SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended March 31, 1999
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to _______________
Commission file number 1-4324
----
ANDREA ELECTRONICS CORPORATION
-----------------------------------
(Exact name of registrant as specified in its charter)
New York 11-0482020
----------- ---------------
(State or other jurisdiction of I.R.S. Employer Identification No.)
incorporation or organization)
45 Melville Park Road, Melville, New York 11747
-------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
516-719-1800
--------------------------
(Registrant's telephone number, Including area code)
Indicate by check mark whether the registrant: (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 13,232,538.
<PAGE>
Item 1 - FINANCIAL STATEMENTS
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
(unaudited) (audited)
------------------ -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,703,901 $ 5,437,423
Accounts receivable, net of allowance for doubtful accounts of $202,251 3,901,489 4,867,782
Inventories 7,708,775 8,014,323
Prepaid expenses and other current assets 352,041 498,662
---------- ----------
Total current assets 16,666,206 18,818,190
PROPERTY, PLANT AND EQUIPMENT, net 2,187,125 1,919,966
DEFERRED INCOME TAXES 1,806,615 1,806,615
OTHER ASSETS 1,955,614 1,751,501
GOODWILL, net 25,925,720 26,385,668
---------- ----------
Total assets $ 48,541,280 $ 50,681,940
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 2,261,265 $ 2,221,912
Current portion of long term debt 514,121 514,121
Other current liabilities 1,253,284 1,745,041
---------- ----------
Total current liabilities 4,028,670 4,481,074
LONG TERM DEBT 1,172,432 1,126,390
CONVERTIBLE NOTES, net 1,462,693 1,455,231
OTHER LIABILITIES 43,533 40,345
---------- ----------
Total liabilities 6,707,328 7,103,040
---------- ----------
COMMITMENTS AND CONTINGENCIES
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 shares 6,605,019 6,605,019
Additional paid-in capital 42,548,399 42,548,399
Accumulated deficit (7,319,466) (5,574,518)
---------- ----------
Total shareholders' equity 41,833,952 43,578,900
---------- ----------
Total liabilities and shareholders' equity $ 48,541,280 $ 50,681,940
========== ==========
See Notes to Consolidated Financial Statements
</TABLE>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
------------------------------------
For the Three Months Ended March 31,
------------------------------------
1999 1998
------------------- ----------------
<S> <C> <C>
SALES $ 4,664,135 $ 4,475,070
COST OF SALES 3,299,316 2,820,222
---------- ----------
Gross Profit 1,364,819 1,654,848
RESEARCH AND DEVELOPMENT EXPENSES 774,838 407,453
GENERAL, ADMINISTRATIVE AND SELLING EXPENSES 2,282,444 2,393,334
---------- ----------
Loss from operations (1,692,463) (1,145,939)
---------- ----------
OTHER INCOME (EXPENSE)
Interest income 23,315 10,643
Interest expense (75,800) (24,893)
Rent and miscellaneous income - 1,925,405
---------- ----------
(52,485) 1,911,155
---------- ----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (1,744,948) 765,216
PROVISION FOR INCOME TAXES - 329,043
---------- ----------
NET INCOME (LOSS) $ (1,744,948) $ 436,173
========== ==========
PER SHARE INFORMATION:
Net Income (Loss) Per Share:
Basic $ (.13) $ .05
========== ==========
Diluted $ (.13) $ .05
========== ==========
Shares used in computing net income (loss) per share:
Basic 13,210,038 8,936,255
========== ==========
Diluted 13,210,038 9,661,189
========== ==========
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
------------------------------------
For the Three Months Ended March 31,
------------------------------------
1999 1998
-------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,744,948) $ 436,173
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Non-cash interest expense 69,293 -
Depreciation and amortization 751,416 505,788
Gain on sale of building - (1,864,767)
Deferred income taxes - 329,043
(Increase) decrease in:
Accounts receivable, net 966,293 500,735
Inventories 305,548 (1,965,266)
Prepaid expenses and other current assets 46,259 (699,488)
Other assets (204,113) (499,293)
Increase (decrease) in:
Trade accounts payable 39,353 1,170,973
Other current and long term liabilities (511,820) 328,974
----------- -----------
Net cash used in operating activities (282,719) (1,757,128)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities - (639,457)
Proceeds from sale of building - 2,282,563
Purchases of property, plant and equipment (450,803) (207,264)
----------- -----------
Net cash (used in) provided by investing activities (450,803) 1,435,842
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving credit facility - 429,880
Issuance of common stock upon exercise of stock options, net of related - 188,030
costs ----------- -----------
Net cash provided by financing activities - 617,910
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (733,522) 296,624
CASH AND CASH EQUIVALENTS, beginning of period 5,437,423 2,059,338
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 4,703,901 $ 2,355,962
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Non-cash investing and
financing activities:
Conversion of convertible debentures and related accrued interest into
common stock $ - $ 1,397,706
=========== ===========
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
--------------------------------------------
1. Basis of Presentation - The accompanying consolidated financial
statements include the accounts of Andrea Electronics Corporation and its
subsidiaries (collectively, the "Company"). All intercompany balances and
transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
reporting. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The results of
operations for any interim period are not necessarily indicative of the
results to be expected for the fiscal year. For further information,
refer to the consolidated financial statements and accompanying footnotes
included in the Company's annual report on Form 10-K for the year ended
December 31, 1998.
2. Earnings Per Common Share - Basic net income per common share ("Basic
EPS") is computed by dividing net income by the weighted average number
of common shares outstanding. Diluted net income per common share
("Diluted EPS") is computed by dividing net income by the weighted
average number of common shares and dilutive common share equivalents and
convertible securities then outstanding.
The following chart provides a reconciliation of information used in
calculating the per share amounts for the three months ended March 31,
1999 and 1998:
<TABLE>
<CAPTION>
Net Income Net Income (Loss) Per
(Loss) Shares Share
---------- ------ --------------------
<S> <C> <C> <C>
1999
Net loss $(1,744,948) 13,210,038 Basic $ (.13)
Effect of dilutive employee stock options - -
---------- ------
13,210,038 Diluted $ (.13)
========== ======
1998
Net Income $ 436,173 8,936,255 Basic $ .05
Effect of dilutive employee stock options 724,934 -
---------- ------
9,661,189 Diluted $ .05
========== ======
</TABLE>
3. Comprehensive Income - In the first quarter of 1998, the Company adopted
SFAS No. 130, "Reporting Comprehensive Income", which requires companies
to report all changes in equity during a period, except those resulting
from investment by owners and distribution to owners, in a financial
statement for the period in which they are recognized. Comprehensive
income is the total of net income and all other nonowner changes in equity
(or other comprehensive income) such as unrealized gains/losses on
securities available-for-sale, foreign currency translation adjustments
and minimum pension liability adjustments. Comprehensive and other
comprehensive income must be reported on the face of the annual financial
statements, or in the case of interim reporting, in the footnotes to the
financial statements. For 1998 and for the quarters ended March 31, 1999
and 1998, the Company's operations did not give rise to items includible
in comprehensive income which were not already included in net income
(loss). Therefore, the Company's comprehensive income (loss) is the same
as its net income (loss) for all periods presented.
4. Derivatives - In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The Statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet
as either an asset or liability measured at its fair value. The statement
requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate,
and assess the effectiveness of transactions that receive hedge
accounting. This Statement is effective for fiscal years beginning after
June 15, 1999. A company may also implement the Statement as of the
beginning of any fiscal quarter after issuance (that is, fiscal quarters
beginning June 16, 1998 and thereafter). SFAS No. 133 cannot be applied
retroactively. SFAS No. 133 must be applied to (a) derivative instruments
and (b) certain derivative instruments embedded in hybrid contracts that
were issued, acquired, or substantively modified after December 31, 1997.
While the Company operates in international markets, it does so presently
without the use of derivatives and therefore this new pronouncement is not
applicable.
5. Credit Facility - The Company has an $8,000,000 credit facility (the
"Credit Facility") with a financial institution consisting of a revolving
loan based on eligible accounts receivable and inventory, as defined, with
an interest rate equal to the prime rate plus .75% on any amounts
outstanding. The Credit Facility matures on September 23, 1999 and renews
on an annual basis unless terminated by either party, as provided in the
Credit Facility. The Credit Facility is subject to normal banking terms and
conditions, including financial covenant compliance. At March 31, 1999,
there were no outstanding borrowings under the Credit Facility.
6. Procurement Agreement - The Company has an agreement with International
Business Machines and its subsidiaries ("IBM") to produce and procure
certain products, as defined. The agreement continues in full force and
effect unless terminated earlier for material breach by either party, as
defined. During the three months ended March 31, 1999, sales of the
Company's computer headsets to IBM and certain of IBM's affiliates,
distributors, licensees, and integrators accounted for approximately 51% of
the Company's total net sales.
7. Convertible Notes - On June 10, 1998, the Company issued and sold in a
private placement, $10,753,000 aggregate principal amount of 6%
Convertible Notes ("Notes") due June 10, 2000. The Notes are convertible
into shares of the Company's common stock at a conversion price equal to
the average of the two lowest closing prices of the common stock during
the thirty trading days preceding any date of conversion, subject to a
maximum conversion price of $16.125 per share. At the option of the
Company, interest is payable in the form of cash or shares of common stock
at the conversion price then in effect. The maximum number of shares
issuable upon conversion or otherwise is 2,100,000 shares, and if this
maximum number of shares is issued, any remaining unconverted principal
amount of the Notes will bear interest at 17% per annum. During 1998,
$9,253,000 of the Notes, together with related accrued interest, was
converted into 2,097,000 shares of the Company's common stock. At March
31, 1999, the remaining obligation from the Notes was recorded net of an
unaccreted discount of $37,307.
8. Acquisition - On May 5, 1998, the Company acquired all of the outstanding
shares of capital stock of Lamar Signal Processing, Ltd. (the
"Acquisition"). The consideration paid by the Company for the Acquisition
was 1,800,000 shares of restricted common stock and $3,000,000 in cash and
notes payable. Of the approximately 1,800,000 shares issued to the
sellers, one-third 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. The
Acquisition was accounted for under the purchase method of accounting and,
accordingly, the operating results of Lamar Signal Processing, Ltd. have
been included in the consolidating operating results of the Company since
the date of the Acquisition. The Acquisition was valued using an
independent appraisal of the fair value of the consideration paid and the
assets purchased, and resulted in goodwill of approximately $27.6 million,
which is being amortized over fifteen years. Goodwill at March 31, 1999
was approximately $25.9 million, which is net of approximately $1.7
million in amortization expense since the date of the Acquisition. Total
goodwill amortization expense for the three months ended March 31, 1999
was approximately $460,000.
9. 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. As defined by SFAS No. 131, the management
approach is based on the way that management organizes the segments of a
company for making operating decisions and assessing performance. While
the Company's results of operations are primarily reviewed on a
consolidated basis, management has organized the Company into two
segments: (i) Andrea Anti-Noise/ Registered Trademark/ Products and (ii)
military intercom products (Traditional Military Products). The following
represents selected consolidated financial information for the Company's
segments for the three months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Traditional
Andrea Anti- Military
Noise Products Products March 31, 1999
-------------- ----------- ---------------
<S> <C> <C> <C>
Segment Data
Net Sales $ 3,701,390 $ 962,745 $ 4,664,135
Income (loss) from operations (1,817,620) 125,157 (1,692,463)
Depreciation 160,354 23,290 183,644
Traditional
Andrea Anti- Military
Noise Products Products March 31, 1998
-------------- ----------- ---------------
Net Sales $ 3,458,473 $ 1,016,596 $ 4,475,070
Income (loss) from operations (1,278,096) 132,157 (1,145,939)
Depreciation 82,720 15,596 98,316
</TABLE>
For the three months ended March 31, 1999 and 1998, sales and accounts
receivable by geographic area are as follows:
Geographic Data March 31, 1999 March 31, 1998
--------------- -------------- ---------------
Sales:
United States $ 2,753,100 $ 3,421,358
Europe 1,105,973 624,909
Other foreign 805,062 428,803
--------- ---------
$ 4,664,135 $ 4,475,070
========= =========
Accounts receivable:
United States $ 1,814,873 $ 3,596,827
Europe 834,090 502,217
Other foreign 1,252,526 768,654
--------- ---------
$ 3,901,489 $ 4,867,698
========= =========
10. Reclassifications - Certain prior year amounts have been reclassified to
conform to the current year presentation.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Andrea Electronics Corporation's mission is to provide state-of-the-art
communications products for the "voice 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/Registered Trademark/ 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, industrial and 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, our collaborative partners supply
us with software that we include with our products. In addition, we have been
increasing our own direct marketing efforts.
The success of our strategy will depend on our ability to, among other things,
increase sales of our line of existing Andrea Anti-Noise products, contain
operating costs, manage growth, introduce additional Andrea Anti-Noise
products, maintain the competitiveness of our technologies through successful
research and development, and achieve widespread adoption of our products and
technologies.
In order to complement our internal efforts to develop DSP technology, in May
1998, we acquired Lamar Signal Processing, Ltd. ("Lamar"), an Israeli
corporation engaged in the development of digital signal processing ("DSP")
noise cancellation microphone solutions for voice-driven interfaces covering a
wide range of audio and acoustic applications. This acquisition resulted in a
substantial amount of goodwill. The amortization of this goodwill has had, and
will continue to have, a negative, non-cash impact on our results of
operations.
We outsource the assembly of most of our Andrea Anti-Noise products from
purchased components, and we are currently assembling our Digital Super
Directional Array (DSDA/Registered Trademark/) products from purchased
components at our New York and Israeli facilities. We manufacture our
traditional intercom systems and related components for military and
industrial applications ("Traditional Products") at our New York facility.
The interim results of operations of the Company presented in this report are
not necessarily indicative of the actual sales or results of operations to be
realized for the full year.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain information contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations for the three months ended March
31, 1999 (the "1999 First Quarter") compared to the three months ended March
31, 1998 (the "1998 First Quarter") are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the "1933
Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the
"1934 Act"). 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.
* Our historic operating results have been volatile and hard to predict and
will continue to vary from period to period due to fluctuations in the
volume of sales of our products under our collaborative marketing
arrangements, the mix of products we sell, the mix of distribution
channels we use, the timing of our new product announcements and releases
and those of our competitors, fluctuations in the computer and
communications hardware and software marketplace, and general economic
conditions.
* The markets for our Andrea Anti-Noise products, including our new DSP
products, have recently begun to develop and are characterized by rapidly
changing technology. The introduction of products incorporating new
technologies could render our products obsolete and unmarketable and
could exert price pressures on existing products. We cannot assure that
we will succeed in developing our new DSP products and technologies, or
that, if we are, that any of these products or technologies will gain
market acceptance. Further, the markets for our products and technologies
are characterized by evolving industry standards and specifications that
may require us to devote substantial time and expense to adapt our
products and technologies.
* Most of our current and potential competitors have significantly greater
financial, technology development, marketing, technical support and other
resources than we do. Our ability to compete successfully will depend
upon our capability to develop and maintain advanced technology, develop
proprietary products, obtain patent or other proprietary protection for
our products and technologies, and manufacture, assemble and successfully
market products, either alone or through third parties.
* We must protect our intellectual property in the United States and other
countries by obtaining patents for our technology, defending our patents
against infringement and preserving our trade secrets and trademarks. We
must also operate without infringing the patents and intellectual
property rights of others. We cannot assure that the steps we have taken
to protect our intellectual property will prevent its misappropriation or
circumvention. We are currently engaged in defending an action brought
against us involving two of our patents which relate to certain active
noise reduction technology, particularly applicable to aircraft passenger
headphones.
* We have entered into 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. 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 are substantially dependent on our product
procurement relationship with IBM. During the 1999 First Quarter, IBM and
certain of IBM's affiliates, distributors, licensees and integrators
accounted for 51% of our sales revenue. 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.
* During the 1999 First Quarter, sales to customers outside the United
States accounted for approximately 40% 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 material
foreign exchange or hedging transactions. We cannot assure that this will
continue to be the case. If we are required to invoice any material
amount of international sales in non-U.S. currencies, fluctuations in the
value of non-U.S. currencies relative to the U.S. dollar may adversely
affect our business, results of operations and financial condition.
* We conduct assembly operations at our facility in New York and through
subcontractors. As unit sales of Andrea Anti-Noise products have
increased to significant levels, assembly operations have primarily been
transferred to a subcontractor in Asia. Any failure on the part of this
subcontractor to meet our production and shipment schedules could have a
material adverse effect on our business, results of operations and
financial condition. While most of the components for the Andrea
Anti-Noise products are available from several sources and are not
characteristically in short supply, certain specialized components for
the Andrea AntiNoise products, such as microphones and DSP boards, are
available from a limited number of suppliers and subject to long lead
times. While we have, to date, been able to obtain sufficient supplies of
these more specialized components, we cannot assure that we will continue
to be able to do so.
* Our performance is substantially dependent on the performance of our
executive officers and key employees. We are dependent on our ability to
retain and motivate high quality personnel for positions in management
and product and technology development. The loss of the services of any
of our executive officers or other key employees could have a material
adverse effect on our business, results of operations and financial
condition. Our future success also depends on our continuing ability to
attract and retain additional highly qualified technical personnel.
Competition for qualified personnel is intense and we cannot assure that
we will be able to attract, assimilate or retain qualified personnel in
the future.
* Sales of a substantial number of shares of our common stock in the public
market could have the effect of depressing the prevailing market price of
our common stock. Of the 25,000,000 shares of common stock presently
authorized, 13,232,538 shares of common stock were outstanding on April
30, 1999. This does not include 3,442,500 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.
RESULTS OF OPERATIONS
Sales
Sales for the 1999 First Quarter were $4,664,135, an increase of 4% over the
1998 First Quarter. On a units sold basis, the Company realized a 30% increase
from the 1998 First Quarter. This increase, however, was entirely offset by a
shift in product mix to lower-priced and lower-margin products to original
equipment manufacturers (OEMs). The increase in sales during the 1999 First
Quarter reflected an approximate 7% increase in sales of Andrea
Anti-Noise/Registered Trademark/ products to $3,701,390, or 79% of total
sales, and an approximate 5% decrease in sales of the Company's Traditional
Military Products to $962,745, or 21% of total sales. For the 1999 First
Quarter, sales of the Company's computer headsets to IBM and certain of its
affiliates, distributors, licensees and integrators accounted for
approximately 51% of our total sales.
Cost of Sales
Cost of sales as a percentage of sales for the 1999 First Quarter increased to
67% from 63% for the 1998 First Quarter. The increase in cost of sales during
the 1999 First Quarter principally reflects a shift in product mix of sales of
Andrea Anti-Noise products to the Company's OEM customers.
Research and Development
Research and development expenses increased 90% to $774,838 for the 1999 First
Quarter from $407,453 for the 1998 First Quarter. This increase is primarily
attributable to continuing development of our digital signal processing and
computer/telephony headset technologies. Our research and development program
is substantially focused on developing optimal far-field microphone solutions
for various voice-driven and natural language interfaces that incorporate the
DSDA microphone technology obtained through the acquisition of Lamar in May
1998. We believe that the acquisition of Lamar significantly reinforces our
position in digital signal processing and enhances our position in other
markets, 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 as the year progresses.
General, Administrative and Selling Expenses
General, administrative and selling expenses decreased 5% to $2,282,444 for
the 1999 First Quarter from $2,393,334 for the 1998 First Quarter. General,
administrative and selling expenses represented approximately 49% and 53% of
total sales for the 1999 First Quarter and 1998 First Quarter, respectively.
These high levels of general, administrative and selling expenses, primarily
attributable to the DSDA and Active Noise Cancellation/Active Noise Reduction
(ANC/ANR) product lines, reflect significant business development expenses
relating to existing and prospective collaborative arrangements with hardware
OEMs, software publishers and developers, distributors and retailers. The
Company also incurs significant promotional, marketing and sales expenses to
promote product awareness and acceptance of the DSDA and ANC/ANR product
lines, particularly in the retail marketplace, and significant expenses with
developing global expansion efforts. Also included in general, administrative
and selling expenses in the 1999 First Quarter is goodwill amortization
expense of $459,948 related to the acquisition of Lamar in May 1998. Excluding
the effect of the goodwill amortization, general, administrative and selling
expenses decreased to $1,822,496, or 39% of total sales. This decrease is
primarily attributable to cost reduction efforts and, to a lesser extent, a
reallocation of resources to research and development activities. In light of
the Company's intentions to continue to support sales of products, introduce
additional products, create new strategic alliances and further integrate
global operations during 1999, high levels of recurring general,
administrative and selling expenses as a percentage of sales is expected to
continue.
Other Income (Expense)
Other expense for the 1999 First Quarter was $52,485 compared to other income
of $1,911,155 for the 1998 First Quarter. This change is primarily
attributable to the gain on the sale of the Company's corporate headquarters
during the 1998 First Quarter of $2,064,187.
Provision for Income Taxes
The Company did not record income tax expense for the 1999 First Quarter in
light of the net loss recorded for the period. The realization of the
Company's reserved deferred tax assets (excluding those generated and reserved
during 1998 and the 1999 First Quarter), if and when realized, will not result
in a tax benefit in the consolidated statement of operations, but will result
in an increase in additional paid in capital as they are related to tax
benefits associated with the exercise of stock options. The Company will be
continually re-assessing its reserves on deferred income tax assets as the
year progresses.
Net Income (Loss)
Net loss for the 1999 First Quarter was $1,566,948 compared to net income of
$436,173 for the 1998 First Quarter. The levels of net loss for the 1999 First
Quarter principally reflect the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds have historically been, and are
expected to continue to be, cash flow from operations and borrowings provided
by certain financial institutions. At March 31, 1999, the Company had cash and
cash equivalents of $4,703,901 compared with $5,437,423 at December 31, 1998.
The balance of cash and cash equivalents at March 31, 1999 is substantially a
result of the Company's June 1998 private placement of $10.75 million
aggregate principal amount of 6% Convertible Notes ("Notes"). All but $1.5
million of the Notes have been converted to common stock, with the remaining
outstanding principal amount convertible into 3,000 shares of Common Stock.
The Company has 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 Signal Processing, Ltd., of the
aggregate cash consideration to be paid by the Company, $1,000,000 was paid on
May 5, 1998, the closing date, with the remainder payable in four equal
installments on each of the six, twelve, twenty-four and thirty-six month
anniversaries of the closing. The majority of the current portion of long term
debt 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.
Working capital at March 31, 1999 was $12,637,536 compared to $14,337,116 at
December 31, 1998. The decrease in working capital reflects a decrease in
total current assets of $2,151,984 offset by a decrease in total current
liabilities of $452,404. The increase in total current assets reflects a
decrease in cash of $733,522, a decrease in accounts receivable of $966,293, a
decrease in inventory of $305,548, and a decrease of $146,621 in prepaid
expenses and other current assets. The decrease in current liabilities
reflects a $39,353 increase in trade accounts payable and $491,757 decrease in
other current liabilities.
The decrease in cash of $733,522 reflects $282,719 of net cash used in
operating activities and $450,803 of cash used in investing activities.
The cash used in operating activities, excluding non-cash charges, is
primarily attributable to the $1,744,948 net loss in the 1999 First Quarter, a
$204,113 increase in other assets and a $511,820 decrease in other current and
long term liabilities, partially offset by a $966,293 decrease in accounts
receivable. The decrease in accounts receivable primarily reflects the
decrease in sales during the 1999 First Quarter coupled with rigorous
collection procedures. Generally, the Company collects receivables from sales
within two months. The increase in other assets represents increases in patent
and trademark costs associated with the Company's proprietary technology. The
decrease in other current liabilities primarily reflects differences in the
timing related to both the payments for and the acquisition of services in
connection with ongoing efforts related to the Andrea Anti-Noise products.
The cash used in investing activities is primarily attributable to capital
expenditures consisting of the ongoing upgrade of manufacturing dies and molds
for Andrea Anti-noise products, as well as investments in the Company's
existing information systems.
Demand for Andrea Anti-Noise products has required the Company to raise
additional working capital to support operations. In addition, the acquisition
of Lamar will require the Company to continue to provide working capital to
support Lamar's operations and to repay notes to the sellers of Lamar. In
December 1995, April 1996 and August 1996, the Company raised working capital
through the issuance of convertible subordinated debentures. In June 1998, the
Company raised $10 million through the issuance and sale of the Notes. In
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 March 31, 1999, there were no
outstanding amounts under the revolving credit agreement.
We expect to raise additional capital through external funding, which together
with our current levels of cash, would provide sufficient liquidity and
capital resources to fund working capital requirements for at least twelve to
eighteen months. We are currently exploring a variety of external funding
sources, including private or public financings through the issuance of debt,
convertible debt or equity, or collaborative arrangements. Notwithstanding the
significance of sales of Andrea Anti-Noise products during the three months
ended March 31, 1999, we cannot assure that demand will continue for these
products or any of our other products, including future products related to
our DSDA technology, or, that if such demand does exist, that we will be able
to obtain the necessary working capital to increase production and marketing
resources to meet such demand on favorable terms, or at all.
YEAR 2000 COMPLIANCE PLAN
In anticipation of the year 2000, Andrea has developed and 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. 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 systems are substantially year 2000
compliant, we cannot assure that the systems 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
of 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.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit
Number Description
- -------- -------------------
27 Financial Data Schedule
(b) Reports on Form 8-K.
On February 26, 1999, the registrant filed a report on Form 8-K stating that
Christopher P. Sauvigne, President and Chief Operating Officer of the
Registrant advised the Registrant that he will postpone assuming a position on
the registrant's Board of Directors in order to comply with certain
interpretations of the regulations of the Securities and Exchange Commission
regarding the independence of outside auditors.
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 March
31, 1999, there were no outstanding borrowings under our credit facility, and
approximately $1.5 million of remaining unconverted debt. 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.
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 and 15(d) of the Exchange
Act, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ANDREA ELECTRONICS CORPORATION
/s/ John N. Andrea Co-Chairman and
- ------------------------- Co-Chief Executive Officer April 30, 1999
John N. Andrea
/s/ Patrick D. Pilch Executive Vice President,
- ------------------------- and Chief Financial Officer April 30, 1999
Patrick D. Pilch
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