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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:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
ANDREA ELECTRONICS CORPORATION
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(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
N/A
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(NAME OF PERSON(S) FILING PROXY STATEMENT)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(I)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing
fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing for which the offsetting fee was paid previously.
Identify the previous filing by registration statement number, or the Form or
Schedule and the date of its filing.
1) Amount Previously Paid:
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2
ANDREA ELECTRONICS CORPORATION
11-40 45th Road
Long Island City, New York 11101
---------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER __, 1998
---------------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of ANDREA
ELECTRONICS CORPORATION ("Company") will be held at the Hotel
Intercontinental,111 East 48th Street, New York, New York 10017, on ____day,
September __, 1998 at 10:00 A.M. local time, for the following purposes:
1. To elect nine 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 Restated Certificate of Incorporation,
as amended, of the Company to increase the authorized shares of Common Stock
to 25,000,000 shares from 15,000,000 shares;
3. To authorize an amendment to the Restated Certificate of Incorporation,
as amended, of the Company to permit the issuance of up to 5,000,000 shares of
Preferred Stock;
4. To authorize the adoption of the Andrea Electronics Corporation 1998
Stock Option Plan, for which the availability of shares of Common Stock depends
upon the approval of Proposal Two;
5. To ratify the selection of Arthur Andersen LLP as the Company's
independent accountants for the year ending December 31, 1998; and
6. 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 August__, 1998 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
Richard A. Maue
Secretary
Long Island City, New York
August __, 1998
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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 September __, 1998 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 August __, 1998, this Proxy
Statement, the enclosed form of proxy and the Company's Annual Report to
Shareholders for the fiscal year ended December 31, 1997, which contains
audited financial statements, are to be mailed to shareholders of record as
of the close of business on August __, 1998. 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 25,000,000
shares from 15,000,000 shares, "FOR" the authorization to issue up to
5,000,000 shares of preferred stock, "FOR" the adoption of the Andrea
Electronics Corporation 1998 Stock Option Plan (the "1998 Plan"), "FOR" the
selection of Arthur Andersen LLP to serve as the Company's independent
accountants for the year ending December 31, 1998, 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.
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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. With respect to
Proposal One, the election of each person proposed for election as a Director
requires a plurality of those shares voted at the meeting with respect to the
election of that Director. Accordingly, abstentions and broker non-votes will
not affect the outcome of the election for Directors of the Company. The
adoption of each of the other Proposals, however, 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.
RECORD DATE; OUTSTANDING SHARES
The Board of Directors has fixed the close of business on August __, 1998
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 August 7, 1998, an aggregate of 11,124,175 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 August 7, 1998
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 1997 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 August 7, 1998 was 11,124,175.
NAME OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) CLASS
- -------------------- -------------------- ----------
Camille Andrea Casling (2) 768,700 6.9%
Frank A. D. Andrea, Jr.(2) 540,800(3) 4.9%
Mary Louise Andrea (2) 540,800(3) 4.9%
ANC-I Limited Partnership(4) 360,000 3.2%
Douglas J. Andrea (2) 338,588(5) 3.0%
John N. Andrea (2) 189,742(6) 1.7%
Patrick D. Pilch 25,000(7) *
Paul M. Morris 18,000(8) *
Christopher Dorney 10,000(9) *
Scott Koondel 10,000(9) *
Gary A. Jones 60,100(10) *
Directors and Executive
Officers as a group
(8 persons) 1,192,230(11) 10.2%
- ----------------------------
Less than 1%.
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(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) 148,086 shares owned directly by Frank A.D. Andrea, Jr.
and Mary Louise Andrea, his spouse, (ii) 67,714 shares owned by a son of Mr.
and Mrs. Andrea, beneficial ownership of which is disclaimed by Mr. and Mrs.
Andrea, (iii) 300,000 of the 360,000 shares owned by ANC-I Limited
Partnership, representing Mr. Andrea's 41.67% and Mrs. Andrea's 41.67%
interest in ANC-I Limited Partnership, and (iv) 25,000 shares issuable upon
the exercise of options which are currently exercisable and exercisable
within 60 days from the date hereof. Does not include 75,000 shares
issuable upon exercise of options under the 1991 Performance Equity Plan
(the "1991 Plan") that are not currently exercisable or exercisable within
60 days from the date hereof.
(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) 39,088 shares owned directly by Douglas J. Andrea and
Mr. Andrea's spouse, (ii) 12,000 of the 360,000 shares owned by ANC-I
Limited Partnership, representing Mr. Andrea's 3.3% interest in ANC-I Limited
Partnership, and (iii) 287,500 shares issuable upon the exercise of options
which are currently exercisable and exercisable within 60 days from the date
hereof. Does not include (i) 162,500 shares issuable upon exercise of options
under the 1991 Plan that are not currently exercisable or exercisable within
60 days from the date hereof and (ii) subject to shareholder approval of the
1998 Plan, 100,000 shares issuable upon exercise of options under the 1998
Plan that are not currently exercisable and would not be exercisable within 60
days from the date hereof.
(6) Includes (i) 438 shares owned directly by John N. Andrea and Mr.
Andrea's spouse, (ii) 39,804 shares owned by Mr. Andrea's minor children,
(iii) 12,000 of the 360,000 shares owned by ANC-I Limited Partnership,
representing Mr. Andrea's 3.3% interest in ANC-I Limited Partnership, and
(iv) 137,500 shares issuable upon the exercise of options which are currently
exercisable and exercisable within 60 days from the date hereof. Does not
include (i) 162,500 shares issuable upon exercise of options under the 1991
Plan that are not currently exercisable or exercisable within 60 days from the
date hereof and (ii) subject to shareholder approval of the 1998 Plan, 100,000
shares issuable upon exercise of options under the 1998 Plan that are not
currently exercisable and would not be exercisable within 60 days from the
date hereof.
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(7) Includes 25,000 shares issuable upon the exercise of options which are
currently exercisable pursuant to the terms of the 1991 Plan. Does not
include (i) 100,000 shares issuable upon exercise of options under the 1991
Plan that are not currently exercisable or exercisable within 60 days from
the date hereof and (ii) subject to shareholder approval of the 1998 Plan,
50,000 shares issuable upon exercise of options under the 1998 Plan that
are not currently exercisable and would not be exercisable within 60 days
from the date hereof.
(8) Does not include 25,000 shares issuable upon exercise of options under
the 1998 Plan that are subject to shareholder approval of the 1998 Plan and
that are not currently exercisable or exercisable within 60 days from the
date hereof.
(9) Includes 10,000 shares issuable upon the exercise of options which are
currently exercisable pursuant to the terms of the 1991 Plan. Does not include
25,000 shares issuable upon exercise of options under the 1998 Plan
that are subject to shareholder approval of the 1998 Plan and that are not
currently exercisable or exercisable within 60 days from the date hereof.
(10) Includes 59,500 shares issuable upon the exercise of options which are
currently exercisable pursuant to the terms of the 1991 Plan. Does not
include (i) 19,500 shares issuable upon exercise of options under the 1991
Plan that are not currently exercisable or exercisable within 60 days from the
date hereof and (ii) subject to shareholder approval of the 1998 Plan, 25,000
shares issuable upon exercise of options under the 1998 Plan that are not
currently exercisable and would not be exercisable within 60 days from the
date hereof.
(11) Includes the shares issuable upon the exercise of the options discussed
in notes (5) through (10) 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, 1997, all Section 16(a) filing requirements were complied
with, except that one monthly report was filed late by Douglas J. Andrea.
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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 nine. 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 71, has been Chairman of the Board and Chief
Executive Officer of the Company 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 40, 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 35, 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 38, has been Executive Vice President and Chief
Financial Officer of the Company since April 1995 and a Director of the
Company since 1992. He served as Vice President - Investment Banking at
Greenwich Capital Markets, Inc. from November 1991 to April 1995, and is a
Certified Public Accountant.
Christopher Dorney, age 55, has been a Director of the Company since
April 1995. He has been President of Andrea Military Communications, LLC,
a subsidiary of the Company. From September 1994 until April 1995, he had
been President of the Pulse Laser Division of Holographics, Inc. since
September 1994. He served as Director of Business Development at Grumman
Corporation's Electronic System Division from January 1989 to September 1994.
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Gary A. Jones, age 52, 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 34, 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 50, co-founded and has been a director since 1993 of
Lamar Signal Processing Ltd., an Israeli digital signal processing company.
Since August 1996, he has been the President of Advanced Technology Inc., a
manufacturer of robotic routing equipment used in manufacturing printed
circuit boards for advanced semiconductors, and from 1990 to 1996, was as 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. Mr. Lahav is a former officer in the Israeli military.
Paul M. Morris, age 37, has been a Director of the Company since 1992.
He has been a Senior Managing Director at Schroder Capital Management since
December 1996. He had been a Partner at Weiss, Peck & Greer from July 1995
to December 1996 and prior to that he was employed by Union Bank of
Switzerland from 1987 to June 1995, where his last position was Managing
Director - Equities.
DIRECTORS' FEES, BOARD MEETINGS AND COMMITTEES
The Board does not have a nominating committee or a committee performing
similar functions. In fiscal 1997, 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 one time during 1997. The Compensation Committee is
comprised of Paul M. Morris, Scott Koondel and Christopher Dorney. The
Compensation Committee administers the 1991 Plan and, subject to shareholder
approval, the 1998 Plan, and makes recommendations to the Board of Directors
with respect to the compensation of management. The Compensation Committee
met one time in 1997. The Board of Directors held six meetings during 1997.
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 Jones and Christopher Dorney were each paid directors'
fees in the amount of $6,000 during 1997.
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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. 1997 177,086 0 4,613(1) 0 100,000 0
Chairman of the Board, 1996 170,640 0 2,079(2) 0 0 0
Chief Executive Officer 1995 161,160 0 8,820(3) 0 0 0
John N. Andrea 1997 250,000 0 7,821(4) 0 150,000 0
Co-President 1996 202,885 0 7,071(5) 0 0 0
1995 174,616 0 7,307(6) 0 100,000(7) 0
Douglas J. Andrea 1997 250,000 4,000 10,652(8) 0 150,000 0
Co-President 1996 195,577 5,000 9,651(9) 0 0 0
1995 184,616 0 7,955(10) 0 100,000(7) 0
Patrick D. Pilch 1997 202,503 0 6,249(11) 0 100,000 0
Executive Vice President, 1996 157,500 0 1,555(12) 0 0 0
Chief Financial Officer 1995 73,077(13) 0 0 0 100,000(7) 0
(1) Represents car allowance payments of $4,613.
(2) Represents car allowance payments of $2,079.
(3) 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.
(4) Represents contribution to Company's profit sharing plan equal to $5,250,
or 2.1% of John Andrea's salary, and car allowance payments of $2,571.
(5) 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.
(6) Represents contribution to Company's profit sharing plan equal to $4,500,
or 2.6% of John Andrea's salary, and car allowance payments of $2,807.
(7) 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.
(8) Represents contribution to Company's profit sharing plan equal to $5,250,
or 2.1% of Douglas Andrea's salary, and car allowance payments of $5,402.
(9) 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.
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(10) 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.
(11) Represents contribution to Company's profit sharing plan equal to $4,575,
or 2.3% of Patrick Pilch's salary, and car allowance payments of $1,674.
(12) Represents car allowance payments of $1,555.
(13) Mr. Pilch joined the Company on April 1, 1995.
The Company granted stock options covering an aggregate of 500,000 shares
of Common Stock during fiscal year 1997 to the named executive officers as
indicated in the above table.
The following table summarizes for each of the named executive officers
the number of shares covered by options granted during 1997, the percent of
total options granted to employees of the Company in 1997, the exercise price
of such options, the expiration date, and the potential realizable value of
such options assuming appreciation rates of 5% and 10% per year through the
expiration date of such options.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants Potential Realizable
----------------------------------------------------- Value at Assumed
Percent of Annual Rates
Number of Total of Stock Price
Securities Options Appreciation for
Underlying Granted Exercise Option Term
Options To Employees Price Expiration ----------------------
Name Granted (#) in Fiscal Year ($/share) Date 5% ($) 10% ($)
- -------------------- ----------- -------------- --------- ---------- --------- ---------
Frank A.D. Andrea, Jr. 100,000 15% 16.75 8/28/07 1,053,398 2,669,519
John N. Andrea 150,000 22% 5.375 4/1/07 507,046 1,284,955
Douglas J. Andrea 150,000 22% 5.375 4/1/07 507,046 1,284,955
Patrick D. Pilch 100,000 15% 5.375 4/1/07 338,031 856,637
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 1997 and the aggregate dollar value of in-the-money,
unexercised options at December 31, 1997. 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
Number of Securities Value of Unexercised
Underlying Options at In-the-Money Options
Shares Fiscal Year End - at Fiscal Year End -
Acquired on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable(1)
- -------------- ----------- -------- ------------------------- --------------------
Frank A.D. Andrea, Jr. 300,000 (2) $3,190,500(2) 0 shares/ $ 0/
100,000 shares (2)(6) $ 118,750
John N. Andrea 125,000 (3) $1,839,598(3) 225,000 shares/ $2,157,813/
150,000 shares (3)(6) $1,884,375
Douglas J. Andrea 100,000 $1,555,500 300,000 shares/ $3,452,500/
150,000 shares (4)(6) $1,884,375
Patrick D. Pilch 75,000 $ 776,938(5) 75,000 shares/ $ 895,313/
100,000 shares (5)(6) $1,256,250
(1) Values were based on a closing trade price for the Company's Common Stock
on December 31, 1997 of $17.9375 per share.
(2) Frank A. D. Andrea was granted options under the 1991 Plan to purchase
300,000 shares at a price of $.743 per share on June 26, 1992 (all of which
were exercised in 1997) and to purchase 100,000 shares at a price of $16.75
per share on August 28, 1997. Value realized does not include $1,052,250
realized from the exercise of options in 1996 that were sold in 1997. None
of the 300,000 shares acquired upon exercise in 1997 were sold in 1997.
(3) John N. Andrea was granted options under the 1991 Plan to purchase
300,000 shares at $.675 per share on June 26, 1992 (of which options for
125,000 shares were exercised during 1997), to purchase 100,000 shares at a
price of $6.00 per share on September 12, 1994 and to purchase 150,000 shares
at a price of $5.375 per share on April 1, 1997. Value realized does not
include $287,000 realized from the exercise of options in 1996 that were sold
in 1997.
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(4) Douglas J. Andrea was granted options under the 1991 Plan to purchase
300,000 shares at $.675 per share on June 26, 1992 (of which options for
100,000 shares were exercised during 1997), to purchase 100,000 shares at a
price of $6.00 per share on September 12, 1994 and to purchase 150,000 shares
at a price of $5.375 per share on April 1, 1997.
(5) Patrick D. Pilch was granted options under the 1991 Plan to purchase
25,000 shares at $.675 per share on June 26, 1992 (all of which were exercised
in 1997), to purchase 25,000 shares at $.675 per share on October 26, 1992 (all
of which were exercised in 1997), to purchase 100,000 shares at a price of
$6.00 per share on September 12, 1994 (of which options for 25,000 shares were
exercised in 1997) and to purchase 100,000 shares at a price of $5.375 per
share on April 1, 1997. None of the 75,000 shares acquired upon exercise in
1997 were sold in 1997.
(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.
Employment Agreements and Change in Control Arrangements
The Company has entered into three-year employment agreements that
commenced on January 1, 1998 with each of John N. Andrea as Co-President of
the Company, Douglas J. Andrea as Co-President of the Company, and Patrick D.
Pilch, as Executive Vice President and Chief Financial Officer of the Company.
Under these agreements, the annual base salaries of John N. Andrea, Douglas J.
Andrea and Patrick D. Pilch are $200,000, $200,000 and $175,000, respectively,
and each agreement provides for additional short-term incentive compensation in
the form of annual cash bonuses based on the achievement of performance goals
and long-term incentive compensation in the form of cash or equity-based
awards. Performance goals, measures and annual awards will be determined by
the Compensation Committee and approved by the Board. Under each agreement,on
the occurrence of a Change in Control (as defined in each agreement), the
Company shall pay the executive, or in the event of his subsequent death, his
beneficiary or beneficiaries, or his estate, as the case may be, a sum equal
to the greater of the payments due for the remaining term of the agreement or
three times the executive's average annual total compensation for the five
preceding taxable years. In addition, on the occurrence of a Change in
Control, all restrictions on any restricted stock then held by the executive
will lapse immediately, incentive stock options and stock appreciation rights
then held by the executive will become immediately exercisable, and any
performance shares or units then held by the executive will vest immediately
in full, and the executive will be entitled to receive benefits due him under
or contributed by the Company on his behalf pursuant to any retirement,
incentive, profit sharing, bonus, performance, disability or other employee
benefit plan maintained by the Company on the executive's behalf to the extent
such benefits are not otherwise paid to the executive under a separate
provision of the agreement. If, during the term of each employment agreement,
the Company terminates the executive's employment other than for Cause (as
defined in each agreement), or the executive resigns for Good Reason (as
defined in each agreement), the Company shall pay to the executive a sum equal
to (i) the amount of the remaining salary payments that the executive would
have earned if he continued his employment with the Company during the
remaining unexpired term of his employment agreement at his base salary at the
date of termination; (ii) the average of the amount of bonus and any other
compensation paid to the executive during the term of his employment agreement
times the remaining number of years of the agreement and any fraction thereof;
and (iii) an amount equal to the average of the annual contributions that were
made on the executive's behalf to any employee benefit plans of the Company
during the term of the agreement times the remaining number of years of the
agreement and any fraction thereof.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In 1996, the Company formed Andrea Military Communications, LLC ("AMC"),
a Delaware limited liability company, in which the Company has a 72.7% equity
interest. The purpose of AMC is to market Andrea Anti-Noise technology for
military applications, including collaboration 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 technology to military customers. Among the
members of AMC is RJC Associates-USA, Inc., 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, with the exact percentage
for any year determined on the basis of a bonus plan approved by the Company.
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. During the
second half of 1997, after various product qualification testing, Northrop
Grumman indicated that it would not proceed with the Andrea headset for the
program that was the original subject of the agreement between the Company and
Northrop Grumman and submitted a purchase order to the Company for a very
limited number of headsets for a second program with which Northrop Grumman is
involved. The Company has decided not to participate in this second program
with Northrop Grumman and, alternatively, intends to pursue future military
business for similar contracts independently.
During 1997 the Company paid an aggregate of $194,206 to Digital
Technologies, Inc. ("DTI"), a software development company of which Gary A.
Jones, a director of the Company, was the President. Of this amount,
approximately 90% was for software development fees and approximately 10% was
for reimbursable expenses. The software under development for the Company by
DTI related to the Company's digital signal processing program. The fee paid
to DTI was based on actual time spent by its employees on this software
development project. In March 1998, Mr. Jones became Managing Director of
Andrea Digital Technologies, Inc., a wholly-owned subsidiary of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
One of the Company's directors and members of its Compensation Committee,
Christopher Dorney, owns RJC Associates-USA, Inc., a corporation that has a
13.6% equity interest in Andrea Military Communications, LLC, the
Delaware limited liability company, in which the Company has a 72.7% equity
interest and the business of which is the application of the Company's Andrea
Anti-Noise technology to military markets. Commencing upon the award of a
certain contract for the purchase of the headsets to AMC, RJC Associates-USA,
Inc. would receive an annual base compensation of $125,000, plus certain
monetary and other compensation for the benefit of Mr. Dorney, the substance
of which is described above under the caption "Certain Relationships and
Related Party Transactions."
12
STOCK PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the
cumulative total shareholder return for the five years ended December 31,
1997 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, 1993 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
- - ----- ----------- ------ -----
1993 539.11 118.81 163.22
1994 533.52 104.95 209.36
1995 270.95 135.28 211.51
1996 245.81 142.74 215.51
1997 801.68 171.76 210.40
13
COMPENSATION COMMITTEE REPORT
For the year ended December 31, 1997, the majority of the Compensation
Committee of the Board of Directors for the Company was composed of
independent Directors. Currently, the Compensation Committee is comprised of
Paul M. Morris, Scott Koondel and Christopher Dorney. The Compensation
Committee is responsible for establishing and monitoring compensation policies
of the Company, evaluating the performance of executives and
establishing salary rates and increases.
It is the policy of the Company to evaluate the performance of senior
management annually using subjective criteria established by the Committee.
Compensation increases are determined by the Committee based on annual
evaluations. In addition, the Committee supplements its criteria with
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.
The Compensation Committee annually reviews and approves the compensation
of Frank A.D. Andrea, Jr., the Chief Executive Officer and Chairman of the
Board for the past thirty-three years. The Committee believes Mr. Andrea is
paid a reasonable salary, and options granted to Mr. Andrea are consistent
with the same corporate financial goals as the other officers of the Company.
To the extent his performance as Chief Executive Officer 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. During 1997, Andrea's
revenues grew 187% and earnings for the year ended December 31, 1997 were
approximately $3.4 million, representing a significant improvement over the
net loss of $0.3 million during the 1996 period. This performance has been
reflected in the Company's overall market capitalization, which grew
approximately $114,000,000 or 247% in 1997. This performance is reflected in
Mr. Andrea's salary and the options granted to him during the year, which are
reported in the respective compensation tables included in this proxy
statement.
Compensation Committee
Paul M. Morris
Scott Koondel
Christopher Dorney
14
PROPOSAL TWO:
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Board of Directors recommends the adoption by shareholders of an
Amendment to Article Third of the Company's Restated Certificate of
Incorporation, as amended (the "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 15,000,000 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 25,000,000 shares. The Board has directed that such amendment be
submitted to a vote of 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.
Of the shares presently authorized, 11,124,175 shares of Common Stock
were outstanding on August 7, 1998. This does not include 1,738,000 shares of
Common Stock reserved for issuance upon exercise of options granted under the
the 1991 Plan, 18,750 shares of Common Stock reserved for issuance upon
exercise of previously issued warrants, and 2,100,000 shares of Common Stock
reserved as the maximum number of shares of Common Stock issuable upon
conversion of the Company's 6% Convertible Notes due June 10, 2000
(the "Notes"). The Company plans to reserve 2,000,000 shares of Common Stock
for issuance under the 1998 Stock Option Plan being submitted for shareholder
approval and set forth as Proposal Four in this Proxy Statement, but does not
currently have a sufficient number of authorized shares to reserve these
shares. In addition, the Company has granted options under the proposed 1998
Stock Option Plan covering 575,000 shares of Common Stock that are conditioned
upon shareholder approval of this Plan. If this Proposal Two to increase the
number of authorized shares of Common Stock is not approved by the
shareholders, the Company will not have a sufficient number of shares of Common
Stock to reserve for issuance under the proposed 1998 Stock Option Plan,
including the options that have been granted subject to shareholder approval
of the 1998 Stock Option Plan.
15
The Notes were issued on June 10, 1998 in the outstanding principal
amount of $10,753,000, and bear interest from the date of issuance at a rate
of 6% per annum. With respect to any portion of the Notes converted prior to
their maturity, accrued interest is payable on such portion at the time of
conversion, otherwise accrued interest is payable at the maturity of the
Notes. At the option of the Company, interest is payable in the form of
cash or shares of Common Stock at the conversion price then in effect.
The conversion price for the Notes is the average of the two lowest closing
bid prices of the Common Stock during the 30 trading days preceding any date
of conversion, subject to a maximum conversion price of $16.125 per share,
which was equal to the closing bid price on AMEX of the Company's Common Stock
on the date of issuance of the Notes. The closing price on such date was
$16.375 per share. As originally issued, the Notes did not have any provision
limiting the number of shares issuable upon conversion. On June 17, 1998, the
Notes were amended to provide that the maximum number of shares issuable upon
conversion (including interest payable, at the Company's option, in the form of
shares of Common Stock) is 2,100,000 shares, and to further provide that if
this maximum number of shares were to be so issued and thereafter there were
any remaining unconverted principal amount of the Notes, the interest rate on
such remaining principal amount would be increased to 17% per annum. The
reason for this modification to the terms of the Notes was to provide
a ceiling on the number of shares that could be issued upon conversions
of the Notes and payments of interest in the form of shares of Common Stock
and thereby not exceed the number of authorized shares of Common Stock
available to be reserved for issuance upon such conversions and payments
of interest in the form of shares of Common Stock. The Notes become
convertible on the earlier of October 8, 1998 and the effectiveness of
a registration statement under the Securities Act of 1933, as amended,
covering the sale of the shares of Common Stock into which the Notes
are convertible, which registration statement the Company is obligated
to file. The Notes provide, however, that they are not convertible to the
extent that, upon any conversion, the shares of Common Stock to be received
upon such conversion, together with shares of Common Stock then
beneficially owned by the holder and its affiliates, exceeds 4.9%
of the outstanding shares of Common Stock of the Company. The Notes do not
contain any redemption provisions.
The actual number of shares of Common Stock that may be issued upon
conversions of the Notes and payments of interest on the Notes in the form
of shares of Common Stock will depend on the conversion price in effect
from time to time during the term of the Notes, the timing of any such
conversions and the decision by the Company to make any payments of interest
in the form of shares of Common Stock. The conversion price can vary from
time to time during the term of the Notes, and interest ceases to accrue on
any portion of the principal amount of the Notes that is converted at the
time of conversion. Consequently, it is not possible to estimate with any
degree of certainty the total number of shares of Common Stock that would
actually be issued upon any conversions of the Notes, the total number of
shares of Common Stock, if available, that could be issued in payment of
interest, or the availability of shares of Common Stock for payments of
interest. The conversion price of the Notes could be substantially
below the market price of the Company's Common Stock on any date of
conversion. Based upon the thirty day period preceding August 7, 1998 the
conversion price would be $6.375. If the entire principal amount of the
Notes were converted at this conversion price, the Notes would be convertible
into 1,686,745 shares of Common Stock, or 15.2%, as of August 7, 1998.
Assuming that no conversions were to occur until immediately prior to
maturity of the Notes, the accrued interest at such time would be
$1,290,360. At the assumed conversion price as of August 7, 1998, such amount
of accrued interest would be convertible into 202,409 shares of Common Stock,
or approximately 1.8% of the outstanding shares as of August 7, 1998. No
assurance can be given that these assumptions would remain valid during the
term of the Notes. The maximum number of 2,100,000 shares of Common
Stock issuable upon conversion of the Notes represents 18.9% of the
outstanding shares as of August 7, 1998. If the maximum number of shares
of Common Stock issuable upon conversions of the Notes and payments of
interest in the form of shares of Common Stock were in fact issued in
connection with one or more conversions during the term of the Notes,
the weighted average conversion price per share would be $5.12 per share, and
the interest rate on any remaining Notes would increase to a rate of 17%
per annum. The following table illustrates the varying amounts of shares of
Common Stock issuable upon conversion of the principal amount of the Notes at
the indicated weighted average conversion prices.
Number of Shares
of Common Stock
Weighted Average Issuable Upon
Conversion Price Conversion
---------------- ---------------
$ 5.12 2,100,000 shares (1)
$ 7.00 1,536,143 shares
$ 9.00 1,195,778 shares
$11.00 977,545 shares
$13.00 827.154 shares
$15.00 716,867 shares
$16.125(2) 666,853 shares
- ----------------
(1) The maximum number of shares of Commmon Stock issuable upon conversion of
the Notes, including shares used to make payment of interest, is 2,100,000
shares. The actual number of shares of Common Stock that may be issued
upon conversions of the Notes and payments of interest on the Notes in the
form of shares of Common Stock will depend on the conversion price in
effect from time to time during the term of the Notes, the timing of any
such conversions and the decision by the Company to make any payments of
interest in the form of shares of Common Stock. In addition, the Notes
provide that they are not convertible to the extent that, upon any
conversion, the shares of Common Stock to be received upon such
conversion, together with shares of Common Stock then beneficially owned
by the holder and its affiliates, exceeds 4.9% of the outstanding shares
of Common Stock of the Company.
(2) The maximum conversion price.
Any conversion of the Notes would increase the number of outstanding
shares of Common Stock of the Company and thus have a dilutive effect on
the current shareholders of the Company. The magnitude of this dilutive
effect is directly proportional to any decline in the stock price of the
Company, and depending on the conversion price in effect from time to time,
this dilutive effect could be substantial. Moreover, the conversion price
on any date of conversion could be substantially below the market price of
the Company's Common Stock on such date of conversion. Management believes,
however, that any dilutive impact would be outweighed by the long-term
benefits of the funds provided from the Notes. The Company will use the
net proceeds from the issuance of the Notes of approximately $10,000,000
for costs associated with technology acquisition and development, tooling
costs, relocation costs, upgrading of information systems, and working
capital requirements.
The Board of Directors believes that it is important in the years ahead
for the Company to maintain an authorized capitalization that will permit a
broad range of financing alternatives, and that the proposed increase in the
number of authorized shares of Common Stock 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
1997, from 10,000,000 shares to 15,000,000 shares. If the Certificate of
Incorporation is amended, the additional shares of Common Stock 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, properties, technologies or products, for use in possible stock
16
dividends and stock splits, for issuance under the Company's proposed
1998 Stock Option Plan, or for any other proper corporate purpose. The
Company does not, however, have any current plans or proposals to issue the
shares of Common Stock proposed to be authorized, except for issuances of
shares upon the exercise of options granted in the future under the 1998 Stock
Option Plan. While the Company may in the future acquire businesses,
properties, technologies or products with shares of its Common Stock, the
Company is not currently planning or negotiating any such acquisitions.
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.
The Board of Directors does not intend to seek further shareholder
approval prior to the issuance of any additional shares of Common Stock in
future transactions unless required by law, by the Company's Certificate of
Incorporation, 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 to be favorable to, and in the interests of, the
Company and its shareholders.
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.
17
PROPOSAL THREE:
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 authorize
the issuance of preferred stock. The Certificate of Incorporation does not
currently authorize the issuance of preferred stock. Although the Company
has no present understandings, agreements, or plans concerning the issuance
of any of the shares of preferred stock 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 authorize the issuance of up to 5,000,000 shares
of Preferred Stock, par value $.01 per share. The Board has directed that
such amendment be submitted to a vote of 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 Board of Directors believes it is important in the years ahead for
the Company to maintain an authorized capitalization that will permit a broad
range of financing alternatives. The Board of Directors believes that the
authority to issue shares of preferred stock will provide for flexibility in
future planning and will enable the Company to obtain financing on suitable
terms.
The shares comprising each issuance of Preferred Stock would have the
relative powers, designations, preferences, rights, and qualifications,
limitations and restrictions and other matters as follows:
(1) Shares of Preferred Stock may be issued in one or more series at
such time or times and for such consideration as the Board of Directors may
determine. All shares of any one series shall be of equal rank and identical
in all respects.
(2) Authority would be expressly granted to the Board of Directors to
fix from time to time, by resolution or resolutions providing for the
establishment and/or issuance of any series of Preferred Stock, the designation
of such series and the powers, preferences and rights of the shares of such
series, and the qualifications, limitations or restrictions thereof, including,
without limitation, the following: (a) the distinctive designation and number
of shares comprising such series, which number may (except where otherwise
provided by the Board of Directors in creating such series) be increased or
decreased (but not below the number of shares then outstanding) from time to
time by action of the Board of Directors; (b) the rate of dividends, if any,
on the shares of that series, whether dividends shall be non-cumulative,
cumulative to the extent earned or cumulative (and, if cumulative, from which
date or dates), whether dividends shall be payable in cash, property or rights,
or in shares of the Corporation's capital stock, and the relative rights of
priority, if any, of payment of dividends on shares of that series over shares
of any other series or class; (c) whether the shares of that series shall be
redeemable and, if so, the terms and conditions of such redemption, including
the date or dates upon or after which they shall be redeemable, and the amount
per share payable in case of redemption (which amount may vary under different
conditions and at different redemption dates) or the property or rights,
including securities of any other corporation, payable in case of redemption;
(d) whether the series shall have a sinking fund for the redemption or purchase
of shares of that series and, if so, the terms and amounts payable into such
18
sinking fund; (e) the rights to which the holders of the shares of that series
shall be entitled in the event of voluntary or involuntary liquidation,
dissolution or winding-up of the Corporation, and the relative rights of
priority, if any, of payment of shares of that series in any such event; (f)
whether the shares of that series shall be convertible into or exchangeable
for shares of stock of any other class or any other series and, if so, the
terms and conditions of such conversion or exchange, including the rate or
rates of conversion or exchange, the date or dates upon or after which they
shall be convertible or exchangeable, the duration for which they shall be
convertible or exchangeable, the event or events upon or after which they
shall be convertible or exchangeable or at whose option they shall be
convertible or exchangeable, and the method (if any) of adjusting the rates
of conversion or exchange in the event of a stock split, stock dividend,
combination of shares or similar event; (g) whether the issuance of any
additional shares of such series, or of any shares of any other series, shall
be subject to restrictions as to issuance, or as to the powers, preferences or
rights of any such other series; (h) whether or not the shares of that series
shall have voting rights, the extent of such voting rights on specified matters
or on all matters, the number of votes to which the holder of shares of such
series shall be entitled in respect of each share of such series, whether such
series shall vote generally with the Common Stock on all matters or (either
generally or upon the occurrence of specified circumstances) shall vote
separately as a class or with other series of Preferred Stock; and (i) any
other preferences, privileges and powers and relative, participating, optional
or other special rights and qualifications, limitations or restrictions of such
series, as the Board of Directors may deem advisable and as shall not be
inconsistent with the provisions of the Company's Certificate of Incorporation
and to the full extent now or hereafter permitted by the laws of the State of
New York.
While the Company has no present intention to issue shares of Preferred
Stock, any such issuance of shares of Preferred Stock of the Company could
dilute the equity of the outstanding shares of Common Stock and could have the
effect of making it more difficult for a third party to acquire a majority of
the outstanding voting stock of the Company. In addition, such Preferred Stock
may have other rights, including economic rights senior to the Common Stock,
and, as a result, the issuance thereof could have a material adverse effect on
the market value of the Common Stock.
The Board of Directors does not intend to seek further shareholder
approval prior to the issuance of any shares of preferred stock 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. Preferred Stock would be issued only if the Company
believed the issuance favorable to, and in the interests of, the Company and
its shareholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR the adoption of this
proposal.
19
PROPOSAL FOUR:
ADOPTION OF THE ANDREA ELECTRONICS CORPORATION
1998 STOCK OPTION 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 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. The Board of Directors has
therefore deemed that it is in the best interests of the Company to establish
the 1998 Plan, under which 2,000,000 shares of Common Stock of the Company would
be reserved for issuance. The availability of these shares depends upon
shareholder approval of Proposal Two set forth above to increase the number of
shares of Common Stock authorized for issuance by the Company. The 1998 Plan was
adopted by the Board on May 5, 1998, and is subject to shareholder approval
within twelve months of that date. As of June 9, 1998, options covering an
aggregate of 575,000 shares have been granted under the 1998 Plan, all of which
are conditioned upon approval of the 1998 Plan by the shareholders. The
identities of each of the directors and executive officers of the Company to
whom these options subject to shareholder approval have been granted and the
number of shares covered by each such option are as follows: John N. Andrea,
100,000 shares; Douglas J. Andrea, 100,000 shares; Patrick D. Pilch, 50,000
shares; Christopher Dorney, 25,000 shares; Gary A. Jones, 25,000 shares; Scott
Koondel, 25,000 shares; Paul M. Morris, 25,000 shares; and Richard A. Maue,
25,000 shares. The remaining 200,000 shares covered by the options conditionally
granted under the 1998 Plan have been granted conditionally to various employees
of the Company who are neither directors nor executive officers. At the Annual
Meeting, shareholders will be asked to adopt the 1998 Plan. 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 discussion summarizes certain material provisions of the
1998 Plan and is qualified in its entirety by reference to the text of the 1998
Plan, which is attached as Annex A to this Proxy Statement.
Summary of the 1998 Plan
Administration. The 1998 Plan will be administered by the Board or, at
its discretion, by a committee (or committees with respect to different groups
of employees, directors or consultants) (the "Administrator") appointed by the
Board, whose members serve at the pleasure of the Board. 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 (e.g., Stock Option or Stock Purchase Rights), 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, shall be final, conclusive and
binding on all persons interested in the 1998 Plan. Awards under the 1998
Plan are evidenced by agreements ("Agreements").
20
In the event of a merger or sale of substantially all of the assets of
the Company, each outstanding Award shall be assumed or an equivalent award
substituted by the successor corporation, unless full and immediate vesting is
otherwise provided in the Agreement covering that award or in the employment
agreement of the Holder. In the event that a successor corporation refuses to
assume or substitute for Awards, Holders shall fully vest in and have the right
to exercise such Awards as to all shares of Common Stock issuable thereunder,
including shares which would not otherwise be vested or exercisable.
In order to prevent the dilution or enlargement of the rights of Holders
under the 1998 Plan, the number of shares of Common Stock covered by each
outstanding Stock Option and Stock Purchase Right, and the number of shares of
Common Stock authorized by the 1998 Plan is subject to adjustment by the Board
in the event of any increase or decrease in the number of shares of outstanding
Common Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without
receipt of consideration by the Company. The shares of Common Stock acquirable
pursuant to the Awards will be 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 shall again be 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 an Incentive 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
21
of the date of the grant (or within five years in the case of an Incentive
Option granted to a person who, at the time of the grant, owns stock possessing
more than 10% of the total combined voting power of all classes of stock of the
Company) or such other lesser period as the Administrator may specify at the
time of the grant. Subject to any limitations or conditions the Administrator
may impose, Options may be exercised, in whole or in part, at any time during
the term of the Option by giving written or electronic notice of exercise from
the person entitled to exercise the Option. Such notice must be accompanied by
payment in full of the purchase price, such payment consisting of any
consideration and/or method of payment authorized by the Administrator and
permitted by the Agreement.
Generally, if the Holder ceases to be an employee, officer, director or
consultant of the Company other then as a result of death or disability, then
the portion of any Option that has vested by the date of such termination may
be exercised for such period as is specified in the Agreement or, if not
specified, for the shorter of three months after termination or the remainder
of the Option's term. In the event the Holder's employment with the Company
is terminated due to disability, the Holder may still exercise the portion of
his or her Option that had vested by the date of termination for a period of
twelve months (or such other shorter period as the Administrator may specify
at the time of grant) from the date of such termination or until the expiration
of the stated term of the Option, whichever period is shorter. Similarly,
should a Holder die while in the employment of the Company or a Subsidiary, his
or her legal representative or legatee under his or her will may exercise the
portion of the decedent Holder's Option that had vested by the time of death
for a period of twelve months from such death (or such other greater or lesser
period as the Administrator specifies at the time of grant) or until the
expiration of the stated term of the Option, whichever is shorter.
Stock Purchase Rights. The Administrator may grant Stock Purchase Rights
in conjunction with any Option granted under the 1998 Plan. The Administrator
shall determine, in its sole discretion, the terms, provisions and conditions
of each Agreement under which Stock Purchase Rights may be granted. Unless
otherwise provided in the Agreement, the Company will have a repurchase option,
at a price equal to the original price paid by the purchaser, which is
exercisable upon the voluntary or involuntary termination of the purchaser's
service with the Company, including death or disability.
Withholding Taxes. Upon the exercise of any Award granted under the 1998
Plan, the Administrator may allow, subject to the provisions of the 1998 Plan,
Holders to satisfy Federal, state and local withholding tax obligations by
electing to have the Company withhold from the shares of Common Stock to be
issued upon exercise of an Option or Stock Purchase Right that number of shares
which have a fair market value (determined on the last trading day before the
date the amount of tax to be withheld is determined) equal to the amount of the
withholding tax due under applicable Federal, state and local laws.
Terms and Amendments. Unless terminated by the Board, the 1998 Plan shall
continue in effect for a term of 10 years. The Board may at any time, and from
time to time, amend, alter, suspend or terminate the 1998 Plan.
22
Federal Income Tax Consequences
The following discussion of the federal income tax consequences of
participation in the 1998 Plan is only a summary of the general rules
applicable to the grant and exercise of Options and does not give specific
details or cover, among other things, state, local and foreign tax treatment
of participation in the 1998 Plan. The information contained in this section
is based on present law and regulations, which are subject to being changed
prospectively or retroactively.
Incentive Options. The Participant will recognize no taxable income upon
the grant or exercise of an Incentive Option. The Company will not qualify for
any deduction in connection with the grant or exercise of Incentive Options.
Upon a disposition of the shares after the later of two years from the date of
grant or one year after the transfer of the shares to the Participant, the
Participant will recognize the difference, if any, between the amount realized
and the exercise price as long-term capital gain or long-term capital loss (as
the case may be) if the shares are capital assets. The excess, if any, of the
fair market value of the shares on the date of exercise of an Incentive Option
over the exercise price will be treated as an item of tax preference for a
Participant's taxable year in which the exercise occurs and may result in an
alternative minimum tax liability for the Participant. The Participant will
recognize the excess, if any, of the amount realized over the fair market value
of the shares on the date of exercise, if the shares are capital assets, as
short-term or long-term capital gain, depending on the length of time that
the Participant held the shares, and the Company will not qualify for a
deduction with respect to such excess.
If Common Stock acquired upon the exercise of an Incentive Option is
disposed of prior to the expiration of the holding periods described above,
(i) the Participant will recognize ordinary compensation income in the taxable
year of disposition in an amount equal to the excess, if any, of the lesser of
the fair market value of the shares on the date of exercise or the amount
realized on the disposition of the shares, over the exercise price paid for
such shares; and (ii) the Company will qualify for a deduction equal to any
such amount recognized, subject to the limitation that the compensation be
reasonable. In the case of a disposition of shares in the same taxable year
as the exercise of the option, there will be no item of tax preference for
alternative minimum tax purposes.
Non-Statutory Stock Options. With respect to Non-Statutory Stock Options
(i) upon grant of the option, the Participant will recognize no income; (ii)
upon exercise of the option (if the shares of Common Stock are not subject to
a substantial risk of forfeiture), the Participant will recognize ordinary
compensation income in an amount equal to the excess, if any, of the fair
market value of the shares on the date of exercise over the exercise price,
and the Company will qualify for a deduction in the same amount, subject to
the requirement that the compensation be reasonable; and (iii) the Company
will be required to comply with applicable Federal income tax withholding
requirements with respect to the amount of ordinary compensation income
recognized by the Participant. On a disposition of the shares, the
Participant will recognize gain or loss equal to the difference between the
amount realized and the sum of the exercise price and the ordinary
compensation income recognized. Such gain or loss will be treated as capital
23
gain or loss if the shares are capital assets and as short-term or long-term
capital gain or loss, depending upon the length of time that the participant
held the shares. If the shares acquired upon exercise of a Non-Statutory Stock
Option are subject to a substantial risk of forfeiture, the Participant will
recognize income at the time when the substantial risk of forfeiture is removed
and the Company will qualify for a corresponding deduction at such time.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR the adoption of this
proposal.
24
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, 1998, subject to ratification by the
shareholders. Arthur Andersen LLP served as the Company's independent
accountants for the year ended December 31, 1997. 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 1998 fiscal year must be received at the Company's offices by
January 4, 1999 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. 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
Richard A. Maue
Secretary
Long Island City, New York
August __, 1998
25
ANDREA ELECTRONICS CORPORATION
Solicited By The Board Of Directors for Annual Meeting To Be Held on
September __, 1998.
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 September __, 1998 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; Patrick D. Pilch and Jack Lahav.
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 Restated Certificate of Incorporation, as
amended, of the Company to increase the authorized shares of Common Stock to
25,000,000 shares from 15,000,000 shares.
FOR ( ) AGAINST ( ) ABSTAIN ( )
3. To authorize an amendment to the Restated Certificate of Incorporation,
as amended, of the Company to permit the issuance of up to 5,000,000 shares of
Preferred Stock.
FOR ( ) AGAINST ( ) ABSTAIN ( )
4. To authorize the adoption of the Andrea Electronics Corporation 1998 Stock
Option Plan.
FOR ( ) AGAINST ( ) ABSTAIN ( )
5. To ratify the selection of Arthur Andersen LLP as the Company's independent
accountants for the year ending December 31, 1998.
FOR ( ) AGAINST ( ) ABSTAIN ( )
6. 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 , 1998
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.
26
Annex A
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
27
purposes as a Nonstatutory Stock Option. Neither service as a Director nor
payment of a director's fee by the Company shall be sufficient to constitute
"employment" by the Company.
l. "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
m. "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) if the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq National
Market or The Nasdaq Small Cap Market of The Nasdaq Stock Market, its Fair
Market Value shall be the closing sales price for such stock (or the closing
bid, if no sales were reported) as quoted on such exchange or system for the
last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) if the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value
of a Share of Common Stock shall be the mean between the high bid and low
asked prices for the Common Stock on the last market trading day prior to the
day of determination, based on such source as the Administrator deems
reliable;
(iii) in the absence of an established market for the Common Stock,
the Fair Market Value shall be determined in good faith by the Administrator.
n. "Incentive Stock Option" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.
o. "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
p. "Notice of Grant" means a written or electronic notice evidencing
certain terms and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement.
q. "Section 16(b) Officer" means a person who is an officer of the
Company within the meaning of Section 16(b) of the Exchange Act and the rules
and regulations promulgated thereunder.
r. "Option" means a stock option granted pursuant to the Plan.
s. "Option Agreement" means an agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant.
The Option Agreement is subject to the terms and conditions of the Plan.
t. "Option Exchange Program" means a program whereby outstanding
options are surrendered in exchange for options with a lower exercise price.
28
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 1997 Stock Plan.
y. "Restricted Stock" means shares of Common Stock acquired pursuant
to a grant of Stock Purchase Rights under Section 11 below.
z. "Restricted Stock Purchase Agreement" means a written agreement
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted
Stock Purchase Agreement is subject to the terms and conditions of the Plan
and the Notice of Grant.
aa. "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
bb. "Section 16(b)" means Section 16(b) of the Securities Exchange
Act of 1934, as amended.
cc. "Service Provider" means an Employee, Director or Consultant.
dd. "Share" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
ee. "Stock Purchase Right" means the right to purchase Common
Stock pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
ff. "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13 of
the Plan, the maximum aggregate number of Shares that may be optioned and
sold under the Plan is 2,000,000 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.
29
(i) Multiple Administrative Bodies. The Plan may be administered by
different Committees with respect to different groups of Service Providers.
(ii) Section 162(m). To the extent that the Administrator
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify transactions
hereunder as exempt under Rule 16b-3, the Plan shall be administered by the
Board or a Committee of two or more "non-employee directors" within the
meaning of Rule 16b-3.
(iv) Other Administration. Other than as provided above, the Plan
shall be administered by (A) the Board or (B) a Committee, which Committee
shall be constituted to satisfy Applicable Laws.
b. POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties
delegated by the Board to such Committee, the Administrator shall have the
authority, in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any Option or Stock Purchase Right granted
hereunder. Such terms and conditions include, but are not limited to, the
exercise price, the time or times when Options or Stock Purchase Rights may
be exercised (which may be based on performance criteria), any vesting
acceleration or waiver of forfeiture restrictions, and any restriction or
limitation regarding any Option or Stock Purchase Right or the shares of
Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vi) to institute an Option Exchange Program;
(vii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(viii) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to subplans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(ix) to modify or amend each Option or Stock Purchase Right
(subject to Section 15(c) of the Plan), including the discretionary authority
to extend the post-termination exercisability period of Options longer than
is otherwise provided for in the Plan;
30
(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.
31
(iii) If an Option is canceled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 13), the canceled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For this purpose, if the
exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.
7. TERM OF PLAN. Subject to Section 19 of the Plan, the Plan shall
become effective upon its adoption by the Board. It shall continue in effect
for a term of ten (10) years unless terminated earlier under Section 15 of the
Plan.
8. TERM OF OPTION. The term of each Option shall be stated in the Option
Agreement. In the case of an Incentive Stock Option, the term shall be ten
(10) years from the date of grant or such shorter term as may be provided in
the Option Agreement. Moreover, in the case of an Incentive Stock Option
granted to an Optionee who, at the time the Incentive Stock Option is
granted, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
term of the Incentive Stock Option shall be five (5) years from the date of
grant or such shorter term as may be provided in the Option Agreement.
9. OPTION EXERCISE PRICE AND CONSIDERATION.
a. EXERCISE PRICE. The per share exercise price for the Shares to
be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option:
(A) granted to an Employee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the
Fair Market Value per Share on the date of grant;
(B) granted to any Employee other than an Employee described
in paragraph (A) immediately above, the per Share exercise price shall be no
less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share
on the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with a
per Share exercise price of less than 100% of Fair Market Value on the date
of grant pursuant to a merger or other corporate transaction.
b. WAITING PERIOD AND EXERCISE DATES. At the time an Option is
granted, the Administrator shall fix the period within which the Option may
be exercised and shall determine any conditions which must be satisfied
before the Option may be exercised.
32
c. FORM OF CONSIDERATION. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the
method of payment. In the case of an Incentive Stock Option, the
Administrator shall determine the acceptable form of consideration at the
time of grant. Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, and (B) have a Fair Market Value on the date
of surrender equal to the aggregate exercise price of the Shares as to which
said Option shall be exercised;
(v) consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. EXERCISE OF OPTIONS.
a. PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
granted hereunder shall be exercisable according to the terms of the Plan and
at such times and under such conditions as determined by the Administrator
and set forth in the Option Agreement. Unless the Administrator provides
otherwise, vesting of Options granted hereunder shall be tolled during any
unpaid leave of absence. An Option may not be exercised for a fraction of a
Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by
the Administrator and permitted by the Option Agreement and the Plan. Shares
issued upon exercise of an Option shall be issued in the name of the Optionee
or, if requested by the Optionee, in the name of the Optionee and his or her
spouse.
Until the Shares are issued (as evidenced by the appropriate entry on
the books of the Company or of a duly authorized transfer agent of the
Company), no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock, notwithstanding
the exercise of the Option.
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The Company shall issue (or cause to be issued) such Shares promptly
after the Option is exercised. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the Shares are
issued, except as provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.
b. TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. If an
Optionee ceases to be a Service Provider, other than upon the Optionee's
death or Disability, the Optionee may exercise his or her Option within such
period of time as is specified in the Option Agreement to the extent that he
or she is entitled to exercise it on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the
Option Agreement).
In the absence of a specified time in the Option Agreement, the Option
shall remain exercisable for three (3) months following the Optionee's
termination. If, on the date of termination, the Optionee is not entitled to
exercise his or her entire Option, the Shares covered by the unexercisable
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified by the
Administrator, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
c. DISABILITY OF OPTIONEE. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may exercise
his or her Option at any time within twelve (12) months from the date of
termination, but only to the extent that the Optionee is entitled to exercise
it on the date of termination (and in no event later than the expiration of
the term of the Option as set forth in the Option Agreement). If, on the date
of termination, the Optionee is not entitled to exercise his or her entire
Option, the Shares covered by the unexercisable portion of the Option shall
revert to the Plan. If, after termination, the Optionee does not exercise
his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
d. DEATH OF OPTIONEE. If an Optionee dies while a Service Provider,
the Option may be exercised at any time within twelve (12) months following
the date of death (but in no event later than the expiration of the term of
such Option as set forth in the Notice of Grant), by the Optionee's estate or
by a person who acquires the right to exercise the Option by bequest or
inheritance, but only to the extent that the Optionee would have been
entitled to exercise the Option on the date of death. If, at the time of
death, the Optionee is not entitled to exercise his or her entire Option, the
Shares covered by the unexercisable portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or
administrator of the Optionee's estate or, if none, by the person(s) entitled
to exercise the Option under the Optionee's will or the laws of descent or
distribution. If the Option is not so exercised within the time specified
herein, the Option shall terminate, and the Shares covered by such Option
shall revert to the Plan.
34
e. BUYOUT PROVISIONS. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted based
on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
11. STOCK PURCHASE RIGHTS.
a. RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it shall
advise the offeree in writing or electronically, by means of a Notice of
Grant, of the terms, conditions and restrictions related to the offer,
including the number of Shares that the offeree shall be entitled to
purchase, the price to be paid, and the time within which the offeree must
accept such offer. The offer shall be accepted by execution of a Restricted
Stock Purchase Agreement in the form determined by the Administrator.
b. REPURCHASE OPTION. Unless the Administrator determines
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination
of the purchaser's service with the Company for any reason (including death
or Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at a rate
determined by the Administrator.
c. OTHER PROVISIONS. The Restricted Stock Purchase Agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
d. RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered
upon the records of the duly authorized transfer agent of the Company. No
adjustment will be made for a dividend or other right for which the record
date is prior to the date the Stock Purchase Right is exercised, except as
provided in Section 13 of the Plan.
12. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Unless
determined otherwise by the Administrator, an Option or Stock Purchase Right
may not be sold, pledged, assigned, hypothecated, transferred, or disposed of
in any manner other than by will or by the laws of descent or distribution
and may be exercised, during the lifetime of the Optionee, only by the
Optionee. If the Administrator makes an Option or Stock Purchase Right
transferable, such Option or Stock Purchase Right shall contain such
additional terms and conditions as the Administrator deems appropriate.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR
ASSET SALE.
a. CHANGES IN CAPITALIZATION. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
35
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
36
consideration, the type of consideration chosen by the holders of a majority
of the outstanding Shares); provided, however, that if such consideration
received in the merger or sale of assets is not solely common stock of the
successor corporation or its Parent, the Administrator may, with the consent
of the successor corporation, provide for the consideration to be received
upon the exercise of the Option or Stock Purchase Right, for each Share of
Optioned Stock subject to the Option or Stock Purchase Right, to be solely
common stock of the successor corporation or its Parent equal in fair market
value to the per share consideration received by holders of Common Stock in
the merger or sale of assets.
14. DATE OF GRANT. The date of grant of an Option or Stock Purchase Right
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other
later date as is determined by the Administrator. Notice of the
determination shall be provided to each Optionee within a reasonable time
after the date of such grant.
15. AMENDMENT AND TERMINATION OF THE PLAN.
a. AMENDMENT AND TERMINATION. The Board may at any time amend,
alter, suspend or terminate the Plan.
b. SHAREHOLDER APPROVAL. The Company shall obtain shareholder
approval of any Plan amendment to the extent necessary and desirable to
comply with Applicable Laws.
c. EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any
Optionee, unless mutually agreed otherwise between the Optionee and the
Administrator, which agreement must be in writing and signed by the Optionee
and the Company.
16. CONDITIONS UPON ISSUANCE OF SHARES.
a. LEGAL COMPLIANCE. Shares shall not be issued pursuant to the
exercise of an Option or Stock Purchase Right unless the exercise of such
Option or Stock Purchase Right and the issuance and delivery of such Shares
shall comply with Applicable Laws and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
b. INVESTMENT REPRESENTATIONS. As a condition to the exercise of an
Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of
any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
17. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
37
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.
38
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
(Optionee's Name and Address)
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:
This Option may be exercised, in whole or in part, in accordance with the
following schedule:
Termination Period:
This Option may be exercised for _____ (days/months) after Optionee ceases to
be a Service Provider. Upon the death or Disability of the Optionee, this
Option may be exercised for such longer period as provided in the Plan. In no
event shall this Option be exercised later than the Term/Expiration Date as
provided above.
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").
39
b. EXERCISE OF OPTION.
(i) Right to Exercise. This Option is exercisable during its term
in accordance with the Vesting Schedule set out in the Notice of Grant and
the applicable provisions of the Plan and this Option Agreement.
(ii) Method of Exercise. This Option is exercisable by delivery of
an exercise notice, in the form attached as Exhibit A (the "Exercise
Notice"), which shall state the election to exercise the Option, the number
of Shares in respect of which the Option is being exercised (the "Exercised
Shares"), and such other representations and agreements as may be required by
the Company pursuant to the provisions of the Plan. The Exercise Notice shall
be completed by the Optionee and delivered to the secretary of the Company.
The Exercise Notice shall be accompanied by payment of the aggregate Exercise
Price as to all Exercised Shares. This Option shall be deemed to be exercised
upon receipt by the Company of such fully executed Exercise Notice
accompanied by such aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option unless
such issuance and exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Exercised Shares shall be considered
transferred to the Optionee on the date the Option is exercised with respect
to such Exercised Shares.
c. METHOD OF PAYMENT. Payment of the aggregate Exercise Price shall
be by any of the following, or a combination thereof, at the election of the
Optionee:
(i) cash;
(ii) check;
(iii) consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan;
(iv) surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market
Value on the date of surrender equal to the aggregate Exercise Price of the
Exercised Shares; or
(v) with the Administrator's consent, delivery of Optionee's
promissory note (the "Note") in the form attached hereto as Exhibit C, in the
amount of the aggregate Exercise Price of the Exercised Shares together with
the execution and delivery by the Optionee of the Security Agreement attached
hereto as Exhibit B. The Note shall bear interest at the "applicable federal
rate" prescribed under the Code and its regulations at time of purchase, and
shall be secured by a pledge of the Shares purchased by the Note pursuant to
the Security Agreement.
d. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred
in any manner otherwise than by will or by the laws of descent or
distribution and may be exercised during the lifetime of Optionee only by the
Optionee. The terms of the Plan and this Option Agreement shall be binding
upon the executors, administrators, heirs, successors and assigns of the
Optionee.
40
e. TERM OF OPTION. This Option may be exercised only within the
term set out in the Notice of Grant, and may be exercised during such term only
in accordance with the Plan and the terms of this Option Agreement.
f. TAX CONSEQUENCES. Some of the federal tax consequences relating
to this Option, as of the date of this Option, are set forth below. THIS
SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE
SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE
EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
g. EXERCISING THE OPTION.
(i) Nonstatutory Stock Option. The Optionee may incur regular
federal income tax liability upon exercise of a NSO. The Optionee will be
treated as having received compensation income (taxable at ordinary income
tax rates) equal to the excess, if any, of the Fair Market Value of the
Exercised Shares on the date of exercise over their aggregate Exercise Price.
If the Optionee is an Employee or a former Employee, the Company will be
required to withhold from his or her compensation or collect from Optionee
and pay to the applicable taxing authorities an amount in cash equal to a
percentage of this compensation income at the time of exercise, and may
refuse to honor the exercise and refuse to deliver Shares if such withholding
amounts are not delivered at the time of exercise.
(ii) Incentive Stock Option. If this Option qualifies as an ISO,
the Optionee will have no regular federal income tax liability upon its
exercise, although the excess, if any, of the Fair Market Value of the
Exercised Shares on the date of exercise over their aggregate Exercise Price
will be treated as an adjustment to alternative minimum taxable income for
federal tax purposes and may subject the Optionee to alternative minimum tax
in the year of exercise. In the event that the Optionee ceases to be an
Employee but remains a Service Provider, any Incentive Stock Option of the
Optionee that remains unexercised shall cease to qualify as an Incentive
Stock Option and will be treated for tax purposes as a Nonstatutory Stock
Option on the date three (3) months and one (1) day following such change of
status.
h. DISPOSITION OF SHARES.
(i) NSO. If the Optionee holds NSO Shares for at least one year,
any gain realized on disposition of the Shares will be treated as long-term
capital gain for federal income tax purposes.
(ii) ISO. If the Optionee holds ISO Shares for at least one year
after exercise and two years after the grant date, any gain realized on
disposition of the Shares will be treated as long-term capital gain for
federal income tax purposes. If the Optionee disposes of ISO Shares within
one year after exercise or two years after the grant date, any gain realized
on such disposition will be treated as compensation income (taxable at
ordinary income rates) to the extent of the excess, if any, of the lesser of
(A) the difference between the Fair Market Value of the Shares acquired on
the date of exercise and the aggregate Exercise Price, or (B) the difference
between the sale price of such Shares and the aggregate Exercise Price. Any
additional gain will be taxed as capital gain, short-term or long-term
depending on the period that the ISO Shares were held.
41
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 Jersey.
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
- ------------------------------------------------------------------------------
42
CONSENT OF SPOUSE
The undersigned spouse of Optionee has read and hereby approves the terms and
conditions of the Plan and this Option Agreement. In consideration of the
Company's granting his or her spouse the right to purchase Shares as set
forth in the Plan and this Option Agreement, the undersigned hereby agrees to
be irrevocably bound by the terms and conditions of the Plan and this Option
Agreement and further agrees that any community property interest shall be
similarly bound. The undersigned hereby appoints the undersigned's spouse as
attorney-in-fact for the undersigned with respect to any amendment or
exercise of rights under the Plan or this Option Agreement.
- -----------------------------------------------
Spouse of Optionee
43
EXHIBIT A
1998 STOCK PLAN
EXERCISE NOTICE
Andrea Electronics Corporation
11-40 45th Road
Long Island City, NY 11101
Attention: Secretary
1. EXERCISE OF OPTION. Effective as of today, ________________, 199__, 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 _____________, 19___ (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 Jersey.
44
Submitted by: Accepted by:
PURCHASER: ANDREA ELECTRONICS CORPORATION:
____________________________ _______________________________
Signature Name
Title:
____________________________
Print Name
Address:
____________________________
-----------------------------------------------------------------------------
---------------------------------------------------------------Date Received