SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from
____________ to ____________
Commission file number 1-4324
ANDREA ELECTRONICS CORPORATION
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(Exact name of registrant as specified in its charter)
New York 11-0482020
- - ---------------------------------- ---------------------------------
(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
45 Melville Park Road, Melville, New York 11747
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 516-719-1800
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- - ------------------------- ------------------------------------------
Common Stock, par value American Stock Exchange
$.50 per share
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
As of March 30, 1999, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $94,471,199 (based on the
closing sale price on the American Stock Exchange).
The number of shares outstanding of the registrant's common stock as of
March 30, 1999 was 13,229,640.
DOCUMENTS INCORPORATED BY REFERENCE
The information required in Part III by Items 10, 11, 12, and 13 is
incorporated by reference to the registrant's proxy statement in connection with
the annual meeting of shareholders to be held on June 24, 1999, which will be
filed by the registrant within 120 days after the close of its fiscal year.
EXHIBIT INDEX APPEARS IN ITEM 14
<PAGE>
TABLE OF CONTENTS
TITLE PAGE
PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
<PAGE>
ITEM 1. BUSINESS
Overview
Andrea Electronics Corporation ("Andrea") develops, manufactures and
markets its Andrea Anti-Noise/Registered Trademark/ family of electronic
headsets and handsets with noise canceling and noise reducing features and its
new Andrea DSDA/Trademark/ microphone arrays with digital signal processing
(DSP) features.
Noise cancellation enhances voice-activated computing, computerized speech
recognition, and computer and Internet telephony.
Noise reduction enhances the quality of sound heard in noisy environments
and can also be used as a means of environmental sound control.
Digital signal processing converts voice and other audio signals from
analog form into digital form and then processes the signals to improve their
quality. Our DSDA (digital super directional array) products are designed to
provide high quality transmission of voice where the speaker is at a distance
from the microphone. Applications for these "far field" microphones include
voice-activated computing and mobile telephony for automobiles, as well as other
settings where speakers need to be free from the constraint of having a
microphone next to the mouth.
Andrea was established in 1934. After several decades of manufacturing
radios, televisions and high fidelity audio systems, we were engaged primarily
in the manufacture of intercom systems for military and industrial use. We
introduced our first Andrea Anti-Noise microphone products in 1995. Since that
time, sales of our Andrea Anti-Noise microphone products have become our largest
source of revenue, and our sales of intercom products have declined. We are
seeking to apply our knowledge of the military and industrial markets to develop
applications of our Andrea Anti-Noise technologies for those markets, but we
cannot assure that these efforts will succeed and we do not expect any material
revenues from new military and industrial products for the foreseeable future.
Our Strategy
Andrea's strategic objective is to use its expertise in voice-based audio
technology to meet the needs of the emerging markets for voice-activated
computing, computerized speech recognition, and computer-based and
Internet-based telephony. We believe that these markets require enhanced levels
of voice quality, intelligibility, and reliability at increasingly
cost-effective prices. Our strategy for achieving this objective includes the
following elements: maintain and extend our market position with our Andrea
Anti-Noise products through our direct sales force, our collaborative
partnerships with software publishers and original equipment manufacturers of
computers, microprocessors and related equipment, and our relationships with
large retail chains and distributors, some of which are national or global in
their scope of operations; broaden our Andrea Anti-Noise product lines through
internal research and development and, from time to time, strategic
acquisitions, such as our acquisition in May 1998 of Lamar Signal Processing,
Ltd. ("Lamar"), an Israeli corporation engaged in developing DSP noise
cancellation microphones for a wide range of audio and acoustic applications;
design our products to satisfy specific end-user requirements identified by our
collaborative partners, many of which are large computer and electronics
manufacturers and software publishers; and outsource manufacturing of our Andrea
Anti-Noise products in order to achieve economies of scale.
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,
introduce additional Andrea Anti-Noise products, maintain the competitiveness of
our technologies through further research and development, and achieve
widespread adoption of our products and technologies. We cannot assure that we
will be able to accomplish these objectives. See "Competition".
Our Technologies
We design our Andrea Anti-Noise products to transmit voice signals with the
high level of quality, intelligibility, and reliability required by the broad
range of emerging voice-based applications in computing and telecommunications.
We achieve this through the use of several audio technologies. These include:
Noise Cancellation ("NC") microphone technology based on pressure gradient
microphones that are mechanically and acoustically designed to diminish the
transmission of noise from the speaker's location. Our NC microphones are a less
costly alternative to our ANC microphones and are well-suited for applications
in which there is a lesser degree of background noise in the speaker's
environment.
Active Noise Cancellation ("ANC") microphone technology based on analog
signal processing circuits that electronically cancel the transmission of noise
from the speaker's location. ANC is particularly well-suited for those
environments in which the speaker is surrounded by high levels of ambient
background noise. Our ANC and NC microphones are most effectively used in
"near-field" applications where the microphone is next to, or very close to, the
speaker's mouth.
Active Noise Reduction ("ANR") earphone technology based on analog signal
processing circuits that electronically reduce the amount of noise in the
listener's environment that the listener would otherwise hear in the earphone.
Our ANR earphones improve the quality of speech and audio heard by a listener in
extremely noisy environments, particularly those characterized by low frequency
sounds, such as those in aircraft, automobiles, trucks and other ground
transportation equipment, machine rooms and factories.
Digital Signal Processing microphone technology based on the use of an
array of microphones from which the analog signals are converted to digital form
and then processed using digital electronic circuitry to eliminate unwanted
noise in the speaker's environment. Our Digital Super Directional Array (DSDA)
DSP microphones provide clear acoustic and audio input performance where the
desired audio signal is at a distance from the microphone. We believe that our
DSDA DSP microphones achieve far-field microphone performance previously
unattainable through NC-type microphones based on mechanical acoustic designs
and ANC-type microphones based on analog signal processing.
In addition to these microphone and earphone technologies, we are also
developing, manufacturing and marketing products based on two other related
technologies:
our Personal Computer Telephone Interface ("PCTI") technology that
allows the use of one headset for both voice-activated computing on a
personal computer and standard telephone communications.
our Universal Serial Bus ("USB") hardware interface technology that
allows computer peripherals, such as the keyboard, mouse, joystick,
scanner, printer and telephony devices, to be interconnected and
attached to computers using a common connector plug.
Our Products and their Markets and Applications
Our Computer, Internet and Telephony-based Products for the Consumer and
Commercial Markets
For the consumer and commercial markets, we have designed our Andrea
Anti-Noise products for the following applications:
- - - Speech recognition for word processing, database, and similar
applications
- - - Educational software Multimedia Computer telephony
- - - Speech over the Internet
- - - Voice-activated interactive games
- - - Wire-based telecommunications
- - - Cellular and other wireless telecommunications
- - - Auto PCs for use in automobiles
- - - Speech enabled global positioning systems (GPS)
- - - Hands-free car phone kits
- - - Audio/videoconferencing Professional audio systems
- - - Home networking automation systems
- - - Hand-held and other personal assistant devices
- - - Hearing aids
Our Andrea Anti-Noise products have been designed for these voice-based
computer applications and computer-based telephony applications across a broad
range of hardware and software platforms. The following products incorporate our
DSDA, ANC, NC or ANR microphone technologies, and are designed to cancel
background noise in a range of increasingly noisy environments, including, among
others, homes, mobile computing environments, offices and factories.
Andrea AutoArray/Trademark/ Microphone ("AutoArray"). The AutoArray is a
digital, high performance microphone system designed for in-vehicle
computing, specifically enhancing the speech recognition interface. It
is the first super-directional audio input device designed specifically
for Auto PCs, global positioning systems (GPS) and cellular car phone
kits. The AutoArray incorporates DSDA technology. The suggested retail
price of the AutoArray is $199.95.
Andrea DesktopArray/Trademark/ Microphone ("DesktopArray"). Similar to
the AutoArray, the DesktopArray incorporates DSDA technology. The
Desktop Array is designed for natural, far-field desktop speech
recognition and audio/videoconferencing computing. This is our most
advanced desktop microphone, allowing for clear speech in untethered,
hands-free applications. The suggested retail price of the DesktopArray
is TBD.
Andrea Anti-Noise/Registered Trademark/ ANC-100 Computer Headset. The
ANC-100 is a lightweight, uniquely styled product that has a single,
high fidelity earphone and a dual-function boom ANC microphone. The
earphone is designed to be comfortably worn on the ear or to be placed
on a desktop mount. When the headset is worn, the microphone is used in
the near field mode; when the headset is placed on the desktop mount,
the microphone is used in the far field mode. The suggested retail price
of the ANC-100 is $39.95.
Andrea Anti-Noise/Registered Trademark/ ANC-200 Computer Handset. The
ANC-200 consists of a high fidelity earphone and ANC microphone system
that closely resembles the traditional telephone handset. The ANC-200
also offers features such as near field and far field use and an
"on/mute" function. The suggested retail price of the ANC-200 is $49.95.
Andrea Anti-Noise/Registered Trademark/ ANC-300 Hand-held Microphone.
The ANC-300 is a dual-function ANC hand-held microphone with both near
field and far field capabilities. Near field operation is utilized when
holding the ANC-300; far field operation can be achieved by setting the
microphone in an accompanying stand for amplified desktop performance.
The suggested retail price of the ANC-300 is $39.95.
Andrea Anti-Noise/Registered Trademark/ ANC-500 Computer Headset. The
ANC-500 consists of a headband with a boom ANC microphone and earphone
and an "on/mute" switch. The suggested retail price of the ANC-500 is
$54.95.
Andrea Anti-Noise/Registered Trademark/ ANC-550 Computer Headset. The
ANC-550 consists of a stereo headset with a boom ANC microphone and an
"on/mute" switch. The suggested retail price of the ANC-550 is $64.95.
Andrea ProVoiceSolutions/Trademark/ ANC-600 Computer Headset. The
ANC-600 is an ANC monaural headset with an ultra-flex boom microphone.
Its durable headband and "on/mute" switch differentiate this product.
This headset can be used on either the left or right side of the head.
The suggested retail price of the ANC-600 is $79.95.
Andrea ProVoiceSolutions/Trademark/ ANC-650 Computer Headset. The
ANC-650 is an ANC stereo headset with an ultra-flex boom microphone.
Like the ANC-600, it has a durable headband and "on/mute" switch, and
can be used on either the left or right side of the head. The suggested
retail price of the ANC-650 is $89.95.
Andrea ProVoiceSolutions/Trademark/ ANC-700 Computer Headset. The
ANC-700 is a monaural headset with an ultra-flex boom ANC microphone.
The newly developed speaker housing design that optimizes the acoustic
performance of the earphone's pre-equalized, digital sound
differentiates this product. The suggested retail price of the ANC-700
is $99.95.
Andrea ProVoiceSolutions/Trademark/ ANC-750 Computer Headset. The
ANC-750 is a stereo headset with an ultra-flex boom ANC microphone. The
newly developed speaker housing design that optimizes the acoustic
performance of the earphone's pre-equalized, digital sound
differentiates this product. The suggested retail price of the ANC-750
is $124.95.
Andrea ConnectSolutions/Trademark/ - Personal Computer Telephone
Interface ("PCTI"). The PCTI is a comprehensive desktop device that
integrates speech-centric computing and traditional telephony
applications by connecting headset users to the telephone, to the
computer, or to both simultaneously. Users can alternately or
simultaneously conduct telephone conversations and use speech
recognition to enter data or dictate into the PC, without having to
pause or toggle between connectivity devices. The suggested retail price
of the PCTI is $149.95.
Andrea Wireless VoiceSolutions/Trademark/ AWS-100 ("AWS-100"). The
AWS-100 is a simple head-mounted microphone system that incorporates
infrared (IR) wireless microphone technology, as well as a unique,
untethered design to allow increased mobility and high-quality voice
transmission. The suggested retail price of the AWS-100 is $149.95.
Andrea Anti-Noise/Registered Trademark/QW-1000 Computer Headset. The
QW-1000 is an ANR headphone system with an audio amplifier. Its stereo
sound capabilities differentiate this product. The suggested retail
price of the QW-1000 is $69.95.
Andrea Anti-Noise/Registered Trademark/QW-1000ANC Computer Headset. The
QW-1000ANC is an ANR and ANC headset with an ultra-flex boom microphone.
This product, similar to the QW-1000 comes with an audio amplifier. Its
stereo sound capabilities and "on/mute" switch differentiate this
product. The suggested retail price of the QW-1000ANC is $169.95
Andrea Anti-Noise/Registered Trademark/NC-6 Computer Headset. The NC-6
consists of a back-of- the-head headband with a flex boom NC microphone.
The NC-6 is a microphone-only headset. The suggested retail price of the
NC-6 is $12.95.
Andrea Anti-Noise/Registered Trademark/NC-8 Computer Headset. The NC-8
is a lightweight, uniquely styled headset consisting of a headband with
an around-the-ear style mount, and a flex boom NC microphone. The NC-8
is offered only as an OEM product.
Andrea Anti-Noise/Registered Trademark/NC-10 Computer Headset. The NC-10
is a miniature ear-bud headset with a flex boom NC microphone. The
suggested retail price of the NC-10 is $19.95.
Andrea Anti-Noise/Registered Trademark/NC-12 Computer Headset. The NC-12
is a monaural in-ear headset consisting of a headband with a flex boom
NC microphone. The suggested retail price of the NC-12 is $14.95.
Andrea Anti-Noise/Registered Trademark/NC-14 Computer Headset. The NC-14
is a dual in-ear headset consisting of a headband with a flex boom NC
microphone. The suggested retail price of the NC-14 is $19.95.
Andrea Anti-Noise/Registered Trademark/ NC-50 Computer Headset. The
NC-50 consists of a headband with a boom NC microphone and earphone. The
suggested retail price of the NC-50 is $29.95.
Andrea Anti-Noise/Registered Trademark/ NC-65 Computer Headset. The
NC-65 is a PRO stereo headset with a flex boom NC microphone. Its
durable headband and higher quality stereo sound features differentiate
this headset. The suggested retail price of the NC-65 is $34.95.
Andrea Anti-Noise/Registered Trademark/ NC-80 Computer Headset. The
NC-80 consists of a headband with a boom NC microphone and earphone.
This headset can be used on either the left or right side of the head.
The suggested retail price of the NC-80 is $19.95
Andrea Anti-Noise/Registered Trademark/ NC-100 Computer Headset. The
NC-100 is a lightweight, uniquely styled product that has a single, high
fidelity earphone to which is attached a dual-function boom NC
microphone. The earphone is designed to be comfortably worn on the ear
or to be placed on a desktop mount. When the NC-100 is worn, the
microphone is used in the near field mode; when the NC-100 is placed on
the desktop mount, the microphone is used in the far field mode. The
NC-100 is offered only as an OEM product.
Andrea Anti-Noise/Registered Trademark/ NC-150 Computer Headset. The
NC-150 is an ultralight, PC stereo headset with a flexible NC boom
microphone. The suggested retail price of the NC-150 is $29.95.
Andrea APS-100 Auxiliary Power Supply. The APS-100 consists of a module
housing which holds two "AAA" batteries supplying three volts of power
to the headsets or handsets described above and two female inputs from
the headset and handset connectors and male output plugs to the personal
computer. The APS-100 is used when the computer microphone input has
either no power or insufficient power for correct microphone operation.
The suggested retail price of the APS-100 is $19.95.
Andrea MC-100 Multimedia Audio Controller. The MC-100 consists of a
module housing that connects a PC headset or handset with a PC
multimedia speaker system thereby allowing a user to conveniently switch
between the headset/handset and the speaker system. The suggested retail
price of the MC-100 is $34.95.
Andrea PC Mini Microphone M-20. The M-20 is a desktop, omni-directional
condenser microphone, which includes a monitor mount and lapel clip. The
suggested retail price of the M-20 is $12.95.
Andrea M-150 Stereo PC Headset. The M-150 is a stereo PC headset with
flexible boom microphone and wide-frequency stereo headphones. The
suggested retail price of the M-150 is $19.95.
Universal Serial Bus Personal Computer Audio Interface ("USB-PCA"). The
USB-PCA offers users of any audio peripheral, the advantages of USB
compatibility. Our USB-PCA interface technology can be integrated into or used
with audio input and connectivity products to transform them into USB-compliant
peripherals, which can combine with the power of USB-ready PCs. USB-PCA
technology provides a cost-effective, convenient means by which audio peripheral
users can achieve better, simpler "plug-and-play" port capacity. The technology
can be integrated into new products to leverage USB compatibility, or can be
incorporated into existing non-USB peripherals to transform them into
USB-compatible tools.
We market and sell our products directly to end users through computer
product distributors, through value-added resellers, to original equipment
manufacturers and to software publishers. We began commercial sales of our
Andrea Anti-Noise products in 1995 with the introduction of the ANC-100. Since
that time, a substantial amount of our revenue from Andrea Anti-Noise products
has been from the sale of our NC microphone products, particularly to certain of
our collaborative partners. See "Collaborative Arrangements".
Our Industrial and Military Communication Products
For the industrial and military markets, our traditional intercom and
related components are designed for the following applications:
Avionics
Ground Transportation Communications
Warehouse and Factory Communications
The related components include headsets, amplifiers, electronic control
boxes and panels, and wiring harnesses. The prices of these components range
from $100 to $5,000. Unfilled orders under government prime contracts and
subcontracts for these products may be terminated at the convenience of the
government under the provisions of statutes or regulations applicable to defense
procurement contracts. In the event of such termination, we are entitled to
reimbursement for costs incurred plus a percentage of profit. Sales under
defense procurement contracts are also subject, in certain instances, to price
redetermination proceedings. We believe that such proceedings, if any, would not
have a material effect upon our earnings. We anticipate a downward trend in
sales of our traditional products in both absolute and relative terms.
We have also developed two Andrea Anti-Noise products for various
communications applications in commerce, industry and the military: ANR
Headphone Kits and ANR/ANC Headset Systems. The ANR Headphone Kit is a
lightweight, open backed headphone for use in high-noise environments, such as
airplane cabins, to reduce ambient noise and offer improved audio listening. We
have sold a limited number of these kits to a major producer of headphones. The
ANR/ANC Headset System is a high performance, communication headset system with
both ANR earphone technology and ANC microphone technology. This product is
designed to be adapted to customer specifications for use in extreme high noise
environments, such as in aircraft, manufacturing and warehouse facilities, and
military vehicles.
Our Collaborative Arrangements
An important element of our strategy is to promote widespread adoption of
our Andrea Anti-Noise technology by partnering with large enterprises and market
and technology leaders in telecommunications, computer manufacturing, and
software publishing. We have entered into such arrangements and/or relationships
with International Business Machines Corporation ("IBM"), Microsoft Corporation
("Microsoft"), Intel Corporation, Lernout & Hauspie, Inc. ("L&H"), Clarion
Corporation of America, CompUSA, Office Max, Staples, Mplayer and Multitude. We
are currently discussing additional arrangements with other companies, but we
cannot assure that any of these discussions will result in any definitive
agreements. During the past several years, under an agreement with Grumman
Corporation (now Northrop Grumman Corporation), we have attempted to develop
headset products for military use. As previously reported, we do not expect our
efforts under this agreement to result in revenues.
IBM Procurement Agreement. In June 1995, we entered into a two-year
procurement agreement with IBM covering the sale to IBM of Andrea Anti-Noise
products for inclusion with IBM's personal computers. In 1996, we entered into
an additional agreement with IBM for the sale to IBM of Andrea Anti-Noise
computer headsets for inclusion with all shrink-wrapped copies of IBM's
speech-enabled OS/2 "Merlin" software product. In 1997, we expanded our
relationship with IBM by signing a procurement agreement to supply several
models of Andrea Anti-Noise PC headsets, handsets and microphones to IBM for
packaging with a full line of IBM's speech recognition software programs. We
anticipate that our agreement with IBM will be renewed, but we cannot assure
that this will happen. During 1998, 1997 and 1996, sales of our computer
headsets to IBM and certain of its affiliates, distributors, licensees, and
integrators accounted for 61%, 56%, and 46%, respectively, of our total sales.
Microsoft License Agreements. In October 1996, we entered into a licensing
agreement with Microsoft covering the distribution by Andrea of Microsoft
NetMeeting/Registered Trademark/ Internet and Intranet conferencing software
with our Andrea Anti-Noise retail line of ANC headsets and handsets. This
agreement replaced our prior licensing agreement with Microsoft for Microsoft's
MS Phone/Registered Trademark/ and MSVoice/Registered Trademark/ computer
telephony and speech recognition software. In April 1997, we signed a similar
licensing agreement with Microsoft allowing us to sell Microsoft's NetMeeting
2.0/Registered Trademark/Internet and Intranet conferencing software with Andrea
Anti-Noise headsets which were endorsed and recommended by Microsoft's
NetMeeting Group. In August 1997, Microsoft recommended Andrea's ANC headsets
for use with Internet Explorer 4.0 and, in addition, Microsoft's Windows
Hardware Qualifications Lab certified Andrea ANC products for use with Windows
95 and Windows NT, all of which incorporate NetMeeting 2.0. In June 1998,
certain of our NC and all of our ANC headsets were certified by Microsoft's
Windows Hardware Qualification Lab for use with Windows 98 and Windows NT.
Microsoft Procurement Agreement. In January 1999, we entered a procurement
agreement with Microsoft covering the sale by us to Microsoft of our patented
NC-8 headset for inclusion in Microsoft Encarta Interactive English Learning
software programs that will be marketed in various markets in various languages.
This agreement also covers the inclusion of Andrea product brochures in the
packaging for these and related Microsoft products. We intend to collaborate
with Microsoft in several co-marketing activities and joint promotional efforts
to support these products. The agreement expires in January 2000, but upon
mutual agreement can be extended for successive twelve-month periods.
Intel License Agreement. In October 1998, we entered into an agreement with
Intel Corporation under which we have been provided access to Intel's Pentium
III microprocessor technology for purposes of optimizing the performance of our
Andrea DSDA far-field microphone technology. Our objective for this program is
to significantly reduce the cost of the components required for the Andrea DSDA
microphone product and to improve its overall performance. If we succeeed, we
expect that the benefits of speech recognition can be marketed to a broader base
of end users.
Clarion Purchase Agreement. On February 24, 1999, we entered into a
purchase agreement with Clarion Corporation of America for the Andrea AutoArray,
the first directional, noise canceling audio input device designed specifically
for the natural speech interface for Clarion's Auto PCs. Under this agreement,
Clarion will purchase the Andrea AutoArray and offer it to its authorized Auto
PC dealers nationwide. The agreement has an initial one-year term and
automatically renews for successive one-year terms unless earlier terminated.
Lerner & Hauspie License and Marketing Agreement. In December 1997, Andrea
Electronics entered into a joint licensing and marketing agreement with L&H.
Under this agreement, L&H bundles various Andrea Anti-Noise products with its
continuous speech recognition software products (VoiceXpress and VoiceCommands)
and, in addition, resells various Andrea Anti-Noise products through its direct
sales group to OEM, corporate and retail customers for use with L&H speech
recognition dictation, voice verification and telecommunications software
programs.
Patents, Trademarks, and Other Intellectual Property Rights
We rely on a combination of patents, patent applications, trade secrets,
copyrights, trademarks, nondisclosure agreements with our employees, licensees
and potential licensees, limited access to and disclosure of our proprietary
information, and other measures to protect our intellectual property and
proprietary rights. We cannot assure, however, that these measures will protect
our intellectual property or prevent misappropriation or circumvention of our
intellectual property.
Andrea has been granted a total of 12 patents in the United States covering
claims to its Andrea Anti-Noise technology and products, including six utility
patents and six design patents. Counterparts of certain of these patents have
been granted in other jurisdictions. Our six U.S. utility patents cover various
method and apparatus claims to our ANC and ANR technology and products. These
method and apparatus patents expire at various dates, ranging from 2010 to 2017.
Our six U.S. design patents cover claims to the design of various types of
headsets and handsets, including a combined boom microphone headset and stand, a
boom microphone headset, two tethered media/communications handsets with
controls, and an untethered communications/media handset. These design patents
expire at various dates, ranging from 2010 to 2012. In addition, our Lamar
Signal Processing subsidiary has been granted a U.S. patent on the adaptive
interference cancelling system and method used in our Andrea DSDA products. This
patent expires in 2016. In addition, we have other U.S. and non-U.S. patent
applications currently pending. We cannot assure that patents will be issued
with respect to these applications or any other patent applications filed by us
in the future.
Andrea, together with its subsidiaries, has nine U.S. and 70 non-U.S.
trademark registrations and 25 U.S. and 16 non-U.S. pending trademark
applications. The U.S. and non-U.S. registered trademarks include: ANDREA,
ANDREA ANTI-NOISE, ANDREA VOICE SOLUTIONS, ANDREA GAMEWARE, NETSET, QUIETWARE,
TECHNOLOGY ENHANCING COMMUNICATIONS, and TECHNOLOGY ENHANCING VOICE
COMMUNICATIONS. The pending trademark applications cover, among other marks:
AUTOARRAY, DESKTOPARRAY, AUDIO COMMANDER, DSDA, DFTA, LAMAR and PCTI. Andrea has
also obtained two copyright registrations in the United States for its AUDIO
COMMANDER software. The first covers the AUDIO COMMANDER icon. The second covers
the actual software computer program and software code.
Numerous patents have already been granted in the fields of noise cancellation,
noise reduction, digital signal processing, and computer voice recognition. We
expect that products in these fields will increasingly be subject to claims
under these patents as the numbers of products and competitors in these fields
grow and the functionality of products overlap. Moreover, the laws of other
countries do not protect our intellectual property rights to the same extent as
the laws of the United States. We cannot assure that any patents issued to us
will provide competitive advantages or will not be infringed, challenged,
invalidated, or circumvented by others, that the patents or proprietary rights
of others will not have an adverse effect on our ability to do business, that we
will be able to obtain licenses to patents of others, if needed, on terms
acceptable to us or at all, or that we will be able to develop additional
patentable technology that may be needed to commercialize successfully our
existing technologies. We are also subject to the risk of adverse claims and
litigation alleging infringement of the proprietary rights of others. Litigation
to establish the validity of patents, to assert infringement claims against
others, and to defend against patent infringement claims can be expensive and
time-consuming, even if the outcome is favorable to us. In November 1998, an
action was brought against us alleging, among other things, that certain of our
ANR patents are invalid. See "Part I - Item 3 - Legal Proceedings".
Research and Development
We consider our technology to be of substantial importance to our
competitiveness. To maintain this competitiveness, we have organized our
research and development efforts using a "market and applications" approach for
meeting the requirements of new and existing customers. Consistent with this
approach, our engineering staff interacts closely with our sales and marketing
personnel and, frequently, directly with customers. The engineering staff is
responsible for the research and development of new products and the improvement
of existing products. Since 1991, substantially all of our research and
development has been in support of developing Andrea Anti-Noise technology and
applications engineering. Research and development expenses for 1998 increased
82% to $2,016,684 from $1,106,880 for 1997. This increase is primarily a result
of our continuing efforts to develop our digital signal processing technology,
coupled with efforts in computer/telephony headset technologies. These efforts
resulted in ten new products during the year ended December 31, 1998. In 1997,
our research and development expenses represented a 12% increase from $988,483
in 1996. We expect research and development expenses to increase as it seeks to
broaden its line of products. No assurance can be given that our research and
development efforts will succeed. See "Part II - Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Sales and Marketing
We employ a sales staff as well as outside sales representative
organizations to market our Andrea Anti-Noise products and our traditional
intercom products. Andrea Anti-Noise products are marketed to computer OEMs and
related peripheral devices, distributors of personal computers and
telecommunications equipment, software publishers, computer and consumer
electronic retailers, and end-users in both business and household environments.
These products are sold to end-users through distributors and value-added
resellers, software publishers, Internet Service Providers, Internet Content
Developers, and retailers. Under our existing collaborative agreements, our
collaborative partners have various marketing and sales rights to our Andrea
Anti-Noise products. We are seeking to enter additional collaborative
arrangements for marketing and selling our Andrea Anti-Noise products, but we
cannot assure that we will be successful in these efforts. Market acceptance of
the Andrea Anti-Noise products is critical to our success.
We market our traditional intercom products to OEMs, military
organizations, and industrial customers.
Production Operations
We conduct assembly operations at our New York facility and through
subcontractors. During initial production runs of Andrea Anti-Noise products, we
assemble the products at our New York facility from purchased components. As
sales of any particular Andrea Anti-Noise product increase, assembly operations
are transferred to a subcontractor in Asia. Most of the components for the
Andrea Anti-Noise products are available from several sources and are not
characteristically in short supply. However, certain specialized components,
such as microphones, are available from a limited number of suppliers and
subject to long lead times. To date we have been able to obtain sufficient
supplies of these more specialized components, but we cannot assure that we will
continue to be able to do so. Shortages of, or interruptions in, the supply of
these more specialized components could have a material adverse effect on our
sales of Andrea Anti-Noise products.
We assemble our traditional intercom products at our New York facility from
purchased components. Certain highly specialized components for our traditional
intercom products sold for military and industrial use have limited sources of
supply, the availability of which can affect particular products. We do not
believe, however, that our earnings have been, or will be, materially affected
due to unavailability of these componenets.
Competition
The markets for our Andrea Anti-Noise products and our traditional line of
military and industrial products are highly competitive. Competition in these
markets is based on varying combinations of product features, quality and
reliability of performance, price, sales, marketing and technical support, ease
of use, compatibility with evolving industry standards and other systems and
equipment, name recognition, and development of new products and enhancements.
Most of our current and potential competitors in these markets have
significantly greater financial, marketing, technical, and other resources than
us. Consequently, these competitors may be able to respond more quickly to new
or emerging technologies and changes in customer requirements, or to devote
greater resources to the development, marketing, and sale of their products than
we can. We cannot assure that one or more of these competitors will not
independently develop technologies that are substantially equivalent or superior
to our technology.
In the markets for our traditional products, we often compete with major
defense electronics corporations as well as smaller manufacturing firms which
specialize in supplying to specific military initiatives. Our performance in
these markets is further subject to several factors, including dependence on
government appropriations, the time required for design and development, the
complexity of product design, the rapidity with which product designs and
technology become obsolete, the intense competition for available business, and
the acceptability of manufacturing contracts by government inspectors.
We believe that our ability to compete successfully will depend upon our
capability to develop and maintain advanced technology, develop proprietary
products, attract and retain qualified personnel, obtain patent or other
proprietary protection for our products and technologies, and manufacture,
assemble and market products, either alone or through third parties, in a
profitable manner.
Employees
At December 31, 1998, we had 123 employees, of whom 44 were engaged in
production and related operations, 42 were engaged in research and development,
and 37 were engaged in management, administration, sales and customer support
duties. None of our employees are unionized or covered by a collective
bargaining agreement. We believe that we generally enjoy good relations with our
employees.
- - --------------
"NetMeeting", "Windows", "MSPhone", and "MSVoice" are registered trademarks of
Microsoft Corporation.
ITEM 2. PROPERTIES
Andrea's corporate headquarters is located in Melville, New York. Our
corporate headquarters is located in approximately 40,000 square feet of leased
space which houses our production operations, research and development
activities, sales, administration and executive offices. We also lease
facilities in Utah and Israel for dedicated research and development, and in
Hong Kong for production management and limited research and development
activities. We believe that we maintain our machinery, equipment and tooling in
good operating condition and that these assets are adequate for our current
business and adequately insured. See Notes 6 and 12 to our Consolidated
Financial Statements for further information concerning our property, plant and
equipment and leased facilities.
ITEM 3. LEGAL PROCEEDINGS
On November 17, 1998 a complaint was filed against us in the U.S. District
Court for the Eastern District of New York by NCT Group, Inc. ("NCT"; formerly
Noise Cancellation Technologies, Inc.) and NCT Hearing Products, Inc., one of
NCT's subsidiaries. The complaint involves two of Andrea's patents, U.S. Patent
No. 5,732,143 and U.S. Patent No. 5,825,897. These patents relate to certain
active noise reduction technology that is particularly applicable to aircraft
passenger headphones. Andrea does not currently derive any sales or licensing
revenue from aircraft passenger headphones. The complaint requests a declaration
that these two patents are invalid and unenforceable and that NCT's products do
not infringe these two patents. The complaint alleges that Andrea has engaged in
unfair competition by misrepresenting the scope of the two patents, tortuously
interfering with prospective contractual rights between NCT and its existing and
potential customers, making false and disparaging statements about NCT and its
products, and falsely advertising Andrea's ANR products. The complaint seeks to
enjoin Andrea from engaging in these alleged activities and seeks compensatory
damages of not less than $5 million, punitive damages of not less than $50
million and plaintiffs' costs and attorneys' fees. On December 30, 1998, we
filed and served an answer to the NCT complaint, denying the allegations and
asserting affirmative defenses and counterclaims. Our counterclaims allege that
NCT has infringed U.S. Patents Nos. 5,732,143 and 5,825,897, and that NCT has
engaged in trademark infringement, false designation of origin, and unfair
competition. The counterclaims also allege that NCT's patent infringement has
been and is willful. The counterclaims seek injunctive relief with respect to
the allegations of patent infringement, trademark infringement, false
designation of origin and unfair competition. We are also seeking exemplary and
punitive damages, prejudgment interest on all damages, costs, reasonable
attorneys' fees and expenses. If this suit is ultimately resolved in favor of
NCT, we could be materially adversely effected. We believe, however, that NCT's
allegations are without merit and we intend to vigorously defend Andrea and to
assert against NCT the claims described above.
On March 11, 1999, we were notified about a claim approximating $3 million
with respect to environmental matters in connection with a site where we have
been identified as a potential responsible party under federal and state
environmental laws and regulations. We cannot assure that the ultimate outcome
of this matter will not have a material adverse effect on us, but based on a
preliminary review we believe that the suit is without merit and we intend to
mount a vigorous defense.
In addition to the litigation described above, we are from time to time
subject to routine litigation incidental to our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of Andrea was held on November 13, 1998.
The results of this meeting were reported in a Current Report on Form 8-K, dated
November 24, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Andrea's common stock is listed on the American Stock Exchange under the
symbol "AND". The table below sets forth the high and low sales prices for
Andrea's Common Stock as reported by the American Stock Exchange. On March 23,
1998, there were approximately 573 holders of record of Andrea's Common Stock.
QUARTER ENDED HIGH LOW
- - ------------- ---- ----
March 31, 1997 7 1/2 4 15/16
June 30, 1997 6 7/8 5 1/16
September 30, 1997 34 1/4 5 7/8
December 31, 1997 29 1/8 16 1/8
March 31, 1998 26 1/8 12
June 30, 1998 25 5/8 13 7/8
September 30, 1998 15 3/8 5 1/8
December 31, 1998 14 5/16 4
No dividends were paid in 1998 or 1997. The above prices have been adjusted to
reflect a two-for-one stock split effected in the form of a 100% stock dividend
to stockholders of record on September 10, 1997.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Sales 21,304,570 26,429,804 9,244,109 5,440,792 3,278,100
Cost of Sales 14,178,871 16,077,801 5,913,091 3,190,226 2,394,828
---------- ---------- --------- --------- ---------
Gross Profit 7,125,699 10,352,003 3,331,018 2,250,566 883,272
Research and Development 2,016,684 1,106,880 988,483 976,344 1,422,310
General, Administrative
and Selling Expenses 13,002,959 5,753,130 3,872,919 2,925,460 1,995,434
---------- ---------- --------- --------- ---------
Income (Loss) from
Operations (7,893,944) 3,491,993 (1,530,384) (1,651,238) (2,534,472)
Other Income (Expense) 1,447,380 76,864 (13,833) 375,323 234,636
Income (Loss) Before
Provision (Benefit)
for Income Taxes (6,445,955) 3,568,857 (1,544,217) (1,275,915) (2,299,836)
Provision (Benefit) for
Income Taxes - 154,461 (1,222,000) - -
---------- ---------- --------- --------- ---------
Net Income (Loss) (6,445,955) 3,414,396 (322,217) (1,275,915) (2,299,836)
========== ========== ========= ========= =========
Earnings (Loss)
Per Share:
Basic (.61) .42 (.05) (.20) (.42)
Diluted (.61) .39 (.05) (.20) (.42)
BALANCE SHEET DATA
Long Term Capital Lease
Obligations - - - 5,388 17,044
Long Term Obligations,
including current
portions 1,640,511 38,500 2,196,286 2,038,500 38,500
Retained Earnings
(Deficit) (5,574,518) 871,437 (2,542,959) (2,220,742) (944,827)
Total Assets 50,681,941 17,789,184 10,794,250 6,551,110 5,016,581
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Andrea Electronics Corporation's mission is to provide state-of-the-art
communications products for the "voice 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
products provide benefits include: Internet and other computer-based speech;
telephony communications; multi-point conferencing; multi-player Internet and CD
ROM interactive games; speech recognition; multimedia; military and industrial
communications; and other applications and interfaces that incorporate natural
language processing. 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,
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 DSP technology, on
May 5, 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 amoritization of this goodwill has had, and will continue to have,
a negative, non-cash impact on our results of operations. See Note 3 to our
Consolidated Financial Statements.
We outsource the assembly of most of our Andrea Anti-Noise products from
purchased components, and we are currently assembling our 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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain information contained in this Management's Discussion and Analysis
of Financial Condition and Results of Operations for the year ended December 31,
1998 and other items set forth in this Report on Form 10K are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
words "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 factors 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. These factors
include:
OUR OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATION
Our results of operations have historically been and are subject to
continued substantial annual and quarterly fluctuations. The causes of these
fluctuations include, among other things:
- - - 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;
- - - 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.
We cannot assure that the level of sales and gross profit, if any, that we
achieve in any particular fiscal period will not be significantly lower than in
other fiscal periods. Our revenues for the year ended December 31, 1998 were
approximately $21.3 million compared to approximately $26.4 million in calendar
1997. For the year ended December 31, 1998, we had a net loss of approximately
$6.4 million versus net income of $3.4 million for the year ended December 31,
1997. For the fourth quarter ended December 31, 1998, our revenues were
approximately $7.1 million versus $7.8 million in the same period in 1997. For
the fourth quarter of 1998, we had a net loss of approximately $3.3 million
compared to net income of approximately $0.6 million in the same period in 1997.
While we are examining opportunities for cost-reduction, production
efficiencies and further diversification of our business, we may continue to
accumulate losses and the market price of our common stock could decline. In
order to remain competitive, we intend to continue to incur substantial research
and development, marketing and general and administrative expenses. These
expenses may not be necessarily or easily reduced if sales revenue is below
expectations, and net income or loss, therefore, may be disproportionately
affected by any reduction in sales revenue. Accordingly, we believe that
period-to-period comparisons of our results of operations may not necessarily be
meaningful and should not be relied upon as indications of future performance.
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE
The market price of our common stock has historically been highly volatile
and could be subject to wide fluctuations in response to quarterly and annual
variations in our results of operations, losses of significant customers,
announcements of technological innovations or new products by us or our
competitors, changes in the outlook of our industry, our company and our
competitors by securities analysts, or other events or factors, including the
risk factors described in this Report. In addition, the stock market has
experienced significant price and volume fluctuations that have particularly
affected the market prices of equity securities of many high technology
companies and that often have been unrelated to the operating performance of
such companies.
MEETING OUR FUTURE CAPITAL NEEDS MAY ADVERSELY AFFECT OUR BUSINESS AND BE
DILUTIVE TO EXISTING SHAREHOLDERS
Our future capital requirements will depend on numerous factors, including:
- - - the costs associated with developing, manufacturing and commercializing our
products;
- - - maintaining existing, or entering into future, collaborative marketing and
distribution agreements;
- - - protecting intellectual property rights; and
- - - expanding facilities and consummating possible future acquisitions of
technologies, products or businesses.
We expect to raise additional capital through external funding. We are
currently exploring a variety of sources, including private or public financings
through the issuance of debt, convertible debt or equity, or collaborative
arrangements. We cannot assure that additional capital will be available on
favorable terms, if at all. If adequate funds are not available, we may be
required to significantly reduce or refocus our operations or to obtain funds
through arrangements that may require us to relinquish rights to certain of our
products, technologies or potential markets, which would have a material adverse
effect on our business, results of operations and financial condition. To the
extent that additional capital is raised through the sale of equity, the
issuance of such securities would result in ownership dilution to our existing
stockholders.
WE MUST INCREASE SALES AND PROFITABILITY OF OUR PRODUCTS AND COMMERCIALIZE NEW
PRODUCTS
Our business, results of operations and financial condition depend on
successful commercialization of our Andrea Anti-Noise products and technologies.
Sales of the initial Andrea Anti-Noise products began in 1995, and since 1995 we
have been expanding the number of products in this line. The success of these
products is subject to the risks frequently encountered by companies in an early
stage of product commercialization, particularly companies in the computing and
communications industries. To achieve increased sales and profitability, we
must, among other things:
- - - increase market acceptance of our Andrea Anti-Noise products;
- - - respond effectively to competitive pressures with the timely introduction
of new Andrea Anti-Noise products; and
- - - successfully market and support these products.
We cannot assure that we will achieve or sustain significant sales or
profitability of our Andrea Anti-Noise products. Failure to do so would have a
material adverse effect on our business, results of operations and financial
condition.
WE FACE INTENSE COMPETITION
The markets in which we sell our Andrea Anti-Noise products and our
traditional line of military and industrial products are highly competitive.
Competition in the markets for our Andrea Anti-Noise products is based on:
- - - varying combinations of product features;
- - - quality and reliability of performance;
- - - price;
- - - marketing and technical support;
- - - ease of use;
- - - compatibility with evolving industry standards and other systems and
equipment;
- - - brand recognition; and
- - - development of new products and enhancements.
Most of our current and potential competitors have significantly greater
financial, technology development, marketing, technical support and other
resources than we do. Consequently, these competitors may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements, or devote greater resources to the development, marketing, and
sale of their products than we can. We cannot assure that one or more of these
competitors will not independently develop technologies that are substantially
equivalent or superior to our technology.
In the markets for our traditional products, we often compete with major
defense electronics corporations as well as smaller manufacturing firms which
specialize in supplying products and technologies for specific military
initiatives. Our performance in this market is further subject to several
factors, including:
- - - dependence on government appropriations;
- - - the time required for design and development;
- - - the complexity of product design;
- - - the rapidity with which product designs and technology become obsolete;
- - - the intense competition for available business; and
- - - the acceptability of manufacturing contracts by government administrators.
We believe that our ability to compete successfully will depend upon our
capability to:
- - - develop and maintain advanced technology;
- - - develop proprietary products;
- - - attract and retain qualified personnel;
- - - 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 cannot assure that we will be able to compete successfully, and failure
to do so would have a material adverse effect on our business, results of
operations and financial condition.
WE MAY BE UNABLE TO OBTAIN MARKET ACCEPTANCE OF OUR VOICE INTERFACE AND INTERNET
COMMUNICATIONS PRODUCTS
We and our competitors are focused on developing and commercializing
products and technologies that enhance the use of voice, particularly in noisy
environments, for a broad range of computer and communications applications. The
markets for these products and technologies have only recently begun to develop,
are rapidly evolving, are characterized by a number of competitors, and are
subject to a high level of uncertainty. Broad market acceptance of these
products and technologies is critical to our success and ability to generate
revenues. We cannot assure that we, or our industry in general, will be
successful in obtaining market acceptance of products and technologies. Failure
to do so would have a material adverse effect on our business, results of
operations and financial condition.
WE MAY BE UNABLE TO DEVELOP AND SUCCESSFULLY INTRODUCE NEW PRODUCTS AND
TECHNOLOGIES
The markets for our products are characterized by rapidly changing
technology, and the introduction of products incorporating new technologies
could render our products obsolete and unmarketable and could exert price
pressures on existing products. In particular, we are currently engaged in the
development of digital signal processing products and technologies for the
voice, speech and natural language interface markets. As part of this effort, we
have established our Andrea Digital Technologies subsidiary in the United States
and have acquired Lamar in Israel. We cannot assure that we will succeed in
developing these new DSP products and technologies, or that any such new DSP
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. We cannot assure that we will successfully
anticipate and adapt in a cost effective and timely manner to changes in
technology and industry standards, develop, introduce and gain market acceptance
of new and enhanced products and technologies, as well as additional
applications for existing products and technologies, or that the introduction of
new products or technologies by others will not render our products and
technologies obsolete. Our failure to develop new and enhanced products and
technologies would have a material adverse effect on our business, results of
operations and financial condition.
OUR SUCCESS IS HIGHLY DEPENDENT ON OUR COLLABORATIVE MARKETING ARRANGEMENTS
We have entered into several 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 of 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 existing products and new products under
development with which to include our products and technologies. We cannot
assure that any product of any of our collaborators incorporating our products
and technologies will be marketed successfully. Our collaborators generally 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 cannot assure that these collaborators will not replace our
products or technologies with, or give higher priority to, the sales of these
competitive products or technologies. 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 Americas. We
cannot assure that any of these channels will devote sufficient resources to
support the sale of our products. We are also currently discussing additional
arrangements with other software companies, several major personal computer
companies, consumer electronic manufacturers, and electronic and compute
rretailers. We cannot assure that any of these discussions will result in any
definitive agreements.
WE DEPEND ON A SINGLE CUSTOMER FOR A SUBSTANTIAL PORTION OF OUR SALES
We are substantially dependent on our product procurement relationship with
IBM. During the years ended December 31, 1996, 1997 and 1998, IBM and certain of
IBM's affiliates, distributors, licensees and integrators accounted for 46%, 56%
and 61%, respectively, of our sales revenue. While we are a party to a
procurement agreement with IBM covering the purchase by IBM of certain of our
Andrea Anti-Noise microphone and earphone products for inclusion with certain of
IBM's personal computer products, IBM is not obligated to purchase these
products and is free to purchase microphone and earphone products and
technologies from our competitors. Our failure to maintain sales of Andrea
Anti-Noise products to IBM would have a material adverse effect on our business,
results of operations and financial condition.
WE MAY NOT BE ABLE TO MAINTAIN NEEDED CONTRACT MANUFACTURING
We conduct assembly operations at our facility in New York and through
subcontractors. During initial production runs of Andrea Anti-Noise products, we
perform assembly operations at our New York facility from purchased components.
As sales of any particular Andrea Anti-Noise product increase, assembly
operations are primarily 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.
Most of the components for the Andrea Anti-Noise products are available
from several sources and are not characteristically in short supply. However,
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. Shortages of, or interruptions in, the
supply of these more specialized components could have a material adverse effect
on our sales of Andrea Anti-Noise products.
We assemble traditional intercom products at our New York facility from
purchased components. Certain highly specialized components for our traditional
intercom products sold for military and industrial use have limited sources of
supply, the availability of which can affect certain of our projects. While we
do not believe that our results of operations have been, or will be, materially
affected if such components are unavailable, we cannot assure that this will
continue to be the case.
WE RELY ON PATENTS AND PROPRIETARY RIGHTS THAT MAY FAIL TO PROTECT OUR BUSINESS
We rely on a combination of patents, patent applications, trade secrets,
copyrights, trademarks, nondisclosure agreements with our employees, licensees
and potential licensees, limited access to and dissemination of our proprietary
information, and other measures to protect our intellectual property and
proprietary rights. We cannot assure, however, that the steps we have taken to
protect our intellectual property will prevent its misappropriation or
circumvention.
We have been granted 12 patents in the United States covering our Andrea
Anti-Noise technology, and we have other U.S. and non-U.S. patent applications
currently pending. We cannot assure that patents will be issued with respect to
these applications or any patent applications filed by us in the future.
Numerous patents have been granted in the fields of noise cancellation,
noise reduction, computer voice recognition and related subject matter. We
expect that products in these fields will increasingly be subject to claims
under these patents as the numbers of products and competitors in these fields
grow and the functionality of products overlap. Moreover, the laws of other
countries do not protect our proprietary rights to our technologies to the same
extent as the laws of the United States.
We cannot assure:
- - - that any patents issued to us will provide us with competitive advantages
or will not be infringed, challenged, invalidated, or circumvented by
others;
- - - that the patents or proprietary rights of others will not have an adverse
effect on our ability to do business;
- - - that we will be able to obtain licenses to patents of others, if needed, on
acceptable terms or at all; or
- - - that we will be able to develop additional patentable technology that may
be needed to successfully commercialize our existing technologies.
We are also subject to the risk of adverse claims, interference proceedings
before the U.S. Patent and Trademark Office, oppositions to patent applications
outside the United States, and litigation alleging infringement of the
proprietary rights of others. Litigation to establish the validity of patents,
to assert infringement claims against others, and to defend against patent
infringement claims can be expensive and time-consuming, even if the outcome is
in our favor.
A complaint has been filed against us by NCT Group, Inc. and NCT Hearing
Products, Inc., one of NCT's subsidiaries (collectively, "NCT") involving two of
our patents which relate to certain active noise reduction technology
particularly applicable to aircraft passenger headphones. See "Part I - Item 3 -
Legal Proceedings".
OUR INTERNATIONAL OPERATIONS MAY BE SUBJECT TO CERTAIN RISKS
We have been seeking to increase our sales to regions outside the United
States, particularly in Europe and certain areas in the Americas and Asia. For
the year ended December 31, 1998, sales to customers outside the United States
accounted for approximately 31% of our sales revenue. 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 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.
YEAR 2000 ISSUES COULD CAUSE INTERRUPTION OR FAILURE OF OUR COMPUTER SYSTEM
We are currently upgrading our information systems to accomplish several
objectives, including, among others, satisfaction of Year 2000 computing
requirements. We are currently assessing the ability of this upgrade to properly
address Year 2000 criteria, and we will be conducting significant transaction
testing throughout the upgrade process. We do not anticipate any material
deficiencies and, further, we do not anticipate difficulty or significant
additional expense in achieving full Year 2000 capability. The Year 2000 issue
is expected to affect the systems of various entities with which we interact,
including our marketing partners, suppliers, and various vendors, and we are
currently seeking to assess the efforts of these entities to satisfy Year 2000
computing requirements. While we believe that our own upgraded information
systems will satisfy Year 2000 computing requirements, we cannot assure that the
systems of these other entities will do so in a timely manner. A failure by any
of these systems to satisfy Year 2000 computing requirements in a timely manner,
or in a manner that is incompatible with our systems, could have a material
adverse effect on our business, results of operations and financial condition.
QUALIFIED MANAGERIAL AND TECHNICAL PERSONNEL ARE SCARCE IN OUR INDUSTRY
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, especially management and product and
technology development teams. 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. Our inability to attract and retain the
necessary technical and other personnel could have a material adverse effect on
our business, results of operations and financial condition.
ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND NEW YORK LAW
MAY ADVERSELY AFFECT OUR STOCKHOLDERS
The New York Business Corporation Law and our Certificate of Incorporation
each contain certain provisions which may, in effect, deter, or make difficult,
a change in control, merger or other acquisition of Andrea. For example, our
Board of Directors may issue up to 5,000,000 shares of preferred stock without
any stockholder vote or action. The preferred stock could have voting,
liquidation, dividend and other rights superior to those of our common stock,
and, therefore, any issuance of preferred stock could adversely affect the
rights of holders of our common stock.
SHARES ELIGIBLE FOR FUTURE SALE MAY HAVE AN ADVERSE EFFECT ON MARKET PRICE; YOU
MAY EXPERIENCE DILUTION
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 the
our common stock. Of the 25,000,000 shares of common stock presently authorized,
13,229,640 shares of common stock were outstanding on March 30, 1999. This does
not include 3,082,500 shares of common stock reserved for issuance upon exercise
of options granted under our 1991 Performance Equity Plan and 1998 Stock Plan.
To the extent that such 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. These shares are subject
to trading restrictions that expire with respect to one-third of these shares in
May 1999, one-third in May 2000, and one-third in May 2001. As the restrictions
expire, the shares are subject to demand and piggyback registration rights.
WE DO NOT ANTICIPATE PAYING CASH DIVIDENDS ON OUR COMMON STOCK
We have not paid any cash dividends on our common stock and do not expect
to pay any cash dividends on our common stock in the foreseeable future.
RESULTS OF OPERATIONS
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Sales
Sales for the year ended December 31, 1998 were $21,304,570, a decrease of
19% over sales of $26,429,804 for the year ended December 31, 1997. The decrease
primarily reflects a shift in product mix to lower-priced and lower-margin
products to original equipment manufacturers (OEMs) with an approximate 45%
decrease in per unit sales prices during the year ended December 31, 1998, and
was offset in part by a 17% increase in unit shipments for the year ended
December 31, 1998 over December 31, 1997. The decrease in sales for the year
ended December 31, 1998 reflects an approximate 22% decrease in sales of Andrea
Anti-Noise products to $17,266,874, or 82% of total sales, and an approximate 6%
decrease in sales of our Traditional Products, to $4,037,696, or 18% of total
sales. For the year ended December 31, 1998, sales of our computer headsets to
one customer and certain of that customer's affiliates, distributors, licensees
and integrators accounted for approximately 61% of our total sales.
Cost of Sales
Cost of sales as a percentage of sales for the year ended December 31, 1998
increased to 67% from 61% for the year ended December 31, 1997. This increase in
cost of sales is primarily a result of the shift in product mix described above.
Research and Development
Research and development expenses for the year ended December 31, 1998
increased 82% to $2,016,684 from $1,106,880 for the year ending December 31,
1997. This increase is primarily a result of our continuing efforts to develop
our digital signal processing technology, coupled with efforts in
computer/telephony headset technologies. These efforts resulted in ten new
products during the year ended December 31, 1998. In addition, 1998 included
research and development activities at our wholly-owned subsidiary, Andrea
Digital Technologies ("ADT"), that was established during the second quarter of
1998 and which operates out of a separate facility in Utah. Research efforts at
ADT are primarily focused on the pursuit of commercializing a natural
language-driven human/machine interface by developing optimal far-field
microphone solutions for various voice-driven interfaces, incorporating the
digital super-directional array microphone technology ("DSDA") obtained through
the acquisition of Lamar in May 1998. Correspondingly, the activities of Lamar,
since the date of acquisition, accounted for approximately 15% of the total
research and development expenses for the year ended December 31, 1998. We
believe that the acquisition of Lamar significantly reinforces our position in
digital signal processing by broadening our exposure to other industries,
including the consumer electronics and professional audio markets, among others.
We anticipate continued significant increases in research and development
expenses, with particular emphasis on digital signal processing efforts.
General, Administrative and Selling Expenses
General, administrative and selling expenses increased 126% to $13,002,959
for the year ended December 31, 1998 from $5,753,130 for the year ended December
31, 1997. This increase, primarily attributable to the ANC/ANR product lines and
the acquisition of Lamar, reflect significant increased business development
expenses relating to existing and prospective collaborative arrangements with
OEMs, software publishers and developers, distributors and retailers. We also
incurred increased promotional, marketing and sales expenses to promote product
awareness and acceptance of the ANC/ANR product lines, particularly in the
retail marketplace, and incurred significant expenses with developing global
expansion efforts. Also included in general, administrative and selling expenses
is goodwill amortization expense of approximately $1.2 million related to the
acquisition of Lamar. In light of our intentions to continue to support sales of
our products, introduce additional products, create new strategic alliances and
further integrate global operations during 1999, high levels of recurring
general, administrative and selling expenses as a percentage of sales may
continue.
Other Income (Expense)
Other income for the year ended December 31, 1998 was $1,447,989 compared
to other income of $76,864 for the year ended December 31, 1997. This change is
primarily attributable to the net gain on the sale of our corporate headquarters
in Long Island City during the year ended December 31, 1998 of $1,864,767,
offset by net interest expense of $476,978, primarily related to the convertible
notes issued and sold in June 1998.
Provision for Income Taxes
We did not record income tax expense for the year ended December 31, 1998
in light of the net loss recorded for the year. The realization of our reserved
deferred tax assets (excluding those generated and reserved during 1998), if and
when realized, will not result in a tax benefit in the consolidated statement of
operations, but will result in an increase in additional paid in capital as they
are related to tax benefits associated with the exercise of stock options. The
income tax expense of $154,461 for the year ended December 31, 1997 resulted
from the effect of a provision for income taxes at our 42% effective income tax
rate, substantially offset by a reduction in our reserve on
previously-generated, fully-reserved deferred income tax assets. We will be
continually re-assessing our reserves on deferred income tax assets on a
quarterly basis. See Note 11 to our Consolidated Financial Statements.
Net Income (Loss)
Net loss for the year ended December 31, 1998 was $6,445,955 compared to
net income of $3,414,396 for the year ended December 31, 1997. The net loss for
the year ended December 31, 1998 principally reflects the factors described
above.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Sales
Sales for the year ended December 31, 1997 were $26,429,804, an increase of
186% over sales of $9,244,109 for the year ended December 31, 1996. The increase
primarily reflects increasing market acceptance of voice interface computer
applications that incorporate our Andrea Anti-Noise technology, coupled with the
strength of new product launches. In addition, revenue was particularly strong
in the latter half of 1997 due to the retail introduction of our products. For
the year ended December 31, 1997, sales from our Andrea Anti-Noise product line
comprised approximately 85 % of total sales while sales from our Traditional
Products comprised approximately 15% of total sales.
Cost of Sales
Cost of sales as a percentage of sales for the year ended December 31, 1997
decreased to 61% from 64% for the year ended December 31, 1996. The improvement
during 1997 principally reflected the efficiencies resulting from our continuing
efforts to globalize our sourcing and manufacturing activities, as well as
maximizing the benefits of shifts in product mix. Also contributing to the
improvement was the higher gross margins realized as a result of the retail
introduction of our products during the latter half of 1997.
Research and Development
Research and development expenses for the year ended December 31, 1997
increased 12% to $1,106,880 from $988,483 for the year ending December 31, 1996.
This increase primarily related to technology investments that resulted in
twelve new products during 1997.
General, Administrative and Selling Expenses
General, administrative and selling expenses for the year ended December
31, 1997 increased 49% to $5,753,130 from $3,872,919 for the year ended December
31, 1996. This increase, primarily attributable to the ANC and ANR product
lines, reflected increased business development expenses related to existing and
prospective collaborative arrangements with hardware OEMs, software publishers,
distributors and retailers. In addition, we incurred increased promotional,
marketing and sales expenses to promote product awareness and acceptance of the
ANC and ANR product lines. As a percentage of sales, however, general,
administrative and selling expenses decreased to 21% for the year ending
December 31, 1997 from 42% for the year ended December 31, 1996.
Other Income (Expense)
Other income for the year ended December 31, 1997 was $76,864 compared to
other expense of $13,833 for the year ended December 31, 1996. This change is
primarily attributable to decreases in interest expense as a result of
conversion rights exercised during 1997, and the lower effective interest rate
on the outstanding convertible debentures during fiscal 1997.
Provision for Income Taxes
The income tax expense of $154,461 for the year ended December 31, 1997
resulted from the effect of a provision for income taxes at our 42% effective
income tax rate, substantially offset by a reduction in our reserve on
previously-generated, fully-reserved deferred income tax assets. As a part of
the normal assessment of our reserves, management determined that it has become
more likely than not that a portion of the previously-reserved deferred tax
assets will be realized and has, accordingly, reduced the valuation allowance on
those previously reserved deferred tax assets. This determination is based on
our profitability in recent quarters and the impact of the sales performance of
its products. Realization of remaining reserved deferred tax assets at December
31, 1997, if and when realized, will not result in a tax benefit in the
consolidated statement of operations, but will result in an increase in
additional paid in capital as they are related to tax benefits associated with
the exercise of stock options. The income tax benefit of $1,222,000 for the year
ended December 31, 1996 represented benefit generated from the 1996 loss as well
as a reduction of the valuation allowance on previously reserved deferred tax
assets at December 31, 1996 (see Note 11 to the financial statements).
Net Income (Loss)
Net income for the year ended December 31, 1997 was $3,414,396, compared to
a net loss of $322,217 for the year ended December 31, 1996. The improvement
principally reflects the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of funds have historically been, and are expected to
continue to be, cash flow from operations, borrowings or investments provided by
financial institutions and sales of stock associated with option exercises. At
December 31, 1998, we had cash and cash equivalents of $5,437,423 compared with
$2,059,338 at December 31, 1997. The increase since December 31, 1997 is
primarily a result of our June 1998 private placement of $10.75 million
aggregate principal amount of 6% Convertible Notes ("Notes"). We have been using
the $10 million in net proceeds from the issuance of the Notes for costs
associated with technology acquisition and development, tooling costs,
relocation costs, a new management information system and general working
capital requirements. In connection with the acquisition of Lamar, of the
aggregate cash consideration to be paid by us, $1,000,000 was paid on May 5,
1998, the closing date, $500,000 was paid on November 5, 1998, and the remainder
is payable in three equal installments on each of the twelve, twenty-four and
thirty-six month anniversaries of the closing.
Working capital at December 31, 1998 was $14,337,116 compared to
$11,786,659 at December 31, 1997. The increase in working capital reflects an
increase in total current assets of $4,387,545, offset by an increase in total
current liabilities of $1,837,088. The increase in total current assets reflects
an increase in cash of $3,378,085, a decrease in marketable securities of
$102,717, an increase in accounts receivable of $299,349, an increase in
inventory of $2,247,396, a decrease in prepaid expenses and other current assets
of $524,999 and a decrease in deferred income taxes of $909,569. The increase in
current liabilities reflects a $1,255,129 increase in trade accounts payable, an
increase in the current portion of long term debt of $514,121, a $1,193,472
decrease in convertible debentures (which debentures were converted to equity
during the first quarter of 1998) and a $1,261,310 increase in other current
liabilities.
The increase in cash of $3,378,085 reflects $6,959,490 of net cash used in
operating activities, $772,385 of net cash used by investing activities and
$11,109,960 of net cash provided by financing activities.
The cash used in operating activities, excluding non-cash charges, is
primarily attributable to the $6,445,955 net loss for the year ended December
31, 1998, coupled with an increase in inventory of our Andrea Anti-Noise
computer headsets in anticipation of future sales. Other significant
contributing factors include increases in accounts receivable and other assets.
These increases were offset by a significant increase in trade accounts payable.
The cash provided by investing activities is primarily attributable to the
sale of our primary operating facility in Long Island City, New York, offset by
the cash consideration paid upon closing of the acquisition of Lamar. Also
contributing to the offset were increases in capital expenditures consisting of
the ongoing upgrade of manufacturing dies and molds for Andrea Anti-noise
products and investments in our information systems. In connection with the sale
of our primary operating facility, rent expense associated with the new leased
facility will approximate $532,000 for the year ended December 31, 1999 (see
Note 12 to the financial statements).
The net cash provided by financing activities resulted from the issuance
and sale of the Notes and the exercise of employee stock options. 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.
The increase in accounts receivable primarily reflects the increase in
sales during the fourth quarter of 1998 (relative to prior quarters), offset by
strong collection procedures. Generally, we collect receivables from sales
within two months. The increase in other assets represents increases in patent
and trademark costs associated with our proprietary technology, as well as the
establishment of an escrow account in connection with the sale of our primary
operating facility. The increase in trade accounts payable 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, including our DSDA
technology. The increase in the current portion of long term debt represents the
current portion of debt recorded as a result of the acquisition of Lamar. The
majority of this balance is comprised of $.5 million in cash consideration due
on the twelve month anniversary of the closing. The remaining $1 million in cash
consideration due on the twenty-four and thirty-six month anniversaries of the
closing is recorded as long term debt on the accompanying consolidated balance
sheet.
Demand for Andrea Anti-Noise products has required us to raise additional
working capital to support our operations. In addition, the acquisition of Lamar
will require us 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, we raised working capital through the issuance of
convertible subordinated debentures. In June 1998, we raised $10 million through
the issuance and sale of the Notes. In addition, we entered into a revolving
credit agreement in September 1997 that provides maximum borrowings of up to $8
million based on eligible accounts receivable and inventory, as defined. At
December 31, 1998, there were no outstanding amounts under the agreement. We
believe that our current levels of cash, as well as our access to borrowing
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 year ended
December 31, 1998, 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 begun to
implement a plan to ensure that all of its information systems are able to
properly recognize and handle dates after December 31, 1999. Our significant
management information systems consist of our financial and inventory systems.
These systems are currently being upgraded with a recently acquired software
package, with a scheduled implementation date of April 1999. All of our 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, we will conduct similar
testing prior to implementation in an effort to ensure year 2000 compliance.
Currently, we do not anticipate any material deficiencies and, further, we do
not anticipate difficulty or significant additional expense in achieving full
year 2000 capability. The cost of the upgrade to our management information
systems is not expected to exceed $1 million. We expect this upgrade to achieve
several business and operational objectives, including, among others,
satisfaction of the year 2000 computing requirements. Although we believe that
our own systems will be year 2000 compliant in April 1999, we cannot assure
this, nor can we assure that, even if we complete our year 2000 compliance plan
in a timely manner, that the systems, when actually implemented in full, will
work properly independently or in conjunction with the systems of any of our
suppliers, service providers, strategic partners or customers.
We will bear the risk of a material adverse affect if any of our suppliers,
service providers, strategic partners or customers do not appropriately address
their own year 2000 compliance issues. Accordingly, we have inquired our
suppliers, service providers, strategic partners and major customers about their
year 2000 compliance. We believe that our strategic partners and major customers
will be year 2000 compliant, and we are still in the process of reviewing the
compliance programs of our suppliers and service providers. We cannot assure
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 our financial condition or
results of operations. If our suppliers and service providers are not year 2000
compliant, we may have to arrange for alternative sources of supply for
inventory procurement and contract manufacturers in the fall of 1999 in
preparation for the year 2000. We do not have any other contingency plans with
respect to other problems that could arise in our business as a result of the
year 2000. Any of these could have a material adverse effect on our financial
condition or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our 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. We are affected by market risk exposure primarily through the
effect of changes in interest rates on amounts payable in cash by us under the
revolving credit facility, as well as the amount payable in stock by us under
convertible debt. A significant rise in interest rates could materially
adversely affect our financial condition and results of operations. At December
31, 1998, there were no outstanding borrowings under our credit facility, and
approximately $1.5 million of remaining unconverted debt (see Notes 9 and 12 to
the financial statements). We do not utilize derivative financial instruments to
hedge against changes in interest rates or for any other purpose. In addition,
substantially all transactions by us are denominated in U.S. dollars. As such,
we have shifted foreign currency exposure onto its foreign customers. As a
result, if exchange rates move against foreign customers, we could experience
difficulty collecting unsecured accounts receivable, the cancellation of
existing orders or the loss of future orders. The foregoing could materially
adversely affect our business, financial condition and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedule listed in Item 14(a)(1) and (2) are
included in this Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 as to directors and executive
officers is incorporated by reference to the information captioned "Election of
Directors" included in the Company's definitive proxy statement in connection
with the meeting of shareholders to be held on June 24, 1999. The information
regarding compliance with Section 16 of the Securities and Exchange Act of 1934
and the Rules promulgated thereunder is incorporated by reference therein to the
Company's definitive proxy statement in connection with the meeting of
shareholders to be held on June 24, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference to
the information captioned "Election of Directors - Executive Compensation"
included in the Company's definitive proxy statement in connection with the
meeting of shareholders to be held on June 24, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference to
the information captioned "Security Ownership" included in the Company's
definitive proxy statement in connection with the meeting of shareholders to be
held on June 24, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The information required by this Item 13 is incorporated by reference to
the information captioned "Certain Relationships and Related Party Transactions"
included in the Company's definitive proxy statement in connection with the
meeting of shareholders to be held on June 24, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The following financial statements of Andrea Electronics Corporation, the
notes thereto, the related reports thereon of independent public accountants,
and financial statement schedules are filed under Item 8 of this Report.
Page
----
Reports of Independent Public Accountants F-1
Consolidated Balance Sheets at December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Shareholders' Equity for the
three years ended December 31, 1998 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
(2) INDEX TO FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants on Schedule S-1
Schedule II - Valuation and Qualifying Accounts S-2
(3) EXHIBITS
See (c) below.
(b) REPORTS ON FORM 8-K
On November 30, 1998, the Registrant filed a Current Report on Form 8-K
relating to: the Registrant's press release, dated November 24, 1998, announcing
the appointment of Christopher P. Sauvigne to the office of President and Chief
Operating Officer of the Registrant; the results of the the annual meeting of
shareholders of the Registrant held on November 13, 1998; the conversion into
Common Stock of $9,253,000, together with related accrued interest, of the
$10,753,000 aggregate principal amount of 6% Convertible Notes ("Notes") due
June 10, 2000.
On November 23, 1998, the Registrant filed a Current Report on Form 8-K
relating to the Registrant's press release, dated November 23, 1998, stating
that the Registrant had received a complaint, involving two of Andrea's patents,
that had been filed against the Registrant by NCT Group, Inc. and NCT Hearing
Products, Inc., one of NCT's subsidiaries.
(c) EXHIBITS
INDEX TO EXHIBITS
Exhibit
Number Description
- - ------------------
3.1 Amended and Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 of the Registrant's Form 10-K
for the year ended December 31, 1992)
3.2 Certificate of Amendment of the Restated Certificate of Incorporation
of Registrant (incorporated by reference to Exhibit 3.2 of the
Registrant's Form 10-K for the year ended December 31, 1997)
3.3 Certificate of Amendment of the Restated Certificate of Incorporation
of Registrant (incorporated by reference to Exhibit 3.1 of the
Registrant's Current Report on Form 8-K filed November 30, 1998)
3.4 Amended By-Laws of Registrant (incorporated by reference to Exhibit 3.2
of the Registrant's Current Report on Form 8-K filed November 30, 1998)
4.1 Securities Purchase Agreement, dated as of December 22, 1995, relating
to the sale of the Registrant's 15% Convertible Subordinated Debentures
due 1997 (with form of Debenture attached thereto) (incorporated by
reference to Exhibit 4.1 of the Registrant's Form 10-K for the year
ended December 31, 1995)
4.2 Registration Rights Agreement, dated as of December 22, 1995, relating
to registration rights granted to the holders of the Registrant's 15%
Convertible Subordinated Debentures due 1997 (incorporated by reference
to Exhibit 4.2 of the Registrant's Form 10-K for the year ended
December 31, 1995)
4.3 Securities Purchase Agreement, dated as of April 16, 1996, relating to
the sale of the Registrant's 15% Convertible Subordinated Debentures
due October 16, 1997 (with forms of Debenture and Registration Rights
Agreement attached thereto) (incorporated by reference to Exhibit 4.1
of the Registrant's Form 10-Q for the Six Months ended June 30, 1996)
4.4 Securities Purchase Agreement, dated as of August 7, 1996, relating to
the sale of the Registrant's 10% Convertible Subordinated Debentures
due February 9, 1998 (with forms of Debenture and Registration Rights
Agreement attached thereto) (incorporated by reference to Exhibit 4.1
of the Registrant's Form 10-Q for the Nine Months ended September 30,
1996)
4.5 Securities Purchase Agreement, dated as of June 10, 1998, relating to
the sale of the Registrant's 6% Convertible Notes due June 10, 2000
(with forms of Note and Registration Rights Agreement attached thereto)
(incorporated by reference To Exhibit 4.1 of the Registrant's Form S-3,
File No. 333-61115)
10.1 1991 Performance Equity Plan, as amended (incorporated by
reference to Exhibit 4 of Registrant's Registration Statement
on Form S-8, No. 333-45421, filed February 2, 1998)
10.2 1998 Stock Plan
10.3* Procurement Agreement, dated June 16, 1995, by and between
International Business Machines Corporation and the Registrant
(incorporated by reference to Exhibit 10.1 of the Registrant's Form
10-Q for the Three Months ended June 30, 1995)
10.4* Memorandum of Agreement, dated as of September 14, 1993, by and between
Grumman Aerospace Corporation and the Registrant (incorporated by
reference to Exhibit 10.3 of the Registrant's Form 10-K for the year
ended December 31, 1995)
10.5* License and Technical Support Agreement, dated as of October 3, 1995,
by and between BellSouth Products, Inc. and the Registrant
(incorporated by reference to Exhibit 10.4 of the Registrant's Form
10-K for the year ended December 31, 1995)
10.6* Software License Bundling Agreement, dated as of March 29, 1996, by and
between Voxware, Inc., and the Registrant
(incorporated by reference to Exhibit 10.1 of the Registrant's
Form 10-Q for the Six Months ended June 30, 1996)
10.7 Employment Agreement, dated as of January 1, 1998, by and between John
N. Andrea and the Registrant (incorporated by reference to Exhibit 10.6
of the Registrant's Form 10-K for the year ended December 31, 1998)
10.8 Employment Agreement, dated as of January 1, 1998, by and between
Douglas J. Andrea and the Registrant (incorporated by reference to
Exhibit 10.7 of the Registrant's Form 10-K for the year ended December
31, 1998)
10.9 Employment Agreement, dated as of January 1, 1998, by and between
Patrick D. Pilch and the Registrant (incorporated by reference to
Exhibit 10.8 of the Registrant's Form 10-K for the year ended December
31, 1998)
10.10 Employment Agreement, dated as of November 20, 1998, by and between
Christopher P. Sauvigne and the Registrant (incorporated by reference
to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed
November 30, 1998)
10.11* Direct Sales and License Agreement, dated as of October 13, 1997, by
and between Lernout & Hauspie Speech Products and the Registrant
(incorporated by reference to Exhibit 10.8 of the Registrant's Form
10-K for the year ended December 31, 1998)
10.12* Production Procurement Agreement, dated as of June 11, 1997, by and
between International Business Machines Corporation and the Registrant
(incorporated by reference to Exhibit 10.9 of the Registrant's Form
10-K for the year ended December 31, 1998)
10.13 Revolving Loan and Security Agreement, dated as of September 23, 1997,
by and between IBM Credit Corporation and the Registrant
10.14 Stock Purchase Agreement, dated April 6, 1998, as amended by Amendment
No. 1 thereto dated May 5, 1998, relating to the purchase of the shares
of Lamar Signal Processing, Ltd. (including form of Registration Rights
Agreement)(incorporated by reference to Exhibits 2.1 and 2.2 of the
Registrant's Current Report on Form 8-K filed May 8, 1998)
10.15** Procurement Agreement, dated as of January 13, 1999, by and between the
Registrant and Microsoft Corporation
10.16** Purchase Agreement, dated as of February 25, 1999, by and between the
Company and Clarion Corporation of America
10.17** Source Code License Agreement, dated as of October 29, 1998, between
the Company and Intel Corporation
21 Subsidiaries of Registrant
22 Consent of Independent Public Accountants
27 Financial Data Schedule
- - ---------------
* Certain portions of this Agreement have been accorded
confidential treatment.
** Confidential treatment has been requested for certain portions
of this Agreement.
(d) Financial Statement Schedules
See Item 14(a)(2).
INDEX TO FINANCIAL STATEMENTS
Page
----
Reports of Independent Public Accountants F-1
Consolidated Balance Sheets at December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Shareholders' Equity for the
three years ended December 31, 1998 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To Andrea Electronics Corporation:
We have audited the accompanying consolidated balance sheets of Andrea
Electronics Corporation (a New York corporation) and subsidiaries as of December
31, 1998 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Andrea Electronics
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Melville, New York
January 26, 1999 (except with respect to the matter discussed in the last
paragraph of Note 12, as to which the date is March 29, 1999)
<PAGE>
<TABLE>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<CAPTION>
December 31,
-----------------------------------
ASSETS 1998 1997
------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,437,423 $ 2,059,338
Marketable securities - 102,717
Accounts receivable, net of allowance for doubtful accounts of $202,251
and $52,251, respectively 4,867,782 4,568,433
Inventories 8,014,323 5,766,927
Deferred income taxes - 909,569
Prepaid expenses and other current assets 498,662 1,023,661
---------------- ----------------
Total current assets 18,818,190 14,430,645
PROPERTY, PLANT AND EQUIPMENT, net 1,919,966 1,022,342
DEFERRED INCOME TAXES 1,806,615 897,046
OTHER ASSETS 1,751,501 1,439,151
GOODWILL 26,385,668 -
---------------- ----------------
Total assets $ 50,681,940 $ 17,789,184
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Trade accounts payable $ 2,221,912 $ 966,783
Current portion of long term debt (Note 8) 514,121 -
Convertible debentures, net (Note 9) - 1,193,472
Other current liabilities 1,745,041 483,731
---------------- ----------------
Total current liabilities 4,481,074 2,643,986
LONG TERM DEBT (Note 8) 1,126,390 -
CONVERTIBLE NOTES, net (Note 9) 1,455,231 -
OTHER LIABILITIES 40,345 38,500
---------------- ----------------
Total liabilities 7,103,040 2,682,486
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized: 5,000,000 shares; none
issued and outstanding - -
Common stock, $.50 par value; authorized: 25,000,000 shares; issued
and outstanding: 13,210,038 and 8,706,692 shares, respectively 6,605,019 4,353,346
Additional paid-in capital 42,548,399 9,881,915
Retained earnings (accumulated deficit) (5,574,518) 871,437
---------------- ----------------
Total shareholders' equity 43,578,900 15,106,698
---------------- ----------------
Total liabilities and shareholders' equity $ 50,681,940 $ 17,789,184
=============== ===============
The accompanying notes are an integral part of these
consolidated balance sheets.
</TABLE>
<PAGE>
<TABLE>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET SALES $ 21,304,570 $ 26,429,804 $ 9,244,109
COST OF SALES 14,178,871 16,077,801 5,913,091
------------- ------------- -------------
Gross profit 7,125,699 10,352,003 3,331,018
RESEARCH AND DEVELOPMENT EXPENSES 2,016,684 1,106,880 988,483
GENERAL, ADMINISTRATIVE AND SELLING EXPENSES
13,002,959 5,753,130 3,872,919
------------- ------------- -------------
Income (loss) from operations (7,893,944) 3,491,993 (1,530,384)
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 233,346 64,873 57,599
Interest expense (710,324) (228,029) (293,290)
Rent and miscellaneous income 1,924,967 240,020 221,858
------------- ------------- -------------
1,447,989 76,864 (13,833)
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT)
(6,445,955) 3,568,857 (1,544,217)
INCOME TAX PROVISION (BENEFIT) (Note 11) - 154,461 (1,222,000)
------------- ------------- -------------
NET INCOME (LOSS) $ (6,445,955) $ 3,414,396 $ (322,217)
============= ============= =============
PER SHARE INFORMATION (Note 4):
Net Income (Loss) Per Share :
Basic $ (.61) $ .42 $ (.05)
============ ============ ============
Diluted $ (.61) $ .39 $ (.05)
============ ============ ============
Shares used in computing net income (loss) per share:
Basic 10,614,237 8,148,153 7,129,534
============= ============= =============
Diluted 10,614,237 8,862,263 7,129,534
============= ============= =============
The accompanying notes are an integral
part of these consolidated statements.
</TABLE>
<PAGE>
<TABLE>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
-------------------------------------------
<CAPTION>
Retained
Additional Earnings Total
Shares Common Paid-In (Accumulated Shareholders'
Outstanding Stock Capital Deficit) Equity
----------- ----- ------- -------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 6,573,720 $ 3,286,860 $ 2,899,162 $ (2,220,742) $ 3,965,280
Conversion of convertible debt 635,674 317,837 3,267,905 - 3,585,742
Exercise of stock options, net of related
costs 375,000 187,500 91,656 - 279,156
Net loss - - - (322,217) (322,217)
------------ ------------- ------------- ------------- --------------
BALANCE, December 31, 1996 7,584,394 3,792,197 6,258,723 (2,542,959) 7,507,961
Conversion of convertible debt 189,548 94,774 1,108,521 - 1,203,295
Exercise of stock options, net of related
costs 932,750 466,375 2,514,671 - 2,981,046
Net income - - - 3,414,396 3,414,396
------------ ------------- ------------- ------------- --------------
BALANCE, December 31, 1997 8,706,692 4,353,346 9,881,915 871,437 15,106,698
Conversion of convertible debt 2,334,846 1,167,423 9,211,993 - 10,379,416
Exercise of stock options, net of related
costs 350,500 175,250 934,710 - 1,109,960
Issuance of common stock for acquisition
of subsidiary (Note 3) 1,818,000 909,000 22,519,781 - 23,428,781
Net loss - - - (6,445,955) (6,445,955)
------------ ------------- ------------- ------------- -------------
BALANCE, December 31, 1998 13,210,038 $ 6,605,019 $ 42,548,399 $ (5,574,518) $ 43,578,900
============ ============= ============= ============= =============
The accompanying notes are an integral part of these consolidated
statements.
</TABLE>
<PAGE>
<TABLE>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (6,445,955) $ 3,414,396 $ (322,217)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Non-cash interest expense 646,650 203,204 162,543
Depreciation and amortization 2,594,519 322,499 353,308
Gain on sale of building (1,864,767) - -
Barter transaction - (750,000) -
Deferred income taxes - 154,461 (1,222,000)
(Increase) decrease in:
Accounts receivable, net (278,132) (1,889,984) (1,632,527)
Inventories (2,218,773) (1,492,752) (3,651,182)
Prepaid expenses and other current assets (128,400) (714,399) 57,954
Other assets (312,350) (439,151) -
Increase (decrease) in:
Trade accounts payable 1,154,192 144,383 567,757
Other current liabilities (106,474) 247,514 14,862
-------------- -------------- --------------
Net cash used in operating activities (6,959,490) (799,829) (5,671,502)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities - - (98,474)
Proceeds from sale of marketable securities 102,717 100,000 -
Acquisition of business, net of cash acquired (947,276) - -
Proceeds from sale of building 2,282,563 - -
Purchases of property, plant and equipment (1,710,389) (408,259) (393,998)
-------------- -------------- --------------
Net cash used in investing activities (272,385) (308,259) (492,472)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligations - (4,685) (39,946)
Payment of acquisition installment notes (Note 3 and 8) (500,000) - -
Net proceeds from convertible debentures (Note 9) - - 3,445,000
Net proceeds from convertible notes (Note 9) 10,000,000 - -
Issuance of common stock upon exercise of stock options, net of related
costs 1,109,960 2,251,046 279,156
-------------- -------------- --------------
Net cash provided by financing activities 10,609,960 2,246,361 3,684,210
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
3,378,085 1,138,273 (2,479,764)
CASH AND CASH EQUIVALENTS, beginning of year 2,059,338 921,065 3,400,829
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, end of year $ 5,437,423 $ 2,059,338 $ 921,065
============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Non-cash investing and
financing activities:
Conversion of convertible debentures and related accrued interest into
common stock (Note 9) $ 10,379,416 $ 1,203,295 $ 3,585,742
============== ============== ==============
Issuance of common stock for acquisition (Note 3) $ 23,428,781 $ - $ -
============== ============== ==============
Issuance of notes payable for acquisition (Note 3 and 8) $ 1,672,212 $ - $ -
============== ============== ==============
Cash paid for:
Interest $ 3,261 $ - $ -
============== ============== ==============
Income taxes $ 32,503 $ 5,200 $ 3,145
============== ============== ==============
The accompanying notes are an integral part of these
consolidated statements.
</TABLE>
<PAGE>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1998
-----------------
1. ORGANIZATION AND BUSINESS:
-------------------------
Andrea Electronics Corporation (together with its subsidiaries, the
"Company") has been engaged in the electronic communications industry since
1934. The Company is presently focused on the development, manufacture and
marketing of its Andrea Anti-Noise family of electronic headsets and handsets
with noise canceling and noise reducing properties. Noise cancellation enhances
voice-activated computing, computerized speech recognition, and computer and
Internet telephony. In addition, the Company is currently developing and
marketing a new line of digital signal processing products to further its role
in technology enhanced communications, and in May 1998, acquired Lamar Signal
Processing, Ltd. ("Lamar"), an Israeli corporation engaged in the development of
digital signal processing (DSP), noise cancellation microphone solutions (Note
3). Prior to the Company's entry into the voice-activated computing market in
the 1990s, its primary business was selling intercom systems for military and
industrial use. The Company continues to manufacture for these systems and is
seeking to apply its knowledge of the military and industrial markets to develop
applications of its Andrea Anti-Noise technologies for these markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Principles of Consolidation
- - ---------------------------
The financial statements include the accounts of the Company and its
subsidiaries. All intercompany balances and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
- - -------------------------
Cash and cash equivalents include cash and highly liquid investments with
original maturities of three months or less.
Marketable Securities
- - ---------------------
The Company accounts for investments according to the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". Accordingly, marketable
securities used as part of the Company's asset management that may be sold in
response to changes in interest rates, prepayments, and other factors have been
classified as available-for-sale. Such securities are reported at fair value,
with unrealized gains and losses excluded from earnings and reported in a
separate component of stockholders' equity (on an after-tax basis). Gains and
losses on the disposition of securities are recognized on the specific
identification method in the period in which they occur. During 1998,
approximately $102,000 of the Company's marketable securities matured. Sales of
securities were $100,000 in 1997. There were no sales of securities in 1998 or
1996. At December 31, 1998 and 1997, the carrying values of the Company's
marketable securities approximate fair value.
<PAGE>
Concentration of Credit Risk
- - ----------------------------
The Company is a manufacturer of audio communications equipment for several
industries. During 1998, the Company primarily generated sales from its noise
canceling and active noise canceling products as well as through sales to the
federal government. Sales of noise canceling and active noise canceling products
were significant to one customer and its affiliates, accounting for
approximately 60% and 52% of total accounts receivable at December 31, 1998 and
1997, respectively, and approximately 61%, 56% and 46% of the total sales for
1998, 1997 and 1996, respectively. Sales to federal governments and related
subcontractors aggregated approximately 9% and 10% of total accounts receivable
at December 31, 1998 and 1997, respectively, and approximately 19%, 15% and 47%
of the total sales for 1998, 1997 and 1996, respectively.
Inventories
- - -----------
Inventories are stated at the lower of cost (on a first-in, first-out) or
market basis.
Property, Plant and Equipment
- - -----------------------------
Property, plant and equipment is stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are provided using
the straight-line method over the estimated useful-lives of the assets which are
as follows:
Building 25 years
Building improvements 10 - 32 years
Machinery and equipment 3 - 7 years
Expenditures for maintenance and repairs which do not materially prolong
the normal useful life of an asset are charged to operations as incurred.
Improvements which substantially extend the useful lives of the assets are
capitalized. Upon sale or other disposition of assets, the cost and related
accumulated depreciation and amortization are removed from the accounts and the
resulting gain or loss, if any, is reflected in the statement of operations.
Intangible Assets
- - -----------------
Patents and trademarks associated with the Company's proprietary technology
are carried at cost less accumulated amortization which is calculated on a
straight-line basis over the estimated useful lives of the assets, not to exceed
17 years. The recoverability of carrying values of intangible assets is
evaluated on a recurring basis. Patents and trademarks approximated $778,000 and
$415,000 at December 31, 1998 and 1997, respectively, and are included in other
assets on the accompanying consolidated balance sheets. Goodwill associated with
the Company's acquisition (Note 3) is carried at cost less accumulated
amortization which is calculated on a straight-line basis over 15 years.
Long-Lived Assets
- - -----------------
The Company accounts for long-lived assets according to the provisions of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". In accordance with SFAS No. 121, the
Company periodically reviews long-lived assets, including identifiable
intangibles (patents) and goodwill, whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable.
Management believes there is no impairment to goodwill and certain identifiable
intangibles as of December 31, 1998.
<PAGE>
Revenue Recognition
- - -------------------
Revenue is recognized upon shipment and acceptance of goods. The Company
reports its sales levels on a net sales basis, with net sales being computed by
deducting from gross sales the amount of actual sales returns and the amount of
reserves established for anticipated sales returns.
Barter Transaction
- - ------------------
The Company records barter transactions at the estimated fair market value
of the services received. Revenue from a barter transaction approximated
$1,250,000 during 1997. The value received in this transaction was recorded as a
deferred charge and, at December 31, 1998, $770,000 is included in other assets.
The remaining balance will be amortized over the lesser of the period of benefit
or the program period, not to exceed five years. The Company did not engage in
any barter transactions during 1998 or 1996.
Income Taxes
- - ------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". This pronouncement established financial
accounting and reporting standards for the effects of income taxes that result
from the Company's activities during the current and preceding years. It
requires an asset and liability approach for financial accounting and reporting
for income taxes.
The provision for income taxes is based upon income after adjustment for
those permanent items that are not considered in the determination of taxable
income. Deferred taxes result when the Company recognizes revenue or expenses
for income tax purposes in a different year than for financial reporting
purposes.
Stock-Based Compensation
- - ------------------------
The Company complies with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), by continuing to apply the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," while providing the required pro forma
disclosures as if the fair value method had been applied (Note 13).
Research and Development
- - ------------------------
The Company expenses all research and development costs as incurred.
Advertising Expenses
- - --------------------
The Company charges all media costs of newspaper and magazine
advertisements to the consolidated statements of operations when advertisements
are run. Prepaid advertising at December 31, 1998 and 1997, which represents
costs for media services purchased but not yet run, is included in prepaid
expenses and other current assets in the accompanying consolidated balance
sheets.
<PAGE>
Fair Value of Financial Instruments
- - -----------------------------------
The Company calculates the fair value of financial instruments and includes
this additional information in the notes to financial statements when the fair
value is different than the book value of those financial instruments. When the
fair value approximates book value, no additional disclosure is made. The
Company uses quoted market prices whenever available to calculate these fair
values. When quoted market prices are not available, the Company uses standard
pricing models for various types of financial instruments which take into
account the present value of estimated future cash flows. At December 31, 1998
and 1997, the carrying value of all financial instruments approximated fair
value.
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.
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
non owner 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. The Company's operations did not give rise to items
includible in comprehensive income which were not already included in net income
(loss). Accordingly, the Company's comprehensive income (loss) is the same as
its net income (loss) for all periods presented.
Recently Issued Accounting Standard
- - -----------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This 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,
accordingly, this new pronouncement is not applicable.
<PAGE>
Reclassifications
- - -----------------
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Use of Estimates
- - ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
Actual results could differ from those estimates.
3. ACQUISTION OF BUSINESS:
----------------------
On May 5, 1998, the Company acquired all of the outstanding shares of
capital stock of Lamar (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 becomes freely transferable on the first
anniversary of the closing, an additional one-third on the second anniversary
and the last one-third on the third anniversary. Of the aggregate cash
consideration to be paid by the Company, $1,000,000 was paid on May 5, 1998,
$500,000 was paid on November 5, 1998, and the remainder is payable in the form
of promissory notes in three equal installments on each of the twelve,
twenty-four and thirty-six month anniversaries of the closing (Note 8). The
Acquisition was accounted for under the purchase method of accounting and,
accordingly, the operating results of Lamar have been included in the
consolidating operating results since the date of acquisition. The Acquisition
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 will be amortized over fifteen years. Goodwill at December 31,
1998 is approximately $26.4 million, which is net of approximately $1.2 million
in amortization expense. The Company made no acquisitions in 1997 or 1996.
The pro forma results listed below, for the years ended December 31, 1998
and 1997, reflect pro forma adjustments, consisting primarily of amortization of
goodwill and interest expense on the discounted value of the $2 million in
promissory notes, assuming the acquisition occurred at the beginning of each
period presented. Pro forma sales amounts would not be materially different from
the historical results reported for 1998 and 1997.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1998 1997
---- -----
<S> <C> <C>
Net income (loss) $ (7,143,660) $ 1,166,506
Net income (loss) per share:
Basic $ (.64) $ .12
Diluted $ (.64) $ .11
Shares used in computing net income (loss) per share:
Basic 11,236,840 9,966,153
Diluted 11,236,840 10,680,263
</TABLE>
<PAGE>
4. NET INCOME (LOSS) PER SHARE:
---------------------------
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings
Per Share". Basic net income (loss) per common share ("Basic EPS") is computed
by dividing net income (loss) by the weighted average number of common shares
outstanding. Diluted net income (loss) per common share ("Diluted EPS") is
computed by dividing net income (loss) by the weighted average number of common
shares and dilutive common share equivalents and convertible securities then
outstanding. The impact of the adoption of this statement was not material to
all previously reported EPS amounts.
The following chart provides a reconciliation of information used in
calculating the per share amounts for the twelve months ended December 31, 1997.
No additional information is presented for 1998 or 1996 as diluted EPS is the
same as Basic EPS for those years, and the inclusion of the impact of stock
options, warrants and convertible securities then outstanding would be
anti-dilutive:
<TABLE>
<CAPTION>
Net Income
Net Income Shares Per Share
---------- ------ ---------
<S> <C> <C> <C>
Basic EPS
---------
Net income $ 3,414,396 8,148,153 $.42
Effect of dilutive employee stock options - 714,110 (.03)
-------------- -------------- -----
Diluted EPS
-----------
Net income $ 3,414,396 8,862,263 $.39
============== ============== ====
5. INVENTORIES, NET:
----------------
Inventories, net, consists of the following:
December 31,
---------------------------------
1998 1997
---- ----
Raw materials $ 2,795,893 $ 2,438,290
Work-in-process 194,289 276,745
Finished goods 5,454,651 3,332,403
------------ --------------
8,444,833 6,047,438
Less: reserve for obsolescence 430,510 280,511
------------ --------------
$ 8,014,323 $ 5,766,927
============ ==============
6. PROPERTY, PLANT AND EQUIPMENT, NET:
----------------------------------
Property, plant and equipment, net, consists of the following:
December 31,
-----------------------------------
1998 1997
---- ----
Land $ - $ 109,000
Building - 453,000
Building improvements 23,672 372,928
Machinery and equipment 3,283,572 1,406,389
------------ ----------------
3,307,244 2,341,317
Less: accumulated depreciation 1,387,278 1,318,975
------------ ----------------
$ 1,919,966 $ 1,022,342
============ ================
</TABLE>
During the first quarter of 1998, the Company sold its primary operating
facility in Long Island City, New York. The Company received approximately $2.2
million in cash paid at the closing and $200,000 in cash in an escrow account
(the "Escrow Funds"). The gain on the sale of the building was $1,864,767, which
is included in rent and miscellaneous income in the accompanying consolidated
statement of operations for 1998. The Escrow Funds are governed by an escrow
agreement whereby the buyer could claim certain expenses, as defined. The Escrow
Funds, which are included in other assets at December 31, 1998, will remain with
the escrow agent until such time as those conditions are met (Note 12).
7. OTHER CURRENT LIABILITIES:
-------------------------
Other current liabilities consists of the following: December 31,
------------------------------------
1998 1997
---- ----
Accrued professional fees $ 831,545 $ 266,999
Accrued interest expense 62,097 132,739
Accrued other 851,399 83,993
---------------- ----------------
$ 1,745,041 $ 483,731
================ ================
8. LONG TERM DEBT:
--------------
Long term debt consists of the following:
December 31,
------------------------------
1998 1997
---- ----
Notes payable to sellers, net (a) $ 1,167,111 $ -
Bank note (b) 473,400 -
---------------- ---------
1,640,511 -
Less: current portion 514,121 -
---------------- ----------
$ 1,126,390 $ -
================ ========
(a) As part of the aggregate purchase price of the Acquisition (Note 3), the
Company issued $2 million in non-interest bearing promissory notes (the
"Promissory Notes") to the former shareholders of Lamar, of which
$500,000 has been paid as of December 31, 1998. The Promissory Notes are
recorded net of an unaccreted discount of $332,889, which discount
reflects a 10.5% effective interest rate. In accordance with the terms of
the Acquisition, the remaining obligation is payable on each of the
twelve, twenty-four and thirty six month anniversaries of the closing
date.
(b) In connection with the Acquisition (Note 3), the Company assumed the
outstanding obligations of Lamar which, at December 31, 1998, includes
Israeli government-guaranteed loans in the amount of $473,400, bearing
interest at 8.7% per annum. These loans are part of a $1 million
government-guaranteed credit facility approved for Lamar, which is
subject to the implementation of an investment program in accordance with
Israeli law. The approval associated with the investment program requires
certain conditions to be met, as defined. In the event Lamar fails to
meet the conditions, immediate repayment may be required. At December 31,
1998, management believes that Lamar was in compliance with those
conditions.
<PAGE>
Scheduled maturities of long term debt are as follows:
1999 $ 514,121
2000 587,247
2001 683,064
2002 151,953
2003 20,488
Thereafter 16,527
----------------
1,973,400
Less: imputed interest on notes 332,889
current portion 514,121
----------------
Total $ 1,126,390
================
9. CONVERTIBLE DEBT:
-----------------
Convertible Notes, net
- - ----------------------
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, were converted into 2,097,000 shares of
the Company's common stock. At December 31, 1998, the remaining obligation from
the Notes is recorded net of an unaccreted discount of $44,769.
Convertible Debentures, net
- - ---------------------------
On August 7, 1996, the Company issued $1,687,500 of 10% Convertible
Subordinated Debentures (the "Series C Debentures") due on February 9, 1998. The
bonds and the related accrued interest were convertible into shares of the
Company's common stock at a price of the lesser of (i) $12.075 per share (the
maximum conversion price) and (ii) the closing price, which is defined as the
last reported bid price for a given day on the exchange the Company's common
stock is listed. In no event was the conversion price to be less than $5.75 per
share (the minimum conversion price). Conversion of these Series C Debentures
into the Company's common stock could, at the holder's option, have been
effected in an amount of up to $843,750 beginning 135 days following the date of
original issuance and up to the entire original principal amount beginning 180
days following the date of original issuance through maturity. These Series C
Debentures were subordinated in right of payment to all future senior
indebtedness, as incurred by the Company. During 1997, $437,500 of the Series C
Debentures, together with the related accrued interest, were converted into the
Company's common stock. At December 31, 1997, the remaining obligation from
converted debentures is recorded net of an unaccreted discount of $56,528.
During 1998, the remainder of the debentures, together with the related accrued
interest, were converted into 238,038 shares of the Company's common stock.
<PAGE>
10. RETIREMENT PLAN:
---------------
The Company has a defined contribution profit sharing plan that is
qualified under Section 401(k) of the Internal Revenue Code and is available to
substantially all of its employees. The Company's contributions, which serve to
match a portion of participant contributions, were $152,487, $161,203 and
$110,831 for 1998, 1997and 1996, respectively.
11. INCOME TAXES:
------------
Income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal:
Current $ - $ - $ -
Deferred (1,733,867) 1,213,411 (525,000)
State and Local:
Current - - -
Deferred (254,980) 285,509 (144,000)
Adjustment to valuation allowance related to net
deferred tax assets 1,988,847 (1,344,459) (553,000)
-------------- -------------- --------------
$ - $ 154,461 $ (1,222,000)
============== ============== ==============
</TABLE>
A reconciliation between the effective rate for income taxes and the amount
computed by applying the statutory Federal income tax rate to income (loss)
before income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Tax provision (benefit) at statutory rate 34% 34% 34%
State and local taxes 5% 8% 9%
Change in valuation allowance for net deferred tax assets
(39%) (38%) 36%
----------- ----------- ---------
- 4% 79%
=========== =========== =========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset, net, at December 31, 1998 and 1997, are as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Allowance for doubtful accounts $ 79,000 $ 22,000
Depreciation 87,000 -
Reserve for obsolescence 168,000 118,000
NOL carryforward 7,407,000 2,147,000
--------------- ---------------
7,741,000 2,287,000
Less: valuation allowance (5,934,385) (480,385)
--------------- ---------------
Deferred tax asset, net $ 1,806,615 $ 1,806,615
=============== ===============
</TABLE>
<PAGE>
At December 31, 1998, the Company had net operating loss and credit
carryforwards of approximately $19.0 million expiring in varying amounts
beginning in 2006 through 2011. In 1997 and 1996, management of the Company
determined that, more likely than not, a portion of its previously reserved
deferred tax assets would be realized and, accordingly, reduced the valuation
allowance. The reduction in the valuation allowance is included in the income
tax provision (benefit) in the accompanying consolidated statement of operations
for 1997 and 1996, as well as in additional paid-in capital at December 31,
1997, for the portion of those deferred tax assets ($730,000) which are related
to tax benefits associated with the exercise of stock options. The determination
that the net deferred tax asset of $1,806,615 at December 31, 1998 and 1997 is
realizable is based on the Company's expectations of future earnings. Of the
remaining fully reserved deferred tax assets of approximately $5.9 million,
approximately $4.5 million relate to tax benefits associated with the exercise
of stock options, which will not result in a tax benefit in the consolidated
statement of operations in future periods but, rather, will result in further
increases to additional paid in capital, if and when realized.
12. COMMITMENTS AND CONTINGENCIES:
-----------------------------
Letters of Credit
- - -----------------
Letters of credit are issued by the Company during the ordinary course of
business through a major domestic bank as required by certain vendor contracts.
At December 31, 1998, the Company had outstanding letters of credit of
approximately $650,000, which are fully collateralized by cash held with the
same bank.
Line of Credit
- - --------------
On September 30, 1997, the Company entered into an $8,000,000 credit
facility (the "Agreement") with a financial institution consisting of a
revolving loan based on eligible accounts receivable and inventory, as defined,
with an interest rate of the prime rate plus .75% on any amounts outstanding.
The Agreement matures on September 23, 1999 and renews on an annual basis unless
terminated by either party, as provided in the Agreement. The facility is
subject to normal banking terms and conditions, including financial covenant
compliance. At December 31, 1998, there were no outstanding borrowings under the
Agreement.
Leases
- - ------
During the first quarter of 1998, the Company sold its primary operating
facility in Long Island City, New York. The Company, as lessor for the rental of
approximately one-third of its building, realized rental income of $240,000 in
1997 and 1996. The Company's new corporate headquarters is located in Melville,
New York, leasing space for manufacturing, research and development, sales and
executive offices from an unrelated party. The current lease is for
approximately 40,000 square feet and expires in June, 2008. Rent expense under
this operating lease was approximately $145,000 in 1998. At December 31, 1998,
the minimum future lease commitments, under this lease and all other
noncancellable operating leases, are as follows:
1999 $ 532,000
2000 553,000
2001 575,000
2002 598,000
2003 622,000
Thereafter 2,660,000
<PAGE>
Legal Proceedings
- - -----------------
On November 17, 1998, a complaint was filed against the Company in the U.S.
District Court for the Eastern District of New York by NCT Group, Inc. ("NCT";
formerly Noise Cancellation Technologies, Inc.) and NCT Hearing Products, Inc.,
one of NCT's subsidiaries. The complaint involves two of the Company's patents
relating to certain active noise reduction technology. The Company does not
currently derive significant sales or licensing revenue from this technology.
The complaint requests a declaration that the two patents are invalid and
unenforceable and that NCT's products do not infringe the patents. The complaint
alleges that the Company has engaged in unfair competition by misrepresenting
the scope of the two patents, tortuously interfering with prospective
contractual rights between NCT and its existing and potential customers, making
false and disparaging statements about NCT and its products, and falsely
advertising certain of the Company's technology. The complaint seeks to enjoin
the Company from engaging in these alleged activities and seeks compensatory
damages of not less than $5 million, punitive damages of not less than $50
million and plaintiffs' costs and attorneys' fees.
On December 30, 1998, the Company filed and served an answer to the NCT
complaint, denying the allegations and asserting affirmative defenses and
counterclaims. The affirmative defenses include that NCT failed to allege fraud
or inequitable conduct or misrepresentation with the particularity required by
Rule 9(b) of the Federal Rules of Civil Procedure, that NCT failed to state
claims upon which relief can be granted and that the statements made by the
Company were true. The counterclaims allege that NCT has infringed the two
patents, and that NCT has engaged in trademark infringement, false designation
of origin, and unfair competition with respect the Company's mark ANR READY. The
counterclaims also allege that NCT's patent infringement has been and is
willful. The counterclaims seek injunctive relief with respect to the
allegations of patent infringement, trademark infringement, false designation of
origin and unfair competition. The Company also seeks exemplary and punitive
damages, prejudgment interest on all damages, costs, reasonable attorneys' fees
and expenses.
While it is not feasible to predict or determine the final outcome of the
claims against the Company, management does not believe that they should result
in a materially adverse effect on the Company's financial position, results of
operations or liquidity.
In addition to the litigation noted above, the Company is from time to time
subject to routine litigation incidental to its business. These lawsuits
primarily involve claims for damages arising out of the use of the Company's
products and/or technologies, some of which include claims for punitive as well
as compensatory damages. The Company believes that the results of the above
noted litigation and other pending legal proceedings will not have a material
adverse effect on the Company's financial condition.
Claim Subsequent to Yearend
- - ---------------------------
In March 1999, 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. 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.
<PAGE>
13. STOCK PLANS:
-----------
On December 31, 1991, the Board of Directors of the Company (the "Board")
adopted the 1991 Performance Equity Plan ("1991 Plan"), which was approved by
the shareholders. The 1991 Plan authorizes the granting of awards, the exercise
of which would allow up to an aggregate of 1,000,000 shares of the Company's
common stock to be acquired by the holders of those awards. The awards can take
the form of stock options, stock appreciation rights, restricted stock, deferred
stock, stock reload options or other stock-based awards. Awards may be granted
to key employees, officers, directors and consultants. On September 12, 1994,
the Board approved an increase in the number of shares available for grant under
the 1991 Plan to 1,500,000 shares, which subsequently was approved by the
shareholders of the Company. In addition, on April 1, 1997, the Board approved
another increase in the number of shares available for grant under the 1991 Plan
to 2,000,000 shares, which was subsequently approved by the shareholders of the
Company. Stock options granted to employees and directors under the 1991 Plan
were granted for terms of up to 10 years at an exercise price equal to the
market value at the date of grant and are exercisable in whole or in part at
stated times from the date of grant up to four years from the date of grant.
On May 5, 1998, the Board adopted the 1998 Stock Option Plan ("1998 Plan"),
which was subsequently approved by the shareholders. The 1998 Plan authorizes
the granting of awards, the exercise of which would allow up to an aggregate of
2,000,000 shares of the Company's common stock to be acquired by the holders of
those awards. Similar to the 1991 Plan, the awards can take the form of stock
options, stock appreciation rights, restricted stock, deferred stock, stock
reload options or other stock-based awards. Awards may be granted to key
employees, officers, directors and consultants.
The Company accounts for equity-based awards granted to employees and
directors under APB Opinion No. 25, under which no compensation cost has been
recognized for stock options granted at market value (Note 2). Had compensation
cost for these stock options been determined consistent with SFAS No. 123, the
Company's net income (loss) and net income (loss) per share would have been
reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
<S> <C> <C> <C> <C>
1998 1997 1996
---- ---- ----
Net income (loss): As Reported $ (6,445,955) $ 3,414,396 $ (322,217)
Pro Forma (11,378,844) 1,526,874 (1,093,868)
Basic net income (loss) per share: As Reported (.61) $.42 $(.05)
Pro Forma (1.07) .19 (.16)
Diluted net income (loss) per share: As Reported (.61) $.39 $(.05)
Pro Forma (1.07) .17 (.16)
</TABLE>
<PAGE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. Option activity during 1998, 1997 and 1996 is
summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period 1,824,750 5.57 2,200,250 3.41 2,130,000 4.12
Granted 1,637,000 11.73 720,000 6.97 445,250 5.51
Exercised (351,000) 3.49 (932,750) 3.21 (375,000) .75
Canceled (28,250) 5.44 (162,750) .68 - -
-------- ---------- ----------
Outstanding at end of period
3,082,500 9.06 1,824,750 5.57 2,200,250 3.41
========= ========= =========
Exercisable at end of year 753,500 5.45 625,500 4.68 1,442,000 1.83
========= ========== =========
Weighted average fair value of
options granted $9.55 $5.38 $4.07
===== ===== =====
</TABLE>
The fair value of the stock options granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Expected life (years) 6.5 7.5
Risk-free interest rates 5.32% 6.87%
Volatility 96% 74%
Dividend yield 0% 0%
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- -------------------------------
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
at December Remaining Exercise at December Exercise
Range of Exercise Prices 31, 1998 Contractual Life Price 31, 1998 Price
------------------------ -------- ---------------- ----- -------- -----
<S> <C> <C> <C> <C> <C>
$ 0.68 to $ 1.02 173,500 3.49 $0.68 173,500 0.68
1.03 to 3.51 - - - - -
3.52 to 5.29 41,500 7.58 5.00 17,000 5.00
5.30 to 7.94 1,009,000 7.46 5.59 416,500 5.78
7.95 to 11.93 893,500 9.42 8.87 121,500 8.85
11.94 to 17.91 965,000 9.29 14.54 25,000 16.75
----------- ----------- -------- ---------- ---------
.68 to 17.91 3,082,500 8.38 9.06 753,500 5.45
=========== =========== ========= =========== =========
</TABLE>
<PAGE>
Warrants
- - --------
In connection with an overseas equity offering in 1994, the Company issued
5 year warrants to purchase 47,500 shares of common stock at prices of $4.92 to
$5.49 per share. During 1997, 5,000 of these warrants were exercised into an
equivalent number of common shares. During 1996, 50% of the original number of
warrants were converted into an equal number of options at an equivalent value.
As of December 31, 1998, all of these 23,750 options are exercisable, and will
expire on July 30, 2006. As of December 31, 1998, all of the remaining 18,750
warrants are exercisable and will expire on June 15, 1999.
14. 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 Products and (ii) military intercom products (Traditional Military
Products). The following represents selected consolidated financial information
for the Company's segments for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Traditional
Andrea Anti- Military
Segment Data Noise Products Products Total 1998
------------ -------------- -------- ----------
<S> <C> <C> <C>
Net Sales $ 17,266,874 $ 4,037,696 $ 21,304,570
Income (loss) from operations (8,418,844) 524,900 (7,893,944)
Depreciation 1,096,229 93,683 1,189,912
Traditional
Andrea Anti- Military
Noise Products Products Total 1997
Net Sales $ 22,404,069 $ 4,025,735 $ 26,429,804
Income from operations 2,968,647 523,346 3,491,993
Depreciation 257,727 64,772 322,499
Traditional
Andrea Anti- Military
Noise Products Products Total 1996
Net Sales $ 5,403,299 $ 3,840,810 $ 9,244,109
Income (loss) from operations (2,029,689) 499,305 (1,530,384)
Depreciation 251,189 102,119 353,308
</TABLE>
<PAGE>
Management of the Company assesses assets on a consolidated basis only, and
the Company has not restated any other prior period information, as it would be
impracticable. For the years ended December 31, 1998, 1997 and 1996, and as of
each respective yearend, sales and accounts receivable by geographic area are as
follows:
<TABLE>
<CAPTION>
Geographic Data 1998 1997 1996
--------------- ---- ---- ----
<S> <C> <C> <C>
Sales:
United States $ 14,720,470 $ 14,949,334 $ 7,109,180
Europe 3,723,609 8,129,621 1,653,612
Other foreign 2,860,491 3,350,849 481,317
---------------- ---------------- ----------------
$ 21,304,570 $ 26,429,804 $ 9,244,109
=============== =============== ===============
Accounts receivable:
United States $ 3,264,958 $ 2,749,591 $ 1,877,170
Europe 898,428 1,400,144 535,139
Other foreign 704,396 418,698 266,140
---------------- ---------------- ----------------
$ 4,867,782 $ 4,568,433 $ 2,678,449
=============== =============== ===============
</TABLE>
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULE
Report of Independent Public Accountants on Schedule S - 1
Schedule II - Valuation and Qualifying Accounts S - 2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
----------------------------------------------------
To Andrea Electronics Corporation:
We have audited, in accordance with generally accepted auditing standards,
the financial statements of Andrea Electronics Corporation included in this
filing and have issued our report thereon dated January 26, 1999 (except with
respect to the matter discussed in the last paragraph of Note 12, as to which
the date is March 29, 1999). Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule of
valuation and qualifying accounts is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Melville, New York
January 26, 1999
<PAGE>
<TABLE>
ANDREA ELECTRONICS CORPORATION
------------------------------
SCHEDULE II
-----------
VALUATION AND QUALIFYING ACCOUNTS
---------------------------------
Charged to Charged to
Balance at Costs and Other Balance at
1998 January 1 Expenses Accounts Deductions December 31
---- --------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts $ 52,521 $ 150,000 $ - $ - $ 202,521
========== ========== ========= ======== ============
1997
Allowance for doubtful
accounts $ 52,521 $ - $ - $ - $ 52,521
========= ========== ========= ======== ==========
1996
Allowance for doubtful
Accounts $ 32,183 $ 51,483 $ - $ 31,145 $ 52,521
========= ========== ========= ======== ============
</TABLE>
<PAGE>
SIGNATURES
In accordance with the requirements of the Section 13 and 15(d) of the
Exchange Act, the Registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ANDREA ELECTRONICS CORPORATION
By: /s/ John N. Andrea
------------------------------------
Date: March 31, 1999 John N. Andrea
Co-Chairman of the Board
and Co-Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capabilities and on
the dates indicated.
/s/ Frank A.D. Andrea, Jr. Chairman Emeritus March 31, 1999
- - --------------------------- and Director
Frank A.D. Andrea, Jr.
/s/ John N. Andrea Co-Chairman, March 31, 1999
- - --------------------------- Co-Chief Executive Officer
John N. Andrea and Director
/s/ Douglas J. Andrea Co-Chairman, March 31, 1999
- - --------------------------- Co-Chief Executive Officer
Douglas J. Andrea and Director
/s/ Christopher P. Sauvigne President and March 31, 1999
- - --------------------------- Chief Operating Officer
Christopher P. Sauvigne
/s/ Patrick D. Pilch Executive Vice President, March 31, 1999
- - --------------------------- Chief Financial Officer
Patrick D. Pilch and Director
/s/ Richard A. Maue Vice President, Controller, March 31, 1999
- - --------------------------- Treasurer and Corporate
Richard A. Maue Secretary
/s/ Frank A.D. Andrea, Jr. Director March 31, 1999
- - ---------------------------
Frank A.D. Andrea, Jr.
/s/ Christopher Dorney Director March 31, 1999
- - ---------------------------
Christopher Dorney
/s/ Gary A. Jones Director March 31, 1999
- - ---------------------------
Gary A. Jones
/s/ Scott Koondel Director March 31, 1999
- - ---------------------------
Scott Koondel
/s/ Paul M. Morris Director March 31, 1999
- - ---------------------------
Paul M. Morris
/s/ Jack Lahav Director March 31, 1999
- - ---------------------------
Jack Lahav
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- - ------------------
3.1 Amended and Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 of the Registrant's Form 10-K
for the year ended December 31, 1992)
3.2 Certificate of Amendment of the Restated Certificate of Incorporation
of Registrant (incorporated by reference to Exhibit 3.2 of the
Registrant's Form 10-K for the year ended December 31, 1997)
3.3 Certificate of Amendment of the Restated Certificate of Incorporation
of Registrant (incorporated by reference to Exhibit 3.1 of the
Registrant's Current Report on Form 8-K filed November 30, 1998)
3.4 Amended By-Laws of Registrant (incorporated by reference to Exhibit 3.2
of the Registrant's Current Report on Form 8-K filed November 30, 1998)
4.1 Securities Purchase Agreement, dated as of December 22, 1995, relating
to the sale of the Registrant's 15% Convertible Subordinated Debentures
due 1997 (with form of Debenture attached thereto) (incorporated by
reference to Exhibit 4.1 of the Registrant's Form 10-K for the year
ended December 31, 1995)
4.2 Registration Rights Agreement, dated as of December 22, 1995, relating
to registration rights granted to the holders of the Registrant's 15%
Convertible Subordinated Debentures due 1997 (incorporated by reference
to Exhibit 4.2 of the Registrant's Form 10-K for the year ended
December 31, 1995)
4.3 Securities Purchase Agreement, dated as of April 16, 1996, relating to
the sale of the Registrant's 15% Convertible Subordinated Debentures
due October 16, 1997 (with forms of Debenture and Registration Rights
Agreement attached thereto) (incorporated by reference to Exhibit 4.1
of the Registrant's Form 10-Q for the Six Months ended June 30, 1996)
4.4 Securities Purchase Agreement, dated as of August 7, 1996, relating to
the sale of the Registrant's 10% Convertible Subordinated Debentures
due February 9, 1998 (with forms of Debenture and Registration Rights
Agreement attached thereto) (incorporated by reference to Exhibit 4.1
of the Registrant's Form 10-Q for the Nine Months ended September 30,
1996)
4.5 Securities Purchase Agreement, dated as of June 10, 1998, relating to
the sale of the Registrant's 6% Convertible Notes due June 10, 2000
(with forms of Note and Registration Rights Agreement attached thereto)
(incorporated by reference To Exhibit 4.1 of the Registrant's Form S-3,
File No. 333-61115)
10.1 1991 Performance Equity Plan, as amended (incorporated by
reference to Exhibit 4 of Registrant's Registration Statement
on Form S-8, No. 333-45421, filed February 2, 1998)
10.2 1998 Stock Plan
10.3* Procurement Agreement, dated June 16, 1995, by and between
International Business Machines Corporation and the Registrant
(incorporated by reference to Exhibit 10.1 of the Registrant's Form
10-Q for the Three Months ended June 30, 1995)
10.4* Memorandum of Agreement, dated as of September 14, 1993, by and between
Grumman Aerospace Corporation and the Registrant (incorporated by
reference to Exhibit 10.3 of the Registrant's Form 10-K for the year
ended December 31, 1995)
10.5* License and Technical Support Agreement, dated as of October 3, 1995,
by and between BellSouth Products, Inc. and the Registrant
(incorporated by reference to Exhibit 10.4 of the Registrant's Form
10-K for the year ended December 31, 1995)
10.6* Software License Bundling Agreement, dated as of March 29, 1996, by and
between Voxware, Inc., and the Registrant
(incorporated by reference to Exhibit 10.1 of the Registrant's
Form 10-Q for the Six Months ended June 30, 1996)
10.7 Employment Agreement, dated as of January 1, 1998, by and between John
N. Andrea and the Registrant (incorporated by reference to Exhibit 10.6
of the Registrant's Form 10-K for the year ended December 31, 1998)
10.8 Employment Agreement, dated as of January 1, 1998, by and between
Douglas J. Andrea and the Registrant (incorporated by reference to
Exhibit 10.7 of the Registrant's Form 10-K for the year ended December
31, 1998)
10.9 Employment Agreement, dated as of January 1, 1998, by and between
Patrick D. Pilch and the Registrant (incorporated by reference to
Exhibit 10.8 of the Registrant's Form 10-K for the year ended December
31, 1998)
10.10 Employment Agreement, dated as of November 20, 1998, by and between
Christopher P. Sauvigne and the Registrant (incorporated by reference
to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed
November 30, 1998)
10.11* Direct Sales and License Agreement, dated as of October 13, 1997, by
and between Lernout & Hauspie Speech Products and the Registrant
(incorporated by reference to Exhibit 10.8 of the Registrant's Form
10-K for the year ended December 31, 1998)
10.12* Production Procurement Agreement, dated as of June 11, 1997, by and
between International Business Machines Corporation and the Registrant
(incorporated by reference to Exhibit 10.9 of the Registrant's Form
10-K for the year ended December 31, 1998)
10.13 Revolving Loan and Security Agreement, dated as of September 23, 1997,
by and between IBM Credit Corporation and the Registrant
10.14 Stock Purchase Agreement, dated April 6, 1998, as amended by Amendment
No. 1 thereto dated May 5, 1998, relating to the purchase of the shares
of Lamar Signal Processing, Ltd. (including form of Registration Rights
Agreement)(incorporated by reference to Exhibits 2.1 and 2.2 of the
Registrant's Current Report on Form 8-K filed May 8, 1998)
10.15** Procurement Agreement, dated as of January 13, 1999, by and between the
Registrant and Microsoft Corporation
10.16** Purchase Agreement, dated as of February 25, 1999, by and between the
Company and Clarion Corporation of America
10.17** Source Code License Agreement, dated as of October 29, 1998, between
the Company and Intel Corporation
21 Subsidiaries of Registrant
22 Consent of Independent Public Accountants
27 Financial Data Schedule
- - ---------------
* Certain portions of this Agreement have been accorded
confidential treatment.
** Confidential treatment has been requested for certain portions
of this Agreement.
ANDREA ELECTRONICS CORPORATION
1998 STOCK PLAN
1. PURPOSES OF THE PLAN. The purposes of this Stock Plan are: to attract and
retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants, and to promote the success of the Company's business. Options
granted under the Plan may be Incentive Stock Options or Nonstatutory Stock
Options, as determined by the Administrator at the time of grant. Stock
Purchase Rights may also be granted under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
a. "Administrator" means the Board or any of its Committees as
shall be administering the Plan, in accordance with Section 4 of the Plan.
b. "Applicable Laws" means the requirements relating to the administration
of stock option plans under U.S. state corporate laws, U.S. federal and state
securities laws, the Code, any stock exchange or quotation system on which the
Common Stock is listed or quoted and the applicable laws of any foreign country
or jurisdiction where Options or Stock Purchase Rights are, or will be, granted
under the Plan.
c. "Board" means the Board of Directors of the Company.
d. "Code" means the Internal Revenue Code of 1986, as amended.
e. "Committee" means a committee of Directors appointed by the Board in
accordance with Section 4 of the Plan.
f. "Common Stock" means the Common Stock of the Company.
g. "Company" means Andrea Electronics Corporation, a New York
corporation.
h. "Consultant" means any person, including an advisor, engaged by
the Company or a Parent or Subsidiary to render services and who is
compensated for such services.
i. "Director" means a member of the Board.
j. "Disability" means total and permanent disability as defined in Section
22(e)(3) of the Code.
k. "Employee" means any person, including Section 16(b) Officers and
Directors, employed by the Company or any Parent or Subsidiary of the Company. A
Service Provider shall not cease to be an Employee in the case of (i) any leave
of absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
l. "Exchange Act" means the Securities Exchange Act of 1934, as amended.
m. "Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:
(i) if the Common Stock is listed on any established stock exchange or
a national market system, including without limitation the Nasdaq National
Market or The Nasdaq Small Cap Market of The Nasdaq Stock Market, its Fair
Market Value shall be the closing sales price for such stock (or the closing
bid, if no sales were reported) as quoted on such exchange or system for the
last market trading day prior to the time of determination, as reported in The
Wall Street Journal or such other source as the Administrator deems reliable;
(ii) if the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, based on such source as the Administrator deems reliable;
(iii) in the absence of an established market for the Common Stock,
the Fair Market Value shall be determined in good faith by the Administrator.
n. "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
o. "Nonstatutory Stock Option" means an Option not intended to qualify as
an Incentive Stock Option.
p. "Notice of Grant" means a written or electronic notice evidencing
certain terms and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement.
q. "Section 16(b) Officer" means a person who is an officer of the Company
within the meaning of Section 16(b) of the Exchange Act and the rules and
regulations promulgated thereunder.
r. "Option" means a stock option granted pursuant to the Plan.
s. "Option Agreement" means an agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
t. "Option Exchange Program" means a program whereby outstanding options
are surrendered in exchange for options with a lower exercise price.
u. "Optioned Stock" means the Common Stock subject to an Option or
Stock Purchase Right.
v. "Optionee" means the holder of an outstanding Option or Stock Purchase
Right granted under the Plan.
w. "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
x. "Plan" means this 1997 Stock Plan.
y. "Restricted Stock" means shares of Common Stock acquired pursuant to a
grant of Stock Purchase Rights under Section 11 below.
z. "Restricted Stock Purchase Agreement" means a written agreement between
the Company and the Optionee evidencing the terms and restrictions applying to
stock purchased under a Stock Purchase Right. The Restricted Stock Purchase
Agreement is subject to the terms and conditions of the Plan and the Notice of
Grant.
aa. "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
bb. "Section 16(b)" means Section 16(b) of the Securities Exchange
Act of 1934, as amended.
cc. "Service Provider" means an Employee, Director or Consultant.
dd. "Share" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
ee. "Stock Purchase Right" means the right to purchase Common
Stock pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
ff. "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13 of the
Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is 2,000,000 Shares, plus any adjustments as provided for
herein. If an Option or Stock Purchase Right expires or becomes
unexercisable without having been exercised in full, or is surrendered
pursuant to an Option Exchange Program, the unpurchased Shares which were
subject thereto shall become available for future grant or sale under the
Plan (unless the Plan has terminated); provided, however, that Shares that
have actually been issued under the Plan, whether upon exercise of an
Option or Right, shall not be returned to the Plan and shall not become
available for future distribution under the Plan, except that if Shares of
Restricted Stock are repurchased by the Company at their original purchase
price, such Shares shall become available for future grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
a. PROCEDURE.
(i) Multiple Administrative Bodies. The Plan may be administered by
different Committees with respect to different groups of Service Providers.
(ii) Section 162(m). To the extent that the Administrator determines
it to be desirable to qualify Options granted hereunder as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the Plan shall
be administered by a Committee of two or more "outside directors" within the
meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify transactions
hereunder as exempt under Rule 16b-3, the Plan shall be administered by the
Board or a Committee of two or more "non-employee directors" within the meaning
of Rule 16b-3.
(iv) Other Administration. Other than as provided above, the Plan
shall be administered by (A) the Board or (B) a Committee, which Committee shall
be constituted to satisfy Applicable Laws.
b. POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan, and
in the case of a Committee, subject to the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be covered
by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any Option or Stock Purchase Right granted hereunder. Such
terms and conditions include, but are not limited to, the exercise price, the
time or times when Options or Stock Purchase Rights may be exercised (which may
be based on performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any Option
or Stock Purchase Right or the shares of Common Stock relating thereto, based in
each case on such factors as the Administrator, in its sole discretion, shall
determine;
(vi) to institute an Option Exchange Program;
(vii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(viii) to prescribe, amend and rescind rules and regulations relating
to the Plan, including rules and regulations relating to subplans established
for the purpose of qualifying for preferred tax treatment under foreign tax
laws;
(ix) to modify or amend each Option or Stock Purchase Right (subject
to Section 15(c) of the Plan), including the discretionary authority to extend
the post-termination exercisability period of Options longer than is otherwise
provided for in the Plan;
(x) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon exercise
of an Option or Stock Purchase Right that number of Shares having a Fair Market
Value equal to the amount required to be withheld. The Fair Market Value of the
Shares to be withheld shall be determined on the date that the amount of tax to
be withheld is to be determined. All elections by an Optionee to have Shares
withheld for this purpose shall be made in such form and under such conditions
as the Administrator may deem necessary or advisable;
(xi) to authorize any person to execute on behalf of the Company any
Instrument required to effect the grant of an Option or Stock Purchase Right
previously granted by the Administrator;
(xii) to make all other determinations deemed necessary or advisable
for administering the Plan.
c. EFFECT OF ADMINISTRATOR'S DECISION. The Administrator's decisions,
determinations and interpretations shall be final and binding on all Optionees
and any other holders of Options or Stock Purchase Rights.
5. ELIGIBILITY. Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Service Providers. Incentive Stock Options may be granted only
to Employees.
6. LIMITATIONS.
a. Each Option shall be designated in the Option Agreement as either an
Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding
such designation, to the extent that the aggregate Fair Market Value of the
Shares with respect to which Incentive Stock Options are exercisable for the
first time by the Optionee during any calendar year (under all plans of the
Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be
treated as Nonstatutory Stock Options. For purposes of this Section 6(a),
Incentive Stock Options shall be taken into account in the order in which they
were granted. The Fair Market Value of the Shares shall be determined as of the
time the Option with respect to such Shares is granted.
b. Neither the Plan nor any Option or Stock Purchase Right shall confer
upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
c. The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year of the
Company, Options to purchase more than 500,000 Shares.
(ii) The foregoing limitations shall be adjusted proportionately in
connection with any change in the Company's capitalization as described in
Section 13.
(iii) If an Option is canceled in the same fiscal year of the Company
in which it was granted (other than in connection with a transaction described
in Section 13), the canceled Option will be counted against the limits set forth
in subsections (i) and (ii) above. For this purpose, if the exercise price of an
Option is reduced, the transaction will be treated as a cancellation of the
Option and the grant of a new Option.
7. TERM OF PLAN. Subject to Section 19 of the Plan, the Plan shall become
effective upon its adoption by the Board. It shall continue in effect for a
term of ten (10) years unless terminated earlier under Section 15 of the
Plan.
8. TERM OF OPTION. The term of each Option shall be stated in the Option
Agreement. In the case of an Incentive Stock Option, the term shall be ten
(10) years from the date of grant or such shorter term as may be provided
in the Option Agreement. Moreover, in the case of an Incentive Stock Option
granted to an Optionee who, at the time the Incentive Stock Option is
granted, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary,
the term of the Incentive Stock Option shall be five (5) years from the
date of grant or such shorter term as may be provided in the Option
Agreement.
9. OPTION EXERCISE PRICE AND CONSIDERATION.
a. EXERCISE PRICE. The per share exercise price for the Shares to
be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option:
(A) granted to an Employee who, at the time the Incentive Stock
Option is granted, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the per Share exercise price shall be no less than 110% of the Fair Market Value
per Share on the date of grant;
(B) granted to any Employee other than an Employee described in
paragraph (A) immediately above, the per Share exercise price shall be no less
than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with a per
Share exercise price of less than 100% of Fair Market Value on the date of grant
pursuant to a merger or other corporate transaction.
b. WAITING PERIOD AND EXERCISE DATES. At the time an Option is granted, the
Administrator shall fix the period within which the Option may be exercised and
shall determine any conditions which must be satisfied before the Option may be
exercised.
c. FORM OF CONSIDERATION. The Administrator shall determine the acceptable
form of consideration for exercising an Option, including the method of payment.
In the case of an Incentive Stock Option, the Administrator shall determine the
acceptable form of consideration at the time of grant. Such consideration may
consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the issuance
of Shares to the extent permitted by Applicable Laws.
10. EXERCISE OF OPTIONS.
a. PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option granted
hereunder shall be exercisable according to the terms of the Plan and at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement. Unless the Administrator provides otherwise, vesting of
Options granted hereunder shall be tolled during any unpaid leave of absence. An
Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i) written
or electronic notice of exercise (in accordance with the Option Agreement) from
the person entitled to exercise the Option, and (ii) full payment for the Shares
with respect to which the Option is exercised. Full payment may consist of any
consideration and method of payment authorized by the Administrator and
permitted by the Option Agreement and the Plan. Shares issued upon exercise of
an Option shall be issued in the name of the Optionee or, if requested by the
Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company), no
right to vote or receive dividends or any other rights as a shareholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option.
The Company shall issue (or cause to be issued) such Shares promptly after
the Option is exercised. No adjustment will be made for a dividend or other
right for which the record date is prior to the date the Shares are issued,
except as provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.
b. TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. If an Optionee ceases
to be a Service Provider, other than upon the Optionee's death or Disability,
the Optionee may exercise his or her Option within such period of time as is
specified in the Option Agreement to the extent that he or she is entitled to
exercise it on the date of termination (but in no event later than the
expiration of the term of such Option as set forth in the Option Agreement).
In the absence of a specified time in the Option Agreement, the Option
shall remain exercisable for three (3) months following the Optionee's
termination. If, on the date of termination, the Optionee is not entitled to
exercise his or her entire Option, the Shares covered by the unexercisable
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified by the
Administrator, the Option shall terminate, and the Shares covered by such Option
shall revert to the Plan.
c. DISABILITY OF OPTIONEE. If an Optionee ceases to be a Service Provider
as a result of the Optionee's Disability, the Optionee may exercise his or her
Option at any time within twelve (12) months from the date of termination, but
only to the extent that the Optionee is entitled to exercise it on the date of
termination (and in no event later than the expiration of the term of the Option
as set forth in the Option Agreement). If, on the date of termination, the
Optionee is not entitled to exercise his or her entire Option, the Shares
covered by the unexercisable portion of the Option shall revert to the Plan. If,
after termination, the Optionee does not exercise his or her Option within the
time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
d. DEATH OF OPTIONEE. If an Optionee dies while a Service Provider, the
Option may be exercised at any time within twelve (12) months following the date
of death (but in no event later than the expiration of the term of such Option
as set forth in the Notice of Grant), by the Optionee's estate or by a person
who acquires the right to exercise the Option by bequest or inheritance, but
only to the extent that the Optionee would have been entitled to exercise the
Option on the date of death. If, at the time of death, the Optionee is not
entitled to exercise his or her entire Option, the Shares covered by the
unexercisable portion of the Option shall immediately revert to the Plan. The
Option may be exercised by the executor or administrator of the Optionee's
estate or, if none, by the person(s) entitled to exercise the Option under the
Optionee's will or the laws of descent or distribution. If the Option is not so
exercised within the time specified herein, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
e. BUYOUT PROVISIONS. The Administrator may at any time offer to buy out
for a payment in cash or Shares, an Option previously granted based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
11. STOCK PURCHASE RIGHTS.
a. RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either alone, in
addition to, or in tandem with other awards granted under the Plan and/or cash
awards made outside of the Plan. After the Administrator determines that it will
offer Stock Purchase Rights under the Plan, it shall advise the offeree in
writing or electronically, by means of a Notice of Grant, of the terms,
conditions and restrictions related to the offer, including the number of Shares
that the offeree shall be entitled to purchase, the price to be paid, and the
time within which the offeree must accept such offer. The offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
b. REPURCHASE OPTION. Unless the Administrator determines otherwise, the
Restricted Stock Purchase Agreement shall grant the Company a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
service with the Company for any reason (including death or Disability). The
purchase price for Shares repurchased pursuant to the Restricted Stock Purchase
Agreement shall be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to the Company. The repurchase
option shall lapse at a rate determined by the Administrator.
c. OTHER PROVISIONS. The Restricted Stock Purchase Agreement shall contain
such other terms, provisions and conditions not inconsistent with the Plan as
may be determined by the Administrator in its sole discretion.
d. RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is exercised, the
purchaser shall have the rights equivalent to those of a shareholder, and shall
be a shareholder when his or her purchase is entered upon the records of the
duly authorized transfer agent of the Company. No adjustment will be made for a
dividend or other right for which the record date is prior to the date the Stock
Purchase Right is exercised, except as provided in Section 13 of the Plan.
12. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Unless determined
otherwise by the Administrator, an Option or Stock Purchase Right may not
be sold, pledged, assigned, hypothecated, transferred, or disposed of in
any manner other than by will or by the laws of descent or distribution and
may be exercised, during the lifetime of the Optionee, only by the
Optionee. If the Administrator makes an Option or Stock Purchase Right
transferable, such Option or Stock Purchase Right shall contain such
additional terms and conditions as the Administrator deems appropriate.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR ASSET
SALE.
a. CHANGES IN CAPITALIZATION. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares
of stock of any class, or securities convertible into shares of stock of any
class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option
or Stock Purchase Right.
b. DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or
liquidation of the Company, the Administrator shall notify each Optionee as soon
as practicable prior to the effective date of such proposed transaction. The
Administrator in its discretion may provide for an Optionee to have the right to
exercise his or her Option until ten (10) days prior to such transaction as to
all of the Optioned Stock covered thereby, including Shares as to which the
Option would not otherwise be exercisable. In addition, the Administrator may
provide that any Company repurchase option applicable to any Shares purchased
upon exercise of an Option or Stock Purchase Right shall lapse as to all such
Shares, provided the proposed dissolution or liquidation takes place at the time
and in the manner contemplated. To the extent it has not been previously
exercised, an Option or Stock Purchase Right will terminate immediately prior to
the consummation of such proposed action.
c. MERGER OR ASSET SALE. In the event of a merger of the Company with or
into another corporation, or the sale of substantially all of the assets of the
Company, each outstanding Option and Stock Purchase Right shall be assumed or an
equivalent option or right substituted by the successor corporation or a Parent
or Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the Option or Stock Purchase
Right, the Optionee shall fully vest in and have the right to exercise the
Option or Stock Purchase Right as to all of the Optioned Stock, including Shares
as to which it would not otherwise be vested or exercisable. If an Option or
Stock Purchase Right becomes fully vested and exercisable in lieu of assumption
or substitution in the event of a merger or sale of assets, the Administrator
shall notify the Optionee in writing or electronically that the Option or Stock
Purchase Right shall be fully vested and exercisable for a period of fifteen
(15) days from the date of such notice, and the Option or Stock Purchase Right
shall terminate upon the expiration of such period. For the purposes of this
paragraph, the Option or Stock Purchase Right shall be considered assumed if,
following the merger or sale of assets, the option or right confers the right to
purchase or receive, for each Share of Optioned Stock subject to the Option or
Stock Purchase Right immediately prior to the merger or sale of assets, the
consideration (whether stock, cash, or other securities or property) received in
the merger or sale of assets by holders of Common Stock for each Share held on
the effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding Shares); provided, however, that if such consideration received
in the merger or sale of assets is not solely common stock of the successor
corporation or its Parent, the Administrator may, with the consent of the
successor corporation, provide for the consideration to be received upon the
exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
14. DATE OF GRANT. The date of grant of an Option or Stock Purchase Right shall
be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other
later date as is determined by the Administrator. Notice of the
determination shall be provided to each Optionee within a reasonable time
after the date of such grant.
15. AMENDMENT AND TERMINATION OF THE PLAN.
a. AMENDMENT AND TERMINATION. The Board may at any time amend,
alter, suspend or terminate the Plan.
b. SHAREHOLDER APPROVAL. The Company shall obtain shareholder
approval of any Plan amendment to the extent necessary and desirable to
comply with Applicable Laws.
c. EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration, suspension
or termination of the Plan shall impair the rights of any Optionee, unless
mutually agreed otherwise between the Optionee and the Administrator, which
agreement must be in writing and signed by the Optionee and the Company.
16. CONDITIONS UPON ISSUANCE OF SHARES.
a. LEGAL COMPLIANCE. Shares shall not be issued pursuant to the exercise of
an Option or Stock Purchase Right unless the exercise of such Option or Stock
Purchase Right and the issuance and delivery of such Shares shall comply with
Applicable Laws and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
b. INVESTMENT REPRESENTATIONS. As a condition to the exercise of an Option
or Stock Purchase Right, the Company may require the person exercising such
Option or Stock Purchase Right to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required.
17. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such
requisite authority shall not have been obtained.
18. RESERVATION OF SHARES. The Company, during the term of this Plan, will at
all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months after the date the
Plan is adopted. Such shareholder approval shall be obtained in the manner
and to the degree required under Applicable Laws.
<PAGE>
ANDREA ELECTRONICS CORPORATION
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
1. NOTICE OF STOCK OPTION GRANT
(Optionee's Name and Address)
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number _________________________
Date of Grant _________________________
Vesting Commencement Date _________________________
Exercise Price per Share $________________________
Total Number of Shares Granted _________________________
Total Exercise Price $________________________
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date: _________________________
Vesting Schedule:
This Option may be exercised, in whole or in part, in accordance with the
following schedule:
Termination Period:
This Option may be exercised for _____ (days/months) after Optionee ceases
to be a Service Provider. Upon the death or Disability of the Optionee, this
Option may be exercised for such longer period as provided in the Plan. In no
event shall this Option be exercised later than the Term/Expiration Date as
provided above.
2. AGREEMENT
a. GRANT OF OPTION. The Plan Administrator of the Company hereby grants to
the Optionee named in the Notice of Grant attached as Part I of this Agreement
(the "Optionee") an option (the "Option") to purchase the number of Shares, as
set forth in the Notice of Grant, at the exercise price per share set forth in
the Notice of Grant (the "Exercise Price"), subject to the terms and conditions
of the Plan, which is incorporated herein by reference. Subject to Section 15(c)
of the Plan, in the event of a conflict between the terms and conditions of the
Plan and the terms and conditions of this Option Agreement, the terms and
conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option ("ISO"),
this Option is intended to qualify as an Incentive Stock Option under Section
422 of the Code. However, if this Option is intended to be an Incentive Stock
Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d)
it shall be treated as a Nonstatutory Stock Option ("NSO").
b. EXERCISE OF OPTION.
(i) Right to Exercise. This Option is exercisable during its term in
accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement.
(ii) Method of Exercise. This Option is exercisable by delivery of an
exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be completed
by the Optionee and delivered to the secretary of the Company. The Exercise
Notice shall be accompanied by payment of the aggregate Exercise Price as to all
Exercised Shares. This Option shall be deemed to be exercised upon receipt by
the Company of such fully executed Exercise Notice accompanied by such aggregate
Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option unless
such issuance and exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Exercised Shares shall be considered
transferred to the Optionee on the date the Option is exercised with respect to
such Exercised Shares.
c. METHOD OF PAYMENT. Payment of the aggregate Exercise Price shall
be by any of the following, or a combination thereof, at the election of the
Optionee:
(i) cash;
(ii) check;
(iii) consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan;
(iv) surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares; or
(v) with the Administrator's consent, delivery of Optionee's
promissory note (the "Note") in the form attached hereto as Exhibit C, in the
amount of the aggregate Exercise Price of the Exercised Shares together with the
execution and delivery by the Optionee of the Security Agreement attached hereto
as Exhibit B. The Note shall bear interest at the "applicable federal rate"
prescribed under the Code and its regulations at time of purchase, and shall be
secured by a pledge of the Shares purchased by the Note pursuant to the Security
Agreement.
d. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in any
manner otherwise than by will or by the laws of descent or distribution and may
be exercised during the lifetime of Optionee only by the Optionee. The terms of
the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
e. TERM OF OPTION. This Option may be exercised only within the term set
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
f. TAX CONSEQUENCES. Some of the federal tax consequences relating to this
Option, as of the date of this Option, are set forth below. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR
DISPOSING OF THE SHARES.
g. EXERCISING THE OPTION.
(i) Nonstatutory Stock Option. The Optionee may incur regular federal
income tax liability upon exercise of a NSO. The Optionee will be treated as
having received compensation income (taxable at ordinary income tax rates) equal
to the excess, if any, of the Fair Market Value of the Exercised Shares on the
date of exercise over their aggregate Exercise Price. If the Optionee is an
Employee or a former Employee, the Company will be required to withhold from his
or her compensation or collect from Optionee and pay to the applicable taxing
authorities an amount in cash equal to a percentage of this compensation income
at the time of exercise, and may refuse to honor the exercise and refuse to
deliver Shares if such withholding amounts are not delivered at the time of
exercise.
(ii) Incentive Stock Option. If this Option qualifies as an ISO, the
Optionee will have no regular federal income tax liability upon its exercise,
although the excess, if any, of the Fair Market Value of the Exercised Shares on
the date of exercise over their aggregate Exercise Price will be treated as an
adjustment to alternative minimum taxable income for federal tax purposes and
may subject the Optionee to alternative minimum tax in the year of exercise. In
the event that the Optionee ceases to be an Employee but remains a Service
Provider, any Incentive Stock Option of the Optionee that remains unexercised
shall cease to qualify as an Incentive Stock Option and will be treated for tax
purposes as a Nonstatutory Stock Option on the date three (3) months and one (1)
day following such change of status.
h. DISPOSITION OF SHARES.
(i) NSO. If the Optionee holds NSO Shares for at least one year, any
gain realized on disposition of the Shares will be treated as long-term capital
gain for federal income tax purposes.
(ii) ISO. If the Optionee holds ISO Shares for at least one year after
exercise and two years after the grant date, any gain realized on disposition of
the Shares will be treated as long-term capital gain for federal income tax
purposes. If the Optionee disposes of ISO Shares within one year after exercise
or two years after the grant date, any gain realized on such disposition will be
treated as compensation income (taxable at ordinary income rates) to the extent
of the excess, if any, of the lesser of (A) the difference between the Fair
Market Value of the Shares acquired on the date of exercise and the aggregate
Exercise Price, or (B) the difference between the sale price of such Shares and
the aggregate Exercise Price. Any additional gain will be taxed as capital gain,
short-term or long-term depending on the period that the ISO Shares were held.
i. NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the Optionee sells
or otherwise disposes of any of the Shares acquired pursuant to an ISO on or
before the later of (i) two years after the grant date, or (ii) one year after
the exercise date, the Optionee shall immediately notify the Company in writing
of such disposition. The Optionee agrees that he or she may be subject to income
tax withholding by the Company on the compensation income recognized from such
early disposition of ISO Shares by payment in cash or out of the current
earnings paid to the Optionee.
j. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws, but not
the choice of law rules, of New York.
k. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES THAT
THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY
CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE
ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER).
OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS
CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT
CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE
PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT
INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S
RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.
By your signature and the signature of the Company's representative below, you
and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE: ANDREA ELECTRONICS CORPORATION
- - -------------------------------- ----------------------------------
Signature By
Title
- - --------------------------------
Print Name
Residence Address
<PAGE>
EXHIBIT A
1998 STOCK PLAN
EXERCISE NOTICE
Andrea Electronics Corporation
11-40 45th Road
Long Island City, NY 11101
Attention: Secretary
1. EXERCISE OF OPTION. Effective as of today, ________________, ____, the
undersigned ("Purchaser") hereby elects to purchase ______________ shares
(the "Shares") of the Common Stock of Andrea Electronics Corporation (the
"Company") under and pursuant to the 1998 Stock Plan (the "Plan") and the
Stock Option Agreement dated _____________, ____ (the "Option Agreement").
The purchase price for the Shares shall be $_____________, as required by
the Option Agreement.
2. DELIVERY OF PAYMENT. Purchaser herewith delivers to the Company the full
purchase price for the Shares.
3. REPRESENTATIONS OF PURCHASER. Purchaser acknowledges that Purchaser has
received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4. RIGHTS AS SHAREHOLDER. Until the issuance (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of
the Company) of the Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares so acquired
shall be issued to the Optionee as soon as practicable after exercise of
the Option. No adjustment will be made for a dividend or other right for
which the record date is prior to the date of issuance, except as provided
in Section 13 of the Plan.
5. TAX CONSULTATION. Purchaser understands that Purchaser may suffer adverse
tax consequences as a result of Purchaser's purchase or disposition of the
Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company
for any tax advice.
6. ENTIRE AGREEMENT; GOVERNING LAW. The Plan and Option Agreement are
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to
the subject matter hereof and supersede in their entirety all prior
undertakings and agreements of the Company and Purchaser with respect to
the subject matter hereof, and may not be modified adversely to the
Purchaser's interest except by means of a writing signed by the Company and
Purchaser. This agreement is governed by the internal substantive laws, but
not the choice of law rules, of New York.
Submitted by: Accepted by:
PURCHASER: ANDREA ELECTRONICS CORPORATION:
- - ---------------------------- -------------------------------
Signature Name
Title:
- - ----------------------------
Print Name
Address:
- - ----------------------------
- - ------------------------------------------------------------------------------
- - ----------------------------------------------------------------Date Received
Microsoft Contract No.: 0 113 99
PROCUREMENT AGREEMENT
THIS PROCUREMENT AGREEMENT (this "Agreement") is made as of the 13th day of
January, 1999 by and between Microsoft Corporation, a Washington corporation
having its main office and place of business at One Microsoft Way, Redmond, WA
98052-6399 (hereinafter referred to as "MICROSOFT") and Andrea Electronics
Corporation, a New York corporation having its main office and place of business
at 45 Melville Park Road, Melville, NY 11747 (hereinafter referred to as
"ANDREA").
RECITALS
1. MICROSOFT develops, markets, licenses and supports, among other things,
the speech-enabled Encarta Interactive English Learning software products (the
"Encarta Interactive English Learning Software Products"), which Encarta
Interactive English Learning Software Products will be marketed, distributed and
sold in various stockkeeping units for various markets and in various languages
(collectively, the "Encarta Interactive English Learning SKUs"). MICROSOFT
desires to procure and bundle ANDREA's NC8 microphone headset (each, an "NC8
Headset"; collectively, "NC8 Headsets") with certain Encarta Interactive English
Learning SKUs. Further, MICROSOFT desires to obtain from ANDREA upgrade
brochures (the "Upgrade Brochures") relating to Andrea headsets that are
upgrades from the NC8 Headset and other ANDREA products (the "Andrea Upgrade
Products") for inclusion in certain Encarta Interactive English Learning SKUs.
2. ANDREA develops, markets and sells, among other products, headsets for
use with speech-enabled personal computer applications software, including,
among others, various models of the NC8 Headset. ANDREA desires to sell NC8
Headsets to MICROSOFT for bundling with Encarta Interactive English Learning
SKUs. Further, ANDREA desires to provide to MICROSOFT and MICROSOFT's designated
agents the Upgrade Brochures for inclusion in certain Encarta Interactive
English Learning SKUs. Further, ANDREA may provide consumer discounts to Encarta
Interactive English Learning SKU users upgrading from NC8 Headsets to ANDREA
Upgrade Products.
NOW, THEREFORE, in consideration of the premises and mutual covenants and
agreements herein contained, and subject to the terms and conditions set forth
herein, the parties hereto agree as follows:
1. DEFINITIONS
1.1 "Actual Number of Units covered by Purchase Orders" shall have the
meaning ascribed thereto in Section 3.8.
1.2 "Additional Promotional Literature" shall have the meaning ascribed
thereto in Section 2.4.
1.3 "Andrea Upgrade Products" shall have the meaning ascribed thereto in
Recital No. 1.
1.4 "Andrea Names, Marks and Materials" shall have the meaning ascribed
thereto in Section 2.2.
1.5 "Andrea IP Rights" shall mean those intellectual property rights,
including copyrights, patents, trade secrets, trademarks, service
marks and other proprietary rights owned or otherwise controlled by
ANDREA and that are specifically embodied in the NC8 Headsets.
1.6 "Andrea Upgrade Products" shall have the meaning ascribed thereto in
Recital No. 1.
1.7 "Claim" shall have the meaning ascribed thereto in Section 8.2(a).
1.8 "Confidential Information" shall have the meaning ascribed thereto in
Section 7. 1.
1.9 "Designated Microsoft Subsidiaries and Third Party Subcontractors"
shall mean Subsidiaries of Microsoft and other third parties with whom
MICROSOFT has contracted to manufacture and distribute Encarta
Interactive English Learning Software Products and which Subsidiaries
or other third parties MICROSOFT identifies to ANDREA in one or more
written notices from time to time during the term of this Agreement.
1.10 "Encarta Interactive English Learning SKU - NC8 Headset Bundles" means
Encarta Interactive English Learning SKUs into which NC8 Headsets have
been bundled.
1.11 "Encarta Interactive English Learning SKUS" shall have the meaning
ascribed thereto in Recital No. 1.
1.12 "Encarta Interactive English Learning Software Products" shall have
the meaning ascribed thereto in Recital No. 1.
1.13 "FOB" shall have the customary and usual commercial meaning of "Free
on Board".
1.14 "Forecast Number of Units covered by Purchase Orders" shall have the
meaning ascribed thereto in Section 3.8.
1.15 "Licensed Activities" shall have the meaning ascribed thereto in
Section 2.2.
1.16 "Microsoft IP Rights" shall mean those intellectual property rights,
including copyrights, patents, trade secrets, trademarks, service
marks and other proprietary rights owned or otherwise controlled by
MICROSOFT and that are specifically embodied in the Encarta
Interactive English Learning Software Products and the Encarta
Interactive English Learning SKUs.
1.17 "NC8 Headset" shall have the meaning ascribed thereto in Recital No.
1.
1.18 "NC8 Headset Documentation" shall have the meaning ascribed thereto in
Section 2.1.
1.19 "Product Warranty" shall have the meaning ascribed thereto in Section
2.3.
1.20 "Purchase Order" shall have the meaning ascribed thereto in Section
3.1.
1.21 "Subsidiary" of any party shall mean any legal entity, more than fifty
percent (50%) of whose outstanding shares or securities representing
the right to vote for the election of directors or other managing
authority are, now or hereafter, owned or controlled, directly or
indirectly, by that party (but only so long as such conditions exist).
1.22 "Upgrade Brochures" shall have the meaning ascribed thereto in
Recital No. 1.
2. PROCURED PRODUCT
2.1 Headsets. ANDREA hereby agrees on the terms set forth herein to sell
the NC8 Headset models specified in Schedule 2.1 to this Agreement,
together with the related documentation and other materials specified
in Schedule 2.1 (the "NC8 Headset Documentation"). The parties agree
that Schedule 2.1 may be revised from time to time during the term of
this Agreement upon the mutual agreement of the parties.
2.2 Trade Names, Trade Marks and Copyrighted Materials. ANDREA hereby
grants to MICROSOFT and Designated Microsoft Subsidiaries and Third
Party Subcontractors, for whose performance and satisfaction of the
terms and conditions of this Agreement MICROSOFT shall be liable, a
non-transferable, non-exclusive, right and license during the term of
this Agreement to use the trade names, trade marks and copyrighted
materials of ANDREA identified in Schedule 2.2 attached hereto (the
"Andrea Names, Marks and Materials") in connection with (i) the
bundling of NC8 Headsets with the Encarta Interactive English
Learning SKUs and subsequent marketing, distribution and sale of such
bundled products and (ii) the inclusion of the Upgrade Brochures in
Encarta Interactive English Learning SKUs that are subsequently
marketed, distributed and sold by Microsoft. Such activities as are
licensed under this Section 2.2 are referred to as the "Licensed
Activities". Microsoft acknowledges and agrees that the only rights
transferring from ANDREA to MICROSOFT pursuant to this Agreement are
the license rights specifically granted in this Section 2.2. Nothing
in this Agreement is intended to transfer title to any Andrea IP
Rights or to take away from ANDREA its ownership rights in the Andrea
IP Rights.
2.3 Product Warranty. ANDREA covenants that each and every NC8 Headset
delivered to MICROSOFT for the purpose of bundling with Encarta
Interactive English Learning SKUs shall be accompanied by and
packaged with a copy of the product warranty that ANDREA ordinarily
and customarily provides to purchasers of NC8 Headsets and set forth
in Schedule 2.3 attached hereto (such product warranty in such form
being referred to as the "Product Warranty"). MICROSOFT covenants
that each and every NC8 Headset bundled with Encarta Interactive
English Learning SKUs shall be bundled as it was received by
MICROSOFT in packaging that contains the Product Warranty and any
other documentation ANDREA elects to include in such packaging.
MICROSOFT shall incur no liability in the event any Encarta
Interactive English Learning SKU - NC8 Headset Bundle contains an NC8
Headset that was not packaged by ANDREA with a Product Warranty or
other documentation.
2.4 Promotional Literature. In addition to the printed materials provided
by ANDREA to MICROSOFT relating to the NC8 Headsets described in
Schedule 2.1 and the Upgrade Brochures, ANDREA shall permit MICROSOFT
and Designated MICROSOFT Subsidiaries and Third Party Subcontractors
to insert additional promotional literature about the NC8 Headsets
and ANDREA's other products ("Additional Promotional Literature")
into the Encarta Interactive English Learning SKU packaging and
mailings made by MICROSOFT to MICROSOFT customers and prospective
customers; provided however, that ANDREA shall have the right to
review any Additional Promotional Literature reasonably prior to the
publication and distribution thereof, and the right to prohibit the
use of any Additional Promotional Literature that ANDREA reasonably
believes could damage the image or customer appeal of ANDREA or any
of ANDREA's products, or that is misleading about the capabilities,
use or function of the NC8 Headsets or ANDREA's other products or the
customer's rights to the NC8 Headsets or ANDREA's other products.
2.5 Export. MICROSOFT acknowledges that any export from the United States
of NC8 Headsets, and all technical data related thereto, is subject
to regulation under United States laws, including, without
limitation, the Export Administration Act of 1979 and regulations
issued thereunder. MICROSOFT agrees to: (a) comply with applicable
export or asset control laws of the United States and regulations
applicable to such exports; (b) comply, and take all permissible
measures to insure its customers' compliance with, the applicable
provisions of said laws and regulations, including, without
limitation, record keeping requirements; and (c) refrain from selling
or otherwise distributing NC8 Headsets, and all technical data
related thereto, in violation of such laws and regulations.
3. PURCHASE ORDERS, PURCHASE PRICE, PAYMENT, DELIVERY AND PROCUREMENT
FORECASTS
3.1 Minimum Amount. Each purchase order for an NC8 Headset model
specified in Schedule 2.1 shall be for a minimum of [Confidential
Treatment Requested] and shall be set forth in writing and delivered
to ANDREA by either electronic or hard copy in the form set forth in
Schedule 3.1 attached to this Agreement (each a "Purchase Order";
collectively, the "Purchase Orders"). Only procurement personnel of
MICROSOFT, its subsidiaries or Microsoft-appointed subcontractors,
the identities of whom shall be designated in writing to ANDREA,
shall have the authority to issue Purchase Orders under the terms and
conditions of this Agreement. MICROSOFT shall have the right to
change or cancel any Purchase Order, provided that MICROSOFT notifies
ANDREA of the change or cancellation no later than [Confidential
Treatment Requested] prior to the order shipment to MICROSOFT by
ANDREA, and further provided that if and whenever MICROSOFT changes
or cancels any Purchase Order, MICROSOFT shall thereupon pay to
ANDREA a stock handling charge equal to [Confidential Treatment
Requested] for each NC8 Headset subject to such change or
cancellation. Should MICROSOFT choose to change any Purchase Order
line item, MICROSOFT shall be required to submit a new Purchase
Order to ANDREA, indicating which line item(s) are changed. Line
item changes shall not affect the remaining items on MICROSOFT's
Purchase Order. Should MICROSOFT choose to cancel a Purchase Order,
MICROSOFT must provide ANDREA with a written cancellation request.
3.2 Purchase Price. MICROSOFT shall pay to ANDREA for each delivery of
NC8 Headsets purchased by MICROSOFT under this Agreement the total
(the "Invoice Total") of: (i) the product of the purchase price set
forth in Schedule 3.2 for each NC8 Headset, which such purchase price
is quoted FOB shipping point, multiplied by the number of NC8
Headsets in such delivery; (ii) any applicable discounts or
surcharges in accordance with Sections 3.3 or 3.5, as the case may
be; and (iii) the charges for freight, handling, insurance and taxes
related to shipment of such NC8 Headsets to Microsoft's designated
manufacturing facility.
3.3 Discount. Any Purchase Order for [Confidential Treatment Requested] of
any NC8 Headset model set forth in Schedule 2.1 shall entitle
MICROSOFT to a purchase price discount of [Confidential Treatment
Requested] from the purchase price that would otherwise apply to such
Purchase Order.
3.4 [Confidential Treatment Requested].
3.5 Delivery. All deliveries of NC8 Headsets covered by Purchase Orders
received by ANDREA from MICROSOFT, its subsidiaries and its
authorized subcontractors under this Agreement shall be made FOB
shipping point. Each delivery of the NC8 Headset model covered by a
Purchase Order shall be made by the [Confidential Treatment Requested]
after receipt by ANDREA of such Purchase Order, provided that the
Actual Number of Units covered by Purchase Orders (as defined in
Section 3.8) for such NC8 Headset model within the month such
Purchase Order was received is no more than [Confidential Treatment
Requested] of the Forecast Number of Units to be covered by Purchase
Orders (as defined in Section 3.8) for such NC8 Headset model for
such month. For all units purchased in excess of [Confidential
Treatment Requested] of such Forecast Number of Units to be covered
by Purchase Orders, delivery shall be made by the [Confidential
Treatment Requested] after receipt of such Purchase Order. All
deliveries hereunder shall be in bulk form and shall be made to such
locations as are specified by MICROSOFT or its Designated
Subsidiaries and Third Party Subcontractors. Such deliveries shall
be at MICROSOFT's expense and through such carriers as MICROSOFT or
its Designated Subsidiaries and Third Party Subcontractors shall
specify. ANDREA agrees that, if requested by MICROSOFT or its
Designated Subsidiaries and Third Party Subcontractors, ANDREA will
arrange for such deliveries through such carriers as MICROSOFT or
its Designated Subsidiaries and Third Party Subcontractors may
approve, and the cost of such deliveries shall be charged to
MICROSOFT in accordance with the schedule of delivery and handling
charges specified in Schedule 3.2.
3.6 Title. Title to NC8 Headsets purchased hereunder shall pass to
MICROSOFT upon delivery FOB shipping point; provided that ANDREA shall
retain a security interest in such goods and the proceeds therefrom
until ANDREA receives full payment for such goods, and MICROSOFT
agrees to execute any and all instruments required to perfect such
security interest.
3.7 Payment. Payment of the Invoice Total to ANDREA by MICROSOFT in
respect of the NC8 Headsets covered by any Purchase Order submitted
by MICROSOFT, its subsidiaries or its authorized subcontractors under
this Agreement shall be made in the following manner: [Confidential
Treatment Requested] . Payment shall be made in U.S. dollars. Any
payments made after the due date shall bear interest at a rate of
[Confidential Treatment Requested] per month.
3.8 Procurement Forecasts.
(a) MICROSOFT shall provide to ANDREA prior to the end of each calendar
month during the Term of this Agreement a rolling forecast of the
quantities of the NC8 Headset models specified in Schedule 2.1 and
Upgrade Brochures for which Microsoft expects to submit Purchase
Orders during the three calendar months immediately following such
calendar month end; provided, however, that MICROSOFT shall have no
obligation to submit Purchase Orders for such quantities, and shall
have no obligation to purchase any NC8 Headsets during any calendar
month period. Further, nothing shall obligate MICROSOFT to combine
Encarta Interactive English Learning Software Products with NC8
Headsets and/or Upgrade Brochures, and nothing shall be construed or
intended to prevent or limit MICROSOFT from making or entering into
any agreements with other persons, organizations or entities with
respect to activities and/or products which are like or similar to
those which are the subject of this Agreement.
(b) For each calendar month during the Term of this Agreement,
beginning with March 1999, a comparison shall be made between the
actual aggregate number of units covered by Purchase Orders for any
NC8 Headset model specified in Schedule 2.1 received during such month
(the "Actual Number of Units covered by Purchase Orders") and the
aggregate number forecast for that month at the end of the calendar
month two months prior to the calendar month for which such
comparison is being made (the "Forecast Number of Units to be covered
by Purchase Orders"). (For example, the first such comparison to be
made would be for March 1999. For each NC8 Headset model specified in
Schedule 2.1, the Actual Number of Units covered by Purchase Orders
for March 1999 would be the actual aggregate number of units covered
by Purchase Orders for that NC8 Headset model received during March
1999, and the Forecast Number of Units to be covered by Purchase
Orders for March 1999 would be the January 1999 forecast of such
number.)
(c) For each NC8 Headset model specified in Schedule 2.1 for each calendar
month during the Term of this Agreement, beginning with March 1999,
(i) in the event that the Actual Number of Units covered by Purchase
Orders is at least [Confidential Treatment Requested] of the
Forecast Number of Units to be covered by Purchase Orders,
MICROSOFT shall be entitled to a [Confidential Treatment
Requested] discount from the undiscounted purchase price set
forth in Schedule 3.2 for the units of such NC8 Headset model
actually purchased for up to [Confidential Treatment Requested]
of the Forecast Number of Units to be covered by Purchase Orders
and the purchase price for the units of such NC8 Headset model
in excess of [Confidential Treatment Requested] of the
Forecast Number of Units shall be such undiscounted purchase
price set forth in Schedule 3.2, and
(ii) in the event that the Actual Number of Units covered by Purchase
Orders is below [Confidential Treatment Requested] of the
Forecast Number of Units to be covered by Purchase Orders, ANDREA
shall be entitled to a [Confidential Treatment Requested]
surcharge applied against the original purchase price for the
units of such NC8 Headset model actually purchased.
3.9 Upgrade Brochures. MICROSOFT shall specify to ANDREA at least
[Confidential Treatment Requested] in advance the number of Upgrade
Brochures that it intends to insert in Encarta Interactive English
Learning SKUs during each month during the term of this Agreement.
ANDREA shall be responsible for arranging for the printing and
delivery of the Upgrade Brochures, and MICROSOFT, its subsidiaries
and/or its appointed subcontractors shall be responsible for
inserting the Upgrade Brochures in the Encarta Interactive English
Learning SKUs, subject to the allocation of expenses set forth in
Section 4.6.
3.10 Upgrades Commission. In respect of each sale of an ANDREA Upgrade
Product that ANDREA receives and that is tracked by or for ANDREA to
an Upgrade Brochure inserted in an Encarta Interactive English
Learning SKU, ANDREA shall pay to MICROSOFT a sales commission equal
to [Confidential Treatment Requested] of the purchase price received
by ANDREA from such sale, which such sales commission shall be paid to
MICROSOFT [Confidential Treatment Requested] following the end of the
quarter in which ANDREA receives payment for such Andrea Upgrade
Product. ANDREA shall maintain effective procedures for the tracking
of each Upgrade Product sale. ANDREA agrees to keep all proper records
and books of account and all proper entries therein relating to the
sale of such Upgrade Products. ANDREA further agrees to provide
MICROSOFT and/or MICROSOFT's independent auditors at Microsoft's
request and expense, copies of applicable records in order to verify
commissions rendered hereunder. If an audit shows that ANDREA has
underpaid commissions to MICROSOFT by an amount equal to or greater
than [Confidential Treatment Requested] of the commissions owed,
ANDREA shall bear all expenses reasonably incurred by MICROSOFT in
connection with the audit, provided that the amount of such
commissions owed is at least [Confidential Treatment Requested].
4. PACKAGING, RETURNS, REPLACEMENTS, WARRANTY SERVICE
4.1 Responsibility. MICROSOFT shall be responsible, at its expense, for
packaging (i) into the Encarta Interactive English Learning SKUs, the
NC8 Headsets (including the NC8 Headset Documentation) purchased by
MICROSOFT hereunder and (ii) into the Encarta Interactive English
Learning SKUs, the Upgrade Brochures obtained from ANDREA.
4.2 Packaging Method. The method of packaging NC8 Headsets into the
Encarta Interactive English Learning SKUs shall be reviewed by ANDREA
prior to implementation of such method, and any change to such method
shall be reviewed by ANDREA prior to implementation of such change.
ANDREA shall have the right to prohibit the use of any element of
such packaging or procedure comprising such method if ANDREA
reasonably believes (i) such element or procedure could damage the
NC8 Headsets, the image or customer appeal of ANDREA or the NC8
Headsets', or ANDREA's rights in the technology comprising the NC8
Headsets or the ANDREA Names, Marks and Materials, or (ii) such
element is misleading about the capabilities, use or function of the
NC8 Headsets.
4.3 Product Warranty. All Encarta Interactive English Learning SKUs
containing NC8 Headsets distributed by MICROSOFT shall include all
written documentation with which NC8 Headsets are individually
packaged. It shall be ANDREA's responsibility to include a written
copy of the Product Warranty in such documentation.
4.4 Not A Sale. Subject to Section 2.4, none of the information or
promotional materials concerning the NC8 Headsets or Andrea's other
products created solely by MICROSOFT or Designated MICROSOFT
Subsidiaries and Third Party Subcontractors shall state or imply that
the intellectual property of ANDREA comprising the NC8 Headsets or
Andrea's other products is being sold outright to or by MICROSOFT or
any manufacturer, distributor, reseller or end-user, but shall in all
cases refer to the grant of "a license to use" such intellectual
property.
4.5 Intellectual Property Markings. MICROSOFT shall not alter, obscure or
remove any copyright, trademark, service mark, patent, patent pending,
or other proprietary rights or legal notice already contained on or in
the NC8 Headset, any of the NC8 Headset Documentation or the Upgrade
Brochures, any of which such notices may be revised or replaced from
time to time.
4.6 Expenses.
(a) MICROSOFT shall be responsible for the payment of all the costs and
expenses of [Confidential Treatment Requested].
(b) ANDREA shall be responsible for the costs and expenses of
[Confidential Treatment Requested].
5. COOPERATION
The parties shall cooperate with each other to their mutual benefit as
follows:
5.1 Web Site Links. Each of MICROSOFT and ANDREA will incorporate in its
own web site a hyperlink to the other's web site for the purpose of
promoting Encarta Interactive English Learning SKUs, NC8 Headsets and
the Andrea Upgrade Products. In furtherance hereof, each party may
use the other party's logo(s) and/or logo link(s) identified in
Schedule 5.1 hereto, provided such use is in compliance with such
other's party's logo guidelines set forth in Schedule 5.1 or any
other replacement guidelines that such other party may provide to the
first party from time to time during the Term of this Agreement. The
MICROSOFT logo link(s) shall link back directly to a MICROSOFT URL
provided to ANDREA by MICROSOFT. The ANDREA logo link(s) shall link
back directly to an ANDREA URL provided to MICROSOFT by ANDREA.
5.2 Joint Promotion. MICROSOFT and ANDREA will promote their Joint
relationship contemplated hereby and the complementarity of the NC8
Headsets (and the Andrea Upgrade Products) and the Encarta
Interactive English Learning SKUs through, by way of example only,
press releases, trade shows agreed upon by the parties, and in
relevant collateral material. Each party shall provide the other
party with reasonably prior opportunity to review and comment on such
press releases, trade show material and collateral material in
furtherance of such promotional efforts.
5.3 Customer Service; Returns and Product Warranty Service.
(a) MICROSOFT shall be responsible for and shall bear [Confidential
Treatment Requested]. Each party agrees to make its personnel
available to the other for reasonable consultation during normal
business hours and at no charge to the other.
(b) ANDREA shall be responsible for and shall bear [Confidential Treatment
Requested].
(c) Replacements for any damaged or malfunctioning NC8 Headsets
delivered to ANDREA or destroyed in accordance with clause (iii)
of subsection 5.3(b) shall be received at the locations
designated by MICROSOFT, its subsidiaries or appointed
subcontractors, as the case may be, as promptly as commercially
reasonable but not later than the [Confidential Treatment
Requested] after ANDREA receives the damaged or malfunctioning
NC8 Headset in respect of which such replacement is being made
or, in the case of any NC8 Headset that ANDREA requests to be
destroyed, ANDREA receives notice that such NC8 Headset is
damaged or malfunctioning.
(d) [Confidential Treatment Requested] shall, at its expense, during
the term of this Agreement maintain a service and support
organization for each of the markets set forth in Schedule 5.3(d)
so that end users in any such market of the NC8 Headsets
purchased hereunder may contact [Confidential Treatment
Requested] or its representatives using a local or tollfree
telephone number in that market for the purpose of obtaining
service and support in respect of such NC8 Headsets from persons
who speak the dominant language in that market as set forth in
Schedule 5.3(d).
5.4 Customer Names, Demographics and related Customer Database
Information. Each party agrees that it will include its own end user
product registration cards for its respective products contained in
Encarta Interactive English Learning SKU - NC8 Headset Bundles. Each
party further agrees that it will share with each other its listing
of registered end users from the purchase of such product bundles.
Further, each party agrees that its will not contact any of the other
party's registered end users without first obtaining the approval of
the other party. With respect to each party's listing of registered
end users referred to in the immediately preceding sentence, without
requiring either party to alter the manner in which it collects
information from its customers and end users and to the extent that
it is commercially reasonable, each party shall include in such
listing the names, demographics and related database information
obtained and/or maintained by such party in respect of such
registered end users.
6. TERM AND TERMINATION
6.1 Term. This Agreement shall become effective on the date first written
above and expire January 31, 2000 unless sooner terminated as
elsewhere provided in this Agreement ("Term of this Agreement");
provided, however, that upon the mutual written agreement of the
parties, this Agreement shall be extended automatically for successive
twelve-month periods.
6.2 Termination.
(a) Either party may terminate this Agreement upon written notice to
the other party in the event of any default in the payment of any
money due hereunder or any material breach of this Agreement by
either party hereto, if the party receiving such notice (i) fails
to cure such breach within [Confidential Treatment Requested] after
notice by the non-breaching party or (ii) in the case of breaches
which require more than [Confidential Treatment Requested] to effect
a cure, fails to commence and continue in good faith efforts to cure
such breach, provided that such cure shall be effected no later than
[Confidential Treatment Requested] after receipt of such notice of
such breach. Any such termination shall be effective at the end of
such [Confidential Treatment Requested] or [Confidential Treatment
Requested], as the case may be. Waiver of any such default or
material breach by either party hereto shall not be construed as
limiting any right of termination for a subsequent default or
material breach.
(b) Either party may terminate this Agreement immediately upon the
other party's (i) becoming insolvent, (ii) commencing or having
commenced against it (without dismissal within 60 days), any
bankruptcy, insolvency, liquidation, reorganization or similar
proceeding under any U.S. or foreign law, (iii) making an
assignment for the benefit of its creditors, (iv) admitting in
writing its inability to satisfy its debts in the ordinary
course of business, or (v) taking an action resulting in or
directed to ceasing, on a permanent basis, its business or
relevant operations.
6.3 Effect of Termination. The expiration or termination of this
Agreement shall in no event relieve Microsoft of its obligation to
make any payments due and payable to ANDREA in respect of the
purchase of NC8 Headsets, and shall in no event relieve ANDREA of its
obligation to deliver NC8 Headset units for which MICROSOFT has
rendered payment, in whole or in part. Upon the expiration or
termination of this Agreement, MICROSOFT shall cease all marketing
and distribution of the Encarta Interactive English Learning - NC8
Headset Bundles except in such quantities as are sufficient or
necessary to fill orders received by MICROSOFT for Encarta
Interactive English Learning SKUs prior to such expiration or
termination as set forth below in this Section 6.3. Upon the
expiration or termination of this Agreement, MICROSOFT shall have the
right for a period of [Confidential Treatment Requested] to continue
to bundle in Encarta Interactive English Learning SKUs NC8 Headsets
that are in MICROSOFT's inventory on the date of such termination or
expiration and sell during such [Confidential Treatment Requested]
period such Encarta Interactive English Learning - NC8 Headset
Bundles.
6.4 Survival. Sections [Confidential Treatment Requested] shall survive
any termination or expiration of this Agreement.
7. CONFIDENTIAL INFORMATION
7.1 Definition. In the course of the parties working together under this
Agreement, each party will have occasion to acquire and/or receive
from the other party and each party will have occasion to disclose to
the other party information that is not public, that is of critical
competitive and financial importance to the disclosing party and that
the disclosing party wishes to maintain in confidence. All of such
information however acquired by the receiving party, including,
without limitation, trade secrets, customer lists, business plans,
marketing plans, non-public financial data, product specifications
and designs, the existence, nature, substance, progress and results
of research and development projects, concepts, inventions,
discoveries, formulations, processes, drawings, documents, records,
software, correspondence between the parties relating to this
Agreement, or any other information, whether similar to the specified
information or not, that is identified as confidential to the
disclosing party, to any parent, subsidiary or affiliate company
thereof, or that under the circumstances surrounding the disclosure
ought to be treated as confidential, is hereinafter referred to as
such party's "Confidential Information".
7.2 General Rule regarding Non-disclosure. Accordingly, each party in its
capacity as a party receiving Confidential Information agrees on
behalf of itself and its principals, partners, directors, officers,
employees and advisors (collectively "Employees") that without the
prior written approval of the disclosing party, it will not:
(a) use the disclosing party's Confidential Information for its own
benefit, except in connection with the carrying out of its
responsibilities and obligations under this Agreement;
(b) use the disclosing party's Confidential Information for anyone
else's benefit for any reason; or
(c) disclose the disclosing party's Confidential Information to
anyone other than to those Employees with a need to know the
information in order to carry out the disclosing party's
responsibilities and obligations under this Agreement;
7.3 Exceptions. The obligations of confidentiality contained in Section
7.2 will not apply to information disclosed by a party (the
"disclosing party") to the other party (the "receiving party") to the
extent that it can be established by the receiving party by competent
proof that such information:
(a) was already known to the receiving party, other than under an
obligation of confidentiality, at the time of disclosure;
(b) was generally available to the public or otherwise part of the
public domain at the time of its disclosure to the receiving
party (provided, however, that a combination of features
individually in the public domain shall not fall within this
exception unless the fact of such combination is also in the
public domain);
(c) became generally available to the public or otherwise part of the
public domain after its disclosure and other than through any act
or omission of the receiving party in breach of this Agreement;
(d) was disclosed to the receiving party, other than under an
obligation of confidentiality, by a third party who had no
obligation to the disclosing party not to disclose such
information to others;
(e) is authorized for release in writing by the disclosing party;
(f) is developed by such party completely independently of any such
received confidential information; or
(g) that is required to be disclosed pursuant to applicable law, a
court order, a judicial proceeding, or the enforcement hereof,
provided that the disclosing party is provided with reasonable
prior written notice so that such party may contest such
disclosure.
7.4 Return of Confidential Information. Upon the request of a party, the
other party will return any of the requesting party's Confidential
Information that is in tangible form and any physical manifestations
of such Confidential Information, or will certify destruction of the
same.
7.5 Employees. The receiving party shall take all reasonable steps
necessary to ensure that its Employees are bound by restrictions
regarding the use and disclosure of the disclosing party's
Confidential Information similar to those contained herein.
7.6 Injunctive Relief. Each party understands, acknowledges and agrees
that Confidential Information is of great competitive as well as
monetary value and that, therefore, without waiving any other rights
or remedies, each party shall have the right to bring an action to
enjoin any unauthorized disclosure or use of its own Confidential
Information by the other party, it being agreed that a suit for
monetary damages alone would be an inadequate remedy. This section
shall survive termination of this Agreement for a period of
[Confidential Treatment Requested].
8. LIMITATION OF LIABILITY AND INDEMNITY FOR INFRINGEMENT
8.1 Limited Warranty. ANDREA warrants the NC8 Headsets to end users as
provided in the written Product Warranty accompanying the NCS
Headsets. All replacement copies are delivered subject to the term(s)
of said Product Warranty. SUCH WARRANTIES MAY BE ASSERTED BY END
USERS ONLY, AND NOT BY MICROSOFT, ITS CUSTOMERS OR ANY OTHER PERSONS
OR ENTITIES OTHER THAN END USERS. ANDREA further warrants to
MICROSOFT that the NC8 Headsets furnished hereunder will, at the time
of delivery, confirm to the written Product Warranty accompanying
such NC8 Headsets. THIS WARRANTY MAY BE ASSERTED BY MICROSOFT ONLY,
AND NOT BY MICROSOFT'S CUSTOMERS OR ANY OTHER THIRD PARTY.
8.2 No Other Warranties. EXCEPT AS EXPRESSLY PROVIDED HEREIN, EACH PARTY
HEREBY EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES OF ANY KIND OR
NATURE, WHETHER EXPRESS OR IMPLIED, RELATING TO THE ANDREA IP RIGHTS,
THE NC8 HEADSETS, THE MICROSOFT IP RIGHTS, THE ENCARTA INTERACTIVE
ENGLISH LEARNING SOFTWARE PRODUCTS AND THE ENCARTA INTERACTIVE
ENGLISH LEARNING SKUS. EXCEPT AS EXPRESSLY PROVIDED HEREIN, EACH
PARTY FURTHER HEREBY EXPRESSLY DISCLAIMS ANY EXPRESS OR IMPLIED
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR
THAT THE PRACTICE OF THE ANDREA IP RIGHTS, THE MICROSOFT IP RIGHTS OR
THE MANUFACTURE, USE OR SALE OF THE NC8 HEADSETS, THE ENCARTA
INTERACTIVE ENGLISH LEARNING SOFTWARE PRODUCTS AND ENCARTA
INTERACTIVE ENGLISH LEARNING SKUS WILL NOT INFRINGE ANY PATENT,
COPYRIGHT, TRADEMARK, OR OTHER RIGHTS OF THIRD PARTIES. Nothing
contained in this Agreement shall be construed as either a warranty
or representation by either party as to the validity or scope of the
Andrea IP Rights or the Microsoft IP Rights. Neither party assumes
any liability in respect of any infringement of any patent or other
right of third parties due to the activities of the other party under
this Agreement.
8.3 ANDREA Indemnity.
(a) ANDREA agrees to indemnify and hold MICROSOFT harmless from, and
defend MICROSOFT against, any loss, cost, damage, or expense and
any claims therefor (including reasonable attorney's fees and
expenses) (each a "Claim") suffered by MICROSOFT that arise from
the infringement or the alleged infringement by ANDREA
trademarks or by the NC8 Headsets of any patent rights,
copyrights or other intellectual property rights of a third
party, including any claim of misappropriation of trade secrets,
in any country that is a signatory to the Berne Convention.
(b) ANDREA SHALL HAVE NO LIABILITY OR OBLIGATION HEREUNDER TO
MICROSOFT WITH RESPECT TO ANY CLAIM THAT RESULTS FROM OR IS BASED
ON (i) ANY IMPROVEMENTS, UPDATES, MODIFICATIONS OR OTHER CHANGES
TO THE NC8 HEADSETS AFTER DELIVERY TO MICROSOFT THAT ARE NOT MADE
BY ANDREA; (ii) IMPROPER USE OF THE NC8 HEADSET; OR (iii) END
USER ERROR.
(c) ANDREA SHALL HAVE NO LIABILITY OR OBLIGATION TO MICROSOFT WHERE
MICROSOFT'S USE OF THE NC8 HEADSETS IS INCIDENT TO AN
INFRINGEMENT NOT RESULTING FROM THE NC8 HEADSETS.
(d) IF ANY NC8 HEADSETS BECOME, OR IN ANDREA'S OPINION IS LIKELY TO
BECOME, THE SUBJECT OF A CLAIM, ANDREA AT ITS OWN OPTION AND
EXPENSE SHALL EITHER (i) PROCURE FOR MICROSOFT AND/OR MICROSOFT
CUSTOMERS THAT HAVE OBTAINED NC8 HEADSETS FROM MICROSOFT IN
ENCARTA INTERACTIVE ENGLISH LEARNING SKUs THE RIGHT TO CONTINUE
USING SUCH NC8 HEADSETS; (ii) REPLACE OR MODIFY THE NC8 HEADSETS
SO THAT THEY BECOME NON-INFRINGING; OR (iii) REFUND TO MICROSOFT
THE PURCHASE PRICE FOR THE NC8 HEADSETS PAID TO ANDREA TO DATE.
8.4 MICROSOFT Indemnity. MICROSOFT agrees to indemnify and hold ANDREA
harmless from, and defend ANDREA against, any loss, cost, damage, or
expense and any claims therefor (including reasonable attorney's fees
and expenses) suffered by ANDREA that arise from the publication,
marketing, distribution and/or sale by MICROSOFT of the Encarta
Interactive English Learning Software Products or the stockkeeping
units containing such Encarta Interactive English Learning Software
Products that are based on (i) alleged infringement by the Encarta
Interactive English Learning Software Products or the stockkeeping
units containing such Encarta Interactive English Learning Software
Products of any patent rights, copyrights or other intellectual
property rights of a third party in any country that is a signatory
to the Berne Convention; or (ii) arising out of the illegal
exportation by MICROSOFT or any authorized agent of MICROSOFT of any
Encarta Interactive English Learning Software Product, Encarta
Interactive English Learning SKU or NC8 Headset.
9. OTHER INDEMNITY MATTERS
9.1 NEITHER PARTY SHALL BE LIABLE OR OBLIGATED IN ANY MANNER UNDER THIS
AGREEMENT TO THE OTHER FOR ANY LOST PROFITS, SPECIAL, INCIDENTAL,
CONSEQUENTIAL OR PUNITIVE DAMAGES EVEN IF INFORMED OF THE POSSIBILITY
THEREOF IN ADVANCE.
9.2 Each party shall give the other party prompt written notice of any
threat, warning or notice of any Claim of which such party has
knowledge or has reason to have such knowledge and for which indemnity
is provided hereunder by a party.
9.3 If any action shall be threatened or brought against either party
(the "Claimant") in respect to which indemnity may be sought from the
other party (the "Non-Claiming Party") pursuant to the provisions of
this Agreement, in order to be entitled to the indemnity hereunder,
the Claimant shall promptly notify the Non-Claiming Party in writing,
specifying the nature of the action and the total monetary amount
sought or other such relief as is sought therein. The Claimant shall
cooperate with the Non-Claiming Party at the Non-Claiming Party's
expense in all reasonable respects in connection with the defense of
any such threatened or actual action. The Non-Claiming Party may,
upon written notice thereof to Claimant, undertake to conduct all
proceedings or negotiations in connection therewith, assume the
defense thereof, and if it so undertakes, it shall also undertake all
other required steps or proceedings to settle or defend any such
action; including the employment of counsel which shall be reasonably
satisfactory to Claimant, and payment of all expenses; provided,
however, that the Non-Claiming Party shall not, without the
Claimant's prior written consent, settle, compromise or consent to
the entry of any Judgment in any such action (whether or not the
Claimant is an actual or potential party to such action), unless such
settlement, compromise or consent (i) includes an unconditional
release of the Claimant from all liability arising out of such action
and (ii) does not include a statement as to or an admission of fault,
culpability or failure to act by or on behalf of the Claimant.
Claimant, at its own expense, shall have the right to employ separate
counsel and participate in the defense thereof. The Non-Claiming Party
shall reimburse Claimant upon demand for any payments made or loss
suffered by it at any time after the date hereof, based upon (i) the
final judgment of any court of competent jurisdiction, or (ii)
pursuant to a bona fide compromise or settlement of claims, demands,
or actions as agreed to by the Non-Claiming Party, in respect to any
damages to which the foregoing relates.
10. NOTICES
All notices and other communications hereunder will be in writing and will
be deemed given if delivered personally or by facsimile transmission (receipt
verified), telexed, or sent by express courier service, to the parties at the
following addresses (or at such other address for a party as will be specified
by like notice; provided, that notices of a change of address will be effective
only upon receipt thereof):
IF TO MICROSOFT AT:
Microsoft Corporation
One Microsoft Way
Redmond, Washington 98052-6399
One copy marked "Attention: [Confidential Treatment Requested]; and a
second copy marked "Attention: [Confidential Treatment Requested]
IF TO ANDREA AT:
Andrea Electronics Corporation
45 Melville Park Road
Melville, NY 11747
One copy marked "Attention: [Confidential Treatment Requested]; and a
second copy marked "Attention: [Confidential Treatment Requested].
11. MISCELLANEOUS
11.1 Entire Agreement; Amendments; Counterparts. This Agreement together
with the schedules attached hereto contains the entire understanding
of the parties on the subject matter hereof and no representation,
affirmation of fact, course of prior dealings, promise or condition in
connection herewith or usage of the trade not expressly incorporated
herein shall be binding on the parties. This Agreement together with
the schedules attached hereto shall not be amended except by written
agreement of the parties signed by each of them; shall be binding
upon, and inure to the benefit of, the parties and their successors,
representatives, administrators and permitted assigns; and may be
executed in one or more counterparts each of which shall be deemed an
original hereof, but all of which shall constitute but one and the
same agreement.
11.2 Nonassignment. Except as provided in this Section 11.2, the rights and
licenses granted herein are nonassignable. Any attempted assignment of
the rights or delegation of the obligations under this Agreement shall
be void without the prior written consent of the nonassigning or
nondelegating party (which may be withheld in the sole discretion of
such party), except in connection with the sale of all or
substantially all of a party's assets (by merger or otherwise). Each
party may without such prior written consent assign or delegate to one
or more of its wholly-owned subsidiaries any or all of its respective
rights or obligations hereunder so long as such party remains
primarily liable for the obligations to the other party set forth
herein.
11.3 Construction.
(a) The words "herein," "hereof," "hereunder," "hereby," "herewith"
and words of similar import when used in this Agreement shall be
construed to refer to this Agreement as a whole. The word
"including" shall mean "including, but not limited to," any
enumerated items.
(b) Each party and its counsel has reviewed this Agreement.
Accordingly, the normal rule of construction that any ambiguities
and uncertainties are to be resolved against the party preparing
an agreement will not be employed in the interpretation of this
Agreement; rather the Agreement shall be construed as if all
parties had jointly prepared it.
11.4 Waivers. A party's failure at any time to require the other party's
performance of any obligation under this Agreement shall not affect
such party's right to require subsequent performance of that
obligation. Any waiver of any breach of any provision of this
Agreement shall not be construed as a waiver of any continuing or
succeeding breach of such provision, waiver or modification of the
provision itself or a waiver or any modification of any right under
this Agreement.
11.5 Severability. Whenever possible, each provision of the Agreement will
be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of the Agreement is held to be
prohibited by or invalid under applicable law, such provision will be
ineffective only to the extent of such prohibition or invalidity,
without invalidating the remainder of the Agreement.
11.6 Force Majeure. Neither ANDREA nor MICROSOFT shall be in default or
liable for any delay or failure of compliance with this Agreement due
to an act of nature, public enemy, government action, freight embargo,
or strike beyond the control of the defaulting party and the
defaulting party shall provide the non-defaulting party immediate
notice of any such anticipated delay or failure of compliance;
provided, however, that any such act shall not relieve the defaulting
party's obligations hereunder and such party hereby agrees to perform
its obligations as soon as practicable after the conditions causing
such delay or failure have subsided. In the event that such condition
persists for a period of [Confidential Treatment Requested], either
party may terminate this Agreement without liability to the other
except for such obligations as have already accrued under this
Agreement prior to such termination.
11.7 Headings. The headings to sections and subsections of this Agreement
are to facilitate reference only and do not form a part of this
Agreement, and shall not in any way affect the interpretation hereof.
11.8 Governing Law; Jurisdiction. Any and all disputes, controversies or
claims arising from or relating to the terms, conditions and/or
provisions of this Agreement, including, without limitation, any and
all such disputes, controversies or claims involving the
interpretation and construction of this Agreement, shall be resolved
by reference to and in accordance with the laws of the State of
Washington as applied to contracts made and to be performed entirely
within the State of Washington.
<PAGE>
IN WITNESS WHEREOF the parties have caused this Agreement to be executed by
their duly authorized representatives as of the day and year first above
written.
<TABLE>
<CAPTION>
MICROSOFT CORPORATION ANDREA ELECTRONICS CORPORATION
<S> <C>
By: [Confidential Treatment Requested] By: [Confidential Treatment Requested]
Name:[Confidential Treatment Requested] Name:[Confidential Treatment Requested]
Title:[Confidential Treatment Requested] Title:[Confidential Treatment Requested]
</TABLE>
<PAGE>
SCHEDULE 2.1
ANDREA NC8 HEADSETS
Model No. Product Description Encarta Interactive
English Learning SKU
[Confidential Treatment Requested]
SCHEDULE 2.2
ANDREA NAMES, MARKS AND MATERIALS
[Confidential Treatment Requested]
SCHEDULE 2.3
FORM OF PRODUCT WARRANTY FOR ANDREA NC8 HEADSETS
(See attached Consumer Guarantee)
SCHEDULE 3.1
FORM OF PURCHASE ORDER
The form of Purchase Order shall include the following items: 1) the
Purchase Order number, 2) the Purchase Order date, 3) the part
number/description, 4) the quantity and unit price, 5) the extended price of the
Purchase Order, 6) the "ship to" address, 7) the "bill to" address, 8) the
anticipated Delivery date, 9) whether MICROSOFT chooses to have ANDREA manage
shipping and handling services for the products covered by the Purchase Order,
and 10) the appropriate contact person.
<PAGE>
SCHEDULE 3.2
PRICING SCHEDULE
Product Volume Price per Unit Leadtime
NC8 Headset [Confidential Treatment Requested]
NC8 Headset [Confidential Treatment Requested]
In the event MICROSOFT chooses ANDREA to manage shipping and handling
services, the prices above will be increased to include actual freight,
applicable tariffs and handling charges currently estimated as follows: (such
estimates are subject to changes in actual freight and tariff costs and,
accordingly, these estimates may increase or decrease from time to time)
<TABLE>
<CAPTION>
Destination Method Cost per Unit Shipping Leadtime
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Confidential Treatment Requested]
</TABLE>
SCHEDULE 5.3(D)
LIST OF MARKETS IN WHICH LOCAL OR TOLLFREE SERVICE IN
DOMINANT LANGUAGE WILL BE PROVIDED
[Confidential Treatment Requested]
<PAGE>
SCHEDULE 5.1
USING MICROSOFT LOGO(S)
1. MICROSOFT LOGO(S):
2. USAGE GUIDELINES:
The following guidelines apply whenever ANDREA places a copy of the
MICROSOFT Logo(s) on ANDREA's web site.
1. Except as Microsoft may authorize elsewhere, ANDREA may use only the
MICROSOFT Logo(s) in accordance with the Agreement and guidelines set forth
below. By signing the Agreement, ANDREA agrees to be bound by these
Guidelines.
2. ANDREA may only use the Microsoft Logo on ANDREA's web site located at
http://________________, and not in any other manner. It must always be an
active link to MICROSOFT's web site located at http://________________ or
other URL(S) as directed by MICROSOFT.
3. The MICROSOFT Logo(s) may be used only on ANDREA's web site as set forth in
the Agreement. ANDREA's web site title must appear at least as prominent as
the MICROSOFT Logo(s). ANDREA may not display the MICROSOFT Logo(s) in any
manner that implies sponsorship, endorsement, or license by MICROSOFT.
4. The MICROSOFT Logo(s) must appear by Itself, with a minimum spacing (the
height of the MICROSOFT Logo) between each side of the MICROSOFT Logo and
other graphic or textual elements on ANDREA's web site. The MICROSOFT
Logo(s) may not be used as a feature or design element of any other logo.
5. ANDREA may not alter the MICROSOFT Logo(s) in any manner, including size,
proportions, colors, elements, etc., or animate, morph or otherwise distort
its perspective or two-dimensional appearance.
6. ANDREA may not use the MICROSOFT Logos on any site that disparages
MICROSOFT or its products or, services, infringes any MICROSOFT
intellectual property or other rights, or violates any state, federal or
international law.
7. These Guidelines do not grant a license or any other right in MICROSOFT's
logos or trademarks. MICROSOFT reserves the right in its sole discretion to
terminate or modify permission to use the MICROSOFT Logo(s) at any time.
MICROSOFT reserves the right to take action against any use that does not
conform to these policies, infringes any MICROSOFT intellectual property or
other right, or violates other applicable law.
8. MICROSOFT DISCLAIMS ANY WARRANTIES THAT MAT BE EXPRESS OR IMPLIED BY LAW
REGARDING THE LOGO, INCLUDING WARRANTIES AGAINST INFRINGEMENT.
<PAGE>
SCHEDULE 5.2
USING ANDREA LOGO(S)
1. ANDREA LOGO(S):
2. USAGE GUIDELINES:
The following guidelines apply whenever MICROSOFT places a copy of the
ANDREA Logo(s) on MICROSOFT's web site.
1. Except as Andrea may authorize elsewhere, MICROSOFT may use only the ANDREA
Logo(s) in accordance with the Agreement and guidelines set forth below. By
signing the Agreement, MICROSOFT agrees to be bound by these Guidelines.
2. MICROSOFT may only use the ANDREA Logo on MICROSOFT's web site located at
http://________________, and not in any other manner. It must always be an
active link to ANDREA's web site located at http://________________ or
other URL(S) as directed by ANDREA.
3. The ANDREA Logo(s) may be used only on MICROSOFT's web site as set forth in
the Agreement. MICROSOFT's web site title must appear at least as prominent
as the ANDREA Logo(s). MICROSOFT may not display the ANDREA Logo(s) in any
manner that implies sponsorship, endorsement, or license by ANDREA.
4. The ANDREA Logo(s) must appear by itself, with a minimum spacing (the
height of the ANDREA Logo) between each side of the ANDREA Logo and other
graphic or textual elements on MICROSOFT's web site. The ANDREA Logo(s) may
not be used as a feature or design element of any other logo.
5. MICROSOFT may not alter the ANDREA Logo(s) in any manner, including size,
proportions, colors, elements, etc., or animate, morph or otherwise distort
its perspective or two-dimensional appearance.
6. MICROSOFT may not use the ANDREA Logos on any site that disparages ANDREA
or its products or, services, infringes any ANDREA intellectual property or
other rights, or violates any state, federal or international law.
7. These Guidelines do not grant a license or any other right in ANDREA's
logos or trademarks. ANDREA reserves the right in its sole discretion to
terminate or modify permission to use the ANDREA Logo(s) at any time.
ANDREA reserves the right to take action against any use that does not
conform to these policies, infringes any ANDREA intellectual property or
other right, or violates other applicable law.
8. ANDREA DISCLAIMS ANY WARRANTIES THAT MAT BE EXPRESS OR IMPLIED BY LAW
REGARDING THE LOGO, INCLUDING WARRANTIES AGAINST INFRINGEMENT.
<PAGE>
CONSUMER GUARANTEE Dear Customer:
Thank you for buying this product from Andrea
ANDREA PURCHASER ________________________________
ELECTRONICS CORPORATION
MODEL NO. ________________________________
A LIST OF AUTHORIZED SERVICE PRODUCT NO. ________________________________
PROVIDERS IS AVAILABLE FROM:
DATE OF PURCHASE ____________________________
Andrea Electronics Corporation
11-40 45th Road PURCHASED FROM ______________________________
Long Island City, NY 11101
ADDRESS ________________________________
STATEMENT OF LIMITED WARRANTY
The warranties provided by Andrea Electronics Corporation in this Statement
of Limited Warranty apply only to products you originally purchase for your use,
and not for resale, from Andrea Electronics or an Andrea Electronics authorized
reseller. The term "product" means an Andrea Electronics Corporation product,
its features, conversions, upgrades, elements, or accessories, or any
combination of them. Products are subject to these terms only if purchased in
the United States or Puerto Rico, or Canada, and located in the country of
purchase. If you have any questions, contact Andrea Electronics Corporation or
your reseller.
Les conditions de la garantie qui s'appliquent dans le pays ou le produit a
ete achete sont disponibles aupres d'Andrea Electronics ou votre detaillant.
Die Garantiebedingungen, die in dem Land gelten, in welchem das Gerat
gekauft wird. Sind von Andrea Electronics oder lhrem Handler erhaltlich.
Le condizioni di garanzia in vigore nel paese ove e stato acquistato il
prodotto sono disposibili presso l'Andrea Electronics o il rivenditore.
Podra obtener los terminos y las condiciones sobre las garantia aplicable
en el pais de compara de Andrea Electronics o de su concessionario local.
IN THE EVENT THAT GUARANTEE SERVICE IS REQUIRED FOR THE ANDREA ELECTRONICS
PRODUCT COVERED BY THIS GUARANTEE, PLEASE RETURN IT TO THE RETAILER AUTHORIZED
SERVICE STATION.
YOUR GUARANTEE
By this Consumer Guarantee, Andrea Electronics Corporation guarantees this
product to be free of defects in materials and workmanship for a period of one
(1) year (the "Guarantee Period") from and after the time of its original
purchase or the time it was taken on hire purchase terms by the consumer from
the retailer.
Subject to the conditions explained below, if during the Guarantee Period
the product proves to be defective due to improper materials or workmanship,
Andrea Electronics' Retailer Authorized Service Stations or Authorized Servicing
Dealers will without charge for labor or parts repair or, at the discretion of
the distributor, replace this product or its defective parts. To contact an
Andrea Electronics customer service representative from 8:00 a.m. to 8:00 p.m.
EST, call (800) 707-5779 or your local Andrea Electronics reseller.
CONDITIONS
1. The guarantee will be honored only if this Consumer Guarantee is
presented together with the original invoice/cash ticket issued to the
consumer by the retailer and if this Consumer Guarantee Card states the
following information: (a) the purchaser's name, (b) the retailer's name
and address, (c) the model name and product number of the purchased
product, and (d) the date or purchase of the product. If this information
has been removed or changed after the original purchase of the product by
the consumer from the retailer, Andrea Electronics reserves the right to
refuse guarantee service.
2. In the event that this product needs to be adapted, change, or adjusted
in order to conform to the national or local technical or safety standards
in force in any country or locality other than the one for which the
product was originally designed and manufactured, any such adaptation,
change, or adjustment shall not be considered to be a defect in materials
or workmanship for purposes of this Consumer Guarantee. No reimbursements
shall be made under this Consumer Guarantee for the following: (a) any
adaptation, changes, or adjustments to the product, or attempts to make the
same, whether properly made or not, in order to conform to such standards,
(b) any adaptation, changes, or adjustments to upgrade the product from its
normal purpose as described in the Instruction Manual, or (c) any damage
resulting from any adaptations, changes, or adjustments to the product or
attempts to make the same.
3. The Consumer Guarantee shall not cover any of the following:
(a) periodic check-ups, maintenance and repair or replacement of
parts due to normal wear and tear;
(b) home service transport costs and other costs and risks of transport
relating directly or indirectly to this Consumer Guarantee; and
(c) damage to this product resulting from:
(i) abuse and misuse, including, without limitation, (a)
the failure to use this product for its normal
purposes or in accordance with Andrea Electronics'
instructions on the proper use and maintenance of
this product and (b) the installation or the use of
this product in a manner inconsistent with the
technical or safety standards in force in the
country where the product is used;
(ii) repairs done by non-Authorized Service Stations; and
(iii) accidents, acts of God, or any cause beyond the
control of Andrea Electronics, including, without
limitation, electrical storms, water, fire, public
disturbances, and improper ventilation.
4. This Consumer Guarantee does not affect the consumer's statutory rights
under applicable national legislation in force, nor the consumer's rights
against the retailer arising from any sales/purchase contracts between the
retailer and the consumer, in the absence of applicable national
legislation, this Consumer Guarantee will be the consumer's sole and
exclusive remedy, and neither Andrea Electronics Corporation nor any of its
subsidiaries or distributors shall be liable for any incidental or
consequential damages for breach of any expressed or implied guarantee of
this product.
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (this "Agreement") is made this 25th day of February,
1999 by and between Clarion Corporation of America, a California corporation
("CLARION") and Andrea Electronics Corporation, a New York corporation
("ANDREA").
RECITALS
WHEREAS, CLARION has developed and markets and sells the Clarion AutoPC
(the "AutoPC Product"), an information, communication, navigation, and
entertainment system for installation in automobile dashboards.
WHEREAS, ANDREA has developed and markets and sells the Andrea
AutoArray (the "AutoArray Product") and the Andrea AutoSE (the "AutoSE
Product"), each a far-field microphone product that can be used with the AutoPC
Product; and
WHEREAS, CLARION desires to purchase from ANDREA, and ANDREA desires to
sell to CLARION, in accordance with the terms of this Agreement, the AutoArray
Product and the AutoSE Product for sale with the AutoPC Product.
NOW, THEREFORE, in consideration of the premises and mutual covenants
and agreements herein contained, and subject to the terms and conditions set
forth herein, the parties hereto agree as follows:
1. DEFINITIONS
The following terms shall have the following meanings under this
Agreement:
.1 "ANDREA Documentation" means computations, configurations, data,
designs, drawings, manuals (including without limitation installation manuals,
owner's manuals and service manuals), models, photographs, plans, renderings,
samples, schematics, sketches, specifications and any other written and tangible
materials provided by ANDREA in connection with this Agreement.
.2 "Andrea IP Rights" shall mean those intellectual property rights,
including copyrights, patents, trade secrets, trademarks, service marks and
other proprietary rights owned or otherwise controlled by ANDREA and that are
specifically embodied in the Products.
.3 "Andrea Trademarks" means those trademarks or trade names owned or
used by ANDREA or its affiliates, and designated by ANDREA in its sole
discretion for use in connection with the AutoArray and AutoSE Products.
.4 "CLARION Documentation" means computations, configurations, data,
designs, drawings, manuals (including without limitation installation manuals,
owner's manuals and service manuals), models, photographs, plans, renderings,
samples, schematics, sketches, specifications and any other written and tangible
materials provided by CLARION in connection with this Agreement.
.5 "Clarion Trademarks" means those trademarks or trade names owned or
used by CLARION or its affiliates, and designated by CLARION in its sole
discretion for use in connection with the AutoPC Products.
.6 "Product(s)" mean those AutoArray Products and AutoSE Products
identified on Schedule 1.5 attached hereto, and the parts and components
thereof, manufactured by ANDREA and sold to CLARION pursuant to this Agreement.
The Products covered by this Agreement may be changed from time to time upon the
written consent of both parties.
.7 "Product Warranty" means the product warranty that ANDREA
ordinarily and customarily provides to purchasers of the AutoArray Product or
the AutoSE Product, as the case may be, and set forth in Schedule 1.6 attached
hereto.
.8 "Purchase Orders" means the purchase orders issued by CLARION to
ANDREA in accordance with Section 3.1.
.9 "Specifications" means the descriptive material itemizing the
functional and operational requirements of the Products to be purchased
hereunder and such other technical specifications, drawings and other material
as identified in Schedule 1.7 attached hereto. The Specifications covered by
this Agreement may be changed from time to time upon the written consent of both
parties.
2. SALE OF PRODUCTS
.1 ANDREA agrees to sell to CLARION, and CLARION agrees to purchase
from ANDREA, Products that conform to the Specifications. Such sale and purchase
of Products shall be made from time to time during the term of this Agreement
and in accordance with the terms and conditions of this Agreement. Specific
quantities of Products shall be ordered by CLARION for purchase by the
transmission to ANDREA, from time to time during the term of this Agreement, of
Purchase Orders issued by CLARION in accordance with Section 3.1. CLARION shall
have no obligation to issue any Purchase Orders or purchase any Products except
such Products as are specified in Purchase Orders placed by CLARION and then
only to the extent of the Products covered under such Purchase Orders.
.2 Subject to the Andrea IP Rights, CLARION shall not be restricted as
to its sale or use of the Products purchased hereunder including, without
limitation, worldwide marketing to any end user or remarketer, and use by
CLARION for its benefit or for the benefit of others. In addition, this
Agreement shall not be construed as preventing CLARION from acquiring at any
time products similar or related to the Products from any other source.
.3 To the extent that CLARION and ANDREA conduct any of the purchase
and sale transactions hereunder through Electronic Data Interchange ("EDI") or
similar electronic means, the system employed by each to effect such transaction
shall be capable of handling calendar dates, leap year calculations and related
calendrical information processing for dates in both the twentieth and
twenty-first centuries a.d.
.4 ANDREA represents and warrants that the Products are Y2K compliant
as such term is defined in Schedule 3.1 attached hereto.
3. PURCHASE ORDERS
.1 Placement. CLARION may place firm Purchase Orders for the delivery
of Products by ANDREA. Each Purchase Order shall specify a delivery date of not
less than [Confidential Treatment Requested] following the date of the Purchase
Order and shall be substantially in the form set forth in Schedule 3.1.
Notwithstanding the foregoing, if CLARION requests an accelerated delivery date
in any Purchase Order, ANDREA may, in its sole discretion, use commercially
reasonable efforts to meet such accelerated date. CLARION shall in addition,
prior to the end of each calendar month during the term of this Agreement,
provide to ANDREA a rolling updated forecast of projected Purchase Orders for
Products by CLARION during the three (3) calendar months immediately subsequent
to such month end. Such forecast shall be for informational purposes only and
shall not be construed as a purchase commitment by CLARION.
.2 Acceptance. ANDREA shall accept and acknowledge all Purchase
Orders, which are placed by CLARION in conformance with the terms of this
Agreement. Any Purchase Order not placed in conformance with the terms of this
Agreement must be rejected by written notice from ANDREA to CLARION within
[Confidential Treatment Requested] after receipt of such Purchase Order. In the
event that ANDREA uses a form of acknowledgement with terms that conflict in any
way with this Agreement, the terms of this Agreement shall be controlling.
.3 Minimum Purchase Order Quantities. Each Purchase Order for AutoArray
Products shall be for a minimum of [Confidential Treatment Requested]. Each
purchase order for AutoSE Products shall be for a minimum of [Confidential
Treatment Requested].
4. PAYMENT TERMS
.1 Prices. The total purchase prices for the Products are set forth in
Schedule 4.1 attached hereto. Prices for the Products may be changed no more
than [Confidential Treatment Requested] by ANDREA providing CLARION with at
least [Confidential Treatment Requested] notice of the change and a new Schedule
4.1.
.2 Payment. Payment for each shipment of Products shall be net
[Confidential Treatment Requested] from the date of delivery of such shipment.
Invoices not paid in accordance with the foregoing shall be subject to a
[Confidential Treatment Requested] per month interest charge on any outstanding
balance or the maximum interest allowed by law, whichever is less, unless such
invoices are the subject of a bona fide dispute between ANDREA and CLARION.
Invoices paid in full within [Confidential Treatment Requested] from the date of
delivery shall entitle CLARION to a discount of [Confidential Treatment
Requested] from the purchase price set forth in such invoice.
5. DELIVERY
.1 Shipment. ANDREA will ship the Products covered by any Purchase
Order F.O.B. CLARION's warehouse. Title to the Products and risk of loss or
damage shall pass from ANDREA to CLARION upon delivery of the Products F.O.B.
CLARION's warehouse. All shipping containers shall bear such information and
markings as shall be desired by CLARION or required by law.
.2 Acceptance. CLARION shall have the right to conduct an incoming
inspection and shall have [Confidential Treatment Requested] after delivery to
notify ANDREA in writing whether some or all of the Products are rejected for
not meeting the Specifications. Any Product not rejected within this
[Confidential Treatment Requested] period shall be deemed accepted. In the event
CLARION rejects Products, CLARION shall provide a detailed explanation therefor,
and ANDREA may inspect the rejected Products at CLARION's premises, replace the
rejected Products without requiring their return, or require the return of the
rejected Products, freight collect. Each Rejected Product shall be repaired or
replaced at ANDREA's expense, including return freight to CLARION.
.3 Cancellation and Rescheduling. CLARION may cancel or request
changes in delivery dates appearing in its Purchase Orders at no charge provided
written notice of such cancellation or change is received by ANDREA not less
than [Confidential Treatment Requested] prior to the scheduled delivery date to
which the cancellation or change pertains. Any cancellation or change received
by ANDREA less than [Confidential Treatment Requested] prior to a scheduled
delivery date shall be subject to a [Confidential Treatment Requested] charge
based on the amount of the Purchase Order or portion thereof changed or
cancelled.
6. TRADEMARKS
.1 ANDREA shall not use the CLARION Trademarks on the Products or on
any other ANDREA products or otherwise; provided, however, that ANDREA may use
the CLARION Trademarks, to the extent and in a manner as specified by CLARION,
solely in connection with promotional materials and subject, however, to the
prior review and approval by CLARION of any such promotional materials. Upon the
expiration or termination of this Agreement, ANDREA shall immediately
discontinue the use of the CLARION Trademarks, and thereafter shall not use the
CLARION Trademarks, or marks or names confusingly similar thereto, directly or
indirectly in connection with its business or that of its affiliates or
principals. During the term of this Agreement, ANDREA will promptly notify
CLARION in the event that it learns of any infringement or unauthorized use of
the CLARION Trademarks by any person.
.2 CLARION shall not use the ANDREA Trademarks in any manner
inconsistent with the instructions of ANDREA nor on or in connection with any
products except as purchased and sold pursuant to this Agreement. Upon the
expiration or termination of this Agreement, CLARION shall immediately
discontinue the use of the ANDREA Trademarks, and thereafter shall not use the
ANDREA Trademarks, or marks or names confusingly similar thereto, directly or
indirectly in connection with its business or that of its affiliates or
principals. During the term of this Agreement, CLARION will promptly notify
ANDREA in the event that it learns of any infringement or unauthorized use of
the ANDREA Trademarks by any person.
7. RIGHTS IN DATA
.1 Ownership of Proprietary Rights. CLARION and its affiliates are the
exclusive owners of all right, title and interest in and to the proprietary
rights associated with or arising from the AutoPC Products and related software.
ANDREA and its affiliates are the exclusive owners of all right, title and
interest in and to the proprietary rights associated with or arising from the
AutoArray Products and the AutoSE Products.
.2 Ownership of Document. The CLARION Document shall remain the
exclusive property of CLARION and its affiliates and shall be protected from
disclosure in accordance with the provisions of Article 12 of this Agreement.
Upon expiration or termination of this Agreement, the CLARION Documentation
(including all copies thereof) shall be promptly returned to CLARION. The ANDREA
Documentation shall remain the exclusive property of ANDREA and its affiliates
and shall be protected from disclosure in accordance with the provisions of
Article 12 of this Agreement. Upon expiration or termination of this Agreement,
the ANDREA Documentation (including all copies thereof) shall be promptly
returned to ANDREA.
8. WARRANTY
.1 Provision of Product Warranty. ANDREA agrees to provide the
Product Warranty for each Product sold to CLARION hereunder. The Product
Warranty shall not apply to any failure or malfunction which results from any
of the following events (if applicable);
(a) improper design of the AutoPC;
(b) components, parts or materials supplied by CLARION and used in
the Product;
(c) improper installation, maintenance, operation or use of a
Product;
(d) any modification of a Product performed without ANDREA's written
approval; or
(e) any combination of a Product with another product not provided or
approved by ANDREA, provided, however, that ANDREA herein
acknowledges and approves the intended use of the Products in
combination with the AutoPC Product.
.2 Customer Service; Returns and Product Warranty Service.
(a) CLARION shall be responsible for and shall bear [Confidential
Treatment Requested]. Each party agrees to make its personnel available to the
other for reasonable consultation during normal business hours and at no charge
to the other for purposes relating to this Agreement.
(b) ANDREA shall be responsible for and shall bear [Confidential
Treatment Requested]. ANDREA shall have no liability under the Product Warranty
for any Product that is found not be in breach of the Product Warranty.
(c) Shipment to ANDREA of any Product for Product Warranty repair or
replacement is sought shall be adequately insured by the sender, and ANDREA
shall be liable for the cost of such shipping and such insurance.
9. QUALITY ASSURANCE
.1 ANDREA's Inspection. ANDREA shall inspect the Products before
delivery to assure compliance with the Specifications. ANDREA shall not delivery
any Products which fail such inspection. Upon request by CLARION, ANDREA shall
provide the record of such finished goods inspection.
.2 Traceability. ANDREA shall give each Product a unique serial number
which shall be recorded for purposes of defect and warranty traceability, and
ANDREA shall maintain a recordkeeping system with such data and provide CLARION
with access to such data as necessary.
.3 Changes. If any change in the design, material or manufacturing
process for the Products (whether or not requested by CLARION) causes the
Products to be of materially different quality from prior shipments, ANDREA
shall submit to CLARION, at least [Confidential Treatment Requested] before
production quantities are scheduled for delivery, a sample Product manufactured
under the proposed change together with a record of its inspection for CLARION's
approval; provided, however, that the Products shall continue to conform to the
Specifications notwithstanding any such change.
.4 Facility Inspection. ANDREA shall from time to time permit CLARION
or its agent to inspect the facilities, conditions regarding quality assurance,
records and documents of ANDREA relating to the Products, and ANDREA shall use
commercially reasonable efforts to gain permission from ANDREA's subcontractors
for CLARION or its agent to inspect the facilities, conditions regarding quality
assurance, records and documents of such subcontractors relating to the
Products, in order for CLARION to determine whether the Products are being
manufactured under appropriate quality controls; provided, however, that such
inspections will be conducted during normal working hours with prior
notification to ANDREA or such subcontractors, as the case may be. Any
information disclosed to or observed by CLARION or its agent during such
inspections shall be deemed to be proprietary information within the meaning of
and subject to the provisions of Article 12 of this Agreement.
.5 Abnormalities. ANDREA and CLARION shall promptly notify each other
of any abnormalities with respect to the Products or the manufacturing process
relating to the Products if ANDREA or CLARION believes such abnormalities
materially affect the quality or function of the Products. In such case, ANDREA
shall promptly report to CLARION any determination made as to the root cause of
the abnormality and the countermeasures taken by ANDREA in response thereto.
.6 Meetings. ANDREA and CLARION shall meet periodically and from time
to time when necessary during each year of the term of this Agreement to discuss
quality assurance and product improvement and various other aspects of their
business relationship.
10. PRODUCT LIABILITY
.1 Indemnification. ANDREA agrees to indemnify and hold CLARION and
its affiliates harmless from and against any and all liability resulting from
any and all claims by third parties for loss, damage or injury (including death)
allegedly caused by any defect in the Products purchased under this Agreement,
to the extent not caused by misuse, abuse or other fault directly attributable
to CLARION or its customers. ANDREA shall pay all damages and costs awarded,
including reasonable attorney's fees and settlements approved by ANDREA, against
CLARION, its affiliates and/or its or their customers, arising from any such
loss, damage or injury (including death), where such award has been made by a
court of competent jurisdiction and is not subject to appeal.
.2 Insurance. During the term of this Agreement and for a reasonable
period thereafter, ANDREA shall maintain in full force and effect adequate
product liability insurance protecting ANDREA, CLARION and its affiliates
against claims and liability for injury, death, or property damage which arise
out of or relate to the use or operation of the Products purchased under this
Agreement. Such product liability insurance policy shall have a minimum limit of
[Confidential Treatment Requested]. Within [Confidential Treatment Requested]
following the date of this Agreement, ANDREA shall provide CLARION with a
certificate of insurance which provides that CLARION is insured as a vendor on
such policy and that the insurer shall not cancel such policy without providing
a minimum of [Confidential Treatment Requested] prior written notice to CLARION.
ANDREA shall furnish additional certificates of insurance to CLARION on an
annual basis during the term of this Agreement.
11. INDEMNIFICATION FOR INFRINGEMENT
.1 ANDREA's Indemnification. ANDREA agrees to indemnify and hold
CLARION and its affiliates harmless from and against all liabilities, damages
and costs arising out of or related to any claim of infringement or alleged
infringement of any patent, copyright, trade secret or other proprietary right
of any third party by reason of the sale or use of the Products. CLARION shall
notify ANDREA in writing of any such infringement or alleged infringement within
a reasonable period of time after receipt of notice concerning same. ANDREA
shall have the option at any time to undertake the sole and complete defense of
any claim of infringement; provided, however, that CLARION shall be kept
completely informed concerning any such claim and shall have the right, at its
sole option and expense, to participate in the defense of such claim. ANDREA
may, at its option and expense, either (i) procure for CLARION the right to
continue using the Products, (ii) modify the Products so as to render them
non-infringing, or (iii) accept the return of the Products and refund the
purchase price.
.2 Exclusions from Section 11.1. Except where ANDREA contributes to or
induces infringement, ANDREA's obligations under the provisions of Section 11.1
above shall not apply to any claims, allegations, suits, actions or proceedings
resulting solely from: (i) the Specifications provided by CLARION; (ii) any
improvements, updates, modifications or other changes to Products after delivery
to CLARION that are not made or approved by ANDREA; (iii) improper use of the
Products; or (iv) end-user error; (v) where use of the Products is incident to
an infringement not resulting from the Products. CLARION agrees to pay all
damages or costs awarded, including reasonable attorneys' fees and settlements
with respect to any suit, judgment, proceeding or action in which ANDREA is
relieved of its obligations pursuant to this Section 11.2.
.3 CLARION's Indemnification. CLARION agrees to indemnify and hold
ANDREA and its affiliates harmless from and against all liabilities, damages and
costs arising out of or related to any claim of infringement or alleged
infringement of any patent, copyright, trade secret or other proprietary right
of any third party by reason of the sale or use of the AutoPC. ANDREA shall
notify CLARION in writing of any such infringement or alleged infringement
within a reasonable period of time after receipt of notice concerning same.
CLARION shall have the option at any time to undertake the sole and complete
defense of any claim of infringement; provided, however, that ANDREA shall be
kept completely informed concerning any such claim and shall have the right, at
its sole option and expense, to participate in the defense of such claim.
12. CONFIDENTIALITY
.1 Each party agrees to take all reasonable steps to prevent any of
the other party's proprietary and confidential information which it receives
pursuant to this Agreement in written form, or which it receives in another form
and thereafter in written form or summarized or described in written form, from
being disclosed to third parties, and each party agrees not to use such
information, directly or indirectly, for any purpose other than in connection
with this Agreement. All information received under this Agreement will be
deemed to be confidential unless specifically designated as nonconfidential.
Such confidentiality and non-use obligations shall not apply with respect to any
information which:
(a) is or becomes public knowledge through no wrongful act of
the receiving party;
(b) is already known to the receiving party through no wrongful
act of the receiving party;
(c) is independently developed by the receiving party;
(d) is rightfully obtained by the receiving party from any third
party without similar restriction and without breach of any
obligation owed to the disclosing party;
(e) is authorized for disclosure by the disclosing party; or
(f) is disclosed pursuant to a lawful requirement or request of
a governmental agency; provided that the disclosing party
has been given reasonably prior written notice and
opportunity to limit such disclosure or have such disclosure
accorded confidential treatment.
.2 Return of Confidential Information. Upon the request of a party,
the other party will return any of the requesting party's Confidential
Information that is in tangible form and any physical manifestations of such
Confidential Information, or will certify destruction of the same.
.3 Employees. The receiving party shall take all reasonable steps
necessary to ensure that its Employees are bound by restrictions regarding the
use and disclosure of the disclosing party's Confidential Information similar to
those contained herein.
.4 Injunctive Relief. Each party understands, acknowledges and agrees
that Confidential Information is of great competitive as well as monetary value
and that, therefore, without waiving any other rights or remedies, each party
shall have the right to bring an action to enjoin any unauthorized disclosure or
use of its own Confidential Information by the other party, it being agreed that
a suit for monetary damages alone would be an inadequate remedy. This section
shall survive termination of this Agreement for a period of [Confidential
Treatment Requested].
.5 In the event of any inconsistency between the terms of this section
and that certain Non-Disclosure Agreement by and between the parties hereto,
effective as of February 24, 1998 ("Non-Disclosure Agreement"), the terms of the
Non-Disclosure Agreement shall be controlling.
13. TERM AND TERMINATION
.1 Term. This Agreement shall have an initial term of one (1) year
from the date hereof and shall thereafter be automatically renewed for
successive one (1) year terms unless notice of termination is given at least
[Confidential Treatment Requested] prior to the termination date of the initial
term or any renewal term, or unless earlier terminated under Section 13.2 or
Section 13.3.
.2 Termination for Default. In the event that either of the parties
defaults in the performance of any of the terms, conditions, obligations,
undertakings, covenants, or liabilities set forth in this Agreement, the other
party shall give the defaulting party notice of such default. In the event the
defaulting party has not remedied the default within [Confidential Treatment
Requested] following notice thereof or, in the case where the defaulting party
has in good faith begun and is continuing efforts to cure such breach within
such [Confidential Treatment Requested] period, [Confidential Treatment
Requested] following such notice thereof, the party giving notice may
immediately terminate this Agreement by providing the defaulting party with
written notice of termination.
.3 Automatic Termination. This Agreement shall terminate immediately
upon written notice by CLARION in the event that ANDREA ceases to carry on its
business, ANDREA becomes the subject of any proceedings under state, federal or
other law for the relief of debtors, ANDREA otherwise becomes insolvent or
bankrupt, ANDREA makes an assignment for the benefit of creditors, or upon the
appointment of a receiver for ANDREA or the reorganization of ANDREA for the
benefit of creditors. This Agreement shall terminate immediately upon written
notice by ANDREA in the event that CLARION ceases to carry on its business,
CLARION becomes the subject of any proceedings under state, federal or other law
for the relief of debtors, CLARION otherwise becomes insolvent or bankrupt,
CLARION makes an assignment for the benefit of creditors, or upon the
appointment of a receiver for CLARION or the reorganization of CLARION for the
benefit of creditors.
.4 Effect of Termination. The termination of this Agreement shall not
relieve either party from its obligations which have accrued pursuant to the
provisions of this Agreement or release either party from any obligations which
have been incurred as a result of operations conducted under this Agreement. In
any event, the rights and obligations of Articles [Confidential Treatment
Requested] and Sections [Confidential Treatment Requested] shall survive the
expiration or termination of this Agreement.
14. COOPERATION
.1 The parties shall cooperate with each other to their mutual benefit
as follows:
(a) Web Site Links. Each of CLARION and ANDREA, at their own
expense, will incorporate in its own web site a hyperlink to the
other's web site for the purpose of promoting AutoPC Products,
AutoArray Products and AutoArray SE Products. In furtherance hereof,
each party may use the other party's logo(s) and/or logo link(s)
identified in Schedule 14.1 hereto, provided such use is in compliance
with such other's party's logo guidelines set forth in Schedule 14.1
or any other replacement guidelines that such other party may provide
to the first party from time to time during the Term of this Agreement
and provided further that each party is afforded a reasonable prior
opportunity to review and approve the precise intended manner of any
such use. The CLARION logo link(s) shall link back directly to a
CLARION URL provided to ANDREA by CLARION. The ANDREA logo link(s)
shall link back directly to a ANDREA URL provided to CLARION by
ANDREA.
(b) Joint Promotion. CLARION and ANDREA will promote, at their
own expense, their joint relationship contemplated hereby and the
complementarity between the AutoPC Products and the AutoArray Products
and AutoSe products through, by way of example only, press releases,
trade shows agreed upon by the parties, and in relevant collateral
material. Each party shall provide the other party with reasonably
prior opportunity to review and approve such press releases, trade
show material and collateral material in furtherance of such
promotional efforts.
(c) Customer Names, Demographics and related Customer Database
Information. CLARION agrees that it will share with ANDREA any listing
in its possession of registered customers and end users to which
CLARION or its agents sell the Products purchased and sold hereunder.
Without requiring CLARION to alter the manner in which it collects
information from its customers and end users and to the extent that
such additional information is obtained by CLARION and it is
commercially reasonable to do so, CLARION shall include in such
listing of registered customers and end users, demographics and
related database information obtained and/or maintained by CLARION in
respect of such registered customers and end users.
15. MISCELLANEOUS
.1 Relationship of Parties. This Agreement does not create the
relationship of principal and agent between ANDREA and CLARION nor shall it be
construed as creating any form of legal arrangement which would impose liability
upon one party for the act or omission of the other party.
.2 Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be delivered personally or mailed by
registered or certified mail, return receipt requested, or delivered by
overnight air courier guaranteeing next day delivery, to the following
addresses:
If to ANDREA:
Andrea Electronics Corporation
45 Melville Park Road
Melville, NY 11747
One copy marked "Attention:
[Confidential Treatment Requested];
and a second copy marked
"Attention: [Confidential Treatment Requested].
If to CLARION:
Clarion Corporation Of America
661 West Redondo Beach Boulevard
Gardena, California 90247-4201
One copy marked "Attention:
[Confidential Treatment Requested];
Either party may change its address upon notice given to the other party in the
foregoing manner. If mailed, notices shall be effective three (3) days after
mailing and if delivered by air courier, notices shall be effective on the day
after it is sent by air courier.
.3 Severability. If any provision of this Agreement shall be
determined by a court of competent jurisdiction to be invalid, illegal, or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
.4 Entire Agreement. With the exception of that certain Non-Disclosure
Agreement, this Agreement (including any schedules attached hereto) contains the
entire agreement of the parties with respect to the Products to be furnished
hereunder (except for any additional terms or conditions which may be contained
in any Purchase Order which may be issued by CLARION pursuant to this Agreement
and which are agreed to in writing by ANDREA). Any modification or amendment of
any term or provision of this Agreement shall not be valid or binding unless the
same is in writing and signed by each party hereto.
.5 Assignment. Neither party shall assign any of its rights or
obligations under this Agreement without the prior written consent of the other
party, which consent may be withheld at the other party's sole and absolute
discretion; provided, however, that CLARION may assign its rights and
obligations hereunder to any of its affiliates without the need for any consent
by ANDREA, and ANDREA may assign its rights and obligations hereunder to any of
its affiliates without the need for any consent by CLARION. This Agreement shall
be binding upon and shall inure to the benefit of the legal successors and
assigns of the parties hereto.
.6 Governing Law and Venue. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, including the
provisions of the Uniform Commercial Code as adopted in the State of California,
and not the Convention for the International Sale of Goods. The parties agree
that any litigation relating directly or indirectly to this Agreement must be
brought before a court of competent jurisdiction within the State of California.
.7 Waivers. No waiver of any of the terms or conditions of this
Agreement by either party shall be valid or binding unless the same is in
writing and signed by an authorized officer of the waiving party. A waiver by
either party of a breach of any of the provisions of this agreement shall not be
construed as a waiver of any further breach of the same provision or of any
other provision of this Agreement.
.8 Attorneys' Fees. In the event that any action at law or in equity
is brought to enforce or interpret the provisions of this Agreement, the
prevailing party shall be entitled to a reasonable attorneys' fee which may be
set by the Court in the same action or in a separate action brought for that
purpose, in addition to any other relief to which the prevailing party may be
entitled.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set
forth above.
CLARION CORPORATION OF AMERICA
By:_[Confidential Treatment Requested]____
Title:__[Confidential Treatment Requested]___
ANDREA ELECTRONICS CORPORATION
By:__[Confidential Treatment Requested]____
Title:___[Confidential Treatment Requested]___
<PAGE>
SCHEDULE 1.5
PRODUCTS
The Andrea AutoArray(TM) microphone, together with related documentation
and materials ("the AUTOARRAY") - The AutoArray is a far field microphone
technology designed for use with automobile PCs, among other things.
The Andrea AutoSE microphone, together with related documentation and
materials ("the AUTOSE") - The AutoSE is a far field microphone technology
designed for use with automobile PCs, among other things.
<PAGE>
SCHEDULE 1.7
SPECIFICATIONS - AUTOARRAY:
[Confidential Treatment Requested]
SPECIFICATIONS - AUTOSE:
[Confidential Treatment Requested]
<PAGE>
SCHEDULE 4.1
PRICES:
PRODUCT VOLUME PRICE PER UNIT LEADTIME
- - ---------------------- -------------------- ------------------ ----------------
AutoArray [Confidential Treatment Requested]
AutoSE [Confidential Treatment Requested]
<PAGE>
SCHEDULE 1.6
PRODUCT WARRANTY:
(See attached Consumer Guarantee)
<PAGE>
SCHEDULE 3.1
FORM OF PURCHASE ORDER:
The form of Purchase Order shall include the following items: 1) the
Purchase Order number, 2) the Purchase Order date, 3) the Product description,
4) the quantity and unit price, 5) the extended price of the Purchase Order, 6)
the "ship to" address, 7) the "bill to" address, 8) the anticipated Delivery
dates(s), and 9) the appropriate contact person.
PURCHASE ORDER Y2K COMPLIANCE STATEMENT
In accepting this Purchase Order you are certifying that all Product sold
to us are Y2K compliant. You are also agreeing to replace or upgrade at no cost
or accept return of any Product that is determined to be non-compliant. The
following is a definition of Year 2000 compliance:
Handles date information before, during, and after
midnight, December 31, 1999, including but not
limited to accepting date input; providing date
output; and performing calculations and comparisons
on dates or portions of dates.
Functions accurately and without interruption before,
during, and after January 1, 2000, without any change
in operations associated with the advent of the new
century.
Responds to two-digit year date input in a way that
resolves the ambiguity as to the century in a
disclosed, defined, and predetermined manner.
Interfacing software must make the same century
assumptions when processing two-digit years.
Processes 2000 as a leap year and handles date fields
containing non-date information and correctly handles
a date in a non-date field.
Correctly processes any date with a year specified
"99" and "00", regardless of other subjective
meanings attached to these values.
<PAGE>
CONSUMER GUARANTEE Dear Customer:
Thank you for buying this product from Andrea
ANDREA PURCHASER ________________________________
ELECTRONICS CORPORATION
MODEL NO. ________________________________
A LIST OF AUTHORIZED SERVICE PRODUCT NO. ________________________________
PROVIDERS IS AVAILABLE FROM:
DATE OF PURCHASE ____________________________
Andrea Electronics Corporation
11-40 45th Road PURCHASED FROM ______________________________
Long Island City, NY 11101
ADDRESS ________________________________
STATEMENT OF LIMITED WARRANTY
The warranties provided by Andrea Electronics Corporation in this Statement
of Limited Warranty apply only to products you originally purchase for your use,
and not for resale, from Andrea Electronics or an Andrea Electronics authorized
reseller. The term "product" means an Andrea Electronics Corporation product,
its features, conversions, upgrades, elements, or accessories, or any
combination of them. Products are subject to these terms only if purchased in
the United States or Puerto Rico, or Canada, and located in the country of
purchase. If you have any questions, contact Andrea Electronics Corporation or
your reseller.
Les conditions de la garantie qui s'appliquent dans le pays ou le produit a
ete achete sont disponibles aupres d'Andrea Electronics ou votre detaillant.
Die Garantiebedingungen, die in dem Land gelten, in welchem das Gerat
gekauft wird. Sind von Andrea Electronics oder lhrem Handler erhaltlich.
Le condizioni di garanzia in vigore nel paese ove e stato acquistato il
prodotto sono disposibili presso l'Andrea Electronics o il rivenditore.
Podra obtener los terminos y las condiciones sobre las garantia aplicable
en el pais de compara de Andrea Electronics o de su concessionario local.
IN THE EVENT THAT GUARANTEE SERVICE IS REQUIRED FOR THE ANDREA ELECTRONICS
PRODUCT COVERED BY THIS GUARANTEE, PLEASE RETURN IT TO THE RETAILER AUTHORIZED
SERVICE STATION.
YOUR GUARANTEE
By this Consumer Guarantee, Andrea Electronics Corporation guarantees this
product to be free of defects in materials and workmanship for a period of one
(1) year (the "Guarantee Period") from and after the time of its original
purchase or the time it was taken on hire purchase terms by the consumer from
the retailer.
Subject to the conditions explained below, if during the Guarantee Period
the product proves to be defective due to improper materials or workmanship,
Andrea Electronics' Retailer Authorized Service Stations or Authorized Servicing
Dealers will without charge for labor or parts repair or, at the discretion of
the distributor, replace this product or its defective parts. To contact an
Andrea Electronics customer service representative from 8:00 a.m. to 8:00 p.m.
EST, call (800) 707-5779 or your local Andrea Electronics reseller.
CONDITIONS
1. The guarantee will be honored only if this Consumer Guarantee is
presented together with the original invoice/cash ticket issued to the
consumer by the retailer and if this Consumer Guarantee Card states the
following information: (a) the purchaser's name, (b) the retailer's name
and address, (c) the model name and product number of the purchased
product, and (d) the date or purchase of the product. If this information
has been removed or changed after the original purchase of the product by
the consumer from the retailer, Andrea Electronics reserves the right to
refuse guarantee service.
2. In the event that this product needs to be adapted, change, or adjusted
in order to conform to the national or local technical or safety standards
in force in any country or locality other than the one for which the
product was originally designed and manufactured, any such adaptation,
change, or adjustment shall not be considered to be a defect in materials
or workmanship for purposes of this Consumer Guarantee. No reimbursements
shall be made under this Consumer Guarantee for the following: (a) any
adaptation, changes, or adjustments to the product, or attempts to make the
same, whether properly made or not, in order to conform to such standards,
(b) any adaptation, changes, or adjustments to upgrade the product from its
normal purpose as described in the Instruction Manual, or (c) any damage
resulting from any adaptations, changes, or adjustments to the product or
attempts to make the same.
3. The Consumer Guarantee shall not cover any of the following:
(a) periodic check-ups, maintenance and repair or replacement of
parts due to normal wear and tear;
(b) home service transport costs and other costs and risks of transport
relating directly or indirectly to this Consumer Guarantee; and
(c) damage to this product resulting from:
(i) abuse and misuse, including, without limitation, (a)
the failure to use this product for its normal
purposes or in accordance with Andrea Electronics'
instructions on the proper use and maintenance of
this product and (b) the installation or the use of
this product in a manner inconsistent with the
technical or safety standards in force in the
country where the product is used;
(ii) repairs done by non-Authorized Service Stations; and
(iii) accidents, acts of God, or any cause beyond the
control of Andrea Electronics, including, without
limitation, electrical storms, water, fire, public
disturbances, and improper ventilation.
4. This Consumer Guarantee does not affect the consumer's statutory rights
under applicable national legislation in force, nor the consumer's rights
against the retailer arising from any sales/purchase contracts between the
retailer and the consumer, in the absence of applicable national
legislation, this Consumer Guarantee will be the consumer's sole and
exclusive remedy, and neither Andrea Electronics Corporation nor any of its
subsidiaries or distributors shall be liable for any incidental or
consequential damages for breach of any expressed or implied guarantee of
this product.
INTEL CONFIDENTIAL
SOURCE CODE LICENSE AGREEMENT
INTEL MICROPROCESSOR ARCHITECTURE OPTIMIZATIONS
This Source Code License Agreement ("Agreement") effective on October 29,
1998 ("Effective Date") is entered into by and between Intel Corporation
("Intel") with offices at 2200 Mission College Blvd., Santa Clara, CA 95052, a
Delaware corporation; and Andrea Electronics Corporation ("Licensor'), with
offices at 45 Melville Park Rd., Melville, NY 11747, a New York corporation.
RECITALS:
Licensor wishes to grant Intel, and Intel desires to receive certain
Materials, specifically identified in Exhibit "A" for the purposes of evaluating
and assisting Licensor with its optimization and/or portation of the Materials
to the Intel microprocessor architecture.
Now, therefore, the parties agree to the following terms and conditions
which shall govern all disclosure/transfer of the Materials provided hereunder.
1. DEFINITIONS
1.1 "Materials" means the software, in source and binary code formats, and
related documentation identified on Exhibit "A". Materials also
includes modifications and enhancements to the Materials supplied by
Licensor and accepted by Intel.
1.2 "Modifications" means the modifications to the Materials developed by
Intel and provided to Licensor.
2. LICENSE GRANT
2.1 LIMITED COPYRIGHT LICENSE:
(a) Licensor grants to Intel a nonexclusive, nontransferable,
worldwide, royalty-free license under Licensor's copyrights to
reproduce and modify the Materials internally, only for the
purposes of porting and/or optimizing the Materials to the
Intel microprocessor architecture.
(b) Licensor grants to Intel a nonexclusive, nontransferable,
worldwide, royalty-free license under Licensor's copyrights to
reproduce the Materials in binary form for the purposes of
demonstrating the Materials to third parties.
(c) Intel grants to Licensor a nonexclusive, nontransferable,
worldwide, royalty-free, perpetual license under Intel's
copyrights to reproduce, modify, perform, display, license,
sublicense, distribute, and prepare derivative works of the:
(1) Modifications in source code form, only when incorporated
into Licensor's products and only for the purposes of porting
and/or optimizing the Modifications to the Intel
microprocessor architecture; and (2) Modifications in binary
code form only when incorporated into Licensor's products
that are hosted for and targeted to the Intel microprocessor
architecture.
2.2 LICENSE RESTRICTIONS:
(a) Intel may not: assign, sublicense, lease, or in any other way
transfer or disclose Materials to any third party or reproduce
or distribute any part of the Materials except as provided in
this Agreement.
(b) Licensor may not: assign, sublicense, !ease, or in any other
way transfer or disclose Modifications to any third party or
reproduce or distribute any part of the Modifications except
as provided in this Agreement.
2.3 Except as expressly granted in this Section 2, no license or right is
granted to either party under this Agreement directly or by
implication, estoppel or otherwise.
3. ADDITIONAL CONDITIONS
3.1 The Materials and all copies thereof are and will remain Licensor's
property. Such ownership shall not extend to pre-existing works or
inventions of Intel. Intel will not remove any copyright, proprietary
information notices, or other notices appearing on Materials.
3.2 Intel retains all right, title and interest in the Modifications,
excluding Licensor's Materials.
3.3 Licensor shall be solely responsible to Licensor's own customers for
any update or support obligation or other liability which may arise
from the distribution of products which incorporate the Modifications,
including liability arising from product infringement or product
warranty.
3.4 Licensor shall not make any statements to the effect or which imply
that Licensor's products are "certified" by Intel or that its
performance is guaranteed by Intel.
3.5 Licensor shall not use Intel's name, logos, or trademarks to market
products without Intel's written permission.
3.6 This Agreement does not preclude Intel from evaluating and/or
marketing similar products, nor shall it be construed as an obligation
of any party to market or distribute the Materials or any derivatives
thereof.
3.7 Neither Party shall disassemble, reverse-engineer, or decompile any
software not provided as source code under this Agreement.
3.8 Intel shall not disclose any part of the Materials other than to those
Intel employees and contractors who (i) have a need to know, and (ii)
who have signed agreements with Intel obligating them not to disclose
any of the Materials except to Intel employees and contractors who
have signed similar agreements.
3.9 Intel may not make commercial use of the Materials, and upon
completion of the evaluation, optimization and/or portation effort,
Intel shall return the Materials to Licensor or destroy the original
and all copies of the Materials and certify to Licensor in writing
that they have been destroyed. Intel may retain the Materials in
binary form subject to the license grants in paragraph 2.1 (b) above.
4. PROTECTION AND CONFIDENTIALITY
4.1 Each party shall maintain in confidence and not disclose to any third
party for a period of [Confidential Treatment Requested] after receipt
thereof any documents, and other trade secret information received
from the other which has been marked "CONFIDENTIAL" (or, if disclosed
in intangible form, is identified at the time of disclosure as
confidential and is summarized in writing within [Confidential
Treatment Requested] of initial disclosure) ("Confidential
Information"). A party shall have no obligation of confidentiality
with respect to Confidential Information which is: (a) rightfully in
the public domain other than by a breach of this Agreement of a duty
to the disclosing party; (b) rightfully received from a third party
without any obligation of confidentiality; (c) rightfully known to the
receiving party without any limitation on use or disclosure prior to
its receipt from the disclosing party; (d) independently developed by
employees of the receiving party; or (e) generally made available to
third parties by the disclosing party without restriction on
disclosure.
4.2 Intel shall be free, at any time, to use the Residual Information
retained by those of its employees who have had access to the
tangible form of the Materials or Confidential Information received
from Licensor, for any purpose, including the use of such Residual
Information in the development, manufacture, marketing and
maintenance of Intel's products and services. "Residual Information"
shall mean that information in non-tangible form (subject only to the
patent, copyright, and maskwork rights of Licensor and the obligation
not to disclose such information during the period of
confidentiality) which may be retained by Intel's employees who have
had access to the Materials or Confidential Information.
4.3 Neither party may disclose the terms of this Agreement or use the
other party's name in any publications, advertisements, or other
announcements without the other party's prior written consent.
4.4 Licensor will not suggest or imply that Licensor has any affiliation
with Intel or that Intel supports, endorses or recommends the
Materials.
5. NO WARRANTY
5.1 INTEL MAKES NO WARRANTY OF ANY KIND REGARDING THE MODIFICATIONS MADE
BY INTEL TO THE MATERIALS. THE MODIFICATIONS ARE PROVIDED TO LICENSOR
ON AN "AS IS" BASIS AND INTEL IS NOT OBLIGATED TO PROVIDE ANY
SUPPORT, ASSISTANCE, INSTALLATION, TRAINING OR OTHER SERVICES. INTEL
IS NOT OBLIGATED TO PROVIDE MODIFICATIONS OR ANY UPDATES,
ENHANCEMENTS OR EXTENSIONS. INTEL SPECIFICALLY DISCLAIMS ANY IMPLIED
WARRANTIES OF MERCHANTABILITY, NONINFRINGEMENT AND FITNESS FOR A
PARTICULAR PURPOSE.
5.2 Licensor warrants it has sufficient rights to enter into this
Agreement.
6. LIMITATION OF LIABILITY
6.1 NEITHER PARTY SHALL BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL
OR CONSEQUENTIAL DAMAGE OF ANY KIND, EVEN IF ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.
7. TERM AND TERMINATION
7.1 The initial term of this Agreement shall be for a period of two (2)
years beginning on the Effective Date, and may be extended by mutual
written agreement of the parties.
7.2 Either party may terminate this Agreement and the licenses granted
herein at any time for any reason with [Confidential Treatment
Requested] prior written notice to the other party.
7.3 If this Agreement is terminated for any reason, Intel will, within
[Confidential Treatment Requested] following termination, either
return to Licensor or destroy the original and all copies of the
Materials and certify to Licensor in writing that they have been
destroyed.
7.4 Sections [Confidential Treatment Requested] shall survive termination
of this Agreement.
8. GENERAL
8.1 Any claim arising under or relating to this Agreement, shall be
governed by the internal substantive laws of the State of Delaware,
without regard to principles of conflict of laws. Each party hereby
agrees to jurisdiction and venue in the courts of the State of
Delaware or federal courts located in Delaware for all disputes and
litigation arising under or relating to this Agreement. This
provision is meant to comply with 6 Del. C. Section 2708(a).
8.2 Licensor and Intel are independent parties. Nothing in this Agreement
shall be construed to make the parties partners or joint ventures or
to make either party liable for the obligations, acts, omissions or
activities of the other party.
8.3 This is the entire agreement between Licensor and Intel relating to
this subject matter, and supersedes all prior and contemporaneous
agreements and negotiations with respect to these matters. No
amendments will be effective unless in a writing signed by both
parties.
8.4 Neither party may assign this Agreement or any part of it without the
other party's prior written consent.
9. EXHIBITS
The following Exhibits are included as part of this Agreement:
Exhibit "A" - Contacts and Description of Materials.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
dates indicated by their respective signatures.
INTEL CORPORATION LICENSOR
_________________________ [Confidential Treatment Requested]
Signature Signature
_________________________ [Confidential Treatment Requested]
Name Name
_________________________ [Confidential Treatment Requested]
Title Title
_________________________ __10/29/98_______________________
Date Date
<PAGE>
EXHIBIT A
CONTACTS AND DESCRIPTION OF MATERIALS
LICENSOR'S TECHNICAL CONTACT:
Name: [Confidential Treatment Requested]
Telephone: [Confidential Treatment Requested]
LICENSOR'S MATERIALS:
Name Description
[Confidential Treatment Requested]
PERSON AT INTEL RESPONSIBLE FOR MONITORING THE USE AND LOCATION OF THE
MATERIALS:
Name:__________________________________
Title:_________________________________
Telephone:_____________________________
Exhibit 21
Name of Subsidiary State of Organization
- - ------------------- ---------------------
Andrea ANC Manufacturing Inc. Delaware
Andrea Digital Technologies, Inc. Delaware
Andrea Direct Marketing Inc. Delaware
Andrea Electronics Europe Inc. Delaware
Andrea Marketing Inc. Delaware
Andrea Military Communications, LLC Delaware
Lamar Signal Processing, Ltd. Israel
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statement File Nos. 33-84092, 333-14385, 333-35687, 333-38609,
333-45421, 333-52159 and 333-61115.
ARTHUR ANDERSEN LLP
Melville, New York
March 30, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,437,423
<SECURITIES> 0
<RECEIVABLES> 5,070,033
<ALLOWANCES> 202,251
<INVENTORY> 8,014,323
<CURRENT-ASSETS> 18,818,190
<PP&E> 1,919,966
<DEPRECIATION> 1,387,278
<TOTAL-ASSETS> 50,681,940
<CURRENT-LIABILITIES> 4,481,074
<BONDS> 1,455,231
0
0
<COMMON> 6,605,019
<OTHER-SE> 36,973,881
<TOTAL-LIABILITY-AND-EQUITY> 50,681,940
<SALES> 21,304,570
<TOTAL-REVENUES> 21,304,570
<CGS> 14,178,871
<TOTAL-COSTS> 14,178,871
<OTHER-EXPENSES> 15,019,643
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 710,324
<INCOME-PRETAX> (6,445,955
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,445,955)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,445,955)
<EPS-PRIMARY> (0.61)
<EPS-DILUTED> (0.61)
</TABLE>
