SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
FILED BY THE REGISTRANT [X]
FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]
CHECK THE APPROPRIATE BOX:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
ANDREA ELECTRONICS CORPORATION
------------------------------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
N/A
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(NAME OF PERSON(S) FILING PROXY STATEMENT)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on
which the filing fee is calculated and state how it was
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5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing for which the offsetting fee was paid previously.
Identify the previous filing by registration statement number, or the Form or
Schedule and the date of its filing.
1) Amount Previously Paid:
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<PAGE>
ANDREA ELECTRONICS CORPORATION
45 Melville Park Road
Melville, New York 11747
-----------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 24, 1999
-----------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of
ANDREA ELECTRONICS CORPORATION ("Company") will be held at the Hotel
Intercontinental, 111 East 48th Street, New York, New York 10017, on Thursday,
June 24, 1999 at 9:00 A.M. local time, for the following purposes:
1. To elect ten directors to hold office until the next Annual Meeting of
Shareholders and until their respective successors have been duly elected and
qualified;
2. To authorize an amendment to the Andrea Electronics Corporation 1998 Stock
Plan, to increase the number of shares of the Company's common stock issuable
thereunder to 3,000,000 shares from 2,000,000 shares;
3. To ratify the selection of Arthur Andersen LLP as the Company's independent
accountants for the year ending December 31, 1999; and
4. To transact such other business as may properly come before the meeting
and any adjournment thereof.
The transfer books will not be closed for the Annual Meeting. Only
shareholders of record at the close of business on May 7, 1999 will be
entitled to notice of, and to vote at, the meeting and any adjournments
thereof. Our 1998 Annual Report, which is not a part of the proxy soliciting
material, is enclosed.
YOU ARE URGED TO READ THE ATTACHED PROXY STATEMENT, WHICH CONTAINS
INFORMATION RELEVANT TO THE ACTIONS TO BE TAKEN AT THE MEETING. IN ORDER TO
ASSURE THE PRESENCE OF A QUORUM, WHETHER OR NOT YOU EXPECT TO ATTEND THE
MEETING IN PERSON, PLEASE SIGN AND DATE THE ACCOMPANYING PROXY CARD AND MAIL
IT PROMPTLY IN THE ENCLOSED ADDRESSED, POSTAGE PREPAID ENVELOPE. YOU MAY
REVOKE YOUR PROXY IF YOU SO DESIRE AT ANY TIME BEFORE IT IS VOTED.
By Order of the Board of Directors
Richard A. Maue
Secretary
Melville, New York
April 30, 1999
<PAGE>
ANDREA ELECTRONICS CORPORATION
-----------------
PROXY STATEMENT
-----------------
GENERAL INFORMATION
ANNUAL MEETING
This Proxy Statement and the enclosed form of proxy are furnished in
connection with solicitation of proxies by the Board of Directors of Andrea
Electronics Corporation ("Company") to be used at the Annual Meeting of
Shareholders of the Company to be held on June 24, 1999 and any adjournment or
adjournments thereof ("Annual Meeting"). The matters to be considered at the
meeting are set forth in the attached Notice of Meeting.
The Company's executive offices are located at 45 Melville Park Road,
Melville, New York 11747. On or about May 14, 1999, this Proxy Statement, the
enclosed form of proxy and the Company's Annual Report to Shareholders for the
fiscal year ended December 31, 1998, which contains audited financial
statements, are to be mailed to shareholders of record as of the close of
business on May 7, 1999. The Company will furnish to any shareholder copies of
any exhibits listed in the Form 10-K contained in the Annual Report upon such
shareholder's request and payment of a fee not exceeding the reasonable
expenses of furnishing such copies.
SOLICITATION AND REVOCATION
Proxies in the form enclosed are solicited by and on behalf of the
Board of Directors. The persons named in the proxy have been designated as
proxies by the Board of Directors. Any proxy given pursuant to such
solicitation and received in time for the Annual Meeting will be voted as
specified in such proxy. If no instructions are given, proxies will be voted
"FOR" the election of the nominees listed below under the caption "Election Of
Directors", "FOR" the amendment to the Andrea Electronics Corporation 1998
Stock Plan (the "1998 Plan") under which the issuable number of shares of the
Company's common stock would be increased to 3,000,000 shares from 2,000,000
shares, "FOR" the selection of Arthur Andersen LLP to serve as the Company's
independent accountants for the year ending December 31, 1999, and, in the
discretion of the proxies named on the proxy card, with respect to any other
matters properly brought before the meeting and any adjournments thereof. In
the unanticipated event that any other matters are properly presented at the
Annual Meeting for action, the persons named in the proxy will vote the
proxies in accordance with their best judgment. Any proxy given pursuant to
this solicitation may be revoked by the shareholder at any time before it is
exercised by written notification delivered to the Secretary of the Company,
by voting in person at the Annual Meeting, or by delivering another proxy
bearing a later date. Attendance by a shareholder at the Annual Meeting does
not alone serve to revoke his or her proxy.
REQUIRED VOTE
The presence, in person or by proxy, of the holders of a majority of
the shares entitled to vote at the Annual Meeting is necessary to constitute a
quorum. Abstentions and broker "non-votes" are counted as present and entitled
to vote for purposes of determining a quorum. A broker "non-vote" occurs when
a nominee holding shares for a beneficial owner does not vote on a particular
proposal because the nominee does not have discretionary voting power for that
particular item and has not received instructions from the beneficial owner. A
plurality of the votes cast is required for the election of Directors.
Abstentions and broker "non-votes" are not counted for purposes of the
election of Directors. The affirmative vote of a majority of the votes cast is
required to approve the amendment to the 1998 Plan and the appointment of
Arthur Andersen LLP, with abstentions and broker "non-votes" not counted as
votes cast for purposes of these two proposals.
RECORD DATE; OUTSTANDING SHARES
The Board of Directors has fixed the close of business on May 7, 1999
as the record date for the determination of shareholders of the Company who
are entitled to receive notice of, and to vote at, the Annual Meeting. At the
close of business on April 16, 1999, an aggregate of 13,210,038 shares of
Common Stock were issued and outstanding, each of which is entitled to one
vote on each matter to be voted upon at the Annual Meeting. The Company's
shareholders do not have cumulative voting rights. The Company has no other
class of voting securities entitled to vote at the Annual Meeting.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 16,
1999 with respect to the stock ownership of (i) those persons or groups who
beneficially own more than 5% of the Company's Common Stock, (ii) each
director and director-nominee of the Company, (iii) each executive officer
named in the Summary Compensation Table and (iv) all directors and executive
officers of the Company as a group. The total number of shares of Common Stock
outstanding on April 16, 1999 was 13,210,038.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP PERCENT OF
NAME OF BENEFICIAL OWNER (1) CLASS
------------------------------------- ------------------------ ------------
<S> <C> <C>
Camille Andrea Casling (2) 758,062 5.7%
Frank A. D. Andrea, Jr.(2) 540,800 (3) 4.1%
ANC-I Limited Partnership(2) 360,000 2.7%
Douglas J. Andrea (2) 413,588 (4) 3.1%
John N. Andrea (2) 264,742 (5) 2.0%
Christopher P. Sauvigne 5,000 (6) *
Patrick D. Pilch 69,900 (7) *
Paul M. Morris 7,250 (8) *
Christopher Dorney 16,250 (9) *
Scott Koondel 16,250 (9) *
Gary A. Jones 82,350 (10) *
Jack Lahav - -
John Larkin - -
Directors and Executive Officers as a
group (11 persons) 1,416,130 (11) 10.0%
*Less than 1%
</TABLE>
(1) Beneficial ownership is determined in accordance with Rule 13d-3
promulgated under the Securities Exchange Act of 1934. The information
concerning the shareholders is based upon information furnished to the Company
by such shareholders. Except as otherwise indicated, all of the shares next to
each identified person or group are owned of record and beneficially by such
person or each person within such group and such persons have sole voting and
investment power with respect thereto.
(2) Camille Andrea Casling is a sister of Frank A.D. Andrea, Jr., Chairman
Emeritus of the Company. Mary Louise Andrea is the spouse of Frank A.D.
Andrea, Jr. Douglas J. Andrea and John N. Andrea, Co-Chairman and Co-Chief
Executive Officers, are the sons of Frank A.D. Andrea, Jr. and Mary Louise
Andrea. ANC-I Limited Partnership is a Delaware limited partnership, of which
the General Partners are Frank A. D. Andrea, Jr. and Mary Louise Andrea. John
N. Andrea and Douglas J. Andrea are limited partners of this partnership. The
address of each of these individuals and the ANC-I Limited Partnership is c/o
Andrea Electronics Corporation, 45 Melville Park Road, Melville, New York
11747.
(3) Includes (i) 148,086 shares owned directly by Frank A.D. Andrea, Jr. and
Mary Louise Andrea, his spouse, (ii) 67,714 shares owned by a son of Mr. and
Mrs. Andrea, beneficial ownership of which is disclaimed by Mr. and Mrs.
Andrea, (iii) 300,000 of the 360,000 shares owned by ANC-I Limited
Partnership, representing Mr. Andrea's 41.67% and Mrs. Andrea's 41.67%
interest in ANC-I Limited Partnership, and (iv) 25,000 shares issuable upon
the exercise of options which are currently exercisable and exercisable within
60 days from the date hereof. Does not include 75,000 shares issuable upon
exercise of options that are not currently exercisable or exercisable within
60 days from the date hereof.
(4) Includes (i) 39,088 shares owned directly by Douglas J. Andrea and Mr.
Andrea's spouse, (ii) 12,000 of the 360,000 shares owned by ANC-I Limited
Partnership, representing Mr. Andrea's 3.3% interest in ANC-I Limited
Partnership, and (iii) 362,500 shares issuable upon the exercise of options
which are currently exercisable and exercisable within 60 days from the date
hereof. Does not include 287,500 shares issuable upon exercise of options that
are not currently exercisable or exercisable within 60 days from the date
hereof.
(5) Includes (i) 438 shares owned directly by John N. Andrea and Mr. Andrea's
spouse, (ii) 39,804 shares owned by Mr. Andrea's minor children, (iii) 12,000
of the 360,000 shares owned by ANC-I Limited Partnership, representing Mr.
Andrea's 3.3% interest in ANC-I Limited Partnership, and (iv) 212,500 shares
issuable upon the exercise of options which are currently exercisable and
exercisable within 60 days from the date hereof. Does not include 287,500
shares issuable upon exercise of options that are not currently exercisable or
exercisable within 60 days from the date hereof.
(6) Includes 5,000 shares owned directly by Christopher P. Sauvigne. Does not
include 325,000 shares issuable upon the exercise of options that are not
currently exercisable or exercisable within 60 days from the date hereof.
(7) Includes (i) 1,150 shares owned by Mr. Pilch's minor children and (ii)
68,750 shares issuable upon the exercise of options that are currently
exercisable and exercisable within 60 days from the date hereof. Does not
include 156,250 shares issuable upon exercise of options that are not
currently exercisable or exercisable within 60 days from the date hereof.
(8) Includes (i) 1,000 shares owned directly by Mr. Morris, and (ii) 6,250
shares issuable upon the exercise of options which are currently exercisable
and exercisable within 60 days from the date hereof. Does not include 18,750
shares issuable upon exercise of options that are not currently exercisable or
exercisable within 60 days from the date hereof.
(9) Includes 16,250 shares issuable upon the exercise of options that are
currently exercisable and exercisable within 60 days from the date hereof.
Does not include 18,750 shares issuable upon exercise of options that are not
currently exercisable or exercisable within 60 days from the date hereof.
(10) Includes (i) 4,600 shares owned directly by Mr. Jones, and (ii) 77,750
shares issuable upon the exercise of options which are currently exercisable
and exercisable within 60 days from the date hereof. Does not include 51,250
shares issuable upon exercise of options that are not currently exercisable or
exercisable within 60 days from the date hereof.
(11) Includes the shares directly owned and the shares issuable upon the
exercise of the options, which are currently exercisable and exercisable
within 60 days from the date hereof, discussed in notes (3) through (10)
above.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and officers and persons who beneficially own
more than ten percent of the Company's Common Stock to file with the
Securities and Exchange Commission ("SEC") and the American Stock Exchange
initial reports of ownership and reports of changes in ownership of Common
Stock in the Company. Officers, directors and greater-than-ten percent
shareholders are also required to furnish the Company with copies of all
Section 16(a) reports they file. To the Company's knowledge, based solely on
review of the copies of such reports furnished to the Company and written
representation that no other reports were required, during the fiscal year
ended December 31, 1998, the Company's directors and officers met all
applicable SEC filing requirements, except that Frank A. D. Andrea Jr. filed
late one report on Form 4 covering a sale of Common Stock.
<PAGE>
PROPOSAL ONE:
ELECTION OF DIRECTORS
The By-laws of the Company provide that the Board of Directors shall
determine the number of directors. The Board has determined that the number of
directors to be elected at the annual meeting shall be ten. The persons listed
below have been designated by the Board as candidates for election as
directors to serve until the next annual meeting of shareholders and until
their respective successors have been elected and qualified. Such persons
include the Co-Chief Executive Officers and the Chief Financial Officer of the
Company. Unless otherwise specified in the form of proxy, the proxies
solicited by management will be voted "FOR" the election of these candidates.
The election of directors requires a plurality of those shares voted at the
meeting with respect to the election of directors. The nominees receiving the
highest vote totals will be elected as the directors of the Company.
Accordingly, abstentions and broker "non-votes" will not affect the outcome of
the election of directors of the Company. In case any of these nominees
become unavailable for election to the Board of Directors, an event which is
not anticipated, the persons named as proxies, or their substitutes, shall
have full discretion and authority to vote or refrain from voting for any
other nominee in accordance with their judgment.
INFORMATION ABOUT NOMINEES
Frank A.D. Andrea, Jr., age 72, has been Chairman Emeritus of the
Board since November 1998 and a Director of the Company since 1962. He served
as Chairman of the Board and Chief Executive Officer of the Company from
December 1965 to November 1998 and as President of the Company from December
1965 to November 1992. Mr. Andrea is the father of Douglas J. Andrea and John
N. Andrea.
John N. Andrea, age 41, has been Co-Chairman and Co-Chief Executive
Officer since November 1998 and a Director of the Company since 1992. He
served as Co-President of the Company from November 1992 to November 1998, as
Executive Vice President of the Company from January 1992 to November 1992,
and as Sales & Marketing Director from September 1991 to November 1992. Mr.
Andrea is the son of Frank A.D. Andrea, Jr. and the brother of Douglas J.
Andrea.
Douglas J. Andrea, age 36, has been Co-Chairman and Co-Chief
Executive Officer since November 1998 and a Director of the Company since
1991. He served as Co-President of the Company from November 1992 to November
1998, as Vice President - Engineering of the Company from December 1991 to
November 1992, and as Secretary of the Company from 1989 to January 1993. Mr.
Andrea is the son of Frank A.D. Andrea, Jr. and the brother of John N. Andrea.
Patrick D. Pilch, age 39, has been Executive Vice President and Chief
Financial Officer of the Company since April 1995 and a Director of the
Company since 1992. He served as Vice President - Investment Banking at
Greenwich Capital Markets, Inc. from November 1991 to April 1995, and is a
Certified Public Accountant.
Christopher Dorney, age 56, has been a Director of the Company since
April 1995. He has been President of Andrea Military Communications, LLC, a
subsidiary of the Company since 1996. From September 1994 until April 1995, he
served as President of the Pulse Laser Division of Holographics, Inc. He
served as Director of Business Development at Grumman Corporation's Electronic
System Division from January 1989 to September 1994.
Gary A. Jones, age 53, has been a Director of the Company since April
1996. He has served as President of Digital Technologies, Inc. since 1994 and
was Chief Engineer, Allied Signal Ocean Systems from 1987 to 1994. In March
1998, Mr. Jones became Managing Director of Andrea Digital Technologies, Inc.
Scott Koondel, age 35, has been a Director of the Company since April
1995. He has been the Eastern Manager, Off-Network Television, Paramount
Pictures, a subsidiary of Viacom International since June 1993, and was the
National Sales Manager for WPIX-TV, a division of Tribune Broadcasting, from
June 1990 to June 1993.
<PAGE>
Jack Lahav, age 51, has been a Director of the Company since November
1998. He co-founded Lamar Signal Processing Ltd., a subsidiary of the Company
that was acquired in May 1998. Since August 1996, he has been the President of
Advanced Technology Inc., a manufacturer of robotic routing equipment used in
manufacturing printed circuit boards for advanced semiconductors, and from
1990 to 1996, was a Director of Vocaltec Communications Ltd., an Israeli
internet telephony software company. In 1980, he founded Remarkable Products,
Inc., a direct mail company, and served as its President until the company was
sold by him in 1993.
John R. Larkin, age 55, has been a Managing Director of
Shields/Alliance, a division of Alliance Capital Management LP, a global asset
management company, since 1994. He joined Shields Asset Management Inc., the
predecessor of Shields/Alliance, in 1986 and held various positions at that
company, the last of which was Managing Director, until that company was sold
by Xerox Corporation to Alliance Capital Management in 1994. Prior to 1986,
Mr. Larkin was a Principal of Smilen & Safian Inc., a New York-based economic
consulting firm, and a Director and Member of the Investment Committee of the
Sector Investment Fund, a publicly held mutual fund. Mr. Larkin has over 25
years experience in the investment management community in both investment
and marketing capacities.
Paul M. Morris, age 37, has been a Director of the Company since
1992. He has been a Senior Managing Director at Schroder Capital Management
since December 1996. From July 1995 to December 1996, he was a Partner at
Weiss, Peck & Greer, and from 1987 to June 1995 he was employed by Union Bank
of Switzerland, where his last position was Managing Director - Equities.
DIRECTORS' FEES, BOARD MEETINGS AND COMMITTEES
The Board is served by an Audit Committee and a Compensation
Committee. The Audit Committee is comprised of Douglas J. Andrea, Paul M.
Morris, Christopher Dorney and Scott Koondel. The Audit Committee meets with
management and Company financial personnel, as well as with the Company's
independent accountants, to consider the adequacy of the internal controls of
the Company and the objectivity of the Company's financial reporting. The
Audit Committee met one time during 1998. The Compensation Committee is
comprised of Paul M. Morris, Scott Koondel and Christopher Dorney. The
Compensation Committee administers the Company's stock option plans and makes
recommendations to the Board of Directors with respect to the compensation of
management. The Compensation Committee met two times in 1998. The Board of
Directors held sixteen meetings during 1998. In fiscal 1998, each of the
Company's Directors attended at least 75% of such meetings. During 1998, Paul
M. Morris, Scott Koondel and Christopher Dorney were each paid directors' fees
in the amount of $4,000 and Gary A. Jones was paid directors' fees in the
amount of $3,000. The Board does not have a nominating committee or a
committee performing similar functions.
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information for the last three fiscal
years relating to compensation earned by the Co-Chief Executive Officers and
the other most highly compensated executive officers who received salary and
bonuses over $100,000 during the year ended December 31, 1998.
<TABLE>
<CAPTION>
STOCK OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) (#)
------------------------------------------ ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Frank A.D. Andrea, Jr., Chairman Emeritus 1998 (1) 160,000 4,247 -
1997 170,766 6,446 100,000
1996 167,480 3,160 -
John N. Andrea, Co-Chairman and Co-Chief
Executive Officer 1998 200,000 153,846 150,000
1997 175,000 75,000 150,000
1996 175,000 27,885 -
Douglas J. Andrea, Co-Chairman and
Co-Chief Executive Officer 1998 200,000 153,846 150,000
1997 175,000 79,000 150,000
1996 175,000 32,885 -
Christopher P. Sauvigne, President and
Chief Operating Officer 1998 (2) 19,230 16,849 250,000
Patrick D. Pilch, Executive Vice President
and Chief Financial Officer 1998 175,000 153,365 75,000
1997 152,503 50,000 100,000
1996 130,000 27,500 -
</TABLE>
(1) Frank A. D. Andrea, Jr. retired as Chief Executive Officer of the Company
on November 20, 1998.
(2) Mr. Sauvigne, age 39, joined the Company on November 20, 1998. From 1982
until joining the Company, Mr. Sauvigne was employed by Arthur Andersen LLP,
where he served in various capacities, the last of which was as Partner. See
"Employment Agreements and Change in Control Arrangements" for information
regarding Mr. Sauvigne's employment agreement with the Company.
The Company granted stock options covering an aggregate of 625,000
shares of Common Stock during fiscal year 1998 to the named executive officers
as indicated in the above table.
<PAGE>
The following table summarizes for each of the named executive
officers the number of shares covered by options granted during 1998, the
percent of total options granted to employees of the Company in 1998, the
exercise price of such options, the expiration date, and the potential
realizable value of such options assuming appreciation rates of 5% and 10% per
year through the expiration date of such options.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual rates of
Individual Grants Stock Price
Appreciation for
Option Term
---------------------------------------------------------------- ------------------------
Number of Percentage of
securities total options
underlying granted to Exercise
Date of options employees in price Expiration
Name grant granted (#) fiscal year ($/share) Date 5% (1) 10% (1)
- --------------------- --------- ------------ -------------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
John N. Andrea 3/3/98 50,000 3% $14.625 3/3/08 $459,879 $1,165,424
6/8/98 100,000 6% $14.125 6/8/08 $888,314 $2,251,161
Douglas J. Andrea 3/3/98 50,000 3% $14.625 3/3/08 $459,879 $1,165,424
6/8/98 100,000 6% $14.125 6/8/08 $888,314 $2,251,161
Christopher P. Sauvigne 11/20/98 250,000 15% $8.875 11/20/08 $1,395,360 $3,536,116
Patrick D. Pilch 3/3/98 25,000 2% $14.625 3/3/08 $229,940 $582,712
6/8/98 50,000 3% $14.125 6/8/08 $444,157 $1,125,581
</TABLE>
(1) The dollar amounts represent certain assumed rates of appreciation. Actual
gains, if any, on stock option exercises and common stock holdings are
dependent upon future performance of the Company's common stock and overall
stock market conditions. There can be no assurance that the amounts reflected
in this table will be realized.
The following table summarizes for each of the named executive
officers the number of shares acquired and value realized upon exercise of
options during fiscal 1998 and the aggregate dollar value of in-the-money,
unexercised options at December 31, 1998. None of the named executive officers
exercised or held any SARs during the year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities
Underlying Value of Unexercisable
Unexercised Options In-the-Money Options at
Shares at Fiscal Year End Fiscal Year End -
Acquired - Exercisable/ Exercisable/
Name on Exercise Value Realized Unexercisable Unexercisable(1)
- ------------------------- ------------ --------------- --------------------- -------------------------
<S> <C> <C> <C> <C>
Frank A. D. Andrea Jr. - $ - (2) 25,000 / 75,000 (2)(7) $ - / $ -
John N. Andrea 125,000 $ 1,999,375 (3) 137,500 / 262,500 (3)(7) $ 556,250 / $ 506,250
Douglas J. Andrea 50,000 $ 706,875 (4) 287,500 / 262,500 (4)(7) $ 1,935,500 / $ 506,250
Christopher P. Sauvigne - $ - - / 250,000 (5)(7) $ - / $ 250,000
Patrick D. Pilch 75,000 $ 853,125 (6) 25,000 / 150,000 (6)(7) $ 112,500 / $ 337,500
</TABLE>
(1) Values were based on a closing trade price for the Company's Common Stock
on December 31, 1998 of $9.875 per share.
(2) Frank A. D. Andrea was granted options to purchase 100,000 shares at a
price of $16.75 per share on August 28, 1997. Value realized does not include
approximately $1.3 million realized from the sale of shares in 1998 that were
acquired pursuant to the exercise of options in prior years.
(3) John N. Andrea was granted options to purchase: 300,000 shares at $.675
per share on June 26, 1992 (the remaining 125,000 shares of which were
purchased during 1998); 100,000 shares at a price of $6.00 per share on
September 12, 1994; 150,000 shares at a price of $5.375 per share on April 1,
1997; 50,000 shares at a price of $14.625 per share on March 3, 1998; and
100,000 shares at a price of $14.125 per share on June 8, 1998.
(4) Douglas J. Andrea was granted options to purchase: 300,000 shares at $.675
per share on June 26, 1992 (of which 50,000 shares were purchased during
1998); 100,000 shares at a price of $6.00 per share on September 12, 1994;
150,000 shares at a price of $5.375 per share on April 1, 1997; 50,000 shares
at a price of $14.625 per share on March 3, 1998; and 100,000 shares at a
price of $14.125 per share on June 8, 1998.
(5) Christopher P. Sauvigne was granted options to purchase 250,000 shares at
$8.875 per share on November 20, 1998.
(6) Patrick D. Pilch was granted options to purchase: 100,000 shares at a
price of $6.00 per share on September 12, 1994 (the remaining 75,000 shares of
which were purchased in 1998); 100,000 shares at a price of $5.375 per share
on April 1, 1997; 25,000 shares at a price of $14.625 per share on March 3,
1998; and 50,000 shares at a price of $14.125 per share on June 8, 1998
(7) Of the shares covered by each option granted, none can be purchased during
the first year following the grant; 25% can be purchased after the first
anniversary of the grant; an additional 25% can be purchased after the second
anniversary of the grant; and the remaining 50% can be purchased after the
third anniversary.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
The Company has entered into three-year employment agreements that
commenced on January 1, 1998 with each of John N. Andrea, Douglas J. Andrea,
and Patrick D. Pilch. Under these agreements, the annual base salaries of John
N. Andrea, Douglas J. Andrea and Patrick D. Pilch are $200,000, $200,000 and
$175,000, respectively, and each agreement provides for additional short-term
incentive compensation in the form of annual cash bonuses based on the
achievement of performance goals and long-term incentive compensation in the
form of cash or equity-based awards. Performance goals, measures and annual
awards will be determined by the Compensation Committee and approved by the
Board. Under each agreement, on the occurrence of a Change in Control (as
defined in each agreement), the Company shall pay the executive, or in the
event of his subsequent death, his beneficiary or beneficiaries, or his
estate, as the case may be, a sum equal to the greater of the payments due for
the remaining term of the agreement or three times the executive's average
annual total compensation for the five preceding taxable years. In addition,
on the occurrence of a Change in Control, all restrictions on any restricted
stock then held by the executive will lapse immediately, incentive stock
options and stock appreciation rights then held by the executive will become
immediately exercisable, and any performance shares or units then held by the
executive will vest immediately in full, and the executive will be entitled to
receive benefits due him under or contributed by the Company on his behalf
pursuant to any retirement, incentive, profit sharing, bonus, performance,
disability or other employee benefit plan maintained by the Company on the
executive's behalf to the extent such benefits are not otherwise paid to the
executive under a separate provision of the agreement. If, during the term of
each employment agreement, the Company terminates the executive's employment
other than for Cause (as defined in each agreement), or the executive resigns
for Good Reason (as defined in each agreement), the Company shall pay to the
executive the product of (A) a sum equal to (i) the amount of the remaining
salary payments that the executive would have earned if he continued his
employment with the Company during the remaining unexpired term of his
employment agreement at his base salary at the date of termination, (ii) the
average of the amount of bonus and any other compensation paid to the
executive during the term of his employment agreement times the remaining
number of years of the agreement and any fraction thereof and (iii) an amount
equal to the average of the annual contributions that were made on the
executive's behalf to any employee benefit plans of the Company during the
term of the agreement, multiplied by (B) the remaining number of years of the
agreement and any fraction thereof.
The Company entered into an employment agreement with Christopher P.
Sauvigne, as President and Chief Operating Officer of the Company, that
commenced on November 20, 1998 and expires on December 31, 2001. The agreement
provides an annual base salary of not less than the greater of (i) $200,000
per annum and (ii) the higher of the base salaries of the Co-Chief Executive
Officers of the Company, plus additional short-term incentive compensation in
the form of annual cash bonuses, based on the achievement of performance goals
and which shall not be less than $150,000 per annum, and long-term incentive
compensation in the form of cash or equity-based awards. Under the agreement,
on the occurrence of a Change in Control (as defined), the Company shall pay
Mr. Sauvigne, or in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, a sum equal to the greater
of the payments due for the remaining term of the agreement or five times Mr.
Sauvigne's average annual total compensation for the five preceding taxable
years, or if his employment by the Company is then less than five years, Mr.
Sauvigne's average annual compensation during his employment by the Company.
In addition, on the occurrence of a Change in Control, all restrictions on any
restricted stock then held by Mr. Sauvigne will lapse immediately, incentive
stock options and stock appreciation rights then held will become immediately
exercisable, and any performance shares or units then held will vest
immediately in full, and Mr. Sauvigne will be entitled to receive benefits due
him under or contributed by the Company on his behalf pursuant to any
retirement, incentive, profit sharing, bonus, performance, disability or other
employee benefit plan maintained by the Company on his behalf to the extent
such benefits are not otherwise paid to him under a separate provision of the
agreement. If, during the term of the agreement, the Company terminates
Mr. Sauvigne's employment other than for Cause (as defined), or Mr. Sauvigne
resigns for Good Reason (as defined), the Company shall pay to him the product
of (A) a sum equal to (i) the amount of the remaining salary payments that he
would have earned if he continued his employment with the Company during the
remaining unexpired term of his employment agreement at his base salary at the
date of termination, (ii) the highest amount of bonus and any other
compensation paid to the executive, in any year, during the term of his
employment agreement times the remaining number of years of the agreement and
any fraction thereof and (iii) an amount equal to the highest amount of annual
contributions that were made on Mr. Sauvigne's behalf, in any year, to any
employee benefit plans of the Company during the term of the agreement,
multiplied by (B) the remaining number of years of the agreement and any
fraction thereof.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In 1996, the Company formed Andrea Military Communications, LLC
("AMC"), a Delaware limited liability company, in which the Company has a
72.7% equity interest. The purpose of AMC is to market Andrea Anti-Noise
technology for military applications. Among the members of AMC is RJC
Associates-USA, Inc. ("RJC"), a corporation owned by Christopher Dorney, a
director of the Company. In exchange for RJC acting as a manager of AMC
through Mr. Dorney, RJC was granted a 13.6% equity interest in AMC. The
original purpose of AMC was to market Andrea Anti-Noise technology for
military applications, including collaboration with Northrop Grumman
Corporation relating to the qualification for military sales of headsets that
incorporate Andrea Anti-Noise technology. During the second half of 1997,
after various product qualification testing, Northrop Grumman indicated that
it would not proceed with the Company's headset for the program that was the
original subject of the agreement between the Company and Northrop Grumman
and submitted a purchase order to the Company for a very limited number of
headsets for a second program with which Northrop Grumman was involved. The
Company decided not to participate in this second program with Northrop
Grumman and, alternatively, intends to pursue future military business for
similar contracts independently. During 1998 the Company paid approximately
$105,000 to Mr. Dorney for certain consulting services.
During 1998 the Company paid approximately $144,000 to Digital
Technologies, Inc. ("DTI"), a software development company of which Gary A.
Jones, a director of the Company, is the President. Of this amount,
approximately 90% was for software development fees and approximately 10% was
for reimbursable expenses. The software developed for the Company by DTI
relates to the Company's digital signal processing program. The fee paid to
DTI was based on actual time spent by its employees on developing this
software. In March 1998, Mr. Jones became Managing Director of Andrea Digital
Technologies, Inc., a wholly-owned subsidiary of the Company.
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
One of the Company's directors and members of its Compensation
Committee, Christopher Dorney, owns RJC Associates-USA, Inc., a corporation
that has a 13.6% equity interest in Andrea Military Communications, LLC, a
Delaware limited liability company in which the Company has a 72.7% equity
interest and the business of which is the application of the Company's Andrea
Anti-Noise technology to military markets.
STOCK PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the
cumulative total shareholder return for the five years ended December 31, 1998
based upon the market price of the Company's Common Stock with the cumulative
total return on the AMEX Market Value Index and a defined peer group based on
companies in the SIC industry code index entitled "radio and television
communication equipment". The graph assumes a $100 investment on January 1,
1994 and the reinvestment of all dividends.
<TABLE>
<CAPTION>
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG
ANDREA ELECTRONICS CORPORATION, AMEX MARKET INDEX, AND SIC CODE INDEX
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Andrea Electronics Corporation 98.96 50.26 45.60 148.70 81.35
AMEX Market Index 88.33 113.86 120.15 144.57 142.61
SIC Code Industry Index 128.26 129.58 132.03 128.90 139.38
</TABLE>
<PAGE>
COMPENSATION COMMITTEE REPORT
For the year ended December 31, 1998, the majority of the
Compensation Committee of the Board of Directors for the Company was composed
of independent directors. Currently, the Compensation Committee is comprised
of Paul M. Morris, Scott Koondel and Christopher Dorney. The Compensation
Committee is responsible for establishing and monitoring compensation policies
of the Company, evaluating the performance of executives and establishing
salary rates and increases.
It is the policy of the Company to evaluate the performance of senior
management annually using subjective criteria established by the Committee.
Compensation increases are determined by the Committee based on annual
evaluations. In addition, the Committee supplements its criteria with
consultative studies of best compensation practices within the industry in
which the Company is engaged.
The Compensation Committee considerations include management skills,
long-term performance, shareholder returns, operating results, new product and
technological developments and introductions, asset-liability management, and
unusual accomplishments as well as economic conditions and other external
events that affect the operations of the Company. Compensation policies must
promote the attraction and retention of highly qualified executives and the
motivation of these executives for performance related to a financial interest
in the success of the Company and the enhancement of long-term shareholders'
value.
In addition to salaries, the Company's compensation plan includes the
awarding of stock options based on performance, length of service and salary
grades. The awards of stock options should provide increased motivation to
work for the success of the Company, thereby increasing the potential for
personal financial success. Options granted to executives and employees are at
a price equal to the closing price of the Company's stock on the date of
grant.
The Compensation Committee annually reviews and approves the
compensation of Douglas J. Andrea and John J. Andrea, the Co-Chief Executive
Officers of the Company. The Committee believes that the Co-Chief Executive
Officers are paid a reasonable salary, and the options granted to them are
consistent with corporate financial incentives provided to the other executive
officers of the Company. To the extent their performance translates into an
increase in the value of the Company's stock, all shareholders share the
benefits. The Committee believes that the Company continues to enhance its
position as a global provider of communications products for the emerging
natural language human/machine interface markets.
Compensation Committee
Paul M. Morris
Scott Koondel
Christopher Dorney
<PAGE>
PROPOSAL TWO:
APPROVAL AND AUTHORIZATION OF AN INCREASE
IN THE NUMBER OF SHARES SUBJECT TO THE
ANDREA ELECTRONICS CORPORATION 1998 STOCK PLAN
The Board of Directors of the Company believes that in order to
attract and retain employees and consultants of the highest caliber, provide
increased incentive for directors, officers and key employees and to continue
to promote the well-being of the Company, it is in the best interests of the
Company and its shareholders to provide directors, officers, key employees and
consultants of the Company and its subsidiaries, through the grant of stock
or stock- related incentive awards, the opportunity to participate in the
value and/or appreciation in value of the Company's common stock. As of March
31, 1999, options covering an aggregate of 1,717,000 shares of the Company's
common stock had been granted under the 1998 Plan with 283,000 shares
remaining for additional grants thereunder, and unexercised options covering
an aggregate of 1,725,500 shares remain outstanding under the Company's 1991
Performance Equity Plan with no further shares available for grant thereunder.
The Board of Directors has therefore approved an amendment to the 1998 Plan to
increase the number of shares of common stock available for grant under the
1998 Plan to 3,000,000 shares from 2,000,000 shares. No options have been
granted pursuant to the 1998 Plan to purchase any of the shares added to the
1998 Plan by this amendment. At the Annual Meeting, shareholders will be asked
to approve and authorize this amendment. The affirmative vote of a majority of
the votes cast by the shareholders is required for approval of the amendment,
with abstentions and broker "non-votes" not counted as votes cast.
The following discussion summarizes certain material provisions of
the 1998 Plan and is qualified in its entirety by reference to the text of the
1998 Plan, which is attached as Annex A to this Proxy Statement.
Summary of the 1998 Plan
Administration. The 1998 Plan is administered, at the discretion of
the Board of Directors of the Company, by its Compensation Committee (in such
capacity, the "Administrator"). The Administrator has full authority, subject
to the provisions of the 1998 Plan, to award (i) Stock Options, (ii) Stock
Purchase Rights and/or (iii) other stock-based awards (collectively "Awards").
Subject to the provisions of the 1998 Plan, the Administrator determines,
among other things, the persons to whom from time to time Awards may be
granted ("Holders" or "Participants"), the specific type of Awards to be
granted, the number of shares subject to each Award, share prices, any
restrictions or limitations on such Awards, and any vesting, exchange,
deferral, surrender, cancellation, acceleration, termination, exercise or
forfeiture provisions related to such Awards. The interpretation and
construction by the Administrator of any provisions of, and the determination
by the Administrator of any questions arising under, the 1998 Plan or any rule
or regulation established by the Administrator pursuant to the 1998 Plan are
final, conclusive and binding on all persons interested in the 1998 Plan.
Awards under the 1998 Plan are evidenced by agreements ("Agreements").
In the event of a merger or sale of substantially all of the assets
of the Company, each outstanding Award shall be assumed or an equivalent award
substituted by the successor corporation, unless full and immediate vesting is
otherwise provided in the Agreement covering that award or in the employment
agreement of the Holder. In the event that a successor corporation refuses to
assume or substitute for Awards, Holders shall fully vest in and have the
right to exercise such Awards as to all shares of Common Stock issuable
thereunder, including shares which would not otherwise be vested or
exercisable.
In order to prevent the dilution or enlargement of the rights of
Holders under the 1998 Plan, the number of shares of Common Stock covered by
each outstanding Stock Option and Stock Purchase Right, and the number of
shares of Common Stock authorized by the 1998 Plan is subject to adjustment by
the Board in the event of any increase or decrease in the number of shares of
outstanding Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company. The shares of Common
Stock acquirable pursuant to the Awards are made available from authorized and
unissued shares of Common Stock. If any unexercised Award granted under the
1998 Plan is forfeited or terminated, the shares of Common Stock that were
available pursuant to such Award are again available for distribution under
the 1998 Plan.
Unless determined otherwise by the Administrator, Awards granted
under the 1998 Plan may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent and distribution and may be exercised only by the Holder during his or
her lifetime.
Eligibility. Subject to the provisions of the 1998 Plan, Awards may
be granted to employees, officers, directors and consultants who are deemed to
be engaged by the Company to render services and who are compensated for such
services. Incentive Stock Options may be awarded only to persons who, at the
time of such awards, are employees of the Company.
Types of Awards.
Options. The 1998 Plan provides both for "incentive" stock options
("Incentive Options") as defined in Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code") and for options not qualifying as Incentive
Options ("Non-Statutory Stock Options"), both of which may be granted with any
other stock based award under the 1998 Plan. The Administrator will determine
the exercise price per share of Common Stock purchasable under each Incentive
Option or Non-Statutory Stock Option (collectively, "Options"). The exercise
price of an Incentive Option may not be less than 100% of the fair market
value on the last trading day before the date of grant (or, in the case of an
Incentive Option granted to a person possessing more that 10% of the total
combined voting power of all classes of stock of the Company, not less than
110% of such fair market value). The exercise price of a Non-Statutory Stock
Option which is intended to be performance-based compensation under Section
162(m) of the Code may not be less that 100% of the fair market value on the
last trading day before the date of the grant. An Incentive Option may only be
exercised within 10 years of the date of the grant (or within five years in
the case of an Incentive Option granted to a person who, at the time of the
grant, owns stock possessing more than 10% of the total combined voting power
of all classes of stock of the Company) or such other lesser period as the
Administrator may specify at the time of the grant. Subject to any limitations
or conditions the Administrator may impose, Options may be exercised, in whole
or in part, at any time during the term of the Option by giving written or
electronic notice of exercise from the person entitled to exercise the Option.
Such notice must be accompanied by payment in full of the purchase price, such
payment consisting of any consideration and/or method of payment authorized by
the Administrator and permitted by the Agreement.
Generally, if the Holder ceases to be an employee, officer, director
or consultant of the Company other then as a result of death or disability,
then the portion of any Option that has vested by the date of such termination
may be exercised for such period as is specified in the Agreement or, if not
specified, for the shorter of three months after termination or the remainder
of the Option's term. In the event the Holder's employment with the Company is
terminated due to disability, the Holder may still exercise the portion of his
or her Option that had vested by the date of termination for a period of
twelve months (or such other shorter period as the Administrator may specify
at the time of grant) from the date of such termination or until the
expiration of the stated term of the Option, whichever period is shorter.
Similarly, should a Holder die while in the employment of the Company or a
Subsidiary, his or her legal representative or legatee under his or her will
may exercise the portion of the decedent Holder's Option that had vested by
the time of death for a period of twelve months from such death (or such other
greater or lesser period as the Administrator specifies at the time of grant)
or until the expiration of the stated term of the Option, whichever is
shorter.
Stock Purchase Rights. The Administrator may grant Stock Purchase
Rights in conjunction with any Option granted under the 1998 Plan. The
Administrator shall determine, in its sole discretion, the terms, provisions
and conditions of each Agreement under which Stock Purchase Rights may be
granted. Unless otherwise provided in the Agreement, the Company will have a
repurchase option, at a price equal to the original price paid by the
purchaser, which is exercisable upon the voluntary or involuntary termination
of the purchaser's service with the Company, including death or disability.
Withholding Taxes. Upon the exercise of any Award granted under the
1998 Plan, the Administrator may allow, subject to the provisions of the 1998
Plan, Holders to satisfy Federal, state and local withholding tax obligations
by electing to have the Company withhold from the shares of Common Stock to be
issued upon exercise of an Option or Stock Purchase Right that number of
shares which have a fair market value (determined on the last trading day
before the date the amount of tax to be withheld is determined) equal to the
amount of the withholding tax due under applicable Federal, state and local
laws.
Terms and Amendments. Unless terminated by the Board, the 1998 Plan
shall continue in effect for a term of 10 years. The Board may at any time,
and from time to time, amend, alter, suspend or terminate the 1998 Plan.
Federal Income Tax Consequences
The following discussion of the federal income tax consequences of
participation in the 1998 Plan is only a summary of the general rules
applicable to the grant and exercise of Options and does not give specific
details or cover, among other things, state, local and foreign tax treatment
of participation in the 1998 Plan. The information contained in this section
is based on present law and regulations, which are subject to being changed
prospectively or retroactively.
Incentive Options. The Participant will recognize no taxable income
upon the grant or exercise of an Incentive Option. The Company will not
qualify for any deduction in connection with the grant or exercise of
Incentive Options. Upon a disposition of the shares after the later of two
years from the date of grant or one year after the transfer of the shares to
the Participant, the Participant will recognize the difference, if any,
between the amount realized and the exercise price as long-term capital gain
or long-term capital loss (as the case may be) if the shares are capital
assets. The excess, if any, of the fair market value of the shares on the date
of exercise of an Incentive Option over the exercise price will be treated as
an item of tax preference for a Participant's taxable year in which the
exercise occurs and may result in an alternative minimum tax liability for the
Participant. The Participant will recognize the excess, if any, of the amount
realized over the fair market value of the shares on the date of exercise, if
the shares are capital assets, as short-term or long-term capital gain,
depending on the length of time that the Participant held the shares, and the
Company will not qualify for a deduction with respect to such excess.
If Common Stock acquired upon the exercise of an Incentive Option is
disposed of prior to the expiration of the holding periods described above,
(i) the Participant will recognize ordinary compensation income in the taxable
year of disposition in an amount equal to the excess, if any, of the lesser of
the fair market value of the shares on the date of exercise or the amount
realized on the disposition of the shares, over the exercise price paid for
such shares; and (ii) the Company will qualify for a deduction equal to any
such amount recognized, subject to the limitation that the compensation be
reasonable. In the case of a disposition of shares in the same taxable year as
the exercise of the option, there will be no item of tax preference for
alternative minimum tax purposes.
Non-Statutory Stock Options. With respect to Non-Statutory Stock
Options (i) upon grant of the option, the Participant will recognize no
income; (ii) upon exercise of the option (if the shares of Common Stock are
not subject to a substantial risk of forfeiture), the Participant will
recognize ordinary compensation income in an amount equal to the excess, if
any, of the fair market value of the shares on the date of exercise over the
exercise price, and the Company will qualify for a deduction in the same
amount, subject to the requirement that the compensation be reasonable; and
(iii) the Company will be required to comply with applicable Federal income
tax withholding requirements with respect to the amount of ordinary
compensation income recognized by the Participant. On a disposition of the
shares, the Participant will recognize gain or loss equal to the difference
between the amount realized and the sum of the exercise price and the ordinary
compensation income recognized. Such gain or loss will be treated as capital
gain or loss if the shares are capital assets and as short-term or long-term
capital gain or loss, depending upon the length of time that the participant
held the shares. If the shares acquired upon exercise of a Non-Statutory Stock
Option are subject to a substantial risk of forfeiture, the Participant will
recognize income at the time when the substantial risk of forfeiture is
removed and the Company will qualify for a corresponding deduction at such
time.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" the adoption of this
proposal.
<PAGE>
RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
The Audit Committee of the Board of Directors has selected the firm
of Arthur Andersen LLP to serve as the Company's independent accountants for
the fiscal year ending December 31, 1999, subject to ratification by the
shareholders. Arthur Andersen LLP served as the Company's independent
accountants for the year ended December 31, 1998. The Board of Directors
recommends a vote "FOR" ratification of this selection. A representative of
Arthur Andersen LLP is expected to be present at the meeting with an
opportunity to make a statement if such representative desires to do so and is
expected to be available to respond to appropriate questions.
SOLICITATION OF PROXIES
The solicitation of proxies in the enclosed form is made on behalf of
the Company and the cost of this solicitation is being paid by the Company. In
addition to the use of the mails, proxies may be solicited personally or by
telephone or telegraph using the services of directors, officers and regular
employees of the Company at nominal cost. Banks, brokerage firms and other
custodians, nominees and fiduciaries will be reimbursed by the Company for
expenses incurred in sending proxy material to beneficial owners of the
Company's stock.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the annual
meeting for the fiscal year 2000 must be received at the Company's offices by
January 4, 2000 for inclusion in the proxy materials relating to that meeting.
OTHER BUSINESS
Action may be taken on the business to be transacted at the meeting
on the date provided in the Notice of the Annual Meeting or any date or dates
to which an original or later adjournment of such meeting may be adjourned. As
of the date of this Proxy Statement, the management does not know of any other
matters to be presented at the Annual Meeting. If, however, other matters
properly come before the Annual Meeting, whether on the original date provided
in the Notice of Annual Meeting or any dates to which any original or later
adjournment of such meeting may be adjourned, it is intended that the holders
of the proxy will vote in accordance with their best judgment. Unless
otherwise required, any such matter properly coming before the Annual Meeting
will be decided by a majority of the votes cast with respect to such matter,
with abstentions and broker "non-votes" not considered as votes cast and,
accordingly, having no effect on the vote with respect to such matter.
By Order of the Board of Directors
Richard A. Maue
Secretary
Melville, New York
April 30, 1999
<PAGE>
ANDREA ELECTRONICS CORPORATION
Solicited By The Board Of Directors for Annual Meeting To Be Held on June 24,
1999.
PROXY
The undersigned Shareholder(s) of ANDREA ELECTRONICS CORPORATION, a New York
corporation ("Company"), hereby appoints John N. Andrea and Douglas J. Andrea,
or either of them, with full power of substitution and to act without the
other, as the agents, attorneys and proxies of the undersigned, to vote the
shares standing in the name of the undersigned at the Annual Meeting of
Shareholders of the Company to be held on June 24, 1999 and at all
adjournments thereof. This proxy will be voted in accordance with the
instructions given below. If no instructions are given, this proxy will be
voted "FOR" all of the following proposals.
1. To elect the following Directors: Frank A.D. Andrea, Jr.; Douglas J.
Andrea; John N. Andrea; Christopher Dorney; Gary A. Jones; Scott Koondel;
Jack Lahav; John R. Larkin; Paul M. Morris; and Patrick D. Pilch.
FOR ( ) WITHHELD ( )
(INSTRUCTION: To withhold authority to vote for any individual nominee, write
the nominee's name in the space provided)
2. To approve and authorize an amendment to the Andrea Electronics Corporation
1998 Stock Plan, to increase the number of shares of common stock issuable
thereunder to 3,000,000 shares from 2,000,000 shares;
FOR ( ) AGAINST ( ) ABSTAIN ( )
3. To ratify the selection of Arthur Andersen LLP as the Company's independent
accountants for the year ending December 31, 1999.
FOR ( ) AGAINST ( ) ABSTAIN ( )
( ) I plan on attending the Annual Meeting.
Date , 1999
Signature
Signature if held jointly
Please sign exactly as name appears above. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
<PAGE>
Annex A
As Amended on April 23, 1999
ANDREA ELECTRONICS CORPORATION
1998 STOCK PLAN
1. PURPOSES OF THE PLAN. The purposes of this Stock Plan are: to attract and
retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants, and to promote the success of the Company's business. Options
granted under the Plan may be Incentive Stock Options or Nonstatutory Stock
Options, as determined by the Administrator at the time of grant. Stock
Purchase Rights may also be granted under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
a. "Administrator" means the Board or any of its Committees as shall be
administering the Plan, in accordance with Section 4 of the Plan.
b. "Applicable Laws" means the requirements relating to the
administration of stock option plans under U.S. state corporate laws,
U.S. federal and state securities laws, the Code, any stock exchange
or quotation system on which the Common Stock is listed or quoted and
the applicable laws of any foreign country or jurisdiction where
Options or Stock Purchase Rights are, or will be, granted under the
Plan.
c. "Board" means the Board of Directors of the Company.
d. "Code" means the Internal Revenue Code of 1986, as amended.
e. "Committee" means a committee of Directors appointed by the Board in
accordance with Section 4 of the Plan.
f. "Common Stock" means the Common Stock of the Company.
g. "Company" means Andrea Electronics Corporation, a New York
corporation.
h. "Consultant" means any person, including an advisor, engaged by the
Company or a Parent or Subsidiary to render services and who is
compensated for such services.
i. "Director" means a member of the Board.
j. "Disability" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
k. "Employee" means any person, including Section 16(b) Officers and
Directors, employed by the Company or any Parent or Subsidiary of the
Company. A Service Provider shall not cease to be an Employee in the
case of (i) any leave of absence approved by the Company or (ii)
transfers between locations of the Company or between the Company,
its Parent, any Subsidiary, or any successor. For purposes of
Incentive Stock Options, no such leave may exceed ninety days, unless
reemployment upon expiration of such leave is guaranteed by statute
or contract. If reemployment upon expiration of a leave of absence
approved by the Company is not so guaranteed, on the 181st day of
such leave any Incentive Stock Option held by the Optionee shall
cease to be treated as an Incentive Stock Option and shall be treated
for tax purposes as a Nonstatutory Stock Option. Neither service as a
Director nor payment of a director's fee by the Company shall be
sufficient to constitute "employment" by the Company.
l. "Exchange Act" means the Securities Exchange Act of 1934, as amended.
m. "Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:
(i) if the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq Small Cap Market of The Nasdaq Stock
Market, its Fair Market Value shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as quoted
on such exchange or system for the last market trading day prior to
the time of determination, as reported in The Wall Street Journal or
such other source as the Administrator deems reliable;
(ii) if the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the
high bid and low asked prices for the Common Stock on the last market
trading day prior to the day of determination, based on such source
as the Administrator deems reliable;
(iii) in the absence of an established market for the Common Stock,
the Fair Market Value shall be determined in good faith by the
Administrator.
n. "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code
and the regulations promulgated thereunder.
o. "Nonstatutory Stock Option" means an Option not intended to qualify
as an Incentive Stock Option.
p. "Notice of Grant" means a written or electronic notice evidencing
certain terms and conditions of an individual Option or Stock
Purchase Right grant. The Notice of Grant is part of the Option
Agreement.
q. "Section 16(b) Officer" means a person who is an officer of the
Company within the meaning of Section 16(b) of the Exchange Act and
the rules and regulations promulgated thereunder.
r. "Option" means a stock option granted pursuant to the Plan.
s. "Option Agreement" means an agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option
grant. The Option Agreement is subject to the terms and conditions of
the Plan.
t. "Option Exchange Program" means a program whereby outstanding options
are surrendered in exchange for options with a lower exercise price.
u. "Optioned Stock" means the Common Stock subject to an Option or Stock
Purchase Right.
v. "Optionee" means the holder of an outstanding Option or Stock Purchase
Right granted under the Plan.
w. "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
x. "Plan" means this 1998 Stock Plan.
y. "Restricted Stock" means shares of Common Stock acquired pursuant to
a grant of Stock Purchase Rights under Section 11 below.
z. "Restricted Stock Purchase Agreement" means a written agreement
between the Company and the Optionee evidencing the terms and
restrictions applying to stock purchased under a Stock Purchase
Right. The Restricted Stock Purchase Agreement is subject to the
terms and conditions of the Plan and the Notice of Grant.
aa. "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to
Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
bb. "Section 16(b)" means Section 16(b) of the Securities Exchange Act of
1934, as amended.
cc. "Service Provider" means an Employee, Director or Consultant.
dd. "Share" means a share of the Common Stock, as adjusted in accordance
with Section 13 of the Plan.
ee. "Stock Purchase Right" means the right to purchase Common Stock
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
ff. "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13 of the
Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is 3,000,000 Shares, plus any adjustments as provided for
herein. If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued
under the Plan, whether upon exercise of an Option or Right, shall not be
returned to the Plan and shall not become available for future distribution
under the Plan, except that if Shares of Restricted Stock are repurchased by
the Company at their original purchase price, such Shares shall become
available for future grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
a. PROCEDURE.
(i) Multiple Administrative Bodies. The Plan may be administered by
different Committees with respect to different groups of Service Providers.
(ii) Section 162(m). To the extent that the Administrator determines
it to be desirable to qualify Options granted hereunder as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the Plan shall
be administered by a Committee of two or more "outside directors" within the
meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify transactions
hereunder as exempt under Rule 16b-3, the Plan shall be administered by the
Board or a Committee of two or more "non-employee directors" within the
meaning of Rule 16b-3.
(iv) Other Administration. Other than as provided above, the Plan
shall be administered by (A) the Board or (B) a Committee, which Committee
shall be constituted to satisfy Applicable Laws.
b. POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan,
and in the case of a Committee, subject to the specific duties delegated by
the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any Option or Stock Purchase Right granted hereunder.
Such terms and conditions include, but are not limited to, the exercise price,
the time or times when Options or Stock Purchase Rights may be exercised
(which may be based on performance criteria), any vesting acceleration or
waiver of forfeiture restrictions, and any restriction or limitation regarding
any Option or Stock Purchase Right or the shares of Common Stock relating
thereto, based in each case on such factors as the Administrator, in its sole
discretion, shall determine;
(vi) to institute an Option Exchange Program;
(vii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(viii) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to subplans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(ix) to modify or amend each Option or Stock Purchase Right (subject
to Section 15(c) of the Plan), including the discretionary authority to extend
the post-termination exercisability period of Options longer than is otherwise
provided for in the Plan;
(x) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld. The Fair Market
Value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined. All elections by an Optionee
to have Shares withheld for this purpose shall be made in such form and under
such conditions as the Administrator may deem necessary or advisable;
(xi) to authorize any person to execute on behalf of the Company any
Instrument required to effect the grant of an Option or Stock Purchase Right
previously granted by the Administrator;
(xii) to make all other determinations deemed necessary or advisable
for administering the Plan.
c. EFFECT OF ADMINISTRATOR'S DECISION. The Administrator's decisions,
determinations and interpretations shall be final and binding on all Optionees
and any other holders of Options or Stock Purchase Rights.
5. ELIGIBILITY. Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. LIMITATIONS.
a. Each Option shall be designated in the Option Agreement as either an
Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
b. Neither the Plan nor any Option or Stock Purchase Right shall confer
upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere
in any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
c. The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year of the
Company, Options to purchase more than 500,000 Shares.
(ii) The foregoing limitations shall be adjusted proportionately in
connection with any change in the Company's capitalization as described in
Section 13.
(iii) If an Option is canceled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 13), the canceled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For this purpose, if the
exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.
7. TERM OF PLAN. Subject to Section 19 of the Plan, the Plan shall become
effective upon its adoption by the Board. It shall continue in effect for a
term of ten (10) years unless terminated earlier under Section 15 of the Plan.
8. TERM OF OPTION. The term of each Option shall be stated in the Option
Agreement. In the case of an Incentive Stock Option, the term shall be ten
(10) years from the date of grant or such shorter term as may be provided in
the Option Agreement. Moreover, in the case of an Incentive Stock Option
granted to an Optionee who, at the time the Incentive Stock Option is granted,
owns stock representing more than ten percent (10%) of the voting power of all
classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
9. OPTION EXERCISE PRICE AND CONSIDERATION.
a. EXERCISE PRICE. The per share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option:
(A) granted to an Employee who, at the time the Incentive Stock
Option is granted, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the
Fair Market Value per Share on the date of grant;
(B) granted to any Employee other than an Employee described in
paragraph (A) immediately above, the per Share exercise price shall be no less
than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share
on the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with a
per Share exercise price of less than 100% of Fair Market Value on the date of
grant pursuant to a merger or other corporate transaction.
b. WAITING PERIOD AND EXERCISE DATES. At the time an Option is granted,
the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before
the Option may be exercised.
c. FORM OF CONSIDERATION. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the
method of payment. In the case of an Incentive Stock Option, the Administrator
shall determine the acceptable form of consideration at the time of grant.
Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, and (B) have a Fair Market Value on the date
of surrender equal to the aggregate exercise price of the Shares as to which
said Option shall be exercised;
(v) consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. EXERCISE OF OPTIONS.
a. PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option granted
hereunder shall be exercisable according to the terms of the Plan and at such
times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. Unless the Administrator provides otherwise,
vesting of Options granted hereunder shall be tolled during any unpaid leave
of absence. An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by
the Administrator and permitted by the Option Agreement and the Plan. Shares
issued upon exercise of an Option shall be issued in the name of the Optionee
or, if requested by the Optionee, in the name of the Optionee and his or her
spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company),
no right to vote or receive dividends or any other rights as a shareholder
shall exist with respect to the Optioned Stock, notwithstanding the exercise
of the Option.
The Company shall issue (or cause to be issued) such Shares promptly
after the Option is exercised. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the Shares are
issued, except as provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.
b. TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. If an Optionee
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that he or she is
entitled to exercise it on the date of termination (but in no event later than
the expiration of the term of such Option as set forth in the Option
Agreement).
In the absence of a specified time in the Option Agreement, the Option
shall remain exercisable for three (3) months following the Optionee's
termination. If, on the date of termination, the Optionee is not entitled to
exercise his or her entire Option, the Shares covered by the unexercisable
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified by the
Administrator, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
c. DISABILITY OF OPTIONEE. If an Optionee ceases to be a Service Provider
as a result of the Optionee's Disability, the Optionee may exercise his or her
Option at any time within twelve (12) months from the date of termination, but
only to the extent that the Optionee is entitled to exercise it on the date of
termination (and in no event later than the expiration of the term of the
Option as set forth in the Option Agreement). If, on the date of termination,
the Optionee is not entitled to exercise his or her entire Option, the Shares
covered by the unexercisable portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified herein, the Option shall terminate, and the Shares covered
by such Option shall revert to the Plan.
d. DEATH OF OPTIONEE. If an Optionee dies while a Service Provider, the
Option may be exercised at any time within twelve (12) months following the
date of death (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who acquires the right to exercise the Option by bequest or
inheritance, but only to the extent that the Optionee would have been entitled
to exercise the Option on the date of death. If, at the time of death, the
Optionee is not entitled to exercise his or her entire Option, the Shares
covered by the unexercisable portion of the Option shall immediately revert to
the Plan. The Option may be exercised by the executor or administrator of the
Optionee's estate or, if none, by the person(s) entitled to exercise the
Option under the Optionee's will or the laws of descent or distribution. If
the Option is not so exercised within the time specified herein, the Option
shall terminate, and the Shares covered by such Option shall revert to the
Plan.
e. BUYOUT PROVISIONS. The Administrator may at any time offer to buy out
for a payment in cash or Shares, an Option previously granted based on such
terms and conditions as the Administrator shall establish and communicate to
the Optionee at the time that such offer is made.
11. STOCK PURCHASE RIGHTS.
a. RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either alone,
in addition to, or in tandem with other awards granted under the Plan and/or
cash awards made outside of the Plan. After the Administrator determines that
it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically, by means of a Notice of Grant, of the
terms, conditions and restrictions related to the offer, including the number
of Shares that the offeree shall be entitled to purchase, the price to be
paid, and the time within which the offeree must accept such offer. The offer
shall be accepted by execution of a Restricted Stock Purchase Agreement in the
form determined by the Administrator.
b. REPURCHASE OPTION. Unless the Administrator determines otherwise, the
Restricted Stock Purchase Agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
c. OTHER PROVISIONS. The Restricted Stock Purchase Agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
d. RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is exercised,
the purchaser shall have the rights equivalent to those of a shareholder, and
shall be a shareholder when his or her purchase is entered upon the records of
the duly authorized transfer agent of the Company. No adjustment will be made
for a dividend or other right for which the record date is prior to the date
the Stock Purchase Right is exercised, except as provided in Section 13 of the
Plan.
12. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Unless
determined otherwise by the Administrator, an Option or Stock Purchase Right
may not be sold, pledged, assigned, hypothecated, transferred, or disposed of
in any manner other than by will or by the laws of descent or distribution and
may be exercised, during the lifetime of the Optionee, only by the Optionee.
If the Administrator makes an Option or Stock Purchase Right transferable,
such Option or Stock Purchase Right shall contain such additional terms and
conditions as the Administrator deems appropriate.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR ASSET
SALE.
a. CHANGES IN CAPITALIZATION. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or
Stock Purchase Right, as well as the price per share of Common Stock covered
by each such outstanding Option or Stock Purchase Right, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be
deemed to have been "effected without receipt of consideration." Such
adjustment shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares
of stock of any class, or securities convertible into shares of stock of any
class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option
or Stock Purchase Right.
b. DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution
or liquidation of the Company, the Administrator shall notify each Optionee as
soon as practicable prior to the effective date of such proposed transaction.
The Administrator in its discretion may provide for an Optionee to have the
right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares
as to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option or Stock Purchase Right shall
lapse as to all such Shares, provided the proposed dissolution or liquidation
takes place at the time and in the manner contemplated. To the extent it has
not been previously exercised, an Option or Stock Purchase Right will
terminate immediately prior to the consummation of such proposed action.
c. MERGER OR ASSET SALE. In the event of a merger of the Company with or
into another corporation, or the sale of substantially all of the assets of
the Company, each outstanding Option and Stock Purchase Right shall be assumed
or an equivalent option or right substituted by the successor corporation or a
Parent or Subsidiary of the successor corporation. In the event that the
successor corporation refuses to assume or substitute for the Option or Stock
Purchase Right, the Optionee shall fully vest in and have the right to
exercise the Option or Stock Purchase Right as to all of the Optioned Stock,
including Shares as to which it would not otherwise be vested or exercisable.
If an Option or Stock Purchase Right becomes fully vested and exercisable in
lieu of assumption or substitution in the event of a merger or sale of assets,
the Administrator shall notify the Optionee in writing or electronically that
the Option or Stock Purchase Right shall be fully vested and exercisable for a
period of fifteen (15) days from the date of such notice, and the Option or
Stock Purchase Right shall terminate upon the expiration of such period. For
the purposes of this paragraph, the Option or Stock Purchase Right shall be
considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase or receive, for each Share of Optioned
Stock subject to the Option or Stock Purchase Right immediately prior to the
merger or sale of assets, the consideration (whether stock, cash, or other
securities or property) received in the merger or sale of assets by holders of
Common Stock for each Share held on the effective date of the transaction (and
if holders were offered a choice of consideration, the type of consideration
chosen by the holders of a majority of the outstanding Shares); provided,
however, that if such consideration received in the merger or sale of assets
is not solely common stock of the successor corporation or its Parent, the
Administrator may, with the consent of the successor corporation, provide for
the consideration to be received upon the exercise of the Option or Stock
Purchase Right, for each Share of Optioned Stock subject to the Option or
Stock Purchase Right, to be solely common stock of the successor corporation
or its Parent equal in fair market value to the per share consideration
received by holders of Common Stock in the merger or sale of assets.
14. DATE OF GRANT. The date of grant of an Option or Stock Purchase Right
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other
later date as is determined by the Administrator. Notice of the determination
shall be provided to each Optionee within a reasonable time after the date of
such grant.
15. AMENDMENT AND TERMINATION OF THE PLAN.
a. AMENDMENT AND TERMINATION. The Board may at any time amend, alter,
suspend or terminate the Plan.
b. SHAREHOLDER APPROVAL. The Company shall obtain shareholder approval of
any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
c. EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
16. CONDITIONS UPON ISSUANCE OF SHARES.
a. LEGAL COMPLIANCE. Shares shall not be issued pursuant to the exercise
of an Option or Stock Purchase Right unless the exercise of such Option or
Stock Purchase Right and the issuance and delivery of such Shares shall comply
with Applicable Laws and shall be further subject to the approval of counsel
for the Company with respect to such compliance.
b. INVESTMENT REPRESENTATIONS. As a condition to the exercise of an
Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of
any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
17. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
18. RESERVATION OF SHARES. The Company, during the term of this Plan, will at
all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months after the date the Plan
is adopted. Such shareholder approval shall be obtained in the manner and to
the degree required under Applicable Laws.
<PAGE>
ANDREA ELECTRONICS CORPORATION
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
1. NOTICE OF STOCK OPTION GRANT
- ------------------------------------------------------------------------------
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number
-----------------------------------
Date of Grant
-----------------------------------
Vesting Commencement Date
-----------------------------------
Exercise Price per Share
-----------------------------------
Total Number of Shares Granted
-----------------------------------
Total Exercise Price
-----------------------------------
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date: -----------------------------------
Vesting Schedule:
Termination Period:
2. AGREEMENT
a. GRANT OF OPTION. The Plan Administrator of the Company hereby grants
to the Optionee named in the Notice of Grant attached as Part I of this
Agreement (the "Optionee") an option (the "Option") to purchase the number of
Shares, as set forth in the Notice of Grant, at the exercise price per share
set forth in the Notice of Grant (the "Exercise Price"), subject to the terms
and conditions of the Plan, which is incorporated herein by reference. Subject
to Section 15(c) of the Plan, in the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this Option Agreement,
the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option under
Section 422 of the Code. However, if this Option is intended to be an
Incentive Stock Option, to the extent that it exceeds the $100,000 rule of
Code Section 422(d) it shall be treated as a Nonstatutory Stock Option
("NSO").
b. EXERCISE OF OPTION. (i) Right to Exercise. This Option is exercisable
during its term in accordance with the Vesting Schedule set out in the Notice
of Grant and the applicable provisions of the Plan and this Option Agreement.
(ii) Method of Exercise. This Option is exercisable by delivery of
an exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be completed
by the Optionee and delivered to the secretary of the Company. The Exercise
Notice shall be accompanied by payment of the aggregate Exercise Price as to
all Exercised Shares. This Option shall be deemed to be exercised upon receipt
by the Company of such fully executed Exercise Notice accompanied by such
aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option unless
such issuance and exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Exercised Shares shall be considered
transferred to the Optionee on the date the Option is exercised with respect
to such Exercised Shares.
c. METHOD OF PAYMENT. Payment of the aggregate Exercise Price shall be by
any of the following, or a combination thereof, at the election of the
Optionee:
(i) cash;
(ii) check;
(iii) consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan;
(iv) surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market
Value on the date of surrender equal to the aggregate Exercise Price of the
Exercised Shares; or
(v) with the Administrator's consent, delivery of Optionee's
promissory note (the "Note") in the form attached hereto as Exhibit C, in the
amount of the aggregate Exercise Price of the Exercised Shares together with
the execution and delivery by the Optionee of the Security Agreement attached
hereto as Exhibit B. The Note shall bear interest at the "applicable federal
rate" prescribed under the Code and its regulations at time of purchase, and
shall be secured by a pledge of the Shares purchased by the Note pursuant to
the Security Agreement.
d. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution
and may be exercised during the lifetime of Optionee only by the Optionee. The
terms of the Plan and this Option Agreement shall be binding upon the
executors, administrators, heirs, successors and assigns of the Optionee.
e. TERM OF OPTION. This Option may be exercised only within the term set
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
f. TAX CONSEQUENCES. Some of the federal tax consequences relating to
this Option, as of the date of this Option, are set forth below. THIS SUMMARY
IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO
CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS
OPTION OR DISPOSING OF THE SHARES.
g. EXERCISING THE OPTION. (i) Nonstatutory Stock Option. The Optionee may
incur regular federal income tax liability upon exercise of a NSO. The
Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market
Value of the Exercised Shares on the date of exercise over their aggregate
Exercise Price. If the Optionee is an Employee or a former Employee, the
Company will be required to withhold from his or her compensation or collect
from Optionee and pay to the applicable taxing authorities an amount in cash
equal to a percentage of this compensation income at the time of exercise, and
may refuse to honor the exercise and refuse to deliver Shares if such
withholding amounts are not delivered at the time of exercise.
(ii) Incentive Stock Option. If this Option qualifies as an ISO, the
Optionee will have no regular federal income tax liability upon its exercise,
although the excess, if any, of the Fair Market Value of the Exercised Shares
on the date of exercise over their aggregate Exercise Price will be treated as
an adjustment to alternative minimum taxable income for federal tax purposes
and may subject the Optionee to alternative minimum tax in the year of
exercise. In the event that the Optionee ceases to be an Employee but remains
a Service Provider, any Incentive Stock Option of the Optionee that remains
unexercised shall cease to qualify as an Incentive Stock Option and will be
treated for tax purposes as a Nonstatutory Stock Option on the date three (3)
months and one (1) day following such change of status.
h. DISPOSITION OF SHARES.
(i) NSO. If the Optionee holds NSO Shares for at least one year, any
gain realized on disposition of the Shares will be treated as long-term
capital gain for federal income tax purposes.
(ii) ISO. If the Optionee holds ISO Shares for at least one year
after exercise and two years after the grant date, any gain realized on
disposition of the Shares will be treated as long-term capital gain for
federal income tax purposes. If the Optionee disposes of ISO Shares within one
year after exercise or two years after the grant date, any gain realized on
such disposition will be treated as compensation income (taxable at ordinary
income rates) to the extent of the excess, if any, of the lesser of (A) the
difference between the Fair Market Value of the Shares acquired on the date of
exercise and the aggregate Exercise Price, or (B) the difference between the
sale price of such Shares and the aggregate Exercise Price. Any additional
gain will be taxed as capital gain, short-term or long-term depending on the
period that the ISO Shares were held.
i. NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the Optionee
sells or otherwise disposes of any of the Shares acquired pursuant to an ISO
on or before the later of (i) two years after the grant date, or (ii) one year
after the exercise date, the Optionee shall immediately notify the Company in
writing of such disposition. The Optionee agrees that he or she may be subject
to income tax withholding by the Company on the compensation income recognized
from such early disposition of ISO Shares by payment in cash or out of the
current earnings paid to the Optionee.
j. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in
their entirety all prior undertakings and agreements of the Company and
Optionee with respect to the subject matter hereof, and may not be modified
adversely to the Optionee's interest except by means of a writing signed by
the Company and Optionee. This agreement is governed by the internal
substantive laws, but not the choice of law rules, of New York.
k. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN
DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT
CAUSE.
<PAGE>
By your signature and the signature of the Company's representative below, you
and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option
Agreement. Optionee hereby agrees to accept as binding, conclusive and final
all decisions or interpretations of the Administrator upon any questions
relating to the Plan and Option Agreement. Optionee further agrees to notify
the Company upon any change in the residence address indicated below.
OPTIONEE: ANDREA ELECTRONICS CORPORATION
- --------------------------------------- ------------------------------
Signature By:
Title:
- ---------------------------------------
Print Name
Residence Address
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
<PAGE>
EXHIBIT A
1998 STOCK PLAN
EXERCISE NOTICE
Andrea Electronics Corporation
45 Melville Park Road
Melville, New York 11747
Attention: Secretary
1. EXERCISE OF OPTION. Effective as of today, ________________, ____, the
undersigned ("Purchaser") hereby elects to purchase ______________ shares (the
"Shares") of the Common Stock of Andrea Electronics Corporation (the
"Company") under and pursuant to the 1998 Stock Plan (the "Plan") and the
Stock Option Agreement dated _____________, ____ (the "Option Agreement"). The
purchase price for the Shares shall be $_____________, as required by the
Option Agreement.
2. DELIVERY OF PAYMENT. Purchaser herewith delivers to the Company the full
purchase price for the Shares.
3. REPRESENTATIONS OF PURCHASER. Purchaser acknowledges that Purchaser has
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
4. RIGHTS AS SHAREHOLDER. Until the issuance (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of
the Company) of the Shares, no right to vote or receive dividends or any other
rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Shares so acquired shall be
issued to the Optionee as soon as practicable after exercise of the Option. No
adjustment will be made for a dividend or other right for which the record
date is prior to the date of issuance, except as provided in Section 13 of the
Plan.
5. TAX CONSULTATION. Purchaser understands that Purchaser may suffer adverse
tax consequences as a result of Purchaser's purchase or disposition of the
Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
6. ENTIRE AGREEMENT; GOVERNING LAW. The Plan and Option Agreement are
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings
and agreements of the Company and Purchaser with respect to the subject matter
hereof, and may not be modified adversely to the Purchaser's interest except
by means of a writing signed by the Company and Purchaser. This agreement is
governed by the internal substantive laws, but not the choice of law rules, of
New York.
Submitted by: Accepted by:
PURCHASER: ANDREA ELECTRONICS CORPORATION:
- ---------------------------- ----------------------------------
Signature Name:
Title:
- ----------------------------
Print Name
Address:
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Date Received:
