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
-------------------------------------------
(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.
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pursuant to Exchange Act Rule 0-11 (set forth the amount on
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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.
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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 22, 2000
-----------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of
ANDREA ELECTRONICS CORPORATION ("Company") will be held at the Melville
Marriot Long Island, 1350 Old Walt Whitman Road, Melville, New York 11747, on
Thursday, June 22, 2000 at 9:30 A.M. local time, for the following purposes:
1. To elect eight directors to hold office until the next Annual
Meeting of Shareholders and until their respective successors have
been duly elected and qualified, or alternatively, if Proposal Two
relating to the classification of the Board of Directors into
three classes should be approved, until the expiration of their
respective terms of one, two and three years, depending on the
class to which they are elected, and their respective successors
have been duly elected and qualified;
2. To consider and act upon a proposal to amend the Bylaws of the
Company to divide the Board of Directors into three classes, each
class consisting of approximately one-third of the whole number of
the Board of Directors, and to designate the class in which each of
eight directors elected pursuant to Proposal One shall serve;
3. To authorize an amendment to the Certificate of Incorporation
of the Company to increase the authorized shares of Common Stock to
35,000,000 shares from 25,000,000 shares;
4. 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 3,675,000 shares from 3,000,000 shares;
5. To ratify the selection of Arthur Andersen LLP as the Company's
independent accountants for the year ending December 31, 2000; and
6. 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 15, 2000 will be
entitled to notice of, and to vote at, the meeting and any adjournments
thereof. Our 1999 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
May __, 2000
<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 22, 2000 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 18, 2000, this Proxy Statement, the
enclosed form of proxy and the Company's Annual Report to Shareholders for the
fiscal year ended December 31, 1999, which contains audited financial
statements, are to be mailed to shareholders of record as of the close of
business on May 15, 2000. 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 Bylaws of the Company under which the
Board of Directors would be divided into three classes, "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 3,675,000 shares from 3,000,000 shares, "FOR" the selection of
Arthur Andersen LLP to serve as the Company's independent accountants for the
year ending December 31, 2000, 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. A majority of the outstanding shares entitled to vote represented
in person or by proxy at the Annual Meeting will be necessary to approve the
amendment to the Bylaws of the Company. The affirmative vote of a majority
of the votes cast is required to approve the amendment to the Restated
Certificate of Incorporation, 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 three proposals.
<PAGE>
RECORD DATE; OUTSTANDING SHARES
The Board of Directors has fixed the close of business on May 15,
2000 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 21, 2000, an aggregate of 13,814,572 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 21,
2000 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 21, 2000 was 13,814,572.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP
NAME OF BENEFICIAL OWNER (1) PERCENT OF
CLASS
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Camille Andrea Casling (2) 753,507 5.4%
Frank A. D. Andrea, Jr.(2) 464,800 (3) 3.3%
ANC-I Limited Partnership(2) 247,000 1.7%
Douglas J. Andrea (2) 551,088 (4) 3.9%
John N. Andrea (2) 390,242 (5) 2.8%
Christopher P. Sauvigne 96,250 (6) *
Patrick D. Pilch 137,150 (7) 1%
Richard A. Maue 62,250 (8) *
Paul M. Morris 13,500 (9) *
Christopher Dorney 22,500 (10) *
Scott Koondel 22,500 (11) *
Gary A. Jones 23,750 (12) *
Jack Lahav - *
John R. Larkin 11,000 (13) *
Directors and Executive Officers as a
group (11 persons) 1,795,030 (14) 13.0%
*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
<PAGE>
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) 199,000 of the 247,000 shares owned by ANC-I Limited
Partnership, and (iv) 50,000 shares issuable upon the exercise of options
which are currently exercisable and exercisable within 60 days from the date
hereof. Does not include 50,000 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 247,000 shares owned by ANC-I Limited
Partnership, and (iii) 500,000 shares issuable upon the exercise of options
which are currently exercisable and exercisable within 60 days from the date
hereof. Does not include 275,000 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, and (iii)
350,000 shares issuable upon the exercise of options which are currently
exercisable and exercisable within 60 days from the date hereof. Does not
include 275,000 shares issuable upon exercise of options that are not
currently exercisable or exercisable within 60 days from the date hereof.
(6) Includes (i) 15,000 shares owned directly by Christopher P. Sauvigne and
(ii) 81,250 shares issuable upon the exercise of options which are currently
exercisable and exercisable within 60 days from the date hereof. Does not
include 368,750 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 Patrick D. Pilch's minor children and
(ii) 136,000 shares issuable upon the exercise of options that are currently
exercisable and exercisable within 60 days from the date hereof. Does not
include 100,000 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 Richard A. Maue and (ii)
61,250 shares issuable upon the exercise of options which are currently
exercisable and exercisable within 60 days from the date hereof. Does not
include 96,250 shares issuable upon the exercise of options that are not
currently exercisable or exercisable within 60 days from the date hereof.
(9) Includes (i) 1,000 shares owned directly by Paul M. Morris, and (ii) 12,500
shares issuable upon the exercise of options which are currently exercisable
and exercisable within 60 days from the date hereof. Does not include 37,500
shares issuable upon exercise of options that are not currently exercisable or
exercisable within 60 days from the date hereof.
(10) Includes 22,500 shares issuable upon the exercise of options that are
currently exercisable and exercisable within 60 days from the date hereof.
Does not include 12,500 shares issuable upon exercise of options that are not
currently exercisable or exercisable within 60 days from the date hereof.
(11) Includes 22,500 shares issuable upon the exercise of options that are
currently exercisable and exercisable within 60 days from the date hereof.
Does not include 37,500 shares issuable upon exercise of options that are not
currently exercisable or exercisable within 60 days from the date hereof.
(12) Includes 23,750 shares issuable upon the exercise of options which are
currently exercisable and exercisable within 60 days from the date hereof.
Does not include 36,250 shares issuable upon exercise of options that are not
currently exercisable or exercisable within 60 days from the date hereof.
(13) Includes 11,000 shares owned directly by John R. Larkin. Does not include
25,000 shares issuable upon exercise of options that are not currently
exercisable or exercisable within 60 days from the date hereof.
<PAGE>
(14) 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, 1999, the Company's directors and officers met all
applicable SEC filing requirements.
<PAGE>
PROPOSAL ONE:
ELECTION OF DIRECTORS
The Company's Bylaws provide for a Board of Directors consisting of
between three and ten members, as determined by resolution of the Board of
Directors. The Board has determined that the number of directors to be elected
at the Annual Meeting shall be eight. 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, except that if Proposal Two relating to the
classification of the Board of Directors into three classes is approved by the
shareholders, the persons listed below will serve until the expiration of
their respective terms of one, two and three years, depending on the classes to
which they are elected, and their respective successors have been duly elected
and qualified. The persons listed below include the Co-Chief Executive Officers
and the President and Chief Operating Officer of the Company. Unless otherwise
specified in the form of proxy, the proxies solicited by the management will
be voted "FOR" the election of these candidates. 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 for 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. The election of directors
requires a plurality of those shares voted at the meeting with respect to the
election of directors.
The nominees have agreed to serve as Directors if elected, and the
Company has no reason to believe that they will be unable to serve. In the
event that any of them is unable or declines to serve as a Director at the time
of the Annual Meeting, proxies may be voted for such other nominee as is then
designated by the Board.
Information on the Directors and Director nominees of the Company follows:
INFORMATION ABOUT NOMINEES
John N. Andrea, age 42, 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 37, 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.
Christopher P. Sauvigne, age 40, has been President and Chief
Operating Officer of the Company since November 1998. From 1982 until joining
the Company in November 1998, Mr. Sauvigne was employed by Arthur Andersen
LLP, where he served in various capacities, the last of which was as Partner.
Gary A. Jones, age 54, 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 36, 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.
Jack Lahav, age 52, 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
<PAGE>
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 56, 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 38, 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, a Compensation Committee
and a Nominating Committee. The Audit Committee is comprised of Christopher
Dorney, Jack Lahav and Paul M. Morris. 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 two times during 1999. The Compensation Committee is
comprised of Scott Koondel, John R. Larkin and Paul M. Morris. 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 three times in 1999. The Nominating
Committee is comprised of Christopher Dorney, Scott Koondel and John R. Larkin.
The Nominating Committee nominates persons to serve on the Board of Directors.
The Nominating Committee will consider recommendations by shareholders for
vacancies on the board, which recommendations may be submitted to the
Company's Secretary. The Nominating Committee met one time in 2000 to
recommend the Nominees for Directors presented in this Proxy Statement. The
Board of Directors held four meetings during 1999. In 1999, each of the
Company's Directors attended at least 75% of such meetings. During 1999,
directors who are not officers or employees of the Company were each paid
$1,000 for physical attendance at meetings of the Board.
<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 $100,000 during the year ended December 31, 1999.
<TABLE>
<CAPTION>
STOCK OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) (#)
--------------------------------------------- --------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
John N. Andrea, Co-Chairman and Co-Chief
Executive Officer 1999 208,505 150,000 (1) 150,000
1998 203,846 150,000 150,000
1997 175,000 75,000 150,000
Douglas J. Andrea, Co-Chairman and Co-
Chief Executive Officer 1999 208,505 150,000 (1) 150,000
1998 203,846 150,000 150,000
1997 175,000 79,000 150,000
Christopher P. Sauvigne, President and Chief
Operating Officer 1999 208,409 75,000 (1) 125,000
1998 (2) 19,230 16,849 (1) 250,000
Patrick D. Pilch, Executive Vice President
and Chief Financial Officer 1999 (3) 181,515 3,366 75,000
1998 178,365 150,000 75,000
1997 152,503 50,000 100,000
Richard A. Maue, Vice President, Controller,
Treasurer and Corporate Secretary 1999 (4) 93,815 27,115 25,000
</TABLE>
(1) Total bonus received by each of John N. Andrea, Douglas J. Andrea, and
Christopher P. Sauvigne was the minimum bonus payment pursuant to his
employment agreement. See "Employment Agreements and Change in Control
Arrangements."
(2) Christopher P. Sauvigne, age 40, 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.
(3) Patrick D. Pilch, age 40, joined the Company in April 1995 and
served as Executive Vice President and Chief Financial Officer until
November 4, 1999. Since November 4, 1999, Mr. Pilch has served as the
Company's Senior Vice President of Strategy.
(4) Richard A. Maue, age 30, joined the Company in April 1997 and
served as Vice President, Controller, Treasurer and Corporate
Secretary until November 4, 1999. Since November 4, 1999, Mr. Maue
has served as the Company's Senior Vice President, Chief Financial
Officer and Corporate Secretary.
The Company granted stock options covering an aggregate of 525,000
shares of Common Stock during year 1999 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 1999, the
percent of total options granted to employees of the Company in 1999, 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
Stock Price
Appreciation for
Individual Grants Option Term
----------------------------------------------------------------- -----------------------
Number of Percentage
securities of total
underlying options Exercise
options granted to price
Date of granted employees ($/share) Expiration
Name grant (#) in fiscal year Date 5% (1) 10% (1)
- - ------------------------ ---------- ------------- -------------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
John N. Andrea 3/22/99 100,000 7% $6.25 3/22/09 $393,059 $996,089
8/17/99 50,000 4% $5.375 8/17/09 $169,015 $428,318
Douglas J. Andrea 3/22/99 100,000 7% $6.25 3/22/09 $393,059 $996,089
8/17/99 50,000 4% $5.375 8/17/09 $169,015 $428,318
Christopher P. Sauvigne 3/22/99 75,000 6% $6.25 3/22/09 $294,794 $747,067
8/17/99 50,000 4% $5.375 8/17/09 $169,015 $428,318
Patrick D. Pilch 3/22/99 50,000 4% $6.25 3/22/09 $196,530 $498,045
8/17/99 25,000 2% $5.375 8/17/09 $84,508 $214,159
Richard A. Maue 8/17/99 25,000 2% $5.375 8/17/09 $84,508 $214,159
</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 1999 and the aggregate dollar value of in-the-money,
unexercised options at December 31, 1999. 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>
John N. Andrea - $ - 212,500 / 337,500 (2) (7) $ 342,100 / $ 432,700
Douglas J. Andrea - $ - 362,500 / 337,500 (3) (7) $ 1,393,150 / $432,700
Christopher P. Sauvigne - $ - 62,500 / 312,500 (4) (7) $ - / $ 223,375
Patrick D. Pilch - $ - 68,750 / 181,250 (5) (7) $ 115,600 / $ 245,250
Richard A. Maue - $ - 27,500 / 95,000 (6) (7) $ 28,900 / $ 115,600
</TABLE>
<PAGE>
(1) Values were based on a closing trade price for the Company's Common Stock
on December 31, 1999 of $7.687 per share.
(2) John N. Andrea was granted options to purchase: 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; 100,000 shares at a price of $14.125 per share on June 8, 1998;
100,000 shares at a price of $6.25 per share on March 22, 1999; and 50,000
shares at a price of $5.375 per share on August 17, 1999.
(3) Douglas J. Andrea was granted options to purchase: 300,000 shares at $.675
per share on June 26, 1992; 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; 100,000
shares at a price of $14.125 per share on June 8, 1998; 100,000 shares at a
price of $6.25 per share on March 22, 1999; and 50,000 shares at a price of
$5.375 per share on August 17, 1999.
(4) Christopher P. Sauvigne was granted options to purchase 250,000 shares at
$8.875 per share on November 20, 1998; 75,000 shares at $6.25 per share on
March 22, 1999; and 50,000 shares at a price of $5.375 per share on August 17,
1999.
(5) Patrick D. Pilch was granted options to purchase: 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; 50,000 shares at a price of $14.125 per
share on June 8, 1998; 50,000 shares at a price of $6.25 per share on March
22, 1999; and 25,000 shares at a price of $5.375 per share on August 17, 1999.
(6) Richard A. Maue was granted options to purchase: 50,000 shares at a price
of $5.375 per share on April 1, 1997; 10,000 shares at a price of $14.625 per
share on March 3, 1998; 25,000 shares at a price of $14.125 per share on June
8, 1998; 25,000 shares at a price of $8.875 on November 20, 1998; and 25,000
shares at a price of $5.375 per share on August 17, 1999.
(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 entered into three-year employment agreements that
commenced on March 26, 2000 with John N. Andrea and Douglas J. Andrea, each as
Co-Chairman and Co-Chief Executive Officers of the Company. Under these
agreements, the annual base salaries of John N. Andrea and Douglas J. Andrea
are $200,000. Each agreement provides for 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.
The Company entered into a two-year employment agreement that
commenced on March 26, 2000 with Richard A. Maue, as Senior Vice President and
Chief Financial Officer of the Company. The agreement provides an annual base
salary of not less than $150,000 per annum, 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 $25,000 per
annum, and long-term incentive compensation in the form of cash or equity-based
awards.
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.
<PAGE>
Under each of the aforementioned agreements, on the occurrence of a
Change in Control (as defined), 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 (A) the payments due
for the remaining term of the agreement or (B) the product of (i)five (in the
case of John N. Andrea, Douglas J. Andrea and Christopher P. Sauvigne) and
three (in the case of Richard A. Maue) multiplied by (ii) the Executive's
average annual total compensation for the five (in the case of John N. Andrea,
Douglas J. Andrea and Christopher P. Sauvigne) and three (in the case of
Richard A. Maue) preceding taxable years, or if his employment by the Company
is then less than three years, the Executive's average annual compensation
during his employment by the Company.
In addition, under each of the aforementioned employment agreements,
on the occurrence of a Change in Control, all restrictions on any restricted
stock then held by Executive 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 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 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
Executive's employment other than for Cause (as defined), or Executive 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 Executive' 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.
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the
cumulative total shareholder return for the five years ended December 31, 1999
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,
1995 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
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1998 1999
------ ------ ------ ------ -----
Andrea Electronics Corporation 50.79 46.07 150.26 82.20 64.40
AMEX Market Index 128.90 136.01 163.66 161.44 201.27
SIC Code Industry Index 101.03 102.94 100.50 108.66 412.11
</TABLE>
<PAGE>
COMPENSATION COMMITTEE REPORT
For the year ended December 31, 1999, the Compensation Committee of
the Board of Directors for the Company was composed of independent directors.
Currently, the Compensation Committee is comprised of Scott Koondel John R.
Larkin and Paul M. Morris. 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 N. 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
Scott Koondel
John R. Larkin
Paul M. Morris
<PAGE>
PROPOSAL TWO:
AMENDMENT TO THE BYLAWS TO ESTABLISH A CLASSIFIED BOARD OF DIRECTORS
The Board of Directors has unanimously approved an amendment to the
Bylaws of the Company that would divide the Company's Board of Directors
into three classes and would generally require a vote of 75% of all outstanding
shares of Common Stock of the Company to repeal this classification of the
Board. The Board believes it to be in the best interests of the
Company to amend the Bylaws of the Company to give effect to the proposed
Amendment and has directed that such amendment be submitted to a
vote of the shareholders at the Annual Meeting. The adoption of this Proposal
requires a majority of the outstanding shares of Common Stock represented in
person or by proxy at the Annual Meeting to be voted "for" such Proposal.
If a majority of the shares so present at the meeting in the aggregate are
voted against, abstain from voting or are not voted on such Proposal, such
Proposal would not be adopted.
The following sections set forth an explanation of the proposed
amendments, which is set forth in its entirety in Exhibit A to this Proxy
Statement.
CLASSIFICATION OF BOARD OF DIRECTORS
Proposal Two would amend the Company's Bylaws to divide the Board of
Directors into three classes, labeled Class I, Class II and Class III, each
containing, insofar as possible, an equal number of directors, with the term
of one of the three classes expiring each year at the Company's annual meeting
or special meeting in lieu thereof.
The exact number of directors, and the number of members of each class
of directors, would be fixed or changed from time to time within such limits by
resolution of the Board of Directors. The provisions of the proposed amendment
would not apply to any director elected by holders of a class or series of the
Company's preferred stock at any time such holders might have a right to vote
separately as a class for the election of directors.
The Class I Directors would serve initially for a one-year term, until
the 2001 annual meeting of shareholders and until successors are duly elected
and have qualified, and thereafter be elected for three-year terms. The Class
II Directors would serve initially for a two-year term, until the 2002 annual
meeting of shareholders and until successors are duly elected and have
qualified, and thereafter be elected for three-year terms. The Class III
Directors would immediately commence service for a three-year term, and serve
until the 2003 annual meeting of shareholders and until their respective
successors are duly elected and have qualified.
REASONS FOR AND EFFECTS OF PROPOSED AMENDMENT
Section 704 of the Business Corporation Law of New York State provides
that a corporation may divide its board into two, three classes or four
classes, with the classes serving for staggered three-year terms, so that only
the directors of one class stand for re-election in any given year.
The Board of Directors believes that the adoption of the proposed
amendment will enhance the likelihood of continuity and stability in the
composition of the Company's Board of Directors and in the policies formulated
by the Board, in that only one-third of the Board of Directors would be subject
to election each year. Staggered terms would also guarantee that, except in the
unusual circumstances of the death or resignation of Directors, two-thirds of
the Directors, or more, at any one time would have at least one year's
experience as Directors of the Company.
The proposed amendment will also restrict the ability of shareholders
of the Company to change the composition of the Board of Directors by extending
the time required to elect a majority of Directors from one to two years. Thus,
the existence of a classified Board may have an anti-takeover effect because a
person who has gained voting control of the Company will be unable to gain
immediate control of the Board of Directors unless he or she can obtain
sufficient votes to amend the proposed amendment pursuant to the requirements
for such an amendment as set forth therein. See "Supermajority Requirements for
Amendment of the Proposed Amendments" below. The provisions of the proposed
amendment would be applicable to every election of Directors and not just
elections occurring in connection with a specified event such as a hostile
tender offer.
<PAGE>
Adoption of the proposed amendment would tend to make more difficult,
or discourage, any attempt to remove current management of the Company by means
of a merger, a tender offer for the Company's stock, a proxy contest or any
other transaction resulting in a change in control, even where such an action
would be favorable to the Company's shareholders or was supported by a majority
of the shareholders. A principal intent of the proposal to adopt a classified
Board of Directors, however, is to enable transactions on terms that are fair
to the shareholders and that encourage a potential acquiror to complete a
transaction on such terms. The proposal is not the result of management's
knowledge of any specific effort to accumulate the Company's securities or to
obtain control of the Company through a merger, tender offer, consent
solicitation or otherwise. Management believes, however, that such an effort
could potentially arise in the course of negotiating strategic collaborations
with various companies, some of which are significantly larger than the Company.
SUPERMAJORITY REQUIRED TO REPEAL PROPOSED AMENDMENTS
The proposed amendment related to a classified board would also
provide that any further amendment to the Bylaws that would amend, alter or
repeal the amendment would require the vote of the holders of seventy-five
percent (75%) of all shares of stock of the Company entitled to vote at a
meeting held for the purpose of voting on the further amendment. The 75%
requirement would not apply in the case of an amendment recommended to the
shareholders pursuant to a resolution of the Board of Directors approved by
two-thirds of the "Continuing Directors." "Continuing Directors," for the
purposes of the proposed amendment, are (i) Directors of the Company who are
or become Directors on the date on which the proposed amendment is adopted by
the shareholders, or (ii) any Director elected by a majority of the Continuing
Directors then in office to succeed any Director to fill any vacancy on the
Board of Directors. This "supermajority" requirement is designed to prevent
the circumvention of the proposed amendment described in this Proxy Statement
by any person or persons holding more than 50% but less than 75% of the voting
stock.
CURRENT PROVISIONS OF CERTIFICATE OF INCORPORATION
The Company does not believe that its Restated Certificate of
Incorporation, as amended (the "Certificate of Incorporation"), as presently
constituted contains any provisions which are intended to have an
anti-takeover effect. However, under the Certificate of Incorporation
4,085,068 shares of Common Stock and 4,974,500 shares of preferred stock
remain authorized and not reserved for any purpose and are available for
issuance. Although these shares were authorized to allow the Board of
Directors, without further shareholder approval, to issue additional shares of
the Company's capital stock to raise capital or to effect potential
acquisitions in the future, the authorization of such additional shares could
potentially be issued in such manner as to hamper the efforts of persons who
might attempt to gain control of the Company. Also, Article Third of the
Certificate of Incorporation specifically provides that the Board has the
authority to create the special terms and conditions of the preferred stock
which it issues. The Board is authorized to establish the number of shares of
preferred stock to be issued in any series it decides to issue and to fix the
voting powers, designations, preferences and relative, participating,
optional or other special rights of the preferred stock, including voting
rights and conversion rights, and the qualifications, limitations and
restrictions thereon. Accordingly, it is possible for the Board to seek to
authorize the issuance of a series of preferred stock with rights and
preferences that could affect an attempt to acquire control of the Company.
For example, such additional authorized shares could potentially be issued to
dilute the stock ownership of persons seeking to obtain control of the
Company, or shares of preferred stock with favorable voting rights, such as
the right to elect certain additional directors, or to provide the holders of
other special rights could be created and issued to parties that support the
management of the Company. In addition, the Company has entered into a Rights
Agreement, dated as of April 23, 1999 (the "Rights Agreement"), which could
have the effect of making more difficult an acquisition without the approval
of the Board of Directors. The Rights Agreement should not interfere with any
merger or other business combination approved by the Board of Directors.
The proposed amendment, combined with the power of the Board of
Directors to issue shares of authorized preferred stock and the Rights
Agreement, may have the effect of maintaining the continuity of management and
may make changes in management more difficult, even if a majority of
shareholders might consider such changes advisable.
In accordance with Proposal One, eight Directors will be elected.
If the amendment establishing the classification of the Board into three
is approved by the shareholders, the Board has nominated Gary A. Jones and
<PAGE>
Jack Lahav for election as Class I Directors, to serve until the Company's 2001
annual meeting of shareholders or special meeting in lieu thereof, and until
successors are duly elected and have qualified. The Board has also nominated
John N. Andrea, Scott Koondel and Paul M. Morris for election as Class II
Directors, to serve until the Company's 2002 annual meeting of shareholders
or special meeting in lieu thereof, and until successors are duly elected and
have qualified, and Douglas J. Andrea, Christopher P. Sauvigne and John R.
Larkin for election as Class III Directors, to serve until the Company's 2003
annual meeting of shareholders or special meeting in lieu thereof, and until
successors are duly elected and have qualified.
THE BOARD DEEMS THE PROPOSED AMENDMENT TO THE BYLAWS OF THE COMPANY TO BE IN
THE BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND UNANIMOUSLY
RECOMMENDS THAT THE COMPANY'S SHAREHOLDERS VOTE FOR THE ADOPTION OF THE
PROPOSED AMENDMENT.
PROPOSAL THREE:
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Board of Directors recommends the adoption by shareholders of an
Amendment to Article Third of the Company's Certificate of Incorporation"), to
increase the number of shares of Common Stock that may be issued. The
Certificate of Incorporation currently authorizes the issuance of 25,000,000
shares of Common Stock, having a par value of $.50 per share. The Board of
Directors believes it to be in the best interests of the Company, and has
therefore proposed and declared it advisable, that the Certificate of
Incorporation be amended to increase the number of authorized shares of Common
Stock, par value $.50 per share, to 35,000,000 shares. The Board has directed
that such amendment be submitted to a vote of shareholders at the Annual
Meeting. 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.
Of the shares presently authorized, 13,814,572 shares of Common Stock
were outstanding on April 21, 2000. This does not include 1,486,000 shares of
Common Stock reserved for issuance upon exercise of options granted under
the Company's 1991 Performance Equity Plan, 2,941,375 shares of Common Stock
reserved for issuance upon exercise of options granted under the 1998 Plan,
193,250 shares of Common Stock reserved for additional grants under the 1991
Performance Equity Plan, 30,500 shares of Common Stock reserved for additional
grants under the 1998 Plan, 1,744,235 shares of Common Stock reserved for
issuance upon conversion of the Company's previously issued and outstanding
Series B Preferred Stock and related warrant, and 3,000 shares of Common Stock
reserved for issuance upon conversion of the Company's previously issued 6%
Convertible Notes due June 10, 2000(the "Notes") that remain outstanding.
The Board of Directors believes that the increase in the authorized
shares will provide for flexibility in future planning and will enable the
Company to obtain financing on suitable terms. The Company last increased its
authorized shares of Common Stock in 1998, and the Board of Directors believes
it important in the years ahead for the Company to maintain an authorized
capitalization that will permit a broad range of financing alternatives. If
the Certificate of Incorporation is amended, the additional shares will be
available for issuance from time to time for use in obtaining funds for
present and future operations, for use in conjunction with possible
acquisitions of businesses or properties, for use in possible stock dividends
and stock splits, or for any other proper corporate purpose. The Board of
Directors does not intend to seek further shareholder approval prior to the
issuance of any additional shares in future transactions unless required by
law, by the Company's Certificate of Incorporation, or by the rules of any
stock exchange upon which the stock may be listed, or unless the Company deems
it advisable to do so to qualify (or to continue to qualify) an employee
benefit plan under the Securities Exchange Act of 1934. Common Stock would be
issued only if the Company believed the issuance favorable to, and in the
interests of, the Company and its shareholders.
The newly authorized shares of Common Stock will have voting and other
rights identical to those of the currently authorized shares of Common Stock.
Any issuance of additional shares of Common Stock of the Company would dilute
the equity of the outstanding shares of Common Stock.
<PAGE>
Under the Certificate of Incorporation of the Company, holders of Common
Stock do not have preemptive rights.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ADOPTION OF THIS
PROPOSAL.
PROPOSAL FOUR:
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 April 21,
2000, options covering an aggregate of 2,969,500 shares of the Company's
common stock had been granted under the 1998 Plan with 30,500 shares remaining
for additional grants and unexercised options covering an aggregate of
2,941,375 shares outstanding thereunder. Also as of April 21, 2000, options
covering an aggregate of 3,806,750 shares of the Company's common stock had
been granted under the 1991 Performance Equity Plan with 193,250 shares
remaining for additional grants and unexercised options covering an aggregate
of 1,486,000 shares outstanding 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 3,675,000
shares from 3,000,000 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 Exhibit B 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
<PAGE>
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 than 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
<PAGE>
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
<PAGE>
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 deductio n at such time.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ADOPTION OF THIS
PROPOSAL.
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, 2000, subject to ratification by the
shareholders. Arthur Andersen LLP served as the Company's independent
accountants for the year ended December 31, 1999. 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, 2001 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
May 18, 2000
<PAGE>
ANDREA ELECTRONICS CORPORATION
Solicited By The Board Of Directors for Annual Meeting To Be Held on June 22,
2000.
PROXY
The undersigned Shareholder(s) of ANDREA ELECTRONICS CORPORATION, a New York
corporation ("Company"), hereby appoints John N. Andrea, Douglas J. Andrea,
and Christopher P. Sauvigne, or any one 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 22, 2000 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: John N. Andrea; Douglas J. Andrea; Gary
A. Jones; Scott Koondel; Jack Lahav; John R. Larkin; Paul M. Morris; and
Christopher P. Sauvigne.
FOR ( ) WITHHELD ( )
(INSTRUCTION: To withhold authority to vote for any individual nominee, write
the nominee's name in the space provided)
2. To amend the Bylaws of the Company to divide the Board of Directors into
three classes, each class consisting of approximately one-third of the whole
number of the Board of Directors, to provide for supermajority shareholder
voting to repeal this amendment, and to designate Messrs. Lahav and Jones as
the initial Class I Directors, Messrs. John N. Andrea, Koondel and Morris as
the initial Class II Directors, and Messrs. Douglas J. Andrea, Larkin and
Sauvigne as the initial Class III Directors.
FOR ( ) AGAINST ( ) ABSTAIN ( )
3. To authorize an amendment to the Certificate of Incorporation of the
Company to increase the authorized shares of Common Stock to 35,000,000 shares
from 25,000,000 shares.
FOR ( ) AGAINST ( ) ABSTAIN ( )
4. 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 3,675,000 shares from 3,000,000 shares;
FOR ( ) AGAINST ( ) ABSTAIN ( )
5. To ratify the selection of Arthur Andersen LLP as the Company's independent
accountants for the year ending December 31, 2000.
FOR ( ) AGAINST ( ) ABSTAIN ( )
( ) I plan on attending the Annual Meeting.
Date , 2000
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
Exhibit A
PROPOSED BYLAW AMENDMENTS
The Bylaws of the Company would be amended by:
replacing Article IV, Section 4.2 in its entirety with the following:
4.2. Number, Election and Term of Office. Until changed as hereinafter
provided, the number of directors shall be not less than three (3) nor more
than ten (10) as may be from time to time fixed by resolution of the Board of
Directors, but no decrease in the number of directors shall have the effect of
shortening the term of an incumbent director. The directors shall be
classified with respect to the time for which they shall severally hold office
by dividing them into three classes, all being as nearly equal as possible.
Each director shall hold office until his or her successor is elected and
qualified, or until his or her earlier death, resignation or removal. The
initial directors of the first class shall serve for a term of one year; the
initial directors of the second class shall serve for a term of two years; and
the initial directors of the third class shall serve for a term of three
years, and subject to the provisions of Section 4.4.2 of this Article IV, at
each annual election after the initial classification of the Board of
Directors, successors to the directors whose terms shall expire that year
shall be elected to hold office for a term of three years, so that the term of
office of one class of directors shall expire in each year. The directors
shall be elected annually by the shareholders entitled to vote at the annual
meeting of shareholders, by a plurality of the votes at such election. Each
director (whether elected at an annual meeting or to fill a vacancy or
otherwise) shall continue in office until the annual meeting of shareholders
held next after his or her election and until his or her successor shall have
been elected and qualified or until his or her earlier death, resignation or
removal in the manner hereinafter provided. No amendment to these Bylaws shall
amend, alter or repeal any of the provisions of this Section 4.2 unless the
amendment effecting such amendment, alteration or repeal shall receive the
affirmative vote of or consent of the holders of seventy-five percent (75%) of
all shares of stock of the Corporation entitled to vote at a meeting of
shareholders held for the purpose of voting on such amendment, considered as
one class; provided that this seventy-five percent (75%) vote shall not be
required for, any such amendment recommended to the shareholders pursuant to a
resolution of the Board of Directors approved by two-thirds of the Continuing
Directors. For purposes of this Section 4.2, a "Continuing Director" shall
mean any Director of the Corporation who is or becomes a Director on the date
that this Section 4.2 is first adopted by the Corporation's shareholders or
any Director elected by a majority of the Continuing Directors then in office
to succeed any Director or to fill any vacancy on the Board of Directors
whether resulting from an increase in the number of Directors or otherwise.
Section 4.4.2 of the Company's By-Laws, referenced in the above text of
proposed Section 4.2, reads as follows:
4.4.2. Vacancies. If any vacancy shall occur among the directors by
reasons of death, resignation, disqualification, removal with cause or by
reason of an increase in the number of directors or otherwise, such vacancy
may be filled by a majority vote of the remaining directors, though less than
a quorum. Any such vacancy and a vacancy resulting from a removal without
cause may also be filled by a majority of the shareholders present and
entitled to vote at any meeting held during the existence of such vacancy,
provided that the notice of such meeting shall have mentioned such vacancy or
expected vacancy.
<PAGE>
Exhibit B
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
<PAGE>
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.
<PAGE>
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;
<PAGE>
(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
<PAGE>
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;
<PAGE>
(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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
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: ___________________________________________________________________
____________________________________________________________________________
Date Received:
