SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period
from ____________ to ____________
Commission file number 1-4324
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ANDREA ELECTRONICS CORPORATION
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(Exact name of registrant as specified in its charter)
New York 11-0482020
------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
45 Melville Park Road, Melville, New York 11747
----------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 631-719-1800
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date 13,887,572.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2000 December 31, 1999
------------------------ ----------------------
(unaudited) (audited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $3,466,323 $9,153,148
Accounts receivable, net of allowance for doubtful
accounts of $202,521 3,793,145 2,770,703
Inventories, net 6,477,682 7,123,747
Prepaid expenses and other current assets 273,037 267,817
------------ -----------
Total current assets 14,010,187 19,315,415
PROPERTY, PLANT AND EQUIPMENT, net 1,493,027 1,930,506
DEFERRED INCOME TAXES 1,806,615 1,806,615
OTHER ASSETS 2,197,667 2,254,989
GOODWILL 23,166,034 24,545,877
------------ ----------
Total assets $ 42,673,530 $ 49,853,402
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $2,419,886 $2,134,873
Current portion of long-term debt 634,151 597,247
Convertible notes, net - 1,485,077
Other current liabilities 1,173,397 1,076,733
------------ -----------
Total current liabilities 4,227,434 5,293,930
LONG-TERM DEBT 244,672 693,362
OTHER LIABILITIES - 14,477
------------ -----------
Total liabilities 4,472,106 6,001,769
SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK, net, $.01 par value;
500 and 750 shares issued and outstanding, respectively 4,821,069 7,187,077
------------ -----------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized: 5,000,000
shares; none issued and outstanding - -
Common stock, $.50 par value; authorized: 35,000,000
shares; issued and outstanding: 13,867,572 and
13,242,538 shares, respectively 6,933,786 6,621,269
Additional paid-in capital 46,612,359 42,990,641
Accumulated deficit (20,165,790) (12,947,354)
------------- -----------
Total shareholders' equity 33,380,355 36,664,556
------------ ------------
Total liabilities and shareholders' equity $ 42,673,530 $ 49,853,402
============ ============
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
0 (UNAUDITED)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------------- -----------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $5,318,936 $4,326,098 $11,701,688 $13,314,312
COST OF SALES 3,772,311 2,953,516 8,537,839 9,244,906
------------ ----------- ----------- -----------
Gross profit 1,546,625 1,372,582 3,163,849 4,069,406
RESEARCH AND DEVELOPMENT EXPENSES 1,249,167 747,848 3,488,839 2,352,585
GENERAL, ADMINISTRATIVE AND SELLING EXPENSES 2,389,736 2,306,481 6,784,391 6,832,961
------------- ------------ ----------- ------------
Loss from operations (2,092,278) (1,681,747) (7,109,381) (5,116,140)
------------- ------------ ----------- ------------
OTHER INCOME (EXPENSE):
Interest income 62,263 107,731 285,655 181,481
Interest expense (41,055) (82,070) (193,238) (224,407)
Other 25,632 10,892 -
------------- ----------- ------------ -------------
46,840 25,661 103,309 (42,926)
------------- ----------- ------------ -------------
LOSS BEFORE PROVISION FOR INCOME TAXES (2,045,438) (1,656,086) (7,006,072) (5,159,066)
PROVISION FOR INCOME TAXES
- - - -
------------- ------------ ------------ ------------
Net loss $(2,045,438) $(1,656,086) $(7,006,072) $(5,159,066)
============== ============ ============ ============
PREFERRED STOCK DIVIDENDS 60,577 94,097 212,364 102,622
-------------- ------------ ------------- ------------
Net loss applicable to common
shareholders $(2,106,015) $(1,750,183) $(7,218,436) $(5,261,688)
============== ============= ============ ============
PER SHARE INFORMATION:
Net Loss Per Share:
Basic $(.15) $(.13) $(.53) $(.40)
============== ============= ============ ============
Diluted $(.15) $(.13) $(.53) $(.40)
============== ============= ============ ============
Shares used in computing net loss per share:
Basic 13,836,893 13,235,908 13,702,946 13,225,185
============= ============= ============ ============
Diluted 13,836,893 13,235,908 13,702,946 13,225,185
============= ============= ============ ============
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
Additional Total
Shares Common Paid-In Accumulated Shareholders'
Outstanding Stock Capital Deficit Equity
----------- ------ --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1999 13,242,538 $ 6,621,269 $ 42,990,641 $ (12,947,354) $36,664,556
Conversion of Series B Redeemable
Convertible Preferred Stock, net
of related costs 371,909 185,955 2,231,447 - 2,417,402
Exercise of stock options, net of
related costs 253,125 126,562 1,390,271 - 1,516,833
Preferred stock dividends - - - (212,364) (212,364)
Net loss - - - (7,006,072) (7,006,072)
BALANCE, September 30, 2000 13,867,572 $ 6,933,786 $ 46,612,359 $(20,165,790) $33,380,355
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended September 30,
--------------------------------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,006,072) $(5,159,066)
Adjustments to reconcile net loss to net cash used in operating
activities:
Non-cash interest expense 39,964 215,314
Depreciation and amortization 2,633,944 2,355,078
(Increase) Decrease in:
Accounts receivable, net (1,022,442) 624,507
Inventories 646,065 366,484
Prepaid expenses and other current assets (420,436) (70,950)
Other assets 769 (313,450)
Increase (Decrease) in:
Trade accounts payable 285,013 113,487
Other current and long term liabilities (98,660) (489,601)
---------- -----------
Net cash used in operating activities (4,941,855) (2,358,197)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (221,688) (795,912)
---------- -----------
Net cash used in investing activities (221,688) (795,912)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net from proceeds from Series B Redeemable Convertible Preferred
Stock - 7,500,000
Payments of debt obligations (555,038) (545,350)
Payment of convertible notes (1,485,077) -
Proceeds from issuance of common stock upon exercise of stock
options, net of related costs ---------- 110,724
----------
1,516,833
Net cash (used in) provided by financing activities (523,282) 7,065,374
---------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,686,825) 3,911,265
========== =========
CASH AND CASH EQUIVALENTS, beginning of period 9,153,148 5,437,423
---------- ---------
CASH AND CASH EQUIVALENTS, end of period $3,466,323 $ 9,348,688
========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Non-cash investing and
financing activities:
Conversion of Series B Redeemable Convertible Preferred Stock
and related accrued dividends into common stock $2,417,402 $ -
========== ===========
Issuance of warrants in connection with Series B Redeemable
Convertible Preferred Stock $ - $ 348,457
========== ===========
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
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, 1999.
2. Earnings Per Common Share - Basic net income (loss) per common share is
computed by dividing net income (loss) by the weighted-average number of
common shares outstanding. Diluted net income (loss) per common share is
computed by dividing net income (loss) by the weighted-average number of
common shares and dilutive common share equivalents and convertible
securities then outstanding.
The following chart provides a reconciliation of information used in
calculating the per share amounts:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended September
September 30, 30,
-------------------------- -----------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Numerator:
<S> <C> <C> <C> <C>
Net loss $(2,045,438) $(1,656,086) $(7,006,072) $(5,159,066)
Preferred stock dividends 60,577 94,097 212,364 102,622
----------- ----------- ----------- -----------
Net loss applicable to
common shareholders $(2,106,015) $(1,750,183) $(7,218,436) $(5,261,688)
=========== =========== =========== ===========
Denominator:
Weighted-average common
shares outstanding -- Basic 13,836,893 13,235,908 13,702,946 13,225,185
Effect of dilutive
employee stock options - - - -
----------- ------------ -----------
Weighted-average common
shares outstanding -- Diluted 13,836,893 13,235,908 13,702,946 13,225,185
=========== ============ =========== ===========
Net loss per share:
Basic $(.15) $(.13) $(.53) $(.40)
=========== ============ =========== ===========
Diluted $(.15) $(.13) $(.53) $(.40)
=========== ============ =========== ===========
</TABLE>
<PAGE>
3. Comprehensive Income - The Company follows the provisions of 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 (loss) and all other non-owner changes in equity (or
other comprehensive income) such as unrealized gains/losses on securities
available-for-sale, foreign currency translation adjustments and minimum
pension liability adjustments. Comprehensive and other comprehensive
income must be reported on the face of the annual financial statements
or, in the case of interim reporting, in the footnotes to the financial
statements. For the nine months ended September 30, 2000 and 1999, the
Company's operations did not give rise to items includible in
comprehensive income (loss), which were not already included in net
income (loss). Accordingly, the Company's comprehensive income (loss) is
the same as its net income (loss) for all periods presented.
4. Derivative Instruments - SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS
No. 133 is effective for all fiscal years beginning after June 15, 1999
(subsequently amended by SFAS No. 137 and SFAS No.138, to be effective
for all fiscal years beginning after June 15, 2000) and will not require
retroactive restatement of prior period financial statements. This
statement requires the recognition of all derivative instruments as
either assets or liabilities in the balance sheet measured at fair value.
Derivative instruments will be recognized as gains or losses in the
period of change. If certain conditions are met where the derivative
instrument has been designated as a fair value hedge, the hedge items may
also be marked to market through earnings, thus creating an offset. If
the derivative is designed and qualifies as a cash flow hedge, the
changes in fair value of the derivative instrument may be recorded in
comprehensive income. While the Company operates in international
markets, it does so presently without the use of derivative instruments.
5. Procurement Agreement - The Company has an agreement with International
Business Machines and its subsidiaries ("IBM"), as amended, to produce
and procure certain products, as defined. The agreement continues in full
force and effect unless terminated earlier for material breach by either
party, as defined. For the nine-month period ending September 30, 2000,
sales of the Company's products to IBM and certain of IBM's affiliates,
distributors, licensees and integrators accounted for approximately 59%
of the Company's total net sales.
6. 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 (the "Notes") due June 10, 2000. The remaining
obligation from these notes was paid in cash on June 9, 2000.
7. Series B Redeemable Convertible Preferred Stock - On June 22, 1999, the
Company issued and sold in a private placement $7,500,000 of Series B
Redeemable Convertible Preferred Stock (the "Series B Preferred Stock"),
and a warrant covering 75,000 shares of the Company's common stock. Each
share of Series B Preferred Stock has a stated value of $10,000 plus
dividends 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% dividends may, at the option of the
Company, be paid in cash. The warrant has an exercise price of $8.775 per
share and expires on June 18, 2004.
On February 25, 2000, 250 shares of the Series B Preferred Stock,
together with related accrued dividends, were converted into 371,909
shares of common stock.
Upon the announcement of a major transaction, as defined, the investor
shall have the right to require the Company to redeem all or a portion of
the investor's Series B Preferred Shares at a redemption price equal to
the greater of 120% of the stated value plus any accrued dividends and
the Market Price on the day of announcement. In addition, upon the
occurrence of certain triggering events, as defined, and depending on the
Company's control over such events, the investor may have the right to
require the Company to a) redeem all or a portion of the Preferred Shares
at a redemption price equal to the greater of 120% of the stated value
plus any accrued dividends and the Market Price on the day of
announcement, or b) pay a penalty equal to 1% of the remaining principal
amount outstanding for a period not to exceed 20 days in any 365 day
period, and adjust the Maximum Conversion Price, as defined.
As of September 30, 2000, the remaining 500 shares of Series B Preferred
Stock are convertible into the Company's common stock. Any unconverted
Series B Preferred Stock that remains outstanding on June 18, 2004, will
automatically convert into the Company's common stock. The Company has
reserved 1,744,235 of common stock for issuance upon conversion of the
shares of the Series B Preferred Stock.
As of September 30, 2000, the Series B Preferred Stock is recorded net of
the unaccreted present value of the warrants of $178,931. Due to the
redemption features discussed above, the Series B Preferred Stock is
presented outside of stockholders' equity in the accompanying
consolidated balance sheet.
8. Acquisition Of Business -On May 5, 1998, the Company acquired all of the
outstanding shares of capital stock of Lamar (the "Acquisition"). The
consideration paid by the Company for the Acquisition was approximately
1,800,000 shares of restricted common stock and $3,000,000 in cash and
notes payable. Of the approximately 1,800,000 shares issued to the
sellers, one-third became freely transferable on the first anniversary of
the closing, an additional one-third became transferable on the second
anniversary and the last one-third becomes transferable on the third
anniversary. Of the aggregate cash consideration to be paid by the
Company, $2,000,000 was paid through 1999, $500,000 was paid on May 5,
2000, and the remaining $500,000 is payable on 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 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 15
years. Goodwill at September 30, 2000 is approximately $23.2 million,
which is net of approximately $4.4 million in accumulated amortization.
9. Segment Information - The Company follows the provisions of 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 three segments: (i) Andrea
Anti-Noise Products, (ii) Aircraft Communications Products, and (iii)
Far-field Digital Audio Technology Products. The following represents
selected consolidated financial information for the Company's segments
for the three months ended September 30, 2000, and 1999:
<TABLE>
<CAPTION>
Far-field
Andrea Aircraft Digital Audio
Anti-Noise Communications Technology September 30,
Segment Data Products Products Products 2000
----------------------------- ----------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 4,560,017 $ 603,056 $ 155,863 $ 5,318,936
Income (loss) from operations 652,886 (170,911) (2,574,253) (2,092,278)
Depreciation 108,868 32,956 43,389 185,213
</TABLE>
<TABLE>
<CAPTION>
Far-field
Andrea Aircraft Digital Audio
Anti-Noise Communications Technology September 30,
Segment Data Products Products Products 1999
----------------------------- ----------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 3,549,392 $ 776,706 $ - $ 4,326,098
Income (loss) from operations (1,790,486) 108,739 - (1,681,747)
Depreciation 221,373 37,052 - 258,425
</TABLE>
For the three months ended September 30, 2000 and 1999, sales and accounts
receivable by geographic area are as follows:
September 30, September 30,
Geographic Data 2000 1999
--------------------- ------------ ------------
Sales:
United States $ 3,960,340 $ 2,215,225
Europe 487,129 809,591
Other foreign 871,467 1,301,282
----------- -----------
$ 5,318,936 $ 4,326,098
=========== ===========
Accounts receivable:
United States $ 2,447,034 $ 2,175,420
Europe 719,147 688,382
Other foreign 626,964 1,379,473
----------- -----------
$ 3,793,145 $ 4,243,275
=========== ===========
10. Legal Proceedings - As previously reported in "Item 3. Legal Proceedings"
in the Company's Annual Report on Form 10-K for the year ended December
31, 1999, on November 17, 1998 a complaint was filed against us in the
U.S. District Court for the Eastern District of New York by NCT Group,
Inc. ("NCT"; formerly Noise Cancellation Technologies, Inc.) and NCT
Hearing Products, Inc., one of NCT's subsidiaries. The complaint involves
two of Andrea's patents, U.S. Patent No. 5,732,143 and U.S. Patent No.
5,825,897. These patents relate to certain active noise reduction
technology that is particularly applicable to aircraft passenger
headphones. Andrea does not currently derive any sales or licensing
revenue from aircraft passenger headphones. The complaint requests a
declaration that these two patents are invalid and unenforceable and that
NCT's products do not infringe upon these two patents. The complaint
alleges that Andrea has engaged in unfair competition by misrepresenting
the scope of the two patents, tortiously interfering with prospective
contractual rights between NCT and its existing and potential customers,
making false and disparaging statements about NCT and its products, and
falsely advertising Andrea's ANR products. The complaint seeks to enjoin
Andrea from engaging in these alleged activities and seeks compensatory
damages of not less than $5 million, punitive damages of not less than
$50 million and plaintiffs' costs and attorneys' fees. On December 30,
1998, we filed and served an answer to the NCT complaint, denying the
allegations and asserting affirmative defenses and counterclaims. Our
counterclaims allege that NCT has infringed U.S. Patents Nos. 5,732,143
and 5,825,897, and that NCT has engaged in trademark infringement, false
designation of origin, and unfair competition. The counterclaims also
allege that NCT's patent infringement has been and is willful. The
counterclaims seek injunctive relief with respect to the allegations of
patent infringement, trademark infringement, false designation of origin
and unfair competition. We are also seeking exemplary and punitive
damages, prejudgment interest on all damages, costs, reasonable
attorneys' fees and expenses. During the second half of 1999, both NCT
and Andrea submitted briefs to the Court on whether to have an early
hearing on the meaning of the claims in the two Andrea patents. This type
of hearing is called a "Markman Hearing." We are unable to anticipate
when the Court will issue a decision on this question. We and NCT are
proceeding with discovery, including document production and depositions.
If this suit is ultimately resolved in favor of NCT, we could be
materially adversely effected. We believe, however, that NCT's
allegations are without merit and we intend to vigorously defend Andrea
and to assert against NCT the claims described above.
On March 11, 1999, we were notified about a claim filed with the New York
State Environmental Protection and Spill Compensation Fund (the "Fund")
by the owners (Mark J. Mergler and Ann Mergler, the "Claimants") of
property adjoining our former Long Island City facility. This claim
alleges property damages arising from petroleum migrating from our former
facility and was purportedly detected in the basement of the Claimants'
property. In their claim to the Fund, the Claimants alleged that their
property has been damaged and that they have incurred remedial costs. In
the event the Fund honors this claim in whole or in part, we may be
liable to reimburse the Fund. The New York State Department of
Environmental Conservation has asserted a demand that we investigate and
remediate the discharge of petroleum from a fuel oil storage tank at our
former Long Island City facility, and determine whether the petroleum
discharge has migrated to the Claimants' adjoining property. We engaged
environmental consultants to investigate the discharge from the fuel oil
storage tank and we are currently funding remediation work. We denied,
however, the allegations that any petroleum discharge has migrated to the
Claimant's property and objected to the claim made by the Claimant to the
Fund. On September 2, 1999, a civil action related to this matter was
commenced in the Nassau County Supreme Court by Mark J. Mergler and Ann
Mergler. The plaintiffs allege that the fuel oil released from the
heating system of our former facility has migrated beneath and onto the
neighboring property causing an excess of $1,000,000 in direct and
consequential damages. The plaintiffs' allegations against us include,
negligence, nuisance and strict liability under the New York State
Navigation Law. We have submitted an answer denying the allegations and
all liability relating to the alleged property damage. This lawsuit is at
an early stage and we are unable to evaluate the likelihood of an
unfavorable outcome or estimate the amount or range of potential loss, if
any.
In addition to the litigation described above, we are from time to time
subject to routine litigation incidental to our business.
11. Reclassifications - Certain prior year amounts have been reclassified to
conform to the current year presentation.
12. Subsequent Event- On October 12, 2000, the company issued and sold in a
private placement $7,500,000 of Series C Redeemable Convertible Preferred
Stock (the "Series C Preferred Stock"). Each of the 750 shares of Series
C Preferred Stock has a stated value of $10,000 plus dividends of 5% per
annum, which sum is convertible into Common Stock at a conversion price
initially equal to 110% of the average of the two lowest closing bid
prices of the Common Stock during the 5 consecutive trading days
immediately preceding the issuance date for the first nine months. The
conversion price will be reset every six months thereafter to the lesser
of the then existing conversion price and the average of the two lowest
closing bid prices of the Common Stock during the 5 consecutive trading
days immediately preceding the six-month reset dates or, for the period
beginning on the day two years after the initial issuance and ending on
the maturity of the Series C Preferred Stock, the least of: (i) the then
existing conversion price, (ii) the average of the two lowest closing bid
prices of the Common Stock during the 15 consecutive trading days
immediately preceding such two year date and (iii) the closing bid price
on the day of conversion, subject in each case to certain adjustments.
The 5% dividend amount may, at the option of the Company, be paid in
cash. The Series C Preferred Stock is convertible or redeemable at
maturity by the Company, based upon certain circumstances at that time,
and is redeemable by the holder upon certain events. The Company has the
right to require the conversion of the Series C Preferred Stock after one
year upon the satisfaction of certain conditions. During the 548-day
period beginning on October 10, 2000, the investor, subject to certain
conditions, may exercise an option to purchase up to an additional $2.5
million of the Company's Series C Preferred Stock.
Upon the announcement of a major transaction or upon certain triggering
events, as defined, the investor shall have the right to require the
Company to redeem all or a portion of the investor's Series C Preferred
Shares at a redemption price equal to the greater of (a) 120% of the
Liquidation Value, as defined, or (b) the product of the applicable
conversion rate in effect on the date of the major transaction or the
triggering event, the closing bid price of the common stock of the
Company on the trading day immediately preceding the major transaction or
triggering event or the closing bid price of the common stock of the
Company on the date the holder's delivery to the Company of notice. In
addition, if the Company is unable to effect such redemption (i) interest
will accumulate on the value of the Series C Preferred Shares that the
Company is unable to redeem at the rate of 2% per month and (b) the
holders of the Series C Preferred Stock are entitled to void their
redemption notices and receive a reset of their applicable conversion
price.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Our mission is to provide the emerging "voice interface" markets with
state-of-the-art communications products that facilitate natural language,
human/machine interfaces.
Examples of the applications and interfaces for which Andrea Anti-Noise
Products and Andrea digital signal processing ("DSP") Microphone and Software
Products provide benefits include: Internet and other computer-based speech;
telephony communications; automotive telematics; multi-point conferencing;
speech recognition; multimedia; personal digital assistants ("PDAs"); distance
learning; military and commercial aircraft 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 in noisy environments, for use with personal computers, mobile
personal computing devices, military and commercial aircraft systems, cellular
and other wireless communication devices and automotive communication systems.
High quality audio communication technologies will be required for these
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 and Andrea
DSP Microphone and Software 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 certain 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 OEMs, software publishers,
and distributors and retailers actively engaged in the various markets in
which our products have application. Under some of these arrangements, we
supply our products for sale by our collaborative partners. Under others, the
collaborative partners supply us with software that we include with our
products. In addition, we have been increasing our own direct marketing
efforts.
The success of our strategy will depend on our ability to, among other things,
increase sales of our line of existing Andrea Anti-Noise Products and Andrea
DSP Microphone and Software Products, contain costs, manage growth, introduce
additional Andrea Anti-Noise Products and Andrea DSP Microphone and Software
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 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 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-NoiseProducts from
purchased components, and we are currently assembling our Andrea DSP
Microphone and Software Products from purchased components at our New York and
Israeli facilities. We manufacture our Aircraft Communications Products at our
New York facility.
The interim results of operations of the Company presented in this report are
not necessarily indicative of the actual sales or results of operations to be
realized for the full year.
Cautionary Statement Regarding Forward-Looking Statements
Certain information contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations for the three months ended
September 30, 2000 (the "2000 Third Quarter") compared to the three months
ended September 30, 1999 (the "1999 Third Quarter"), and for the nine months
ended September 30, 2000 (the "2000 First Nine Months") compared to the nine
months ended September 30, 1999 (the "1999 First Nine Months"), are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. The words "anticipates," "believes," "estimates," "expects,"
"intends," "plans," "seeks," variations of such words, and similar expressions
are intended to identify forward-looking statements. We have based these
forward-looking statements on our current expectations, estimates and
projections about our business and industry, our beliefs and certain
assumptions made by our management. Investors are cautioned that matters
subject to forward-looking statements involve risks and uncertainties
including economic, competitive, governmental, technological and other factors
that may affect our business and prospects. These statements are not
guarantees of future performance and are subject to certain risks,
uncertainties and assumptions that are difficult to predict. In order to
obtain the benefits of these "safe harbor" provisions for any such
forward-looking statements, we wish to caution investors and prospective
investors about the following significant factors, which, among others, have
in some cases affected our actual results and are in the future likely to
affect our actual results and could cause them to differ materially from those
expressed in any such forward-looking statements. These factors include:
o Our results of operations have historically been and are subject to
continued substantial annual and quarterly fluctuations. The causes of
these fluctuations include, among other things:
- the volume of sales of our products under our collaborative
marketing arrangements;
- the cost of development of our products under our collaborative
development arrangements;
- the mix of products we sell;
- the mix of distribution channels we use;
- the timing of our new product releases and those of our competitors;
- fluctuations in the computer and communications hardware and
software marketplace; and
- general economic conditions.
o We cannot assure that the level of sales and gross profit, if any, that
we achieve in any particular fiscal period will not be significantly
lower than in other fiscal periods. Our revenues for the 2000 Third
Quarter were approximately $5.3 million compared to approximately $4.3
million in the 1999 Third Quarter. For the 2000 Third Quarter, we had a
net loss applicable to common shareholders of approximately $2.1 million
versus a net loss of $1.8 million for the 1999 Third Quarter. Our
revenues for the 2000 First Nine Months were approximately $11.7 million
compared to approximately $13.3 million in the 1999 First Nine Months.
For the 2000 First Nine Months, we had a net loss applicable to common
shareholders of approximately $7.2 million versus a net loss of $5.3
million for the 1999 First Nine Months.
o While we are examining opportunities for further cost-reduction,
production efficiencies and diversification of our business, we may
continue to accumulate losses and the market price of our common stock
could decline. In order to remain competitive, we intend to continue to
incur substantial research and development, selling and general and
administrative expenses. These expenses may not be necessarily or easily
reduced if sales revenue is below expectations and, therefore, net income
or loss may be disproportionately affected by any reduction in sales
revenue. Accordingly, we believe that period-to-period comparisons of our
results of operations may not necessarily be meaningful and should not be
relied upon as indications of future performance.
o 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 35,000,000 shares of common stock presently
authorized, 13,887,572 were outstanding as of November 1, 2000. This does
not include (i) 5,253,125 shares of our common stock reserved for
issuance upon exercise of outstanding options granted under our 1991
Performance Equity Plan and 1998 Stock Plan and shares of our common
stock reserved for further option grants under the 1991 Performance
Equity Plan and 1998 Stock Plan, (ii) 1,744,235 shares of common stock
reserved for issuance upon conversion of the Series B Convertible
Preferred Stock and exercise of the related warrant and (iii) 2,500,000
shares of common stock reserved for issuance upon conversion of the
Series C Convertible Preferred Stock. To the extent that Series B
Convertible Preferred Stock is converted and the related warrant is
exercised or the Series C Convertible Preferred Stock is converted or we
issue additional shares of capital stock, the ownership interests of
holders of common stock would be diluted.
We have 750 shares of Series C Convertible Preferred Stock outstanding
and during the 548-day period beginning on October 10, 2000, the
investor, subject to certain conditions, may exercise an option to
purchase up to an additional $2.5 million of the Company's Series C
Preferred Stock. The number of shares of common stock issuable upon the
conversion of the Series C Convertible Preferred Stock depends on the
prices of the common stock as quoted on the American Stock Exchange and
the initial conversion price is equal to 110% of the average of the two
lowest closing bid prices of the Common Stock during the five consecutive
trading days immediately preceding the issuance date for the first nine
months. The conversion price will be reset every six months thereafter to
the lesser of the then existing conversion price and the average of the
two lowest closing bid prices of the Common Stock during the five
consecutive trading days immediately preceding the six-month reset dates
or, for the period beginning on the day two years after the initial
issuance and ending on the maturity of the Series C Convertible Preferred
Stock, the least of: (i) the then existing conversion price, (ii) the
average of the two lowest closing bid prices of the Common Stock during
the 15 consecutive trading days immediately preceding such two year date
and (iii) the closing bid price on the day of conversion, subject in each
case to certain adjustments. We cannot predict the price of the common
stock in the future. If the price of our common stock decreases over
time, the number of shares of common stock issuable upon conversion of the
Series C Convertible Preferred Stock will increase and the holders of
common stock would experience substantial dilution of their investment.
We have 500 shares of Series B Convertible Preferred Stock and a warrant
for 75,000 shares of common stock outstanding and, subject to certain
conditions and limitations. The number of shares of common stock issuable
upon the conversion of the Series B Convertible Preferred Stock depends
on the prices of the common stock as quoted on the American Stock
Exchange shortly before the date of conversion. We cannot predict the
price of the common stock in the future. If the price of our common stock
decreases over time, the number of shares of common stock issuable upon
conversion of the Series B Convertible Preferred Stock will increase and
the holders of common stock would experience substantial dilution of
their investment. On February 25, 2000, 250 shares of Series B
Convertible Preferred Stock were converted into 371,909 shares of common
stock.
In addition, in May 1998, we issued 1,800,000 shares of common stock as
part of the consideration for our acquisition of Lamar Signal Processing,
Ltd., of which 600,000 shares of common stock are subject to trading
restrictions that expire in May 2001. As the restrictions expire, the
shares are subject to demand and piggyback registration rights.
o Most of our current and potential competitors have significantly greater
financial, technology development, marketing, technical support and other
resources than we do. Consequently, these competitors may be able to
respond more quickly to new or emerging technologies and changes in
customer requirements, or devote greater resources to the development,
marketing, and sale of their products than we can. We cannot assure that
one or more of these competitors will not independently develop
technologies that are substantially equivalent or superior to our
technology.
o 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 and Andrea DSP
Microphone and Software Products. Under these collaborative arrangements,
our products are or will be sold to end users through inclusion of the
products of our collaborators. The revenue derived by us from these
arrangements will be based in large part upon the sale of our
collaborator's products. Our success will therefore be dependent to a
substantial degree on the efforts of these collaborators in marketing
existing products and new products under development with which to
include our products and technologies. We cannot assure that any product
of any of our collaborators incorporating our products and technologies
will be marketed successfully. Our collaborators generally are not
contractually obligated to any minimum level of sales of our products or
technologies. Furthermore, our collaborators may develop their own
microphone or earphone products or technologies that compete with our
products and technologies. We cannot assure that these collaborators will
not replace our products or technologies with, or give higher priority
to, the sales of these competitive products or technologies. We have also
established direct arrangements with large electronic and computer retail
chains in the United States, as well as with certain distributors in
Europe and the Americas. We cannot assure that any of these channels will
devote sufficient resources to support the sale of our products. We are
also currently discussing additional arrangements with other software
companies, several major automotive companies, several major personal
computer companies, consumer electronic manufacturers, and electronic and
computer retailers. We cannot assure that any of these discussions will
result in any definitive agreements. We are substantially dependent on
our product procurement relationship with IBM. During the 2000 Third
Quarter, IBM and certain of IBM's affiliates, distributors, licensees and
integrators accounted for 59% of our net sales. While we are a party to a
procurement agreement with IBM covering the purchase by IBM of certain of
our Andrea Anti-Noise Microphone and Earphone products and Andrea DSP
Microphone and Software Products for inclusion with certain of IBM's
personal computer products, IBM is not obligated to purchase these
products and is free to purchase microphone and earphone products and
technologies from our competitors. Our failure to maintain sales of
Andrea Anti-Noise Products and Andrea DSP Microphone and Software
Products to IBM would have a material adverse effect on our business,
results of operations and financial condition.
o We conduct assembly operations at our facilities in New York and Israel
and through subcontractors. During initial production runs of Andrea
Anti-Noise Products, we perform assembly operations at our New York
facility from purchased components. As sales of any particular Andrea
Anti-Noise Product increase, assembly operations are primarily
transferred to a subcontractor in Asia. Any failure on the part of this
subcontractor to meet our production and shipment schedules could have a
material adverse effect on our business, results of operations and
financial condition.
Most of the components for the Andrea Anti-Noise Products and Andrea DSP
Microphone and Software Products are available from several sources and
are not characteristically in short supply. However, certain specialized
components, such as microphones and DSP boards, are available from a
limited number of suppliers and subject to long lead times. To date we
have been able to obtain sufficient supplies of these more specialized
components, but we cannot assure that we will continue to be able to do
so. Shortages of, or interruptions in, the supply of these more
specialized components could have a material adverse effect on our sales
of Andrea Anti-Noise Products and Andrea DSP Microphone and Software
Products.
We assemble our Aircraft Communications Products at our New York facility
from purchased components. Certain highly specialized components for our
Aircraft Communications Products sold for military and industrial use
have limited sources of supply, the availability of which can affect
particular products. We do not believe, however, that our earnings have
been, or will be, materially affected due to unavailability of these
components.
o We rely on a combination of patents, patent applications, trade secrets,
copyrights, trademarks, nondisclosure agreements with our employees,
licensees and potential licensees, limited access to and dissemination of
our proprietary information, and other measures to protect our
intellectual property and proprietary rights. We cannot assure, however,
that the steps we have taken to protect our intellectual property will
prevent its misappropriation or circumvention.
o We have been granted 19 patents in the United States covering our Andrea
Anti-Noise and Andrea DSP Microphone and Software Products, and we have
other U.S. and non-U.S. patent applications currently pending. We cannot
assure that patents will be issued with respect to these applications or
any patent applications filed by us in the future.
o Our performance is substantially dependent on the performance of our
executive officers and key employees. We are dependent on our ability to
retain and motivate high quality personnel, especially management and
product and technology development teams. The loss of the services of any
of our executive officers or other key employees could have a material
adverse effect on our business, results of operations and financial
condition. Our future success also depends on our continuing ability to
attract and retain additional highly qualified technical personnel.
Competition for qualified personnel is intense and we cannot assure that
we will be able to attract, assimilate or retain qualified personnel in
the future. Our inability to attract and retain the necessary technical
and other personnel could have a material adverse effect on our business,
results of operations and financial condition.
Results Of Operations
Quarter Ended September 30, 2000 Compared to the Quarter Ended September 30,
1999
Sales
Sales for the 2000 Third Quarter were $5,318,936, an increase of 23% from
sales of $4,326,098 for the 1999 Third Quarter. Sales for the 2000 First Nine
Months were $11,701,688, a decrease of 12% from the 1999 First Nine Months
sales of $13,314,312. The increase in sales for the 2000 Third Quarter
reflects an approximate 23% increase in sales of Andrea Anti-Noise Products to
$4,560,011 or 86% of total sales, an approximate 4% decrease in sales of our
Aircraft Communications Products, to $603,056, or 11% of total sales, offset
by initial sales of Far-field Digital Audio Technology Products of $155,863,
or 3% of total sales. The increase in sales over the 1999 Third Quarter is
primarily due to the significant increase in USB headset and USB adapter
shipments to IBM during the quarter. The decrease in sales over the 1999 First
Nine Months is due to i) lower volumes of PC headset sales to the Company's
original equipment manufacturing (OEM) customers, and ii) a decrease in unit
sales of Aircraft Communications Products. For the 2000 Third Quarter, sales
of our computer headsets to IBM and certain of its affiliates, distributors,
licensees and integrators accounted for approximately 59% of our total sales.
Cost of Sales
Cost of sales as a percentage of sales for the 2000 Third Quarter increased to
71% from 68% for the 1999 Third Quarter. Cost of sales as a percentage of
sales for the 2000 First Nine Months increased to 73% from 69% for the 1999
First Nine Months. This increase in cost of sales percentage is primarily a
result of margin pressure associated with the comparable product mix, offset,
to an extent by an increase in USB-related sales, which sales provided
incremental revenue coverage over which to spread the Company's pool of fixed
overhead costs.
Research and Development
Research and development expenses for the 2000 Third Quarter increased 67% to
$1,249,167 from $747,848 for the 1999 Third Quarter. Research and development
expenses for the 2000 First Nine Months were $3,488,839, an increase of 48%
from the 1999 First Nine Months research and development expenses of
$2,352,585. This increase is due to the Company's continuing efforts to
develop and commercialize its Far-field Digital Audio Technologies, coupled
with, to a lesser extent, efforts in Aircraft Communication product
technologies and Andrea Anti-Noise Product technologies. Specifically, during
the 2000 Third Quarter, Far-field Digital Audio Technology efforts were
$1,038,419, or 83% of total research and development expenses, Aircraft
Communications technology efforts were $139,386, or 11% of total research and
development expenses and Andrea Anti-Noise Product efforts were $71,362, or 6%
of total research and development expenses. With respect to Far-field Digital
Audio Technologies, research efforts are primarily focused on the pursuit of
commercializing a natural language-driven human/machine interface by
developing optimal far-field microphone solutions for various voice-driven
interfaces, incorporating the Company's Digital Super Directional Array
microphone technology ("DSDA") and certain other related technologies obtained
through the acquisition of Lamar in May 1998. Correspondingly, the activities
of Lamar accounted for approximately 24% of the total research and development
expenses during the 2000 Third Quarter. The Company believes that the
acquisition of Lamar significantly reinforces its position in digital signal
processing by extending the Company's marketing programs to other industries,
including the consumer electronics and professional audio markets, among
others. With respect to Aircraft Communication technologies, research efforts
are primarily focused on developing intercom systems that are capable of
accepting the Company's digital audio software technologies. The Company
anticipates continued significant increases in research and development
expenses during the forth quarter, with particular emphasis on Far-field
Digital Audio Technologies.
General, Administrative and Selling Expenses
General, administrative and selling expenses for the 2000 Third Quarter
increased 4% to $2,389,736 from $2,306,481 from the 1999 Third Quarter.
General, administrative and selling expenses for the 2000 First Nine Months
were $6,784,391, a decrease of 1% from the 1999 First Nine Months general,
administrative and selling expenses of $6,832,961. The relative high level of
general, administrative and selling expenses, primarily attributable to the
Far-field Digital Audio Technology product line, reflects significant business
development expenses relating to existing and prospective collaborative
arrangements with OEMs, software publishers and developers. The Company also
incurs significant promotional, marketing and sales expenses to promote
product awareness and acceptance of the Far-field Digital Audio Technology
product line. In addition, included in general, administrative and selling
expenses in the 2000 Third Quarter and 2000 First Nine Months is goodwill
amortization expense of $459,948 and $1,379,843, respectively.
Other Income (Expense)
Other income for the 2000 Third Quarter increased 83% to $46,840 from $25,661
from the 1999 Third Quarter. Other income for the 2000 First Nine Months was
$103,309 compared to other expense of $42,926 for the 1999 First Nine Months.
This change was primarily due to miscellaneous rental income activity.
Provision for Income Taxes
The Company did not record income tax expense or benefit for the 2000 Third
Quarter or 2000 First Nine Months in light of the net loss recorded for the
periods. Furthermore, the realization of a portion of the Company's reserved
deferred tax assets, if and when realized, will not result in a tax benefit in
the consolidated statement of operations, but will result in an increase in
additional paid in capital as they are related to tax benefits associated with
the exercise of stock options. The Company will be continually re-assessing
its reserves on deferred income tax assets in future periods on a quarterly
basis.
Net Income (Loss)
Net loss for the 2000 Third Quarter was $2,045,438 compared to a net loss of
$1,656,086 for the 1999 Third Quarter. Net loss for the 2000 First Nine Months
was $7,006,072, compared to net loss of $5,159,066 for the 1999 First Nine
Months. The levels of net loss for the 2000 Third Quarter and 2000 First Nine
Months principally reflect the factors described above.
Liquidity And Capital Resources
The Company's principal sources of funds have historically been, and are
expected to continue to be, cash flow from operations and proceeds from the
sale of convertible notes, preferred stock or other securities to certain
financial institutions. At September 30, 2000, we had cash and cash
equivalents of $3,466,323 compared with $9,153,148 at December 31, 1999. The
balance of cash and cash equivalents at September 30, 2000 is primarily a
result of the Company's issuance and sale in a private placement of $7,500,000
of its Series B Redeemable Convertible Preferred Stock (the "Series B
Preferred Stock"). On February 25, 2000, 250 shares of the Series B Preferred
Stock were converted into 371,909 shares of common stock at a conversion price
of $6.91 per share. On October 12, 2000, the company raised an additional $7.5
million as a result of the issuance and sale in a private placement of its
Series C Redeemable Convertible Preferred Stock ("Series C Preferred Stock").
The Company is using the net proceeds from the issuance of the Series B
Preferred Stock and the Series C Preferred Stock for costs associated with
technology development, tooling costs, creating and maintaining strategic
alliances, payment of certain debt obligations and general working capital
requirements.
In connection with the acquisition of Lamar, of the aggregate cash
consideration to be paid by the Company, $1,000,000 was paid on May 5, 1998,
the closing date, and $500,000 was paid on each of the six, twelve and
twenty-four month anniversaries of the closing date, with the remainder
payable on the thirty-six month anniversary of the closing. The $500,000 in
additional cash consideration remaining, due on the thirty-six month
anniversary of the closing, is recorded as a component of current portion of
long-term debt on the accompanying consolidated balance sheet.
Working capital at September 30, 2000, was $9,782,753 compared to $14,021,485
at December 31, 1999. The decrease in working capital reflects decreases in
total current assets and total current liabilities of $5,305,228, and
$1,066,496, respectively. The decrease in total current assets reflects
decreases in cash and inventory of $5,686,825 and $646,065, respectively,
offset by increases in accounts receivable and prepaid expenses and other
current assets of $1,022,442, and $5,220, respectively. The decrease in
current liabilities reflects a decrease in convertible notes of $1,485,077,
offset by increases in trade accounts payable of $285,013, current portion of
long-term debt of $36,904 and other current liabilities of $96,664.
The decrease in cash from December 31, 1999 to the period ending September 30,
2000 of $5,686,825 reflects $4,941,855 of net cash used in operating
activities, $221,688 of net cash used in investing activities and $523,282 of
net cash used in financing activities.
The cash used in operating activities, excluding non-cash charges, is
primarily attributable to the $7,006,072 net loss for the 2000 First Nine
Months, a $1,022,422 increase in accounts receivable, a $420,436 increase in
prepaid expenses and other current assets offset by a $646,065 decrease in
inventory and a $285,013 increase in accounts payable. The increase in
accounts receivables primarily reflects the increase in sales during the 2000
Third Quarter sales. The increase in prepaid expenses and other current assets
primarily includes the recognition of increased premiums for prepaid property
taxes and insurance, as well as increases in other service costs related to
the remainder of 2000. The increase in accounts payable and 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 Company's various
product lines.
The cash used in investing activities is primarily attributable to investments
in the Company's existing information systems, as well as, to a lesser extent,
capital expenditures consisting of the ongoing upgrade of manufacturing dies
and molds for Andrea Anti-Noise Products.
The net cash used in financing activities reflects the payment of the
remaining principal amount of the Notes and the twenty-four month anniversary
installment payment to the former shareholders of Lamar, partially offset by
exercises of employee stock options.
Demand for the Company's products and technologies 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 June 1998, the Company raised $10 million through the issuance and
sale of the Notes. In June 1999, the Company raised $7.5 million through the
issuance and sale of Series B Preferred Stock. In October 2000, the company
raised $7.5 million through the issuance and sale of Series C Preferred Stock.
We believe that our current levels of cash and our access to financing
sources, provide sufficient liquidity and capital resources to fund working
capital requirements for at least twelve to eighteen months. Notwithstanding
the significance of sales of Andrea Anti-Noise Products as a percentage of our
total sales during the 2000 First Nine Months, we cannot assure that demand
will continue for these products or any of our other products, including
future products related to our Andrea Microphone Array Products and Software
Technologies, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal sources of financing activities include the issuance to
financial institutions of convertible debt and convertible redeemable
preferred stock. We are affected by market risk exposure primarily through the
effect of changes in interest rates on amounts 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
September 30, 2000, there was $5 million of unconverted redeemable preferred
stock. We do not utilize derivative financial instruments to hedge against
changes in interest rates or for any other purpose. In addition, substantially
all transactions by us are denominated in U.S. dollars. As such, we have
shifted foreign currency exposure onto its foreign customers. As a result, if
exchange rates move against foreign customers, we could experience difficulty
collecting unsecured accounts receivable, the cancellation of existing orders
or the loss of future orders. The foregoing could materially adversely affect
our business, financial condition and results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
The Registrant did not file any Reports on Form 8-K during the three-month
period ended September 30, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
ANDREA ELECTRONICS CORPORATION
<S> <C> <C>
/s/ Christopher P. Sauvigne President and Chief November 10, 2000
---------------------------- Operating Officer
Christopher P. Sauvigne
/s/ Richard A. Maue Senior Vice President, Chief November 10, 2000
Richard A. Maue Financial Officer, and Secretary
</TABLE>
