<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to_______________
Commission file number 1-4324
-------
ANDREA ELECTRONICS CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 11-0482020
------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11-40 45th Road, Long Island City, New York 11101
------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
1-800-442-7787
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: as of May 14, 1998,
11,070,675 shares of Common Stock, par value $.50 per share.
<PAGE>
<PAGE> 2
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS March 31, December 31,
1998 1997
-------- ------------
(unaudited) (audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,355,962 $ 2,059,338
Marketable securities 742,174 102,717
Accounts receivable, net 4,067,698 4,568,433
Inventories, net 7,732,193 5,766,927
Deferred income taxes 849,250 909,569
Prepaid expenses and other current assets 1,330,359 1,023,661
------------ ------------
Total current assets 17,077,636 14,430,645
Property, plant & equipment, net 713,494 1,022,342
Deferred income taxes 628,322 897,046
Other assets 1,938,444 1,439,151
------------ ------------
Total assets $ 20,357,896 $17,789,184
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 2,137,756 $ 966,783
Other current liabilities 661,653 483,731
Convertible debentures - 1,193,472
------------ ------------
Total current liabilities 2,799,409 2,643,986
LONG TERM DEBT 429,880 -
OTHER LIABILITIES - 38,500
------------ ------------
Total liabilities 3,229,289 2,682,486
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock, $.50 par value;
authorized: 15,000,000 shares;
issued and outstanding: 9,052,730 and
8,706,692 shares, respectively 4,526,365 4,353,346
Additional paid-in capital 11,294,632 9,881,915
Retained earnings (deficit) 1,307,610 871,437
------------ ------------
Total shareholders' equity 17,128,607 15,106,698
------------ ------------
Total liabilities and shareholders' equity $ 20,357,896 $ 17,789,184
============ ============
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 3
<TABLE>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
For the Three Months Ended March 31,
1998 1997
<S> <C> <C>
SALES $ 4,475,070 $ 5,384,269
COST OF SALES 2,820,222 3,195,908
------------- -------------
Gross Profit 1,654,848 2,188,361
RESEARCH AND DEVELOPMENT EXPENSES 407,453 152,824
GENERAL, ADMINISTRATIVE AND SELLING EXPENSES 2,393,334 1,253,074
------------- -------------
Income (loss) from operations (1,145,939) 782,463
------------- -------------
OTHER INCOME (EXPENSE)
Interest income 10,643 19,048
Interest expense (24,893) (66,527)
Rent and miscellaneous income 1,925,405 57,750
------------- -------------
1,911,155 10,271
------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES 765,216 792,734
PROVISION FOR INCOME TAXES 329,043 186,293
------------- -------------
NET INCOME $ 436,173 $ 606,441
============= =============
PER SHARE INFORMATION:
Net Income Per Share:
Basic $ .05 $ .08
============= =============
Diluted $ .05 $ .07
============= =============
Shares used in computing net income per share:
Basic 8,936,255 7,734,394
============= =============
Diluted 9,661,189 8,988,096
============= =============
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<PAGE> 4
<TABLE>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<CAPTION>
Total
Shares Additional Paid- Retaine Shareholders'
Outstanding Common Stock In Capital Earnings Equity
----------- ------------ ---------- -------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 8,706,692 $ 4,353,346 $ 9,881,915 $ 871,437 $ 15,106,698
Exercise of Stock Options, net 108,000 54,000 134,030 - 188,030
Conversion of Convertible
Debentures 238,038 119,019 1,278,687 - 1,397,706
Net Income - - - 436,173 436,173
--------- ------------ ------------ ------------ ------------
BALANCE, March 31, 1998
(Unaudited) 9,052,730 $ 4,526,365 $ 11,294,632 $ 1,307,610 $ 17,128,607
========= ===++======= ============ ============ ============
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 5
<TABLE>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
For the Three Months Ended
March 31,
1998 1997
------------ ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 436,173 $ 606,441
Adjustments to reconcile net income to net cash (used
in) provided by operating activities:
Depreciation and amortization 505,788 101,491
Deferred income taxes 329,043 177,217
Gain on sale of building (1,864,767) -
(Increase) decrease in:
Accounts receivable 500,735 (736,970)
Inventories (1,965,266) 949,782
Prepaid expenses and other current assets (699,488) (136,575)
Other assets (499,293) -
Increase (decrease) in:
Trade accounts payable 1,170,973 (306,518)
Other current and long term liabilities 328,974 (42,857)
----------- ------------
Net cash (used in) provided by
operating activities (1,757,128) 612,011
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (207,264) (62,833)
Proceeds from sale of building 2,282,563 -
Purchases of investment securities (639,457) -
----------- ------------
Net cash provided by (used in)
investing activities 1,435,842 (62,833)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligations - -
Proceeds from revolving credit facility, net 429,880 -
Exercise of stock options 188,030 223,500
----------- ------------
Net cash provided by financing activities 617,910 223,500
----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 296,624 772,678
CASH AND CASH EQUIVALENTS - beginning of period 2,059,338 921,065
----------- ------------
CASH AND CASH EQUIVALENTS - end of period $ 2,355,962 $ 1,693,743
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Conversion of debt into common stock $ 1,397,706 $ -
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 6
Notes to Consolidated Financial Statements
- ------------------------------------------
I. Basis of Presentation. The accompanying consolidated financial
statements include the accounts of the Company and its subsidiaries
(collectively, "Andrea Electronics" or the "Company"). All intercompany
balances and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial reporting.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for any interim period are not
necessarily indicative of the results to be expected for the fiscal year.
For further information, refer to the consolidated financial statements and
accompanying footnotes included in the Company's annual report on Form 10-K
for the year ended December 31, 1997.
II. Stock Split. On September 2, 1997, the Company's Board of Directors
authorized a two-for-one stock split effected in the form of a 100% stock
dividend that was distributed on September 17, 1997 to shareholders of record
on September 10, 1997. All share and per share data included in the
accompanying financial statements have been restated to reflect the stock
split for all periods presented.
III. Earnings Per Common Share. Effective December 31, 1997, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share". Basic net income per common share ("Basic EPS") is
computed by dividing net income by the weighted average number of common
shares outstanding. Diluted net income per common share ("Diluted EPS") is
computed by dividing net income by the weighted average number of common
shares and dilutive common share equivalents and convertible securities then
outstanding. SFAS No. 128 requires the presentation of both Basic EPS and
Diluted EPS on the face of the consolidated statements of operations. The
impact of the adoption of this statement was not material to all previously
reported EPS amounts.
The following chart provides a reconciliation of information used in
calculating the per share amounts for the three months ended March 31, 1998
and 1997:
<TABLE>
<CAPTION>
Net Income Shares Net Income Per Share
---------- ------ --------------------
<S> <C> <C> <C>
1998
Net Income $ 436,173 8,936,255 Basic $ .05
Effect of dilutive employee stock options 724,934 -
--------- -----
9,661,189 Diluted $ .05
1997
Net Income $ 606,441 7,734,394 Basic $ .08
Effect of dilutive employee stock options 1,253,702 (.01)
--------- -----
8,988,096 Diluted $ .07
</TABLE>
IV. Comprehensive Income In the first quarter of 1998, the Company
adopted SFAS No. 130, "Reporting Comprehensive Income", which
requires companies to report all changes in equity during a period,
except those resulting from investment by owners and distribution to
owners, in a financial statement for the period in which they are
recognized. Comprehensive income is the total of net income and all
other nonowner changes in equity (or other comprehensive income)
such as unrealized gains/losses on securities available-for-sale,
foreign currency translation adjustments and minimum pension
liability adjustments. Comprehensive and other comprehensive income
must be reported on the face of the annual financial statements or
in the case of interim reporting, in the footnotes to the financial
<PAGE> 7
statements. For 1997, and for the quarters ended March 31, 1998 and
1997, the Company's operations did not give rise to items includible
in comprehensive income which were not already included in net
income. Therefore, the Company's comprehensive income is the same
as its net income for all periods presented.
V. Debt Financing. On September 23, 1997, the Company entered
into an $8 million credit facility with a financial institution
consisting of a revolving loan based on eligible accounts receivable
and inventory, as defined. The facility, together with the amount
available to the Company under commercial letters of credit,
approximates $10 million. 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 year-end
financial covenant compliance and, at March 31, 1998, there was
$429,880 outstanding under the agreement.
VI. Procurement Agreement. In August 1997, the Company entered
into an agreement with International Business Machines and its
subsidiaries ("IBM") to produce and procure certain products, as
defined. The agreement replaces all previous agreements with IBM
and will continue in full force and effect unless terminated earlier
for material breach by either party, as defined. During the three
months ended March 31, 1998, sales of the Company's computer
headsets to IBM and certain of IBM's affiliates, distributors,
licensees, and integrators accounted for approximately 53% of the
Company's total net sales.
VII. Conversion of Convertible Debentures - On February 9, 1998,
$1,250,000 of the Company's remaining 10% subordinated convertible
debentures, together with related accrued interest, was converted
into the Company's common stock. There are no remaining debentures
subject to conversion at March 31, 1998.
VIII. Subsequent Event - On May 5, 1998, the Company acquired all
of the outstanding shares of capital stock of Lamar Signal
Processing, Ltd. ("Lamar"), an Israeli corporation engaged in the
development of digital signal processing (DSP) noise cancellation
microphone solutions for voice-driven interfaces covering a wide
range of audio and acoustic applications. The consideration paid by
the Company for the acquisition of Lamar was 1,800,000 shares of
restricted common stock and $3,000,000 in cash. Of the 1,800,000
shares, one-third becomes freely transferable on the first
anniversary of the closing, an additional one-third on the second
anniversary and the last one-third on the third anniversary. Of the
aggregate cash consideration to be paid by the Company, $1,000,000
was paid on May 5, 1998 with the remainder payable in four equal
installments on each of the sixth, twelfth, twenty-four and
thirty-six month anniversaries of the closing. The acquisition will be
accounted for under the purchase method of accounting and,
accordingly, the purchase price (consisting of the present value of
cash payments, the fair value of the restricted stock and other
costs related to the acquisition) will be allocated to the assets
acquired and liabilities assumed based upon their estimated fair
values. The value of the restricted stock and the overall purchase
price allocation will be determined according to third party appraisals,
other studies and additional information as they become available,
and the Company expects that the excess of the purchase price over
the net assets acquired will be amortized over a period not
exceeding 10 years. Results of operations for Lamar will be
included with those of the Company for periods subsequent to the
date of acquisition.
IX. Reclassifications. Certain prior year amounts have been
reclassified to conform to the current year presentation.
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Andrea Electronics' mission is to provide state-of-the-art voice
communications products for the natural language-driven,
"human/machine" interface markets that are emerging from the
convergence of the telecommunications and computer industries. The
Company's strategy for serving these markets is to leverage its
expertise in audio communications technology, including its patented
Andrea Anti-Noise/Registered Trademark/ Active Noise Cancellation
("ANC") and Active Noise Reduction ("ANR") technologies, and to
continue developing, manufacturing and marketing its line of Andrea
Anti-Noise headsets, handsets and related communication products.
These products are designed to cost-effectively enhance voice
communications for end users of the growing number of new,
voice-driven computer and computer telephony applications and
interfaces. The Company is also seeking to apply its ANC and ANR
technologies to the defense and industrial electronics markets that
are requiring increasingly higher quality voice communication
products. To extend its position in technology enhancing
communications, the Company has undertaken a digital signal
processing (DSP) development program. This program is the focus of
the Company's recently formed Andrea Digital Technologies subsidiary
and recently acquired Lamar Signal Processing subsidiary.
Examples of the applications for which Andrea Anti-Noise headsets,
handsets and related products currently provide benefit include:
voice-driven word processing, navigation and other speech
recognition applications; Internet and other computer-based
telephony and multi-point teleconferencing applications; multiplayer
Internet and CD-ROM interactive games; multimedia entertainment and
education applications; military and industrial communications; and
other applications and interfaces that incorporate natural language
processing. The Company's headsets, handsets and related products
can be used with personal computers, business and residential
telephones, military headsets, cellular and other wireless
telephones, personal communication systems, and avionics
communications systems. The Company believes its Andrea Anti-Noise
products significantly enhance voice transmission and reception,
particularly in noisy environments. In addition, the Company is
designing its Andrea DSP products for emerging "far field" voice
applications, ranging from continuous speech dictation, to
multiparty video teleconferencing and computer-based collaboration,
to natural language 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 collaborative arrangements with software publishers,
distributors and retailers actively engaged in the various markets
in which the Company's products have application, as well as with
hardware OEMs. Under certain of these arrangements, the Company
supplies its products for sale by the collaborative partners. Under
certain others, the collaborative partners supply the Company with
software that the Company includes with its products. 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. In
contrast, the Company manufactures in its own facilities the
intercom systems and related components for military applications
and industrial applications that comprise its traditional line of
intercom products ("Traditional Intercom Products"). To the extent
that the Company succeeds in developing a new line of products for
military and industrial use that incorporate Andrea Anti-Noise ANC
and ANR technology, management anticipates that it will manufacture
these new products through both outsourcing and self-manufacturing.
<PAGE> 9
The interim results of operations of the Company presented in this
report are not necessarily indicative of the actual sales or results
of operations to be realized for the full year. The Company expects
its May 1998 acquisition of Lamar Signal Processing to be dilutive
of net income during the remainder of 1998 and to begin being
accretive in 1999.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain information contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations for the
three months ended March 31, 1998 (the "1998 First Quarter") are
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The words "believe",
"expect", "anticipate", and similar expressions identify
forward-looking statements. In order to obtain the benefits of
these "safe harbor" provisions for any such forward-looking
statements, the Company wishes to caution investors and prospective
investors about the following significant factors, which, among
others, have in some cases affected the Company's actual results and
are in the future likely to affect the Company's actual results and
could cause them to differ materially from those expressed in any
such forward-looking statements. These factors include:
First, the rate at which the Company's Anti-Noise technology is
accepted by the diverse range of users and applications within the
global communications and computing marketplace;
Second, 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 the
ability of the Company to develop similarly competitive Andrea DSP
products will require the Company to have sufficient funds to expend
on research and development and to manage the collaboration of its
newly established Andrea Digital Technologies subsidiary and newly
acquired Lamar Signal Processing subsidiary;
Third, the ongoing ability of the Company to enter into and maintain
collaborative relationships with larger companies in the fields of
telecommunications, computer manufacturing, software design and
publishing, Internet and online services, defense-related
manufacturers and system providers, as well as retail and direct
marketing distributors;
Fourth, the potential for quarter-to-quarter and year-to-year
fluctuations in the Company's results of operations caused by the
rapid and continuing development of the markets in which the Company
competes;
Fifth, to the extent that the Company seeks to grow on a global
basis, it will become increasingly subject to potentially adverse
economic and business conditions outside the United States and the
risks of conducting international operations; and
Sixth, in the event that the Company experiences continued
significant growth in demand for its Anti-Noise technology, the
ability of the Company to raise sufficient external capital to fund
the working capital requirements for meeting such demand.
The failure of the Company to surmount the challenges posed by any
one or more of these factors could have a material adverse effect on
the Company's business, results of operations and financial
condition.
<PAGE> 10
RESULTS OF OPERATIONS
Sales
Sales for the 1998 First Quarter were $4,475,070, a decrease of 17%
over the three months ended March 31, 1997 (the "1997 First
Quarter"). This decrease in sales primarily reflects a decline in
unit sales and to a lesser extent price erosion. The decrease in
sales during the 1998 First Quarter was comprised of an approximate
17% decrease in sales of Andrea Anti-Noise products to $3,514,654,
or 78% of total sales, and an approximate 9% decrease in sales of
the Company's Traditional Intercom Products to $960,417, or 22% of
total sales.
Cost of Sales
Cost of sales as a percentage of sales for the 1998 First Quarter
increased to 63% from 59% for the 1997 First Quarter. The increase
in cost of sales during the 1998 First Quarter principally reflects
a shift in the product mix of sales.
Research and Development
Research and development expenses increased 167% to $407,453 for the
1998 First Quarter from $152,824 for the 1997 First Quarter. This
increase is primarily related to management's commitment to maintain
the Company's competitive technological position in the voice
interface markets. Management intends to at least maintain this
level of research and development during 1998, particularly as it
seeks to broaden the Andrea Anti-Noise product line and to develop
Andrea DSP technology and products. In this respect, a significant
portion of research and development expenses are expected to be
incurred by the Company's two wholly-owned subsidiaries, Andrea
Digital Technologies and Lamar Signal Processing, both of which are
focused on developing and incorporating next-generation digital
voice solutions.
General, Administrative and Selling Expenses
General, administrative and selling expenses increased 91% to
$2,393,334 for the 1998 First Quarter from $1,253,074 for the 1997
First Quarter. This increase was primarily attributable to expanded
marketing and selling of the ANC and ANR product lines to existing
hardware OEMs, software publishers, distributors and retailers, and
to the development of relationships with prospective collaborators
and customers. In addition, the Company incurred increased
promotional, marketing and selling expenses to promote product
awareness and acceptance among end users of the ANC and ANR product
lines and incurred significant marketing and selling expenses to
expand the Company's global position. As a percentage of sales,
general, administrative and selling expenses increased to 53% for
the 1998 First Quarter from 23% for the 1997 First Quarter.
Other Income
Other income for the 1998 First Quarter was $1,911,155 compared to
other income of $10,271 for the 1997 First Quarter. This change is
primarily attributable to the gain of $1,864,767 on the sale of the
Company's corporate headquarters during the 1998 First Quarter,
coupled with a decrease in interest expense as a result of the
conversion in the 1998 First Quarter of all of the Company's
remaining convertible debentures.
Provision for Income Taxes
The provision for income taxes of $329,043 in the 1998 First Quarter
represents income tax expense at the Company's combined statutory
rate of approximately 43%. The provision for income taxes of
<PAGE> 11
$186,293 in the 1997 First Quarter represents an effective tax rate
of 23.5%, which was comprised of tax expense at the Company's
combined statutory rate of approximately 43%, offset by a reduction
in the Company's reserve on previously generated, fully-reserved
deferred income tax assets in light of management's expectations as
to future profitability at that time.
The Company will be continually re-assessing its reserves on
deferred income tax assets as 1998 operations progress. The
realization of remaining reserved deferred tax assets, if and when
realized, will not result in a tax benefit in the consolidated
statement of operations, but will result in an increase in
additional paid in capital as they are related to tax benefits
associated with the exercise of stock options.
Net Income
Net income for the 1998 First Quarter was $436,173 compared to net
income of $606,441 for the 1997 First Quarter. The levels of net
income for the 1998 First Quarter principally reflect the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds have historically been, and
are expected to continue to be, cash flow from operations and
borrowings provided from financial institutions. At March 31, 1998,
the Company had cash and cash equivalents of $2,355,962 compared
with $2,059,338 at December 31, 1997. In connection with the
acquisition of Lamar Signal Processing in April 1998, of the
aggregate cash consideration to be paid by the Company, $1,000,000
was paid on May 5, 1998, the closing date, with the remainder
payable in four equal installments on each of the sixth, twelfth,
twenty-fourth and thirty-sixth month anniversaries of the closing.
Working capital at March 31, 1998 was $14,278,277 compared to
$11,786,659 at December 31, 1997. The increase in working capital
reflects an increase in total current assets of $2,646,991 offset by
an increase in total current liabilities of $155,423. The increase
in total current assets reflects an increase in cash of $296,624, a
decrease in accounts receivable of $500,735, an increase in
inventory of $1,965,266, a decrease in deferred income taxes of
$60,319 and an increase of $306,698 in prepaid expenses and other
current assets. The increase in current liabilities reflects a
$1,170,973 increase in trade accounts payable, a $177,922 increase
in other current liabilities and a $1,193,472 decrease in
convertible debentures (which were converted to equity during the
period).
The decrease in accounts receivable primarily reflects the decrease
in sales during the 1998 First Quarter coupled with more rigorous
collection procedures. Generally, the Company collects receivables
from sales within three months.
The increase in prepaid expenses and other current assets primarily
includes the recognition of increased premiums for prepaid property
taxes and insurance, increased fulfillment costs associated with
expansion efforts as well as increases in other service costs
related to the second quarter of 1998. The increase in other assets
represents increases in patent and trademark costs for the Company's
proprietary technology, as well as the establishment of an escrow
account in connection with the sale of the Company's primary
operating facility.
The increase in trade accounts payable and other current and long
term liabilities primarily reflects differences in the timing
related to both the payments for and the acquisition of raw
materials as well as for other services in connection with ongoing
efforts related to the Andrea Anti-Noise products.
<PAGE> 12
The increase in cash of $296,624 during the 1998 First Quarter
reflects $1,757,128 of net cash used in operating activities,
$1,435,842 of cash provided by investing activities, and $617,910 of
cash provided by financing activities.
The cash used in operating activities, excluding non-cash charges,
is primarily attributable to the $1,145,939 operating loss in the
1998 First Quarter, coupled with an increase in inventory of the
Company's Anti-Noise computer headsets in anticipation of future
sales.
The cash provided by investing activities was primarily attributable
to the sale of the Company's primary operating facility in Long
Island City, New York, offset by capital expenditures on the ongoing
upgrade of manufacturing dies and molds for Andrea Anti-Noise
products and investments in the Company's information systems.
Following the sale of the Company's primary operating facility,
relocation is anticipated to occur during the third quarter of 1998
and the lease expense associated with the new facility is
anticipated to range between $450,000 to $550,000 per year.
The net cash provided by financing activities resulted from
drawdowns on the Company's revolving credit facility and the
exercise of employee stock options.
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.
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, all of which have been
converted into common stock of the Company. 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, of which
$429,880 was outstanding at March 31, 1998. The Company continually
explores its financing options and may, from time to time, issue
equity or debt in the public or private markets. Notwithstanding
the significance of sales of Andrea Anti-Noise products during 1997
and the 1998 First Quarter, no assurance can be given that demand
will continue 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. Failure to do so could have a material adverse
effect on the Company's business, results of operations and
financial condition.
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit
Number Description
- ---------- -------------
27 Financial Data Schedule
(b) Reports on Form 8-K.
On February 2, 1998, the Company filed a Report on Form 8-K
containing the Company's January 27, 1998 press release on certain
financial information with respect to the year ended December 31,
1997.
<PAGE> 14
SIGNATURES
In accordance with the requirements of Section 13 and 15(d) of the
Exchange Act, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ANDREA ELECTRONICS CORPORATION
/s/ John N. Andrea Co-President May 14, 1998
- ----------------------
John N. Andrea
/s/ Patrick D. Pilch Executive Vice President, May 14, 1998
- ---------------------- and Chief Financial Officer
Patrick D. Pilch
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BYREFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1997
<CASH> 2,355,962
<SECURITIES> 742,174
<RECEIVABLES> 4,120,219
<ALLOWANCES> 52,521
<INVENTORY> 7,732,193
<CURRENT-ASSETS> 17,077,636
<PP&E> 811,810
<DEPRECIATION> 98,316
<TOTAL-ASSETS> 20,357,896
<CURRENT-LIABILITIES> 2,799,409
<BONDS> 429,880
0
0
<COMMON> 4,526,365
<OTHER-SE> 12,602,242
<TOTAL-LIABILITY-AND-EQUITY> 20,357,896
<SALES> 4,475,070
<TOTAL-REVENUES> 4,475,070
<CGS> 2,820,222
<TOTAL-COSTS> 2,820,222
<OTHER-EXPENSES> 2,800,787
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,893
<INCOME-PRETAX> 765,216
<INCOME-TAX> 329,043
<INCOME-CONTINUING> 436,173
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 436,173
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
