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 June 30, 1999
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to_____________
Commission file number 1-4324
----
ANDREA ELECTRONICS CORPORATION
(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>
PART I
FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
ASSETS 1999 1998
------ (unaudited) (audited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $10,425,570 $ 5,437,423
Accounts receivable, net of allowance for doubtful accounts of $202,251 3,982,012 4,867,782
Inventories, net 7,486,331 8,014,323
Prepaid expenses and other current assets 207,803 498,662
------------ --------------
Total current assets 22,101,716 18,818,190
PROPERTY, PLANT AND EQUIPMENT, net 2,115,123 1,919,966
DEFERRED INCOME TAXES 1,806,615 1,806,615
OTHER ASSETS 2,037,198 1,751,501
GOODWILL 25,465,772 26,385,668
-------------- ----------------
Total assets $53,526,424 $ 50,681,940
=========== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Trade accounts payable $1,664,692 $ 2,221,912
Other current liabilities 1,549,773 1,745,041
Current portion of long term debt 505,000 514,121
Convertible Notes 1,470,154 -
---------- ---------------
Total current liabilities 5,189,619 4,481,074
LONG TERM DEBT 682,491 1,126,390
CONVERTIBLE NOTES, net - 1,455,231
OTHER LIABILITIES - 40,345
---------- ---------------
Total liabilities 5,872,110 7,103,040
---------- ---------------
SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK, $.01 par value; 750 and 0
shares issued and outstanding, respectively 7,160,068 -
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized: 5,000,000 shares - -
Common stock, $.50 par value; authorized: 25,000,000 shares; issued
and outstanding: 13,232,538 and 13,210,038 shares, respectively 6,616,269 6,605,019
Additional paid-in capital 42,964,000 42,548,399
Accumulated deficit (9,086,023) (5,574,518)
---------- ---------------
Total shareholders' equity 40,494,246 43,578,900
---------- ---------------
Total liabilities and shareholders' equity $53,526,424 $ 50,681,940
=========== ===============
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
---------------------------------- -----------------------------------
For the Three Months Ended June For the Six Months Ended
30, June 30,
---------------------------------- -----------------------------------
1999 1998 1999 1998
---------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
NET SALES $ 4,324,079 $ 4,370,358 $8,988,214 $8,845,428
COST OF SALES 2,992,074 2,753,932 6,291,390 5,574,154
----------- ----------- ---------- ----------
Gross Profit 1,332,005 1,616,426 2,696,824 3,271,274
RESEARCH AND DEVELOPMENT EXPENSES 829,899 582,646 1,604,737 990,098
GENERAL, ADMINISTRATIVE AND SELLING EXPENSES 2,244,036 2,897,114 4,526,480 5,290,448
----------- ----------- ---------- ----------
Loss from operations (1,741,930) (1,863,334) (3,434,393) (3,009,272)
----------- ----------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income 50,435 62,671 73,750 73,315
Interest expense (66,537) (85,664) (142,337) (110,119)
Rent and miscellaneous income - - - 1,924,966
--------------- ---------------- ----------------- ---------
(16,102) (22,993) (68,587) 1,888,162
--------------- ---------------- ----------------- ---------
LOSS BEFORE INCOME TAXES (1,758,032) (1,886,327) (3,502,980) (1,121,110)
PROVISION FOR INCOME TAXES - - - (329,043)
--------------- ---------------- ----------------- ---------
NET LOSS (1,758,032) (1,886,327) (3,502,980) (1,450,153)
PREFERRED STOCK DIVIDENDS 8,525 - 8,525 -
--------------- ---------------- ----------------- ---------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (1,766,557) $ (1,886,327) $(3,511,505) $(1,450,153)
============= ============= ============ ============
PER SHARE INFORMATION:
Net Loss Applicable to Common Shareholders:
Basic $ (.13) $ (.18) $ (.27) $ (.15)
========== ========= ========== ===========
Diluted $ (.13) $ (.18) $ (.27) $ (.15)
========== ========= ========== ===========
Shares used in computing net loss per share:
Basic 13,229,324 10,339,488 13,219,734 9,641,748
========== ========== ========== =========
Diluted 13,229,324 10,339,488 13,219,734 9,641,748
========== ========== ========== =========
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
---------------- ----------------- ---------------- ------------------ --------------
Additional Total
Shares Common Stock Paid-In Capital Accumulated Shareholders'
Outstanding Deficit Equity
---------------- ----------------- ---------------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998 13,210,038 $6,605,019 $ 42,548,399 $(5,574,518) $ 43,578,900
Exercise of stock options, net of related
costs 22,500 11,250 67,144 - 78,394
Issuance of warrants in connection with Series B
Redeemable Convertible Preferred Stock - - 348,457 - 348,457
Preferred Stock Dividends - - - (8,525) (8,525)
Net Loss - - - (3,502,980) (3,502,980)
---------- ----------- ------------ ----------- ------------
BALANCE, June 30, 1999 (unaudited) 13,232,538 $ 6,616,269 $ 42,964,000 $(9,086,023) $ 40,494,246
========== =========== ============ ============ ============
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended
June 30,
----------------------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(3,502,980) $(1,450,153)
Adjustments to reconcile net loss to net cash used in operating
activities:
Non-cash interest expense 143,535 32,259
Depreciation and amortization 1,563,925 1,095,693
Gain on sale of building - (1,864,767)
Deferred income taxes - 329,043
(Increase) decrease in:
Accounts receivable, net 885,770 436,368
Inventories, net 527,992 (2,320,982)
Prepaid expenses and other current assets 59,218 (982,470)
Other assets (313,450) (574,980)
Increase (decrease) in:
Trade accounts payable (557,220) 434,643
Other current and long term liabilities (282,115) 318,795
--------- -------
Net cash used in operating activities (1,475,325) (4,546,551)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities - (543,322)
Proceeds from sale of building - 2,282,563
Acquisition of business, net of cash acquired - (947,276)
Purchases of property, plant and equipment (579,792) (715,720)
--------- ---------
Net cash (used in) provided by investing activities (579,792) 76,245
--------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from redeemable convertible preferred securities 7,456,830 -
Net proceeds from convertible debentures - 10,000,000
Payments of debt obligations (535,130) -
Long term debt proceeds - 665,788
Proceeds from issuance of common stock upon exercise of employee stock
options 121,564 1,087,041
------- ---------
Net cash provided by financing activities 7,043,264 11,752,829
--------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,988,147 7,282,523
CASH AND CASH EQUIVALENTS, beginning of period 5,437,423 2,059,338
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 10,425,570 $9,341,861
============ ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Non-cash investing and financing activities:
Issuance of Common Stock for acquisition $ - $23,428,781
Conversion of convertible debentures and related accrued interest into
common stock $ - $ 1,397,706
Issuance of notes payable for acquisition $ - $ 1,564,000
Issuance of warrants in connection with Series B Redeemable Convertible
Preferred Stock $ 348,457 $ -
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation - The accompanying consolidated financial
statements include the accounts of the Company and its subsidiaries
(collectively, "Andrea Electronics" or the "Company"). All intercompany
balances and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
reporting. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The results of
operations for any interim period are not necessarily indicative of the
results to be expected for the fiscal year. For further information,
refer to the consolidated financial statements and accompanying footnotes
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
2. Earnings Per Common Share - Basic net income (loss) per common share
("Basic EPS") is computed by dividing net income (loss) by the weighted
average number of common shares outstanding. Diluted net income per
common share ("Diluted EPS") is computed by dividing net income by the
weighted average number of common shares and dilutive common share
equivalents and convertible securities then outstanding.
The following chart provides a reconciliation of information used in
calculating the per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Numerator:
<S> <C> <C> <C> <C>
Net loss $(1,758,032) $(1,886,327) $(3,502,980) $(1,450,153)
Preferred stock dividends 8,525 - 8,525 -
Net loss applicable to common shareholders $(1,766,557) $(1,886,327) $(3,511,505) $(1,450,153)
Denominator:
Weighted average common shares outstanding - Basic 13,229,324 10,339,488 13,219,734 9,641,748
Effect of dilutive employee stock options and
convertible securities - - - -
Weighted average common shares outstanding - Diluted 13,229,324 10,339,488 13,219,734 9,641,748
Net loss per common share:
Basic $ (.13) $ (.18) $ (.27) $ (.15)
Diluted $ (.13) $ (.18) $ (.27) $ (.15)
</TABLE>
3. Comprehensive Income - The Company has adopted SFAS No. 130,
"Reporting Comprehensive Income", which requires companies to report
all changes in equity during a period, except those resulting from
investment by owners and distribution to owners, in a financial
statement for the period in which they are recognized. Comprehensive
income is the total of net income and all other nonowner changes in
equity (or other comprehensive income) such as unrealized
gains/losses on securities available-for-sale, foreign currency
translation adjustments and minimum pension liability adjustments.
Comprehensive and other comprehensive income must be reported on the
face of the annual financial statements or, in the case of interim
reporting, in the footnotes to the financial statements. For the six
months ended June 30, 1999 and 1998, the Company's operations did not
give rise to items includible in comprehensive income which were not
already included in net income (loss). Therefore, the Company's
comprehensive income (loss) is the same as its net income (loss) for
all periods presented.
4. Derivatives - In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". The Statement establishes accounting and
reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement requires that
changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income
statement and requires that a company must formally document,
designate, and assess the effectiveness of transactions that receive
hedge accounting. This Statement is effective for fiscal years
beginning after June 15, 1999. A company may also implement the
Statement as of the beginning of any fiscal quarter after issuance
(that is, fiscal quarters beginning June 16, 1998 and thereafter).
SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be
applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired,
or substantively modified after December 31, 1997. While the Company
operates in international markets, it does so presently without the
use of derivatives and therefore this new pronouncement is not
applicable.
5. Credit Facility - The Company has an $8,000,000 credit facility (the
"Agreement") with a financial institution consisting of a revolving
loan based on eligible accounts receivable and inventory, as defined,
with an interest rate of the prime rate plus .75% on any amounts
outstanding. The 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 June 30,
1999, there were no outstanding borrowings under the Agreement.
6. Procurement Agreement - The Company has an agreement with
International Business Machines and its subsidiaries ("IBM") to
produce and procure certain products, as defined. The agreement
continues in full force and effect unless terminated earlier for
material breach by either party, as defined. During the three months
ended June 30, 1999, sales of the Company's computer headsets to IBM
and certain of IBM's affiliates, distributors, licensees, and
integrators accounted for approximately 48% of the Company's total
net sales.
7. Convertible Notes - On June 10, 1998, the Company issued and sold in
a private placement, $10,753,000 aggregate principal amount of 6%
Convertible Notes ("Notes") due June 10, 2000. The Notes are
convertible into shares of the Company's common stock at a conversion
price equal to the average of the two lowest closing prices of the
common stock during the thirty trading days preceding any date of
conversion, subject to a maximum conversion price of $16.125 per
share. At the option of the Company, interest is payable in the form
of cash or shares of common stock at the conversion price then in
effect. The maximum number of shares issuable upon conversion is
2,100,000 shares, and if this maximum number of shares is issued, any
remaining unconverted principal amount of the Notes will bear
interest at 17% per annum. During 1998, $9,253,000 of the Notes,
together with related accrued interest, was converted into 2,097,000
shares of the Company's common stock. At June 30, 1999, the remaining
obligation from the Notes is recorded net of an unaccreted discount
of $29,846, and is reflected as a current liability in the
accompanying consolidated balance sheet.
8. Series B Redeemable Convertible Preferred Stock - On June 22, 1999,
the Company issued and sold in a private placement, $7,500,000 of its
Series B Redeemable Convertible Preferred Stock (the "Preferred
Stock"), and a warrant covering 75,000 shares of the Company's common
stock. Each share of Preferred Stock has a stated value of $10,000
plus an additional amount of 4% per annum, which sum is convertible
into common stock at a conversion price equal to the lower of $8.775
(the "Maximum Conversion Price") and the average of the two lowest
closing bid prices of the common stock during the 15 consecutive
trading days immediately preceding a conversion date (the "Market
Price"), subject to certain adjustments, including anti-dilution. The
4% additional amount may, at the option of the Company, be paid in
cash. The Preferred Stock becomes convertible into the Company's
common stock according to a vesting schedule, with 12.5% of the
shares becoming convertible on October 17, 1999 and an additional
12.5% becoming convertible at the end of each succeeding 30-day
period. The vesting schedule will lapse for conversions occurring at
the Maximum Conversion Price and upon the occurrence of certain
extraordinary events, as defined. Any unconverted Preferred Stock
that remains outstanding on June 18, 2004 will automatically convert
into the Company's common stock. The Company has currently reserved
2,581,680 shares of common stock for issuance upon conversion of the
Preferred Stock and exercise of certain warrants issued in connection
with the Preferred Stock. Prior to June 22, 2000, the Company has the
option to redeem any Preferred Stock presented for conversion by the
holder thereof if the conversion price is less than or equal to $4.725
per share, at a redemption price equal to 110% of the stated value plus
any accrued dividends. Upon the announcement of a Major Transaction,
as defined, a holder of Preferred Stock shall have the right to
require the Company to redeem all or a portion of such holder's
Preferred Stock at a redemption price equal to the greater of 120% of
par plus any accrued dividends and the Market Price on the day of
announcement. In addition, upon the occurrence of certain Triggering
Events, as defined, and depending on the Company's control over such
events, the investor may have the right to require the Company to (a)
redeem all or a portion of the Preferred Stock at a redemption price
equal to the greater of 120% of the stated value plus any accrued
dividends and the Market Price on the day of announcement, or (b) pay
a penalty equal to 1% of the remaining principal amount outstanding
for a period not to exceed 20 days in any 365 day period, and adjust
the Maximum Conversion Price, as defined. During the six month period
beginning March 14, 2000, the Company, subject to certain conditions,
may exercise an option to sell up to an additional $7.5 million of
its Preferred Stock, and warrants for up to an additional 75,000
shares of common stock. The warrant has an exercise price of $8.775
per share and expires on June 18, 2004. At June 30, 1999, the
Preferred Stock is recorded net of the unaccreted present value of
the warrants of $348,457. Due to the redemption features discussed
above, the Preferred Stock is not included in stockholders' equity
in the accompanying consolidated balance sheet.
9. Acquisition - On May 5, 1998, the Company acquired all of the
outstanding shares of capital stock of Lamar Signal Processing, Ltd.
(the "Acquisition"). The consideration paid by the Company for the
Acquisition was 1,800,000 shares of restricted common stock and
$3,000,000 in cash and notes payable. Of the approximately 1,800,000
shares issued to the sellers, 600,000 shares became freely transferable
on May 5, 1999, 600,000 shares are subject to trading restrictions that
expire on May 5, 2000 and 600,000 shares are subject to trading
restrictions that expire on May 5, 2001. Of the aggregate
cash consideration to be paid by the Company, $1,000,000 was paid on
May 5, 1998, $500,000 was paid on each of November 5, 1998 and May 5,
1999, and the remainder is payable in the form of promissory notes in
two equal installments on May 5, 2000 and May 5, 2001. The
Acquisition was accounted for under the purchase method of accounting
and, accordingly, the operating results of Lamar have been included
in the consolidating operating results 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 June 30,
1999 is approximately $25.5 million, which is net of approximately
$2.1 million in amortization expense since the closing date. Total
goodwill amortization expense for the six months ended June 30, 1999
was approximately $920,000.
10. Segment Information - Effective December 31, 1998, the Company
adopted SFAS No. 131,"Disclosures about Segments of an Enterprise and
Related Information." Reportable operating segments are determined
based on the Company's management approach. The management approach,
as defined by SFAS No. 131, is based on the way that the chief
operating decision-maker organizes the segments within an enterprise
for making operating decisions and assessing performance. While the
Company's results of operations are primarily reviewed on a
consolidated basis, the chief operating decision-maker also manages
the enterprise in two segments: (i) Andrea Anti-Noise /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 June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Traditional
Andrea Anti- Military
SEGMENT DATA Noise Products Products June 30, 1999
-------------- -------- -------------
<S> <C> <C> <C>
Net Sales $ 3,258,125 $ 1,065,954 $ 4,324,079
Income (loss) from operations $ (1,930,222) $ 188,292 $ (1,741,930)
Depreciation $ 172,715 $ 25,048 $ 197,763
</TABLE>
<TABLE>
<CAPTION>
Traditional
Andrea Anti- Military
Noise Products Products June 30, 1998
-------------- -------- -------------
<S> <C> <C> <C>
Net Sales $ 3,366,948 $ 1,003,410 $ 4,370,358
Income (loss) from operations $ (1,993,777) $ 130,443 $ (1,863,334)
Depreciation $ 106,826 $ 16,173 $ 122,999
</TABLE>
For the three months ended June 30, 1999 and 1998, sales and accounts
receivable by geographic area are as follows:
<TABLE>
<CAPTION>
Geographic Data June 30, 1999 June 30, 1998
--------------- ------------- -------------
Sales:
<S> <C> <C>
United States $2,815,988 $3,043,280
Europe $ 976,619 $ 597,924
Other foreign $ 531,471 $ 729,154
Accounts receivable:
United States $2,725,204 $2,542,207
Europe $ 432,538 $ 566,082
Other foreign $ 824,270 $1,044,993
</TABLE>
11. 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 digital signal
processing ("DSP") technology, in May 1998, we acquired Lamar Signal
Processing, Ltd. ("Lamar"), an Israeli corporation engaged in the development
of DSP noise cancellation microphone solutions for voice-driven interfaces
covering a wide range of audio and acoustic applications. This acquisition
resulted in a substantial amount of goodwill. The amortization of this
goodwill has had, and will continue to have, a negative, non-cash impact on
our results of operations.
We outsource the assembly of most of our Andrea Anti-Noise products from
purchased components, and we are currently assembling our Digital Super
Directional Array (Andrea DSDA/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 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.
"Andrea Anti-Noise" is a registered trademark of Andrea. "Andrea DSDA" is a
trademark of Andrea.
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
June 30, 1999 (the "1999 Second Quarter") compared to the three months ended
June 30, 1998 (the "1998 Second Quarter"), and for the six months ended
June 30, 1999 (the "1999 First Half") compared to the six months ended
June 30, 1998 (the "1998 First Half"), 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.
* Our historic operating results have been volatile and hard to predict and
will continue to vary from period to period due to fluctuations in the
volume of sales of our products under our collaborative marketing
arrangements, the mix of products we sell, the mix of distribution
channels we use, seasonally high sales during the last quarter of each
year, the timing of our new product announcements and releases
and those of our competitors, fluctuations in the computer and
communications hardware and software marketplace, and general economic
conditions.
* The markets for our Andrea Anti-Noise products, including our new DSP
products, have recently begun to develop and are characterized by rapidly
changing technology. The introduction of products incorporating new
technologies could render our products obsolete and unmarketable and
could exert price 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 collaborative and distribution arrangements
with software publishers and computer hardware manufacturers relating to
the marketing and sale of Andrea Anti-Noise products. Under these
collaborative arrangements, our products are sold to end users through
inclusion with the products of our collaborators. The revenue derived by
us from these arrangements will be based in large part upon the sale of
our collaborator's products. Our success will therefore be dependent to a
substantial degree on the efforts of these collaborators in marketing
their existing products and new products under development with which to
include our products and technologies. Our collaborators are
not contractually obligated to any minimum level of sales of our products
or technologies. Furthermore, our collaborators may develop their own
microphone or earphone products or technologies that compete with our
products and technologies. We are substantially dependent on our product
procurement relationship with IBM. During the 1999 First Half, IBM and
certain of IBM's affiliates, distributors, licensees and integrators
accounted for 49% 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 Asia. We
cannot assure that any of these channels will devote sufficient resources
to support the sale of our products.
* During the 1999 Second Quarter, sales to customers outside the United
States accounted for approximately 35% 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. The authorized capital stock of the Company consists of:
25,000,000 shares of common stock, of which 13,232,538 shares were issued
and outstanding on August 13, 1999 which does not include 3,725,000 shares
that are reserved for issuance pursuant to the Company's stock option and
purchase plans, 2,581,680 shares (subject to adjustment based on
fluctuations in the market price of the Company's common stock) that are
reserved for issuance upon conversion of the Company's Series B Redeemable
Convertible Preferred Stock and exercise of related warrants, and 3,000
shares reserved for issuance pursuant to other securities. To the extent
that the options are exercised or we issue additional shares of capital
stock, the ownership interests of holders of common stock would be
diluted. In addition, in May 1998 we issued 1,800,000 shares of common
stock as part of the consideration for our acquisition of Lamar, of which
600,000 shares became freely transferable on May 5, 1999 by persons other
than "affiliates" of the Company, as defined under the Securities Act of
1933, as amended, 600,000 shares are subject to trading restrictions that
expire on May 5, 2000, and 600,000 shares are subject to trading
restrictions that expire on May 5, 2001. As the restrictions expire, the
shares are subject to demand and piggyback registration rights.
RESULTS OF OPERATIONS
Net Sales
Net sales for the 1999 Second Quarter were $4,324,079, a decrease of 1% over
the three months ended June 30, 1998 (the "1998 Second Quarter"). Sales for
the 1999 First Half were $8,988,214, an increase of 2% over the six months
ended June 30, 1998 (the "1998 First Half"). In terms of unit sales, the
Company realized a 37% and 29% increase over the 1998 Second Quarter and 1998
First Half, respectively. These increases were entirely offset, however, by a
continuing shift in product mix to lower-priced and lower-margin products to
original equipment manufacturers (OEMs). The decrease in net sales during the
1999 Second Quarter reflected an approximate 3% decrease in sales of Andrea
Anti-Noise products to $3,258,125, or 75% of total sales, and an approximate
6% increase in sales of the Company's Traditional Military Products, to
$1,065,954, or 25% of total sales. The flat sales during the 1999 First Half
reflected an approximate 1% increase in sales of Andrea Anti-Noise products to
$6,959,515 or 77% of total sales, and an approximate 3% increase in sales of
the Company's Traditional Military Products to $2,028,699 or 23% of total
sales. During the 1999 First Half, sales of the Company's computer headsets to
IBM and certain of IBM's affiliates, distributors, licensees, and integrators
accounted for approximately 49% of the Company's total net sales.
Cost of Sales
Cost of sales as a percentage of sales for the 1999 Second Quarter increased
to 69% from 63% for the 1998 Second Quarter. Cost of sales as a percentage of
sales for the 1999 First Half increased to 70% from 63% for the 1998 First
Half. These increases in cost of sales as a percentage of sales during the
1998 Second Quarter are primarily a result of the shift in product mix
described above under "Net Sales".
Research and Development
Research and development expenses increased 42% to $829,899 for the 1999
Second Quarter from $582,646 for the 1998 Second Quarter. Research and
development expenses increased 62% to $1,604,737 for the 1999 First Half from
$990,098 for the 1998 First Half. These increases are primarily a result of
continuing efforts to develop the Company's digital signal processing
technology, coupled with efforts in computer/telephony headset technologies.
Research and development efforts are primarily focused on the pursuit of
commercializing a natural language-driven human/machine interface by
developing optimal far-field microphone solutions that incorporate
voice-driven interfaces, incorporating the digital super-directional array
microphone technology ("DSDA") and certain other technologies obtained through
the acquisition of Lamar in May 1998. Correspondingly, the activities of Lamar
accounted for approximately 23% and 19% of the total research and development
expenses during the 1999 Second Quarter and 1999 First Half, respectively. The
Company believes that the acquisition of Lamar significantly reinforces its
position in digital signal processing by increasing exposure to other
industries, including the consumer electronics and professional audio markets,
among others. The Company anticipates continued significant increases in
research and development expenses, with particular emphasis on digital signal
processing efforts as the year progresses.
General, Administrative and Selling Expenses
General, administrative and selling expenses decreased 23% to $2,244,036 for
the 1999 Second Quarter from $2,897,114 for the 1998 Second Quarter. General,
administrative and selling expenses decreased 14% to $4,526,480 for the 1999
First Half from $5,290,448 for the 1998 First Half. General, administrative
and selling expenses represented approximately 52% and 66% of total sales for
the 1999 Second Quarter and 1998 Second Quarter, respectively, and
approximately 50% and 60% of total sales for the 1999 First Half and 1998
First Half, respectively. Included in general, administrative and selling
expenses in the 1999 Second Quarter and 1999 First Half is goodwill
amortization expense of $459,948 and $919,896, respectively, related to the
acquisition of Lamar in May 1998. Excluding the effect of the goodwill
amortization, general, administrative and selling expenses decreased to
$1,784,088 and $3,606,584 for the 1999 Second Quarter and 1999 First Half,
respectively, or 41% and 40% of total sales, respectively. These decreases are
primarily attributable to cost reduction efforts and, to a lesser extent, a
reallocation of resources to research and development activities. The 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. 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,
relatively high levels of general, administrative and selling expenses as a
percentage of sales are expected to continue.
Other Income (Expense)
Other expense for the 1999 First Half was $68,587 compared to other income of
1,888,162 for the 1998 First Half. This change is primarily attributable to
the net gain of $1,864,767 on the sale of the Company's corporate headquarters
during the 1998 First Half.
Provision for Income Taxes
The Company did not record income tax expense for the 1999 Second Quarter in
light of the net loss recorded for the period. The realization of a portion of
the Company's reserved deferred tax assets (the portion excluding those
generated and reserved during 1998 and the 1999 First Half), 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
because such deferred tax assets 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 Second Quarter was $1,758,032, compared to net loss of
$1,886,327 for the 1998 Second Quarter. Net loss for the 1999 First Half was
$3,502,980, compared to net loss of $1,450,153 for the 1998 First Half. The
levels of net loss for the 1999 Second Quarter and 1999 First Half 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 financings with
certain financial institutions. At June 30, 1999, the Company had cash and
cash equivalents of $10,425,570 compared with $5,437,423 at December 31, 1998.
Working capital at June 30, 1999 was $16,912,097 compared to $14,337,116 at
December 31, 1998. The increase in working capital reflects an increase in
total current assets of $3,283,526, offset by an increase in total current
liabilities of $708,545. The increase in total current assets reflects an
increase in cash of $4,988,147, a decrease in accounts receivable of $885,770,
a decrease in inventory of $527,992, and a decrease of $290,859 in prepaid
expenses and other current assets. The increase in current liabilities
primarily reflects a $557,220 decrease in trade accounts payable, a $195,268
decrease in other current liabilities and an increase of $1,470,154 in
convertible notes (recorded net of an unaccreted discount of $29,846),
representing the remaining obligation on the Notes described above.
The increase in cash of $4,988,147 reflects $1,457,325 of net cash used in
operating activities, $579,792 of net cash used in investing activities and
$7,043,264 of net cash provided by financing activities.
The net cash used in operating activities, excluding non-cash charges, is
primarily attributable to the $3,502,980 net loss in the 1999 Second Half, a
$313,450 increase in other assets, a $557,220 decrease in trade accounts
payable and a $282,115 decrease in other current and long term liabilities,
partially offset by a $885,770 decrease in accounts receivable and a $527,992
decrease in inventory. The increase in other assets represents increases in
patent and trademark costs associated with the Company's proprietary
technologies. The decreases in trade accounts payable and other current and
long term liabilities as well as the decrease in inventory primarily reflect
differences in the timing related to both the payments for and the acquisition
of raw materials as well as for other services in connection with ongoing
efforts related to the Andrea Anti-Noise product line. The decrease in
accounts receivable primarily reflects a decrease in sales during the 1999
First Half in comparison to the seasonally high level of sales in the fourth
quarter of 1998 coupled with rigorous collection procedures. Generally, the
Company collects receivables from sales within 60 days.
The cash used in investing activities is primarily attributable to investments
in the Company's existing information systems, as well as capital expenditures
consisting of the ongoing upgrade of manufacturing dies and molds for Andrea
Anti-noise products.
The cash provided by financing activities during 1998 and 1999 result from the
Company's June 1998 private placement of $10.75 million aggregate principal
amount of 6% Convertible Notes ("Notes") and June 1999 private placement of
$7,500,000 of its Series B Redeemable Convertible Preferred Stock (the
"Preferred Stock"). The Company is using the net proceeds from the issuance of
the Notes and Preferred Stock for costs associated with technology development,
tooling costs, continued integration of the Company's recently acquired
management information system, creating and maintaining strategic alliances,
payment of certain other debt obligations and general working capital
requirements. All but $1.5 million of the Notes have been converted to
common stock, with the remaining outstanding principal amount convertible into
3,000 shares of common stock, which amount is recorded as a current liability,
net of an unaccreted discount of $29,846, in the accompanying consolidated
balance sheet. In addition, the Company entered into a revolving credit
agreement in September 1997 that provides maximum borrowings of up to
$8 million based on eligible accounts receivable and inventory, as defined. At
June 30, 1999, there were no outstanding amounts under the revolving credit
agreement.
In connection with the acquisition of Lamar, of the aggregate cash
consideration to be paid by the Company, $1,000,000 was paid on May 5, 1998,
the closing date, $500,000 was paid on each of the six and twelve month
anniversaries of the closing, and the remainder is payable in two equal
installments on each of the twenty-four and thirty-six month anniversaries of
the closing. The current portion of long term debt is comprised of
approximately $500,000 in cash consideration due on the twenty-four
month anniversary of the closing. The approximate $500,000 in cash
consideration due on the thirty-six month anniversary of the closing
is included in long term debt on the accompanying consolidated balance sheet.
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. 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. We cannot assure
that demand will continue or grow for our products, including future products
related to our DSDA technology, or, that if such demand grows, 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. The significant management
information systems consist primarily of financial and inventory systems. All
of the Company's material hardware, including our AS/400 mainframe, telephone
systems and networks are being tested for year 2000 compliance. With respect
to significant future system hardware or software purchases and/or
modifications, the Company will conduct similar testing prior to
implementation in an effort to ensure year 2000 compliance. Currently, the
Company does not anticipate any material deficiencies and, further, does not
anticipate difficulty or significant additional expense in achieving full year
2000 capability. The cost of the upgrade to the management information systems
is not expected to exceed $1 million. The Company expects this upgrade to
achieve several business and operational objectives, including, among others,
satisfaction of the year 2000 computing requirements. Although the Company
believes that its systems are substantially year 2000 compliant, there can be
no assurance that the systems will work properly, independently or in
conjunction with the systems of any of the Company's suppliers, service
providers, strategic partners or customers.
The Company will bear the risk of a material adverse affect if any of its
suppliers, service providers, strategic partners or customers do not
appropriately address their own year 2000 compliance issues. Accordingly, the
Company has inquired of its suppliers, service providers, strategic partners
and major customers about their year 2000 compliance. The Company believes
that its strategic partners and major customers will be year 2000 compliant,
and the Company is still in the process of reviewing the compliance programs
of suppliers and service providers. There can be no assurance that these other
companies will achieve year 2000 compliance or that any conversions by them to
become year 2000 compliant will be made in a timely manner. Failure of these
companies to become year 2000 compliant, in a timely manner, could have a
material adverse effect on the Company's financial condition or results of
operations. If the Company's suppliers and service providers are not year 2000
compliant, the Company may have to arrange for alternative sources of supply
for inventory procurement and contract manufacturers in the fall of 1999 in
preparation for the year 2000. The Company does not have any other contingency
plans with respect to other problems that could arise during the normal course
of business as a result of the year 2000. Any of these could have a material
adverse effect on the Company's financial condition or results of operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's recent principal sources of external funding have been
convertible debt and convertible preferred stock. In addition, the Company
maintains a revolving credit facility that provides for interest at a spread
above the prime rate. At June 30, 1999, the Company had $1.5 million of
outstanding convertible notes, $7.5 million of outstanding redeemable
convertible preferred stock, and no outstanding borrowings under its revolving
credit facility. The Company is affected by market risk exposure primarily
through changes in the amount of its common stock issuable upon
the conversion of its outstanding convertible preferred stock due to changes
in the market price of its common stock and, during periods that it has
outstanding borrowings under its revolving credit facility, changes in
the prime rate. A significant decline in the market price of the Company's
common stock could result in a substantial increase in the number of
shares of common stock into which its outstanding convertible preferred stock
can be converted and a significant rise in interest rates during periods that
the Company has borrowings outstanding under its revolving credit facility
could materially adversely affect the Company's financial condition and
results of operations. The Company does not utilize derivative financial
instruments to hedge against changes in interest rates or for any other
purpose. In addition, substantially all transactions are denominated in
U.S. dollars. As such, we have shifted foreign currency exposure onto foreign
customers. As a result, if exchange rates move against foreign customers, the
Company could experience difficulty collecting unsecured accounts receivable,
the cancellation of existing orders or the loss of future orders. The
foregoing could materially adversely affect the Company's business, financial
condition and results of operations.
<PAGE>
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 24, 1999, at the Annual Meeting of Shareholders of the Company, the
shareholders elected as directors of the Company the following individuals:
Frank A.D. Andrea Jr. (10,505,676 shares for, 561,683 shares withheld); Douglas
J. Andrea (10,520,636 shares for, 546,723 shares withheld); John N. Andrea
(10,489,376 shares for, 577,983 shares withheld); Christopher Dorney
(10,557,132 shares for, 510,227 shares withheld); Gary Jones (10,557,317
shares for, 510,042 shares withheld); Scott Koondel (10,558,157 shares for,
509,202 shares withheld); Paul Morris (10,560,657 shares for, 506,702 shares
withheld); Patrick D. Pilch (10,531,282 shares for, 536,077 shares withheld);
Jack Lahav (10,550,957 shares for, 516,402 shares withheld); and John R. Larkin
(10,555,557 shares for, 511,802 shares withheld). In addition, the
shareholders authorized an amendment to the 1998 Stock Plan of the Company to
increase the number of shares of common stock issuable thereunder to 3,000,000
shares from 2,000,000 shares (3,545,317 shares for, 1,196,818 shares against,
101,559 shares abstained, and 6,223,665 broker nonvoted shares). The
shareholders also ratified the selection of Arthur Andersen LLP as the
Company's independent accountants for the year ending December 31, 1999
(10,910,823 shares for, 93,616 shares against, and 62,920 shares abstained).
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 May 7, 1999, the registrant filed a report on Form 8-K stating that on
April 23, 1999, the Board of Directors of the registrant declared a dividend,
payable on May 7, 1999 to the stockholders of record on that date, of one
preferred share purchase right for each outstanding share of common stock of
the registrant, which such right entitles the holder to purchase from the
registrant one one-thousandth of a share (a "Unit") of Series A Junior
Participating Preferred Stock, par value $.01 per share, of the registrant at
a price of $50.00 per Unit, subject to adjustment.
On June 22, 1999, the registrant filed a report on Form 8-K stating that
the registrant had completed a private placement of 750 shares of its Series
B Convertible Preferred Stock and a warrant covering 75,000 shares of its
common stock to an institutional investor with proceeds to the registrant
of $7,500,000.
<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/ Christopher P. Sauvigne President and August 13, 1999
- --------------------------- Chief Operating Officer
/s/ Patrick D. Pilch Executive Vice President, August 13, 1999
- --------------------------- and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the registrant's consolidated balance sheet as of June 30, 1999 and
consolidated statement of operations for the six months ended
June 30, 1999, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000006494
<NAME> ANDREA ELECTRONICS CORPORATION
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 10,425,570
<SECURITIES> 0
<RECEIVABLES> 4,184,263
<ALLOWANCES> 202,251
<INVENTORY> 7,486,331
<CURRENT-ASSETS> 22,101,716
<PP&E> 2,499,758
<DEPRECIATION> 384,635
<TOTAL-ASSETS> 53,526,424
<CURRENT-LIABILITIES> 5,189,619
<BONDS> 1,470,154
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<COMMON> 6,616,269
<OTHER-SE> 33,877,977
<TOTAL-LIABILITY-AND-EQUITY> 53,526,424
<SALES> 8,988,214
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