to use" such
intellectual property.
6.5 Intellectual Property Markings. L&H shall not alter or remove any
copyright, trademark, patent, patent pending, proprietary and/or
other legal notice contained on or in the Headset. The existence
of any copyright notice shall not be construed as an admission, or
be deemed to create a presumption, that any publication of AEC
copyrighted material has occurred.
6.6 Expenses. (CONFIDENTIAL TREATMENT REQUESTED)
7 COOPERATION. The parties shall cooperate with each other to their
mutual benefit as follows:
7.1 Web Site Links. Each of L&H and AEC will incorporate in its own
web site a so-called "hot-link" to the other's web site.
7.2 Joint Promotion. L&H and AEC will promote their joint relationship
and the symbiosis of the Headsets and Software through press
releases, all relevant trade shows that pertain to the markets in
which the Headsets and Software are being marketed, and in relevant
collateral material.
7.3 Customer Service. (CONFIDENTIAL TREATMENT REQUESTED)
7.4 Returns and Product Warranty Service. Andrea shall be responsible
for and shall bear any and all expenses incurred in connection with
the handling of returns of Headsets for service or replacement
under the Product Warranty.
8 TERM AND TERMINATION.
8.1 This Agreement shall have an initial term of one (1) year
commencing on the date first set forth above and shall
automatically renew for successive terms of one (1) year each
unless one party provides written notice of non-renewal to the
other party at least (CONFIDENTIAL TREATMENT REQUESTED) prior
to the expiration of the then current term or unless earlier
terminated as the result of a breach by a party.
8.2 If either party shall breach any term, condition or provision of
this Agreement and if the breaching party shall (a) fail to cure
such breach within (CONFIDENTIAL TREATMENT REQUESTED) days after
receipt from the other party of a notice of such breach or (b) in
the case of breaches which require more than (CONFIDENTIAL
TREATMENT REQUESTED) days to effect a cure, fail to commence and
continue in good faith efforts to cure such breach, provided that
such cure shall be effected no later than (CONFIDENTIAL TREATMENT
REQUESTED)days after receipt of such notice of such breach, the
non-breaching party may terminate this Agreement by written notice
to the other party.
9 CONFIDENTIAL INFORMATION.
9.1 Definition. In the course of the parties working together under
this Agreement, each party will have occasion to acquire and/or
receive from the other party and each party will have occasion to
disclose to the other party information that is not public, that is
of critical competitive and financial importance to the disclosing
party and that the disclosing party wishes to maintain in
confidence. All of such information however acquired by the
receiving party, including, without limitation, trade secrets,
customer lists, business plans, marketing plans, non-public
financial data, product specifications and designs, the existence,
nature, substance, progress and results of research and development
projects, concepts, inventions, discoveries, formulations,
processes, drawings, documents, records, software, or any other
information, whether similar to the specified information or not,
that is identified as confidential to the disclosing party, to any
parent, subsidiary or affiliate company thereof or to any third
party, is hereinafter referred to as such party's "Confidential
Information".
9.2 General Rule regarding Non-disclosure. Accordingly, each party in
its capacity as a party receiving Confidential Information agrees
on behalf of itself and its principals, partners, directors,
officers, employees and advisors (collectively "Employees") and
that without the prior written approval of the disclosing party, it
will not:
9.2.1 use the disclosing party's Confidential Information for its
own benefit, except in connection with the carrying out of its
responsibilities and obligations under this Agreement;
9.2.2 use the disclosing party's Confidential Information for anyone
else's benefit for any reason;
9.2.3 disclose the disclosing party's Confidential Information to
anyone other than to those Employees with a need to know the
information in order to carry out its responsibilities and
obligations under this Agreement.
9.3 Exceptions. The obligation of confidentiality shall not relate to
any information (a) that was already known to the receiving party
prior to its disclosure by the disclosing party; (b) that is or
becomes publicly known through no act or fault of the receiving
party; (c) that is received by a party (without a breach of this
Agreement) from a third party with no restrictions as to its
disclosure; or (d) that is required to be disclosed pursuant to
applicable law, a court order, a judicial proceeding, or the
enforcement hereof, provided that the party whose information is to
be disclosed is provided with reasonable prior written notice so
that such party may contest such disclosure.
9.4 Return of Confidential Information. Upon the request of a party,
the other party will return any of the requesting party's
Confidential Information that is in tangible form and any physical
manifestations of such Confidential Information.
9.5 Employees. The receiving party shall take all reasonable steps
necessary to ensure that its employees are bound by restrictions
regarding the use and disclosure of the disclosing party's
Confidential Information similar to those contained herein.
9.6 Injunctive Relief. Each party understands, acknowledges and agrees
that Confidential Information is of great competitive as well as
monetary value and that, therefore, each party shall have the right
to bring an action to enjoin any unauthorized disclosure or use of
its own Confidential Information by the other party, it being
agreed that a suit for monetary damages alone would be an
inadequate remedy.
9.7 Degree of care. Each party as a receiving party shall use the same
degree of care in protecting the confidentiality of confidential
information received from the other party as such receiving party
uses to protect its own confidential information.
10 AEC WARRANTY AND INDEMNITY FOR INFRINGEMENT.
10.1 Warranty.
10.1.1 AEC warrants (i) that it has the right to grant the licenses
contained herein to L&H for the Licensed Activities, and (ii)
that the Licensed Activities and the use of the Headsets by
end-users will not infringe any patent rights, copyrights or
other intellectual property rights of a third party.
10.1.2 AEC MAKES NO WARRANTY WITH RESPECT TO INTELLECTUAL PROPERTY
RIGHTS IN ANY COUNTRIES, OR OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, OR ANY OTHER OR FURTHER WARRANTY, EITHER
EXPRESS OR IMPLIED OR BY TRADE USAGE, IN CONNECTION WITH THE
HEADSETS OR THE CONDUCT OF THE LICENSED ACTIVITIES.
10.2 Indemnity.
10.2.1 AEC agrees to indemnify and hold L&H and L&H customers that
purchase Headsets from L&H hereunder harmless from, and defend
L&H against, any loss, cost, damage, or expense and any claims
therefor (including reasonable attorney's fees and expenses)
suffered by L&H that arise from the infringement or the
alleged infringement by the Headsets or the conduct of the
Licensed Activities of any patent rights, copyrights or other
intellectual property rights of a third party, including any
claim of misappropriation of trade secrets (each a "Claim").
10.2.2 In the event a Claim is made, in order to be entitled to the
indemnity hereunder, L&H and any L&H customer indemnified
hereunder must promptly notify AEC thereof in writing and must
tender the defense of the Claim to AEC in writing. AEC shall
undertake the defense of the Claim at its own expense and in a
prompt and competent manner.
10.3 Limitations and Exclusions.
10.3.1 AEC SHALL HAVE NO LIABILITY OR OBLIGATION HEREUNDER TO L&H
WITH RESPECT TO ANY CLAIM THAT RESULTS FROM OR IS BASED ON (i)
ANY IMPROVEMENTS, UPDATES, MODIFICATIONS OR OTHER CHANGES TO
THE HEADSETS THAT ARE NOT MADE BY AEC; (ii) IMPROPER USE OF
THE HEADSET; (iii) THE MALFUNCTIONING OF ANY HEADSET NOT
OTHERWISE COVERED BY THE WARRANTY SET FORTH IN SCHEDULE 3.3;
OR (iv) END-USER ERROR.
10.3.2 AEC SHALL HAVE NO LIABILITY OR OBLIGATION TO L&H HEREUNDER
WITH RESPECT TO ANY CLAIM OF INFRINGEMENT OF A PATENT,
COPYRIGHT, TRADEMARK OR OTHER INTELLECTUAL PROPERTY RIGHT IN
WHICH AEC OR ANY AFFILIATE OF AEC HAS AN INTEREST OR LICENSE
OTHER THAN THE INTEREST GRANTED HEREUNDER.
10.3.3 IF ANY HEADSETS BECOME, OR IN AEC'S OPINION IS LIKELY TO
BECOME, THE SUBJECT OF A CLAIM, AEC AT ITS OWN OPTION AND
EXPENSE SHALL EITHER (i) PROCURE FOR L&H AND/OR L&H CUSTOMERS
THAT HAVE PURCHASED HEADSETS FROM L&H THE RIGHT TO CONTINUE
USING SUCH HEADSETS; (ii) REPLACE OR MODIFY THE HEADSETS SO
THAT THEY BECOME NON-INFRINGING.
11 RESERVED.
12 L&H'S INDEMNITY FOR INFRINGEMENT.
12.1 Indemnity. L&H agrees to indemnify and hold AEC harmless from, and
defend AEC against, any loss, cost, damage, or expense and any
claims therefor (including reasonable attorney's fees and expenses)
suffered by AEC that arise from the publication and/or sale by L&H
of the Software or that are based on (i) alleged infringement by
the Software of any patent rights, copyrights or other intellectual
property rights of a third party; (ii) on theories of product
liability, warranty, personal injury; or (iii) arising out of the
illegal exportation of any Software or Headset by L&H.
12.2 Claims. In the event any claim of the type described in Section
12.1 is made against AEC, in order to be entitled to the indemnity
provided hereunder, AEC must promptly notify L&H thereof and must
tender the defense thereof to L&H in writing. L&H shall undertake
the defense thereof at its own expense in a prompt and competent
manner.
13 OTHER INDEMNITY MATTERS.
13.1 NEITHER PARTY SHALL BE LIABLE OR OBLIGATED IN ANY MANNER UNDER THIS
AGREEMENT TO THE OTHER FOR ANY SPECIAL, INCIDENTAL, CONSEQUENTIAL
OR PUNITIVE DAMAGES EVEN IF INFORMED OF THE POSSIBILITY THEREOF IN
ADVANCE.
13.2 Each party shall give the other party prompt written notice of any
threat, warning or notice of any claim of which such party has
knowledge or has reason to have such knowledge and for which
indemnity is provided hereunder by a party.
14 NOTICES. All notices required or permitted under this Agreement shall
be in writing and shall be deemed given either (a) when hand delivered
to a party; (b) when deposited with any delivery service listed in
Schedule 14 attached hereto with instructions to provide next-business-
day delivery and proof of delivery to a party; or (c) when sent by
facsimile transmission to a party followed immediately by delivery in
conformity with clauses (a) or (b) of this Section 14, as follows:
IF TO L&H AT: IF TO AEC AT:
Sint-Krispinstraat 7 11-40 45/th/ Road
8900 leper, Belgium Long Island City, NY 11101
Attn: Legal Department Attn: Legal Department
Fax#: (617) 893-6525 Fax#: (718) 784-8457
or to such other address of a party as such party may by notice hereunder
designate to the other party.
15 MISCELLANEOUS.
15.1 Entire Agreement; Amendments; Counterparts. This Agreement
together with the schedules attached hereto contains the entire
understanding of the parties on the subject matter hereof except as
otherwise expressly contemplated herein and no representation,
affirmation of fact, course of prior dealings, promise or condition
in connection herewith or usage of the trade not expressly
incorporated herein shall be binding on the parties; shall not be
amended hereof except as otherwise expressly contemplated herein;
shall not be amended except by written agreement of the parties
signed by each of them; shall be binding upon and inure to the
benefit of the parties and their successors and permitted assigns;
may be executed in one or more counterparts each of which shall be
deemed an original hereof, but all of which shall constitute but
one and the same agreement; and shall not be assignable by a party
without the prior written consent of the other party.
15.2 Assignment. L&H shall not assign this Agreement or any rights or
obligations hereunder without the prior written consent of AEC.
AEC shall not assign this Agreement or any rights or obligations
hereunder without the prior written consent of L&H.
15.3 Construction.
15.3.1 The words "herein," "hereof," "hereunder," "hereby,"
herewith" and words of similar import when used in this
Agreement shall be construed to refer to this Agreement as a
whole. The word "including" shall mean "including, but not
limited to," any enumerated items.
15.3.2 Each party and its counsel has reviewed this Agreement.
Accordingly, the normal rule of construction that any
ambiguities and uncertainties are to be resolved against the
party preparing an agreement will not be employed in the
interpretation of this Agreement; rather the Agreement shall
be construed as if all parties had jointly prepared it.
15.4 Waivers. The failure to insist upon strict compliance with any
term, covenant or condition contained herein shall not be deemed a
waiver of such term, nor shall any waiver or relinquishment of any
right at any one or more times be deemed a waiver or relinquishment
of such right at any other time or times.
15.5 Severability. In the event that any section or subsection of this
Agreement or part thereof is found by competent judicial authority
to be invalid, illegal or unenforceable in any respect, then such
section or subsection or part thereof shall, if possible, be
modified to the minimum extent necessary to render such section or
subsection valid, legal and enforceable and still be consistent
with the intent of the parties, and the validity, legality and
enforceability of any such section or subsection or part thereof in
every other respect and the remainder of this Agreement shall
continue in effect.
15.6 Force Majeure. Neither AEC nor L&H shall be in default or liable
for any delay or failure of compliance with this Agreement due to
an act of nature, public enemy, government action, freight embargo,
or strike beyond the control of the defaulting party and the
defaulting party shall provide the non-defaulting party immediate
notice of any such anticipated delay or failure of compliance;
provided, however, that any such act shall not relieve the
defaulting party's obligations hereunder and such party hereby
agrees to perform its obligations as soon as practicable after the
conditions causing such delay or failure have subsided.
15.7 Headings and Captions. The headings and captions of the sections
and paragraphs herein are for convenience only and shall not be
used to construe or interpret this Agreement.
15.8 Governing Law; Jurisdiction. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York
without giving effect to any choice of law or conflict of law
provision or rule whether of the State of New York or any other
jurisdiction that would cause the application hereto of the laws of
any jurisdiction other than the State of New York. Each party
agrees that any action arising under this Agreement may be brought
in the federal or state courts in the County of New York, State of
New York, and each party agrees to submit to the personal
jurisdiction of such courts.
IN WITNESS WHEREOF the parties have caused this Agreement to be executed by
their duly authorized representatives as of the day and year first above
written.
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. ANDREA ELECTRONICS CORPORATION
By: By:
------------------------------- -----------------------------
President Co-President
SCHEDULE 2.1(A) - L&H SOFTWARE
(CONFIDENTIAL TREATMENT REQUESTED)
SCHEDULE 2.1(B) - AEC HEADSETS
Product Description Purchase Price MSRP
(Confidential Treatment Request)
SCHEDULE 3.2 - AEC COPYRIGHTED MATERIALS
Andrea Electronics Corporation hereby grants to L&H, its subsidiaries and
affiliates the nonexclusive, royalty-free right and license to use, in
connection with the marketing of the Headsets, the Headset name(s) and
trademarks used by the supplier to identify the Headsets including any
portions thereof. If Andrea Electronics Corporation informs L&H in writing,
that Andrea Electronics Corporation objects to L&H's use of the Headset(s)
names and trademarks, L&H will take reasonable steps to modify it.
(Confidential Treatment Requested)
SCHEDULE 3.3 - FORM OF AEC PRODUCT WARRANTY
Andrea warrants that all Headsets provided to L&H under the terms of this
Agreement are free from defects in design, material and workmanship, and
conform to all of AEC's Headset representations in this agreement and agreed
upon Headset specifications.
(see attached Consumer Guarantee)
SCHEDULE 4.3 -
FOB Shipping point is defined as freight on board at AEC's shipping points in
(CONFIDENTIAL TREATMENT REQUESTED). (CONFIDENTIAL TREATMENT REQUESTED)
SCHEDULE 14 - LIST OF APPROVED COURIERS FOR DELIVERY OF NOTICES
(CONFIDENTIAL TREATMENT REQUESTED)
ORDER SCHEDULE
(CONFIDENTIAL TREATMENT REQUESTED)
DELIVERY SCHEDULE
(CONFIDENTIAL TREATMENT REQUESTED)
CONFIDENTIAL TREATMENT REQUESTED FOR
PORTIONS OF THIS DOCUMENT
IBM Production Procurement Agreement
Production Procurement Agreement #7SZ970156
This is an Agreement (Agreement), dated as of June 11, 1997, by and between
International Business Machines Corporation (IBM), a New York corporation and
Andrea Electronics Corporation (Supplier), a New York corporation.
Statement of Intent
It is IBM's intention to do business with Suppliers who remain competitive in
providing IBM with leading-edge technology at favorable prices on acceptable
terms and conditions. Accordingly, from time to time, IBM intends to assess
Suppliers' competitiveness in terms of pricing, continuity of supply, quality
improvement, and cost reduction, and to notify Supplier if IBM determines
that the Supplier is not competitive with its fully qualified competitors so
that the Supplier can in its sole discretion remedy the situation.
1. PRODUCT:
In return for the prices paid by IBM under this Agreement, Supplier shall
provide IBM with materials, products, components, documentation, spare parts
and/or related services (Products) according to the terms and conditions of
the Product Specification and Price List (PSPL) which is an Attachment to
this Agreement and the Work Authorizations issued under Section 3.0 below,
(each a "Work Authorization", collectively the "Work Authorizations").
2. TERM AND TERMINATION:
This Agreement shall commence on the date of execution by the parties and
shall continue in full force and effect unless earlier terminated as provided
in this Agreement. Either party may terminate this Agreement for material
breach of the other party upon (CONFIDENTIAL TREATMENT REQUESTED) days
written notice.
3. WORK AUTHORIZATION:
Only a Work Authorization in the form of a purchase order issued by IBM or
its subsidiaries, in either electronic or hard copy form, provides
authorization to the Supplier to perform any work or produce any products
under this Agreement. Only procurement personnel of IBM or its subsidiaries
have the authority to issue Work Authorizations or direct work activity under
the terms and conditions of this Agreement.
4. MOST FAVORED CUSTOMER:
The prices provided by Supplier to IBM under this Agreement should not exceed
those offered to other customers purchasing similar products or services in
like or lesser quantities under similar terms and conditions. If Supplier
offers prices to other customers which are lower than those offered to IBM in
like or lesser quantities during the same time period, then those prices
shall become available to IBM at the time of their availability to that other
customer. IBM and Supplier shall maintain the confidentiality of the prices
provided to IBM.
5. SUPPLIER ACTIONS:
5.1 PRODUCT MODIFICATIONS: No changes of any kind shall be made by Supplier
in the form, fit or function of Products without IBM's prior written
approval, which such approval shall not be unreasonably withheld.
5.2 WITHDRAWAL OF PRODUCTS: Supplier shall notify IBM (CONFIDENTIAL
TREATMENT REQUESTED) prior to Supplier's withdrawal of any Product(s). IBM
will then have (CONFIDENTIAL TREATMENT REQUESTED) to place orders and
Supplier shall deliver such Product(s) before the withdrawal date or upon
mutually agreed upon delivery terms.
6. SUPPLIER REPRESENTATIONS/WARRANTIES:
6.1 REPRESENTATIONS AND WARRANTIES: Supplier represents and warrants: (i)
it has the right to enter into this Agreement; (ii) Supplier's performance of
this Agreement will not violate the terms of any license, contract, note or
other obligation to which Supplier is a party or any statute, law, regulation
or ordinance to which Supplier is subject, including, without limitation, all
health, safety and environmental statutes, laws, regulations and ordinances;
(iii) no claim, lien, or action is pending or threatened against Supplier or
its suppliers, subsidiaries, affiliates or parent company which would
interfere with IBM's, its subsidiaries', distributors' or customers' use of
the Products; (iv) the Products do not infringe any patent, trademark,
copyright or other intellectual property rights of a third party; (v) none of
the Products contain nor are any of the Products manufactured using ozone
depleting substances including, without limitation, chlorofluorocarbons,
halons, methyl chloroform and carbon tetrachloride; (vi) each of the Products
at time of delivery to IBM is safe for its intended use, it being understood
that Supplier makes no representation or warranty as to safety of any Product
in the event that such Product is altered in any manner following delivery to
IBM or used by IBM, the end user or any other party for other than its
intended use, and (vii) all Products provided to IBM under this Agreement are
new and do not contain anything used or reconditioned.
6.2 PRODUCT WARRANTY: The Supplier warrants that all Products provided to
IBM are free from defects in design (except for designs provided by IBM),
material and workmanship, and will conform to all of Supplier's Product
representations, the representations in Section 6.1 and agreed-upon Product
specifications. THE WARRANTIES IN THIS AGREEMENT ARE IN LIEU OF ALL OTHER
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THOSE WARRANTIES OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR USE.
7. INTELLECTUAL PROPERTY RIGHTS AND INDEMNIFICATION:
Supplier shall own or have all rights and licenses under all U.S. and foreign
copyrights and patents applicable to the Products, and Supplier grants IBM
all rights and licenses necessary for IBM and its subsidiaries to exercise
its right under this Agreement. Supplier agrees to defend, hold harmless,
and indemnify IBM from and against any claim that Supplier's Product
infringes any intellectual property rights or any claim arising from the
failure of Supplier to comply with its warranties under Section (6.1). If
such a claim of infringement is made the Supplier shall use commercially
reasonable efforts to obtain for IBM the right to continue to use and market
the Supplier's Product or replace it with noninfringing product.
8. TRADEMARKS AND TRADE NAMES:
Neither party may use any of the other party's or its subsidiaries'
trademarks, trade names or brand names without the other party's written
consent.
9. GENERAL:
9.1 CONFIDENTIALITY: IBM and Supplier agree that the pricing terms of this
Agreement are confidential. All other exchanges of information between the
parties pursuant to this Agreement shall be deemed nonconfidential, unless
the parties have entered into a separate written confidentiality agreement.
9.2 NO AGENT: Supplier is an independent contractor and is not an agent of
IBM for any purpose whatsoever. Each party is solely responsible for the
acts of its employees and agents, including any negligent acts.
9.3 CHOICE OF LAW, WAIVER OF JURY TRIAL: This Agreement shall be governed
by the laws of New York, without regard to any principles of conflicts of
laws. The parties expressly waive any right they may have to a jury trial
regarding disputes related to this Agreement.
9.4 FORCE MAJEURE: Neither IBM nor Supplier shall be in default or liable
for any delay or failure of compliance with this Agreement due to an act of
nature (e.g., flood, fire, explosion, breakdown of plant, casualty and
accident), strikes, lockouts, labor disputes, public enemy (e.g., war,
revolution and civil commotion), government action (e.g., injunction, law,
order, proclamation, regulation, ordinance, demand or requirement of any
government or of any subdivision, authority or representative of any such
government) or freight embargo (e.g., any blockage or embargo of financial
transactions, commerce, trade, transportation and the like) beyond the
control of the defaulting party and the defaulting party shall provide the
nondefaulting party immediate notice of any such anticipated delay or failure
of compliance; provided, however, that any such act shall not relieve the
defaulting party's obligations hereunder and such party hereby agrees to
perform its obligations as soon as practicable after the conditions causing
such delay or failure have subsided.
9.5 ASSIGNMENT: IBM and Supplier shall not assign their rights or delegate
or subcontract their duties under this Agreement without the prior written
consent of the other party.
9.6 RIGHTS OF SUBSIDIARIES: IBM and its subsidiaries may exercise any of
the rights of IBM under this Agreement.
9.7 SURVIVAL: The provisions set forth in Sections (CONFIDENTIAL TREATMENT
REQUESTED) shall survive and continue after any expiration, termination or
cancellation of this Agreement and shall remain in effect until fulfilled,
and apply to respective successors and assigns.
9.8 WAIVER: In order for a waiver to be effective under this Agreement, it
must be in writing signed by the party so waiving its rights. The waiver by
either party of any instance of the other party's noncompliance with any
obligation or responsibility herein shall not be deemed a waiver of
subsequent instances or of either party's remedies for such noncompliance.
9.9 ENTIRE AGREEMENT AND ORDER OF PRECEDENCE: This Agreement which
incorporates the attached PSPL, together with Work Authorizations issued
hereunder, constitute the entire Agreement between the parties with respect
to the subject matter hereof. In the event of any conflict in these various
documents, the order of precedence will be: (i) the quantity, price, payment
and delivery terms of a Work Authorization; (ii) the PSPL; (iii) this
Agreement; and (iv) the remaining terms of the Work Authorization.
9.10 AMENDMENTS: This Agreement may only be amended in writing signed by
authorized representatives of each of the parties. To be effective, such
amendment must specifically reference this Agreement.
ACCEPTED AND AGREED TO:
INTERNATIONAL BUSINESS MACHINES ANDREA ELECTRONICS
CORPORATION CORPORATION
By:
Name: (CONFIDENTIAL TREATMENT REQUESTED)
Title: (CONFIDENTIAL TREATMENT REQUESTED)
Date:
Product Specification and Price List Attachment #001
To Production Procurement Agreement #7SZ970156
This Product Specification & Price List Attachment #001 (Attachment)
incorporated under Agreement #7SZ970156 ("Agreement") is entered into by and
between Andrea Electronics Corporation ("Andrea") and International Business
Machines Corporation (IBM). The term of this Attachment shall be effective
from July 30, 1997. (Attachment - Term).
1. PRODUCT DESCRIPTION
The Product is a computer headset and plug converter which consists of
headband, speaker, boom mounted microphone, cord with inline active noise
cancellation electronics, cord jacks, miscellaneous peripheral devices and
documentation for use with computer products which include but are not
limited to hand held, mobile and desktop personal computers, lower form
personal computers and personal computer peripherals and components, and
application software and operating systems. The Product part numbers are set
forth in Subsection 3.1. The Product is further described by the
requirements set forth in the following specifications which are incorporated
herein by reference:
(CONFIDENTIAL TREATMENT REQUESTED)
2. PRODUCT REQUIREMENTS
2.1 PRODUCT WARRANTIES: Notwithstanding anything to the contrary, Supplier
represents and warrants that at all times: (i) for a period of (CONFIDENTIAL
TREATMENT REQUESTED), the Products shall operate (a) in accordance with all
specifications and requirements in this Attachment, (b) in accordance with
IBM's intended use of the Products, and (c) in or with IBM's products
(including but not limited to system units, peripherals, application software
and operating systems). Those Products that do not conform to this or any
other Product warranties shall, at IBM's option, be repaired or replaced (or
the purchased price paid shall be credited or refunded) by Supplier within
(CONFIDENTIAL TREATMENT REQUESTED) of IBM's notification to Supplier, and
Supplier agrees to reimburse IBM for all costs associated with such repair or
replacement of Products; (ii) for Products that have a defect rate of
(CONFIDENTIAL TREATMENT REQUESTED) of total Products purchased (Epidemic
Defect Rate), Supplier shall, at IBM's option and within (CONFIDENTIAL
TREATMENT REQUESTED) of IBM's notification to Supplier, repair or replace all
Products (or, if IBM elects, the purchase price paid shall be credited or
refunded) and Supplier shall, at IBM's option, reimburse IBM for all costs
associated with such repair or replacement of products of IBM, IBM
subsidiaries, and its and their distributors and end users; (iii) Supplier
shall, at IBM's option and within (CONFIDENTIAL TREATMENT REQUESTED) of IBM's
notification to Supplier, repair or replace Products (or the purchase price
paid shall be credited or refunded) that are part of products that IBM, in
its discretion, has recalled or provided other corrective actions for safety
reasons associated with the Products, and Supplier shall, at IBM's option,
reimburse IBM for all costs associated with such repair or replacement of
Products of IBM, IBM subsidiaries, and its and their distributors and end
users.
2.2 PRODUCT FIELD SUPPORT: In addition to the Product warranties, Supplier,
at (CONFIDENTIAL TREATMENT REQUESTED) expense, shall provide all end user
support and inquiries in support of the Product during the end user's
warranty period of (CONFIDENTIAL TREATMENT REQUESTED); support IBM, its
subsidiaries, distributors and all end user telephone calls regarding the
Product by providing a published telephone number in each major geography and
key countries to include North America, Europe, Latin America and Asia
Pacific at a minimum of (CONFIDENTIAL TREATMENT REQUESTED) hours per day.
With regards to Latin America, Supplier agrees to provide to IBM its schedule
for implementation in Latin America, to be agreed to by the parties. Such
information shall be included on the warranty documentation with the Product.
In addition, Andrea shall:
1) support IBM regarding the determination of whether there is a
defect (patent or latent), error or other problem ("Defects") with
the Product; and
2) isolate and promptly correct all Defects with the Products, and
provide such corrections to IBM in accordance with the parameters
set forth below (these parameters are "time of the essence").
IBM shall notify Supplier to obtain a Return Material Authorization ("RMA")
number prior to returning Products for non-conformance, which RMA Supplier
agrees to promptly issue upon request. IBM shall furnish the following
information with Products returned to Supplier: a) IBM's complete address,
b) name and telephone numbers of IBM's employee to contact in case of
questions about the Product, c) a complete list of Products returned, (d) the
nature of the defect or failure if known, and e) whether or not returned
Products are in warranty.
2.3 PRODUCT CERTIFICATIONS: REQUIRED PRODUCT CERTIFICATIONS:
CE Mark
Green Point/Dot
2.4 COO PRODUCT CERTIFICATION: Supplier hereby certifies that the Products
purchased hereunder have the following country(ies) of origin. If there are
any changes to this information, Supplier will notify IBM by providing a new
country of origin certification signed by an authorized Suppliers'
representative before shipping any Products other than those with the country
of origin listed below for such Product. Supplier acknowledges that IBM will
rely upon this certification, and timely updates to it, in making
representations to IBM customers and to comply with various laws and
regulations. If any part number listed has more than one country of origin,
Supplier certifies that each country of origin is listed below, and Supplier
agrees to deliver to IBM instructions regarding how IBM can distinguish each
country of origin for part numbers with more than one country of origin.
IS
PRODUCT MARKED WITH AN
IBM ASSIGNED PRODUCT COUNTRY OF ORIGIN & COMPLETE INDUSTRY
STANDARD 4L BARCODE
KIT PART NUMBER DESCRIPTION STREET ADDRESS
(Y/N)
(CONFIDENTIAL TREATMENT REQUESTED)
The country of origin street address for the above part numbers is as
follows:
(CONFIDENTIAL TREATMENT REQUESTED)
2.5 COMPATIBILITY REQUIREMENTS: The Products shall be compatible with IBM
Products and Supplier agrees to enhance or correct and test Products to
ensure such compatibility.
2.6 TRANSLATIONS: The Product publications and warranty information shall
be provided in a multilingual format to include at a minimum English, French,
German, Italian and Spanish.
2.7 FIELD REPLACEMENT UNITS: During the term of this Agreement and for a
period of (CONFIDENTIAL TREATMENT REQUESTED) thereafter, for each Product
ordered by IBM under this Agreement Andrea shall maintain the capability to
supply Field Replacement Units ("FRUs") packaged to IBM's specifications and
at Andrea's expense in volumes (based on Andrea's quality performance) to be
agreed to from time to time between the parties. The initial quantity of
FRUs shall be (CONFIDENTIAL TREATMENT REQUESTED) of the units estimated to be
delivered during the first year of this Agreement.
3. PRICING
3.1 PRODUCT PRICING: Supplier shall make the Product available to IBM at
the pricing specified in Exhibit 1, "Product Prices", attached hereto. The
pricing in Exhibit 1 as expressed in Work Authorizations ("WAs," i.e.,
written or electronic IBM purchase orders or other electronic transactions
that are expressly identified as an authorization to perform work under the
Agreement or this Attachment) shall be the only charges due to the Supplier
from IBM. Supplier warrants that the pricing in Exhibit 1 does not include
sales taxes and that Supplier will not include any sales taxes on any
Products purchased by IBM.
3.2 PAYMENTS: Supplier will invoice IBM upon IBM's receipt of Product at
IBM's facilities. Terms for payment on all invoices will be net
(CONFIDENTIAL TREATMENT REQUESTED) from receipt of an acceptable invoice by
IBM. In the event payment is not received within such period, Supplier will
notify IBM and IBM will make prompt payment of the amount due. Payment of
invoices shall not be deemed acceptance of the Products. All prices are
expressed in USA dollars.
3.3 WORK AUTHORIZATION LOGISTICS
Supplier will deliver Products as specified in WAs. The agreed to lead-time
for IBM to issue WAs prior to delivery shall be (CONFIDENTIAL TREATMENT
REQUESTED). IBM may provide a (CONFIDENTIAL TREATMENT REQUESTED) rolling
estimated forecast for any quantities of Product that may be required.
Supplier agrees to cooperate and use best efforts for cases where IBM
requests a shorter lead-time. Any increase in the agreed to lead time must
have IBM's prior written approval. Any requests to increase lead time by
Supplier must be approved by IBM. Andrea shall use the (CONFIDENTIAL
TREATMENT REQUESTED) rolling estimated forecast for planning purposes for
long leadtime components for Products.
ANY PRODUCT QUANTITIES CITED IN OR IN SUPPORT OF THIS ATTACHMENT ARE
PRELIMINARY ONLY AND SHALL NOT IN ANY WAY BE CONSTRUED AS A COMMITMENT AND
ARE NON-BINDING. IBM MAKES NO REPRESENTATION OR WARRANTY AS TO THE QUANTITY
OF PRODUCTS THAT IT WILL PURCHASE, IF ANY.
4. DELIVERY LOGISTICS
4.1 DELIVERY POINT: All references to delivery as it applies to this
Attachment shall mean delivery to one of the following IBM locations that may
be further specified by IBM in a WA or separate letter: IBM Corporation,
Raleigh, NC, IBM/Lotus Corporation, Cambridge, MA, and IBM Lotus/Corporation,
Dublin, Ireland. The delivery point shall be the IBM locations specified
herein. Prior to shipping the product from its shipping point, Andrea shall
notify the IBM Business Coordinator that the shipment is ready and IBM will
have option to change the shipping mode to air freight at IBM's expense.
4.2 ON-TIME DELIVERY: Products must be delivered no more than (CONFIDENTIAL
TREATMENT REQUESTED) early and (CONFIDENTIAL TREATMENT REQUESTED) late. Time
is of the essence. If Supplier cannot meet a scheduled delivery date,
Suppler shall promptly notify IBM of Andrea's revised delivery date and IBM
may, at its option, without limitation (i) cancel Products not delivered
without charge, (ii) buy elsewhere and charge Supplier any cost differential,
(iii) charge the Supplier for any premium costs (including, without
limitation, shipping and handling costs) incurred as a result of the late
delivery and (iv) exercise all other remedies provided at law, in equity and
in the Agreement (including this Attachment).
4.3 Supplier agrees that the date of manufacture for all Products purchased
by IBM shall be less than (CONFIDENTIAL TREATMENT REQUESTED) from the date of
delivery.
4.4 IBM INVENTORY BALANCE
IBM shall have the right to return any Product to Supplier and shall be
entitled to the greater of (a) a full refund of any monies paid by IBM for
the returned Product less a maximum (CONFIDENTIAL TREATMENT REQUESTED)
handling/restocking charge, or (b) (CONFIDENTIAL TREATMENT REQUESTED) of the
price paid by IBM. In addition, the parties agree to negotiate any payments
due for scrap of parts, components, packaging material and documentation that
was specified or customized for IBM.
5. OEM ACCOUNTS
5.1 During the term of this Attachment, Supplier grants to IBM the right to
disclose to its OEM Accounts information under this Attachment which shall
include but not limited to Product description, pricing, leadtime, order
placement contact, delivery and Product warranty information which will
enable OEMs, at its discretion, to order Product under the terms of
Attachment 1. At no time will any purchase orders from OEMs be construed by
Andrea as a WA from IBM and IBM shall not be liable for any action or
inaction of the OEM who elects to do business with Andrea.
6. MARKETING PROGRAM
6.1 During the term of this Attachment, Andrea agrees with respect to each
Product sold to IBM (i) to include in the package containing such Product
Andrea's marketing and promotional materials which includes flyers, brochures
and coupons, including discount coupons, that describe Andrea products and
accessories ("Marketing Materials") whereby IBM, its subsidiaries,
distributors and end-users may purchase additional Product and various Andrea
products that may be required for certain computer configurations, including
at a minimum a battery adapter for portable computers, other microphones, and
accessories; (ii) to provide to IBM for IBM's prompt review and approval
which shall not be unreasonably withheld all Marketing Materials prior to
including the Marketing Materials as a part of the Product package. Andrea
agrees to make reasonable changes to the Marketing Materials upon IBM
request; (iii) to provide on a worldwide basis fulfillment services for all
Andrea products, such services shall include: publish telephone numbers and
Internet address to accept and fulfill orders; provide shipment and return
capability; perform warranty services; and, provide maintenance and support
as required, and (iv) to confirm that all Andrea products provided under the
marketing program meet any agency or country compliance requirements where
applicable.
6.2 MARKETING ASSISTANCE FROM ANDREA
During the term of this Attachment and upon IBM's reasonable request, Andrea
will provide to IBM the following marketing assistance:
6.2.1 DEMONSTRATIONS
Andrea shall participate in demonstrations of IBM products at trade shows,
conferences, and sales meetings (up to (CONFIDENTIAL TREATMENT REQUESTED) per
year).
6.2.2 SALES CALLS
Andrea shall participate in executive sales calls with IBM marketing
representatives on IBM's large prospects and major distributors (up to
(CONFIDENTIAL TREATMENT REQUESTED) per year or more).
7. TRADEMARKS
Notwithstanding the provision of Section 8, "Trademarks and Trade Names", of
the Agreement, the parties agree as follows:
7.1 IBM TRADEMARKS
IBM hereby grants to Supplier to use of the IBM Via Voice(Trademark)
trademark in Supplier's marketing and promotional materials.
7.2 USE OF IBM TRADEMARKS
Supplier agrees that the following shall govern the use of IBM's trademark.
Supplier will use the appropriate trademark and trademark symbol (either "TM"
or an R in a circle in a superscript in the United States and as appropriate
under local law elsewhere) and clearly indicate the ownership of the
trademark whenever the trademark is first displayed or mentioned in any
advertisement, brochure, package or in any other manner in connection with
the Products listed herein. The use of the Trademark shall only be in
connection with the marketing of the Products and not with any other goods or
services offered by Supplier and will only be used to make factual
statements. At no time during the term of this Agreement, shall any name or
trademark confusingly similar to IBM's trademark be used. The use of the
trademark will not directly or indirectly create in or for you any right,
title or interest in the trademark. Supplier agrees that the trademark
together with the goodwill of the business symbolized thereby is the sole and
exclusive properties of IBM. The use of Supplier by the trademark inure
solely to the benefit of IBM. Supplier will not take any action to interfere
with, challenge, register or claim any right in the trademark. Andrea's name
or trademarks will not be displayed in a manner that suggests that its name
or trademarks are part or related to the trademark. Supplier may not display
IBM's trademark as prominent or more prominent than its name, trademarks,
trade names or those of any third party. Upon request of IBM, Supplier
agrees to change any promotional, advertising or related materials which IBM
determines to be inaccurate, objectionable, misleading or a misuse of the
trademark.
7.3 SUPPLIER TRADEMARKS
Supplier hereby grants to IBM, its subsidiaries and its and their successors,
assigns, agents and distributors a nonexclusive, royalty-free right and
license to use, in connection with the marketing of the Product, the product
name(s) and trademark(s) used by supplier to identify the Product including
any portions thereof. If Supplier informs IBM in writing that it objects to
IBM's use of its Product names and trademarks, IBM will take reasonable steps
to modify it.
8. COMMUNICATIONS
All communications between the parties shall be carried out through the
designated coordinators.
All procurement, business and administrative communications between the
parties shall be conducted through the following "Business
Coordinators":
(CONFIDENTIAL TREATMENT REQUESTED)
* Technical communications between the parties shall be conducted through
the following "Technical Coordinators".
* All legal notices shall be sent to the following addresses and shall be
deemed received (a) 2 Days after mailing if sent by certified mail,
return receipt requested or (b) on the date confirmation is received if
sent by facsimile transmittal, to the party set forth below:
(CONFIDENTIAL TREATMENT REQUESTED)
Each party may change its designated coordinators and/or addresses any time
during the Attachment-Term by notifying the Business Coordinator (with a
carbon copy to the Technical Coordinator or legal notice coordinator, as
applicable) of the other party in writing.
9 TERMINATION
9.1 TERMINATION FOR CAUSE: Either party may terminate this Attachment for
material breach by the other party or in the event that the other party
becomes insolvent, files, or has filed against it, a petition in bankruptcy
or undergoes a reorganization pursuant to a petition in bankruptcy. Such
termination shall become effective (CONFIDENTIAL TREATMENT REQUESTED) after
receipt of any such notice, unless the party receiving notice remedies the
cause cited in such notice within such (CONFIDENTIAL TREATMENT REQUESTED)
period. In the event Supplier terminates an Attachment as set forth in this
Subsection 9.1, Supplier shall have the right to cancel all outstanding WAs.
In the event IBM terminates an Attachment as set forth in this Subsection
9.1, Supplier shall immediately (a) cease all work and shall treat all
applicable outstanding WAs in accordance with Subsection 9.2 as if all
outstanding WAs were canceled for cause, (b) prepare and submit to IBM an
itemization of all completed and partially completed Products under such WAs,
and at IBM's sole option and only upon IBM's written direction, Supplier
shall deliver to IBM the (i) number of IBM requested completed Products at
the prices set forth in the applicable WA and (ii) IBM requested partially
completed Products at a price to be agreed to by the parties, but in no event
shall such price be greater than the per unit price of the Product, (c) allow
IBM access to Andrea's premises to take possession of all IBM owned property
or to file a security interest in such property, (d) return to IBM all IBM
confidential information or property, if any, and (e) reimburse IBM for all
reasonable costs associated with IBM locating and securing another supplier
of the Product or a product that is a suitable substitute to the Product.
IBM shall also have all other remedies available at law, in equity and in the
Agreement (including this Attachment).
9.1 WORK AUTHORIZATION CANCELLATION: IBM may at any time cancel WAs in
total or in part, for convenience or cause by notifying Supplier, in writing.
Cancellation will be effective immediately upon Andrea's receipt of the
notice. Supplier will immediately cease all work under such WA in accordance
with the cancellation notice. IBM shall have no liability if it cancels WAs
for cause, and IBM shall have the right to return all Products that have not
been used for a full refund. IBM shall also have any other remedies
available at law, equity or in this Agreement. If IBM cancels WA(s) for
convenience, IBM's total and maximum liability, and Andrea's sole and
exclusive remedy, shall be limited to the actual and reasonable costs
substantiated by Supplier within any authorization limits and cancellation
schedules set forth in the Attachment and WA, provided, however, in no event,
shall IBM's liability exceed the total outstanding balance of the canceled
WAs. Supplier shall use all reasonable efforts to mitigate any IBM
liabilities by returning to its suppliers, selling to others, or otherwise
using any applicable materials, parts and subassemblies acquired or produced
by Supplier in connection with the canceled WAs.
All amounts previously paid to Supplier shall be deducted from any amount so
payable to Supplier and if such prior payments exceed the amount payable to
Supplier under the applicable WA, Supplier agrees to refund the difference to
IBM within 30 Days of the effective date of cancellation. The results of all
work paid for by IBM under the applicable WA are the sole property of IBM and
upon cancellation, the disposition of all such IBM property shall be in
accordance with IBM's written instructions.
10 LIMITATION OF LIABILITY
In no event will IBM or its subsidiaries be liable for any lost revenue, lost
profits or consequential, incidental or punitive damages, even if advised of
the possibility of such damages. In no event shall IBM or its subsidiaries
be liable to Supplier (i) under a Work Authorization for an amount greater
than the amount due and unpaid under such Work Authorization, and (ii) under
the Agreement (including this Attachment) for an amount greater than the
amount due and unpaid under all outstanding Work Authorizations hereunder, as
applicable.
11 SEVERABILITY
If any Section or Subsection of the Agreement, including this Attachment, is
found by competent judicial authority to be invalid, illegal or unenforceable
in any respect, the validity, legality and enforceability of any such Section
or Subsection in every other respect and the remainder of this Agreement
shall continue in effect.
12 NO PUBLICITY
Supplier may reference the fact that IBM is a customer of the Supplier. The
Supplier agrees not to disclose the specific terms of the Agreement
(including this Attachment), except as may be required by law or government
regulation.
13 SURVIVAL
The rights and obligations of Sections and Subsections 2.1, 2.2, 2.6, 7.0,
8.0, 10.0, 11.0 and 13.0 of this Attachment shall survive and continue after
termination or expiration of this Attachment and shall remain in full force
and effect, and shall bind the parties and their legal representatives,
successors, heirs and assigns. The rights and obligations of this entire
Attachment as they apply to WAs that are not terminated or canceled shall
survive and continue after expiration of this Attachment and shall bind the
parties and their legal representatives, successors, heirs and assigns until
expiration or cancellation of such WAs.
14 ORDER OF PRECEDENCE
In accordance with Subsection 9.9, "Entire Agreement and Order of Precedence"
of the Agreement, any terms in any Supplier documents such as
acknowledgements, shipping instructions or other Supplier forms shall be void
and of no effect.
15 COUNTERPARTS
This Attachment may be assigned in one or more counterparts, each of which
shall be deemed to be an original and all of which when taken together shall
constitute the same agreement. Any signed copy of this Attachment may by
reliable means (e.g., photocopy or facsimile) is considered an original.
THIS ATTACHMENT, WAs ISSUED HEREUNDER, THE AGREEMENT THAT THIS ATTACHMENT IS
ISSUED UNDER, AND THE CONFIDENTIALITY AGREEMENT (IF ANY) CONSTITUTE THE
ENTIRE AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT MATTER
HEREOF AND SUPERSEDE ALL COMMUNICATIONS AND UNDERSTANDINGS BETWEEN THE
PARTIES, WHETHER WRITTEN OR ORAL, WITH RESPECT TO THE SUBJECT MATTER HEREOF.
IN WITNESS WHEREOF, the parties hereto have caused this Attachment to be
signed by their respective duly authorized representatives.
ACCEPTED AND AGREED TO: ACCEPTED AND AGREED TO:
INTERNATIONAL BUSINESS MACHINES ANDREA ANDREA ELECTRONICS CORPORATION
ELECTRONICS CORPORATION
CORPORATION
Authorized Signature: Date Authorized Signature
Date
(CONFIDENTIAL TREATMENT REQUESTED)
Printed Name Printed Name
(CONFIDENTIAL TREATMENT REQUESTED)
Title: Title:
ATTACHMENT 1
PRODUCT PRICES
PRODUCT DESCRIPTION FOB:
(CONFIDENTIAL TREATMENT REQUESTED)
For (CONFIDENTIAL TREATMENT REQUESTED) from contract signing by the parties,
(CONFIDENTIAL TREATMENT REQUESTED).
(CONFIDENTIAL TREATMENT REQUESTED)
REVOLVING LOAN AND SECURITY AGREEMENT
REVOLVING LOAN AND SECURITY AGREEMENT ("Agreement") by and between IBM CREDIT
CORPORATION ("IBM Credit") and the undersigned customer ("Customer") of IBM
Credit.
1. DEFINITIONS
1.1 Special Definitions. The following terms shall have the following
respective meanings in this Agreement:
"Accounts": as defined in the UCC.
"Advance": any loan or advance made by IBM Credit to or for the account
of Customer pursuant to this Agreement.
"Advance Date": for a specific Advance, the Business Day on which IBM
Credit makes an Advance under this Agreement.
"Available Credit": at any time, (1) the Maximum Advance Amount less (2)
the Outstanding Advances at such time.
"Borrowing Base": as set forth in Attachment A, the percentage of the
amount of the Customer's Eligible Accounts as of the date of
determination as reflected in Customer's most recent Collateral reports
pursuant to Section 3.8(j) of this Agreement.
"Business Day": any day other than a Saturday, Sunday, other day on
which commercial banks in New York, NY are authorized or required by law
to close or other day on which IBM Credit is closed.
"Closing Date": the date upon which all conditions precedent to the
effectiveness of this Agreement are performed to the satisfaction of IBM
Credit or waived in writing by IBM Credit.
"Collateral": as defined in Section 4.1.
"Default": either (1) an Event of Default, or (2) any event or condition
which, but for the requirement that notice be given or time lapse or
both, would be an Event of Default.
"Delinquency Fee Rate": as defined in Attachment A.
"Eligible Accounts": as defined in Section 3.3.
"Event of Default": as defined in Section 6.1.
"Guarantor": the guarantors as set forth in Attachment B.
"Intellectual Property": Customer's possession of such assets, licenses,
patents, patent applications, copyrights, service marks, trademarks,
trade names, trade dress and trade secrets and all rights and other
property relating thereto or arising therefrom as are necessary or
advisable for the continuance of its present and proposed business
activities.
"Line of Credit": as defined in Section 2.1.
"Material Adverse Effect": a material adverse effect (1) on the
business, operations, results of operations, assets, or financial
condition of Customer, (2) on the aggregate value of the Collateral or
the aggregate amount which IBM Credit would be likely to receive (after
giving consideration to reasonably likely delays in payment and
reasonable cost of enforcement) in the liquidation of such Collateral to
recover the Obligations in full, or (3) on the rights and remedies of
IBM Credit under this Agreement.
"Maximum Advance Amount": at any time, the lesser of (1) the amount of
the Line of Credit at such time and (2) the Borrowing Base at such time.
"Obligations": all covenants, agreements, warranties, duties,
representations, loans, advances, liabilities and indebtedness Of any
kind and nature whatsoever now or hereafter arising, owing, due or
payable from Customer to IBM Credit or whether primary or secondary,
joint or several, direct, contingent, fixed or otherwise, secured,
unsecured or arising under this Agreement, the Other Agreements or any
agreements previously, now or hereafter executed by Customer and
delivered to IBM Credit, or by oral agreement or operation of law and
whether or not evidenced by instruments of indebtedness. Obligations
shall include, without limitation, any third party claims against
Customer satisfied or acquired by IBM Credit.
"Other Agreements": all security agreements, mortgages, leases,
instruments, documents, guarantees, schedules of assignment, contracts
and other agreements previously, now or hereafter executed by Customer
and delivered to IBM Credit or delivered by or on behalf of Customer to
a third party and assigned to IBM Credit by operation of law or
otherwise.
"Outstanding Advances": at the time of determination, the unpaid
principal amount of all Advances made by IBM Credit.
"Periodic Rate": the Revolver Financing Charge or Delinquency Fee Rate,
as the case may be, multiplied by the quotient of the number of days
elapsed in the applicable billing period divided by 360.
"Permitted Liens": as defined in Attachment B.
"Permitted Prior Liens": as defined in Attachment B. "Person": any
individual, association, firm, corporation, governmental body, agency or
instrumentality whatsoever. "Policies": as defined in Section 5.1 (r).
"Person": any individual, association, firm, corporation, governmental
body, agency or instrumentality whatsoever.
"Policies": as defined in Section 5.1(r).
"Prime Rate": as of the date of determination, the average of the rates
of interest announced by Citibank, N.A., Chase Manhattan Bank and Bank
of America National Trust & Savings Association (or any other bank which
IBM Credit uses in its normal course of business of determining Prime
Rate) as their prime or base rate, as of the last Business Day of the
calendar month immediately preceding the date of determination, whether
or not such announced rates are the actual rates charged by such banking
institutions to their most creditworthy borrowers.
"Revolver Financing Charge": as defined in Attachment A.
"UCC": the Uniform Commercial Code in effect from time to time in the
state set forth in Attachment A.
"Voting Stock": securities, the holders of which are ordinarily, in the
absence of contingencies, entitled to elect the corporate directors (or
persons performing similar functions).
1.2 Other Defined Terms. Terms not otherwise defined in this Agreement
which are defined in the UCC shall have the meanings assigned to them
therein.
2. LINE OF CREDIT/INTEREST RATES/CHARGES
2.1 Line of Credit. Subject to the terms and conditions set forth in this
Agreement, on and after the Closing Date to but not including the date that
is the earlier of (i) the date on which this Agreement is terminated pursuant
to Section 7 and (ii) the date on which IBM Credit terminates the Credit Line
pursuant to Section 6, IBM Credit agrees to extend to the Customer a line of
credit (the "Line of Credit") in the amount set forth in Attachment A
pursuant to which IBM Credit will make to the Customer, from time to time,
Advances in an aggregate amount at any one time outstanding not to exceed the
Maximum Advance Amount. Notwithstanding any other term or provision of this
Agreement, IBM Credit may, at any time and from time to time, in its sole
discretion (x) temporarily increase the amount of the Line of Credit above
the amount set forth in Attachment A and decrease the amount of the Line of
Credit back to the amount of the Line of Credit set forth in Attachment A, in
each case upon written notice to the Customer and (y) make Advances pursuant
to this Agreement upon the request of Customer in an aggregate amount at any
one time outstanding in excess of the Line of Credit.
2.1.1 Interest. (A) Subject to paragraph (B) below, each Advance shall
accrue interest at a rate per annum equal to the lesser of (i) the Revolver
Financing Charge and (ii) the highest rate from time to time permitted by
applicable law. Amounts received from Customer in excess of such highest
rate from time to time permitted by applicable law shall be considered
reductions to principal to the extent of such excess.
(B) If any amount owed under this Agreement is not paid when due (whether at
maturity, by acceleration or otherwise), the unpaid amount will bear interest
from and including its due date to and including the date IBM Credit receives
payment. Such interest will accrue at a rate per annum equal to the lesser
of (i) the Delinquency Fee Rate and (ii) the highest rate from time to time
permitted by applicable law. Amounts received from Customer in excess of
such highest rate from time to time permitted by applicable law shall be
considered reductions to principal to the extent of such excess.
(C) The Revolver Financing Charge and the Delinquency Fee Rate are computed
on the basis of a 360-day year for the actual number of days elapsed. The
Revolver Financing Charge for each billing period shall be calculated by
multiplying the Periodic Rate for the billing period by the Average Daily
Balance (as hereinafter defined) of the Advances outstanding during said
period which were not past-due. The Delinquency Fee Rate for each billing
period shall be calculated by multiplying the applicable Periodic Rate for
the billing period by the applicable Average Daily Balance of the Advances
outstanding during said period which were past-due. The "Average Daily
Balance" of the outstanding Advances shall be equal to the sum of the
principal balances of the Advances as of each day during the billing period,
divided by the number of days in the billing period.
2.1.2 Charges. Customer hereby agrees to pay to IBM Credit the charges
set forth in the "Other Charges" section of Attachment A to this Agreement.
Customer hereby acknowledges that any such charges are not interest but that
such charges, if unpaid, will constitute part of the principal from time to
time outstanding.
2.1.3 Voluntary Prepayment. Customer may at any time prepay in whole
or in part all amounts owed under this Agreement. IBM Credit may, in its
sole discretion, if amounts owed to IBM Credit are delinquent, apply payments
first to pay interest and other amounts owing under this Agreement and then
to pay the principal amount owed by the Customer. IBM Credit may, but shall
not be obligated to, apply principal payments to the oldest (earliest)
Advances first.
2.2 Payments. (A) If, on any date, the Outstanding Advances shall exceed
the Maximum Advance Amount (such excess, the "Shortfall Amount"), the
Customer shall within two (2) Business Days from such date pay the Advances
in an amount equal to the Shortfall Amount plus interest at the Delinquency
Fee Rate for the period from and including the initial date of the occurrence
of the Shortfall Amount to and including the date IBM Credit receives payment
for such Shortfall Amount.
(B) Interest and Other Charges owed under this Agreement, and any charges
hereafter agreed to by the parties are payable monthly on receipt of IBM
Credit's bill or statement and IBM Credit may, in its sole discretion, if
amounts owed to IBM Credit are delinquent, add interest and Other Charges to
Customer's outstanding loan balance. In accordance with the provisions of
Section 2.1.1 and Section 2.1.2, each statement of account rendered by IBM
Credit to Customer and relating to the Obligations shall be presumed to be
correct and accurate and shall constitute an account stated that is fully
binding upon Customer unless, within ten (10) Business Days after the
statement is received by Customer, Customer shall give to IBM Credit written
objection specifying the error or errors, if any, contained in that
statement. Customer shall be deemed to have received such statement five (5)
Business Days from the date IBM Credit mails such statement by United States
first-class mail, postage prepaid, and properly addressed to Customer.
3. LINE OF CREDIT - ADDITIONAL PROVISIONS
3.1 Procedures for Advances. (A) Customer shall deliver to IBM Credit a
written request ("Request for Advance") for each Advance. Customer may
deliver a Request for Advance via facsimile transmission. The Request for
Advance shall specify (i) the requested Advance Date and (ii) the amount of
the requested Advance. Customer shall include with each Request for Advance
a list ("Schedule of Accounts") of all Accounts created or acquired by
Customer since the previous Schedule of Accounts. Customer shall not request
an Advance in excess of the Available Credit on the requested Advance Date
for an Advance after giving effect to the repayment of any Outstanding
Advances to be made on such date.
(B) In the event Customer utilizes an IBM Credit inventory financing plan,
it will be pursuant to the terms of the Agreement for Wholesale Financing (as
amended or otherwise modified from time to time, the "AWF") between Customer
and IBM Credit dated as set forth in Attachment A to this Agreement. IBM
Credit may, in its sole and absolute discretion, make an advance to itself
under the Line of Credit to satisfy Customer's obligations under the AWF.
Customer hereby authorizes IBM Credit to make such advances. Any such
advance shall constitute an Advance under this Agreement. Customer
acknowledges that unless and until IBM Credit makes such an Advance the
obligations of the Customer to IBM Credit under the AWF shall be due and
payable in accordance with the terms and conditions of the AWF and nothing in
this Agreement relieves Customer of any payment or other obligations under
the AWF.
3.2 Each Advance. The submission by Customer of a Request for Advance and
the receipt by the Customer of the proceeds of any Advance on an Advance Date
shall be deemed to be a representation and warranty by the Customer that, as
of and on such Advance Date, the following statements set forth in (A)
through (C) are true:
(A) The representations and warranties contained in this Agreement and in
each Other Agreement are true and correct as though made on and as of such
Advance Date;
(B) No event has occurred and is continuing, or would result from such
Advance or the application of the proceeds thereof, which could reasonably be
expected to have a Material Adverse Effect; and
(C) Both before and after giving effect to the making of such Advance, no
Shortfall Amount exists.
3.3 Ineligible Accounts. IBM Credit and Customer agree that IBM Credit
shall have the sole right to determine eligibility of Accounts from an
Account debtor (the "Eligible Accounts") for purposes of determining the
Borrowing Base; however, without limiting such right, the following Accounts
will be deemed to be not Eligible Accounts for purposes of determining the
Borrowing Base:
(a) Accounts created from the sale of goods and services on non-standard
terms and/or that allow for payment to be made later than thirty (30)
days from the date of sale;
(b) Accounts unpaid more than ninety (90) days from date of invoice;
(c) Accounts payable by an Account debtor if fifty percent (50%) or more of
the outstanding balance of all Accounts payable by such Account debtor
remains unpaid for more than ninety (90) days from the date of invoice;
(d) Accounts payable by an Account debtor that is an officer, employee,
agent, parent, guarantor, subsidiary, stockholder or affiliate of
Customer or is related to or has common shareholders, officers or
directors with Customer;
(e) Accounts arising from consignment sales;
(f) Accounts with respect to which the payment by the Account debtor is or
may be conditional;
(g) Accounts payable by any Account debtor (other than any wholly owned
subsidiaries of International Business Machines Corporation located
outside of the United States) that (i) is not a commercial or
institutional entity, or (ii) is not a resident of the United States;
(h) Accounts payable by any Account debtor to which Customer is or may
become liable for goods sold or services rendered by such Account debtor
to Customer;
(i) Accounts arising from the sale or lease of goods purchased for a
personal, family or household purpose;
(j) Accounts arising from the sale or lease of goods that have been used for
demonstration purposes or loaned by the Customer to another party;
(k) Accounts which are progress payment accounts;
(l) Accounts payable by any Account debtor that is, or Customer knows will
become, subject to proceedings under United States Bankruptcy Law or
other law for the relief of debtors;
(m) Accounts which are not payable in US dollars;
(n) Accounts payable by any Account debtor that is a remarketer of computer
hardware and software products and whose purchases of such products from
Customer have been financed by another person, other than IBM Credit,
who pays the proceeds of such financing directly to Customer on behalf
of such debtor ("Third Party Financer") unless (i) such Third Party
Financer does not have a separate financing relationship with Customer
or (ii) such Third Party Financer has a separate financing relationship
with Customer and has waived its right to set off its obligations to
Customer;
(o) Accounts arising from the sale or lease of goods which are billed in
advance of shipment by Customer;
(p) Accounts as to which IBM Credit does not have a valid, perfected, first
priority security interest;
(q) Accounts with respect to which Customer has permitted or agreed to any
extension, compromise or settlement, or made any change or modification
of any kind or nature, including, but not limited to, any change or
modification to the terms relating thereto;
(r) Accounts which do not arise from undisputed bona fide transactions
completed in accordance with the terms and conditions contained in the
invoices and purchase orders relating thereto;
(s) Accounts which are discounted for the full payment term specified in
Customer's terms and conditions with its Account debtors, or for any
longer period of time;
(t) Accounts on cash on delivery (COD) terms;
(u) Accounts arising from maintenance or service contracts which are billed
in advance of full performance of service;
(v) Accounts arising from bartered transactions;
(w) Accounts arising from incentive payments, rebates, discounts, credits,
and refunds from a supplier; and
(x) For any and all other Accounts which IBM Credit deems, in its sole and
absolute discretion, to be ineligible, IBM Credit will provide Customer
with 10 days notice.
3.4 Reimbursement for Charges. Customer agrees to reimburse IBM Credit for
all charges paid by IBM Credit with respect to collection of checks and
other items of payment, all fees relating to the use and maintenance of a
lockbox account and with respect to remittances of proceeds of the loans
hereunder.
3.5 Collections. (A) Customer shall establish and maintain a lockbox (the
"Lockbox"), at the address set forth in Attachment A with the financial
institution listed in Attachment A (the "Bank") pursuant to an agreement
between Customer and Bank in form and substance satisfactory to IBM Credit.
Customer shall also establish and maintain a deposit account which shall
contain only proceeds of Customer's Accounts (the "Special Account") with the
Bank. Customer shall enter into and maintain a blocked account agreement
with the Bank for the benefit of IBM Credit in form and substance
satisfactory to IBM Credit.
(B) Customer shall instruct all Account debtors to remit payments directly
to the Lockbox. In addition, Customer shall have such instruction printed in
conspicuous type on all invoices. Customer further agrees that it shall not
deposit or permit any deposits of funds other than remittances paid in
respect of the Account into the Special Account or permit any commingling of
funds with such remittances in the Lockbox or Special Account.
(C) IBM Credit may at its option notify any Account debtor or debtors of the
assignment of Accounts, and directly collect the same. All payments received
by Customer from its Account debtors, whether in the form of money, checks,
notes, drafts, or other things of value or items of payment, shall be
received by Customer solely as agent and in trust for IBM Credit. Customer
shall properly endorse and immediately deposit into the Special Account, on
the day of receipt thereof, all original checks, drafts, acceptances, notes
and other evidences of, or properties constituting payment of, or on
account of, Accounts, including all cash. Customer shall have no right and
agrees not to commingle with its own funds or to use, divert or withhold any
of the proceeds of any collections received thereon. Customer shall make
entries on its books and records in a form satisfactory to IBM Credit and
shall keep a separate account on its record books of all collections
received thereon. Until delivery to IBM Credit, Customer shall keep all
remittances received separate and apart from Customer's funds so that they
are capable of identification as the property of IBM Credit.
3.6 Collection Days. All amounts received by IBM Credit in respect of any
Account may be credited by IBM Credit to the repayment of the Obligations
under this Agreement or, in IBM Credit's sole and absolute discretion, may be
disbursed to Customer. Should no Obligations exist, as defined in the
Agreement, then such amounts will be disbursed to Customer, provided that no
pending legal action or judgment exists against the Customer. The crediting
of amounts received by IBM Credit in respect of such Obligations shall in all
cases be subject to the final collection thereof.
3.7 Power of Attorney. Customer hereby irrevocably appoints IBM Credit (and
any person designated by it) as Customer's true and lawful attorney- in-fact
with full power to at any time, in good faith and in compliance with
commercially reasonable standards, in the sole and absolute discretion of IBM
Credit:
(a) upon the occurrence and during the continuance of an Event of
Default, demand payment, enforce payment and otherwise exercise all
Customer's rights and remedies with respect to the collection of
any Accounts;
(b) upon the occurrence and during the continuance of an Event of
Default, settle, adjust, compromise, extend or renew any Accounts;
(c) to settle, adjust or compromise any legal proceedings brought to
collect any Accounts;
(d) upon the occurrence and during the continuance of an Event of
Default, sell or assign any Accounts upon such terms, for such
amounts and at such time or times as IBM Credit may deem advisable;
(e) upon the occurrence and during the continuance of an Event of
Default, discharge and release any Accounts;
(f) to prepare, file and sign Customer's name on any proof of claim or
similar document against any Account debtor;
(g) to prepare, file and sign Customer's name on any notice of lien,
claim of mechanic's lien, assignment or satisfaction of lien or
mechanic's lien, or similar document in connection with any
Accounts;
(h) to endorse the name of Customer upon any chattel paper, document,
instrument, invoice, freight bill, bill of lading or similar
document or agreement relating to any Account or goods pertaining
thereto;
(i) to endorse the name of Customer upon any of the items of payment of
proceeds and deposit the same in the account of IBM Credit for
application to the Obligations;
(j) to sign the name of Customer to requests for verification of
Accounts and notices thereof to Account debtors;
(k) to sign the name of Customer on any document or instrument that IBM
Credit shall deem necessary or appropriate to perfect and maintain
perfected the security interest in the Collateral contemplated
under this Agreement and the Other Agreements;
(l) upon the occurrence and during the continuance of an Event of
Default, to make, settle and adjust claims under the Policies and
endorse Customer's name on any check, draft, instrument or other
item of payment of the proceeds of the Policies; and
(m) upon the occurrence and during the continuance of an Event of
Default, to take control in any manner of any item of payment or
proceeds (excluding any rebates, discounts or credits) and for such
purpose to notify the postal authorities to change the address for
delivery of mail addressed to Customer to such address as IBM
Credit may designate.
The power of attorney granted by this Section is for value and coupled with
an interest and is irrevocable until the later of the payment in full of the
Obligations and the termination of this Agreement.
3.8 Continuing Requirements. Customer shall:
(a) from time to time, if required by IBM Credit, immediately upon
their creation, deliver to IBM Credit copies of all invoices,
delivery evidences and other documents relating to each Account;
(b) within three (3) Business Days after Customer's learning thereof,
inform IBM Credit in writing of any rejection of goods or services
by any Account debtor, delays in delivery of goods or performance
of services, non-performance of contracts and of any assertion of
any claim, offset or counterclaim by any Account debtor, if such
return or rejection could reasonably be expected to have a Material
Adverse Effect;
(c) not permit or agree to any extension, compromise or settlement or
make any change or modification of any kind or nature with respect
to any Account, including any of the terms relating thereto;
(d) within three (3) Business Days after Customer's learning thereof,
furnish to and inform IBM Credit in writing of all adverse
information relating to the financial condition of any Account
debtor if such information could reasonably be expected to have a
Material Adverse Effect;
(e) affix appropriate endorsements or assignments upon all items of
payment and proceeds so that the same may be properly deposited by
IBM Credit to IBM Credit's account;
(f) within three (3) Business Days after Customer's learning thereof,
notify IBM Credit in writing which Accounts may be deemed
ineligible as defined in Subsection 3.3 herein;
(g) keep all goods rejected or returned by any Account debtor and all
goods repossessed or stopped in transit by Customer from any
Account debtor segregated from other property of Customer, holding
the same in trust and as trustee for IBM Credit until Customer
applies a credit against such Account debtor's outstanding
obligations to Customer or sells such goods in the ordinary course
of business, whichever occurs first, if such returned goods could
reasonably be expected, as determined by IBM Credit, to have a
Material Adverse Affect;
(h) stamp or otherwise mark chattel paper and instruments now owned or
hereafter acquired by it to show that the same are subject to IBM
Credit's security interest and immediately thereafter deliver or
cause such chattel paper and instruments to be delivered to IBM
Credit or any agent designated by IBM Credit with appropriate
endorsements and assignments to vest title and possession in IBM
Credit;
(i) together with each Request for Advance, provide IBM Credit with a
summary of the aging of the Accounts; and
(j) provide to IBM Credit a detailed aging report of its Accounts,
which shall include its accounts receivable ledger and its on-line
aging of Accounts and any other report listing other Collateral
that IBM Credit may request, in a format acceptable to IBM Credit,
no later than the fifteenth (15th) day of each month and containing
information as of the close of business on the last day of the
preceding month.
3.9 Rights of IBM Credit. IBM Credit may, without notice to Customer and at
any time or times hereafter, when Customer has any Obligations to IBM Credit:
(a) verify with Account debtors or others the validity, amount or any
other matter relating to any Account by mail, telephone or other
means in the name of Customer or IBM Credit; and
(b) take control in any manner of any cash or non-cash items of payment
or proceeds of Accounts and of any rejected, returned, repossessed
or stopped in transit goods relating to Accounts.
3.10 Release. Customer releases IBM Credit from any and all claims and
causes of action which Customer may now or hereafter have for any loss or
damage to it claimed to be caused by or arising from:
(a) any failure of IBM Credit to protect, enforce or collect, in whole
or in part, any Account;
(b) IBM Credit's notification to any Account debtors thereon of IBM
Credit's security interest in any of the Accounts;
(c) IBM Credit's directing any Account debtor to pay any sum owing to
Customer directly to IBM Credit; and
(d) any other act or omission to act on the part of IBM Credit, its
officers, agents or employees, except for its gross negligence or
willful misconduct.
IBM Credit shall have no obligation to preserve rights to Accounts against
prior parties.
3.11 Additional Requirements. Customer agrees to comply with the
requirements set forth in Attachment A to this Agreement.
3.12 Audit. Customer shall at all times permit IBM Credit (or any person
designated by it) upon notification, during Customer's usual business hours,
to have access to audit, examine and check the Collateral, Customer's other
assets and any and all of Customer's books, records, files and business
procedures and practices, and permit the copying of the same and the making
of abstracts therefrom as part of IBM Credit's customary audit procedures.
4. SECURITY - COLLATERAL
4.1 Grant. To secure Customer's payment and performance of the Obligations
and to secure Customer I s prompt, full and faithful performance and
observance of all of the provisions under this Agreement and the Other
Agreements, Customer hereby grants IBM Credit a security interest in all of
Customer's right, title and interest in and to the following, whether now
owned or hereafter acquired or existing and wherever located:
(a) all inventory and equipment, and all parts thereof, attachments,
accessories and accessions thereto, products thereof and documents
therefor;
(b) all accounts, contract rights, chattel paper, instruments, deposit
accounts, general intangibles (other than any Intellectual
Property) and other obligations of any kind, and all rights now or
hereafter existing in and to all mortgages, security agreements,
leases or other contracts securing or otherwise relating to any of
the same;
(c) all substitutions and replacements for all of the foregoing;
(d) all books and records pertaining to any of the foregoing: and
(e) all proceeds of all of the foregoing and, to the extent not
otherwise included, all payments under insurance or any indemnity,
warranty or guaranty, payable by reason of loss or damage to or
otherwise with respect to any of the foregoing.
All of the above assets are hereinafter collectively referred to as
"Collateral."
Customer covenants and agrees with IBM Credit that: (a) the security interest
granted under this Agreement is in addition to any other security interest
from time to time held by IBM Credit; (b) IBM Credit may realize upon all or
part of any Collateral in any order it desires and any realization by any
means upon any Collateral will not bar realization upon any other Collateral;
and (c) the security interest hereby created is a continuing security
interest and will cover and secure the payment of all Obligations both
present and future of Customer to IBM Credit pursuant to this Agreement and
the Other Agreements.
4.2 Instruments. Customer shall execute and deliver, or cause to be
executed and delivered, to IBM Credit at such time or times as IBM Credit may
request, all financing statements, continuation statements, security
agreements, assignments, certificates, certificates of title, applications
for vehicle titles, affidavits, reports, notices, schedules of accounts, and
other documents, instruments, agreements and other papers, and take any other
action, that IBM Credit may deem desirable to create, confirm, perfect or
maintain perfected IBM Credit's security interest in the Collateral.
Customer shall make appropriate entries on its books and records disclosing
IBM Credit's security interest in the Collateral.
5. WARRANTIES, REPRESENTATIONS, AND COVENANTS
5.1 Affirmative Warranties, Representations and Covenants. Except as
otherwise specifically provided in any of the Other Agreements, Customer
warrants and represents to and covenants with IBM Credit that:
(a) Each Account is based on an actual and bona fide sale and delivery
of goods or rendition of services, made or performed by Customer,
in the ordinary course of its business; the Account debtors have
accepted such goods or services, owe and are obligated to pay the
full amounts stated in the invoices according to their terms,
without any dispute, offset, defense or counterclaim and have the
ostensible authority to contract; and there are no proceedings or
actions known to Customer which are pending or threatened against
any Account debtor that might result in any material adverse change
in such Account debtor's financial condition;
(b) Customer has and shall at all times have good and valid title to
all Collateral free and clear of all liens, security interests,
encumbrances and claims of any Person, except for Permitted Liens;
(c) IBM Credit's security interest in the Collateral is and shall at
all times constitute a perfected security interest in the
Collateral which security interest is not and shall at no time
become subordinate or junior to the security interest, lien,
encumbrance or claim of any other Person except for Permitted Prior
Liens;
(d) Customer is and shall at all times during the term of this
Agreement be a corporation duly organized, validly existing and in
good standing under the laws of the state of its incorporation set
forth in Attachment A and qualified and licensed to do business in
each state, county, or parish in which the nature of its business
or property requires it to be qualified or licensed;
(e) Customer has the right and is duly authorized to enter into this
Agreement and the Other Agreements and the execution, delivery and
performance of this Agreement and the Other Agreements by the
Customer do not and will not violate Customer's articles of
incorporation or by-laws, any law, rule, regulation, order, writ,
judgment, injunction, decree, determination or award presently in
effect having applicability to Customer or any provisions of any
indenture, agreement, document, instrument or undertaking to which
Customer is now or hereafter becomes a party or by which it is, may
be or hereafter becomes bound;
(f) each Guarantor has the right and power to and is duly authorized to
make any guaranty given to IBM Credit;
(g) all financial statements and information relating to Customer and
any Guarantor which have been or may hereafter be delivered by
Customer or any Guarantor to IBM Credit are true and correct and
have been, and upon delivery will be, prepared in accordance with
generally accepted accounting principles and there has been no
material adverse change in the financial or business condition of
Customer since the submission of any such financial information to
IBM Credit;
(h) there are, and shall be, no actions or proceedings pending or
threatened against Customer and no change or development involving
a prospective change which in any such case, has had or could
reasonably be expected to have a material adverse effect on
(i) Customer's business (financial or otherwise), (ii) the value of
the Collateral or the amount which IBM Credit would be likely to
receive in the liquidation of such Collateral, (iii) the Customer's
ability to perform its Obligations, or (iv) the rights and remedies
of IBM Credit under this Agreement or the Other Agreements;
(i) Customer shall maintain all of its properties (business and
otherwise) in good condition and repair and pay and discharge all
costs of necessary repair and maintenance thereof and all rental
and mortgage payments and related charges pertaining thereto,
except where adequate reserves (as defined by GAAP) have been made;
(j) Customer will use commercially reasonable efforts to collect all
Accounts owed;
(k) Customer has duly filed and shall hereafter duly file all federal,
state, local and other governmental tax returns which it is
required by law to file;
(l) all taxes, levies, assessments and governmental charges of any
nature which are or may become due by Customer have been and will
be fully paid when due and Customer shall promptly pay when due all
such tax liabilities which may hereafter accrue;
(m) Customer shall maintain a system of accounting in accordance with
generally accepted accounting principles and ledger and account
records which contain such information as may be requested by IBM
Credit;
(n) Customer shall deliver to IBM Credit:
1) within ninety (90) days after the end of each of Customer's
fiscal years, a reasonably detailed balance sheet and a
reasonably detailed profit and loss statement covering
Customer's operations for such fiscal year, prepared in
accordance with generally accepted accounting standards, audited
by an independent certified public accountant satisfactory to
IBM Credit and containing an opinion of such public accountant
in form and substance satisfactory to IBM Credit,
2) within forty-five (45) days after the end of each of Customer's
first three fiscal quarters, Customer shall deliver to IBM
Credit a reasonably detailed balance sheet as of the last day of
such quarter and profit and loss statement covering Customer's
operations for such quarter (subject to normal year-end audit
adjustments) prepared in accordance with generally accepted
accounting standards,
3) promptly upon the request therefor by IBM Credit, any other
report requested by IBM Credit relating to the Collateral or the
financial condition of Customer.
Each report, statement, or document delivered or caused to be delivered
to IBM Credit under this Subsection 5.1 (n) shall be accompanied by the
certificate of an authorized officer of Customer to the effect that to
the best of such officer's knowledge, after due diligence and following
a reasonably independent investigation and review, the same is complete
and correct and thoroughly and accurately presents the financial
condition of Customer and that there exists on the date of delivery of
said certificate no condition or event which constitutes a Default or
Event of Default under this Agreement or any of the Other Agreements;
(o) Customer shall promptly supply IBM Credit with such other
information concerning its or any Guarantor's affairs as IBM Credit
from time to time hereafter may reasonably request;
(p) The address of the principal place of business and chief executive
office of Customer is as set forth in Attachment B to this
Agreement. The books and records of Customer, and all of its
chattel paper and records of Accounts, are maintained at such
location. There is no location in which Customer has any assets,
equipment or inventory (except for vehicles and inventory in
transit for processing) other than those locations identified in
Attachment B. There is no location in which Customer has a place
of business other than those locations identified in Attachment B
pursuant to the preceding sentence and those other locations
identified in Attachment B. Attachment B also contains a complete
list of the legal names and addresses of each warehouse at which
Customer's inventory is stored. All receipts received by Customer
from any warehouseman shall state that the goods covered shall be
delivered only to Customer. Customer agrees to notify IBM Credit
in writing at least thirty (30) days prior to the effective date of
any change in the information listed in Attachment B.
(q) Customer agrees that it shall give IBM Credit thirty (30) days
advance notice prior to any change in Customer's identity, name,
form of ownership or management.
(r) Customer, at its sole expense, shall keep and maintain the
Collateral insured for its full insurable value against loss or
damage by fire, theft, explosion, sprinklers and all other hazards
and risks ordinarily insured against by other owners or users of
such properties and interests in properties in similar businesses.
All such insurance policies ("Policies") shall be in form, with
companies, in amounts and with deductibles satisfactory to IBM
Credit. Customer shall deliver to IBM Credit true and correct
copies of the Policies as well as such evidence of insurance as IBM
Credit may from time to time require, and, on IBM Credit's request,
evidence of payment of all premiums therefor. Each of the Policies
shall contain an endorsement, in a form satisfactory to IBM Credit,
showing loss payable to IBM Credit; upon receipt of proceeds by IBM
Credit the same shall be applied on account of Obligations.
Customer agrees to instruct each insurer to give IBM Credit, by
endorsement upon the Policy issued by it or by independent
instruments furnished to IBM Credit, at least ten (10) days'
written notice before any Policy shall be altered or cancelled and
that no act or default of Customer or any other person shall affect
the right of IBM Credit to recover under the Policies. Customer
hereby directs all insurers under the Policies to pay all proceeds
directly to IBM Credit.
Without limiting the generality of the foregoing, Customer shall
keep and maintain, at its sole expense, the Collateral insured for
an amount not less than the amount set forth in writing by IBM
Credit from time to time against all loss or damage under an "all
risk" Policy with companies mutually acceptable to IBM Credit and
Customer, with a lender's loss payable endorsement or mortgagee
clause in form and substance reasonably satisfactory to IBM Credit
designating that any loss payable thereunder with respect to such
Collateral shall be payable to IBM Credit. Customer agrees to
instruct each insurer to give IBM Credit, by endorsement upon the
Policy issued by it or by independent instruments furnished to IBM
Credit, at least ten (10) days written notice before any Policy
shall be altered or cancelled and that no act or default of
Customer or any other person shall affect the right of IBM Credit
to recover under the Policies. Customer hereby agrees to direct
all insurers under the Policies to pay all proceeds with respect to
the Collateral directly to IBM Credit.
If Customer fails to pay any cost, charges or premiums, or if
Customer fails to insure the Collateral, IBM Credit may pay such
costs, charges or premiums. Any amounts paid by IBM Credit
hereunder shall be considered an additional debt owed by Customer
to IBM Credit and are due and payable immediately upon receipt of
an invoice by IBM Credit.
(s) Customer shall advise IBM Credit of the commencement or institution
of legal proceedings filed against the Customer subsequent to the
execution of this Agreement before any court, administrative board
or tribunal which, in the event of an adverse decision to Customer,
could have a material adverse effect on the Customer's condition
(financial or otherwise), operations, properties or prospects or
the Customer's ability to perform its Obligations or the rights and
remedies of IBM Credit under this Agreement and the Other
Agreements.
5.2 Negative Covenants. Customer agrees with IBM Credit that Customer will
not at any time (without IBM Credit's express prior written consent):
(a) other than in the ordinary course of its business, sell, lease or
otherwise dispose of or transfer any of its assets;
(b) merge or consolidate with another corporation;
(c) acquire any other corporation;
(d) enter into any transaction not in the usual course of its business
which might be expected in any material way adversely affect the
ability of Customer to repay the Obligations;
(e) guarantee or indemnify or otherwise become in any way liable with
respect to the obligations of any person, except by endorsement of
instruments or items of payment for deposit to the general account
of Customer or which are transmitted or turned over to IBM Credit
on account of the Obligations;
(f) redeem, retire, purchase or otherwise acquire, directly or
indirectly, any material portion of Customer's capital stock which
might be expected in any way to materially adversely affect the
ability of the Customer to repay the Obligations;
(g) make any change in Customer's capital structure or in any of its
business objectives, purposes or operations which might be expected
in any way to materially adversely affect the ability of Customer
to repay the Obligations;
(h) make any distribution of Customer's property or assets with an
aggregate value not to exceed 1% of Customer's Total Net Worth as
defined in Attachment A;
(i) incur any debts outside of the ordinary course of Customer's
business except renewals or extensions of existing debts and
interest thereon; and
(j) make any loans, advances, contributions or payments of money or
goods to any subsidiary, affiliated or parent corporation or to any
officer, director or stockholder of Customer or of any such
corporation including, without limitation, paying any dividend on
or making any payment on account of any capital stock of Customer
or indebtedness of Customer to any of the foregoing (except for
compensation for personal services actually rendered in an amount
not to exceed that available on an arms length basis).
6. DEFAULT
6.1 Definition. Any one or more of the following events shall constitute
an event of default ("Event of Default") by Customer under this Agreement and
the Other Agreements:
(a) Customer or any Guarantor breaches any term, provision, condition
or covenant contained in this Agreement, in any of the Other
Agreements or any guaranty;
(b) Any warranty, representation, statement, report, or certificate
made or delivered by Customer or any of its officers, employees, or
agents or by any Guarantor to IBM Credit is not true and correct;
(c) Customer fails to immediately pay any of the Obligations when due
and payable or declared to be due and payable;
(d) IBM Credit shall determine that it is insecure with respect to any
of the Collateral that would materially and adversely affect its
value or a known event or condition which may adversely affect
repayment of any part of the Obligations;
(e) Customer attempts to or shall sell, transfer, convey, exchange,
assign, mortgage, pledge, charge, grant a security interest in or
otherwise dispose of or in any way part with the possession of the
Collateral, other than in the ordinary course of business or as
otherwise permitted under this Agreement;
(f) Customer removes, other than by sale to the extent allowed under
this Agreement, any part of the Collateral from any of Customer's
locations specified in Attachment B to this Agreement;
(g) Customer abandons the Collateral or any part thereof;
(h) Any judgment is entered against Customer and such judgment is not
satisfied, dismissed, stayed or superseded by bond within thirty
(30) days after the date of entry thereof (and in the event of a
stay or supersedeas bond such judgment is not discharged within 30
days after termination of such stay or bond);
(i) There issues a warrant of distress for any rent or taxes with
respect to any premises occupied by Customer in or upon which the
Collateral, or any part thereof, may at any time be situated;
(j) Customer suffers or permits the Collateral to be seized or taken in
execution without the consent of IBM Credit;
(k) Customer fails to insure or keep insured the Collateral within the
provisions of this Agreement;
(l) Customer suspends business;
(m) (i) Customer shall become insolvent or generally fail to pay, or
shall admit its inability or refusal to pay debts as they
become due;
(ii) Customer shall apply for, consent to, or acquiesce in the
appointment of a trustee, receiver or other custodian for
Customer or for its properties, assets, business or
undertakings;
(iii) any bankruptcy, reorganization, debt arrangement or other case
or proceeding under any bankruptcy or insolvency law, or any
dissolution or liquidation proceeding, shall be commenced in
respect to Customer; or
(iv) Customer shall take any action to authorize, or in the
furtherance of, any of the foregoing;
(n) Any guaranty of any or all of the Customer's Obligations executed
by any Guarantor in favor of IBM Credit shall at any time for any
reason cease to be in full force and effect or shall be declared to
be null and void by a court of competent jurisdiction, or the
validity or enforceability thereof shall be contested or denied by
any Guarantor, or any Guarantor shall deny that it, he or she has
any further liability or obligation thereunder or any Guarantor
shall fail to comply with or observe any of the terms, provisions
or conditions contained in said Guaranty;
(o) Any event shall occur or condition shall exist under any agreement
or instrument relating to any debt of the Customer and shall
continue after the applicable grace period, if any, specified in
such agreement or instrument if the effect of such nonpayment,
other condition or conditions is to accelerate, or permit the
acceleration of the maturity of such debt, for any reason
whatsoever;
(p) Any "person" (as defined in Section 13(d) (3) of the Securities
Exchange Act of 1934, as amended) acquires a beneficial interest in
50% or more of the Voting Stock of Customer;
(q) Customer is in default under the terms of any of the Other
Agreements.
6.2 Rights of IBM Credit. Upon the occurrence and during the continuance
of any Event of Default, IBM Credit may:
(a) declare all or any of the Obligations immediately due and payable
together with all court costs and all costs and expenses of
repossession and collection activity, including, but not limited
to, reasonable attorney's fees;
(b) terminate the Line of Credit;
(c) exercise any or all of the rights accruing to a secured party upon
default by a debtor under the Uniform Commercial Code and any other
applicable laws;
(d) sell, lease or otherwise dispose of the Collateral at public or
private sale;
(e) at its sole election and without demand enter, with or without
process of law, any premises where Collateral might be and, without
charge or liability to IBM Credit therefor, do one or more of the
following:
(i) take possession of the Collateral and use or store it in said
premises or remove it to such other place or places as IBM
Credit may deem convenient;
(ii) take possession of all or part of such premises and the
Collateral and place a custodian in the exclusive control
thereof until completion of enforcement, under the UCC or
other applicable law, of IBM Credit's security interest in the
Collateral or until IBM Credit's removal of the Collateral to
such other place or places as IBM Credit may deem convenient;
(iii) remain on such premises and use the same, together with
Customer's materials, supplies, books and records, for the
purpose of liquidating or collecting such Collateral and
conducting and preparing for disposition of such Collateral;
and
(iv) remove the same to such place or places as IBM Credit may deem
convenient for the purpose of IBM Credit's using the same in
connection with IBM Credit's liquidation and collection of
such Collateral and to conduct and prepare for the disposition
of such Collateral (and Customer grants IBM Credit a security
interest in all Customer's contract-related material,
supplies, books, and records for such purpose as those
described above);
provided that upon the occurrence of any Event of Default set forth in
Section 6.1(m) all of the Obligations automatically shall become
immediately due and payable together with all such costs and expenses.
6.3 Customer's Obligations. Upon the occurrence and during the continuance
of an Event of Default, Customer shall if IBM Credit requests, assemble the
Collateral and make it available to IBM Credit at a place or places to be
designated by IBM Credit. Customer recognizes that if Customer fails to
perform, observe or discharge any of its Obligations under this Agreement or
the Other Agreements no remedy at law will provide adequate relief to IBM
Credit; therefore, Customer agrees that IBM Credit shall be entitled to
temporary and permanent injunctive relief in any such case without the
necessity of proving actual damages. All of IBM Credit's rights and remedies
granted under this Agreement and Other Agreements are cumulative and non-
exclusive.
6.4 Waiver. Upon the occurrence and during the continuance of an Event of
Default, Customer waives and releases: any and all claims and causes of
action which it may now or ever have against IBM Credit as a result of any
possession, repossession, collection or sale by IBM Credit of any of the
Collateral, notwithstanding the effect of such possession, repossession,
collection or sale upon Customer's business; all rights of redemption from
any such sale; and the benefit of all valuation, appraisal and exemption
laws. IBM Credit's only obligation in respect to its repossession,
collection or sale of any Collateral is to act in a commercially reasonable
manner. If IBM Credit seeks to take possession of any of the Collateral by
replevin or other court process Customer hereby irrevocably waives any bonds,
surety and security relating thereto required by any statute, court rule or
otherwise as an incident to such possession and any demand for possession of
the Collateral prior to the commencement of any suit or action to recover
possession thereof.
7. MISCELLANEOUS
7.1 Termination. This Agreement shall be effective until the first
anniversary of the date of the execution and delivery by Customer of this
Agreement and shall automatically renew itself from year to year thereafter
unless terminated as hereinafter provided. This Agreement may be terminated
by either party at any time by giving written notice of such termination by
registered mail or certified mail addressed to the other party at the address
provided for in this Agreement. Termination shall be effective on the date
specified in the written notification (the "Effective Date of Termination")
which date shall be no less than thirty (30) days from the date the written
notification is delivered by the terminating party. Customer shall not be
relieved from any Obligations to IBM Credit until such time as all of the
Obligations of Customer shall have been indefeasibly paid in full. Upon the
termination of this Agreement by IBM Credit or Customer, all of Customer's
Obligations incurred under this Agreement shall be immediately due and
payable in their entirety, even if they are not yet due under their terms, on
the Effective Date of Termination. IBM Credit's rights under this Agreement
and IBM Credit's security interest in the Collateral shall continue after
termination of this Agreement until all of Customer's Obligations to IBM
Credit are indefeasibly paid in full. The covenants, warranties and
representations of this Agreement shall survive termination of the Agreement.
7.2 Collection. Customer agrees that checks and other instruments delivered
to IBM Credit on account of Customer's Obligations shall constitute
conditional payment until such items are actually paid to IBM Credit. Upon
the continuance of any default by the Customer, Customer waives the right to
direct the application of any and all payments hereafter received by IBM
Credit on account of Customer's Obligations. Customer agrees that IBM Credit
shall have the continuing exclusive right to apply and reapply any such
payments in such manner as IBM Credit may deem advisable notwithstanding any
entry by IBM Credit upon any of its books and records.
7.3 Demand, Etc. Customer waives to the extent permitted by law:
(a) demand, protest and all notices of protest, default or dishonor;
(b) all notices of payment and non-payment;
(c) all notices required by law; and
(d) except as otherwise specifically provided for in this Agreement,
all notices of default, non-payment at maturity, release,
compromise, settlement, extension or renewal of any or all
commercial paper, accounts, contract rights, documents,
instruments, chattel paper and guarantees at any time held by IBM
Credit on which Customer may, in any way, be liable and Customer
hereby ratifies and confirms whatever IBM Credit may do in that
regard.
7.4 Additional Obligations. IBM Credit, without waiving or releasing any
Obligation or Default of Customer, may perform any Obligations of Customer
that Customer shall fail to perform. IBM Credit may, at any time or times
hereafter, but shall be under no obligation so to do, pay, acquire or accept
any assignment of any security interest, lien, encumbrance or claim against
the Collateral asserted by any person. All sums paid by IBM Credit in
performing in satisfaction or on account of the foregoing and any expenses,
including reasonable attorney's fees, court costs, and other charges relating
thereto, shall be a part of the Obligations, payable on demand and secured by
the Collateral.
7.5 Indemnification. Customer hereby agrees to indemnify and hold harmless
IBM Credit against all loss or liability relating, directly or indirectly, to
any of the activities of the Customer or its predecessors in interest, to the
execution, delivery or performance of this Agreement or the Other Agreements
or the consummation of the transactions contemplated hereby or thereby or to
any of the Collateral. Notwithstanding the foregoing, Customer shall not be
obligated to indemnify IBM Credit for any loss or liability which is the
direct result of IBM Credit's gross negligence or willful misconduct. The
indemnity provided herein shall survive this Agreement.
7.6 Alterations/Waiver. In the event that IBM Credit at any time or from
time to time dispenses with any one or more of the Obligations specified in
this Agreement or any of the Other Agreements, such dispensation may be
revoked by IBM Credit at any time and shall not be deemed to constitute a
waiver of any such Obligation subsequent thereto. IBM Credit's failure at
any time or times to require strict performance by Customer of any
Obligations shall not waive, affect or diminish any right of IBM Credit
thereafter to demand strict compliance and performance. Any waiver by IBM
Credit of any Default by Customer under this Agreement or any of the Other
Agreements shall not waive or affect any other Default by Customer under this
Agreement or any of the Other Agreements, whether such Default is prior or
subsequent to such other Default and whether of the same or a different type.
None of the Obligations of Customer contained in this Agreement or the Other
Agreements and no Default by Customer shall be deemed waived by IBM Credit
unless such waiver is in writing signed by an authorized representative of
IBM Credit and delivered to Customer.
7.7 Notices. Except as otherwise expressly provided herein, any notice
required or desired to be served, given or delivered hereunder shall be in
writing, and shall be deemed to have been validly served, given or delivered
(i) three (3) Business Days after deposit in the United States mails,
registered or certified return receipt with proper postage prepaid, (ii) when
sent after receipt of confirmation or answerback if sent by telecopy, or
other similar facsimile transmission, (iii) one Business Day after being
deposited with a reputable overnight courier with all charges prepaid, or
(iv) when delivered, if hand-delivered by messenger, all of which shall be
properly addressed to the party to be notified and sent to the address or
number indicated in Attachment B or to such other address or number as each
party designates to the other in the manner herein prescribed.
7.8 Severability. Whenever possible, each provision of this Agreement shall
be interpreted in such a manner as to be effective and valid under applicable
law, but if any provision of this Agreement shall be prohibited by or invalid
under applicable law, such provision shall be ineffective only to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provisions or the remaining provisions of this Agreement.
7.9 One Loan. All loans and advances heretofore, now or hereafter made by
IBM Credit to Customer under this Agreement or the Other Agreements shall
constitute one loan secured by IBM Credit's security interests in the
Collateral and by all other security interests, liens and encumbrances
previously, presently or in the future granted by Customer to IBM Credit or
any assignor of IBM Credit.
7.10 Additional Collateral. All monies, reserves and proceeds received or
collected by IBM Credit with respect to Accounts and other property of
Customer in possession of IBM Credit at any time or times hereafter are
hereby pledged by Customer to IBM Credit as security for the payment of
Customer's Obligations and may be held by IBM Credit (without interest to
Customer) until Customer's Obligations are paid in full or applied by IBM
Credit on account of Customer's Obligations. IBM Credit may release to
Customer such portions of such monies, reserves and proceeds as IBM Credit
may from time to time determine, in its sole discretion.
7.11 Offsets. Customer hereby waives any right of set-off it may have
against IBM Credit.
7.12 Limitation of Liability. IBM Credit shall not have any liability with
respect to any special, indirect or consequential damages suffered by
Customer in connection with this Agreement, any other Agreement or any claims
in any manner related thereto.
7.13 Time. Time shall be of the essence hereof.
7.14 Entire Agreement. This Agreement, together with the Other Agreements
and any other documents to be delivered pursuant hereto and thereto,
constitutes the entire Agreement between the Customer and IBM Credit
pertaining to the subject matter hereof and supersedes all prior agreements,
understandings, negotiations and discussions, whether oral or written, with
respect to the subject matter hereof.
7.15 Paragraph Titles. The Section titles used in this Agreement and the
Other Agreements are for convenience only and do not define or limit the
contents of any Section.
7.16 Binding Effect. This Agreement and the Other Agreements shall be
binding upon and inure to the benefit of IBM Credit and Customer and their
respective successors and assigns but Customer shall have no right to assign
this Agreement or any of the Other Agreements without the prior written
consent of IBM Credit.
7.17 Conditions To Effectiveness. The effectiveness of this Agreement shall
be conditioned upon the receipt by IBM Credit of the instruments and other
documents specified in Attachment A to this Agreement including IBM Credit's
receipt of an agreement, in form and substance satisfactory to IBM Credit,
between Customer and a financial institution acceptable to IBM Credit, which
creates a lockbox account arrangement which is blocked in favor of IBM Credit
so that the only disbursements made against the account shall be in favor of
IBM Credit.
7.18 Submission by Customer. This Agreement and the Other Agreements are
submitted by Customer to IBM Credit (for IBM Credit's acceptance or rejection
thereof) at IBM Credit's place of business specified in Attachment B of this
Agreement, as an offer by Customer to borrow monies from IBM Credit and shall
not be binding upon IBM Credit or become effective until and unless accepted
in writing by IBM Credit at its said place of business. If so accepted, this
Agreement and the Other Agreements shall be deemed to have been made at IBM
Credit's said place of business. This Agreement and the Other Agreements and
all transactions pursuant thereto shall be governed and controlled as to
interpretation, enforcement, validity, construction, effect and in all other
respects (including, but not limited to, the legality of the interest charged
to Customer pursuant thereto) by the laws, statutes and decisions of the
state of IBM Credit's said place of business. Customer, in order to induce
IBM Credit to accept this Agreement and the Other Agreements, agrees that all
actions or proceedings arising directly or indirectly in connection with this
Agreement or the Other Agreements may be litigated, at IBM Credit's sole
discretion and election, in courts having situs within the state where IBM
Credit's aforesaid place of business is located. Customer hereby consents
and submits to the jurisdiction of any local, state or federal court located
within such state. Customer hereby waives any right it may have to transfer
or change the venue of any litigation brought against it by IBM Credit in
accordance with this paragraph.
CUSTOMER AND IBM CREDIT HEREBY IRREVOCABLY WAIVE THEIR RIGHT TO TRIAL BY JURY
WITH RESPECT TO ANY ACTION OR PROCEEDING IN WHICH IBM CREDIT AND CUSTOMER
ARE PARTIES.
IN WITNESS WHEREOF, the duly authorized representatives of Customer have
executed and delivered this Agreement as of the date set forth below.
Date: 9/23/97
Customer: Andrea Electronics
Corporation
By: /s/ Patrick D. Pilch
--------------------------------
Print Name: Patrick D. Pilch
--------------------------
Title: EVP/CFO
-------------------------------
ATTEST: /s/ Richard A. Maue
------------------------------
(Secretary)
ACCEPTED this 15th day of October, 1997, at IBM Credit's place of business
specified at the beginning of this Agreement.
IBM Credit Corporation
By: /s/ Robert J. Halapin
------------------------------
Print Name: Robert J. Halapin
---------------------
Title: Account Executive
---------------------------
SECRETARY'S CERTIFICATE
(Revolving Loan and Security Agreement)
I, Richard A. Maue, do hereby certify that I am the duly elected and acting
Secretary of Andrea Electronics, a New York corporation, and as such I am the
keeper of the corporate records and seal of said corporation; that the
following is a true and correct copy of resolutions duly adopted and ratified
by action of the board of directors of said corporation on June 19, 1997 as
ratified and approved by the stockholders of said corporation by action of
said stockholders on June 19, 1997, all in accordance with its by-laws and
articles of incorporation and the laws of its jurisdiction of incorporation;
and that the same have not been modified, repealed, rescinded or withdrawn,
are in full force and effect and do not contravene any provisions of said
corporation's articles of incorporation or by-laws:
RESOLVED, that the President, each Vice-President, the Secretary, the
Treasurer and each other officer and each agent of this Corporation, or
any one or more of them, be and they are hereby authorized and empowered
on behalf of this Corporation: to obtain from IBM Credit Corporation
("IBM Credit") loans in such amounts and on such terms and conditions as
such officers deem proper; to execute notes and other evidences of this
corporation's indebtedness with respect thereto; to enter into financing
and other agreements with IBM Credit relating to the terms and
conditions upon which any such loans may be obtained and the security to
be furnished by this corporation therefore; from time to time to modify,
supplement or amend any such agreements, any such terms or conditions
and any such security; from time to time to pledge, assign, guaranty,
mortgage, consign, grant security interest in and otherwise transfer to
IBM Credit as collateral security for any and all debts and obligations
of this corporation to IBM Credit, whenever and however arising, any and
all accounts and other forms of obligations, receivables, choses in
action, inventory, warehouse receipts, machinery, equipment, land,
buildings and other real, personal or fixed property, tangible or
intangible, now or hereafter belonging to or acquired by this
corporation; for said purposes to execute and deliver any and all
assignments, schedules, transfers, endorsements, contracts, debentures,
guarantees, agreements, designations, consignments, deeds of trust,
mortgages, instruments of pledge or other instruments in respect thereof
and to make remittances and payments in respect thereof by checks,
drafts or otherwise; and to do and perform all other acts and things
deemed by such officer or agent necessary, convenient or proper to carry
out any of the foregoing; hereby ratifying, approving and confirming all
that any said officers and agents have done or may do in the premises.
(Revolving Loan and Security Agreement)
I do further certify that the following are the names and specimen signatures
of the officers and agents of said corporation so empowered and authorized,
namely:
Co-President:
John N. Andilea
- -------------------------
(Print Name)
/s/ John N. Andilea
- -------------------------
(Signature)
Co-President:
Douglas J. Andrea
- -------------------------
(Print Name)
/s/ Douglas J. Andrea
- -------------------------
(Signature)
EVP/CFO:
Patrick D. Pilch
- ------------------------------
(Print Name)
/s/ Patrick D. Pilch
- -------------------------
(Signature)
Treasurer:
Richard A. Maue
- --------------------
(Print Name)
/s/ Richard A. Maue
- -------------------------
(Signature)
Agent:
- -------------------------
(Print Name)
- ------------------------
(Signature)
Witness my hand and seal of said corporation this 23rd day of September,
1997. (Attach corporate seal here.)
Richard A. Maue
-------------------------------
(Secretary of said corporation)
ATTACHMENT A TO
REVOLVING LOAN AID SECURITY AGREEMENT
Dated 9/23 , 1997
--------------
Customer's Name: Andrea Electronic Corporation
1. A/R Revolver Credit Line Fees, Rates and Repayment Terms:
(a) Line of Credit in the amount of:
Eight Million dollars ($8,000,000.00);
(b) Borrowing Base:
(i) Percentage on invoice amount of Eligible Accounts: 85%;
including, but not limited to, Accounts arising from incentive
payments, rebates, discounts and refunds relating to Approved
Inventory, to be later defined in an agreement, which are
(i) verifiable by suppliers, and (ii) payable by suppliers, and
(iii) paid by suppliers by check to a lockbox approved by IBM
Credit Corporation.
(ii) Valuation Percentage of Additional Collateral: 20%;
Type of Additional Collateral: Raw Materials and Finished Goods (to
be further defined in an agreement).
(c) Monthly Service Fees $1,000.00;
(d) Revolver Financing Charge: Prime Rate plus 0.75%;
(e) Delinquency Fee Rate: Prime Rate plus 6.50%.
2. Documentation Requirements: (Other Agreements)
Executed Revolving Loan and Security Agreement;
Executed Blocked Account Amendment to a Lockbox Agreement;
Executed Corporate Guaranty of all Affiliates, including: Andrea
Direct Marketing, Inc., Andrea ANC Manufacturing, Inc., Andrea
Marketing, Inc., Andrea Electronics Europe, Inc. and Andrea
Military Communications, Inc., LLC.
Executed Waiver of Landlord Lien for all premises in which a
landlord had the right of levy for rent.
Proof of "All risk" insurance policy in amount of $5,OOOK naming
IBMCC as lender loss payee;
Execute Agreement for Non-Transfer of Assets from owners with
10% or more holdings;
ATTACHMENT A TO
LETTER OF UNDERSTANDING (Continued)
1. Customer must submit the following within ninety (90) days after the end
of Customer's fiscal year, and as requested by IBM Credit from time to
time:
Pro forma income statement, balance sheet and cash flow
statement for the next 12 months or through the current fiscal
year and the following fiscal year; and
business narrative that at a minimum should include an
explanation on how Customer plans to accomplish significant
changes in revenue, gross profit margin, expenses, operating
profit margin and net profit. The Customer's business strategy,
anticipated business climate, and the headcount that will
produce the projected financial results should also be included.
2. Documentation Requirements (Other Agreements) (continued):
A list of all creditors possessing a security interest or 1ien
on accounts receivable; all creditors will be required to
subordinate to IBM Credit or terminate their filings; and
all creditors possessing a security interest or lien which is
superior to IBM Credit's in any Collateral; creditors may be
required to subordinate to IBM Credit.
3. Financial Covenants:
Definitions: The following terms shall have the following respective
meanings in this Letter of Understanding. All amounts shall be determined in
accordance with generally accepted accounting principles (GAAP).
Current shall mean within the on-going twelve month period.
Current Assets shall mean assets that are cash or expected to become
cash within the on-going twelve months.
Current Liabilities shall mean payment obligations resulting from past
or current transactions that require settlement within the on-going
twelve month period. All indebtedness to IBM Credit shall be considered
a Current Liability for purposes of determining compliance with the
Financial Covenants.
Current Ratio shall mean Current Assets divided by Current Liabilities.
Long Term shall mean beyond the on-going twelve month period.
Long Term Assets shall mean assets that take longer than a year to be
converted to cash. They are divided into four categories:
tangible assets, investments, intangibles and other.
Long Term Debt shall mean payment obligations of indebtedness which
mature more than twelve months from the date of determination, or mature
within twelve months from such date but are renewable or extendible at
the option of the debtor to a date more than twelve months from the date
of determination.
Net Profit after Tax shall mean Revenue plus all other income, minus all
costs, including applicable taxes.
Revenue shall mean the monetary expression of the aggregate of products
or services transferred by an enterprise to its customers for which said
customers have paid or are obligated to pay, plus other income as
allowed.
Subordinated Debt shall mean Customer's indebtedness to third parties as
evidenced by an executed Notes Payable Subordination Agreement in favor
of IBM Credit.
ATTACHMENT A TO
REVOLVING LOAN AND SECURITY AGREEMENT (Continued)
3. Financial Covenants (continued):
Tangible Net Worth shall mean:
Total Net Worth minus;
(a) goodwill, organizational expenses, pre-paid expenses,
deferred charges, research and development expenses,
software development costs, leasehold expenses,
trademarks, trade names, copyrights, patents, patent
applications, privileges, franchises, licenses and rights
in any thereof, and other similar intangibles (but not
including contract rights) and other current and non-
current assets as identified in Customer's financial
statements;
(b) all accounts receivable from employees, officers,
directors, stockholders and affiliates; and
(c) all callable/redeemable preferred stock.
Total Assets shall mean the total of Current Assets and Long Term
Assets.
Total Liabilities shall mean the Current Liabilities and Long Term Debt
less Subordinated Debt, resulting from past or current transactions,
that require settlement in the future.
Total Net Worth (the amount of owner's or stockholder's ownership in an
enterprise) is equal to Total Assets minus Total Liabilities.
Working Capital shall mean Current Assets minus Current Liabilities.
Customer will be required to maintain the following financial percentage and
ratios as of the last day of the fiscal period under review by IBM Credit:
a) Net Profit after Tax to Revenue percentage equal to or greater
than 1.20%;
b) Total Liabilities to Tangible Net Worth greater than zero and
equal to or less than 1.3:1.0;
c) Revenue (on an annual basis) to Working Capital ratio greater
than zero and equal to or less than 5.0:1.0.
4. Customer's state of incorporation is: New York
------------
5. Lockbox Information: 6. IBM Credit Account
Information:
Bank Name: European American Bank Bank Name: First
Chicago Bank
Address: Long Island City, Address: Chicago,
Illinois
New York
- ---------------------
-------------------------
- ---------------------
6. Uniform Commercial Code:
The Uniform Commercial Code in effect from time to time in the state of
New York will apply to this Agreement.
------------
Exhibit 21
Name of Subsidiary State of Organization
- ------------------ ---------------------
Andrea ANC Manufacturing Inc. Delaware
Andrea Digital Technologies, Inc. Delaware
Andrea Direct Marketing Inc. Delaware
Andrea Electronics Europe Inc. Delaware
Andrea Marketing Inc. Delaware
Andrea Military Communications, LLC Delaware
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statement Files No. 33-84092 and 333-14385.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Melville, New York
March 31, 1998
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statement Files No. 33-84092 and 333-14385.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Melville, New York
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,059,338
<SECURITIES> 102,717
<RECEIVABLES> 4,620,954
<ALLOWANCES> 52,521
<INVENTORY> 5,766,927
<CURRENT-ASSETS> 14,430,645
<PP&E> 2,341,317
<DEPRECIATION> 1,318,975
<TOTAL-ASSETS> 17,789,184
<CURRENT-LIABILITIES> 2,643,986
<BONDS> 1,193,472
0
0
<COMMON> 4,353,346
<OTHER-SE> 5,611,862
<TOTAL-LIABILITY-AND-EQUITY> 17,789,184
<SALES> 26,429,804
<TOTAL-REVENUES> 26,429,804
<CGS> 16,077,801
<TOTAL-COSTS> 16,077,801
<OTHER-EXPENSES> 6,860,010
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 228,029
<INCOME-PRETAX> 3,568,857
<INCOME-TAX> 154,461
<INCOME-CONTINUING> 3,414,396
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,414,396
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.39)
</TABLE>
