SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended September 30, 1999
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
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(Exact name of registrant as specified in its charter)
New York 11-0482020
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
45 Melville Park Road, Melville, New York 11747
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(Address of principal executive offices) (Zip Code)
516-719-1800
----------------------------------------------------
(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 13,242,538.
<PAGE>
Item 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
September 30, December 31, 1998
------------- -----------------
ASSETS 1999 1999
------ ---- ----
(unaudited) (audited)
----------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,348,688 $ 5,437,423
Accounts receivable, net of allowance for doubtful accounts of $202,251 4,243,275 4,867,782
Inventories, net 7,647,839 8,014,323
Prepaid expenses and other current assets 239,179 498,662
----------- -------------
Total current assets 21,478,981 18,818,190
PROPERTY, PLANT AND EQUIPMENT, net 2,114,020 1,919,966
DEFERRED INCOME TAXES 1,806,615 1,806,615
OTHER ASSETS 2,022,008 1,751,501
GOODWILL 25,005,825 26,385,668
----------- -------------
Total assets $52,427,449 $ 50,681,940
=========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Trade accounts payable $ 2,335,399 $ 2,221,912
Other current liabilities 1,449,191 1,745,041
Current portion of long-term debt 505,000 514,121
Convertible notes 1,477,616
----------- -------------
Total current liabilities 5,767,206 4,481,074
LONG-TERM DEBT 713,327 1,126,390
CONVERTIBLE NOTES, net - 1,455,231
OTHER LIABILITIES - 40,345
----------- ------------
Total liabilities 6,480,533 7,103,040
----------- ------------
SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK, $.01 par value; 750 and 0
shares issued and outstanding, respectively 7,170,523 -
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized: 5,000,000 shares - -
Common stock, $.50 par value; authorized: 25,000,000 shares; issued and
outstanding: 13,242,538 and 13,210,038 shares, respectively 6,621,269 6,605,019
Additional paid-in capital 42,991,330 42,548,399
Accumulated deficit (10,836,206) (5,574,518)
------------ ------------
Total shareholders' equity 38,776,393 43,578,900
------------ ------------
Total liabilities and shareholders' equity $ 52,427,449 $ 50,681,940
============ ============
See Notes to Consolidated Financial Statements
</TABLE>
<TABLE>
<CAPTION>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<S> <C> <C> <C> <C>
---------------------------------------------------------------------
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------------------------
NET SALES $ 4,326,098 $ 5,341,719 $13,314,312 $14,187,148
COST OF SALES 2,953,516 3,466,280 9,244,906 9,040,435
----------- ------------ ------------ -----------
Gross profit 1,372,582 1,875,439 4,069,406 5,146,713
RESEARCH AND DEVELOPMENT EXPENSES 747,848 369,806 2,494,294 1,359,905
GENERAL, ADMINISTRATIVE AND SELLING EXPENSES 2,306,481 3,302,466 6,691,252 8,592,915
----------- ------------ ------------ ------------
Loss from operations (1,681,747) (1,796,833) (5,116,140) (4,806,107)
----------- ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 107,731 113,554 181,481 186,870
Interest expense (82,070) (326,816) (224,407) (436,935)
Rent and miscellaneous income - - - 1,924,967
----------- ------------ ------------ ------------
25,661 (213,262) (42,926) 1,674,902
----------- ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (1,656,086) (2,010,095) (5,159,066) (3,131,205)
PROVISION FOR INCOME TAXES - (329,043) - -
----------- ----------- ------------ ------------
NET LOSS (1,656,086) $(1,681,052) $(5,159,066) $(3,131,205)
=========== ============ ============ ============
PREFERRED STOCK DIVIDENDS 94,097 - 102,622 -
----------- ------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (1,750,183) $(1,681,052) $(5,261,688) $(3,131,205)
============= ============ ============ ============
PER SHARE INFORMATION:
Net loss applicable to common shareholders:
Basic $ (.13) $ (.15) $ (.40) $ (.31)
============= ============ =========== ============
Diluted $ (.13) $ (.15) $ (.40) $ (.31)
============= ============ =========== ============
Shares used in computing net loss per share:
Basic 13,235,908 11,105,730 13,225,185 10,130,198
============= ============ =========== ============
Diluted 13,235,908 11,105,730 13,225,185 10,130,198
============= ============ =========== ============
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
----------------------------------------------------------------------------------
Additional Total
Shares Common Paid-In Accumulated Shareholders'
Outstanding Stock Capital Deficit Equity
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998 13,210,038 $6,605,019 $ 42,548,399 $ (5,574,518) $ 43,578,900
Exercise of stock options, net of related
costs 32,500 16,250 94,474 - 110,724
Issuance of warrants in connection with
Series B Redeemable Convertible
Preferred Stock - - 348,457 - 348,457
Preferred stock dividends - - - (102,622) (102,622)
Net loss - - - (5,159,066) (5,159,066)
----------- ----------- ------------ -------------- ------------
BALANCE, September 30, 1999 (unaudited) 13,242,538 $ 6,621,269 $ 42,991,330 $(10,836,206) $ 38,776,393
=========== =========== ============ ============== ============
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
-----------
For the Nine months Ended
September 30,
----------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,159,066) $ (3,131,205)
Adjustments to reconcile net loss to net cash used in operating
activities:
Non-cash interest expense 215,314 315,018
Depreciation and amortization 2,355,078 3,149,619
Gain on sale of building - (1,864,767)
(Increase) decrease in:
Accounts receivable, net 624,507 299,974
Inventories, net 366,484 (2,221,891)
Prepaid expenses and other current assets (70,950) (2,509,517)
Other assets (313,450) (610,667)
Increase (decrease) in:
Trade accounts payable 113,487 459,489
Other current and long term liabilities (489,601) 500,382
------------ ------------
Net cash used in operating activities (2,358,197) (5,613,565)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of marketable securities - 102,717
Proceeds from sale of building - 2,282,563
Acquisition of business, net of cash acquired - (947,276)
Purchases of property, plant and equipment, net (795,912) (773,400)
------------ -----------
Net cash (used in) provided by investing activities (795,912) 664,604
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from redeemable convertible preferred securities 7,500,000 -
Net proceeds from convertible debentures - 10,000,000
Payments of debt obligations (545,350) (41,922)
Proceeds from issuance of common stock upon exercise of employee stock
options 110,724 1,087,041
------------ -----------
Net cash provided by financing activities 7,065,374 11,045,119
------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,911,265 6,096,158
CASH AND CASH EQUIVALENTS, beginning of period 5,437,423 2,059,338
------------ -----------
CASH AND CASH EQUIVALENTS, end of period $ 9,348,688 $ 8,155,496
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Non-cash investing and
financing activities:
Conversion of debt into common stock $ - $ 1,397,706
Issuance of notes payable for acquisition $ - $ 1,564,000
Issuance of warrants in connection with Series B Redeemable Convertible
Preferred Stock $ 348,457 $ -
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------
1. 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,
1998.
2. Earnings Per Common 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 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.
The following chart provides a reconciliation of information used in
calculating the per share amounts:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net loss $ (1,656,086) $ (1,681,052) $ (5,159,066) $ (3,131,205)
Preferred stock dividends 94,097 - 102,622 -
Net loss applicable to common shareholders $ (1,750,183) $ (1,681,052) $ (5,261,688) $ (3,131,205)
Denominator:
Weighted average common shares outstanding - Basic 13,235,908 11,105,730 13,225,185 10,130,198
Effect of dilutive employee stock options and
convertible securities - - - -
Weighted average common shares outstanding - Diluted 13,235,908 11,105,730 13,225,185 10,130,198
Net loss per common share:
Basic $ (.13) $ (.15) $ (.40) $ (.31)
Diluted $ (.13) $ (.15) $ (.40) $ (.31)
</TABLE>
3. Comprehensive Income - The Company has adopted SFAS No. 130, "Reporting
Comprehensive Income", which requires companies to report all changes in
equity during a period, except those resulting from investment by owners
and distribution to owners, in a financial statement for the period in
which they are recognized. Comprehensive income is the total of net
income and all other nonowner changes in equity (or other comprehensive
income) such as unrealized gains/losses on securities available-for-sale,
foreign currency translation adjustments and minimum pension liability
adjustments. Comprehensive and other comprehensive income must be
reported on the face of the annual financial statements or, in the case
of interim reporting, in the footnotes to the financial statements. For
the nine months ended September 30, 1999 and 1998, the Company's
operations did not give rise to items includible in comprehensive income
which were not already included in net income (loss). Therefore, the
Company's comprehensive income (loss) is the same as its net income
(loss) for all periods presented.
4. Derivatives - In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The Statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet
as either an asset or liability measured at its fair value. The statement
requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate,
and assess the effectiveness of transactions that receive hedge
accounting. This Statement is effective for fiscal years beginning after
June 15, 1999. A company may also implement the Statement as of the
beginning of any fiscal quarter after issuance (that is, fiscal quarters
beginning June 16, 1998 and thereafter). SFAS No. 133 cannot be applied
retroactively. SFAS No. 133 must be applied to (a) derivative instruments
and (b) certain derivative instruments embedded in hybrid contracts that
were issued, acquired, or substantively modified after December 31, 1997.
While the Company operates in international markets, it does so presently
without the use of derivatives and therefore this new pronouncement is
not applicable.
5. Credit Facility - The Company has 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 plus .75% on any amounts outstanding. The
initial term of the Agreement matured on September 23, 1999 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
September 30, 1999, there were no outstanding borrowings under the
Agreement.
6. Procurement Agreement - The Company has an agreement with International
Business Machines and its subsidiaries ("IBM") to produce and procure
certain products, as defined. The agreement continues in full force and
effect unless terminated earlier for material breach by either party, as
defined. For the three and nine month periods ending September 30, 1999,
sales of the Company's computer headsets to IBM and certain of IBM's
affiliates, distributors, licensees and integrators accounted for
approximately 49% of the Company's total net
sales.
7. Convertible Notes - On June 10, 1998, the Company issued and sold in a
private placement, $10,753,000 aggregate principal amount of 6%
Convertible Notes ("Notes") due June 10, 2000. The Notes are convertible
into shares of the Company's common stock at a conversion price equal to
the average of the two lowest closing prices of the common stock during
the thirty trading days preceding any date of conversion, subject to a
maximum conversion price of $16.125 per share. At the option of the
Company, interest is payable in the form of cash or shares of common
stock at the conversion price then in effect. The maximum number of
shares issuable upon conversion is 2,100,000 shares, and if this maximum
number of shares is issued, any remaining unconverted principal amount of
the Notes will bear interest at 17% per annum. During 1998, $9,253,000 of
the Notes, together with related accrued interest, was converted into
2,097,000 shares of the Company's common stock. At September 30, 1999,
the remaining obligation from the Notes is recorded net of an unaccreted
discount of $22,384, and is reflected as a current liability in the
accompanying consolidated balance sheet.
8. Series B Redeemable Convertible Preferred Stock - On June 22, 1999, the
Company issued and sold in a private placement, $7,500,000 of its Series
B Redeemable Convertible Preferred Stock (the "Preferred Stock"), and a
warrant covering 75,000 shares of the Company's common stock. Each share
of Preferred Stock has a stated value of $10,000 plus an additional
amount of 4% per annum, which sum is convertible into common stock at a
conversion price equal to the lower of $8.775 (the "Maximum Conversion
Price") and the average of the two lowest closing bid prices of the
common stock during the 15 consecutive trading days immediately preceding
a conversion date (the "Market Price"), subject to certain adjustments,
including anti-dilution. The 4% additional amount may, at the option of
the Company, be paid in cash. The Preferred Stock becomes convertible
into the Company's common stock according to a vesting schedule, with
12.5% of the shares having become convertible on October 17, 1999 and an
additional 12.5% becoming convertible at the end of each succeeding
30-day period. The vesting schedule will lapse for conversions occurring
at the Maximum Conversion Price and upon the occurrence of certain
extraordinary events, as defined. Any unconverted Preferred Stock that
remains outstanding on June 18, 2004 will automatically convert into the
Company's common stock. The Company has reserved 2,450,000 of common
stock for issuance upon conversion of the shares of the Preferred Stock.
Prior to June 22, 2000, the Company has the option to redeem any
Preferred Stock presented for conversion by the investor if the
conversion price is less than or equal to $4.725 per share, at a
redemption price equal to 110% of the stated value plus any accrued
dividends. Upon the announcement of a major transaction, as defined, the
investor shall have the right to require the Company to redeem all or a
portion of the investor's Preferred Shares at a redemption price equal
to the greater of 120% of the stated value plus any accrued dividends
and the Market Price on the day of announcement. In addition, upon the
occurrence of certain triggering events, as defined, and depending on
the Company's control over such events, the investor may have the right
to require the Company to a) redeem all or a portion of the Preferred
Shares at a redemption price equal to the greater of 120% of the stated
value plus any accrued dividends and the Market Price on the day of
announcement, or b) pay a penalty equal to 1% of the remaining principal
amount outstanding for a period not to exceed 20 days in any 365 day
period, and adjust the Maximum Conversion Price, as defined. During the
six month period beginning March 14, 2000, the Company, subject to
certain conditions, may exercise an option to sell to the investor up
to an additional $7.5 million of its Preferred Stock, and warrants for
up to an additional 75,000 shares of common stock. The warrant has an
exercise price of $8.775 per share and expires on June 18, 2004. At
September 30, 1999, the Preferred Stock is recorded net of the unaccreted
present value of the warrants of $329,477. Due to the redemption features
discussed above, the Preferred Stock is not included in stockholders'
equity in the accompanying consolidated balance sheet.
9. Acquisition - On May 5, 1998, the Company acquired all of the outstanding
shares of capital stock of Lamar Signal Processing, Ltd. (the
"Acquisition"). The consideration paid by the Company for the Acquisition
was 1,800,000 shares of restricted common stock and $3,000,000 in cash and
notes payable. Of the approximately 1,800,000 shares issued to the
sellers, one-third became freely transferable on the first anniversary of
the closing, an additional one-third becomes freely transferable on the
second anniversary and the last one-third becomes freely transferable on
the third anniversary. Of the aggregate cash consideration to be paid by
the Company, $1,000,000 was paid on May 5, 1998, $500,000 was paid on each
of November 5, 1998 and May 5, 1999, and the remainder is payable in the
form of promissory notes in two equal installments on May 5, 2000 and May
5, 2001. The Acquisition was accounted for under the purchase method of
accounting and, accordingly, the operating results of Lamar Signal
Processing, Ltd. have been included in the consolidated operating results
since the date of acquisition. The Acquisition was valued using an
independent appraisal of the fair value of the consideration paid and the
assets purchased, and resulted in goodwill of approximately $27.6 million,
which is being amortized over fifteen years. Goodwill at September 30,
1999 is approximately $25.0 million, which is net of approximately $2.5
million in amortization expense. Total goodwill amortization expense for
the nine months ended September 30, 1999 was approximately $1.4 million.
10. Segment Information - Effective December 31, 1998, the Company adopted
SFAS No. 131,"Disclosures about Segments of an Enterprise and Related
Information." Reportable operating segments are determined based on the
Company's management approach. The management approach, as defined by
SFAS No. 131, is based on the way that the chief operating decision-maker
organizes the segments within an enterprise for making operating
decisions and assessing performance. While the Company's results of
operations are primarily reviewed on a consolidated basis, the chief
operating decision-maker also manages the enterprise in two segments: (i)
Andrea Anti-Noise(R) Products and (ii) military intercom products
(Traditional Military Products). The following represents selected
consolidated financial information for the Company's segments for the
three months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Traditional
Andrea Anti- Military
Segment Data Noise Products Products Total
-------------- ----------- -------------
<S> <C> <C> <C>
September 30, 1999
- ------------------
Net sales $ 3,549,392 $ 776,706 $ 4,326,098
Income (loss) from operations $ (1,790,486) $ 108,739 $ (1,681,747)
Depreciation $ 221,373 $ 37,052 $ 258,425
September 30, 1998
- ------------------
Net sales $ 4,334,137 $ 1,007,582 $ 5,341,719
Income (loss) from operations $ (1,927,276) $ 130,443 $ (1,796,833)
Depreciation $ 150,922 $ 18,849 $ 169,771
For the three months ended September 30, 1999 and 1998, sales and accounts
receivable by geographic area are as follows:
</TABLE>
<TABLE>
<CAPTION>
Geographic Data September 30, 1999 September 30, 1998
--------------- ------------------ ------------------
<S> <C> <C>
Sales:
United States $ 3,015,556 $ 4,025,437
Europe $ 809,591 $ 608,070
Other foreign $ 500,951 $ 708,212
Accounts receivable:
United States $ 2,798,527 $ 3,485,606
Europe $ 417,182 $ 197,762
Other foreign $ 1,027,566 $ 606,308
</TABLE>
11. Legal Proceedings - As previously reported in "Item 3. Legal Proceedings"
in the Company's Annual Report on Form 10-K for the year ended December
31, 1998, the Company was notified about a claim with respect to
environmental matters in connection with a site where the Company has
been identified as a potential responsible party under federal and state
environmental laws and regulations. On September 24, 1999, the Company
was served with a complaint in this matter seeking $1 million in
compensatory damages. The complaint was filed in the Supreme Court of the
State of New York, County of Nassau. Based on a preliminary review of the
complaint, and while no assurance can be given as to the ultimate outcome
of this matter, the Company believes that the claim is without merit and
intends to vigorously defend itself.
12. Reclassifications - Certain prior year amounts have been reclassified to
conform to the current year presentation.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Andrea Electronics Corporation's mission is to provide state-of-the-art
communications products for the "voice interface" markets that are rapidly
emerging from the convergence of the telecommunications and computer
industries. These markets require increasingly higher quality voice
communication products.
Examples of the applications and interfaces for which Andrea Anti-Noise(R)
products provide benefits include: computer-based speech recognition
applications; Internet telephony; multi-point video/audio conferencing;
automobile PCs, home automation systems, hand-held devices; multi-player
Internet and CD ROM interactive games; multimedia; military and industrial
communications; and other applications and interfaces that incorporate
natural language processing. We believe 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.
Our strategy is to maintain and extend our market position with our Andrea
Anti-Noise products; broaden our Andrea Anti-Noise product lines through
internal research and development and, from time to time, strategic
acquisitions; design our products to satisfy specific end-user requirements
identified by our collaborative partners; and outsource manufacturing of our
Andrea Anti-Noise products in order to achieve economies of scale. An important
element of our strategy for expanding the channels of distribution and
broadening the base of users for our products is our collaborative arrangements
with computer OEMs, software publishers, and distributors and retailers
actively engaged in the various markets in which our products have application.
Under some of these arrangements, we supply our products for sale by our
collaborative partners. Under others, the collaborative partners supply us with
software that we include with our products. In addition, we have been
increasing our own direct marketing efforts.
The success of our strategy will depend on our ability to, among other things,
increase sales of our line of existing Andrea Anti-Noise products, contain
operating costs, manage growth, introduce additional Andrea Anti-Noise
products, maintain the competitiveness of our technologies through successful
research and development, and achieve widespread adoption of our products and
technologies.
In order to complement our internal efforts to develop digital signal
processing ("DSP") technology, in May 1998, we acquired Lamar Signal
Processing, Ltd. ("Lamar"), an Israeli corporation engaged in the development
of DSP noise cancellation microphone solutions for voice-driven interfaces
covering a wide range of audio and acoustic applications. This acquisition
resulted in a substantial amount of goodwill. The amortization of this
goodwill has had, and will continue to have, a negative, non-cash impact on
our results of operations.
We outsource the assembly of most of our Andrea Anti-Noise products from
purchased components, and we are currently assembling our digital
super-directional array microphone technology ("DSDA") products from
purchased components at our New York and Israeli facilities. We manufacture our
traditional intercom systems and related components for military and industrial
applications ("Traditional Products") at our New York facility.
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.
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
September 30, 1999 (the "1999 Third Quarter") compared to the three months
ended September 30, 1998 (the "1998 Third Quarter"), and for the nine months
ended September 30, 1999 (the "1999 First Nine Months") compared to the nine
months ended September 30, 1998 (the "1998 First Nine Months"), are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. The words "anticipates," "believes," "estimates," "expects,"
"intends," "plans," "seeks," variations of such words, and similar expressions
are intended to identify forward-looking statements. We have based these
forward-looking statements on our current expectations, estimates and
projections about our business and industry, our beliefs and certain
assumptions made by our management. Investors are cautioned that matters
subject to forward-looking statements involve risks and uncertainties including
economic, competitive, governmental, technological and other actors that may
affect our business and prospects. These statements are not guarantees of
future performance and are subject to certain risks, uncertainties and
assumptions that are difficult to predict. In order to obtain the benefits of
these "safe harbor" provisions for any such forward-looking statements, we wish
to caution investors and prospective investors about the following significant
factors, which, among others, have in some cases affected our actual results
and are in the future likely to affect our actual results and could cause them
to differ materially from those expressed in any such forward-looking
statements.
* Our historic operating results have been volatile and hard to predict
and will continue to vary from period to period due to fluctuations in
the volume of sales of our products under our collaborative marketing
arrangements, the mix of products we sell, the mix of distribution
channels we use, seasonally high sales during the last quarter of each
year, the timing of our new product announcements and releases and those
of our competitors, fluctuations in the computer and communications
hardware and software marketplace, and general economic conditions.
* The markets for our Andrea Anti-Noise products, including our new DSP
products, have recently begun to develop and are characterized by rapidly
changing technology. The introduction of products incorporating new
technologies could render our products obsolete and unmarketable and
could exert price pressure on existing products. We cannot assure that
we will succeed in developing our new DSP products and technologies or
that, if we are successful, that any of these products or technologies
will gain market acceptance. Further, the markets for our products and
technologies are characterized by evolving industry standards and
specifications that may require us to devote substantial time and
expense to adapt our products and technologies.
* Most of our current and potential competitors have significantly
greater financial, technology development, marketing, technical support
and other resources than we do. Our ability to compete successfully will
depend upon our capability to develop and maintain advanced technology,
develop proprietary products, obtain patent or other proprietary
protection for our products and technologies, and manufacture, assemble
and successfully market products, either alone or through third parties.
* We must protect our intellectual property in the United States and
other countries by obtaining patents for our technology, defending our
patents against infringement and preserving our trade secrets and
trademarks. We must also operate without infringing the patents and
intellectual property rights of others. We cannot assure that the steps
we have taken to protect our intellectual property will prevent its
misappropriation or circumvention. We are currently engaged in defending
an action brought against us involving two of our patents which relate to
certain active noise reduction technology, particularly applicable to
aircraft passenger headphones.
* We have entered into collaborative and distribution arrangements with
software publishers and computer hardware manufacturers relating to the
marketing and sale of Andrea Anti-Noise products. Under these
collaborative arrangements, our products are sold to end users through
inclusion with the products of our collaborators. The revenue derived by
us from these arrangements will be based in large part upon the sale of
our collaborator's products. Our success will therefore be dependent to a
substantial degree on the efforts of these collaborators in marketing
their existing products and new products under development with which to
include our products and technologies. Our collaborators are not
contractually obligated to any minimum level of sales of our products or
technologies. Furthermore, our collaborators may develop their own
microphone or earphone products or technologies that compete with our
products and technologies. We are substantially dependent on our product
procurement relationship with IBM. During the 1999 Third Quarter and the
1999 First Nine Months, IBM and certain of IBM's affiliates,
distributors, licensees and integrators accounted for 49% of our net
sales. We have also established direct arrangements with large electronic
and computer retail chains in the United States, as well as with certain
distributors in Europe and the Asia. We cannot assure that any of these
channels will devote sufficient resources to support the sale of our
products.
* During the 1999 Third Quarter and the 1999 First Nine Months, sales to
customers outside the United States accounted for approximately 30% and
35%, respectively, of our net sales. International sales and operations
are subject to a number of risks, including trade restrictions in the
form of license requirements, restrictions on exports and imports and
other government controls, changes in tariffs and taxes, difficulties in
staffing and managing international operations, problems in establishing
or managing distributor relationships, general economic conditions, and
political and economic instability or conflict. To date, we have invoiced
our international sales in U.S dollars, and have not engaged in any
material foreign exchange or hedging transactions. We cannot assure that
this will continue to be the case. If we are required to invoice any
material amount of international sales in non-U.S. currencies,
fluctuations in the value of non-U.S. currencies relative to the U.S.
dollar may adversely affect our business, results of operations and
financial condition.
* We conduct assembly operations at our facility in New York and through
subcontractors. As unit sales of Andrea Anti-Noise products have
increased to significant levels, assembly operations have primarily been
transferred to a subcontractor in Asia. Any failure on the part of this
subcontractor to meet our production and shipment schedules could have a
material adverse effect on our business, results of operations and
financial condition. While most of the components for the Andrea
Anti-Noise products are available from several sources and are not
characteristically in short supply, certain specialized components for
the Andrea AntiNoise products, such as microphones and DSP boards, are
available from a limited number of suppliers and subject to long lead
times. While we have, to date, been able to obtain sufficient supplies of
these more specialized components, we cannot assure that we will continue
to be able to do so.
* Our performance is substantially dependent on the performance of our
executive officers and key employees. We are dependent on our ability to
retain and motivate high quality personnel for positions in management
and product and technology development. The loss of the services of any
of our executive officers or other key employees could have a material
adverse effect on our business, results of operations and financial
condition. Our future success also depends on our continuing ability to
attract and retain additional highly qualified technical personnel.
Competition for qualified personnel is intense and we cannot assure that
we will be able to attract, assimilate or retain qualified personnel in
the future.
* Sales of a substantial number of shares of our common stock in the
public market could have the effect of depressing the prevailing market
price of our common stock. The authorized capital stock of the Company
consists of: 25,000,000 shares of common stock, of which 13,242,538
shares were issued and outstanding on November 1, 1999, which such amount
does not include 4,703,000 shares that are reserved for issuance pursuant
to the Company's stock option and purchase plans, 2,581,680 shares
(subject to adjustment based on fluctuations in the market price of the
Company's common stock) that are reserved for issuance upon conversion of
the Company's Series B Redeemable Convertible Preferred Stock and
exercise of related warrants, and 3,000 shares reserved for issuance
pursuant to other securities. To the extent that the options are
exercised or we issue additional shares of capital stock, the ownership
interests of holders of common stock would be diluted. In addition, in
May 1998 we issued 1,800,000 shares of common stock as part of the
consideration for our acquisition of Lamar, of which 600,000 shares
became freely transferable on May 5, 1999 by persons other than
"affiliates" of the Company, as defined under the Securities Act of 1933,
as amended, 600,000 shares are subject to trading restrictions that
expire on May 5, 2000, and 600,000 shares are subject to trading
restrictions that expire on May 5, 2001. As the restrictions expire,
the shares are subject to demand and piggyback registration rights.
RESULTS OF OPERATIONS
Net Sales
- ---------
Net sales for the 1999 Third Quarter were $4,326,098, a decrease of 19% over
the 1998 Third Quarter. Net sales for the 1999 First Nine Months were
$13,314,312, a decrease of 6% over the 1998 First Nine Months. The decrease in
net sales during the 1999 Third Quarter reflected an approximate 18% decrease
in sales of Andrea Anti-Noise products to $3,549,392, or 82% of total sales,
and an approximate 23% decrease in sales of the Company's Traditional Military
Products, to $776,706, or 18% of total sales. The decrease in sales during the
1999 First Nine Months reflected an approximate 4% decrease in sales of Andrea
Anti-Noise products to $10,509,458 or 79% of total sales, and an approximate
13% decrease in sales of the Company's Traditional Military Products to
$2,804,854 or 21% of total sales. In terms of Andrea Anti Noise unit sales
during the 1999 Third Quarter, the Company realized an approximate 18% decrease
over the 1998 Third Quarter, representing the primary contributing factor to
the decrease in total net sales during the 1999 Third Quarter over the 1998
Third Quarter. Andrea Anti Noise unit sales for the 1999 First Nine Months
increased approximately 8% over the 1998 First Nine Months. This increase was
entirely offset, however, by a continuing shift in product mix to lower-priced
and lower-margin products to original equipment manufacturers (OEMs). During
the 1999 Third Quarter and the 1999 First Nine Months, sales of the Company's
computer headsets to IBM and certain of IBM's affiliates, distributors,
licensees, and integrators accounted for approximately 49% of the Company's
total net sales.
Cost of Sales
- -------------
Cost of sales as a percentage of sales for the 1999 Third Quarter increased to
68% from 65% for the 1998 Third Quarter. Cost of sales as a percentage of sales
for the 1999 First Nine Months increased to 69% from 64% for the 1998 First
Nine Months. These increases have resulted primarily from the shift in product
mix described above under "Net Sales".
Research and Development
- ------------------------
Research and development expenses increased 102% to $747,848 for the 1999 Third
Quarter from $369,806 for the 1998 Third Quarter. Research and development
expenses increased 83% to $2,494,294 for the 1999 First Nine Months from
$1,359,905 for the 1998 First Nine Months. These increases are primarily a
result of continuing efforts to develop the Company's digital signal processing
technology, coupled with efforts in computer/telephony headset technologies.
Research efforts are primarily focused on the pursuit of commercializing a
natural language-driven human/machine interface by developing optimal far-field
microphone solutions for various voice-driven interfaces, incorporating the
Company's digital super-directional array microphone technology ("DSDA") and
certain other technologies obtained through the acquisition of Lamar in May
1998. Correspondingly, the activities of Lamar accounted for approximately 20%
and 24% of the total research and development expenses during the 1999 Third
Quarter and 1999 First Nine Months, respectively. The Company believes that the
acquisition of Lamar significantly reinforces its position in digital signal
processing by extending the Company's marketing programs to other industries,
including the consumer electronics and professional audio markets, among
others. The Company anticipates continued significant increases in research
and development expenses, with particular emphasis on digital signal processing
efforts as the year progresses.
General, Administrative and Selling Expenses
- --------------------------------------------
General, administrative and selling expenses decreased 30% to $2,306,481 for
the 1999 Third Quarter from $3,302,466 for the 1998 Third Quarter. General,
administrative and selling expenses decreased 22% to $6,691,252 for the 1999
First Nine Months from $8,592,915 for the 1998 First Nine Months. General,
administrative and selling expenses represented approximately 53% and 50% of
total net sales for the 1999 Third Quarter and 1999 First Nine Months,
respectively. These high levels of general, administrative and selling
expenses, primarily attributable to the DSDA and Andrea Anti-Noise Active Noise
Cancellation/Active Noise Reduction ("ANC/ANR") product lines, reflect
significant business development expenses relating to existing and prospective
collaborative arrangements with hardware OEMs, software publishers and
developers, distributors and retailers. The Company also incurs significant
promotional, marketing and sales expenses to promote product awareness and
acceptance of the DSDA and ANC/ANR product lines, particularly in the retail
marketplace, and significant expenses with developing global expansion efforts.
Also included in general, administrative and selling expenses in the 1999 Third
Quarter and 1999 First Nine Months is goodwill amortization expense of $459,948
and $1,379,844, respectively, related to the acquisition of Lamar in May 1998.
Excluding the effect of the goodwill amortization, general, administrative and
selling expenses decreased to $1,846,533 and $5,311,408 for the 1999 Third
Quarter and 1999 First Nine Months, respectively, or 42% and 40% of total
sales, respectively. This decrease is primarily attributable to cost reduction
efforts and, to a lesser extent, a reallocation of resources to research and
development activities. In light of the Company's intentions to continue to
support sales of products, introduce additional products, create new strategic
alliances and further integrate global operations during 1999, high levels of
recurring general, administrative and selling expenses both as a percentage of
sales and in absolute dollars, is expected to continue.
Other Income (Expense)
- ----------------------
Other expense for the 1999 First Nine Months was $42,926 compared to other
income of $1,674,902 for the 1998 First Nine Months. This change is primarily
attributable to the net gain on the sale of the Company's corporate
headquarters during the 1998 First Nine Months of $1,864,767.
Provision for Income Taxes
- --------------------------
The Company did not record income tax expense for the 1999 Third Quarter in
light of the net loss recorded for the period. Furthermore, the realization of
a portion of the Company's reserved deferred tax assets (the portion excluding
those generated and reserved during 1998 and the 1999 First Nine Months), if
and when realized, will not result in a tax benefit in the consolidated
statement of operations, but will result in an increase in additional paid in
capital as they are related to tax benefits associated with the exercise of
stock options. The Company will be continually re-assessing its reserves on
deferred income tax assets as the year progresses.
Net Income (Loss)
- -----------------
Net loss for the 1999 Third Quarter was $1,656,086, compared to net loss of
$1,681,052 for the 1998 Third Quarter. Net loss for the 1999 First Nine Months
was $5,159,066, compared to net loss of $3,131,205 for the 1998 First Nine
Months. The levels of net loss for the 1999 Third Quarter and 1999 First Nine
Months principally reflect the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds have historically been, and are
expected to continue to be, cash flow from operations and proceeds from the
sale of convertible notes and preferred stock to certain financial institutions.
At September 30, 1999, the Company had cash and cash equivalents of $9,348,688
compared with $5,437,423 at December 31, 1998. The balance of cash and cash
equivalents at September 30, 1999 is primarily a result of the Company's
issuance and sale in a private placement of $7,500,000 of its Series B
Redeemable Convertible Preferred Stock (the "Preferred Stock"), and from the
Company's June 1998 private placement of $10.75 million aggregate principal
amount of 6% Convertible Notes ("Notes"). All but $1.5 million of the Notes
have been converted to common stock, with the remaining outstanding principal
amount convertible into 3,000 shares of common stock, which amount is recorded
as a current liability, net of an unaccreted discount of $22,384 in the
accompanying consolidated balance sheet. The Company is using the net proceeds
from the issuance of the Preferred Stock and Notes for costs associated with
technology development, tooling costs, continued integration of the Company's
recently acquired management information system, creating and maintaining
strategic alliances, payment of certain debt obligations and general working
capital requirements.
In connection with the acquisition of Lamar, of the aggregate cash
consideration to be paid by the Company, $1,000,000 was paid on May 5, 1998,
the closing date, with the remainder payable in four equal installments on
each of the six, twelve, twenty-four and thirty-six month anniversaries of
the closing. The current portion of long-term debt is comprised of
approximately $.5 million in cash consideration due on the twenty-four month
anniversary of the closing. The approximate $.5 million in cash consideration
remaining, due on the thirty-six month anniversary of the closing, is recorded
as long-term debt on the accompanying consolidated balance sheet.
Working capital at September 30, 1999 was $15,711,775 compared to $14,337,116
at December 31, 1998. The increase in working capital reflects an increase in
total current assets of $2,660,791 offset by an increase in total current
liabilities of $1,286,132. The increase in total current assets reflects an
increase in cash of $3,911,265, a decrease in accounts receivable of $624,507,
a decrease in inventory of $366,484, and a decrease of $259,483 in prepaid
expenses and other current assets. The increase in current liabilities
primarily reflects a $113,487 increase in trade accounts payable, a $295,850
decrease in other current liabilities and an increase of $1,477,616 in
convertible notes (recorded net of an unaccreted discount of $22,384),
representing the remaining obligation from the Notes described above.
The increase in cash of $3,911,265 reflects $2,358,197 of net cash used in
operating activities, $795,912 of net cash used in investing activities and
$7,065,374 of net cash provided by financing activities.
The net cash used in operating activities, excluding non-cash charges, is
primarily attributable to the $5,159,066 net loss in the 1999 First Nine
Months, a $313,450 increase in other assets and a $489,601 decrease in other
current and long term liabilities, partially offset by a $624,507 decrease in
accounts receivable and a $366,484 decrease in inventory. The increase in other
assets represents increases in patent and trademark costs associated with the
Company's proprietary technologies. The decreases other current and long term
liabilities as well as the decrease in inventory primarily reflect 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 product line. The decrease in accounts
receivable primarily reflects the timing of Third Quarter sales, coupled with
timing of collection of such sales. Generally, the Company collects receivables
from sales within two months.
The cash used in investing activities is primarily attributable to investments
in the Company's existing information systems, as well as capital expenditures
consisting of the ongoing upgrade of manufacturing dies and molds for Andrea
Anti-Noise products.
Demand for Andrea Anti-Noise products has required the Company to raise
additional working capital to support operations. In addition, the acquisition
of Lamar will require the Company to continue to provide working capital to
support Lamar's operations and to repay notes to the sellers of Lamar. In
December 1995, April 1996 and August 1996, the Company raised working capital
through the issuance of convertible subordinated debentures. In June 1998, the
Company raised $10 million through the issuance and sale of the Notes. In June
1999, the Company raised $7.5 million through the issuance and sale of
Preferred Stock. 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
September 30, 1999, there were no outstanding amounts under the revolving
credit agreement. We believe that our current levels of cash, as well as our
access to financing sources, provides sufficient liquidity and capital
resources to fund working capital requirements for at least twelve to eighteen
months. Notwithstanding the significance of sales of Andrea Anti-Noise
products during the nine months ended September 30, 1999, we cannot assure that
demand will continue for these products or any of our other products, including
future products related to our DSDA technology, or, that if such demand does
exist, that we will be able to obtain the necessary working capital to increase
production and marketing resources to meet such demand on favorable terms, or
at all.
YEAR 2000 COMPLIANCE PLAN
In anticipation of the year 2000, Andrea has developed and implemented a plan
to ensure that all of its information systems are able to properly recognize
and process dates after December 31, 1999. The significant management
information systems consist primarily of financial and inventory systems. All
of the Company's material hardware, including our AS/400 mainframe, telephone
systems and networks are being tested for Year 2000 compliance. With respect to
significant future system hardware or software purchases and/or modifications,
the Company will conduct similar testing prior to implementation in an effort
to ensure Year 2000 compliance. Currently, the Company does not anticipate any
material deficiencies and, further, does not anticipate difficulty or
significant additional expense in achieving full Year 2000 capability. The cost
of the upgrade to the management information systems is not expected to exceed
$1 million. The Company expects this upgrade to achieve several business and
operational objectives, including, among others, satisfaction of the Year 2000
computing requirements. Although the Company believes that its systems are
substantially Year 2000 compliant, there can be no assurance that the systems
will work properly, independently or in conjunction with the systems of any of
the Company's suppliers, service providers, strategic partners or customers.
The Company will bear the risk of a material adverse affect if any of its
suppliers, service providers, strategic partners or customers do not
appropriately address their own Year 2000 compliance issues. Accordingly, the
Company has inquired of its suppliers, service providers, strategic partners
and major customers about their Year 2000 compliance. The Company believes that
its strategic partners and major customers will be Year 2000 compliant, and the
Company is still in the process of reviewing the compliance programs of
suppliers and service providers. There can be no assurance that these other
companies will achieve Year 2000 compliance or that any conversions by them to
become Year 2000 compliant will be made in a timely manner. Failure of these
companies to become Year 2000 compliant, in a timely manner, could have a
material adverse effect on the Company's financial condition or results of
operations. If the Company's suppliers and service providers are not Year 2000
compliant, the Company may have to arrange for alternative sources of supply
for inventory procurement and contract manufacturers during the 1999 fourth
quarter in preparation for the Year 2000. The Company does not have any other
contingency plans with respect to other problems that could arise during the
normal course of business as a result of the Year 2000. Any of these could have
a material adverse effect on the Company's financial condition or results of
operations. Our Year 2000 efforts are ongoing and our overall plan will
continue to evolve as new information becomes available. While we anticipate
continuity of our business activities, that continuity will be dependent upon
our ability, and the ability of third parties on whom we rely directly or
indirectly to be Year 2000 compliant.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's principal source of financing activities includes debt under a
revolving credit facility that provides for interest at a spread above the
prime rate, as well as the issuance of convertible debt with major financial
institutions. The Company is affected by market risk exposure primarily through
the effect of changes in interest rates on amounts payable in cash under the
revolving credit facility, as well as the amount payable in stock under
convertible debt. A significant rise in interest rates could materially
adversely affect the Company's financial condition and results of operations.
At September 30, 1999, there were no outstanding borrowings under the Company's
credit facility, there was $1.5 million of remaining unconverted debt, and $7.5
million of unconverted redeemable preferred stock. The Company does not utilize
derivative financial instruments to hedge against changes in interest rates or
for any other purpose. In addition, substantially all transactions are
denominated in U.S. dollars. As such, we have shifted foreign currency exposure
onto foreign customers. As a result, if exchange rates move against foreign
customers, the Company could experience difficulty collecting unsecured
accounts receivable, the cancellation of existing orders or the loss of future
orders. The foregoing could materially adversely affect the Company's business,
financial condition and results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit
Number Description
- -------- ---------------
27 Financial Data Schedule
99.1 Press Release dated November 4, 1999.
(b) Reports on Form 8-K.
The registrant did not file any reports on Form 8-K during the three-month
period ended September 30, 1999.
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 and 15(d) of the
Exchange Act, the Registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ANDREA ELECTRONICS CORPORATION
/s/ John N. Andrea Co-Chairman and November 4, 1999
- --------------------------- Co-Chief Executive Officer
John N. Andrea
/s/ Richard A. Maue Senior Vice President, November 4, 1999
- --------------------------- Chief Financial Officer,
Richard A. Maue and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the registrant's consolidated balance sheet as of September 30, 1999
and consolidated statement of operations for the nine months ended
September 30, 1999, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000006494
<NAME> ANDREA ELECTRONICS CORPORATION
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,348,688
<SECURITIES> 0
<RECEIVABLES> 4,445,526
<ALLOWANCES> 202,251
<INVENTORY> 7,647,839
<CURRENT-ASSETS> 21,478,981
<PP&E> 2,715,877
<DEPRECIATION> 601,857
<TOTAL-ASSETS> 52,427,449
<CURRENT-LIABILITIES> 5,767,206
<BONDS> 1,477,616
0
7,170,523
<COMMON> 6,621,269
<OTHER-SE> 32,155,124
<TOTAL-LIABILITY-AND-EQUITY> 52,427,449
<SALES> 13,314,312
<TOTAL-REVENUES> 13,314,312
<CGS> 9,244,906
<TOTAL-COSTS> 9,244,906
<OTHER-EXPENSES> 9,185,546
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (224,407)
<INCOME-PRETAX> (5,159,066)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,159,066)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,159,066)
<EPS-BASIC> (.40)
<EPS-DILUTED> (.40)
</TABLE>
Exhibit 99
Andrea Electronics Corporation Announces Management Changes
-----------------------------------------------------------
Changes to Complement and Advance Company's Digital Audio
Interface Market Strategy
MELVILLE, NEW YORK, November 4, 1999 -- Andrea Electronics Corporation
(Amex: AND) announced today several management changes designed to complement
and advance the Company's strategy to expand its operations in the digital
audio interface market. Specifically, Patrick D. Pilch, who has been
Executive Vice President and Chief Financial Officer of the Company, has been
appointed to Senior Vice President of Strategy; Richard A. Maue, who has been
Controller, Treasurer and Corporate Secretary, has been appointed to Senior
Vice President, Chief Financial Officer and Corporate Secretary; and Joseph
Marash, who has been General Manager of Lamar Signal Processing, Ltd.
("Lamar"), a wholly-owned subsidiary of the Company, has been appointed to the
newly created position of Chief Technology Officer of Andrea Electronics.
"We are pleased to announce these new appointments," said John N. Andrea,
Co-Chairman & Co-Chief Executive Officer of Andrea Electronics. "We believe
they will best position the Company's resources to take advantage of the many
new opportunities we have been pursuing in the digital audio interface
market."
As Senior Vice President of Strategy, Patrick D. Pilch will be responsible
for identifying emerging market opportunities, formulating strategic
directives and negotiating strategic alliances covering the development and
commercialization of the Company's technology portfolio, particularly its
digital signal processing (DSP) technology. Mr. Pilch brings an extensive
strategic planning, business development and financial operations and
management background to this new position at Andrea Electronics. Mr. Pilch
has been a director of the Company since 1992 and joined the Company as CFO in
1995. Patrick D. Pilch has a Bachelor of Science degree in Accounting from
Fairfield University and an MBA from Columbia Business School.
As Senior Vice President, Chief Financial Officer and Corporate Secretary,
Richard A. Maue will be responsible for Andrea Electronics' worldwide finance
and treasury activities, risk management, and contracts administration. Mr.
Maue has been the Controller and Treasurer of Andrea Electronics since 1997
and, prior to joining the Company, was part of the Audit and Business Advisory
division at Arthur Anderson LLP. Richard A. Maue has a Bachelor of Science
degree in Accounting from Villanova University. He is a Certified Public
Accountant, a member of the American Institute of Certified Public Accountants
and a member of the New York State Society of Certified Public Accountants.
As Chief Technology Officer, Joseph Marash will be responsible for the
Company's core technology development and engineering infrastructure
management, and will continue to work on the development of the Company's
digital signal processing technologies. Mr. Marash has been General Manager
of Lamar for the past six years and has been integral to the development of
new far-field products and digital software algorithms for the Company during
the past 18 months. Joseph Marash holds a Bachelor of Science degree in
Electrical Engineering from the University of Beer Sheva and a Masters degree
in Digital Signal Processing from the Technion Institute of Technology in
Haifa, Israel.
Andrea Electronics Corporation designs, develops and manufactures audio
technologies and equipment for enhancing applications that require high
performance and high quality voice input. The Company's patented and patent-
pending Active Noise Reduction (ANR READY (R)), Active Noise Cancellation
(ANC), Digital Super Directional Array (DSDA(TM)), Directional Finding and
Tracking Array (DFTA(TM)), PureAudio(TM), SuperBeam(TM) and EchoStop(TM)
technologies enhance a wide range of audio products to eliminate background
noise and ensure the optimum performance of voice applications. Applications
for the Company's technologies include: speech recognition programs, Internet
telephony, video/audio conferencing, automobile PCs, home automation systems,
hand-held devices and multiplayer online games, among others. OEM and
software publisher customers and strategic partners of Andrea Electronics'
include: IBM Corporation, Intel Corporation, Clarion Corporation of America,
Microsoft Corp., Lernout & Hauspie, AVR Communications, Lotus Development
Corporation, J. D'Addario & Co., Mpath, IDT/Net2Phone and ILINC, among others.
This press release may contain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The words
"anticipates," "believes," "estimates," "expects," "intends," "plans,"
"seeks," variations of such words, and similar expressions are intended to
identify forward-looking statements. These statements are not guarantees of
future performance and involve matters that are subject to certain risks,
uncertainties and assumptions that are difficult to predict, including
economic, competitive, governmental, technological and other factors, that may
affect the business and prospects of Andrea Electronics Corporation (the
"Company"). The Company cautions 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 forward-
looking statements: the rate at which Andrea Anti-Noise, DSDA, DFTA and other
Andrea technologies are accepted in the marketplace; the competitiveness of
Andrea Anti-Noise, DSDA, DFTA and other Andrea products in terms of technical
specifications, quality, price, reliability and service; the sufficiency of
the Company's funds for research and development, marketing and general and
administrative expenses; infringement and other disputes relating to patents
and other intellectual property rights held or licensed by the Company or
third parties; and the Company's continuing ability to enter and maintain
collaborative relationships with other manufacturers, software authoring and
publishing companies, and distributors. These and other similar factors are
discussed under the heading "Cautionary Statement Regarding Forward-looking
statements" included in the Management's Discussion and Analysis of Financial
Condition and Results of Operations in the Company's Annual Report on Form 10-
K and in the Company's Annual Report to shareholders, and in documents
subsequently filed by the Company with the Securities and Exchange Commission.
"Andrea Anti-Noise," "ANR Ready," "DSDA," DSDA-PRO," "DFTA," "PureAudio,"
"SuperBeam" and "EchoStop" are trademarks of Andrea Electronics Corporation or
an Andrea Electronics Corporation subsidiary.
Visit Andrea Electronics' website at http://www.AndreaElectronics.com.
