SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
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ANDREA ELECTRONICS CORPORATION
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ANDREA ELECTRONICS CORPORATION
11-40 45th Road
Long Island City, New York 11101
---------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 19, 1997
---------------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of ANDREA
ELECTRONICS CORPORATION ("Company") will be held at the Garden City Hotel,
45 7th Street, Garden City, New York 11530, on Thursday, June 19, 1997 at
10:00 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;
2. To authorize an amendment to the Certificate of Incorporation of the
Company to increase the authorized shares of Common Stock to 15,000,000 shares
from 10,000,000 shares;
3. To authorize an amendment to the Company's 1991 Performance Equity
Plan to increase the number of shares issuable thereunder to 2,000,000
shares from 1,500,000 shares;
4. To ratify the selection of Arthur Andersen LLP as the Company's
independent accountants for the year ending December 31, 1997; and
5. To transact such other business as may properly come before the
meeting, and any adjournment(s) thereof.
The transfer books will not be closed for the Annual Meeting. Only
shareholders of record at the close of business on May 9, 1997 will be
entitled to notice of, and to vote at, the meeting and any adjournments
thereof.
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
Jeffrey S. Gosman
Secretary
Long Island City, New York
May 17, 1997
ANDREA ELECTRONICS CORPORATION
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PROXY STATEMENT
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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 19, 1997 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 11-40 45th Road, Long
Island City, New York 11101. On or about May 17, 1997, this Proxy Statement,
the enclosed form of proxy and the Company's Annual Report to Shareholders for
the fiscal year ended December 31, 1996, which contains audited financial
statements, are to be mailed to shareholders of record as of the close of
business on May 9, 1997. 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 increase in the number of authorized shares of Common Stock to 15,000,000
shares from 10,000,000 shares, "FOR" the increase in the number of shares
issuable under the Company's 1991 Performance Equity Plan (the "1991 Plan")
to 2,000,000 shares from 1,500,000 shares, "FOR" the selection of Arthur
Andersen LLP to serve as the Company's independent accountants for the year
ending December 31, 1997, 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 such 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.
QUORUM
The presence of a majority of the outstanding shares of Common Stock,
represented in person or by proxy at the Annual Meeting, will constitute a
quorum. Shares represented by proxies that are marked "abstain" and proxies
relating to "street name" shares that are returned to the Company but marked
by brokers as "not voted" ("broker non-votes") will be treated as shares
present for purposes of determining the presence of a quorum on all matters
unless authority to vote is completely withheld on the proxy.
RECORD DATE; OUTSTANDING SHARES
The Board of Directors has fixed the close of business on May 9, 1997
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 May 9, 1997, an aggregate of 4,038,277 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 29, 1997
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
whose compensation exceeded $100,000 in the 1996 fiscal year, and (iv) all
directors and executive officers of the Company as a group. The total number
of shares of Common Stock outstanding on April 29, 1997 was 4,038,277.
NAME OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) CLASS
- ------------------ -------------------- ----------
Camille Andrea Casling (2) 398,371 9.9%
Frank A. D. Andrea, Jr.(2) 391,341(3) 9.7%
Mary Louise Andrea (2) 391,341(3) 9.7%
ANC-I Limited Partnership(4) 230,000 5.7%
Douglas J. Andrea (2) 201,615(5) 4.8%
John N. Andrea (2) 186,066(6) 4.4%
Patrick D. Pilch 50,000(7) 1.2%
Paul M. Morris 25,000 *
Christopher Dorney 5,200(8) *
Scott Koondel 5,000(8) *
Gary A. Jones 6,550(9) *
Directors and Executive
Officers as a group
(8 persons) 870,772(10) 19.7%
- ---------------------------
* Less than 1%.
(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 are
owned of record and beneficially and the persons identified have sole voting and
investment power with respect thereto.
(2) Camille Andrea Casling is a sister of Frank A.D. Andrea, Jr., Chairman
of the Company. Mary Louise Andrea is the spouse of Frank A.D. Andrea, Jr.,
Douglas J. Andrea and John N. Andrea, Co-Presidents of the Company, are the
sons of Frank A.D. Andrea, Jr. and Mary Louise Andrea. The address of each of
these individuals and ANC-I Limited Partnership is c/o the Company, 11-40 45th
Road, Long Island City, New York 11101.
(3) Includes (i) 191,341 shares owned directly by Frank A.D. Andrea, Jr.
and Mary Louise Andrea, his spouse, and (iii) 200,000 of the 230,000 shares
owned by ANC-I Limited Partnership, representing Mr. Andrea's 43.48% and
Mrs. Andrea's 43.48% interest in ANC-I Limited Partnership.
Page 2
(4) 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.
(5) Includes (i) 16,972 shares owned directly by Douglas J. Andrea and
Mr. Andrea's spouse, (ii) 3,643 shares owned by Mr. Andrea's spouse,
(iii) 6,000 of the 230,000 shares owned by ANC-I Limited Partnership,
representing Mr. Andrea's 2.6% interest in ANC-I Limited Partnership, and
(iv) 175,000 shares issuable upon the exercise of options which are currently
exercisable and exercisable within 60 days from the date hereof. Does not
include (x) 25,000 shares issuable upon the exercise of outstanding options
which are not currently exercisable or exercisable within 60 days from the
date hereof and (y) 75,000 shares issuable upon the exercise of options that
are subject to approval by the shareholders of the Company of the increase in
the number of shares issuable under the 1991 Plan and that vest over four
years from the date of grant.
(6) Includes (i) 12,339 shares owned directly by John N. Andrea and Mr.
Andrea's spouse, (ii) 17,727 shares owned by Mr. Andrea's minor children,
(iii) 6,000 of the 230,000 shares owned by ANC-I Limited Partnership,
representing Mr. Andrea's 2.6% interest in ANC-I Limited Partnership, and
(iv) 150,000 shares issuable upon the exercise of options which are currently
exercisable and exercisable within 60 days from the date hereof. Does not
include (x) 25,000 shares which are not currently exercisable or exercisable
within 60 days from the date hereof and (y) 75,000 shares issuable upon the
exercise of options that are subject to approval by the shareholders of the
Company of the increase in the number of shares issuable under the 1991 Plan
Plan and that vest over four years from the date of grant.
(7) Includes (i) 25,000 shares owned directly by Patrick D. Pilch and
(ii) 25,000 shares issuable upon the exercise of options which are currently
exercisable pursuant to the terms of the 1991 Plan. Does not include
(x) 25,000 shares issuable upon the exercise of options which are not
currently exercisable and will not become exercisable within 60 days from the
date hereof and (y) 50,000 shares issuable upon the exercise of options that
are subject to approval by the shareholders of the Company of the increase in
the number of shares issuable under the 1991 Plan and that vest over four
years from the date of grant.
(8) Includes 5,000 shares issuable upon the exercise of options which are
currently exercisable pursuant to the terms of the 1991 Plan. Does not
include 5,000 shares issuable upon the exercise of options which are not
currently exercisable and will not become exercisable within 60 days from the
date hereof.
(9) Includes 6,250 shares issuable upon the exercise of options which are
currently exercisable pursuant to the terms of the 1991 Plan. Does not
include 28,250 shares issuable upon the exercise of options which are not
currently exercisable and will not become exercisable within 60 days from the
date hereof.
(10) Includes the shares issuable upon the exercise of the options discussed
in notes (5) through (9) above.
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, 1996, all Section 16(a) filing requirements were complied
with, except that one monthly report was filed late by Frank A.D. Andrea, Jr.,
Douglas J. Andrea and John N. Andrea.
Page 3
PROPOSAL ONE: ELECTION OF DIRECTORS
The By-laws of the Company provide that the Board of Directors shall
determine the number of directors. The Board has determined that the number
of directors to be elected at the annual meeting shall be 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. Such persons
include all of the executive officers 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.
INFORMATION ABOUT NOMINEES
Frank A.D. Andrea, Jr., age 70, has been Chairman of the Board since
December 1965 and a Director of the Company since 1962. He served as
President of the Company from December 1965 to November 1992. Mr. Andrea is
the father of Douglas J. Andrea and John N. Andrea.
John N. Andrea, age 39, has been Co-President of the Company since
November 1992 and a Director of the Company since 1992. He served 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 34, has been Co-President of the Company since
November 1992 and a Director of the Company since 1991. He served as Vice
President - Engineering of the Company from December 1991 to November 1992,
and as Secretary of the Company from 1989 to January 1993. Mr. Andrea is the
son of Frank A.D. Andrea, Jr. and the brother of John N. Andrea.
Patrick D. Pilch, age 37, has been Executive Vice President and Chief
Financial Officer of the Company since April 1995 and a Director of the
Company since 1992. He served as Vice President - Investment Banking at
Greenwich Capital Markets, Inc. from November 1991 to April 1995, and is a
Certified Public Accountant.
Paul M. Morris, age 36, 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.
Christopher Dorney, age 54, has been a Director of the Company since
April 1995 and is the President of Andrea Military Communications, LLC.
From September 1994 to April 1995, he was President of the Pulse Laser
Division of Holographics, Inc. He served as Director of Business Development
at Grumman Corporation's Electronic System Division from January 1989 to
September 1994.
Scott Koondel, age 33, has been a Director of the Company since April
1995. He has been the Eastern Manager, Off-Network Television, Paramount
Pictures, a subsidiary of Viacom International since June 1993, and was the
National Sales Manager for WPIX-TV, a division of Tribune Broadcasting, from
June 1990 to June 1993.
Page 4
Gary A. Jones, age 51, 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.
DIRECTORS' FEES, BOARD MEETINGS AND COMMITTEES
The Board does not have a nominating committee or a committee performing
similar functions. In fiscal 1996, the Audit Committee was comprised of
Messrs. Douglas J. Andrea, Paul M. Morris, Christopher Dorney and Scott
Koondel. The Audit Committee meets with management to consider the adequacy
of the internal controls of the Company and the objectivity of the financial
reporting; the committee also meets with the independent accountants and with
appropriate Company financial personnel about these matters. The Audit
Committee met four times during 1996. The Compensation Committee is
comprised of Paul M. Morris, Scott Koondel and Christopher Dorney. The
Compensation Committee administers the 1991 Plan and makes recommendations to
the Board of Directors with respect to the compensation of management. The
Compensation Committee met four times in 1996. The Board of Directors held
six meetings during the last year. None of the directors attended less than
75% of such meetings. Each outside director receives a fee of $1,000 for each
meeting attended. Paul M. Morris, Scott Koondel, Gary A. Jones and Christopher
Dorney were each paid directors' fees in the amount of $6,000 during 1996.
EXECUTIVE COMPENSATION
The following table sets forth information for the last three fiscal
years, respecting compensation earned by the four most highly compensated
executive officers earning over $100,000, including the Chief Executive
Officer.
LONG-TERM
COMPENSATION
--------------------
ANNUAL COMPENSATION AWARDS
----------------------------------- --------------------
OTHER RESTRICTED ALL
ANNUAL STOCK STOCK OTHER
NAME AND SALARY BONUS COMPENSATION AWARDS OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($)
- ------------------------ ---- -------- -------- ------------- ---------- -------- ------------
Frank A.D. Andrea, Jr. 1996 170,640 0 2,079(1) 0 0 0
Chairman of the Board, 1995 161,160 0 8,820(2) 0 0 0
Chief Executive Officer 1994 204,109 15,000 2,344(3) 0 0 0
John N. Andrea 1996 202,885 0 7,071(4) 0 0 0
Co-President 1995 174,616 0 7,313(5) 0 50,000(6) 0
1994 141,956 10,000 3,987(7) 0 0 0
Douglas J. Andrea 1996 195,577 5,000 9,651(8) 0 0 0
Co-President 1995 184,616 0 7,955(9) 0 50,000(6) 0
1994 142,500 10,000 1,916(10) 0 0 0
Patrick D. Pilch 1996 157,500 0 1,555(11) 0 0 0
Executive Vice President, 1995 73,077(12) 0 0 0 50,000(6) 0
Chief Financial Officer
(1) Represents car allowance payments of $2,079.
(2) Represents contribution to Company's profit sharing plan equal to $6,750,
or 4.2% of Frank Andrea's salary, and car allowance payments of $2,070.
Page 5
(3) Represents contribution to Company's profit sharing plan equal to $2,344,
or 1.1% of Frank Andrea's salary.
(4) Represents contribution to Company's profit sharing plan equal to $4,500,
or 2.2% of John Andrea's salary, and car allowance payments of $2,571.
(5) Represents contribution to Company's profit sharing plan equal to $4,506,
or 2.6% of John Andrea's salary, and car allowance payments of $2,807.
(6) Represents number of shares covered by options granted in September 1994.
Such grant was subject to shareholder approval of an increase in the number of
shares covered by the 1991 Plan, which approval was obtained in September
1995.
(7) Represents contribution to Company's profit sharing plan equal to $3,987,
or 2.8% of John Andrea's salary.
(8) Represents contribution to Company's profit sharing plan equal to $6,750,
or 3.3% of Douglas Andrea's salary, and car allowance payments of $2,901.
(9) Represents contribution to Company's profit sharing plan equal to $6,059,
or 3.3% of Douglas Andrea's salary, and car allowance payments of $1,896.
(10) Represents contribution to Company's profit sharing plan equal to
$1,916, or 1.3% of Douglas Andrea's salary.
(11) Represents car allowance payments of $1,555.
(12) Mr. Pilch joined the Company on April 1, 1995.
The Company did not grant any stock options or stock appreciation rights
during fiscal year 1996 to any of the named executive officers.
Page 6
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 year 1996 and the aggregate dollar value of in-the-money,
unexercised options at December 31, 1996. None of the named executive
officers exercised or held any SARs during fiscal year 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
Number of Securities Value of Unexercised
Shares Underlying Options at In-the-Money Options
Acquired on Value Fiscal Year End -- at Fiscal Year End --
Name Exercise Realized Exercisable/Unexercisable
Exercisable/Unexercisable(1)
- ------------- ----------- -------- ------------------------- ------------------------
Frank A.D. Andrea, Jr. 100,000 (2) $556,646 150,000 shares/ $1,427,100/
0 shares (2)(6) $0
John N. Andrea 25,000 (3) $0 150,000 shares/ $1,206,250/
25,000 shares (3)(6) $0
Douglas J. Andrea 0 $0 175,000 shares/ $1,447,500/
25,000 shares (4)(6) $0
Patrick D. Pilch 0 $0 50,000 shares/ $ 241,250/
25,000 shares (5)(6) $0
(1) Values were based on a closing trade price for the Company's Common Stock
on December 31, 1996 of $11 per share.
(2) Frank A. D. Andrea was granted options under the 1991 Plan to purchase
100,000 shares at a price of $.908 per share on December 31, 1991 (all of which
were exercised during 1996) and to purchase 150,000 shares at a price of $1.486
per share on June 26, 1992.
(3) John N. Andrea was granted options under the 1991 Plan to purchase 150,000
shares at $1.35 per share on June 26, 1992 (of which options for 25,000 shares
were exercised during 1996) and to purchase 50,000 shares at a price of $12.00
per share on September 12, 1994.
(4) Douglas J. Andrea was granted options under the 1991 Plan to purchase
150,000 shares at $1.35 per share on June 26, 1992 and to purchase 50,000
shares at a price of $12.00 per share on September 12, 1994.
(5) Patrick D. Pilch was granted options under the 1991 Plan to purchase
12,500 shares at $1.35 per share on June 26, 1992, to purchase 12,500 shares
at $1.35 per share on October 26, 1992 and to purchase 50,000 shares at a
price of $12.00 per share on September 12, 1994.
(6) Of the options granted, none are exercisable during the first year
following grant; 25% of the options become exercisable during the second
year following grant; an additional 25% become exercisable during the third
year following grant; and the remaining 50% become exercisable during the
fourth year following grant.
Page 7
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In 1996, the Company formed Andrea Military Communications, LLC
("AMC"), a Delaware limited liability company, in which the Company has a
72.7% equity interest. The purpose of AMC is to collaborate with Northrop
Grumman in accordance with the Company's agreement with Northrop Grumman
relating to the qualification for military sales and subsequent marketing
of headsets that incorporate Andrea Anti-Noise/(Registered Trademark)/
technology to military customers. Among the members of AMC is a corporation
owned by Christopher Dorney, a director of the Company. In exchange for this
corporation acting as a manager of AMC through Mr. Dorney, this corporation
was granted a 13.6% equity interest in AMC. In addition, commencing upon the
award of a contract for the purchase of the headsets from Northrop Grumman to
AMC, this corporation will receive an annual base compensation of $125,000,
plus monetary or other compensation sufficient to provide insurance and other
benefits to Mr. Dorney equivalent to those of the officers of the Company,
plus an annual bonus in a range between 0% and 40% of the base compensation.
Also immediately upon the award of such purchase contract, this corporation
will be awarded warrants to purchase 50,000 shares of Andrea Common Stock at
an exercise price of $10.00 per share, which warrants will vest at an annual
rate of 20% beginning on the first anniversary of the date of the award. No
assurance can be given that the headsets that are the subject of the agreement
with Northrop Grumman will be qualified for purchase by the military or that a
contract for the purchase of the headsets will by awarded by Northrop Grumman
to AMC. In addition, Mr. Dorney received $60,000 in consulting fees related
to AMC during 1996.
During 1996 the Company paid an aggregate of $105,850 to Digital
Technologies, Inc., a software development company of which Gary A. Jones,
a director of the Company, is the President. Of this amount, $90,000 was for
software development fees and $15,850 was for reimbursable expenses. The
Company expects to pay similar fees to this company during 1997.
Page 8
STOCK PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the
cumulative total shareholder return for the five years ended December 31,
1996 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 Company used this SIC index in and
prior to 1996. In 1996, the Company elected to begin to compare its yearly
percentage change in total shareholder return against the AMEX High
Technology Subindex because during 1995 the Company commenced sales of
products embodying its Andrea Anti-Noise(Registered Trademark) technology for
voice-activated computing, telecommunications and computer/Internet
communications. This Subindex was discontinued by the AMEX at the end of
1996. The graph assumes a $100 investment on January 1, 1992 and the
reinvestment of all dividends.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG
ANDREA ELECTRONICS CORPORATION, AMEX MARKET INDEX, AND SIC CODE INDEX
SIC
Andrea AMEX Code
Electronics Market Industry
Year Corporation Index Index
- ---- ----------- ------ -----
1992 511.43 101.37 118.99
1993 2,757.14 120.44 194.22
1994 2,728.57 106.39 249.12
1995 1,385.71 137.13 251.68
1996 1,257.14 144.70 256.44
Page 9
COMPENSATION COMMITTEE REPORT
For the year ended December 31, 1996, the majority of the Compensation
Committee of the Board of Directors for the Company was composed of
independent Directors. Currently, the Compensation Committee is comprised of
Paul M. Morris, Scott Koondel and Christopher Dorney. The Compensation
Committee is responsible for establishing and monitoring compensation policies
of the Company, evaluating the performance of executive officers 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
extensive consultative studies of best compensation practices within the
industry in which the Company is engaged. The Committee reviews the
evaluations and sets compensation levels for the coming year.
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.
Compensation Committee
Paul M. Morris
Scott Koondel
Christopher Dorney
PROPOSAL TWO: AMENDMENT OF CERTIFICATE OF INCORPORATION
The Board of Directors recommends 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 10,000,000
shares of Common Stock, having a par value of $.50 per share. Although the
Company has no present understandings, agreements, or plans concerning the
issuance of any of the additional shares to be authorized, 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 15,000,000 shares. The Board has directed
that such amendment be submitted to a vote of shareholders at the Annual
Meeting.
Of the shares presently authorized, 4,038,277 shares of Common Stock
were outstanding on May 9, 1997. This does not include 893,875 shares of
Common Stock reserved for issuance upon exercise of options granted under the
the 1991 Plan, 260,000 shares of Common Stock reserved for issuance upon
exercise of options that would be granted under the 1991 Plan in the event that
the shareholders of the Company approve an increase
Page 10
in the number of shares
issuable under the 1991 Plan, 11,875 shares of Common Stock reserved for
issuance upon exercise of previously issued warrants, and 198,583 shares of
Common Stock reserved for issuance upon exercise of previously issued
convertible subordinated debentures. 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 1992, 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 could dilute
the equity of the outstanding shares of Common Stock.
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 THREE: APPROVAL AND AUTHORIZATION OF AN INCREASE IN THE NUMBER OF
SHARES SUBJECT TO THE ANDREA ELECTRONICS CORPORATION 1991 PERFORMANCE
EQUITY PLAN
The Board 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 granting of stock or stock related incentive
awards, the opportunity to participate in the value and/or appreciation in
value of the Company's Common Stock. As of March 31, 1997, options granted
under the Plan exercisable for 893,875 shares were outstanding and no
additional shares were available for new options under the 1991 Plan.
Therefore, on April 1, 1997, the Board approved an increase in the number of
shares available for grant under the 1991 Plan to 2,000,000 shares from
1,500,000 shares. At the Annual Meeting, shareholders will be asked to
approve and authorize an amendment to the 1991 Plan to increase the number of
shares available for grant to 2,000,000 shares from 1,500,000 shares. The
affirmative vote of the holders of a majority of all outstanding shares
entitled to vote thereon is required to approve and adopt the increase in
the number of shares subject to the 1991 Plan. With respect to this matter,
abstentions and broker non-votes will have the same effect as a negative vote.
In December 1991 the Board adopted the 1991 Plan which was
subsequently approved by the shareholders of the Company. In September 1994,
the Board approved an increase in the shares available for grant under the
1991 Plan to 1,500,000 shares from 1,000,000 shares, which was subsequently
approved by the shareholders of the Company. At the Annual Meeting,
shareholders will be asked to approve and authorize an
Page 11
amendment to the 1991
Plan to increase the number of shares available for grant to 2,000,000 shares
from 1,500,000 shares.
The following discussion summarizes the material terms of the 1991 Plan.
Summary of the 1991 Plan
Administration. The 1991 Plan is administered by the Board or, at its
discretion, by a stock option committee (the "Committee") appointed by
the Board, whose members serve at the pleasure of the Board. (The
Compensation Committee currently serves as the Committee.)
The Committee has full authority, subject to the
provisions of the 1991 Plan, to award (i) Stock Options, (ii) Stock
Appreciation Rights, (iii) Restricted Stock, (iv) Deferred Stock, (v)
Stock Reload Options and/or (vi) other stock-based awards (collectively
"Awards"). Subject to the provisions of the 1991 Plan, the Committee
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 (e.g., Stock Option, Restricted Stock), the
number of shares subject to each Award, share prices, any restrictions
or limitations on such Awards (e.g., the "Deferral Period" in the grant
of Deferred Stock and the "Restriction Period" when Restricted Stock is
subject to forfeiture), and any vesting, exchange, deferral, surrender,
cancellation, acceleration, termination, exercise or forfeiture
provisions related to such Awards. The interpretation and construction by
the Committee of any provisions of, and the determination by the Committee
of any questions arising under, the 1991 Plan or any rule or regulation
established by the Committee pursuant to the 1991 Plan, shall be final,
conclusive and binding on all persons interested in the 1991 Plan. Awards
under the 1991 Plan are evidenced by agreements.
To date, the Company has granted options to purchase 1,500,000 shares
of Common Stock at an average exercise price of $4.85 per share, of which
options covering 893,875 shares at an average exercise price of $8.05 per
share were outstanding on April 30, 1997, and the Board of Directors has
approved additional options exercisable for 260,000 shares of Common Stock
all at an exercise price of $10.625 per share, which additional options are
subject to the approval of the shareholders of the Company of the proposed
increase in the number of shares issuable under the 1991 Plan. The last
sale price of the Company's Common Stock on April 30, 1997 was $11.875 per
share.
In order to prevent the dilution or enlargement of the rights of
Holders under the 1991 Plan, the number of shares of Common Stock
authorized by the 1991 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 dividend, stock split,
reverse stock split, merger, reorganization, consolidation,
recapitalization or other change in corporate structure affecting the
Company's stock. The shares of Common Stock acquirable pursuant to the
Awards will be made available, in whole or in part, from authorized and
unissued shares of Common Stock. If any Award granted under the 1991
Plan is forfeited or terminated, the shares of Common Stock that were
available pursuant to such Award shall again be available for
distribution in connection with Awards subsequently granted under the
1991 Plan.
Eligibility. Subject to the provisions of the 1991 Plan, Awards may be
granted to key employees, officers, directors and consultants who are
deemed to have rendered or to be able to render significant services to
the Company and are deemed to have contributed or to have the potential
to contribute to the success of the Company. Incentive Stock Options
may be awarded only to persons who, at the time of such awards, are
employees of the Company.
Page 12
Types of Awards.
Options. The 1991 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-qualified Options"), both of which may be
granted with any other stock based award under the 1991 Plan. The
Committee will determine the exercise price per share of Common Stock
purchasable under an Incentive or Non-qualified 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-qualified Option may 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 granted within
a 10-year period commencing from December 31, 1991 and 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). Subject
to any limitations or conditions the Committee may impose, Options may
be exercised, in whole or in part, at any time during the term of the
Option by giving written notice of exercise to the Company specifying
the number of shares of Common Stock to be purchased. Such notice must
be accompanied by payment in full of the purchase price, either in cash
or in securities of the Company, or in combination thereof.
Options granted under the 1991 Plan are exercisable only by the Holder
during his or her lifetime. The Options granted under the 1991 Plan
may not be transferred other than by will or by the laws of descent and
distribution, except that the Committee in its sole discretion may
allow a Non-qualified Option to be transferred to a family group member
as defined in the 1991 Plan.
Generally, if the Holder is an employee, no Option, or any portion
thereof, granted under the 1991 Plan may be exercised by the Holder
unless he or she is employed by the Company or a Subsidiary at the time of
exercise and has been so employed continuously from the time the Option
was granted. However, in the event the Holder's employment with the
Company is terminated due to disability, the Holder may still exercise
his or her Option for a period of one year (or such other lesser period
as the Committee 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 if 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
decedent Holder's Option for a period of one year from death (or such
other greater or lesser period as the Committee specifies at the time
of grant) or until the expiration of the stated term of the Option,
whichever is shorter. Further, if the Holder's employment is
terminated without cause or due to normal retirement (upon attaining
the age of 65), then the portion of any Option which has vested by the
date of such retirement may be exercised for the lesser of three months
after retirement or the balance of the Option's term.
Other. The Committee may grant Stock Appreciation Rights ("SARs" or
singularly "SAR") in conjunction with all or part of any Option granted
under the 1991 Plan, or may grant SARs on a free-standing basis. In
conjunction with Non-qualified Options, SARs may be granted either at
or after the time of the grant of such Non-qualified Options. In
conjunction with Incentive Options, SARs may be granted only at the
time of the grant of such Incentive Options. An SAR entitles the
Holder thereof to receive an amount (payable in cash and/or Common
Stock as determined by the Committee) equal to the excess fair market
value of one share of Common Stock over the SAR price or the exercise
price of the related Option, multiplied by the number of shares subject
to the SAR. Additionally, the Committee may award shares of Restricted
Stock, Deferred Stock and other stock-based awards either alone or in
addition to or in tandem with other Awards granted under the 1991 Plan.
Page 13
Stock Reload Options. The Committee may grant Stock Reload Options in
conjunction with any Option granted under the 1991 Plan. In conjunction with
Incentive Options, Stock Reload Options may be granted only at the time of
the grant of such Incentive Option. In conjunction with Non-qualified
Options, Stock Reload Options may be granted either at or after the time of
the grant of such Non-qualified Options. A Stock Reload Option permits a
Holder who exercises an Option, by delivering already owned stock (i.e., the
stock-for-stock method), to receive back from the Company a new Option (at the
current market price) for the same number of shares delivered to exercise the
Option.
Withholding Taxes. Upon the exercise of any Award granted under the 1991
Plan, the Holder may be required to remit to the Company an amount sufficient
to satisfy all Federal, state and local withholding tax requirements prior to
delivery of any certificate or certificates for shares of Common Stock.
Subject to certain stringent limitations under the 1991 Plan and at the
discretion of the Company, the Holder may satisfy these requirements by
electing to have the Company withhold a portion of the shares to be received
upon the exercise of the Award having a value 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 1991 Plan
shall continue to remain effective until such time as no further Awards
may be granted and all Awards granted under the 1991 Plan are no longer
outstanding. The Board may at any time, and from time to time, amend
the 1991 Plan.
Federal Income Tax Consequences
The following discussion of the federal income tax consequences of
participation in the 1991 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 1991 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.
Page 14
Non-qualified Options. With respect to Non-qualified Options (i) upon
grant of the option, the Participant will recognize no income; (ii) upon
exercise of the option (if the shares of Common Stock are not subject to a
substantial risk of forfeiture), the Participant will recognize ordinary
compensation income in an amount equal to the excess, if any, of the fair
market value of the shares on the date of exercise over the exercise price,
and the Company will qualify for a deduction in the same amount, subject to
the requirement that the compensation be reasonable; and (iii) the Company
will be required to comply with applicable Federal income tax withholding
requirements with respect to the amount of ordinary compensation income
recognized by the Participant. On a disposition of the shares, the
Participant will recognize gain or loss equal to the difference between the
amount realized and the sum of the exercise price and the ordinary
compensation income recognized. Such gain or loss will be treated as capital
gain or loss if the shares are capital assets and as short-term or long-term
capital gain or loss, depending upon the length of time that the participant
held the shares. If the shares acquired upon exercise of a Non-qualified
Option are subject to a substantial risk of forfeiture, the Participant will
recognize income at the time when the substantial risk of forfeiture is
removed and the Company will qualify for a corresponding deduction at
such time.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR the adoption of this
proposal.
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, 1997, subject to ratification by the
shareholders. Arthur Andersen LLP served as the Company's independent
accountants for the year ended December 31, 1996. 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 1997 fiscal year must be received at the Company's offices by
January 2, 1998 for inclusion in the proxy materials relating to that meeting.
Page 15
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. Any such
matter properly coming before the Annual Meeting will be decided by a majority
of the votes cast with respect to such matter. Abstentions and broker
non-votes are not considered as cast and, accordingly, will have no effect on
the vote with respect to such matter.
By Order of the Board of Directors
Jeffrey S. Gosman
Secretary
Long Island City, New York
May 17, 1997
Page 16
ANDREA ELECTRONICS CORPORATION
Solicited By The Board Of Directors for Annual Meeting To Be Held on June 19,
1997
PROXY
The undersigned Shareholder(s) of ANDREA ELECTRONICS CORPORATION, a New York
corporation ("Company"), hereby appoints Frank A.D. Andrea, Jr. and John N.
Andrea, or either of them, with full power of substitution and to act without
the other, as the agents, attorneys and proxies of the undersigned, to vote
the shares standing in the name of the undersigned at the Annual Meeting of
Shareholders of the Company to be held on June 19, 1997 and at all
adjournments thereof. This proxy will be voted in accordance with the
instructions given below. If no instructions are given, this proxy will be
voted FOR all of the following proposals.
1. To elect the following Directors: Frank A.D. Andrea, Jr.; Douglas J.
Andrea; John N. Andrea; Christopher Dorney; Gary A. Jones; Scott Koondel; Paul
M. Morris; and Patrick D. Pilch.
FOR ( ) WITHHELD ( )
(INSTRUCTION: To withhold authority to vote for any individual nominee write
the nominee's name in the space provided)
2. To authorize an amendment to the Certificate of Incorporation of the
Company to increase the authorized shares of Common Stock to 15,000,000 shares
from 10,000,000 shares.
FOR ( ) AGAINST ( ) ABSTAIN ( )
3. To authorize an amendment to the Company's 1991 Performance Equity
Plan to increase the number of shares issuable thereunder to 2,000,000 shares
from 1,500,000 shares.
FOR ( ) AGAINST ( ) ABSTAIN ( )
4. To ratify the selection of Arthur Andersen LLP as the Company's independent
accountants for the year ending December 31, 1997.
FOR ( ) AGAINST ( ) ABSTAIN ( )
5. In their discretion, the proxies are authorized to vote upon such other
business as may come before the meeting or any adjournment thereof.
( ) I plan on attending the Annual Meeting.
Date , 1997
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.