As filed with the Securities and Exchange Commission on December 7, 2000
Registration No. 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 10, 2001
REGISTRATION NO. _______________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------------------------
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------------------------------------
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
incorporation or organization) Identification No.)
45 MELVILLE PARK ROAD
MELVILLE, NEW YORK 11747
(631) 719-1800
-------------------
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
JOHN N. ANDREA
CO-CHAIRMAN AND CO-CHIEF--------------------------------
CHRISTOPHER P. SAUVIGNE with a copy to:
CHIEF EXECUTIVE OFFICER AND PRESIDENT
ANDREA ELECTRONICS CORPORATION LORI M. BERESFORD, ESQ.
45 MELVILLE PARK ROAD MULDOON MURPHY & FAUCETTE LLP
MELVILLE, NEW YORK 11747 5101 WISCONSIN AVENUE, N.W.
(631) 719-1800 -------------------WASHINGTON, D.C. 20016
(Name, address, including zip code, and (202) 362-0840
telephone number, including area code, of agent
for service)
with a copy to:
ALAN L. JAKIMO, ESQ.
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 839-5300
---------------------------------------------------
Approximate date of commencement of proposed sale to the public:
FROM TIME
TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
-------------------
From Time To Time After The Effective Date Of This Registration Statement.
--------------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. | |[ ]
If any of the Securitiessecurities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|[X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement fromfor the same offering. | |[ ] _________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registrationregistrations statement number of the earlier effective registration statement
for the same offering. | |[ ] ___________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. | |
[ ]
-------------------------------------------
Calculation of Registration Fee
==============================================================================================================
Proposed Maximum Proposed Maximum Amount to be Offering Price Per Aggregate Offering Amount of
Title of Shares to beEach Class of Securities Amount To Be Offering Price Aggregate Offering Registration
To Be Registered Registered UnitRegistered(1) Per Unit(2) Price Registration Fee(2) Fee(2)(3)
- ---------------------------------- ----------------- -------------------- --------------------- --------------------------------------------------------------------------------------------------------------------------------
Common Stock................. 320,760 $3.325(1) $1,066,527 $282
Common Stock,
Issuable Upon 2,142,298(2) $3.325(1) $7,123,141 $1,881
Conversion of Series C
Convertible Preferred Stockpar value $.50 per share 8,748,113 $0.60 $5,248,868 $1,313
- --------------------------- ----------------- -------------------- --------------------- ------------------
Totals 2,463,058 $8,189,668 $2,163--------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the registration fee
pursuant to Rule 457(c) of the Securities Act of 1933, as amended,
and based on the average of the high and low prices as quoted on the
American Stock Exchange on November 30, 2000.
(2) Shares of Common Stock that may be offered pursuant to this registration
statement consist of shares that may be issuable upon conversion of Series C
convertible preferred stock. For purposes of estimating the number of shares
of Common Stock to be included in this registration statement, we included
8,748,113 shares, which together with 2,142,298 shares representingregistered under
Registration Statement No. 333-51424, initially filed by the Registrant on
December 7, 2000, represents 200% of the number of shares of Common Stock
issuable upon conversion in full of the outstanding Series C convertible
preferred stock as of December 5, 2000September 7, 2001 at a conversion price of $7.0565$1.44 per
share, plus shares that may be issued as thea result of any stock split, stock
dividend or similar transaction as provided by Rule 416 ofunder the Securities
Act.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act, on the basis of the
average of the high and low prices for shares of Common Stock as reported on
the American Stock Exchange on September 7, 2001.
(3) Pursuant to Rule 429 under the Securities Act of 1933, the Prospectus
contained in this Registration Statement also relates to an additional
2,463,058 shares previously registered on Registration Statement Number
333-51424, as to which a registration fee in the amount of $2,163 has
already been paid.
----------------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICHTHAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a)8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THISTHE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a)8(A), MAY DETERMINE.
(SubjectIn accordance with Rule 429 under the Securities Act of 1933, as
amended, the Prospectus contained in this Registration Statement relates to Completion,a
total of 11,211,171 shares of the Registrant's Common Stock, 8,748,113 of which
are being registered pursuant to this Registration Statement and 2,463,058 of
which were registered in the Registrant's Registration Statement No. 333-51424
filed with the Securities and Exchange Commission on December 7, 2000)2000. This
Registration Statement, which is a new Registration Statement, also constitutes
Post- Effective Amendment No. 1 to Registration Statement No. 333-51424, which
shall hereafter become effective concurrently with the effectiveness of this
Registration Statement in accordance with Section 8(a) of the Securities Act of
1933, as amended.
Prospectus2
SUBJECT TO COMPLETION, DATED SEPTEMBER 10, 2001.
PROSPECTUS
ANDREA ELECTRONICS CORPORATION
45 Melville Park Road
Melville, New York 11747
2,463,058 Shares11,211,171 SHARES
COMMON STOCK
(Par Value $.50 Per Share)
This prospectus relates to 2,463,05811,211,171 shares of our common stockCommon Stock which
may be sold from time to time by the selling stockholders, including their
transferees, pledgees, donees or successors.
Thetransferees. Included in the 11,211,171 shares are 2,463,058 shares of our
common stock are comprised of (i) 2,142,298 shares that may
may be issued upon the conversion of our Series C convertible preferred stock
and (ii) 320,760 shares of common stock which are currently outstanding and
were issued in connection with the our acquisition in May 1998 of Lamar Signal
Processing, Ltd. The Series C convertible preferred stock was issued and sold
on October 10, 2000 to the selling stockholders pursuant to a Securities
Purchase Agreement, dated October 5, 2000, in a private placement exempt from
thepreviously covered by an earlier registration requirements of the Securities Act of 1933. The holder of the
Series C convertible preferred stock and the holders of the common stock that
are outstanding are described in the section "Selling Stockholders" beginning
on page 18.
The shares are being registered to permit the selling stockholders to
sell the shares from time to time in the public market. The selling
stockholders, or their pledgees, donees, transferees, or other successors in
interest, may sell the common stock from time to time on the American Stock
Exchange, in the over-the-counter market, in a negotiated transaction or in a
combination of such methods of sale, at market prices prevailing at the time
of sale, at prices related to such prevailing market prices or at prices
otherwise negotiated. See "Plan of Distribution" beginning on page 29. We can
not assure you that the selling stockholders will sell all or any portion of
the common stock offered hereby.statement.
We will not receive any of the proceeds from the sale of these shares,
although we have paid the expenses of preparing this prospectus and the related
Registration Statement.registration statement.
Our common stockCommon Stock is quoted on the American Stock Exchange under the
symbol "AND." On November 30, 2000,September 7, 2001, the last reported sale price for the common stockCommon
Stock on the American Stock Exchange was $3.29$0.52 per share.
Our principal executive offices are located at 45 Melville Park Road,
Melville, New York, 11747. Our telephone numberInvesting in the Common Stock involves a high degree of risk. You should
carefully read the "Risk Factors" section of this prospectus beginning on page 3
of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined whether
this prospectus is (631) 719-1800.
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY READ THE "RISK FACTORS" SECTION OF THIS PROSPECTUS BEGINNING ON PAGE
7 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED WHETHER
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is DecemberSeptember __, 20002001
3
TABLE OF CONTENTS
SUMMARY......................................................................1PROSPECTUS SUMMARY.............................................................2
RISK FACTORS...................................................................3
ANDREA ELECTRONICS............................................................12
FORWARD LOOKING STATEMENTS....................................................13
USE OF PROCEEDS...............................................................14
SELLING STOCKHOLDER...........................................................14
DESCRIPTION OF CAPITAL STOCK..................................................16
STOCKHOLDER DILUTION..........................................................26
NEW YORK ANTI-TAKEOVER LAW....................................................27
PLAN OF DISTRIBUTION..........................................................27
LEGAL MATTERS.................................................................29
EXPERTS.......................................................................29
WHERE YOU CAN FIND MORE INFORMATION..........................................1
INCORPORATED DOCUMENTS.......................................................2INFORMATION...........................................29
INCORPORATION OF CERTAIN INFORMATION REGARDING THE SERIES C CONVERTIBLE
CONVERTIBLE PREFERRED STOCK..............................................3
THE COMPANY..................................................................5
FORWARD LOOKING STATEMENTS...................................................7
RISK FACTORS.................................................................7
USE OF PROCEEDS.............................................................18
SELLING STOCKHOLDERS........................................................18
DESCRIPTION OF CAPITAL STOCK................................................19
NEW YORK ANTI-TAKEOVER LAW..................................................28
PLAN OF DISTRIBUTION........................................................29
LEGAL MATTERS...............................................................31
EXPERTS.....................................................................31
You should only rely on the information incorporated by reference or
provided in this prospectus or any supplement. We have not authorized any
person to provide you with any different information. If anyone provides you
with different or inconsistent information you should not rely on it. The
common stock is not being offered in any state where the offer is not
permitted. You should not assume that the information in this prospectus or
any supplement is accurate as of any date other than the date on the front of
this prospectus.
The information in this prospectusBY REFERENCE.............................30
1
4
PROSPECTUS SUMMARY
This summary may not contain all of the information that may be
important to you. You should read the entire prospectus as well
as the documents incorporated by reference in the prospectus, before making an
investment decision. All references to "we," "us," "our," "Andrea" or the "Company"Our financial statements and related notes are not included
in this prospectus, meanbut are incorporated by reference from the documents listed
under the caption "Incorporation of Certain Documents by Reference" located at
the end of this prospectus.
ANDREA ELECTRONICS
Andrea Electronics Corporationdesigns, develops and its subsidiaries.
"Andreamanufacturers state-of-the-art
microphone technologies and equipment for enhancing speech-based applications
software and communications that require high performance and high quality voice
input.
Andrea's products and technologies optimize the performance of
speech-based applications software and communications in markets such as:
o voice communication over the Internet;
o speech recognition and dictation to desktop, laptop and hand-held
computers;
o audio/video conferencing;
o computer-based automobile monitoring and control systems for use
by drivers and passengers;
o electronic equipment for incorporation into home appliances and
industrial and commercial office equipment that is activated and
controlled by voice;
o electronic intercom systems for incorporation into military and
commercial aircraft; and
o interactive games where one or more players participate over the
Internet.
Our patented Active Noise Cancellation microphone and Active Noise
Reduction earphone technologies help to ensure clear speech in personal computer
and telephone headset applications. Active Noise Cancellation microphone
technology uses electronic circuits that distinguish a speaker's voice from
background noise in the speaker's environment and then cancels the noise from
the signal to be transmitted by the microphone. Active Noise Reduction earphone
technology uses electronic circuits that distinguish the signal coming through
an earphone from background noise in the listener's environment and then reduces
the noise heard by the listener. Together with our lower-end noise cancelling
headset products, these technologies and related products comprise our Andrea
Anti-Noise" "Andrea QuietWare," line of business.
Our patented and "Technology Enhancing
Communications"patent-pending Andrea Digital Super Directional Array
and Andrea Direction Finding and Tracking Array technologies enable the person
speaking to be several feet from the microphone, and frees the speaker from
having to hold the microphone (we refer to this capability as "far-field"
microphone use). Our DSDA and DFTA microphone products convert sound received by
the array of microphones in the product into digital signals that are registered trademarksthen
processed to cancel background noise from the signal to be transmitted. These
two technologies represent the core technologies within our portfolio of
Andrea. "Andrea DSDA"far-field technologies. We are initially targeting our far-field microphone
technologies at the market for personal computers designed for use in
automobiles, trucks and "Andreabuses to control sound systems, mobile telephones,
satellite-based navigation systems, and other devices within vehicles. These
technologies and related products comprise our Andrea Digital Signal Processing
(DSP) Microphone and Software line of business.
In May 1998, we acquired Lamar Signal Processing, Ltd., an Israeli
corporation engaged in the development of scalable, digital signal
processing-based directional, noise cancellation microphone technologies,
2
5
which included primarily DSDA and DFTA. The consideration paid by Andrea for
Lamar was approximately 1,800,000 shares of restricted common stock, $1,000,000
in cash and $2,000,000 in notes payable. We recorded the cash at stated value.
We discounted the value of the notes payable to $1,615,000 to reflect Andrea's
borrowing rate as well as the time value of the payments on the notes, and we
discounted the value of the shares to $23,129,532 to reflect, among other
things, trading restrictions on the shares. We believe that the acquired
technologies, together with the research staff at Lamar, provide Andrea with
noise filtering capabilities and performance that is superior to other DSP-based
technologies in the marketplace, and unattainable in traditional
mechanical-based microphone solutions.
We are incorporated under the laws of the State of New York and have
been engaged in the electronic communications industry since 1934. For several
decades prior to our entry into the voice-activated computing market in the
1990's, our sole business was selling intercom systems for military and
industrial use. We refer to this line of business , which continues to represent
a significant portion of Andrea's business, as Aircraft Communications. We are
seeking to apply our knowledge of the military and industrial markets to develop
applications of our Andrea DSP Microphone and Software Products" are trademarks of Andrea. All other
trademarks in this prospectus are the trademarks of their respective owners.
Summary
On behalf of the selling stockholders identified later in this
prospectus, we are registering for resale 2,463,058 shares of common stock
comprised of (i) 2,142,298 shares which are issuable in connection with the
potential conversion of up to 750 shares of Series C convertible preferred
stock, par value $0.01 per share and (ii) 320,760 shares of common stock which
are currently outstanding and were issued in connectionwith the our
acquisition in May 1998 of Lamar Signal Processing, Ltd.
The number of shares of common stock that we will issue in connection
with the conversion of the Series C convertible preferred stock may vary from
time to time depending on the prevailing market price of our common stock.technologies.
You should read the following information about our company,Andrea, together with
the more detailed information about the securities underlying this offering,
contained elsewhere in this prospectus. In particular, you should read the
section entitled "Risk Factors," which explains that your investment in shares
of our common stockCommon Stock involves a high degree of risk.
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CONSIDER CAREFULLY, ALONG WITH OTHER FACTORS, THE FOLLOWING RISKS AND
SHOULD CONSULT WITH YOUR OWN LEGAL, TAX AND FINANCIAL ADVISORS.
BECAUSE OUR OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATION, PERIOD-TO-
PERIOD COMPARISONS OF OUR OPERATING RESULTS MAY NOT NECESSARILY BE MEANINGFUL
AND YOU SHOULD NOT RELY ON THEM AS INDICATIONS OF OUR FUTURE PERFORMANCE.
Our financial
statementsresults of operations have historically been and related notes are not included in this prospectus, but are
incorporated by referencesubject to
continued substantial annual and quarterly fluctuations. The causes of these
fluctuations include, among other things:
o the volume of sales of our products under our collaborative
marketing arrangements;
o the cost of development of our products under our collaborative
development arrangements;
o the mix of products we sell;
o the mix of distribution channels we use;
o the timing of our new product releases and those of our
competitors;
o fluctuations in the exhibits located atcomputer and communications hardware and
software marketplace; and
o general economic conditions.
We cannot assure that the endlevel of this
prospectus.
Where You Can Find More Informationsales 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 2001 Second Quarter were
approximately $2.6 million compared to approximately $3.2 million in the 2000
Second Quarter. For both the 2001 Second Quarter and 2000 Second Quarter, we had
a net loss attributable to common shareholders of approximately
3
6
$2.5 million. Our revenues for the 2001 First Half were approximately $5.2
million compared to approximately $6.4 million in the 2000 First Half. For the
2001 First Half we had a net loss attributable to common shareholders of
approximately $5.2 million compared to a net loss attributable to common
shareholders of $5.1 million in the 2000 First Half. We file annual, quarterlyhave experienced a
significant decline in headset unit shipments, offset to an extent, by an
increase in aircraft communication revenues. In response, we are examining
opportunities for cost-reduction, production efficiencies and periodic reports, proxy statementsfurther
diversification of our business. But to remain competitive, we intend to
continue incurring substantial research and development, marketing and general
and administrative expenses. We may not be able to easily and quickly reduce
these expenses if our sales revenue falls below our expectations and, therefore,
our net income or loss may be disproportionately affected by any reduction in
sales revenue. Furthermore, our acquisition in 1998 of Lamar Signal Processing,
Ltd. resulted in a substantial amount of goodwill and other information withintangible assets.
The amortization of these intangible assets has, and will continue to have, a
negative, non-cash impact on our results of operations. As a result of these
factors, we expect to continue to accumulate losses and the Securities and Exchange Commission using the
Commission's EDGAR system. You may inspect these documents and copy
information from them at the Commission's public reference facilities at 450
Fifth Street, N.W., Washington, D.C. 20549 or at the regional officesmarket price of the
Commission at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of such
site is http//www.sec.gov.
We have filed a registration statement with the Commission relating to
the offering of the common stock. The registration statement contains
information which is not included in this prospectus. You may inspect or copy
the registration statement at the Commission's public reference facilities or
its Web site.
We furnish our
stockholders with annual reports containing audited
financial statements and with such other periodic reports as we fromCommon Stock could decline.
IF WE FAIL TO OBTAIN ADDITIONAL CAPITAL, WE WILL BE REQUIRED TO SIGNIFICANTLY
REDUCE, SELL, OR REFOCUS OUR OPERATIONS AND OUR BUSINESS; RESULTS OF OPERATIONS
AND FINANCIAL CONDITION COULD BE MATERIALLY AND ADVERSELY AFFECTED.
From time to time deem appropriateduring the past several years, we have raised
additional capital from external sources. We expect to continue to have to raise
additional capital from external sources. These sources may include private or
public financings through the issuance of debt, convertible debt or equity, or
collaborative arrangements. Andrea has engaged an investment banker to assist it
in seeking additional capital and funding. Additional capital and funding may
not be available on favorable terms, if at all. Additionally, we may only be
able to obtain additional capital or funds through arrangements that require us
to relinquish rights to our products, technologies or potential markets, in
whole or in part, or result in the sale of Andrea. In the event we are
unsuccessful in raising additional capital or funding, our funding will be
primarily reliant upon existing funding sources and gross cash flows from
operations which are expected to be insufficient to maintain our operations at
current levels. Additionally, Andrea's funding and capital raising efforts could
trigger change in control payments due to certain executive officers of Andrea
under their employment contracts.
SHARES ELIGIBLE FOR FUTURE SALE MAY HAVE AN ADVERSE EFFECT ON MARKET PRICE; YOU
MAY EXPERIENCE SUBSTANTIAL DILUTION.
Sales of a substantial number of shares of our Common Stock in the
public market could have the effect of depressing the prevailing market price of
our Common Stock. Of the 70,000,000 shares of Common Stock presently authorized,
15,503,866 were outstanding as may be required by law.
Our common stock is listed on AMEXof September 7, 2001. This does not include
5,915,625 shares of our Common Stock reserved for issuance upon exercise of
outstanding awards granted under our 1991 Performance Equity Plan and 1998 Stock
Plan and shares of our Common Stock reserved for further awards under the symbol "AND."
Incorporated Documents
We have filed1998
Stock Plan and 20,496,848 shares of Common Stock reserved for issuance upon
conversion of the following documents with the Commission. We are
incorporating these documentsSeries B and Series C convertible preferred stock and exercise
of related warrants. In addition, in this prospectus, and they are aMay 1998, we issued 1,800,000 shares of
Common Stock as part of this
prospectus.
(1) Our Annual Report on Form 10-K for the fiscal year ended December
31, 1999 (including information specifically incorporated by
reference into our Form 10-K from our definitive Proxy Statementconsideration for our 2000 Annual Meetingacquisition of Stockholders);
(2) Our Quarterly ReportsLamar Signal
Processing, Ltd. Trading restrictions on Form 10-Qthese 1,800,000 shares have expired and
are subject to demand and piggyback registration rights. To date, 920,880 of the
1,800,000 shares have been registered for the quarters ended March 31,
2000, June 30, 2000 and September 30, 2000;
(3) Our Current Report on Form 8-K dated October 12, 2000; and
(4) The description of our common stock, par value $.50 per share,
contained in (i) our registration statement filedsale under the ExchangeSecurities Act of 1934, as amended, No. 1-4324, as declared effective on
February 28, 1967, (ii) Article Third1933.
CONVERSIONS OF OUR SERIES B CONVERTIBLE PREFERRED STOCK AND SERIES C CONVERTIBLE
PREFERRED STOCK MAY RESULT IN SUBSTANTIAL DILUTION TO OTHER HOLDERS OF OUR
COMMON STOCK.
As of our Restated CertificateSeptember 7, 2001, we had 283 shares of Incorporation filed as Exhibit 3.1 to our Current Report on Form 8-K
dated November 30, 1998 as amended by our certificate of Amendment
dated June 10, 1999 filed as Exhibit 3.1 to our Current Report on
Form 8-K dated June 18, 1999Series B convertible
preferred stock and as subsequently amended by our
Certificate of Amendment dated October 5, 2000 filed as Exhibit 3.1
to our Current Report on Form 8-K dated October 12, 2000 and (iii)
any subsequent amendment(s) or report(s) filed for the purpose of
updating such description.
We are also incorporating by reference in this prospectus all documents
which we file pursuant to Section 13(a), 13(c), 14 or 15 of the Securities
Exchange Act of 1934, as amended after the date of this prospectus. Such
documents are incorporated by reference in this prospectus and are a part of
this prospectus from the date we file the documents with the Commission.
If we file with the Commission any document that contains information
which is different from the information contained in this prospectus, you may
rely only on the most recent information which we have filed with the
Commission.
We will provide a copy of the documents referred to above without charge
if you request the information from us. Requests for such copies should be
directed to us at our principal executive offices at Andrea Electronics
Corporation, 45 Melville Park Road, Melville, New York, 11747, attention:
Secretary or (631) 719-1800.
Certain Information Regarding the Series C Convertible Preferred Stock
The 750 shares of Series C convertible preferred stock
were issued and
sold on October 10, 2000 to HFTP Investment L.L.C., pursuant to a Securities
Purchase Agreement, dated October 5, 2000, in a private placement exempt fromoutstanding. Both the registration requirements of the Securities Act of 1933. See "Selling
Stockholders" beginning on Page 18.
Conversion
Each share of Series CB convertible preferred stock is convertible into
that number of shares of our common stock equal to (i) $10,000, plus any
accrued premium of 5% per annum, divided by (ii) the applicable conversion
price described below. Until the nine month anniversary of the initial
issuance ofand the Series C
convertible preferred stock the applicable
conversion price is equal to $7.0565, which is 110%are convertible into shares of the average of the two
lowest closing bid prices of our common stock during the five consecutive
trading days immediately preceding the initial issuance date. After the first
nine months, the conversion price will be reset every six months to the lesser
of the then applicable conversion price and the average of the two lowest
closing bid prices of our common stock during the five consecutive trading days
immediately preceding the six-month reset dates. 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 conversion price will equal the
least of (i) the then applicable conversion price, (ii) the average of the two
lowest closing bid prices of our common stock during the 15 consecutive
trading days immediately preceding such two year date, and (iii) the closing
bid price on the date of conversion. The applicable conversion price during
all periods isCommon Stock, subject
to adjustment, as provided in the Certificate of
Amendment setting forth the rights, privileges andownership limitations of the Series C
convertible preferred stock. If we or the transfer agent does not timely effect
a conversion or reissuance of the remaining shares of Series C convertible
preferred stock, we are subject to certain cash penalties, adjustments to the
applicable conversion price and certain other penalties as more fully described
in the Certificate of Amendment.
In addition, ifthat prohibit the holders of the preferred stock from
owning more than 4.99% of the outstanding shares of Common
4
7
Stock at the time of conversion or 9.99% over the sixty day period prior to the
conversion. These restrictions do not prevent purchasers from converting and
selling some of their holdings and then later converting the rest of their
holdings.
AS THE PRICE OF OUR COMMON STOCK DECREASES, THE NUMBER OF SHARES OF COMMON STOCK
ISSUABLE UPON CONVERSION OF OUR SERIES B CONVERTIBLE PREFERRED STOCK AND SERIES
C CONVERTIBLE PREFERRED STOCK INCREASES.
The variable conversion price of the Series CB convertible preferred
stock submit a conversion request and we are not able to issue the required amount
of shares of common stock due to our inability to comply with the rulesany reset of the American Stock Exchange, under the Certificate of Amendment, a "Triggering
Event" would occur. In such event, the Company could be required by the
holders to redeem all or a portion of such holder's shares of Series C
convertible preferred stock at aconversion price equal to the greater of (i) 120% of the
liquidation value of the Series C convertible preferred stock, which per share
is $10,000 plus an additional accrued premium, and (ii) the product of (A) the
conversion rate at such time, and (B) the greater of (I) the closing bid price
of our common stock on the trading day immediately preceding such Triggering
Event or (II) the closing bid price of our common stock on the date of the
holder's delivery to us of a notice or, if such date of delivery is not a
trading day, the next date on which the exchange or market on which our common
stock is traded is open. In addition, if we fail to redeem at the holder's
request upon the Triggering Event, we shall, if so directed by the holders of
a majority of the shares of Series C convertible preferred stock then
outstanding, issue to each holder of shares of Series C convertible preferred
stock in exchange for such holder's shares of Series C convertible preferred
stock a senior secured note in the amount of the applicable redemption price
of such holder's shares of Series C convertible preferred stock. The senior
secured notes shall have a term of one week, shall be senior to any other of
our indebtedness and shall contain other mutually acceptable credit terms.
The shares of Series C convertible preferred Stock are presently
convertible. The holders of the Series C convertible
preferred stock are prohibitedfunctions of the market price of our Common Stock. If the
price of our Common Stock decreases over time, the number of shares of Common
Stock issuable upon conversion of each series will increase. In addition, In
accordance with the provisions of Emerging Issues Task Force Issue No. 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios", Andrea may be required to record, at
the time of exercise for such additional Preferred Shares, a charge to
accumulated deficit as a result of this beneficial conversion right.
The following table illustrates the varying amounts of shares of Common
Stock issuable upon conversion of all 283 shares of Series B Convertible
Preferred Stock at the indicated conversion prices (without regard to any
limitations on conversion) and assuming that the 4% additional amount is paid in
the Certificatecash:
Percentage of
AmendmentAssumed Number Number of Shares Outstanding
Assumed of Shares Outstanding after Common
Conversion Price Converted(1) Assumed Conversion Stock(2)
- ------------------- ------------------- ------------------- --------------
$0.50 5,660,000 21,163,886 27%
$1.50 1,886,667 17,390,553 11%
$2.50 1,132,000 16,635,886 7%
$3.50 808,571 16,312,457 5%
$4.50 628,889 16,132,775 4%
$5.50 514,545 16,018,431 3%
$6.50 435,385 15,939,271 3%
$7.50 377,333 15,881,219 2%
- --------------------------------------------------------------------------------
- ----------------------------------
(1) The Series B Holder is prohibited from converting their respectiveits holdings of the Series
C convertible preferred stockB Convertible Preferred Stock if after giving effect to such conversion the holderit
would beneficially own in excess of 4.99% or, over anythe sixty day period
prior to the conversion, 9.99% of the outstanding shares of our common stockCommon Stock
following such conversion. This calculation excludes the number ofThe numbers in this column do not reflect these
limitations.
(2) Based on 15,503,866 shares of
common stock which would be issuable upon (1) conversion of the remaining,
nonconverted shares of Series C convertible preferred stock beneficially owned
by the holder and its affiliates, (2) conversion of any of our Series B
convertible preferred stock or exercise of the warrants issued in connection
with the Series B convertible preferred stock beneficially owned by the
holders and its affiliates and (3) the exercise or conversion of any of the
unexercised or unconverted portion of any of our other securities (including,
without limitation, any warrants or convertible preferred stock) subject to a
limitation on conversion or exercise analogous to this limitation beneficially
owned by the holder and its affiliates. The Series C convertible preferred
stock will convert automatically into shares of our common stock at the
applicable conversion price then in effect on the date two years after the
initial issuance, to the extent any shares of the applicable issuance of
Series C convertible preferred stock remain outstanding. In the event we are
unable to convert any Series C convertible preferred stock due to restrictions
set forth in the Certificate of Amendment, we shall redeem the shares that
could not be converted due to certain of such restrictions for an amount in
cash per share equal to $10,000, plus the accrued premium of 5% per annum to
the two year anniversary of the initial issuance. The maturity date for the
Series C convertible preferred stock may be extended beyond the two year
anniversary of the initial issuance under certain circumstances set forth in
the Certificate of Amendment.
The table below sets forth the identity of the holder of the outstanding
Series C convertible preferred stock, the number of shares of Series C
convertible preferred stock owned by the holder, the number of shares of
common stock issuable upon conversion of all the outstanding Series C
convertible preferred stock (without regard to any limitations on conversion)
and the percentage of outstanding common stock represented by the shares
issuable upon conversion. The "Shares of Common Stock Issuable Upon
Conversion" column assumes a conversion date of November 30, 2000. The
"Percentage of Outstanding Common Stock" column is based on 13,897,572 shares
of common stock outstanding as of November 30, 2000 and does not give effect
to any limitations on conversion.
Shares of Series C Shares of Common Percentage of
Stock Beneficially Stock Issuable Outstanding Common
Series C Stockholder Owned Upon Conversion(1) Stock
- -------------------------------------------------------- -------------------- -------------------- -------------------
HFTP Investment L.L.C.(2) 750 1,070,275 7.7
(1) Computed by dividing the per share stated value of $10,000 plus an
additional amount of 5% per annum, by a conversion price of $7.0565, the
initial conversion price. This column also assumes that the additional
amount per share is paid in common stock, rather than in cash. See
"Description of Capital Stock -- Series C Convertible Preferred Stock."
(2) Promethean Asset Management, LLC, a New York limited liability company,
serves as investment manager to HFTP Investment L.L.C. and may be deemed
to share beneficial ownership of the shares beneficially owned by HFTP by
reason of shared power to vote and to dispose of the shares beneficially
owned by HFTP. Promethean disclaims beneficial ownership of the shares
beneficially owned by HFTP. Mr. James F. O'Brien, Jr. indirectly controls
Promethean. Mr. O'Brien disclaims beneficial ownership of the shares
beneficially owned by Promethean and HFTP.September 7,
2001.
The following table illustrates, as of any reset date and assuming the
conversion price indicated is lower than the then applicable conversion price on
that date, the varying amounts of shares of common stockCommon Stock that would be issuable
upon conversion of all outstanding 750 shares of Series C convertible preferred
stock at the indicated
5
8
conversion prices (without regard to any limitations on conversion) and assuming
that the 5% additional amount is paid in cash:
Percentage of
Assumed Number Number of Shares Outstanding
Assumed of Shares Outstanding after Common
Conversion Price Converted(1) Assumed Conversion Stock(2)
- ------------------- ------------------- ------------------- --------------
$0.40 18,750,000 34,253,886 55%
$0.55 13,636,364 29,140,250 47%
$0.70 10,714,286 26,218,172 41%
$0.85 8,823,529 24,327,415 36%
$1.00 7,500,000 23,003,886 33%
$1.15 6,521,739 22,025,625 30%
$1.30 5,769,231 21,273,117 27%
$1.44 5,208,333 20,712,219 25%
- --------------------------------------------------------------------------------
- ----------------------------------
(1) The Series C Holder is prohibited from converting its holdings of the Series
C Convertible Preferred Stock if after giving effect to such conversion it
would beneficially own in excess of 4.99% or, over the sixty day period
prior to the conversion, 9.99% of the outstanding shares of our Common Stock
following such conversion. The numbers in this column do not reflect these
limitations.
(2) Based on 15,503,866 shares of Common Stock outstanding as of September 7,
2001.
The following table illustrates the varying amounts of shares of Common
Stock that would be issuable upon conversion of all 283 outstanding shares of
Series B convertible preferred stock and all 750 outstanding shares of Series C
convertible preferred stock at the indicated conversion prices (without regard
to any limitations on conversion) and assuming that the 5%all additional amount isamounts are
paid in cash:
Number of Shares of Common Stock Percentage of Outstanding Common
Conversion Price Issuable Upon Conversion Stock(1)
- ----------------------------------------- -------------------------------------- -------------------------------------
$4.00 1,875,000 13.5
$5.00 1,500,000 10.8
$6.00 1,250,000 9.0
$7.00 1,071,429 7.7
$8.00 937,500 6.7
- ----------------------Percentage of
Assumed Number Number of Shares Outstanding
Assumed of Shares Outstanding after Common
Conversion Price Converted(1)(2)(3) Assumed Conversion Stock(4)
- ------------------- ------------------- ------------------- --------------
$0.50 20,660,000 36,163,886 57%
$1.00 10,330,000 25,833,886 40%
$1.44 7,173,611 22,677,497 32%
$2.50 6,340,333 21,844,219 29%
$3.50 6,016,905 21,520,791 28%
$4.50 5,837,222 21,341,108 27%
$5.50 5,722,879 21,226,765 27%
$6.50 5,643,718 21,147,604 27%
6
9
$7.50 5,585,667 21,089,553 26%
- --------------------------------------------------------------------------------
- ----------------------------------
(1) Based on 13,897,572 shares of common stock outstanding as of November 30,
2000.
The holderscalculation assumes that the conversion price of the Series B and Series
C convertible preferred stock are prohibited in
the Certificatesame at the assumed conversion prices
of Amendment from converting their respective holdings$.50, $1.00 and $1.44. This could only occur if the market price of
Andrea's Common Stock declines, and at a future reset date, the conversion
price of the Series C adjusts to the then prevailing market price (the
current fixed conversion price of the Series C is $1.44, and such conversion
price is fixed unless adjusted downward at a future reset date).
(2) The calculation assumes that for any conversion of the Series B convertible
preferred stock if after giving effect to such conversionwhen the holder would beneficially own in excess of 4.99% or, over any sixty day
period, 9.99% ofprevailing market price is above $1.44, the outstanding shares of our common stock following such
conversion. This calculation excludes the number of shares of our common stock
which would be issuable upon (1) conversion of the remaining, nonconverted
shares of Series
C convertible preferred stock beneficially owned bywould still be converted at its maximum conversion price of $1.44.
(3) The Series B and Series C holder is prohibited from converting the holder and its affiliates, (2) conversion of any of ourSeries C
or Series B convertible preferred stock, or exercise offrom exercising the warrants
issued in connection with the Series B convertible preferred stock, if after
giving effect to such conversion it would beneficially owned byown in excess of
4.99% or, over the holders and its
affiliates and (3)sixty day period prior to the exercise orconversion, 9.99% of the
outstanding shares of our Common Stock following such conversion.
(4) Based on 15,503,866 shares of Common Stock outstanding as of September 7,
2001.
SALES OF AN INCREASED NUMBER OF SHARES OF COMMON STOCK ISSUED UPON CONVERSION OF
THE SERIES B CONVERTIBLE PREFERRED STOCK AND THE SERIES C CONVERTIBLE PREFERRED
STOCK RESULTING FROM A DECLINING MARKET PRICE FOR OUR COMMON STOCK CAN CAUSE THE
MARKET PRICE OF OUR COMMON STOCK TO DECLINE FURTHER.
Disregarding the manner in which the shares of Common Stock issued upon
conversion of any of the unexercised or
unconverted portion of any of our other securities (including, without
limitation, any warrants orSeries B convertible preferred stock) subject to a
limitation on conversion or exercise analogous to this limitation beneficially
owned by the holderstock and its affiliates.
For a description of other important terms of the Series C
convertible preferred stock see "Descriptionare sold as well as any other factors such as
reactions to our operating results and general market conditions which may be
operative in the market at such time, an increase in the number of Capital Stock-Seriesshares of
Common Stock eligible for sale can cause a decrease in the market price of our
Common Stock. This decrease would reduce the conversion prices of the Series B
convertible preferred stock and the Series C Convertible
Preferredconvertible preferred stock,
leading to a further increase in the number of shares of Common Stock issuable
upon future conversions and a further decline in our stock price.
SHORT SALES OF OUR COMMON STOCK MAY BE ATTRACTED BY OR ACCOMPANY CONVERSIONS OF
SERIES B CONVERTIBLE PREFERRED STOCK AND SERIES C CONVERTIBLE PREFERRED STOCK,
WHICH SALES MAY CAUSE DOWNWARD PRESSURE UPON THE PRICE OF OUR COMMON STOCK.
Short sales of our Common Stock may be attracted by or accompany the
sale of converted Common Stock, which in the aggregate could cause downward
pressure upon the price of the Common Stock, regardless of our operating
results, thereby attracting additional short sales of the Common Stock. The
result of conversions of the Series B and Series C convertible preferred stock
at declining conversion prices would be increasing and substantial dilution of
the interests of the other holders of Common Stock.
IF WE FAIL TO MARKET AND COMMERCIALIZE OUR ANDREA ANTI-NOISE AND ANDREA DIGITAL
SIGNAL PROCESSING MICROPHONE AND SOFTWARE PRODUCTS AS WELL AS OUR AIRCRAFT
COMMUNICATIONS PRODUCTS, OUR REVENUES MAY NOT INCREASE AT A HIGH ENOUGH RATE TO
IMPROVE OUR RESULTS OF OPERATIONS OR AT ALL.
Our business, results of operations and financial condition depend on
successful commercialization of our Andrea Anti-Noise and Andrea DSP Microphone
and Software products and technologies. Since we began sales of the initial
Andrea Anti-Noise products in 1995, we have been expanding the number of
products in this line. We introduced our first Andrea Digital Super Directional
Array products in 1998 and we are initially targeting these and our other Andrea
DSP Microphone and Software products at the market for computer-based automobile
monitoring and control systems for use by drivers and passengers. This market is
commonly referred to as the automobile
7
10
telematics market. The success of these products is subject to the risks
frequently encountered by companies in an early stage of product
commercialization, particularly companies in the computing and communications
industries.
IF WE ARE UNABLE TO OBTAIN MARKET ACCEPTANCE OF OUR VOICE INTERFACE AND INTERNET
COMMUNICATIONS PRODUCTS AND TECHNOLOGIES, OR IF MARKET ACCEPTANCE OF THESE
PRODUCTS AND TECHNOLOGIES OCCURS AT A SLOW RATE, THEN OUR BUSINESS, RESULTS OF
OPERATIONS AND FINANCIAL CONDITION WILL BE MATERIALLY AND ADVERSELY AFFECTED.
We and our competitors are focused on developing and commercializing
products and technologies that enhance the use of voice, particularly in noisy
environments, for a broad range of computer and communications applications.
These products and technologies have been rapidly evolving and the number of our
competitors has grown, but the markets for these products and technologies are
subject to a high level of uncertainty and have been developing slowly. We,
alone or together with our industry, may be unsuccessful in obtaining market
acceptance of these products and technologies.
IF WE FAIL TO DEVELOP AND SUCCESSFULLY INTRODUCE NEW PRODUCTS AND TECHNOLOGIES
IN RESPONSE TO COMPETITION AND EVOLVING TECHNOLOGY, WE MAY NOT BE ABLE TO
ATTRACT NEW CUSTOMERS OR RETAIN CURRENT CUSTOMERS.
The markets in which we sell our Andrea Anti-Noise and Andrea DSP
Microphone and Software products and our Aircraft Communication products are
highly competitive. We may not compete successfully with any of our competitors.
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. One or more of these competitors may
independently develop technologies that are substantially equivalent or superior
to our technology. The introduction of products incorporating new technologies
could render our products obsolete and unmarketable and could exert price
pressures on existing products.
We are currently engaged in the development of digital signal processing
products and technologies for the voice, speech and natural language interface
markets. We may not succeed in developing these new digital signal processing
products and technologies, and any of these new digital signal processing
products or technologies may not gain market acceptance.
In the markets for our aircraft communications products, we often
compete with major defense electronics corporations as well as smaller
manufacturing firms which -specialize in supplying products and technologies for
specific military initiatives. Further, the markets for our products and
technologies are characterized by evolving industry standards and specifications
that may require us to devote substantial time and expense to adapt our products
and technologies. We may not successfully anticipate and adapt our products and
technologies in a cost effective and timely manner to changes in technology and
industry standards or to introductions of new products and technologies by
others that render our then existing products and technologies obsolete.
IF OUR MARKETING COLLABORATORS DO NOT EFFECTIVELY MARKET THOSE OF THEIR PRODUCTS
WITH WHICH OUR PRODUCTS ARE INCLUDED OR INCORPORATED, OUR SALES GROWTH COULD BE
ADVERSELY AFFECTED.
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 through inclusion or incorporation with the products of our
collaborators. Our success will therefore be dependent to a substantial degree
on the efforts of these collaborators to market those of their products with
which our products are included or incorporated. Our collaborators may not
successfully market these products. In addition, our collaborators generally are
not contractually obligated to any minimum
8
11
level of sales of our products or technologies, and we have no control over
their marketing efforts. Furthermore, our collaborators may develop their own
microphone, earphone or headset products that may replace our products or
technologies or to which they may give higher priority.
IF WE FAIL TO MAINTAIN SALES OF ANDREA ANTI-NOISE PRODUCTS AND ANDREA DSP
MICROPHONE AND SOFTWARE PRODUCTS TO IBM, WE WOULD EXPERIENCE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
We are substantially dependent on our product procurement relationship
with IBM. During the 2001 Second Quarter, IBM and certain of IBM's affiliates,
distributors, licensees and integrators accounted for 25% of our net sales. This
represents an approximate 49% decrease from the 2000 Second Quarter. While we
are a party to a procurement agreement with IBM covering the purchase by IBM of
certain of our Andrea Anti-Noise microphone and earphone products for inclusion
with certain of IBM's personal computer products, IBM is not obligated to
purchase these products and is free to purchase microphone and earphone products
and technologies from our competitors. Our failure to maintain sales of Andrea
Anti-Noise Products and Andrea DSP Microphone and Software Products to IBM would
have a material adverse effect on our business, results of operations and
financial condition.
IF WE FAIL TO MAINTAIN SALES OF AIRCRAFT COMMUNICATION PRODUCTS TO THE U.S.
GOVERNMENT, WE WOULD EXPERIENCE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
We are substantially dependent on product sales to the U.S. Government.
During the 2001 Second Quarter, the U.S. Government accounted for 27% of our net
sales. The U.S. Government is not obligated to continue to purchase these
products and is free to purchase similar products from our competitors. Our
failure to maintain sales of Aircraft Communication Products to the U.S.
Government would have a material adverse effect on our business, results of
operations and financial condition.
SHORTAGES OF, OR INTERRUPTIONS IN, THE SUPPLY OF MORE SPECIALIZED COMPONENTS FOR
ALL OF OUR PRODUCTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR SALES.
We conduct assembly operations at our facilities in New York and Israel
and through subcontractors using purchased components. Some specialized
components for our products, such as microphones, digital signal processing
boards and mechanical switches, as well as other discrete components, are
available from a limited number of suppliers and subject to long lead times. We
may not be able to continue to obtain sufficient supplies of these more
specialized components, particularly if our sales increase substantially or
market demand for these components otherwise increases.
IF OUR SUBCONTRACTOR FAILS TO MEET OUR PRODUCTION AND SHIPMENT SCHEDULES, OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION WOULD BE MATERIALLY AND
ADVERSELY AFFECTED.
We conduct assembly operations at our facilities in New York and Israel
and through subcontracting. During initial production runs of Andrea Anti-Noise
and Andrea DSP Microphone products, we perform assembly operations at our New
York facility from purchased components. As sales of any particular product
increase, assembly operations are primarily transferred to a subcontractor in
Asia.
OUR ABILITY TO COMPETE MAY BE LIMITED BY OUR FAILURE TO ADEQUATELY PROTECT OUR
INTELLECTUAL PROPERTY OR BY PATENTS GRANTED TO THIRD PARTIES.
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.
9
12
However, the steps that we have taken to protect our intellectual property may
not prevent its misappropriation or circumvention. In addition, numerous patents
have been granted to other parties in the fields of noise cancellation, noise
reduction, computer voice recognition, digital signal processing and related
subject matter. We expect that products in these fields will increasingly be
subject to claims under these patents as the numbers of products and competitors
in these fields grow and the functionality of products overlap. Claims of this
type could have an adverse effect on our ability to manufacture and market our
products or to develop new products and technologies, because the parties
holding these patents may refuse to grant licenses or only grant licenses with
onerous royalty requirements. Moreover, the laws of other countries do not
protect our proprietary rights to our technologies to the same extent as the
laws of the United States.
AN UNFAVORABLE RULING IN ANY CURRENT LITIGATION PROCEEDING OR FUTURE PROCEEDING
MAY ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL
CONDITION.
From time to time we are subject to litigation incidental to our
business. For example, we are subject to the risk of adverse claims,
interference proceedings before the U.S. Patent and Trademark Office,
oppositions to patent applications outside the United States, and litigation
alleging infringement of the proprietary rights of others. Litigation to
establish the validity of patents, to assert infringement claims against others,
and to defend against patent infringement claims can be expensive and
time-consuming, even if the outcome is in our favor.
As more fully disclosed in "Item 3. Legal Proceedings" in our annual
report on Form 10-K for the year ended December 31, 2000 incorporated herein by
reference, 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. and NCT
Hearing Products, Inc., one of NCT's subsidiaries, requesting a declaration that
two of our patents, which relate to active noise reduction technology applicable
to aircraft passenger headphones, are invalid and unenforceable and that these
patents are not being infringed by NCT's products. The complaint also seeks to
enjoin us from engaging in certain 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. The counterclaims seek injunctive relief for 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 ourselves and to assert against NCT the claims described
above.
As more fully disclosed in "Item 3. Legal Proceedings" in our annual
report on Form 10-K for the year ended December 31, 2000 incorporated herein by
reference, on March 11, 1999, we were notified about a claim filed with the New
York State Environmental Protection and Spill Compensation Fund by the owners
(Mark J. Mergler and Ann Mergler) 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 CompanyNew 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
10
13
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 in 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.
CHANGES IN ECONOMIC AND POLITICAL CONDITIONS OUTSIDE THE UNITED STATES COULD
ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
We have been seeking to increase our sales to regions outside the United
States, particularly in Europe and areas in the Americas and Asia. For the 2001
Second Quarter, sales to customers outside the United States accounted for
approximately 22% of our net sales. International sales and operations are
subject to a number of risks, including:
o trade restrictions in the form of license requirements;
o restrictions on exports and imports and other government
controls;
o changes in tariffs and taxes;
o difficulties in staffing and managing international operations;
o problems in establishing and managing distributor relationships;
o general economic conditions; and
o political and economic instability or conflict, particularly
current Middle Eastern hostilities which could impact our
research and development operations in Israel.
To date, we have invoiced our international sales in U.S. dollars, and
have not engaged in any foreign exchange or hedging transactions. We may not
continue to be able to invoice all our sales in U.S. dollars and to avoid
engaging in foreign exchange or hedging transactions. 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 or
require us to incur hedging costs to counter such fluctuations.
IF WE ARE UNABLE TO ATTRACT AND RETAIN THE NECESSARY MANAGERIAL, TECHNICAL AND
OTHER PERSONNEL NECESSARY FOR OUR BUSINESS, THEN OUR BUSINESS, RESULTS OF
OPERATIONS AND FINANCIAL CONDITION WILL BE HARMED.
Our performance is substantially dependent on the performance of our
executive officers and key employees. The loss of the services of any of these
executive officers or key employees could have a material adverse effect on our
business, results of operations and financial condition. Our future success
depends on our continuing ability to attract and retain additional highly
qualified managers and technical personnel. Competition for qualified personnel
is intense and we may not be able to attract, assimilate or retain qualified
personnel in the future.
11
14
ANDREA ELECTRONICS
Our mission is to provide the emerging "voice interface" markets with
state-of-the-art communications productsproducts. The idea underlying these markets is
that facilitate natural language human/machine interfaces.
Examplesspoken by the human voice will become an important means
by which to control many types of the applications and interfaces for which Andrea Anti-Noise
Products and Andrea digital signal processing, or DSP, Microphone and Software
Products provide benefits include: Internetcomputing devices and other computer-based speech;
telephony communications; telematics; multi-point conferencing; speech
recognition; multimedia; multi-player Internetappliances and
CD ROM interactive games;equipment that contain microprocessors. We are designing and marketing our
products and technologies to be used for these "natural language, human/machine"
interfaces with:
o desktop, laptop and hand-held computers and mobile personal
computing devices;
o military and commercial aircraft communications;systems;
o cellular and other applicationswireless communication devices; and
interfaces that incorporate natural language processing.o automotive communication systems.
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
computingenvironments. To improve our product
offering, we are utilizing digital signal processing technology. This technology
converts voice signals to digital signals which can then be processed in
microprocessors and similar electronic devices militaryto reduce external interference
and commercial aircraft systems, cellularincrease clarity. In order to further our efforts to develop digital signal
processing technology, in May 1998, we acquired Lamar Signal Processing, Ltd.,
an Israeli corporation engaged in the development of noise cancellation
microphones covering a wide range of audio and other wireless communication devices and automotive communication systems.acoustic applications.
High quality audio communication technologies willis also be required for
emerging "far-field" voice applications rangingfor microphones located several feet from the person
speaking, or far-field microphone technology. Applications in this area range
include:
o continuous speech dictation to personal computer and personal
data assistants;
o multiparty video teleconferencing and collaboration,software that allows
participants to see and jointly edit documents, spreadsheets and
other information; and
o natural language-driven interfaces for automobiles, home and
office automation and
other machines andautomation.
We believe that an increasing number of these devices into which voice-controlled microprocessors are
expected towill be introduced
during the next several years.
We outsource the assembly of most of our Andrea Anti-Noise products from
purchased components, and we are currently assembling our Andrea DSDA 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.
Our strategy is to
o maintain and extend our market position with our Aircraft
Communications and Andrea Anti-Noise Products;products;
o broaden our Andrea Anti-Noise Productproduct lines and Andrea DSP MicrophoneDSDA
microphone and Software Productsoftware product lines through internal research
and development and, from time to time, strategic acquisitions;
o design our products to satisfy specific end-user requirements
identified by our collaborative partners; and
12
15
o outsource manufacturing of certainsome of our 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,manufacturers of computing and communications
equipment, 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,
o increase sales,
of our line of existing Andrea Anti-Noise Products and
Andrea DSP Microphone and Software Products,o contain costs,
o manage growth,
o introduce additional Andrea Anti-Noise Productsproducts and Andrea DSP MicrophoneDSDA
microphone and Software Products,software products,
o maintain the competitiveness of our technologies through
successful research and development, and
o 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., 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-Noise Products 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.
We cannot assure you that we will be able to accomplish these objectives.
We have been engaged in the electronic communications industry since
1934. For several decades prior to our entry into the voice-activated
computing market in the 1990's, our primary business was selling intercom
systems for military and industrial use. We continue to manufacture
replacement parts for these systems, but we do not expect revenue from this
business to increase materially. We are seeking to apply our knowledge of the
military and industrial markets to develop applications of our Andrea
Anti-Noise technologies for these markets. We cannot, however, assure you that
these efforts will succeed, and we do not expect any material revenues from
such new products for the foreseeable future.
Forward Looking StatementsFORWARD LOOKING STATEMENTS
We make certain "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, throughout this prospectus and in
the documents we incorporate by reference into this prospectus. 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 which 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. Important factors which could cause our actual results to differ
materially from the forward-looking statements in this prospectus include, but
are not limited to, those identified in this
13
16
prospectus under "Risk Factors" and those described in Management's Discussion
and Analysis of Financial ConditionsCondition and Results of Operations in our Form 10-K
for the fiscal year ended December 31, 1999, the2000, our Form 10-Q for the quarter ended
March 31, 2000,
the2001, our Form 10-Q for the quarter ended June 30, 2000, the Form 10-Q for the
quarter ended September 30, 20002001 and in any
other filings which are incorporated by reference in this prospectus.
You should read this prospectus and the documents that we incorporate by
reference into this prospectus completely and with the understanding that our
actual future results may be materially different from what we expect.
Forward-looking statements in this prospectus speak only as of the date of this
prospectus. We may
not update thesehave ongoing disclosure obligations under the federal securities
laws to file periodic quarterly and annual reports as well as current reports
that cover events that are material to our business, results of operations and
financial condition. These reports could contain information that reflect
subsequent developments relating to forward-looking statements even though our situation will
change in the future.this
prospectus. All forward-looking statements attributable to us are expressly
qualified by these cautionary statements.
Risk Factors
An investment in our common stock involves a high degree of risk. You
should consider carefully, along with other factors, the following risks and
should consult with your own legal, tax and financial advisors.
Our Operating Results are Subject to Significant Fluctuation
Our results of operations have historically been and are subject to
continued substantial annual and quarterly fluctuations. The causes of these
fluctuations include, among other things:
o the volume of sales of our products under our collaborative
marketing arrangements;
o the cost of development of our products under our collaborative
development arrangements;
o the mix of products we sell;
o the mix of distribution channels we use;
o the timing of our new product announcements and releases and those
of our competitors;
o fluctuations in the computer and communications hardware and
software marketplace; and
o general economic conditions.
We cannot assure that the level of sales and gross profit, if any, that
we achieve in any particular fiscal period will not be significantly lower
than in other fiscal periods. Our revenues for the year ended December 31,
1999 were approximately $17.1 million compared to approximately $21.3 million
in calendar 1998. For the year ended December 31, 1999, we had a net loss of
approximately $7.1 million versus a net loss of $6.4 million for the year
ended December 31, 1998. For the first nine months ended September 30, 2000,
our revenues were approximately $11.7 million compared to revenues of
approximately $13.3 million over the same period in 1999. For the first nine
months ended September 30, 2000, we had a net loss of approximately $7.0
million compared to a net loss of approximately $5.2 million in the same
period in 1999.
While we are examining opportunities for cost-reduction, production
efficiencies and further diversification of our business, we may continue to
accumulate losses and the market price of our common stock could decline. In
order to remain competitive, we intend to continue to incur substantial
research and development, marketing and general and administrative expenses.
These expenses may not be necessarily or easily reduced if sales revenue is
below expectations and, 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.
Our Stock Price Has Been and May Continue to be Volatile
The market price of our common stock has historically been highly
volatile and could be subject to wide fluctuations in response to quarterly
and annual variations in our results of operations, losses of significant
customers, announcements of technological innovations or new products by us or
our competitors, changes in the outlook of our industry, our company and our
competitors by securities analysts, or other events or factors, including the
risk factors described in this prospectus. In addition, the stock market has
experienced significant price and volume fluctuations that have particularly
affected the market prices of equity securities of many high technology
companies and that often have been unrelated to the operating performance of
such companies.
Meeting Our Future Capital Needs May Adversely Affect Our Business and be
Dilutive to Existing Shareholders
Our future capital requirements will depend on numerous factors,
including:
o the costs associated with developing, manufacturing and
commercializing our products;
o maintaining existing, or entering into future, collaborative
marketing and distribution agreements;
o protecting intellectual property rights; and
o expanding facilities and consummating possible future acquisitions
of technologies, products or businesses.
From time to time during the past several years, we have raised
additional capital from external sources. We may continue to have to raise
additional capital from external sources. These sources may include private or
public financings through the issuance of debt, convertible debt or equity, or
collaborative arrangements. We cannot assure that additional capital will be
available on favorable terms, if at all. If adequate funds are not available,
we may be required to significantly reduce or refocus our operations or to
obtain funds through arrangements that may require us to relinquish rights to
certain of our products, technologies or potential markets, which would have a
material adverse effect on our business, results of operations and financial
condition. To the extent that additional capital is raised through the sale of
equity, the issuance of such securities would result in ownership dilution to
our existing stockholders. In June 1999, we sold $7.5 million of Series B
convertible preferred stock and a related warrant for 75,000 shares of our
common stock. In October 2000, we sold $7.5 million of Series C convertible
preferred stock and, under certain conditions, we may be obligated to sell up
to an additional $2.5 million of Series C convertible preferred stock. We
cannot assure you that such conditions will be satisfied or, if they are, that
we will sell any additional Series B convertible preferred stock, warrants or
Series C convertible preferred stock.
Shares Eligible for Future Sale May Have an Adverse Effect on Market Price; You
May Experience Substantial Dilution
Sales of a substantial number of shares of our common stock in the public
market could have the effect of depressing the prevailing market price of the
our common stock. The authorized capital stock of the Company consists of (i)
35,000,000 shares of Common Stock, of which as of November 30, 2000,
13,897,572 shares were issued and outstanding, and 5,243,125 shares were
issuable and reserved for issuance pursuant to the Company's stock option and
purchase plans and (ii) 5,000,000 shares of preferred stock, of which as of
November 30, 2000, (A) 1,500 shares were designated as Series B convertible
preferred stock, of which 500 shares were issued and outstanding, (B) 25,000
shares are issuable and reserved for issuance pursuant to the Company's Rights
Plan, and (C) 1,000 shares were designated as Series C convertible preferred
stock, of which 750 shares were issued and outstanding. To the extent that the
Series B convertible preferred stock is converted, the related warrant is
exercised, the Series C convertible preferred stock is converted, such options
are exercised or we issue additional shares of capital stock, the ownership
interests of holders of common stock would be diluted.
We have 500 shares of Series B convertible preferred stock and a warrant
for 75,000 shares of common stock outstanding. 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 immediately before the date of conversion. We cannot predict the
price of the common stock in the future. Based on an assumed conversion date
of November 30, 2000 the applicable conversion price for the Series B
convertible preferred stock would be $2.22. If all of the 500 shares of Series
B convertible preferred stock outstanding were converted at this conversion
price (without regard to any limitations on conversion) and assuming the 4%
additional amount were paid in shares of common stock, the Series B
convertible preferred stock would be convertible into 2,383,315 shares of
common stock, or 17.1% of the outstanding shares of common stock as of
November 30, 2000. 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.
We have 750 shares of Series C convertible preferred stock outstanding
and, subject to certain conditions and limitations, the holder has the right
until April 11, 2002 to purchase up to an additional 250 shares of Series C
convertible preferred stock. After the nine month anniversary of the initial
issuance, the conversion price of the Series C convertible preferred stock
will be reset every 6 months and the number of shares of common stock issuable
upon the conversion of the Series C convertible preferred stock will depend on
the prices of the common stock as quoted on the American Stock Exchange
shortly before the 6 month reset dates. We cannot predict the price of our
common stock in the future. Based on an assumed conversion date of November
22, the applicable conversion price for the Series C convertible preferred
stock was $7.0565. If all of the 750 shares of Series C convertible preferred
stock outstanding and assuming all 250 shares subject to the option described
above were outstanding and converted at this conversion price (without regard
to any limitations on conversion) and assuming the 5% additional amount on the
750 shares of outstanding Series C were paid in shares of common stock and
assuming no additional amount was paid on the additional 250 shares, the
Series C convertible preferred stock would be convertible into 1,424,558
shares of common stock, or 10.3% of the outstanding shares of common stock as
of November 30, 2000. 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 may increase and the holders of common stock would
experience substantial dilution of their investment.
In connection with the Series B convertible preferred stock and Series C
convertible preferred stock, the following risks are associated with
conversions:
o because the variable conversion price of the Series B convertible
preferred stock and any reset of the conversion price of the Series
C convertible preferred stock are a function of the market price of
the common stock upon conversion or as of a reset date, the lower
the price of the common stock at the time the holder converts or at
a reset date, the greater number of shares of common stock received
upon conversion;
o to the extent that common stock received upon conversion is sold
into the market, and disregarding the manner in which such shares
are sold as well as any other factors such as reactions to our
operating results and general market conditions which may be
operative in the market at such time, such sales may cause a
decrease in the market price of the common stock, which in turn,
relative to additional conversions of the Series B convertible
preferred stock and/or Series C convertible preferred stock, would
reduce the variable conversion price of the Series B preferred stock
and, if such variable conversion price were lower than the fixed
conversion price of the Series B preferred stock, increase the
number of shares of common stock issued upon future conversions, the
sales of which may further decrease the market price for the common
stock;
o short sales of the common stock may be attracted by or accompany
conversions and sales of common stock from conversions, which sales
in the aggregate could cause downward pressure upon the price of the
common stock, excluding the effect of other market factors possibly
operative at the time, thereby attracting additional short sales of
the common stock; and
o conversions of the Series B and Series C convertible preferred stock
may result in substantial dilution of the interests of the other
holders of common stock. In this regard, the ownership limitations
which prohibits the holders from owning more than 4.99% of the
outstanding shares of our common stock following such conversion
only applies to shares of common stock held at one time and, subject
to the ownership limitation which prohibits the purchasers from
owning more than 9.99% of the Common Stock of the Company over any
sixty-day period, does not prevent purchasers from converting and
selling some of their holdings and then later converting the rest of
the holdings.
We Must Increase Sales and Profitability of Our Products and Commercialize New
Products
Our business, results of operations and financial condition depend on
successful commercialization of our Andrea Anti-Noise products and
technologies. Sales of the initial Andrea Anti-Noise products began in 1995,
and since 1995 we have been expanding the number of products in this line. The
success of these products is subject to the risks frequently encountered by
companies in an early stage of product commercialization, particularly
companies in the computing and communications industries. To achieve increased
sales and profitability, we must, among other things:
o increase market acceptance of our Andrea Anti-Noise products;
o respond effectively to competitive pressures with the timely
introduction of new Andrea Anti-Noise products; and
o successfully market and support these products.
We cannot assure that we will achieve or sustain significant sales or
profitability of our Andrea Anti-Noise products. Failure to do so would have a
material adverse effect on our business, results of operations and financial
condition.
We Face Intense Competition
The markets in which we sell our Andrea Anti-Noise products and our
traditional line of military and industrial products are highly competitive.
Competition in the markets for our Andrea Anti-Noise products is based on:
o varying combinations of product features;
o quality and reliability of performance;
o price;
o marketing and technical support;
o ease of use;
o compatibility with evolving industry standards and other systems and
equipment;
o brand recognition; and
o development of new products and enhancements.
Most of our current and potential competitors have significantly greater
financial, technology development, marketing, technical support and other
resources than we do. Consequently, these competitors may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements, or devote greater resources to the development, marketing, and
sale of their products than we can. We cannot assure that one or more of these
competitors will not independently develop technologies that are substantially
equivalent or superior to our technology.
In the markets for our traditional products, we often compete with major
defense electronics corporations as well as smaller manufacturing firms which
specialize in supplying products and technologies for specific military
initiatives. Our performance in this market is further subject to several
factors, including:
o dependence on government appropriations;
o the time required for design and development;
o the complexity of product design;
o the rapidity with which product designs and technology become
obsolete;
o the intense competition for available business; and
o the acceptability of manufacturing contracts by government
administrators.
We believe that our ability to compete successfully will depend upon our
capability to:
o develop and maintain advanced technology; o develop proprietary
products;
o attract and retain qualified personnel;
o obtain patent or other proprietary protection for our products and
o technologies; and
o manufacture, assemble and successfully market products, either alone
or
o through third parties.
We cannot assure that we will be able to compete successfully, and
failure to do so would have a material adverse effect on our business, results
of operations and financial condition.
We May Be Unable to Obtain Market Acceptance of Our Voice Interface and
Internet Communications Products
We and our competitors are focused on developing and commercializing
products and technologies that enhance the use of voice, particularly in noisy
environments, for a broad range of computer and communications applications.
The markets for these products and technologies have only recently begun to
develop, are rapidly evolving, are characterized by a number of competitors,
and are subject to a high level of uncertainty. Broad market acceptance of
these products and technologies is critical to our success and ability to
generate revenues. We cannot assure that we, or our industry in general, will
be successful in obtaining market acceptance of products and technologies.
Failure to do so would have a material adverse effect on our business, results
of operations and financial condition.
We May be Unable to Develop and Successfully Introduce New Products and
Technologies
The markets for our products are characterized by rapidly changing
technology, and the introduction of products incorporating new technologies
could render our products obsolete and unmarketable and could exert price
pressures on existing products. In particular, we are currently engaged in the
development of digital signal processing products and technologies for the
voice, speech and natural language interface markets. As part of this effort,
we have established our Andrea Digital Technologies subsidiary in the United
States and have acquired Lamar Signal Processing Ltd., in Israel. We cannot
assure that we will succeed in developing these new DSP products and
technologies, or that any such new DSP products or technologies will gain
market acceptance. Further, the markets for our products and technologies are
characterized by evolving industry standards and specifications that may
require us to devote substantial time and expense to adapt our products and
technologies. We cannot assure that we will successfully anticipate and adapt
in a cost effective and timely manner to changes in technology and industry
standards, develop, introduce and gain market acceptance of new and enhanced
products and technologies, as well as additional applications for existing
products and technologies, or that the introduction of new products or
technologies by others will not render our products and technologies obsolete.
Our failure to develop new and enhanced products and technologies would have a
material adverse effect on our business, results of operations and financial
condition.
Our Success is Highly Dependent on our Collaborative Marketing Arrangements
We have entered into several collaborative and distribution arrangements
with software publishers and computer hardware manufacturers relating to the
marketing and sale of Andrea Anti-Noise products and Andrea DSP microphone and
software products. Under these collaborative arrangements, our products are
sold to end users through inclusion of the products of our collaborators. The
revenue derived by us from these arrangements will be based in large part upon
the sale of our collaborator's products. Our success will therefore be
dependent to a substantial degree on the efforts of these collaborators in
marketing existing products and new products under development with which to
include our products and technologies. We cannot assure that any product of
any of our collaborators incorporating our products and technologies will be
marketed successfully. Our collaborators generally are not contractually
obligated to any minimum level of sales of our products or technologies.
Furthermore, our collaborators may develop their own microphone or earphone
products or technologies that compete with our products and technologies. We
cannot assure that these collaborators will not replace our products or
technologies with, or give higher priority to, the sales of these competitive
products or technologies. We have also established direct arrangements with
large electronic and computer retail chains in the United States, as well as
with certain distributors in Europe and the Americas. We cannot assure that
any of these channels will devote sufficient resources to support the sale of
our products. We are also currently discussing additional arrangements with
other software companies, several major personal computer companies, consumer
electronic manufacturers, and electronic and computer retailers. We cannot
assure that any of these discussions will result in any definitive agreements.
We Depend on a Single Customer for a Substantial Portion of our Sales
We are substantially dependent on our product procurement relationship
with IBM. During the years ended December 31, 1997, 1998 and 1999, IBM and
certain of IBM's affiliates, distributors, licensees and integrators accounted
for 56%, 61% and 49%, respectively, and 59% during the first nine months of
2000, of our sales revenue. While we are a party to a procurement agreement
with IBM covering the purchase by IBM of certain of our Andrea Anti-Noise
Microphone and Earphone products 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.
We May Not be Able to Maintain Needed Contract Manufacturing
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 for the Andrea AntiNoise products, such as microphones and DSP
boards, are available from a limited number of suppliers and subject to long
lead times. While we have, to date, been able to obtain sufficient supplies of
these more specialized components, we cannot assure that we will continue to
be able to do so. Shortages of, or interruptions in, the supply of these more
specialized components could have a material adverse effect on our sales of
Andrea Anti-Noise products and Andrea DSP Microphone and Software Products.
We assemble our Aircraft Communication Products at our New York facility
from purchased components. Certain highly specialized components for our
Aircraft Communication 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.
We Rely on Patents and Proprietary Rights That May Fail to Protect our Business
We rely on a combination of patents, patent applications, trade secrets,
copyrights, trademarks, nondisclosure agreements with our employees, licensees
and potential licensees, limited access to and dissemination of our
proprietary information, and other measures to protect our intellectual
property and proprietary rights. We cannot assure, however, that the steps we
have taken to protect our intellectual property will prevent its
misappropriation or circumvention.
We have been granted 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.
Numerous patents have been granted in the fields of noise cancellation,
noise reduction, computer voice recognition and related subject matter. We
expect that products in these fields will increasingly be subject to claims
under these patents as the numbers of products and competitors in these fields
grow and the functionality of products overlap. Moreover, the laws of other
countries do not protect our proprietary rights to our technologies to the
same extent as the laws of the United States.
We cannot assure:
o that any patents issued to us will provide us with competitive
advantages or will not be infringed, challenged, invalidated, or
circumvented by others;
o that the patents or proprietary rights of others will not have an
adverse effect on our ability to do business;
o that we will be able to obtain licenses to patents of others, if
needed, on acceptable terms or at all; or
o that we will be able to develop additional patentable technology
that may be needed to successfully commercialize our existing
technologies.
We are Subject to Litigation Relating to our Business
From time to time to we are subject to litigation incidental to our
business. For example, we are subject to the risk of adverse claims,
interference proceedings before the U.S. Patent and Trademark Office,
oppositions to patent applications outside the United States, and litigation
alleging infringement of the proprietary rights of others. Litigation to
establish the validity of patents, to assert infringement claims against
others, and to defend against patent infringement claims can be expensive and
time-consuming, even if the outcome is in our favor. As more fully disclosed
in "Item 3. Legal Proceedings" in our 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") and NCT Hearing products, Inc., one of NCT's subsidiaries,
requesting a declaration that two of our patents, which relate to certain
active noise reduction technology applicable to aircraft passenger headphones,
are invalid and unenforceable and that these patents are not being infringed
by NCT's products. The complaint also seeks to enjoin us from engaging in
certain 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. The counterclaims seek injunctive relief for 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.
Our International Operations may be Subject to Certain Risks
We have been seeking to increase our sales to regions outside the United
States, particularly in Europe and certain areas in the Americas and Asia. For
the year ended December 31, 1999, 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:
o trade restrictions in the form of license requirements;
o restrictions on exports and imports and other government controls;
o changes in tariffs and taxes;
o difficulties in staffing and managing international operations;
o problems in establishing or managing distributor relationships;
o general economic conditions; and
o political and economic instability or conflict.
To date, we have invoiced our international sales in U.S dollars, and
have not engaged in any foreign exchange or hedging transactions. We cannot
assure that this will continue to be the case. If we are required to invoice
any material amount of international sales in non-U.S. currencies,
fluctuations in the value of non-U.S. currencies relative to the U.S. dollar
may adversely affect our business, results of operations and financial
condition or require us to incur hedging costs to counter such fluctuations.
Qualified Managerial and Technical Personnel are Scarce in our Industry
Our performance is substantially dependent on the performance of our
executive officers and key employees. We are dependent on our ability to
retain and motivate high quality personnel, especially management and product
and technology development teams. The loss of the services of any of our
executive officers or other key employees could have a material adverse effect
on our business, results of operations and financial condition. Our future
success also depends on our continuing ability to attract and retain
additional highly qualified technical personnel. Competition for qualified
personnel is intense and we cannot assure that we will be able to attract,
assimilate or retain qualified personnel in the future. Our inability to
attract and retain the necessary technical and other personnel could have a
material adverse effect on our business, results of operations and financial
condition.
Anti-Takeover Provisions in our Certificate of Incorporation and New York Law
May Adversely Affect our Stockholders
The New York Business Corporation Law, our Certificate of Incorporation
and our Series A Junior Participating Preferred Stock each contain certain
provisions which may, in effect, deter, or make difficult, a change in
control, merger or other acquisition of Andrea. For example, our Board of
Directors may issue up to 4,973,250 shares of preferred stock without any
stockholder vote or action. The preferred stock could have voting,
liquidation, dividend and other rights superior to those of our common stock,
and, therefore, any issuance of preferred stock could adversely affect the
rights of holders of our common stock.
We Do Not Anticipate Paying Cash Dividends on our Common Stock
We have not paid any cash dividends on our common stock and do not expect
to pay any cash dividends on our common stock in the foreseeable future.
Use of ProceedsUSE OF PROCEEDS
All of the shares of common stockCommon Stock offered hereby are being offered for
the account of the selling stockholders. We will not receive any proceeds from
the sale by the selling stockholders of the common stock hereunder.
Selling StockholdersCommon Stock made pursuant to this
registration statement.
SELLING STOCKHOLDERS
We are registering the shares in order to permit the selling
stockholders to offer the shares of common stockCommon Stock for resale from time to time.
The shares of common stockCommon Stock being offered by one of the selling stockholders, HFTP Investment L.L.C. are issuable
upon conversion of the Series C convertible preferred stock. For additional
information regarding the Series C convertible preferred stock, see "Description
of Capital Stock -- Preferred Stock." Except for the ownership by
HFTPNone of our Series B and Series C convertible preferred stock, and warrants
issued in connection with the Series B convertible preferred stock, the selling stockholders has not had
any material relationship with us withinin the past three years.
The following table sets forth as of August 31, 2001 the namesname of the
selling stockholders, the number of shares of common stockCommon Stock owned beneficially by
each of them as of
November 30, 2000,the selling stockholders, calculated in the nammermanner described below, the number
of shares which may be offered pursuant to this prospectus and the number of
shares and percentage of class to be owned by each of the selling stockholderstockholders
after this offering
Theoffering.
For HFTP InvstmentInvestment L.L.C., the second column lists the number of shares
of common stockCommon Stock held, plus the number of shares of common stock,Common Stock, based on its
ownership of Series C convertible preferred stock as well as Series B preferred
stock and related warrants, that would have been issuable to the selling
stockholder as of November 30, 2000August 31, 2001 assuming conversion of all Series B and Series
C convertible preferred stock and exercise of the warrants issued in connection
with the Series B convertible preferred stock held by the selling stockholder on
that date, without regard to any limitations on conversions or exercise. Because
conversion of the Series B and Series C convertible preferred stock is based on
a formula that may depend on the market price of our common stock,Common Stock, the numbers
listed in the second column may fluctuate from time to time. The third column
lists the shares of common stockCommon Stock being offered by this prospectus by the selling
stockholders.
In accordance with the terms of the registration rights agreement with
the holder of the Series C convertible preferred stock, this prospectus covers
the resale of at least that number of shares of common stockCommon Stock equal to the
product of 2.0 and the number of shares of common stockCommon Stock issuable upon conversion
of the Series C convertible preferred stock, without regard to any limitations
on conversions, determined as if the outstanding Series C convertible preferred
stock was converted in full as of the date immediately preceding the filing of
the registration statement of which this registration statement.prospectus is a part. Because of
adjustments at the reset dates, at maturity or upon dilutive issuances, the
number of shares that will actually be issued upon conversion of the Series C
convertible preferred stock may be more or less than the 2,142,29810,890,411 shares being
offered by this prospectus for the holder of the Series C convertible preferred
stock.
14
17
The fourth column assumes the sale of all of the shares offered by the
selling stockholders pursuant to this prospectus.
Under the Certificatecertificate of Amendmentamendment for the Series C convertible
preferred stock, the holder may not convertSeries C Holder is prohibited from converting its holdings
of the Series C Convertible Preferred Stock or Series B Convertible Preferred
Stock or Series C convertible preferred
stock, or exercisefrom exercising the warrantsWarrants issued in connection withwitht the Series B
convertible preferred stock,Convertible Preferred Stock if after giving effect to the extent such conversion or
exercise it would causebeneficially own in excess of 4.99% or, over the selling stockholder, together with its affiliates,sixty day
period prior to have acquired
a numberthe conversion, 9.99% of the outstanding shares of common stock which would exceed 4.99%, or which during
the 60-day period ending on the date of conversion, when added to the number
of shares of common stock held at the beginning ofour Common
Stock following such 60-day period, would
exceed 9.99%, of our then outstanding common stock, excluding for purposes of
such determination shares of common stock issuable upon conversion of the
Series B and C convertible preferred stock which have not been converted and
upon exercise of the warrants issued in connection with the Series B
convertible preferred stock which have not been exercised.conversion. The number of shares in the second column and
fourth column and the percentage in the fifth column for HFTP does not reflect
this limitation.
The selling stockholders may sell all, some or none of theirits shares in
this offering. See "Plan of Distribution."
The 320,760 shares of common stock currently outstanding which are being
offered by the selling stockholders other than HFTP under this prospectus are
part of the 1,800,000 shares of common stock issued as consideration for our
acquisition of Lamar Signal Processing, Ltd.
The "Shares Beneficially Owned After the Offering" column assumes the
sale of all shares offered. The "Percentage of Class" column is based on
13,897,57215,503,866 shares of common stockCommon Stock outstanding as of November 30, 2000.September 7, 2001.
Shares
Shares Beneficially
Beneficially Shares Offered Owned Percentage
Owned Prior To By This After Percentageof
Selling Stockholder The OfferingOffering(1) Prospectus The Offering Of Class
- --------------------------------- ---------------------- --------------------- ---------------------------------------------------- --------------- --------------- -------------- -----
HFTP Investment L.L.C.(1) 3,528,590 2,142,298 2,458,315 17.79,915,807 10,890,411 4,475,596 18.03%
Ventnor LLC(2)LLC (2) 92,835 61,890 30,945 *
Cherry Hill LLC(3)LLC (2) 144,738 96,492 48,246 *
Marla LLC(4)LLC (2) 144,663 96,442 48,221 *
Knighthawk Investment LLC(5) 98,904 65,936 32,968 *
- ----------------LLC (2) 98,904 65,936 32,968 *
- --------------------------------
* Represents less than 1%.
(1) In addition to the 1,070,2755,440,211 shares issuable as of November 30, 2000August 31, 2001 upon
conversion of the Series C preferred stock, includes up to 2,458,3153,876,667
shares of common stockCommon Stock issuable upon conversion of the Series B
convertible preferred stock and exercise of related warrants held of
record by HFTP Investment LLC.LLC, without regard to any limitations on
conversions or exercises. Promethean Asset Management, LLC, a New York
limited liability company, serves as investment manager to HFTP
Investment L.L.C. and may be deemed to share beneficial ownership of the
shares beneficially owned by HFTP by reason of shared power to vote and
to dispose of the shares beneficially owned by HFTP. Promethean
disclaims beneficial ownership of the shares beneficially owned by HFTP.
Mr. James F. O'Brien, Jr. indirectly controls Promethean. Mr. O'Brien
disclaims beneficial ownership of the shares beneficially owned by
Promethean and HFTP. HFTP is not a registered broker-dealer. HFTP,
however, is under common control with, and therefore an affiliate of,
Promethean Capital Group LLC which is a registered broker-dealer.
(2) Includes 30,945The natural person having the ultimate voting power over the ordinary
shares of common stock subject to trading restrictions
that expire on May 5, 2001
(3) Includes 48,246 shares of common stock subject to trading restrictions
that expire on May 5, 2001
(4) Includes 48,221 shares of common stock subject to trading restrictions
that expire on May 5, 2001
(5) Includes 32,968 shares of common stock subject to trading restrictions
that expire on May 5, 2001
Description of Capital Stockis Fred Knoll.
- --------------------------------
* Represents less than 1%.
15
18
DESCRIPTION OF CAPITAL STOCK
As of November 30, 2000September 7, 2001 our authorized capital stock totaled 30,000,00075,000,000
shares, consisting of:
(1) 25,000,00070,000,000 shares of common stock,Common Stock, par value $.50 per share, of
which 13,897,57215,503,866 shares were issued and outstanding; and
(2) 5,000,000 shares of preferred stock, par value $.01 per share,
of which
(A)(a) 25,000 shares were designated Series A Junior
Participating Preferred Stock,junior
participating preferred stock, none of which were issued
and outstanding,
(B)(b) 1,500 shares were designated as Series B convertible
preferred stock, of which 500283 shares were issued and
outstanding,
(C)(c) 1,000 shares were designated Series C Preferred
Stock,preferred stock, of
which 750 Sharesshares were issued and outstanding and
(D)
4,973,500(d) 4,972,500 shares of preferred stock which have not been
designated.
Of the 13,897,57215,503,866 shares of common stockCommon Stock outstanding on November 30, 2000,September 7,
2001, this amount does not include 5,243,1255,915,625 shares of common stockCommon Stock reserved for
issuance upon exercise of options granted under our 1991 Performance Equity Plan
and 1998 Stock Plan.
Common StockPlan and 20,496,848 shares of common stock reserved for issuance
upon conversion of the Series B and Series C convertible preferred stock and
exercise of related warrants.
COMMON STOCK
The holders of common stockour Common Stock are entitled to one vote per share on
all matters to be voted on by shareholders. The holders of shares of common stockshareholders and are entitled to receive such dividends
if any, as may bewhen declared from time
to time, by our board of directors, in itsat their discretion, from funds legally
available therefor.funds. The holders of common stockour Common Stock are not entitled to preemptive,
subscription or conversion rights, and there are no redemption or sinking fund
provisions applicable to the common stock.our Common Stock.
Upon liquidation dissolution or winding up,dissolution, the holders of shares of common stockour Common Stock are
entitled to receive all assets available for distribution to shareholders,
subject to the preferential rights of the holders of the Series B convertible preferred stock, theand Series C
convertible preferred stock and any holdersother series of shares of other preferred stock that may be
then outstanding.
The holders of common stock are not subject to further calls
or assessments by us. All outstanding shares of common stock are validly
issued, fully paid and nonassessable.
Preferred StockPREFERRED STOCK
Shares of preferred stock are issuable in one or more series at suchthe time
or times and for suchthe consideration as our board of directors may determine,
with alldetermine. All
shares of any oneeach series of preferred stock shall be equal in rank and identical in
all respects. Authority is expressly granted to our board of directors to fix
from time to time, by resolution or resolutions providing for
o the establishment and/or issuance of any series of preferred
stock,
o the designation of suchany series andof preferred stock,
o the powers, preferences and rights of the shares of suchthat series,
and
o the qualifications, limitations or restrictions thereof.of the preferred
stock.
We currently have designated three series of preferred stock. Each
series of preferred stock a summary
of the terms of which are set forthis summarized below. While we have no present
intention to issue shares of any additional series of preferred stock, any such
16
19
issuance could dilute the equity of the outstanding shares of common stockCommon Stock and
could have the effect of making it more difficult for a third party to acquire a
majority of our outstanding voting stock. In addition, suchany newly issued
preferred stock may have other rights, including economic rights senior to the
common stock,Common Stock, and, as a result, the issuance thereof could have a material
adverse effect on the market value of the common stock.
SeriesCommon Stock.
SERIES A Junior Participating Preferred Stock
---------------------------------------------JUNIOR PARTICIPATING PREFERRED STOCK
Under our Shareholder Rights Plan, preferred stock purchase rights were
distributed as a dividend at the rate of one right for each share of common
stockCommon
Stock outstanding as of the close of business on May 7, 1999. Each purchase
right entitles the holder to purchase one-thousandth of a share of our Series A
Junior Participating Preferred Stock,junior participating preferred stock, par value $0.01 per share, at an exercise
price of $50. These purchase rights will not be exercisable unless a person or
group acquires, or announces the intent to acquire, beneficial ownership of 20%
or more of our common stock.Common Stock.
Each share of Series A Junior Participating Preferred Stockjunior participating preferred stock shall
entitle the holder thereof to one thousand (1,000)1,000 votes on all matters submitted to a vote of our
stockholders.
Subject to the rights of the holders of any series of preferred stock
ranking senior to the Series A Junior Participating Preferred Stockjunior participating preferred stock with respect
to dividends, each holder of a share of Series A Junior Participating
Preferred Stock,junior participating preferred
stock, in preference to the holders of shares of common stock,Common Stock, will be entitled
to a dividend equal to one thousand times any dividend declared per share of
common stock.Common Stock.
Upon anyour liquidation dissolution or winding up, no distribution shall be
made (1) to the holders of stock ranking junior to the Series A Junior
Participating Preferred Stock unless, prior thereto, thedissolution, holders of Series A Junior Participating Preferred Stock shall have receivedjunior
participating preferred stock are entitled to:
(1) $1,000 per share, plus an amount equal to accrued and unpaid dividends and
distributions, thereon, to the date of such payment, provided that the holders of Series A
Junior Participating Preferred Stock shall be entitled to receiveor an aggregate amount per share (subject to
adjustment), equal to 1,000 times the aggregate amount to be
distributed per share to holders of common stock, or (2)Common Stock, before we make
any distributions to the holders of stock ranking on a parity withjunior to the
Series A Junior Participating
Preferred Stock, exceptjunior participating preferred stock; or
pro rata distributions made ratably on the Series A Junior
Participating Preferred Stock and all such parity stock in proportion to the total amounts to
which theall holders of all suchstock ranking in parity with the Series A
junior participating preferred stock are entitled.entitled before we make
any distributions to those other holders.
In the case of any consolidation, merger, combination or other
transaction in which shares of common stockCommon Stock are exchanged, each share of Series
A Junior Participating Preferred Stockjunior participating preferred stock shall be similarly exchanged into an
amount per share equal to one thousand (1,000)1,000 times the aggregate amount of stock, securities,
cash and/or any other property (payable in kind), as the case may be, into which
each share of common stockCommon Stock is exchanged.
The Series A Junior Participating Preferred Stock shall rank,junior participating preferred stock ranks, with respect to
the payment of dividends and the distribution of assets, junior to all series of
any other class of Preferred Stock.preferred stock. Whenever dividends or distributions payable
on the Series A Junior Participating Preferred Stockjunior participating preferred stock are in arrears, thereafter andwe cannot,
until all accrued and unpaid dividends and distributions, whether or not
declared, on the Series A Junior Participating
Preferred Stockjunior participating preferred stock outstanding shall have
been paid in full, we cannot:
(i)paid:
o declare or pay dividends, or make any other distributions, on
any stock ranking junior to the Series A Junior Participating Preferred Stock;
(ii)junior participating
preferred stock;
o declare or pay dividends, or make any other distributions, on any
stock ranking on a parity with the Series A Junior Participating Preferred
Stock,junior participating
preferred stock, except dividends paid ratably on the Series A
Junior Participating
Preferred Stockjunior participating preferred stock and all such parity stock on
which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then
entitled;
(iii)o redeem or purchase or otherwise acquire any stock ranking junior
to the Series A Junior Participating Preferred Stock,junior
17
20
participating preferred stock, provided that we may at any time
redeem, purchase or otherwise acquire shares of any such junior
stock in exchange for any of our stock ranking junior to the
Series A Junior
Participating Preferred Stock;junior participating preferred stock; or
(iv)o redeem or purchase or otherwise acquire any Series A Junior
Participating Preferred Stock,junior
participating preferred stock, or any shares of stock ranking on
a parity with the Series A Junior Participating Preferred Stock,junior participating preferred stock,
except in accordance with a purchase offer made in writing or by
publication to all holders of such shares upon such terms as the
Boardboard of Directorsdirectors shall determine in good faith will result in
fair and equitable treatment among the respective series or
classes.
The shares of Series A Junior Participating Preferred Stockjunior participating preferred stock are also
subject to antidilution provisions which are triggered in the event of certain
stock
splits, recapitalizations, or other dilutive transactions. The Series A Junior Participating Preferred Stock shalljunior
participating preferred stock is not be redeemable.
SERIES B CONVERTIBLE PREFERRED STOCK AND WARRANT
BACKGROUND. On June 18, 1999, we issued 750 shares of the Series B
Convertible Preferred Stock, ------------------------------------
As$10,000 stated value per share, and a warrant to
purchase, at an exercise price of November 30, 2000, we had outstanding 500$8.725 per share, 75,000 shares of SeriesCommon
Stock, for $7.5 million in a private placement to one investor (the "Investor").
At September 7, 2001, 283 shares of B convertible preferredPreferred Stock remain outstanding; 467
shares (including the applicable premium) of B Preferred Stock have been
converted into a total of 1,950,723 shares of Common Stock.
GENERAL TERMS OF THE SERIES B CONVERTIBLE PREFERRED STOCK. The B
Preferred Stock has no voting rights, other than as required by law and is not
entitled to the payment of dividends. However, the holder is entitled to receive
an additional amount in cash or shares of Common Stock, at our option, upon
conversion of the B Preferred Stock. The additional amount is calculated based
on an annual premium of 4% on the $10,000 per share stated value of the B
Preferred Stock.
In the event of our liquidation or dissolution, the holder of the B
Preferred Stock is entitled to receive in cash out of our assets an amount per
share equal to $10,000 plus the additional amount described above. The holder of
B Preferred Stock is entitled to these amounts in preference to the holders of
our Common Stock and any other junior class of our capital stock.
CONVERSION. Each share of Series B convertible preferred stock has a stated value of
$10,000 plus dividends of 4% per annum, which sumPreferred Stock is convertible into common
stockshares
of the Common Stock at the option of the holder, at our option under certain
circumstances after June 18, 2002, and mandatorily on the maturity date for the
B Preferred Stock, which, subject to a possible required extension, is June 18,
2004. The number of shares of Common Stock into which a share may be converted
(the "conversion rate") is equal to $10,000 divided by the conversion price equal toof
the lower of $8.775, the maximumB Preferred Stock. The conversion price is variable and, at the time of
conversion, will be equal to the average of the two lowest closing bid prices of
our
common stockthe Common Stock during the 15 consecutive trading days immediately preceding
conversion. However, the conversion price cannot exceed $8.775 per share. There
is no minimum conversion price, but the number of shares that may be converted
at any one time may be limited. For more information about limitations, see
"--Limitations on Conversion."
We have reserved 9,606,437 shares of Common Stock for issuance upon
conversion of shares of the B Preferred Stock (including to satisfy the
additional amounts discussed above) and the exercise of the warrant. Depending
on the conversion price, this amount may or may not be adequate to account for
the total number of shares of Common Stock issuable upon such conversion.
The 4% dividends may, at our option, be paid in cash.
Uponfollowing table illustrates the announcementvarying amounts of a major transaction the holdershares of theCommon
Stock issuable upon conversion of all 283 shares of Series B convertible
preferred stock at the indicated conversion prices (without regard to any
limitations on conversion) and assuming that the 4% additional amount is paid in
cash:
18
21
Percentage of
Assumed Number Number of Shares Outstanding
Assumed of Shares Outstanding after Common
Conversion Price Converted(1) Assumed Conversion Stock(2)
- ------------------- ------------------- ------------------- --------------
$0.50 5,660,000 21,163,886 27%
$1.50 1,886,667 17,390,553 11%
$2.50 1,132,000 16,635,886 7%
$3.50 808,571 16,312,457 5%
$4.50 628,889 16,132,775 4%
$5.50 514,545 16,018,431 3%
$6.50 435,385 15,939,271 3%
$7.50 377,333 15,881,219 2%
- --------------------------------------------------------------------------------
- ----------------------------------
(1) The Series B Holder is prohibited from converting its holdings of the Series
B Convertible Preferred Stock if after giving effect to such conversion it
would beneficially own in excess of 4.99% or, over the sixty day period
prior to the conversion, 9.99% of the outstanding shares of our Common Stock
following such conversion. The numbers in this column do not reflect these
limitations.
(2) Based on 15,503,866 shares of Common Stock outstanding as of September 7,
2001.
REDEMPTION. The holder of the B Preferred Stock has the right to require
usAndrea to redeem all or a portion of its shares upon the announcement of a major
transaction or the happening of a triggering event. Major transactions include a
merger, consolidation, tender offer or sale of substantially all of Andrea's
assets. Triggering events include a default under Andrea's registration
obligations with respect to the Series B convertible preferred shares atstock, the
delisting of the Common Stock and a default with respect to Andrea's conversion
obligations, among other things.
The redemption price upon the happening of these events would be equal
to the greater of 120% of (i) $10,000 plus any accrued dividendsthe liquidation value of the B Preferred Stock, and
(ii)o in the case of a major transaction, the product of (A) the conversion
rate at such timein effect for the B Preferred Stock and (B) the closing bid
price on the date of the public announcement of the major transaction. In
addition, upontransaction;
o in the occurrencecase of certaina triggering events, and depending on
our control over such events,event, the holderproduct of the Seriesconversion
rate in effect for the B convertible preferred
stock may have the right to require us to (a) redeem all or a portion of the
Series B convertible preferred shares at a redemption price equal to the
greater of 120% of $10,000 plus any accrued dividendsPreferred Stock and the closing bid
price immediately before the triggering event or on the date of
the holder's redemption notice,notice.
In addition, to the extent that Andrea is not able to issue the shares
of Common Stock required to be issued upon the voluntary or (b)mandatory conversion
of the B Preferred Stock, Andrea could be required to redeem the shares of B
Preferred Stock that cannot be converted into Common Stock.
19
22
The redemption price for the B Preferred Stock under these circumstances
would be the product of the conversion rate in effect for the B Preferred Stock
and the closing bid price for the Common Stock on the applicable conversion
date. If Andrea does not timely pay a penalty equalthe redemption price, such unpaid amount
bears interest at the rate of 2% per month.
LIMITATIONS ON CONVERSION. The issuance of shares of Common Stock upon
conversion of the B Preferred Stock is limited to 1%an amount which, after giving
effect to the conversion, would cause the holder to beneficially own in excess
of 4.99%, or, together with other shares beneficially owned during the 60-day
period prior to such conversion, beneficially own in excess of 9.99% of the
outstanding shares of the Common Stock. This calculation excludes the number of
shares of Common Stock which would be issuable upon:
o conversion 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 of November 30, 2000, the remaining 500nonconverted shares of Series B Preferred
Stock beneficially owned by the holder and its affiliates;
o exercise or conversion of any of the unexercised or unconverted
portion of any other of Andrea's securities (including, without
limitation, any warrants or convertible preferred stock are convertible into our common stock. Any unconverted Seriesstock) subject
to a limitation on conversion or exercise analogous to this
limitation beneficially owned by the holder and its affiliates.
This limitation does not prevent the holder from reducing its beneficial
ownership by sale or other transfer of Common Stock, and then acquiring
additional shares of Common Stock, up to the beneficial ownership limits, by
conversion of shares of B convertible preferred share that remain outstandingPreferred Stock.
GENERAL TERMS OF THE WARRANT. In connection with the sale of the B
Preferred Stock, Andrea issued a warrant to purchase up to 75,000 shares of
Common Stock, exercisable at the price of $8.775 per share. The warrant expires
on June 18, 2004, will
automatically convert into common stock. We have reserved 1,744,235subject to certain possible extensions. The right to exercise
the warrant is also limited by the 4.99% and 9.99% beneficial ownership
limitations described above with respect to the B Preferred Stock. The exercise
price and number of shares of
common stock for issuancethat may be purchased upon conversionexercise of the shareswarrants
are subject to adjustment upon the occurrence of certain dilution events (as
defined in the Series B
convertible preferred stock.
Serieswarrant). Andrea intends to use the proceeds, if the warrants are
exercised, for working capital and general corporate purposes.
SERIES C Convertible Preferred Stock
------------------------------------CONVERTIBLE PREFERRED STOCK
The following is a summary of the material terms of the Series C
convertible preferred stock, which terms are qualified by reference to the
full text of the underlying documents which are filed as exhibits to our Form
8-K dated October 12, 2000.stock. The underlying documents for the Series C
convertible preferred stock are a Securities Purchase Agreement, Registration
Rights Agreementsecurities purchase agreement, registration
rights agreement and a Certificatecertificate of Amendment,amendment, all filed as exhibits to our
Form 8-K dated October 12, 2000.
BACKGROUND. On October 10, 2000, Andrea issued 750 shares of the C
Preferred Stock, $10,000 stated value per share, for $7.5 million in a private
placement to the Investor. Subject to various terms and conditions, the C
Preferred Stock, among other things, is convertible into shares of Common Stock
at the election of the holder and mandatorily at the maturity date of the C
Preferred Stock. The Closings
The transaction consistedC Preferred Stock has an initial maturity date of one closing with, if necessary, upOctober
10, 2002 for those outstanding shares of C Preferred Stock which can be
converted into shares of Common Stock on that date without exceeding various
limitations on such conversion. In general, for the outstanding shares of C
Preferred Stock in excess of those subject to two
additional closingsthe October 10, 2002 maturity
date, the maturity date is extended until five trading days after such shares
can be converted into Common Stock without violating the applicable limitations
on conversion (or after a triggering event as discussed below under
"--Triggering Events").
ADDITIONAL CLOSINGS. In addition to follow in the eventissuance of 750 shares of C
Preferred Stock on October 10, 2000 as described above, the holder of the Series C
convertible preferred stock exercises itsPreferred Stock has an option to purchase additional shares, as described below. At the initial closing of the transaction on
October 10, 2000 (the "Initial Closing"), the holder of the Series C
convertible preferred stock purchased from us an aggregate of 750 shares of
Series C convertible preferred stock for total gross proceeds to us of
$7,500,000. The Initial Closing was subject to various conditions, including
(a) that the representations, warranties and agreements of ours set forth in
the transaction documents are true and correct as of the Initial Closing, (b)
that we file the Certificate of Amendment for the Series C convertible
preferred stock with the New York Secretary of State, (c) that we deliver all
required certificates, opinions, and documents required under the Securities
Purchase Agreement, and (d) certain other terms and conditions, all as more
fully set forth in the Securities Purchase Agreement. The Initial Closing
occurred on October 10, 2000 (the "Initial Closing Date").shares. During the period
beginning on October 10, 2000, the Initial Closing Dateinitial closing date, and ending on April 11,
2002, the holder,
of the Series C convertible preferred stock, on not more than two occasions, may purchase from usAndrea up to
an aggregate of 250 additional 250 shares of the Series C convertible preferred stockPreferred Stock for up to an
additional $2,500,000 (the
"Additional Closing").$2,500,000. The terms and conditions of these additional shares of C
Preferred Stock would be identical to existing C Preferred Stock. The conditions
to the Additional Closing include (a)additional closings include:
20
23
o that theour representations warranties and agreements of the Company as set
forth in the transaction documents are true
and correct as of the date of the Additional Closing, b) the Company'sadditional closing,
o our Common Stock is listed with The American Stock Exchange,
c) the Company deliverso we deliver all required certificates, opinions, and documents
required under the Securities Purchase Agreement,securities purchase agreement, and
d) theo satisfaction of certain other terms and conditions, all as more fully set
forth in the Securities Purchase Agreement. Thesecurities purchase agreement.
We are using the proceeds from the offering includingof the Initial Closing and any Additional Closing, will be used by the
Company for the purposes set forth on Schedule 4(d) to the Securities Purchase
Agreement.
Conversion
Each share of Series C convertible
preferred stock, including the initial closing and any additional closing, for
working capital and general corporate purposes, including the expansion of our
sales and marketing capabilities for the commercialization of our anti-noise
products and the expansion of our research and development activities.
GENERAL TERMS OF THE SERIES C CONVERTIBLE PREFERRED STOCK. The C
Preferred Stock has no voting rights other than as required by law, and is not
entitled to receive dividends. However, the holder of C Preferred Stock is
entitled to receive an additional amount in cash or shares of Common Stock, at
Andrea's option, upon conversion of the C Preferred Stock. The additional amount
is calculated based on an annual premium of 5% on the $10,000 per share stated
value of the C Preferred Stock.
In the event of Andrea's liquidation or dissolution, the holder of the C
Preferred Stock is entitled to receive in cash out of Andrea's assets an amount
per share of equal to $10,000 plus the additional amount described above. The
holder of C Preferred Stock is entitled to receive these amounts in preference
to the holders of Andrea's Common Stock and any other junior class of Andrea's
capital stock.
CONVERSION. Each share of C Preferred Stock is convertible into shares
of the Common Stock at the option of the holder, at the option of Andrea under
certain circumstances after October 10, 2001, and mandatorily on the "maturity
date" for the C Preferred Stock. The C Preferred Stock has an initial maturity
date of October 10, 2002 for those outstanding shares of C Preferred Stock which
can be converted into shares of Common Stock on that date without exceeding
various limitations on such conversion. In general, for the outstanding shares
of C Preferred Stock in excess of those subject to the October 10, 2002 maturity
date, the maturity date is extended until five trading days after such shares
can be converted into Common Stock without violating the applicable limitations
on conversion (or after a triggering event as discussed below).
The number of shares of Common Stock into which a share of C Preferred
Stock may be converted (the "conversion rate,") is equal to (i) $10,000 (the "Stated
Value"), plus any accrued premium of 5% per annum (the "Conversion Amount"), divided by
(ii) the applicable Conversion Price. The applicable conversion price isof the C Preferred Stock. The conversion price was
initially equal to $7.0565 which is 110% of the Market Price (as
defined below) on the initial issuance date,per share for the first nine months thereafter and will be reset every six months thereafter to the lesseror 110% of the
then applicable conversion price and the
average of the two lowest closing bid prices of the Common Stock during the 5five
consecutive trading days immediately proceeding the issuance of October 10,
2000. The conversion price will be reset every six months thereafter to the
lesser of the then existing conversion price or 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,Preferred Stock, the least ofof: (i) the then applicableexisting conversion price,
(ii) the average of the two lowest closing bid prices of the Common Stock during
the 15 consecutive trading days immediately precedingproceding such two year date, andor
(iii) the closing bid price on the dateday of conversion, , subject in each case to
adjustment, includingcertain adjustments. The current conversion price is $1.44. There is no minimum
conversion price, but the number of shares that may be converted at any one time
may be limited. For more information about limitations, see "--Limitations on
Conversion."
Andrea has reserved 10,890,411 shares of Common Stock for issuance upon
the announcement of a Major
Transaction (as defined below), all as provided in the Certificate of
Amendment (the "Conversion Price"). "Market Price" means the averageconversion of the two lowest closing bid pricesshares of the CommonC Preferred Stock during(including to satisfy the
5 consecutive
trading days immediately preceding a date of determination. Inadditional amounts discussed above). Depending on the event thatconversion
21
24
price, this amount may or may not be adequate to account for the Company or the transfer agent does not timely effect a conversion or
reissuance of the remaining shares of Series C convertible preferred stock,
the Company is subject to certain cash penalties, adjustments to the
applicable conversion price and certain other penalties as more fully
described in the Certificate of Amendment.
In addition, if the holders of the Series C convertible preferred stock
submit a conversion request and the Company is not able to issue the required
amounttotal number of
shares of Common Stock dueissuable upon such conversion.
The following table illustrates the Company's inability to comply with
the rulesvarying amounts of AMEX, then under the Certificateshares of Amendment a Triggering EventCommon
Stock that would occur. In such event, the Company could be required by the holders to
redeemissuable upon conversion of all or a portion of such holder'soutstanding 750 shares of
Series C convertible preferred stock at a price equalthe indicated conversion prices (without
regard to any limitations on conversion) and assuming that the greater5% additional
amount is paid in cash:
Percentage of
(i) 120%Assumed Number Number of the Liquidation
Value (as defined below) and (ii) the productShares Outstanding
Assumed of (A) theShares Outstanding after Common
Conversion Rate at
such time, and (B) the greater of (I) the closing bid price of the Common
Stock on the trading day immediately preceding such Triggering Event or (II)
the closing bid price of our Common Stock on the date of the holder's delivery
to the Company of a notice or, if such date of delivery is not a trading day,
the next date on which the exchange or market on which the Common Stock is
traded is open. In addition, if the Company fails to redeem at the holder's
request upon the Triggering Event, the Company shall, if so directed by the
holders of a majority of the shares ofPrice Converted(1) Assumed Conversion Stock(2)
- ------------------- ------------------- ------------------- --------------
$0.40 18,750,000 34,253,886 55%
$0.55 13,636,364 29,140,250 47%
$0.70 10,714,286 26,218,172 41%
$0.85 8,823,529 24,327,415 36%
$1.00 7,500,000 23,003,886 33%
$1.15 6,521,739 22,025,625 30%
$1.30 5,769,231 21,273,117 27%
$1.44 5,208,333 20,712,219 25%
- --------------------------------------------------------------------------------
- ----------------------------------
(1) The Series C convertible preferred stock
then outstanding, issue to each holder of shares of Series C convertible
preferred stock in exchange for such holder's shares of Series C convertible
preferred stock a senior secured note in the amount of the applicable
redemption price of such holder's shares of Series C convertible preferred
stock. The senior secured notes shall have a term of one week, shall be senior
to any other of the Company's indebtedness and shall contain other mutually
acceptable credit terms.
The shares of Series C convertible preferred stock are presently
convertible. The holders of the Series C convertible preferred stock areHolder is prohibited in the Certificate of Amendment from converting their respectiveits holdings of the Series
C convertible preferred stockConvertible Preferred Stock if after giving effect to such conversion the holderit
would beneficially own in excess of 4.99% or, over anythe sixty day period
prior to the conversion, 9.99% of the outstanding shares of our Common Stock of the
Company
following such conversion. This calculation excludesThe numbers in this column do not reflect these
limitations.
(2) Based on 15,503,866 shares of Common Stock outstanding as of September 7,
2001.
REDEMPTION. The holder of the C Preferred Stock has the right to require
Andrea to redeem all or a portion of its shares upon the announcement of a major
transaction or the happening of a triggering event. For more information about
triggering events, see "--Triggering Events." Major transactions include a
merger, consolidation, tender offer or sale of substantially all Andrea's
assets.
The redemption price upon the happening of these events would be equal
to the greater of 120% of the liquidation value of the C Preferred Stock, and:
o in the case of a major transaction, the product of the conversion
rate in effect for the C Preferred Stock and the closing bid
price on the date of the public announcement of the transaction;
or
o in the case of a triggering event, the product of the conversion
rate in effect for the C Preferred Stock and the closing bid
price immediately before the triggering event or on the date of
the holder's redemption notice.
22
25
In addition, to the extent that Andrea is not able to issue the shares
of Common Stock required to be issued upon the voluntary or mandatory conversion
of the C Preferred Stock, Andrea could be required to redeem the shares of C
Preferred Stock that cannot be converted into Common Stock.
The redemption price for the C Preferred Stock under these circumstances
would be the product of the conversion rate in effect for the C Preferred Stock
and the closing bid price for the Common Stock on the applicable conversion
date. If Andrea does not timely pay the redemption price, such unpaid amount
bears interest at the rate of 2% per month.
TRIGGERING EVENTS. A triggering event will occur upon:
o the lapse of the effectiveness of the registration statement for
ten consecutive trading days or for an aggregate of fifteen
trading days per year;
o the unavailability of the registration statement for the sale of
all of the shares of Common Stock into which the Series C
convertible preferred stock is convertible for a period of ten
consecutive trading days or an aggregate of fifteen trading days
per year;
o the delisting of our Common Stock by AMEX for five consecutive
trading days or for an aggregate of ten trading days per year;
o the failure of us or our transfer agent to comply with the
conversion obligations of the Series C convertible preferred
stock within ten business days after a conversion notice is
submitted;
o our inability to issue conversion shares due to limitations
imposed by the requirements of AMEX;
o our failure to make any excluded redemption event daily payment
(as defined in certificate of amendment); and
o the breach of our representations, warranties, covenants (that
are not cured in fewer than ten days) or terms of the transaction
documents which would have a material adverse effect (as defined
in the certificate of amendment).
LIMITATIONS ON CONVERSION. The issuance of shares of Common Stock upon
conversion of the C Preferred Stock is limited to that amount which, after
giving effect to the conversion, would cause the holder to beneficially own in
excess of 4.99% or, together with other shares beneficially owned during the
60-day period prior to such conversion, beneficially own in excess of 9.99% of
the outstanding shares of the Common Stock. These calculations exclude the
number of shares of Common Stock which would be issuable upon (1)upon:
o conversion of the remaining, nonconverted shares of Series C convertible preferred stockPreferred
Stock beneficially owned by the holder and its affiliates, (2)affiliates;
o conversion of any of the Company's Series B convertible preferred stockPreferred Stock or exercise of the
warrants issued in connection with the Series B convertible preferred stockPreferred Stock
beneficially owned by the holdersholder and its affiliatesaffiliates; and
the (3)o exercise or conversion of any of the unexercised or unconverted
portion of any other securities of the CompanyAndrea's securities (including, without
limitation, any warrants or convertible preferred stock) subject
to a limitation on conversion or exercise analogous to this
limitation beneficially owned by the holder and its affiliates.
The Series C convertible preferred stock will convert
automatically intoThese limitations do not prevent the holder from reducing its beneficial
ownership by sale or other transfer of Common Stock, at the applicable Conversion Priceand then in
effect on the second anniversary dateacquiring
additional shares of issuance (the "Two Year Date"),Common Stock, up to the extent anybeneficial ownership limits, by
conversion of shares of C Preferred Stock.
23
26
CONVERSION AT OUR OPTION. As more fully set forth in the applicable issuancecertificate of
amendment, after one year we may require that the shares of Series C convertible
preferred stock remain outstanding. Inbe submitted for conversion. We may only exercise this right if
the eventlast reported sale price (as reported by Bloomberg) for our Common Stock is
greater than $17.64125, among other conditions.
REGISTRATION OF SHARES. We are obligated by a registration rights
agreement to register the Company is unable to
convert any Series C convertible preferred stock due to restrictions set forth
in the Certificate of Amendment, the Company shall redeem the shares that
could not be converted due to certain of such restrictions for an amount in
cash per share equal to the Conversion Amount on the Two Year Date. The
maturity date for the Series C convertible preferred stock may be extended
beyond the Two Year Date under certain circumstances set forth in the
Certificate of Amendment.
Dividends
The holdersCommon Stock issuable upon conversion of the Series C
convertible preferred stockstock. We are not entitled
to receive dividends. The holders are entitled to receive upon conversion,
payable in cash or Common Stock at the election of the Company, an annual
premium of 5% on the aggregate "Stated Value" (i.e., $10,000 per share).
Voting Rights
The holders of the Series C convertible preferred stock have no voting
rights except as providedrequired by law, except to the extent such holders own shares
of Common Stock.
Liquidation Value
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Series C convertible preferred
stock shall be entitled to receive in cash out of the assets of the Company,
whether from capital or from earnings available for distribution to its
stockholders before an amount shall be paid to any class junior in rank to the
Series C convertible preferred stock an amount per share of Series C
convertible preferred stock equal to $10,000 plus any Additional Amount (the
"Liquidation Value").
Redemption
The holders of the Series C convertible preferred stock may require the
Company to redeem the Series C convertible preferred stock upon the
consummation of a "Major Transaction" or a "Triggering Event."
Major Transactions
Certain mergers, consolidations, tender offers, or the sale of
substantially all the assets of the Company.
Triggering Events
o failure of the registration statement covering the resale of the
conversion shares to be declared effective within 180 days after the
Initial Closing Date;
o the effectiveness of the registration statement lapses for ten
consecutive trading days or for an aggregate of fifteen trading days
per year;
o the registration statement is unavailable for the sale of all of the
"Registrable Securities" (as defined in the Certificate of
Amendment) for a period of ten consecutive trading days or an
aggregate of fifteen trading days per year in accordance with the
terms of the applicable registration rights agreement;
o the delisting of the Company's common Stock by AMEX for five
consecutive trading days or for an aggregate of ten trading days per
year;
o certain failures of the Company or its transfer agent to comply with
conversions of the Series C convertible preferred stock within ten
business days after a conversion notice is submitted.
o the inability of the Company to issue conversion shares due to
limitations imposed by the requirements of AMEX;
o failure of the Company to make any Excluded Redemption Event Daily
Payment (as defined in Certificate of Amendment); and
o certain breaches of representations, warranties, covenants (that are
not cured in fewer than ten days) or terms of the transaction
documents which would have a Material Adverse Effect (as defined in
the Certificate of Amendment).
Redemption And Other Remedies
The holders can send a notice of redemption upon the occurrence of a
Triggering Event or Major Transaction and require the Company to redeem the
Series C convertible preferred stock at the greater of (a) 120% of the
Liquidation Value of the Series C convertible preferred stock, or (b) (i) the
product of the applicable conversion rate in effect and the closing bid price
on the date of the announcement of the Major Transaction or, (ii) in the case
of a Triggering Event, the product of the applicable conversion rate in effect
and the closing bid price of the Common Stock on the trading day immediately
preceding the Triggering Event or the closing bid price of the Common Stock on
the date of the holder's delivery to the Company of notice, unless such date
is not a trading day, then on the next date on which the exchange or market on
which the Common Stock is traded is open.
o If the Company is unable to effect a redemption, interest will
accumulate on the value of the shares that the Company in unable to
redeem at the rate of 2.0% per month.
o If the Company is unable to effect a redemption, the holders are
also entitled to void their redemption notices and receive a reset
of their applicable Conversion Price. The Conversion Price on the
Series C convertible preferred stock would be reset to the lesser of
(A) the Conversion Price as in effect on the date the notice is
delivered to the Company and (B) the lowest closing bid price during
the period beginning on the date on which the notice of redemption
is delivered to the Company and ending on the date on which the
notice is received.
Registration Of Shares
The Company is required bythis agreement to initially
register with the Commission the resale of at least the number of Shares equal to the product of
(i) 2.0 and (ii) the number of initial registrable securities (without regard
to any limitation on conversion). The Company is also required by agreement to
initially register with the SEC the resale of at least the number of shares of
Common Stock equal to the product of
(i)(a) 2.0 and
(ii)(b) the number of initial registrable securities (without regard to
any limitation on conversion).
We are also required by the registration rights agreement to initially
register with the Commission the resale of at least the number of shares of
Common Stock equal to the product of
(a) 2.0 and
(b) the number of additional registrable securities (without regard
to any limitation on conversion) as of the date immediately
preceding the date the Registration Statementregistration statement is initially filed.
The Company hasWe filed the registration statement with respect to the initial shares
of Series C convertible preferred stock on December 7, 2000, no later than 60
days after the initial closing date, the initial filing deadline, and had the
registration statement declared effective by the Commission on February 14,
2001, no later than 120 days after the initial closing, the initial
effectiveness deadline. If the holder elects to purchase additional shares of
Series C convertible preferred stock, we have agreed to use itsour best efforts to
file the registration statement with respect to the additional shares of Series
C convertible preferred stock as soon as possible but no later than 6030 days
after the Initial Closing Date (the "Initial Filing Deadline")additional closing date and have the registration statement declared
effective by the Commission no later than 120 days after the Initial Closing (the "Initial Effectiveness Deadline").additional closing.
If the Company iswe are unable to have the registration statement filed or declared
effective in the time required, the Companywe shall pay to each holder of Registrable Securitiesregistrable
securities an amount in cash per Registrable Securityregistrable security held equal to the product
of
(i)(a) $10,000 multiplied by
(ii)(b) the sum of
(A)(1) .01, if the Registration Statementregistration statement is not filed by the
Scheduled Filing Date (as
defined in the Registration Rights Agreement),initial filing deadline described above, plus
(B)(2) .01, if the Registration Statementregistration statement is not declared
effective by the Scheduled Effective
Date (as defined in the Registration Rights Agreement),initial effectiveness deadline described
above, plus
(C)(3) the product of
(I)(i) .0005 multiplied by
(II)(ii) the sum of
(x) the number of days after the Scheduled Filing Datescheduled
filing date that such Registration Statementregistration statement
is not filed with the Commission, plus
24
27
(y) the number of days after the Scheduled Effective Datescheduled
effective date that the Registration Statementregistration statement is not declared effective by the
Commission, plus
(z) the number of days that sales cannot be made
pursuant to the Registration Statementregistration statement after
the Registration Statementregistration statement has been declared
effective by the Commission (excluding days
during any Allowable Grace Period
(as defined in the Registration Rights Agreement)).
Conversion At Company's Option
As more fullyallowable grace period set forth
in the applicable Certificateregistration rights agreement).
We have agreed to indemnify the holders of Amendment, after
one yearregistrable securities
against liabilities under the Company may require thatSecurities Act in connection with the sharesregistration
of the Common Stock issuable upon conversion of the Series C convertible
preferred stockstock. To the extent any indemnification is prohibited or limited by
law, we have agreed to make the maximum contribution with respect to any amounts
for which we would otherwise be submitted for conversion but only ifliable under the last reported sale
price (as reportedregistration rights agreement
to the fullest extent permitted by Bloomberg) for the Common Stock is at least 250% of the
Conversion Price on the initial issuance date of such shares and certain other
conditions are met.
Other Termslaw. The holders will similarly indemnify us.
OTHER TERMS. The transaction documents relating to the Series C
convertible preferred stock also contain certain other representations, warranties,
agreements and indemnification obligations of the Company.Andrea. The operative agreements
also (i)o contain a right of first refusal in favor of the investors which
applies to certain of our private equity financings of the Company and would commence on the
Initial Closing and endsfor one year
thereafter, (ii)after the initial closing,
o restrict the Company'sour ability to redeem, any of its Common Stock, pay any cash dividends on its
Common Stock, and make
certain distributions on itsour Common Stock,
(iii)o limit theour ability of the Company to issue any senior preferred stock, and
(iv)o prohibit the Companyus from entering into certain related party transactions
except as set forth in the Securities Purchase Agreement.securities purchase agreement.
The shares of Series C convertible preferred stock are also subject to
antidilution provisions which are triggered in the event of certain stock
splits, recapitalizations, or other dilutive transactions, as well as issuances
of Common Stock at a price below the Conversion Priceconversion price in effect, or the issuance
of warrants, options, rights, or convertible securities which have an exercise
price or conversion price less than the Conversion Price,conversion price, other than for certain
previously outstanding securities and certain "excluded securities" (as defined
in the Certificatecertificate of Amendment)amendment). In the event that the Company issueswe issue securities in the
future which have a conversion price or exercise price which varies with the
market price and the terms of such variable price are more favorable than the
Conversion Priceconversion price in the Series C convertible preferred stock, the Purchaserspurchasers may
elect to substitute the more favorable variable price when making conversions of
the Series C convertible preferred stock.
Placement Agent Compensation
The CompanyPLACEMENT AGENT COMPENSATION. We and the Purchaserpurchaser each acknowledges
that it has not engaged any placement agent in connection with the sale of the
Series C convertible preferred stock.
Use of ProceedsUSE OF PROCEEDS. The net proceeds of the Series C convertible preferred
stock received by us have been and will continue to be used for working capital
and general corporate purposes, including the purposes set forth on Schedule 4(d) toexpansion of our sales and
marketing capabilities for the Securities Purchase
Agreement.
Interestscommercialization of Certain Personsour anti-noise products and
the expansion of our research and development activities. We will not receive
any of the proceeds from the sale of Common Stock by the selling stockholder.
INTERESTS OF CERTAIN PERSONS. None of the investors in the Series C
convertible preferred stock transactions is a director, executive officer or
five percent or greater shareholder of us or is our affiliate.
25
28
STOCKHOLDER DILUTION
The conversion of the CompanyB Preferred Stock and the C Preferred Stock may
result in substantial dilution to other shareholders of the Common Stock.
The following table illustrates the varying amounts of shares of Common
Stock that would be issuable upon conversion of all 283 outstanding shares of B
Preferred Stock and all 750 outstanding shares of C Preferred Stock at the
indicated conversion prices (without regard to any limitation on conversion),
assuming that all additional amounts are paid cash.
Percentage of
Assumed Number Number of Shares Outstanding
Assumed of Shares Outstanding after Common
Conversion Price Converted(1)(2)(3) Assumed Conversion Stock(4)
- ------------------- ------------------- ------------------- --------------
$0.50 20,660,000 36,163,886 57%
$1.00 10,330,000 25,833,886 40%
$1.44 7,173,611 22,677,497 32%
$2.50 6,340,333 21,844,219 29%
$3.50 6,016,905 21,520,791 28%
$4.50 5,837,222 21,341,108 27%
$5.50 5,722,879 21,226,765 27%
$6.50 5,643,718 21,147,604 27%
$7.50 5,585,667 21,089,553 26%
- --------------------------------------------------------------------------------
- -------------------------
(1) The calculation assumes that the conversion price of the Series B and Series
C convertible preferred stock are the same at the assumed conversion prices
of $.50, $1.00 and $1.44. This could only occur if the market price of
Andrea's Common Stock declines, and at a future reset date, the conversion
price of the Series C adjusts to the then prevailing market price (the
current fixed conversion price of the Series C is $1.44, and such conversion
price is fixed unless adjusted downward at a future reset date).
(2) The calculation assumes that for any conversion of the Series B convertible
preferred stock when the prevailing market price is above $1.44, the Series
C would still be converted at its maximum conversion price of $1.44.
(3) The Series B and Series C holder is prohibited from converting the Series C
or an affiliateSeries B convertible preferred stock, or from exercising the warrants
issued in connection with the Series B convertible preferred stock, if after
giving effect to such conversion it would beneficially own in excess of
4.99% or, over the sixty day period prior to the conversion, 9.99% of the
outstanding shares of our Common Stock following such conversion.
(4) Based on 15,503,866 shares of Common Stock outstanding as of September 7,
2001.
ADDITIONAL INFORMATION REGARDING THE TERMS OF THE SERIES B CONVERTIBLE
PREFERRED STOCK AND WARRANTS AND THE SERIES C CONVERTIBLE PREFERRED STOCK
Copies of the relevant documents regarding the issuance of the B
Preferred Stock and the C Preferred Stock were filed with the Securities and
Exchange Commission as exhibits to Andrea's Reports on Form 8-K, dated June 22,
1999 and October 12, 2000, respectively. Shareholders desiring a more complete
understanding of these securities are urged to refer to such disclosures and
exhibits.
26
29
Andrea will furnish to any such personshareholder upon receipt of a written or entity.oral
request, copies of these Reports on Form 8-K, including exhibits, without
charge, to the Corporate Secretary, Andrea Electronics Corporation, 45 Melville
Park Road, Melville, New York Anti-Takeover Law11747 (631) 719-1800.
In connection with Andrea's issuance of the B Preferred Stock and the
related warrant and the C Preferred Stock, Andrea filed registration statements
on Form S-3 with the Securities and Exchange Commission on July 17, 1999, as
amended September 13, 1999 and October 13, 1999, and on December 7, 2000, as
amended January 16, 2001, January 31, 2001 and February 14, 2001, respectively.
Those registration statements relate to the resale of the shares of Common Stock
that are issuable upon conversion of the B Preferred Stock, and upon exercise of
the warrants, and upon conversion of the C Preferred Stock.
NEW YORK ANTI-TAKEOVER LAW
We are also subject to certain provisions of the New York Business Corporation
Law (the "NYBCL") which relate to certain business combinations with an "interested
shareholder" and prohibit any person from making a takeover bid for a New York
corporation unless certain prescribed disclosure requirements are satisfied.
Section 912 of the NYBCL provides, with certain exceptions, that a New
York corporation may not engage in a "business combination," such as a merger,
consolidation, recapitalization or disposition of stock, with any "interested
shareholder" for a period of five years from the date that such persons first
became an interested shareholder unless:
(a) the transaction resulting in a person becoming an interested
shareholder, or the business combination, was approved by the
board of directors of the corporation prior to that person
becoming an interested shareholder,
(b) the business combination is approved by the holders of a majority
of the outstanding voting stock not beneficially owned by such
interested shareholder, or
(c) the business combination meets certain valuation requirements for
the stock of the New York corporation.
An "interested shareholder" is defined as any person that
(x) is the beneficial owner of 20% or more of the outstanding
voting stock of a New York corporation or
(y) is an affiliate or associate of the corporation that at
any time during the prior five years was the beneficial
owner, directly or indirectly, of 20% or more of the
corporation's then outstanding voting stock.
The provisions of Section 912 of the NYBCL apply if and for so long as a
New York corporation has a class of securities registered under Section 12 of
the Exchange Act, at least 25% of its total employees are employed primarily
within New York, or at least 250 employees are so employed and at least 10% of
our voting stock is owned beneficially by residents of the State of New York. We
expect to continue to meet one or more of these tests and, accordingly, to be
subject to Section 912 of the NYBCL. Article 16 of the NYBCL provides that
persons seeking to make takeover bids comply with certain registration and
disclosure requirements .
Plan of Distributionrequirements.
PLAN OF DISTRIBUTION
We are registering the shares of common stock issuable upon conversion of
the Series C convertible preferred stock and the 320,760 shares issued as
consideration for our acquisition of LamarCommon Stock to permit the resale of
the shares of common stockCommon Stock by the holdersholder from time to time after the date of this
prospectus. We will not receive any of the proceeds from the sale by the selling
stockholdersstockholder of the shares of common stock.Common Stock. We will bear all fees and expenses
incident to our
27
30
obligation to register the shares of common stock.Common Stock.
The selling stockholders may sell all or a portion of the common stockCommon Stock
beneficially owned by itthem and offered hereby from time to time directly or
through one or more underwriters, broker-dealers or agents. If the common
stockCommon Stock
is sold through underwriters or broker-dealers, the selling stockholdersstockholder will be
responsible for underwriting discounts or commissions or agent's commissions.
The common stockCommon Stock may be sold in one or more transactions at fixed prices, at
prevailing market prices at the time of the sale, at varying prices determined
at the time of sale, or at negotiated prices. These sales may be effected in
transactions, which may involve crosses or block transactions,
(1)o on any national securities exchange or quotation service on which
the securities may be listed or quoted at the time of sale,
(2)o in the over-the-counter market,
(3)o in transactions otherwise than on these exchanges or systems or
in the over-the-counter market,
(4)o through the writing of options, whether such options are listed
on an options exchange or otherwise, or
(5)o through the settlement of short sales.
If the selling stockholdersstockholder effects such transactions by selling shares
of common stockCommon Stock to or through underwriters, broker-dealers or agents, such
underwriters, brokers-dealersbroker-dealers or agents may receive commissions in the form of
discounts, concessions or commissions from the selling stockholdersstockholder or
commissions from purchasers of the shares of common stockCommon Stock for whom they may act
as agent or to whom they may sell as principal (which discounts, concessions or
commissions as to particular underwriters, brokers-dealers or agents may be in
excess of those customary in the types of transactions involved). In connection
with sales of the common stockCommon Stock or otherwise, the selling stockholdersstockholder may enter
into hedging transactions with broker-dealers, which may in turn engage in short
sales of the common stockCommon Stock in the course of hedging in positions they assume. The
selling stockholdersstockholder may also sell shares of common stockCommon Stock short and deliver
shares of common stockCommon Stock covered by this prospectus to close out short positions,
provided that the short sale is made after the registration statement is
declared effective and a copy of this prospectus is delivered in connection with
the short sale. The selling stockholdersstockholder may also loan or pledge shares of common stockCommon
Stock to broker-dealers that in turn may sell such shares.
The selling stockholdersstockholder may pledge or grant a security interest in some
or all of the shares of common stockCommon Stock owned by them and, if they default in the
performance of their secured obligations, the pledgees or secured parties may
offer and sell the shares of common stockCommon Stock from time to time pursuant to the
prospectus. The selling stockholdersstockholder also may transfer and donate the shares of
common stockCommon Stock in other circumstances in which case the transferees, donees,
pledgees or other successors in interest will be the selling beneficial owners
for purposes of the prospectus.
The selling stockholdersstockholder and any broker-dealer participating in the
distribution of the shares of common stockCommon Stock may be deemed to be "underwriters"
within the meaning of the Securities Act, and any commissions paid, or any
discounts or concessions allowed to any such broker-dealer may be deemed to be
underwriting commissions or discounts under the Securities Act. At the time a
particular offering of the shares of common stockCommon Stock is made, a prospectus
supplement, if required, will be distributed which will set forth the aggregate
amount of shares of common stockCommon Stock being offered and the terms of the offering,
including the name or names of any broker-dealers or agents, any discounts,
commissions and other terms constituting compensation from the selling
stockholdersstockholder and any discounts, commissions or concessions allowed or reallowed
or paid to broker-dealers.
Under the securities laws of some states, the shares of common stockCommon Stock may
be sold in such states only through registered or licensed brokers or dealers.
In addition, in some states the shares of common stock may not be sold unless
such shares have been registered or qualified for sale in such state or an
exemption from registration or qualification is available and is complied
with.28
31
There can be no assurance that any selling stockholder will sell any or
all of the shares of common stockCommon Stock registered pursuant to the shelf registration
statement, of which this prospectus forms a part.
The selling stockholdersstockholder and any other person participating in such
distributionsales of
shares pursuant to this prospectus will be subject to applicable provisions of
the Exchange Act and the Exchange Act's rules and regulations, thereunder, including,
without limitation, Regulation M of the Exchange Act, which may limit the timing
of purchases and sales of any of the shares of common stockCommon Stock by the selling
stockholder and any other participating person. Regulation M may also restrict
the ability of any person engaged in thea distribution of the shares of common stockCommon
Stock to engage in market-making activities with respect to the shares of common stock.Common
Stock. All of the foregoing may affect the marketability of the shares of common stockCommon
Stock and the ability of any person or entity to engage in market-making
activities with respect to the shares of common stock.Common Stock.
We will pay all expenses of the registration of the shares of common
stockCommon
Stock pursuant to the registration rights agreement estimated to be $50,000$45,000 in
total, including, without limitation, Commission filing fees and expenses of
compliance with state securities or "blue sky" laws; provided, however, that the
selling stockholdersstockholder will pay all underwriting discounts and selling commissions,
if any.
In connection with sales made pursuant to this prospectus, we will
indemnify the selling stockholdersstockholder against liabilities, including some
liabilities under the Securities Act, in accordance with the registration rights
agreement or the selling stockholdersstockholder will be entitled to contribution. We will
be indemnified by the selling stockholdersstockholder against civil liabilities, including
liabilities under the Securities Act that may arise from any written information
furnished to us by the selling stockholdersstockholder for use in this prospectus or we will
be entitled to contribution.
Once sold under the shelf registration statement, of which this
prospectus forms a part, the shares of common stockCommon Stock will be freely tradable in
the hands of persons other than our affiliates.
Legal MattersHFTP, the selling stockholder, has advised us that it purchased the
Series C convertible preferred stock in the ordinary course of its business and,
at the time HFTP purchased the Series C convertible preferred stock, it was not
a party to any agreement or other understanding to distribute the securities,
directly or indirectly.
LEGAL MATTERS
Legal matters with respect to our common stockCommon Stock being offered hereby have
been passed upon for us by our counsel, BrownMuldoon Murphy & WoodFaucette LLP,
New York, New York.
ExpertsWashington, D.C.
EXPERTS
The consolidated financial statements and schedules of the Company
includedAndrea
incorporated in our Form 10-Kthis prospectus and incorporatedregistration statement by reference hereinto our
annual report on Form 10-K have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
incorporated herein by reference in reliance upon the authority of said firm as experts
in accounting and auditingauditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and periodic reports, proxy statements and
other information with the Securities and Exchange Commission using the
Commission's EDGAR system. You may inspect these documents and copy information
from them at the Commission's public reference facilities at 450 Fifth Street,
N.W., Washington, D.C. 20549 or at the regional offices of the Commission at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of
such
29
32
material can be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of such site is http://www.sec.gov.
We have filed a registration statement with the Commission relating to
the offering of the Common Stock. The registration statement contains
information which is not included in giving said reports.
NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANYthis prospectus. You may inspect or copy
the registration statement at the Commission's public reference facilities or
its web site.
We furnish our stockholders with annual reports containing audited
financial statements and with such other periodic reports as we from time to
time deem appropriate or as may be required by law.
INCORPORATION OF CERTAIN INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING HEREIN CONTAINED AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY US OR THE SELLING STOCKHOLDERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN OUR AFFAIRS SINCE THE DATE
HEREOF OR THAT ANY INFORMATION CONTAINED HEREIN IS CORRECT AS TO ANY OF THE
TIME SUBSEQUENT TO ITS DATE. HOWEVER, WE HAVE UNDERTAKEN TO AMEND THE
REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART TO REFLECT ANY FACTS
OR EVENTS ARISING AFTER THE EFFECTIVE DATE THEREOF WHICH INDIVIDUALLY OR IN
THE AGGREGATE REPRESENT A FUNDAMENTAL CHANGE IN THE INFORMATION SET FORTH IN
THE REGISTRATION STATEMENT. IT IS ANTICIPATED, HOWEVER, THAT MOST UPDATED
INFORMATION WILL BE INCORPORATED HEREIN BY REFERENCE
TO OUR REPORTS FILED
UNDER THE SECURITIES EXCHANGE ACT OFWe have filed the following documents with the Commission. We are
incorporating these documents in this prospectus, and they are a part of this
prospectus.
(1) Our annual report on Form 10-K for the fiscal year ended December
31, 2000;
(2) Our quarterly reports on Form 10-Q for the quarters ended March
31, 2001 and June 30, 2001;
(3) Our current report on Form 8-K dated June 6, 2001;
(4) Our current report on Form 8-K dated March 1, 2001; and
(5) The description of our Common Stock, par value $.50 per share,
contained in
(a) our registration statement filed under the Exchange Act
of 1934, as amended, No. 1-4324, as declared effective on
February 28, 1967,
(b) Article Third of our Restated Certificate of Incorporation
filed as Exhibit 3.1 to our current report on Form 8-K
dated November 30, 1998 as amended by our certificate of
Amendment dated June 10, 1999 filed as Exhibit 3.1 to our
current report on Form 8-K dated June 18, 1999 and as
subsequently amended by our Certificate of Amendment dated
October 5, 2000 filed as Exhibit 3.1 to our Current Report
on Form 8-K dated October 12, 2000 and
(c) any subsequent amendment(s) or report(s) filed for the
purpose of updating such description.
We are also incorporating by reference in this prospectus all documents
which we file pursuant to Section 13(a), 13(c), 14 or 15 of the Securities
Exchange Act of 1934, as amended, after the date of this prospectus. Such
documents are incorporated by reference in this prospectus and are a part of
this prospectus from the date we file the documents with the Commission.
If we file with the Commission any document that contains information
that is different from the information contained in this prospectus, you may
rely only on the most recent information which we have filed with the
Commission.
We will provide a copy of the documents referred to above without charge
if you request the information from us. Requests for such copies should be
directed to us at our principal executive offices at Andrea Electronics
Corporation, 45 Melville Park Road, Melville, New York, 11747, attention:
Secretary or (631) 719-1800.
You should only rely on the information incorporated by reference or
provided in this prospectus or any supplement. We have not authorized any person
to provide you with any different information. If anyone provides
30
33
you with different or inconsistent information you should not rely on it. The
Common Stock is not being offered in any state where the offer is not permitted.
You should not assume that the information in this prospectus or any supplement
is accurate as of any date other than the date on the front of this prospectus.
The information in this prospectus may not contain all of the
information that may be important to you. You should read the entire prospectus,
as well as the documents incorporated by reference in the prospectus, before
making an investment decision.
No dealer, salesman, or any other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus in connection with the offering herein contained and, if given or
made, such information or representations must not be relied upon as having been
authorized by us or the selling stockholders. This prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make an offer or solicitation.
Neither the delivery of this prospectus nor any sale made hereunder
shall, under any circumstances, create an implication that there has been no
change in our affairs since the date hereof or that any information contained
herein is correct as to any of the time subsequent to its date. However, we have
undertaken to amend the registration statement of which this prospectus is a
part to reflect any facts or events arising after the effective date thereof
which individually or in the aggregate represent a fundamental change in the
information set forth in the registration statement. It is anticipated, however,
that most updated information will be incorporated herein by reference to our
reports filed under the securities exchange act of 1934. SEE "DOCUMENTS INCORPORATED BY
REFERENCE.See "documents
incorporated by reference."
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
2,463,058All dealers effecting transactions in the Common Stock offered hereby,
whether or not participating in this distribution, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
31
34
11,211,171 SHARES
ANDREA ELECTRONICS CORPORATION
COMMON STOCK
---------------------------------------------------------
PROSPECTUS
---------------------
December------------------------------------
SEPTEMBER __, 20002001
32
35
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ItemITEM 14. Other Expenses of Issuance and DistributionOTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Registration Fee - Securities and Exchange Commission $ 2,1631,313
American Stock Exchange Listing FeeFee* 17,500
Legal Fees and Disbursements* 20,00015,000
Accounting Fees and Disbursements* 3,0005,000
Legal Fees and Expenses in Connection with Blue Sky Filings* $ 2,000
Miscellaneous* 5,337
---------4,187
-----
Total $ 50,00045,000
- ---------------------
*Estimated.
ItemII-1
ITEM 15. Indemnification Of Directors And Officers.INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 722 of the Business Corporation Law of the State of New York
empowers a New York corporation to indemnify any person made, or threatened to
be made, a party to any action or proceeding (other than an action by or in the
right of the corporation to procure a judgment in its favor), whether civil or
criminal, including an action by or in the right of any other corporation of any
type or kind, domestic or foreign, or any partnership, joint venture, trust,
employee benefit plan or other enterprise, which any director or officer of the
corporation served in any capacity at the request of the corporation, by reason
of the fact that such person, such person's testator or such person's intestate
is or was a director or officer of the corporation, or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise in
any capacity, against judgments, fines, amounts paid in settlement and
reasonable expenses, including attorneys' fees actually and necessarily incurred
as a result of such action or proceeding or any appeal therein, if such person
acted in good faith, for a purpose which such person reasonably believed to be
in, or, in the case of services for any other corporation or other enterprise,
not opposed to, the best interests of the corporation, and with respect to any
criminal action or proceeding, had no reasonable cause to believe that such
person's conduct was unlawful.
The termination of any action or proceeding by judgment, settlement,
conviction, or upon plea of nolo contendere or its equivalent, does not, of
itself, create a presumption that such person did not act in good faith, for a
purpose which such person reasonably believed to be in, or, in the case of
services for any other corporation or other enterprise not opposed to, the best
interests of the corporation, or had reasonable cause to believe that such
person's conduct was unlawful.
In the case of an action by or in the right of the corporation, Section
722 empowers a corporation to indemnify any person made or threatened to be made
a party to any action in any of the capacities set forth above against amounts
paid in settlement and reasonable expenses, including attorneys' fees, actually
and necessarily incurred by such person in connection with the defense or
settlement of such action or an appeal therein, if such person acted in good
faith, for a purpose which such person reasonably believed to be in, or, in the
case of services for any other corporation or other enterprise, not opposed to,
the best interests of the corporation, except that indemnification is not
permitted in respect of
(1) a threatened action or pending action which is settled or
otherwise disposed of, or
33
36
(2) any claim, issue, or matter as to which such person is adjudged
to be liable to the corporation unless and only to the extent
that the court in which such action was brought, or if no action
was brought, any court of competent jurisdiction, determines upon
application that, in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for
such portion of the settlement amount and expenses as the court
deems proper.
Section 723 provides that a New York corporation is required to
indemnify a person who has been successful, on the merits or otherwise, in the
defense of an action described in Section 722.
Section 721 provides that indemnification provided for by Section 722
shall not be deemed exclusive of any other rights to which the indemnified party
may be entitled, whether contained in the certificate of incorporation or the
by-laws or, when authorized by such certificate of incorporation or by-laws,
(i)(a) a resolution of shareholders,
(ii)(b) a resolution of directors, or
(iii)(c) an agreement providing for such indemnification, provided that no
indemnification may be made to or on behalf of any director or
officer if a judgment or other final adjudication adverse to the
director or officer establishes that such person's acts were
committed in bad faith or were the result of active and
deliberate dishonesty and were material to the cause of action so
adjudicated.
The Company'sAndrea's Certificate of Incorporation provides that the personal
liability of the directors of the CompanyAndrea is eliminated to the fullest extent
permitted by Section 402(b) of the Business Corporation Law of the State of New
York. In addition, the By-Laws of the CompanyAndrea provide in substance that, to the
fullest extent permitted by New York law, each director and officer shall be
indemnified by the CompanyAndrea against reasonable expenses, including attorneys' fees,
and any liabilities which such officer may incur in connection with any action
to which such officer may be made a party by reason of being or having been a
director or officer of the Company.Andrea. The indemnification provided by the Company'sAndrea's By-Laws
is not deemed exclusive of or in any way to limit any other rights which any
person seeking indemnification may be entitled.
ItemITEM 16. Exhibits.EXHIBITS.
A. Exhibits
Exhibit
Number Description
- ------- -----------
3.1* Certificate of Amendment to the Certificate of Incorporation of
the Registrant.
4.1* Securities Purchase Agreement, dated October 5, 2000 by and
between HFTP Investment L.L.C. and the Registrant.
4.2* Registration Rights Agreement, dated October 5, 2000 by and
between HFTP Investment L.L.C. and the Registrant.
5.1 Opinion of Counsel
Removed Exhibits 13.1-5 (Form 10-K, 10-Q's, 8-K's)
23.1 Consent of Arthur Andersen LLPIndependent Public Accountants
34
37
23.2 Consent of Counsel (contained in Exhibit 5.1)
24.1 Power of Attorney relating to subsequent amendments (contained
in a signature page)
- ---------------------------------------------
* Incorporated by reference to the Registrant's Current Reportregistrant's current report on Form 8-K,
dated October 12, 2000.
B. Financial StatementsFINANCIAL STATEMENTS & SchedulesSCHEDULES
All schedules for which provision is made in Regulation S-X of the
Securities and Exchange Commission either are not required under the related
instructions or the information required to be included therein has been
included in the financial statements of the Company.
ItemAndrea.
ITEM 17. Undertakings.UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b), if, in the aggregate,
the changes in volume and price represent no more than 20
percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement; provided,
however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the information required to be included in a
post-effective amendment by those paragraphs is contained
in periodic reports filed with or furnished to the
Securities and Exchange Commission by the registrant
pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in
this registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and
the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
35
38
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of the registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person
of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy
as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
(d) The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.36
39
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, State of New York on the 5th10th day of
December, 2000.September, 2001.
ANDREA ELECTRONICS CORPORATION
By: /s/ John N. Andrea
--------------------------------------
John N. Andrea
Co-Chairman and Co-Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below under "SIGNATURES" constitutes and appoints, John N. Andrea, Douglas J.
Andrea, Christopher P. Sauvigne and Patrick D. Pilch,Richard A. Maue, his true and lawful
attorneys-in-fact and agents, each acting alone, with full powers of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this registration
statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
By: /s/ Christopher P. Sauvigne
-------------------------------------
Christopher P. Sauvigne
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
/s/ John N. Andrea Co-Chairman, Co-Chief
- --------------------------- Executive Officer and Director December 5, 2000
John N. Andrea
/s/ Douglas J. Andrea Co-Chairman, Co-Chief
- --------------------------- Executive Officer and Director December 5, 2000
Douglas J. Andrea
/s/ Christopher P. Sauvigne President and Chief Operating
- --------------------------- Officer and Director December 5, 2000
Christopher P. Sauvigne
/s/ Richard A. Maue Chief Financial Officer and
- --------------------------- Corporate Secretary December 5, 2000
Richard A. Maue
/s/ Gary A. Jones Director December 5, 2000
- --------------------------/s/ Christopher P. Sauvigne President, Chief Executive
- ------------------------------ Officer and Director September 10, 2001
Christopher P. Sauvigne
/s/ Richard A. Maue Executive Vice President,
- ------------------------------ Chief Financial Officer,
Richard A. Maue Secretary and Chief
Accounting Officer September 10, 2001
/s/ Douglas J. Andrea Chairman of the Board September 10, 2001
- ------------------------------
Douglas J. Andrea
/s/ John N. Andrea Director September 10, 2001
- -------------------------------
John N. Andrea
/s/ Gary A. Jones Director September 10, 2001
- -------------------------------
Gary A. Jones
/s/ Paul M. Morris Director December 5, 2000
- -------------------------- Paul M. Morris
Director September 10, 2001
- -------------------------------
Paul M. Morris
37
40
/s/ Jack Lahav Director September 10, 2001
- -------------------------
Jack Lahav
/s/ John Larkin Director September 10, 2001
- -------------------------
John Larkin
38
43
EXHIBIT INDEX
(Pursuant to Item(PURSUANT TO ITEM 601 of RegulationOF REGULATION S-K)
Exhibit
Number Description
- ------ -----------
3.1* Certificate of Amendment to the Certificate of Incorporation of the
Registrant.
4.1* Securities Purchase Agreement,securities purchase agreement, dated October 5, 2000 by and between
HFTP Investment L.L.C. and the Registrant.
4.2* Registration Rights Agreement, dated October 5, 2000 by and between
HFTP Investment L.L.C. and the Registrant.
5.1 Opinion of Counsel
23.323.1 Consent of Arthur Andersen LLP
23.4Independent Public Accountants
23.2 Consent of Counsel (contained in Exhibit 5.1)
24.1 Power of Attorney relating to subsequent amendments (contained in a
signature page)
- ---------------------------------------
* Incorporated by reference to the registrant's current report on Form 8-K,
dated October 12, 2000.
39