1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
FILED BY THE REGISTRANT [X]
FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]
CHECK THE APPROPRIATE BOX:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant Rule 14a-12
ANDREA ELECTRONICS CORPORATION
--------------------------------------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
N/A
--------------------------------------------------------------------------------
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
---------------------------------------------------------------
(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):
---------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
---------------------------------------------------------------
(5) Total fee paid:
---------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
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:
--------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
--------------------------------------------------------------
(3) Filing Party:
--------------------------------------------------------------
(4) Date Filed:
--------------------------------------------------------------
2
ANDREA ELECTRONICS CORPORATION
45 MELVILLE PARK ROAD
MELVILLE, NEW YORK 11747
------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 24, 2002
------------------------------------
On Tuesday, September 24, 2002, Andrea Electronics Corporation will
hold its annual meeting of shareholders at the American Stock Exchange, 86
Trinity Place, New York, New York 10006. The meeting will begin at 9:00 a.m.,
local time. At the meeting, shareholders will consider and act on the following:
1. The election of eight directors to hold office until the next
annual meeting of shareholders;
2. The approval of an amendment to the Andrea Electronics
Corporation 1998 Stock Plan to increase the number of shares
of the Company's common stock issuable thereunder to 5,275,000
shares from 4,375,000 shares;
3. The ratification of the selection of Marcum & Kliegman LLP as
the Company's independent accountants for the year ending
December 31, 2002; and
4. Such other business as may properly come before the meeting.
NOTE: As of the date of this notice, the Board of Directors is not
aware of any other business to be presented for consideration at the meeting.
The Board of Directors set August 23, 2002 as the record date for the
meeting. This means that owners of Andrea Electronics Corporation as the close
of business on that date are entitled to receive notice of the meeting and to
vote at the meeting and any adjournments or postponements of the meeting.
Please complete and sign the enclosed form of proxy, which is solicited
by the Board of Directors, and mail it promptly in the enclosed envelope. The
proxy will not be used if you attend the meeting and vote in person.
By Order of the Board of Directors
/s/ Richard A. Maue
Richard A. Maue
Secretary
Melville, New York
September 4, 2002
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE COMPANY THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES IN ORDER TO ENSURE A QUORUM. A SELF-ADDRESSED
ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN
THE UNITED STATES.
3
ANDREA ELECTRONICS CORPORATION
-------------------------
PROXY STATEMENT
-------------------------
GENERAL INFORMATION
ANNUAL MEETING
This Proxy Statement and the enclosed form of proxy are furnished in
connection with the solicitation of proxies by the Board of Directors of Andrea
Electronics Corporation (the "Company") to be used at the Annual Meeting of
Shareholders of the Company to be held on September 24, 2002 and any adjournment
or adjournments thereof ("Annual Meeting"). The matters to be considered at the
Annual Meeting are set forth in the attached Notice of Meeting.
The Company's executive offices are located at 45 Melville Park Road,
Melville, New York 11747. On or about September 4, 2002, this Proxy Statement,
the enclosed form of proxy and the Company's Annual Report to Shareholders for
the fiscal year ended December 31, 2001, which contains audited financial
statements, are to be mailed to shareholders of record as of the close of
business on August 23, 2002. A copy of the Company's Annual Report on Form 10-K,
without exhibits, for the year ended December 31, 2001, as filed with the
Securities and Exchange Commission, will be furnished without charge to persons
who were shareholders as of the close of business on August 23, 2002 upon
written request to Richard A. Maue, Secretary, Andrea Electronics Corporation,
45 Melville Park Road, Melville, New York 11747. The Company will furnish to any
shareholder copies of any exhibits listed in the Form 10-K 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, properly executed and dated proxies will be
voted "FOR" the election of the nominees listed below under the caption
"Election Of Directors," "FOR" the amendment to the Andrea Electronics
Corporation 1998 Stock Plan and "FOR" the selection of Marcum & Kliegman LLP to
serve as the Company's independent accountants for the year ending December 31,
2002, and, in the discretion of the proxies named on the proxy card, with
respect to any other matters properly brought before the Annual Meeting and any
adjournments thereof. In the unanticipated event that any other matters are
properly presented at the Annual Meeting for action, the persons named in the
proxy will vote the proxies in accordance with their best judgment. Any proxy
given pursuant to this solicitation may be revoked by the shareholder at any
time before it is exercised by written notification delivered to the Secretary
of the Company, by voting in person at the Annual Meeting, or by delivering
another properly executed and dated proxy bearing a later date. Attendance by a
shareholder at the Annual Meeting does not alone serve to revoke his or her
proxy.
REQUIRED VOTE
The presence, in person or by proxy, of the holders of a majority of
the shares entitled to vote at the Annual Meeting is necessary to constitute a
quorum. Abstentions and broker "non-votes" are counted as present and entitled
to vote for purposes of determining a quorum. A broker "non-vote" occurs when a
4
nominee holding shares for a beneficial owner does not vote on a particular
proposal because the nominee does not have discretionary voting power for that
particular item and has not received instructions from the beneficial owner.
A plurality of the votes cast is required for the election of
Directors. Abstentions and broker "non-votes" are not counted as votes cast for
purposes of the election of Directors. The affirmative vote of a majority of the
votes cast is required to approve the appointment of Marcum & Kliegman LLP with
abstentions and broker "non-votes" not counted as votes cast for purposes of
these proposals.
RECORD DATE; OUTSTANDING SHARES
The Board of Directors has fixed the close of business on August 23,
2002 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 23, 2002, an aggregate of 19,086,098 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 23,
2002 with respect to the stock ownership of (i) those persons or groups who
beneficially own more than 5% of the Common Stock, (ii) each Director of the
Company, (iii) each executive officer named in the Summary Compensation Table
and (iv) all Directors and executive officers of the Company as a group.
Amount and
Nature of
Beneficial Percent
Name of Beneficial Owner Ownership (1) of Class
---------------------------- ----------------- --------------
Douglas J. Andrea 1,088,588 (2) 5.5%
Christopher P. Sauvigne 897,500 (3) 4.5%
Richard A. Maue 250,750 (4) 1.3%
John R. Croteau -- (5) *
James M. Griffin 5,000 (6) *
Gary A. Jones 62,000 (7) *
Scott Koondel 67,500 (8) *
Jack Lahav -- (9) *
Louis Libin -- (5) *
Directors and Executive Officers as 2,366,338 (10) 12.4%
a group (9 persons)
------------------------------------
*Less than 1%
(1) Beneficial ownership is determined in accordance with Rule 13d-3
promulgated under the Securities Exchange Act of 1934. The information
concerning the shareholders is based upon information furnished to the
Company by such shareholders. Except as otherwise indicated, all of the
shares next to each identified person or group are owned of record and
beneficially by such person or each person within such group and such
persons have sole voting and investment power with respect thereto.
(2) Includes (i) 256,088 shares owned directly by Douglas J. Andrea, Mr.
Andrea's spouse and Mr. Andrea's daughter, and (ii) 832,500 shares
issuable upon the exercise of options which are currently exercisable
or
2
5
exercisable within 60 days from the date hereof. Does not include
62,500 shares issuable upon exercise of options that are not currently
exercisable or exercisable within 60 days from the date hereof.
(3) Includes (i) 190,000 shares owned directly by Christopher P. Sauvigne
(ii) 15,000 shares owned by Mr. Sauvigne's spouse, (iii) 5,000 shares
owned by Mr. Sauvigne's minor children, and (iv) 687,500 shares
issuable upon the exercise of options which are currently exercisable
or exercisable within 60 days from the date hereof. Does not include
62,500 shares issuable upon the exercise of options that are not
currently exercisable or exercisable within 60 days from the date
hereof.
(4) Includes (i) 2,000 shares owned directly by Richard A. Maue and Mr.
Maue's spouse and (ii) 248,750 shares issuable upon the exercise of
options which are currently exercisable or exercisable within 60 days
from the date hereof. Does not include 71,250 shares issuable upon the
exercise of options that are not currently exercisable or exercisable
within 60 days from the date hereof.
(5) Does not include 35,000 shares issuable upon exercise of options that
are not currently exercisable or exercisable within 60 days from the
date hereof.
(6) Includes 5,000 shares owned directly by James M. Griffin. Does not
include 35,000 shares issuable upon exercise of options that are not
currently exercisable or exercisable within 60 days from the date
hereof.
(7) Includes (i) 2,000 shares owned directly by Gary A. Jones, and (ii)
60,000 shares issuable upon the exercise of options that are currently
exercisable or exercisable within 60 days from the date hereof. Does
not include 10,000 shares issuable upon exercise of options that are
not currently exercisable or exercisable within 60 days from the date
hereof.
(8) Includes 67,500 shares issuable upon the exercise of options that are
currently exercisable or exercisable within 60 days from the date
hereof. Does not include 87,500 shares issuable upon exercise of
options that are not currently exercisable or exercisable within 60
days from the date hereof.
(9) Does not include 10,000 shares issuable upon exercise of options that
are not currently exercisable or exercisable within 60 days from the
date hereof.
(10) Includes the shares directly owned and the shares issuable upon the
exercise of the options, which are currently exercisable and
exercisable within 60 days from the date hereof, discussed in notes (2)
through (9) above.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and officers and persons who beneficially own
more than ten percent of the Common Stock to file with the Securities and
Exchange Commission and the American Stock Exchange initial reports of ownership
and reports of changes in ownership of Common Stock. 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/or written representations that no other reports were required, during the
fiscal year ended December 31, 2001, the Company's directors, officers and
greater-than-ten percent holders met all applicable SEC filing requirements,
except that the following reports by the following individuals were not filed on
a timely basis due to administrative error: one report on Form 4 containing one
transaction for each of Christopher P. Sauvigne and Douglas J. Andrea.
PROPOSAL ONE:
ELECTION OF DIRECTORS
The By-laws of the Company provide that the Board of Directors shall
consist of not less than three and not more than ten Directors as determined by
the Board. The Board has determined that the number of Directors to be elected
at the annual meeting shall be eight. The persons listed below have been
nominated by the Board for election as Directors to serve until the next annual
meeting of shareholders and until their respective successors have been elected
and qualified. Unless otherwise specified in the form of proxy, the proxies
solicited by management will be voted "FOR" the election of
3
6
these candidates. The election of Directors requires a plurality of those shares
voted at the meeting with respect to the election of Directors. The nominees
receiving the highest vote totals will be elected as the Directors of the
Company. Accordingly, abstentions and broker "non-votes" will not affect the
outcome of the election of Directors of the Company. In case any of these
nominees become unavailable for election to the Board of Directors, an event
which is not anticipated, the persons named as proxies, or their substitutes,
shall have full discretion and authority to vote or refrain from voting for any
other nominee in accordance with their judgment.
INFORMATION ABOUT NOMINEES
Information on Director nominees of the Company follows (ages are as of December
31, 2001):
DOUGLAS J. ANDREA, age 39, has been the Chairman of the Board of
Directors since November of 2001 and a Director of the Company since 1991. He
was Co-Chairman and Co-Chief Executive Officer from November 1998 until August
2001. He served as Co-President of the Company from November 1992 to November
1998, as Vice President - Engineering of the Company from December 1991 to
November 1992, and as Secretary of the Company from 1989 to January 1993.
CHRISTOPHER P. SAUVIGNE, age 41, has been President and Chief Executive
Officer of the Company since August 2001 and a Director since June 2000. He
was President and Chief Operating Officer of the Company from November 1998
until August 2001. From 1982 until joining the Company in November 1998, Mr.
Sauvigne was employed by Arthur Andersen LLP, where he served in various
capacities, the last of which was as Partner.
JOHN R. CROTEAU, age 41, has been a Director of the Company since March
2002. Mr. Croteau, Director, Computer Products and Services at Analog Devices,
Inc., is currently responsible for Analog Devices' DSP and System Product
businesses in PCs and peripherals. Mr. Croteau, having 19 years of semiconductor
and technology marketing and business management experience, built a franchise
in PC Audio at Analog Devices, servicing substantially all PC OEMs, including
Intel, Dell, Compaq, Hewlett Packard, IBM, Sony, Fujitsu, FSC and NEC, among
others. Since joining Analog Devices in 1983, Mr. Croteau held a variety of
strategic marketing and planning positions, specializing in bringing new
technologies and products to market.
JAMES M. GRIFFIN, age 55, has been a Director of the Company since
February 2002. Mr. Griffin has been a private investor since 1994. Prior to
that time, Mr. Griffin held financial management positions at Estee Lauder Inc.,
where he was Executive Vice President and Chief Operating Officer of Lauder
Investments, Inc., and earlier, Vice President and Treasurer of Estee Lauder,
Inc. Mr. Griffin also serves as a Director of Vail Banks, Inc., a bank holding
company; at Overseas Military Sales Corp., a privately held company that sells
U.S.-made automobiles to Armed Forces personnel located outside the United
States; and as Chairman of the Board at Southern Holdings, Inc., one of the
largest privately-held metal and plastic recyclers in the United States. Mr.
Griffin is a Certified Public Accountant and a member of the American Institute
of Certified Public Accountants.
GARY A. JONES, age 56, 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 at Allied Signal Ocean Systems from 1987 to 1994. From March
1998 to December 2000, Mr. Jones was the Managing Director of Andrea Digital
Technologies, Inc, a wholly-owned subsidiary of Andrea Electronics Corporation.
SCOTT KOONDEL, age 38, 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
4
7
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 54, has been a Director of the Company since November
1998. He co-founded Lamar Signal Processing td., a subsidiary of the Company
that was acquired in May 1998. Since August 1996, he has been the President of
Advanced Technology Inc., a manufacturer of robotic routing equipment used in
manufacturing printed circuit boards for advanced semiconductors, and from 1990
to 1996, was a Director of Vocaltec Communications Ltd., an Israeli Internet
telephony software company. In 1980, he founded Remarkable Products, Inc., a
direct mail company, and served as its President until the company was acquired
in 1993.
LOUIS LIBIN, age 43, has been a Director of the Company since February
2002. He is President of Broad Comm, Inc., a consulting group specializing in
advanced television broadcast, interactive TV, Internet Protocol and wireless
communications. Prior to his tenure at Broad Comm, Mr. Libin was Chief
Technology Officer for NBC, and was responsible for all business and technical
matters for satellite, wireless and communication issues for General Electric
and NBC. Since 1989, Mr. Libin has represented the United States on satellite
and transmission issues at the International Telecommunications Union (the ITU)
in Geneva, Switzerland. Mr. Libin is a Senior Member of the Institute of
Electrical and Electronic Engineers (IEEE), and is a member of the National
Society of Professional Engineers.
INFORMATION ABOUT EXECUTIVE OFFICER WHO IS NOT A DIRECTOR
RICHARD A. MAUE, age 32, has been the Company's Chief Financial Officer
and Corporate Secretary since November 1999. Mr. Maue joined the Company in
April 1997 and served as Vice President, Controller, Treasurer and Corporate
Secretary until November 1999. From 1992 until joining the Company in April
1997, Mr. Maue was employed in the audit and business advisory division at
Arthur Andersen LLP.
The executive officers of the Company are elected annually and hold
office until their successors have been elected and qualified or until they are
removed or replaced.
DIRECTORS' FEES, BOARD MEETINGS AND COMMITTEES
The Board is served by an Audit Committee, a Compensation Committee and
a Nominating Committee. The Audit Committee is comprised of James M. Griffin,
Scott Koondel and Jack Lahav. The Audit Committee meets with management and
Company financial personnel, as well as with the Company's independent
accountants, to consider the adequacy of the internal controls of the Company
and the objectivity of the Company's financial reporting. The Audit Committee
met four times during 2001. The Compensation Committee is comprised of Scott
Koondel, James M. Griffin and Louis Libin. The Compensation Committee
administers the Company's stock option plans and makes recommendations to the
Board of Directors with respect to the compensation of management. The
Compensation Committee met two times during 2001. The Nominating Committee
consists of Scott Koondel, Louis Libin and John R. Croteau and selects annually
the nominees for election as Directors. The Nominating Committee met once to
select nominees for election as Directors at this Annual Meeting. The Company's
Bylaws provided for shareholder nominations as Directors. See "Shareholders
Proposals and Nominations." The Board of Directors held five meetings during
2001. In fiscal 2001, each of the Company's Directors attended at least 75% of
such meetings. During 2001 and through September 23, 2002, independent Directors
will each have been paid $1,000 for physical attendance at meetings of the
Board. Effective September 24, 2002, independent Directors will receive
5
8
an annual retainer of $5,000 in the form of Company common stock and will be
paid $500 for attendance at Board Meetings and $250 for attendance at committee
meetings.
EXECUTIVE COMPENSATION
The following table sets forth information for the last three fiscal
years relating to compensation earned by the Chief Executive Officer and the
other most highly compensated executive officers who received salary and bonuses
over $100,000 during the year ended December 31, 2001.
RESTRICTED
STOCK STOCK
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) AWARDS($)(2) OPTIONS(#)
------------------------------------------------------------------------------------------------------------------------
Christopher P. Sauvigne, President and Chief 2001 $243,723 $ -- $45,500 $ --
Executive Officer and former Chief Operating 2000 211,718 150,000 -- 125,000
Officer 1999 208,409 150,000 -- 125,000
Douglas J. Andrea, Chairman of the Board and 2001 241,724 -- 45,500 --
former Co-Chairman and Co-Chief Executive 2000 206,350 150,000 -- 125,000
Officer(3) 1999 208,505 150,000 -- 150,000
Richard A. Maue, Executive Vice President, 2001 154,134 -- -- 15,000
Chief Financial Officer and Corporate 2000 145,528 25,000 -- 70,000
Secretary 1999 93,815 27,115 -- 25,000
John N. Andrea, former Co-Chairman and Co- 2001 267,030 100,000 45,500 200,000
Chief Executive Officer(3) 2000 207,410 150,000 -- 125,000
1999 208,505 150,000 -- 150,000
---------------------------------------
(1) Total bonuses received by each of Christopher P. Sauvigne, Douglas J. Andrea, Richard A. Maue and John N.
Andrea represented bonuses paid pursuant to their respective employment agreements. See "Employment Agreements
and Change in Control Arrangements." Bonus payments for 1999 and 2000 have been restated to reflect amounts
earned for each respective period.
(2) For 2001, includes 25,000 shares of restricted stock granted to each of Christopher P. Sauvigne, Douglas J.
Andrea and John N. Andrea which vested on March 19, 2002. Based on the closing price of $0.85 on December 31, 2001,
the market values of the unvested shares of restricted stock held by each of Christopher P. Sauvigne, Douglas J. Andrea
and John N. Andrea was $21,250. See "Employment Agreements and Change in Control Arrangements."
(3) Effective August 2001, Douglas J. Andrea and John N. Andrea relinquished their duties as Co-Chairman and Co-Chief
Executive Officers of the Company, Christopher P. Sauvigne was named President and Chief Executive Officer and
Douglas J. Andrea became sole Chairman of the Board of Andrea Electronics Corporation. Effective November 2001,
John N. Andrea resigned as a Director and officer of the Company. See "Employment Agreements and Change in
Control Arrangements."
The following table summarizes, for each of the named executive
officers, the number of shares covered by options granted during 2001, the
percent of total options granted to employees of the Company in 2000, the
exercise price of such options, the expiration date, and the potential
realizable value of such options assuming appreciation rates of 5% and 10% per
year through the expiration date of such options. No other executive officers
were granted options during 2001.
6
9
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable
Value at Assumed
Anual Rates of Stock
Price Appreciation for
Individual Grants Option Term
----------------------------------------------------------------------- -------------------------
Percentage
Number of of Total
Securities Options
Underlying Granted to Excercise
Date of Options Employees in Price Expiration
Name Grant Granted(#) Fiscal Year ($/share) Date 5% (1) 10% (1)
-----------------------------------------------------------------------------------------------------------------------------------
John N. Andrea(2) 11/15/01 200,000 32.2% $0.70 11/15/11 $88,045 $223,124
Richard A. Maue(3) 3/19/01 15,000 2.4% $1.78 3/19/11 $16,791 $42,553
-----------------------------------
(1) The dollar gains under these columns result from calculations required by the Securities and Exchange Commission's rules
and are not intended to forecast future price appreciation of the Company's common stock. Options have value only if the
stock price increases above the exercise price shown in the table during the effective option period. In order for the
executive to realize the potential values set forth in the 5% and 10% columns in the table, the price per share of the
Company's common stock as of the expiration date of the options for John N. Andrea would be approximately $1.14 per share
and $1.82 per share, respectively, and for Richard A. Maue would be approximately $2.90 per share and $4.62 per share,
respectively.
(2) Of the shares covered by this option grant, 50% can be purchased after January 1, 2002; and the remaining 50% can be
purchased after January 1, 2003.
(3) Of the shares covered by this option grant, none can be purchased during the first year following the grant; 25% can be
purchased after the first anniversary of the grant; an additional 25% can be purchased after the second anniversary of the
grant; and the remaining 50% can be purchased after the third anniversary of the grant.
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 2001 and the aggregate dollar value of in-the-money, unexercised options
at December 31, 2001. 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 IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT FISCAL
SHARES AT FISCAL YEAR END-- YEAR END--
ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXECISE VALUE REALIZED UNEXERCISABLE UNEXERCISABLE (1)
--------------------------------------------------------------------------------------------------------------------------
Christopher P. Sauvigne -- $ -- 343,750 / 156,250(2) $ -- / $ --
Douglas J. Andrea 15,000 $12,975 626,250 / 168,750(2) $21,000 / $ --
Richard A. Maue -- $ -- 127,500 / 80,000(2) $ -- / $ --
John N. Andrea -- $ -- 506,250 / 368,750(3) $ -- / $30,000
------------------------------
(1) Values were based on a closing trade price for Andrea's Common Stock on December 31, 2001 of $0.85 per share.
7
10
(2) Of the shares covered by each option granted, none can be purchased
during the first year following the grant; 25% can be purchased after the
first anniversary of the grant; an additional 25% can be purchased after
the second anniversary of the grant; and the remaining 50% can be
purchased after the third anniversary of the grant.
(3) For 675,000 shares covered by these options granted, none can be
purchased during the first year following the grant; 25% can be purchased
after the first anniversary of the grant; an additional 25% can be
purchased after the second anniversary of the grant; and the remaining
50% can be purchased after the third anniversary of the grant. For
200,000 shares covered by these options granted, 50% can be purchased
after January 1, 2002, and the remaining 50% can be purchased on or after
January 1, 2003.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
The Company entered into three-year employment agreements that
commenced on March 26, 2000 with John N. Andrea and Douglas J. Andrea, each as
Co-Chairman and Co-Chief Executive Officers of the Company. Under these
agreements, the total annual cash compensation for each of John N. Andrea and
Douglas J. Andrea was $350,000. Each agreement also provided for potential
long-term incentive compensation in the form of cash or equity-based awards.
During the first quarter of 2001, both Douglas J. Andrea and John N. Andrea
agreed to a $50,000 reduction in cash compensation in exchange for 25,000 shares
of restricted stock of the Company. Effective August 2001, Mr. John N. Andrea
and Mr. Douglas J. Andrea relinquished their duties as Co-Chairman and Co-Chief
Executive Officers of the Company, and Mr. Douglas J. Andrea became sole
Chairman of the Board of Andrea Electronics Corporation. During the third
quarter of 2001, and in connection with his new position at the Company, Mr.
Douglas J. Andrea agreed to modify his existing employment agreement, reducing
his annualized cash compensation from $300,000 to $100,000 for the remainder of
2001. In addition, during the first quarter of 2002, Mr. Douglas J. Andrea
agreed to receive an annual base salary of $175,000 for the duration of his
employment agreement, plus the potential ability to receive a $125,000 cash
bonus based on the achievement of specific financial performance goals. Certain
other rights and provisions within Mr. Douglas J. Andrea's existing employment
agreement have either been waived or are pending final negotiation. No assurance
can be made that such negotiation will be successful. Mr. John N. Andrea entered
into a separate agreement with the Company that replaced his previous employment
agreement with the Company. Mr. John N. Andrea is no longer an executive officer
or Director of the Company.
The Company entered into an employment agreement with Christopher P.
Sauvigne, as President and Chief Operating Officer of the Company, which
commenced on November 20, 1998 and expires on December 31, 2002. Under this
agreement, the total annual cash compensation for Mr. Sauvigne is $350,000. This
agreement also provides for long-term incentive compensation in the form of cash
or equity-based awards. During the first quarter of 2001, Mr. Sauvigne agreed to
a $50,000 reduction in total cash compensation in exchange for 25,000 shares of
restricted stock of the Company. Effective August 2001, Mr. Sauvigne became
President and Chief Executive Officer of the Company. During the third quarter
of 2001, and in connection with his new position at th Company, Mr. Sauvigne
agreed to reduce his total annualized cash compensation to $100,000 for the
remainder of 2001. In addition, during the first quarter of 2002, Mr. Sauvigne
agreed to receive an annual base salary of $175,000 for the duration of his
current employment agreement, plus the potential ability to receive a $125,000
cash bonus based on the achievement of specific financial performance goals.
Certain other rights and provisions within Mr. Sauvigne's existing employment
agreement have either been waived or are pending final negotiation. No assurance
can be made that such negotiation will be successful.
Under each of the aforementioned agreements (with the exception of the
agreement between Mr. John N. Andrea and the Company), on the occurrence of a
Change in Control (as defined), the Company shall pay the Executive, or in the
event of his subsequent death, his beneficiary or
8
11
beneficiaries, or his estate, as the case may be a sum equal to the greater of
(a) the payments due for the remaining term of the agreement or (b) the product
of three multiplied by (ii) the Executive's average annual total compensation
for the three preceding taxable years. In addition, under each of the
aforementioned employment agreements, on the occurrence of a Change in Control,
all restrictions on any restricted stock then held by Executive will lapse
immediately, incentive stock options an stock appreciation rights then held will
become immediately exercisable, and the Executive will be entitled to receive
benefits due him under or contributed by the Company on his behalf pursuant to
any retirement, incentive, profit sharing, bonus, performance, disability or
other employee benefit plan maintained by the Company on his behalf to the
extent such benefits are not otherwise paid to him under a separate provision of
the agreement. If, during the term of the agreement, the Company terminates
Executive's employment other than for Cause (as defined), or Executive resigns
for Good Reason (as defined), the Company shall pay to him the product of (a) a
sum equal to (i) the amount of the remaining salary payments that he would have
earned if he continued his employment with the Company during the remaining
unexpired term of his employment agreement at his base salary at the date of
termination, (ii) the highest amount of bonus and any other compensation paid to
the Executive, in any year, during the term of his employment agreement times
the remaining number of years of the agreement and any fraction thereof and
(iii) an amount equal to the highest amount of annual contributions that were
made on the Executive's behalf, in any year, to any employee benefit plans of
the Company during the term of the agreement, multiplied by (b) the remaining
number of years of the agreement and any fraction thereof.
The Company entered into a two-year employment agreement that commenced
on March 26, 2000 with Richard A. Maue, as Senior Vice President and Chief
Financial Officer of the Company. The agreement provided an annual base salary
of not less than $150,000 per annum, plus additional short- term incentive
compensation in the form of annual cash bonuses, based on the achievement of
performance goals and which was not to be less than $25,000 per annum, and
long-term incentive compensation in the form of cash or equity-based awards.
Effective August 2001, Mr. Maue became an Executive Vice President of the
Company. In addition, during the first quarter of 2002, Mr. Maue agreed to waive
his 2001 minimum bonus payment in exchange for 37,500 stock options. Mr. Maue
and the Company are currently negotiating a new employment agreement for his
position as Executive Vice President and Chief Financial Officer of the Company.
No assurance can be made that such negotiation will be successful.
COMPENSATION COMMITTEE REPORT
For the year ended December 31, 2001, the Compensation Committee of the
Board of Directors for the Company was composed of independent directors.
Currently, the Compensation Committee is comprised of James M. Griffin, Louis
Libin and Scott Koondel. 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 Compensation
Committee. Compensation increases are determined by the Committee based on
annual evaluations. In addition, the Committee supplements its criteria with
consultative studies of best compensation practices within the industry in which
the Company is engaged.
The Compensation Committee considerations include management skills,
long-term performance, shareholder returns, operating results, new product and
technological developments and introductions, asset-liability management, and
unusual accomplishments as well as economic conditions and other external events
that affect the operations of the Company. Compensation policies must
9
12
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. All
stock option awards are approved by the Compensation Committee and any stock
options awarded to Directors must be approved by the Board of Directors.
The Compensation Committee annually reviews and approves the
compensation of Christopher P. Sauvigne, the Chief Executive Officer of the
Company. The Committee believes that the Chief Executive Officer is paid a
reasonable salary, and the options granted to him are consistent with corporate
financial incentives provided to the other executive officers of the Company. To
the extent his performance translates into an increase in the value of the
Company's stock, all shareholders share the benefits. The Committee believes
that the Company continues to enhance its position as a global provider of
communications products for the emerging natural language human/machine
interface markets.
COMPENSATION COMMITTEE
Scott Koondel (Chairman)
James M. Griffin
Louis Libin
10
13
STOCK PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the
cumulative total shareholder return for the five years ended December 31, 2001
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 December 31,
1996 and the reinvestment of all dividends.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG
ANDREA ELECTRONICS CORPORATION, AMEX MARKET INDEX
AND SIC CODE INDUSTRY INDEX
[GRAPHIC OMITTED]
-------------------------------------------------------------------------------------------------------------------------
SUMMARY
12/31/96 12/31/97 12/31/98 12/31/99 12/29/00 12/31/01
-------- -------- -------- -------- -------- --------
ANDREA ELECTRONICS CORPORATION $100.00 $326.14 $178.41 $139.77 $ 38.18 $ 15.45
AMEX MARKET INDEX $100.00 $120.33 $118.69 $147.98 $146.16 $139.43
SIC CODE INDUSTRY INDEX $100.00 $ 97.63 $105.56 $400.35 $207.91 $145.04
NOTES:
A. THE LINES REPRESENT MONTHLY INDEX LEVELS DERIVED FROM COMPOUNDED DAILY RETURNS THAT INCLUDE ALL DIVIDENDS.
B. THE INDEXES ARE REWEIGHTED DAILY, USING THE MARKET CAPITALIZATION ON THE PREVIOUS TRADING DAY.
C. IF THE MONTHLY INTERVAL, BASED ON THE FISCAL YEAR-END IS NOT A TRADING DAY, THE PRECEDING TRADING DAY IS USED.
D. THE INDEX LEVEL FOR ALL SERIES WAS SET TO $100.00 ON DECEMBER 31, 1996.
-------------------------------------------------------------------------------------------------------------------------
11
14
PROPOSAL TWO:
APPROVAL AND AUTHORIZATION OF AN INCREASE
IN THE NUMBER OF SHARES SUBJECT TO THE
ANDREA ELECTRONICS CORPORATION 1998 STOCK PLAN
The Board of Directors of the Company believes that in order to attract
and retain employees and consultants of the highest caliber, provide increased
incentive for directors, officers and key employees and to continue to promote
the well-being of the Company, it is in the best interests of the Company and
its shareholders to provide directors, officers, key employees and consultants
of the Company and its subsidiaries, through the grant of stock or stock-related
incentive awards, the opportunity to participate in the value and/or
appreciation in value of the Company's common stock. As of August 23, 2002,
awards covering an aggregate of 4,138,625 shares of the Company's common stock
remain outstanding under the 1998 Stock Plan with 205,750 shares remaining for
additional awards thereunder, and unexercised awards covering an aggregate of
1,388,000 shares remain outstanding under the Company's 1991 Performance Equity
Plan. No further awards may be granted under the 1991 Performance Equity Plan.
The Board of Directors has therefore approved an amendment to the 1998 Plan to
increase the number of shares of common stock available for grant under the 1998
Plan to 5,275,000 shares from 4,375,000 shares. No awards or decisions to make
awards have been granted or made pursuant to the 1998 Plan to purchase any of
the shares proposed to be added to the 1998 Plan by this amendment. At the
Annual Meeting, shareholders will be asked to approve and authorize this
amendment. The affirmative vote of a majority of the votes cast by the
shareholders is required for approval of the amendment, with abstentions and
broker "non-votes" not counted as votes cast.
The following discussion summarizes certain material provisions of the
1998 Plan and is qualified in its entirety by reference to the text of the 1998
Plan, which is attached as Appendix A to this Proxy Statement.
SUMMARY OF THE 1998 PLAN
ADMINISTRATION. The 1998 Plan is administered, at the discretion of the
Board of Directors of the Company, by its Compensation Committee (in such
capacity, the "Administrator"). The Administrator has full authority, subject to
the provisions of the 1998 Plan, to award (i) Stock Options, and/or (ii) Stock
Purchase Rights (collectively "Awards"). Subject to the provisions of the 1998
Plan, the Administrator determines, among other things, the persons to whom from
time to time Awards may be granted ("Holders" or "Participants"), the specific
type of Awards to be granted, the number of shares subject to each Award, share
prices, any restrictions or limitations on such Awards, and any vesting,
exchange, deferral, surrender, cancellation, acceleration, termination, exercise
or forfeiture provisions related to such Awards. However, under the current
policies of the Company, all awards granted to Directors must be approved by the
Board of Directors. The interpretation and construction by the Administrator of
any provisions of, and the determination by the Administrator of any questions
arising under, the 1998 Plan or any rule or regulation established by the
Administrator pursuant to the 1998 Plan are final, conclusive and binding on all
persons interested in the 1998 Plan. Awards under the 1998 Plan are evidenced by
agreements ("Agreements").
In the event of a merger or sale of substantially all of the assets of
the Company, each outstanding Award shall be assumed or an equivalent award
substituted by the successor corporation, unless full and immediate vesting is
otherwise provided in the Agreement covering that award or in the employment
agreement of the Holder. In the event that a successor corporation refuses to
assume or substitute for Awards, Holders shall fully vest in and have the right
to exercise such Awards as to all
12
15
shares of Common Stock issuable thereunder, including shares which would not
otherwise be vested or exercisable.
In order to prevent the dilution or enlargement of the rights of
Holders under the 1998 Plan, the number of shares of Common Stock covered by
each outstanding Stock Option and Stock Purchase Right, and the number of shares
of Common Stock authorized by the 1998 Plan is subject to adjustment by the
Board in the event of any increase or decrease in the number of shares of
outstanding Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company. The shares of Common
Stock acquirable pursuant to the Awards are made available from authorized and
unissued shares of Common Stock. If any unexercised Award granted under the 1998
Plan is forfeited or terminated, the shares of Common Stock that were available
pursuant to such Award are again available for distribution under the 1998 Plan.
Unless determined otherwise by the Administrator, Awards granted under
the 1998 Plan may not be sold, pledged, assigned, hypothecated, transferred, or
disposed of in any manner other than by will or by the laws of descent and
distribution and may be exercised only by the Holder during his or her lifetime.
ELIGIBILITY. Subject to the provisions of the 1998 Plan, Awards may be
granted to employees, officers, directors and consultants who are deemed to be
engaged by the Company to render services and who are compensated for such
services. Incentive Options may be awarded only to persons who, at the time of
such awards, are employees of the Company.
TYPES OF AWARDS
OPTIONS. The 1998 Plan provides both for "incentive" stock options
("Incentive Options") as defined in Section 422 of the Internal Revenue Code of
1986, as amended (the "Code") and for options not qualifying as Incentive
Options ("Non-Statutory Stock Options"), both of which may be granted with any
other stock based award under the 1998 Plan. The Administrator will determine
the exercise price per share of Common Stock purchasable under each Incentive
Option or Non-Statutory Stock Option (collectively, "Options"). The exercise
price of an Incentive Option may not be less than 100% of the fair market value
on the last trading day before the date of grant (or, in the case of an
Incentive Option granted to a person possessing more that 10% of the total
combined voting power of all classes of stock of the Company, not less than 110%
of such fair market value). The exercise price of a Non-Statutory Stock Option
which is intended to be performance-based compensation under Section 162(m) of
the Code may not be less that 100% of the fair market value on the date of the
grant. An Incentive Option may only be exercised within 10 years of the date of
the grant (or within five years in the case of an Incentive Option granted to a
person who, at the time of the grant, owns stock possessing more than 10% of the
total combined voting power of all classes of stock of the Company) or such
other lesser period as the Administrator may specify at the time of the grant.
Subject to any limitations or conditions the Administrator may impose, Options
may be exercised, in whole or in part, at any time during the term of the Option
by giving written or electronic notice of exercise from the person entitled to
exercise the Option. Such notice must be accompanied by payment in full of the
purchase price, such payment consisting of any consideration and/or method of
payment authorized by the Administrator and permitted by the Agreement.
13
16
Generally, if the Holder ceases to be an employee, officer, director or
consultant of the Company other than as a result of death or disability, then
the portion of any Option that has vested by the date of such termination may be
exercised for such period as is specified in the Agreement or, if not specified,
within three months after termination. 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. Similarly,
should a Holder die while in the employment of the Company or a Subsidiary, his
or her legal representative or beneficiary 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 shorter period as
the Administrator may specify at the time of grant).
STOCK PURCHASE RIGHTS. The Administrator may grant Stock Purchase
Rights in conjunction with any Option granted under the 1998 Plan. The
Administrator shall determine, in its sole discretion, the terms, provisions and
conditions of each Agreement under which Stock Purchase Rights may be granted.
Unless otherwise provided in the Agreement, the Company will have a repurchase
option, at a price equal to the original price paid by the purchaser, which is
exercisable upon the voluntary or involuntary termination of the purchaser's
service with the Company, including death or disability.
WITHHOLDING TAXES. Upon the exercise of any Award granted under the
1998 Plan, the Administrator may allow, subject to the provisions of the 1998
Plan, Holders to satisfy Federal, state and local withholding tax obligations by
electing to have the Company withhold from the shares of Common Stock to be
issued upon exercise of an Option or Stock Purchase Right that number of shares
which have a fair market value (determined on the last trading day before the
date the amount of tax to be withheld is determined) equal to the amount of the
withholding tax due under applicable Federal, state and local laws.
TERMS AND AMENDMENTS. Unless terminated by the Board, the 1998 Plan
shall continue in effect for a term of 10 years. The Board may at any time, and
from time to time, amend, alter, suspend or terminate the 1998 Plan.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion of the federal income tax consequences of
participation in the 1998 Plan is only a summary of the general rules applicable
to the grant and exercise of Options and Stock Purchase Rights 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
14
17
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 AND STOCK PURCHASE RIGHTS. With respect to
Non-Statutory Stock Options and Stock Purchase Rights (i) upon grant, the
Participant will recognize no income; (ii) upon exercise (if the shares of
Common Stock are not subject to a substantial risk of forfeiture), the
Participant will recognize ordinary compensation income in an amount equal to
the excess, if any, of the fair market value of the shares on the date of
exercise over the exercise price, and the Company will qualify for a deduction
in the same amount, subject to the requirement that the compensation be
reasonable; and (iii) the Company will be required to comply with applicable
Federal income tax withholding requirements with respect to the amount of
ordinary compensation income recognized by the Participant. On a disposition of
the shares, the Participant will recognize gain or loss equal to the difference
between the amount realized and the sum of the exercise price and the ordinary
compensation income recognized. Such gain or loss will be treated as capital
gain or loss if the shares are capital assets and as short-term or long-term
capital gain or loss, depending upon the length of time that the participant
held the shares. If the shares acquired upon exercise of a Non-Statutory Stock
Option or Stock Purchase Right 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.
15
18
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information about Company common stock
that may be issued upon exercise of options, warrants and rights under all of
the Company's equity compensation plans as of December 31, 2001, including the
1998 Stock Plan and the 1991 Performance Equity Plan. The Company's stockholders
have approved both of these plans.
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES FUTURE ISSUANCE UNDER
TO BE ISSUED UPON WEIGHTED-AVERAGE EQUITY COMPENSATION PLANS
EXERCISE OF EXERCISE PRICE OF (EXCLUDING SECURITIES
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REFLECTED IN THE FIRST
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN)
----------------------------- -------------------------- ------------------------ -------------------------------
Equity compensation
plans approved by
security holders............. 4,213,125 $6.36 1,519,250
Equity compensation
plans not approved by
security holders............. -- -- --
--- --- ---
Total........................ 4,213,125 $6.36 1,519,250
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ADOPTION OF THIS
PROPOSAL.
PROPOSAL THREE:
RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
GENERAL
The Board of Directors has appointed Marcum & Kliegman LLP to be the
Company's independent auditors for the fiscal year ending December 31, 2002,
subject to the ratification by stockholders. A representative of Marcum &
Kliegman LLP is expected to be present at the annual meeting to respond to
appropriate questions from stockholders and will have the opportunity to make a
statement should he or she desire to do so.
If the ratification of the appointment of independent auditors is not
approved by a majority of the votes cast by stockholders at the annual meeting,
the Board of Directors would consider other independent public accountants. THE
BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE RATIFICATION OF
THE APPOINTMENT OF INDEPENDENT AUDITORS.
Arthur Andersen LLP served as the Company's independent auditors for
the fiscal year ended December 31, 2001. A representative of Arthur Andersen LLP
is not expected to be present at the annual meeting.
16
19
CHANGE IN INDEPENDENT AUDITORS
On July 1, 2002, the Company's Board of Directors, at the
recommendation of its Audit Committee, determined not to engage Arthur Andersen
LLP as the Company's independent accountants for the fiscal year ending December
31, 2002, however, no action was taken on this date to formally dismiss Arthur
Andersen LLP as the Company's independent accountants. On July 29, 2002, the
Company's Board of Directors, at the recommendation of its Audit Committee,
determined to engage PricewaterhouseCoopers LLP as the Company's independent
accountants, however no action was taken on this date to formally engage
PricewaterhouseCoopers LLP as the Company's independent accountants. On August
6, 2002, the Securities and Exchange Commission informed the Company that Arthur
Andersen LLP had notified the Securities and Exchange Commission that it was
unable to perform future audit services for the Company and, as a result, its
relationship with the Company was effectively terminated. Arthur Andersen LLP
did not notify the Company of this directly, however, the Securities and
Exchange Commission stated in its letter that Arthur Andersen LLP's notification
was consistent with widely disseminated press reports of the wind-down of Arthur
Andersen's business. As a result, on August 6, 2002, Arthur Andersen LLP was
dismissed as the Company's independent accountant.
The report of Arthur Andersen LLP on the financial statements of the
Company for each of the years ended December 31, 2001 and 2000 did not contain
an adverse opinion or a disclaimer of opinion and was not qualified or modified
as to uncertainty, audit scope, or accounting principles. During each of the
years ended December 31, 2001 and 2000 and the subsequent interim period
preceding August 6, 2002, the Company was not in disagreement with Arthur
Andersen LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreement, if not
resolved to the satisfaction of Arthur Andersen LLP, would have caused Arthur
Andersen LLP to make reference to the subject matter of the disagreement in
connection with its report.
On August 6, 2002, the Company's Board of Directors, at the
recommendation of its Audit Committee, engaged PricewaterhouseCoopers LLP as the
Company's independent accountants. During the years ended December 31, 2001 and
2000 and through the date of the Board's decision, the Company did not consult
PricewaterhouseCoopers LLP with respect to the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Company's consolidated financial
statements, or any other matters or reportable events as set forth in Items
304(a)(2)(i) and (ii) of Regulation S-K.
On August 14, 2002, the Company's Board of Directors, at the
recommendation of its Audit Committee, dismissed PricewaterhouseCoopers LLP as
the Company's independent accountants. During the term of its engagement,
PricewaterhouseCoopers LLP did not audit or review any financial statements of
the Company as of any date or for any period, nor issue any reports relating
thereto. However, PricewaterhouseCoopers LLP did commence, but did not complete
a review of the Company's interim financial statements for the quarter ended
June 30, 2002.
During the term of its engagement, there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of PricewaterhouseCoopers LLP
would have caused it to make reference thereto in any report on any audited
financial statements of the Company.
17
20
During the term of PricewaterhouseCoopers LLP's engagement, there were
no reportable events (as defined in Regulation S-K Item 304(a)(1)(v)), except
that prior to its dismissal, PricewaterhouseCoopers LLP raised questions
regarding the Company's ability to recover its deferred tax assets.
PricewaterhouseCoopers LLP was dismissed prior to the matter being resolved.
Members of the Board of Directors, one of which is a member of the Audit
Committee, discussed this matter with PricewaterhouseCoopers LLP. The Company
has authorized PricewaterhouseCoopers LLP to respond fully to the inquiries of
the Company's successor accountant concerning this matter.
On August 15, 2002, the Company's Board of Directors, at the
recommendation of its Audit Committee, engaged Marcum & Kliegman LLP as the
Company's independent accountants. During the years ended December 31, 2001 and
2000 and through the date of the Board's decision, the Company did not consult
Marcum & Kliegman LLP with respect to the application of accounting principles
to a specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's consolidated financial
statements, or any other matters or reportable events as set forth in Items
304(a)(2)(i) and (ii) of Regulation S-K.
AUDIT FEES
The following table sets forth the fees billed to the Company for the
fiscal year ending December 31, 2001 by Arthur Anderson LLP:
Audit Fees................................................ $94,000
Financial information and systems......................... $ 0
All other fees*........................................... $23,651
--------------------------------
* Includes fees for assistance with securities filings and other services.
The Audit Committee has considered whether the non-audit fees paid to
Arthur Andersen LLP were compatible with maintaining Arthur Andersen LLP's
independence.
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors is responsible for
assisting the Board of Directors in fulfilling its responsibility to the
stockholders relating to corporate accounting, reporting practices and the
quality and integrity of the financial reports of the Company. Additionally, the
Audit Committee selects the auditors and reviews their independence and their
annual audit.
The Audit Committee is comprised of three Directors, each of whom is
independent under the American Stock Exchange's listing standards. The Audit
Committee acts under a written charter adopted by the Board of Directors, a copy
of which is attached to the Company's 2000 proxy statement as Appendix B. The
Audit Committee reviewed and discussed the annual audited financial statements
with management and the independent accountants. As part of this process,
management represented to the Audit Committee that the financial statements were
prepared in accordance with generally accepted accounting principles. The Audit
Committee also received and reviewed written disclosures and a letter from the
accountants concerning their independence as required by Independence Standards
Board Statement No. 1. The Audit Committee discussed with the accountants the
contents of such materials, the accountant's independence and the additional
matters required under Statement on Auditing
18
21
Standards No. 61. Based on such review and discussions, the Audit Committee
recommended that the Board of Directors include the audited consolidated
financial statements in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001 for filing with the Securities and Exchange Commission.
The Audit Committee's responsibility is to monitor and review the
Company's financial reporting process, including its system of internal controls
and the preparation of consolidated financial statements. It is not the duty or
the responsibility of the Audit Committee to conduct auditing or accounting
reviews or procedures. The Audit Committee's oversight does not provide it with
an independent basis to determine that management has maintained appropriate
accounting and financial reporting principles or policies, or appropriate
internal controls and procedures designed to assure compliance with accounting
standards and applicable laws and regulations. Furthermore, the Audit
Committee's considerations and discussions with management and the independent
auditors do not assure that the Company's financial statements are presented in
accordance with generally accepted accounting principles, that the audit of the
Company's financial statements has been carried out in accordance with generally
accepted auditing standards or that the Company's independent accountants are in
fact "independent."
AUDIT COMMITTEE
James M. Griffin (Chairman)
Scott Koondel
Jack Lahav
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 AND NOMINATIONS
Proposals of shareholders intended to be presented at the annual
meeting for the fiscal year 2002 must be received at the Company's offices by
May 7, 2003 and must otherwise comply with the requirements of Rule 14a-8 for
inclusion in the proxy materials relating to that meeting.
The Company's Bylaws provide that in order for a shareholder to make
nominations for the election of Directors or proposals for business to be
brought before the annual meeting, a shareholder must give written notice of
such nominations and/or proposals to the Secretary not less than 90 days prior
to the date of the Annual Meeting. A copy of the Bylaws may be obtained from the
Company.
OTHER BUSINESS
Action may be taken on the business to be transacted at the Annual
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
19
22
of any other matters to be presented at the Annual Meeting. If, however, other
matters properly come before the Annual Meeting, whether on the original date
provided in the Notice of Annual Meeting or any dates to which any original or
later adjournment of such meeting may be adjourned, it is intended that the
holders of the proxy will vote in accordance with their best judgment. Unless
otherwise required, any such matter properly coming before the Annual Meeting
will be decided by a majority of the votes cast with respect to such matter,
with abstentions and broker "non-votes" not considered as votes cast and,
accordingly, having no effect on the vote with respect to such matter.
If you and others who share your address own your shares in street
name, your broker or other holder of record may be sending only one annual
report and proxy statement to your address. This practice, known as
"householding," is designed to reduce our printing and postage costs. However,
if a shareholder residing at such an address wishes to receive a separate annual
report or proxy statement in the future, he or she should contact the broker or
other holder of record. If you own your shares in street name and are receiving
multiple copies of our annual report and proxy statement, you can request
householding by contacting your broker or other holder of record.
Whether or not you plan to attend the annual meeting, please vote by
marking, signing, dating and promptly returning the enclosed proxy card in the
enclosed envelope.
By Order of the Board of Directors
/s/ Richard A. Maue
Richard A. Maue
Secretary
Melville, New York
September 4, 2002
20
23
Appendix 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 purposes as a Nonstatutory Stock Option.
Neither service as a Director nor
24
payment of a director's fee by the Company shall be sufficient to constitute
"employment" by the Company.
l. "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
m. "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) if the Common Stock is listed on any established
stock exchange or a national market system, including
without limitation the Nasdaq National Market or The
Nasdaq Small Cap Market of The Nasdaq Stock Market,
its Fair Market Value shall be the closing sales
price for such stock (or the closing bid, if no sales
were reported) as quoted on such exchange or system
for the last market trading day prior to the time of
determination, as reported in The Wall Street Journal
or such other source as the Administrator deems
reliable;
(ii) if the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are
not reported, the Fair Market Value of a Share of
Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the last
market trading day prior to the day of determination,
based on such source as the Administrator deems
reliable;
(iii) in the absence of an established market for the
Common Stock, the Fair Market Value shall be
determined in good faith by the Administrator.
n. "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
o. "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
p. "Notice of Grant" means a written or electronic notice evidencing
certain terms and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement.
q. "Section 16(b) Officer" means a person who is an officer of the
Company within the meaning of Section 16(b) of the Exchange Act and the rules
and regulations promulgated thereunder.
r. "Option" means a stock option granted pursuant to the Plan.
s. "Option Agreement" means an agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant.
The Option Agreement is subject to the terms and conditions of the Plan.
t. "Option Exchange Program" means a program whereby outstanding
options are surrendered in exchange for options with a lower exercise price.
u. "Optioned Stock" means the Common Stock subject to an Option or
Stock Purchase Right.
A-2
25
v. "Optionee" means the holder of an outstanding Option or Stock
Purchase Right granted under the Plan.
w. "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
x. "Plan" means this 1998 Stock Plan.
y. "Restricted Stock" means shares of Common Stock acquired pursuant
to a grant of Stock Purchase Rights under Section 11 below.
z. "Restricted Stock Purchase Agreement" means a written agreement
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
aa. "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor
to Rule 16b-3, as in effect when discretion is being exercised with respect to
the Plan.
bb. "Section 16(b)" means Section 16(b) of the Securities Exchange Act
of 1934, as amended.
cc. "Service Provider" means an Employee, Director or Consultant.
dd. "Share" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
ee. "Stock Purchase Right" means the right to purchase Common Stock
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
ff. "Subsidiary" means a "subsidiary corporation", whether now
or hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13 of the
Plan, the maximum aggregate number of Shares that may be optioned and sold under
the Plan is 5,275,000 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.
A-3
26
4. ADMINISTRATION OF THE PLAN.
a. PROCEDURE.
(i) Multiple Administrative Bodies. The Plan may be
administered by different Committees with respect to
different groups of Service Providers.
(ii) Section 162(m). To the extent that the Administrator
determines it to be desirable to qualify Options
granted hereunder as "performance-based compensation"
within the meaning of Section 162(m) of the Code, the
Plan shall be administered by a Committee of two or
more "outside directors" within the meaning of
Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify
transactions hereunder as exempt under Rule 16b-3,
the Plan shall be administered by the Board or a
Committee of two or more "non-employee directors"
within the meaning of Rule 16b-3.
(iv) Other Administration. Other than as provided above,
the Plan shall be administered by (A) the Board or
(B) a Committee, which Committee shall be
constituted to satisfy Applicable Laws.
b. POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific
duties delegated by the Board to such Committee, the
Administrator shall have the authority, in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and
Stock Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to
be covered by each Option and Stock Purchase Right
granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any
Option or Stock Purchase Right granted hereunder.
Such terms and conditions include, but are not
limited to, the exercise price, the time or times
when Options or Stock Purchase Rights may be
exercised (which may be based on performance
criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or
limitation regarding any Option or Stock Purchase
Right or the shares of Common Stock relating
thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall
determine;
(vi) to institute an Option Exchange Program;
(vii) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;
A-4
27
(viii) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations
relating to subplans established for the purpose of
qualifying for preferred tax treatment under foreign
tax laws;
(ix) to modify or amend each Option or Stock Purchase
Right (subject to Section 15(c) of the Plan),
including the discretionary authority to extend the
post-termination exercisability period of Options
longer than is otherwise provided for in the Plan;
(x) to allow Optionees to satisfy withholding tax
obligations by electing to have the Company withhold
from the Shares to be issued upon exercise of an
Option or Stock Purchase Right that number of Shares
having a Fair Market Value equal to the amount
required to be withheld. The Fair Market Value of
the Shares to be withheld shall be determined on the
date that the amount of tax to be withheld is to be
determined. All elections by an Optionee to have
Shares withheld for this purpose shall be made in
such form and under such conditions as the
Administrator may deem necessary or advisable;
(xi) to authorize any person to execute on behalf of the
Company any Instrument required to effect the grant
of an Option or Stock Purchase Right previously
granted by the Administrator;
(xii) to make all other determinations deemed necessary or
advisable for administering the Plan.
c. EFFECT OF ADMINISTRATOR'S DECISION. The Administrator's
decisions, determinations and interpretations shall be final
and binding on all Optionees and any other holders of Options
or Stock Purchase Rights.
5. ELIGIBILITY. Nonstatutory Stock Options and Stock Purchase Rights may
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. LIMITATIONS.
a. Each Option shall be designated in the Option Agreement as
either an Incentive Stock Option or a Nonstatutory Stock
Option. However, notwithstanding such designation, to the
extent that the aggregate Fair Market Value of the Shares
with respect to which Incentive Stock Options are exercisable
for the first time by the Optionee during any calendar year
(under all plans of the Company and any Parent or Subsidiary)
exceeds $100,000, such Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section
6(a), Incentive Stock Options shall be taken into account in
the order in which they were granted. The Fair Market Value
of the Shares shall be determined as of the time the Option
with respect to such Shares is granted.
b. Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing
the Optionee's relationship as a Service Provider with the
Company, nor shall they interfere in any way with the
Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
A-5
28
c. The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal
year of the Company, Options to purchase more than
500,000 Shares.
(ii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the
Company's capitalization as described in Section 13.
(iii) If an Option is canceled in the same fiscal year of
the Company in which it was granted (other than in
connection with a transaction described in Section
13), the canceled Option will be counted against the
limits set forth in subsections (i) and (ii) above.
For this purpose, if the exercise price of an Option
is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new
Option.
7. TERM OF PLAN. Subject to Section 19 of the Plan, the Plan shall
become effective upon its adoption by the Board. It shall continue in effect
for a term of ten (10) years unless terminated earlier under Section 15 of the
Plan.
8. TERM OF OPTION. The term of each Option shall be stated in the Option
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Incentive
Stock Option shall be five (5) years from the date of grant or such shorter term
as may be provided in the Option Agreement.
9. OPTION EXERCISE PRICE AND CONSIDERATION.
a. EXERCISE PRICE. The per share exercise price for the Shares
to be issued pursuant to exercise of an Option shall be
determined by the Administrator, subject to the following:
(i) In the case of an Incentive Stock Option:
(A) granted to an Employee who, at the time the
Incentive Stock Option is granted, owns
stock representing more than ten percent
(10%) of the voting power of all classes of
stock of the Company or any Parent or
Subsidiary, the per Share exercise price
shall be no less than 110% of the Fair
Market Value per Share on the date of grant;
(B) granted to any Employee other than an
Employee described in paragraph (A)
immediately above, the per Share exercise
price shall be no less than 100% of the Fair
Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per
Share exercise price shall be determined by the
Administrator. In the case of a Nonstatutory Stock
Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of
the Code, the per Share exercise price shall be no
less than 100% of the Fair Market Value per Share on
the date of grant.
A-6
29
(iii) Notwithstanding the foregoing, Options may be granted
with a per Share exercise price of less than 100% of
Fair Market Value on the date of grant pursuant to a
merger or other corporate transaction.
b. WAITING PERIOD AND EXERCISE DATES. At the time an Option is
granted, the Administrator shall fix the period within which
the Option may be exercised and shall determine any
conditions which must be satisfied before the Option may be
exercised.
c. FORM OF CONSIDERATION. The Administrator shall determine
the acceptable form of consideration for exercising an
Option, including the method of payment. In the case of an
Incentive Stock Option, the Administrator shall determine the
acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired
upon exercise of an option, have been owned by the
Optionee for more than six months on the date of
surrender, and (B) have a Fair Market Value on the
date of surrender equal to the aggregate exercise
price of the Shares as to which said Option shall be
exercised;
(v) consideration received by the Company under a formal
cashless exercise program adopted by the Company in
connection with the Plan;
(vi) a reduction in the amount of any Company liability
to the Optionee, including any liability
attributable to the Optionee's participation in any
Company-sponsored deferred compensation program or
arrangement;
(vii) any combination of the foregoing methods of payment;
or
(viii) such other consideration and method of payment for
the issuance of Shares to the extent permitted by
Applicable Laws.
10. EXERCISE OF OPTIONS.
a. PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
granted hereunder shall be exercisable according to the terms
of the Plan and at such times and under such conditions as
determined by the Administrator and set forth in the Option
Agreement. Unless the Administrator provides otherwise,
vesting of Options granted hereunder shall be tolled during
any unpaid leave of absence. An Option may not be exercised
for a fraction of a Share.
An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance
with the Option Agreement) from the person entitled to
exercise the Option, and (ii) full payment for the Shares with
respect to which
A-7
30
the Option is exercised. Full payment may consist of any
consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the
Plan. Shares issued upon exercise of an Option shall be issued
in the name of the Optionee or, if requested by the Optionee,
in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive
dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the
exercise of the Option.
The Company shall issue (or cause to be issued) such Shares
promptly after the Option is exercised. No adjustment will be
made for a dividend or other right for which the record date
is prior to the date the Shares are issued, except as provided
in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number
of Shares thereafter available, both for purposes of the Plan
and for sale under the Option, by the number of Shares as to
which the Option is exercised.
b. TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. If an
Optionee ceases to be a Service Provider, other than upon the
Optionee's death or Disability, the Optionee may exercise his
or her Option within such period of time as is specified in
the Option Agreement to the extent that he or she is entitled
to exercise it on the date of termination (but in no event
later than the expiration of the term of such Option as set
forth in the Option Agreement).
In the absence of a specified time in the Option Agreement,
the Option shall remain exercisable for three (3) months
following the Optionee's termination. If, on the date of
termination, the Optionee is not entitled to exercise his or
her entire Option, the Shares covered by the unexercisable
portion of the Option shall revert to the Plan. If, after
termination, the Optionee does not exercise his or her Option
within the time specified by the Administrator, the Option
shall terminate, and the Shares covered by such Option shall
revert to the Plan.
c. DISABILITY OF OPTIONEE. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the
Optionee may exercise his or her Option at any time within
twelve (12) months from the date of termination, but only to
the extent that the Optionee is entitled to exercise it on
the date of termination (and in no event later than the
expiration of the term of the Option as set forth in the
Option Agreement). If, on the date of termination, the
Optionee is not entitled to exercise his or her entire
Option, the Shares covered by the unexercisable portion of
the Option shall revert to the Plan. If, after termination,
the Optionee does not exercise his or her Option within the
time specified herein, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
d. DEATH OF OPTIONEE. If an Optionee dies while a Service
Provider, the Option may be exercised at any time within
twelve (12) months following the date of death (but in no
event later than the expiration of the term of such Option
as set forth in the Notice of
A-8
31
Grant), by the Optionee's estate or by a person who acquires
the right to exercise the Option by bequest or inheritance,
but only to the extent that the Optionee would have been
entitled to exercise the Option on the date of death. If, at
the time of death, the Optionee is not entitled to exercise
his or her entire Option, the Shares covered by the
unexercisable portion of the Option shall immediately revert
to the Plan. The Option may be exercised by the executor or
administrator of the Optionee's estate or, if none, by the
person(s) entitled to exercise the Option under the Optionee's
will or the laws of descent or distribution. If the Option is
not so exercised within the time specified herein, the Option
shall terminate, and the Shares covered by such Option shall
revert to the Plan.
e. BUYOUT PROVISIONS. The Administrator may at any time offer
to buyout 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,
A-9
32
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee. If the Administrator makes an
Option or Stock Purchase Right transferable, such Option or Stock Purchase Right
shall contain such additional terms and conditions as the Administrator deems
appropriate.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR
ASSET SALE.
a. CHANGES IN CAPITALIZATION. Subject to any required action by
the shareholders of the Company, the number of shares of
Common Stock covered by each outstanding Option and Stock
Purchase Right, and the number of shares of Common Stock which
have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been
granted or which have been returned to the Plan upon
cancellation or expiration of an Option or Stock Purchase
Right, as well as the price per share of Common Stock covered
by each such outstanding Option or Stock Purchase Right, shall
be proportionately adjusted for any increase or decrease in
the number of issued shares of Common Stock resulting from a
stock split, reverse stock split, stock dividend, combination
or reclassification of the Common Stock, or any other increase
or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company;
provided, however, that conversion of any convertible
securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment
shall be made by the Board, whose determination in that
respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect,
and no adjustment by reason thereof shall be made with respect
to, the number or price of shares of Common Stock subject to
an Option or Stock Purchase Right.
b. DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Administrator
shall notify each Optionee as soon as practicable prior to the
effective date of such proposed transaction. The Administrator
in its discretion may provide for an Optionee to have the
right to exercise his or her Option until ten (10) days prior
to such transaction as to all of the Optioned Stock covered
thereby, including Shares as to which the Option would not
otherwise be exercisable. In addition, the Administrator may
provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option or Stock Purchase
Right shall lapse as to all such Shares, provided the proposed
dissolution or liquidation takes place at the time and in the
manner contemplated. To the extent it has not been previously
exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
c. MERGER OR ASSET SALE. In the event of a merger of the Company
with or into another corporation, or the sale of substantially
all of the assets of the Company, each outstanding Option and
Stock Purchase Right shall be assumed or an equivalent option
or right substituted by the successor corporation or a Parent
or Subsidiary of the successor corporation. In the event that
the successor corporation refuses to assume or substitute for
the Option or Stock Purchase Right, the Optionee shall fully
vest in and
A-10
33
have the right to exercise the Option or Stock Purchase Right
as to all of the Optioned Stock, including Shares as to which
it would not otherwise be vested or exercisable. If an Option
or Stock Purchase Right becomes fully vested and exercisable
in lieu of assumption or substitution in the event of a merger
or sale of assets, the Administrator shall notify the Optionee
in writing or electronically that the Option or Stock Purchase
Right shall be fully vested and exercisable for a period of
fifteen (15) days from the date of such notice, and the Option
or Stock Purchase Right shall terminate upon the expiration of
such period. For the purposes of this paragraph, the Option or
Stock Purchase Right shall be considered assumed if, following
the merger or sale of assets, the option or right confers the
right to purchase or receive, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right immediately
prior to the merger or sale of assets, the consideration
(whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common
Stock for each Share held on the effective date of the
transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders
of a majority of the outstanding Shares); provided, however,
that if such consideration received in the merger or sale of
assets is not solely common stock of the successor corporation
or its Parent, the Administrator may, with the consent of the
successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase
Right, for each Share of Optioned Stock subject to the Option
or Stock Purchase Right, to be solely common stock of the
successor corporation or its Parent equal in fair market value
to the per share consideration received by holders of Common
Stock in the merger or sale of assets.
14. DATE OF GRANT. The date of grant of an Option or Stock Purchase Right
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall be
provided to each Optionee within a reasonable time after the date of such grant.
15. AMENDMENT AND TERMINATION OF THE PLAN.
a. AMENDMENT AND TERMINATION. The Board may at any time amend,
alter, suspend or terminate the Plan.
b. SHAREHOLDER APPROVAL. The Company shall obtain shareholder
approval of any Plan amendment to the extent necessary and
desirable to comply with Applicable Laws.
c. EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration,
suspension or termination of the Plan shall impair the rights
of any Optionee, unless mutually agreed otherwise between the
Optionee and the Administrator, which agreement must be in
writing and signed by the Optionee and the Company.
16. CONDITIONS UPON ISSUANCE OF SHARES.
a. LEGAL COMPLIANCE. Shares shall not be issued pursuant to the
exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the
issuance and delivery of such Shares shall comply with
Applicable Laws and shall be further subject to the approval
of counsel for the Company with respect to such compliance.
A-11
34
b. INVESTMENT REPRESENTATIONS. As a condition to the exercise of
an Option or Stock Purchase Right, the Company may require the
person exercising such Option or Stock Purchase Right to
represent and warrant at the time of any such exercise that
the Shares are being purchased only for investment and without
any present intention to sell or distribute such Shares if, in
the opinion of counsel for the Company, such a representation
is required.
17. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
18. RESERVATION OF SHARES. The Company, during the term of this Plan, will at
all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months after the date the Plan
is adopted. Such shareholder approval shall be obtained in the manner and to
the degree required under Applicable Laws.
A-12
35
ANDREA ELECTRONICS CORPORATION
Solicited By The Board Of Directors for Annual Meeting To Be Held
on September 24, 2002.
PROXY
The undersigned Shareholder(s) of ANDREA ELECTRONICS CORPORATION, a New York
corporation ("Company"), hereby appoints Douglas J. Andrea and Christopher P.
Sauvigne, 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 24, 2002 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: Douglas J. Andrea; Christopher P.
Sauvigne; John R. Croteau; James M. Griffin; Gary A. Jones; Scott
Koondel; Jack Lahav; and Louis Libin.
FOR ( ) WITHHELD ( )
(INSTRUCTION: To withhold authority to vote for any individual nominee, write
the nominee's name in the space provided)
2. To approve and authorize an amendment to the Andrea Electronics
Corporation 1998 Stock Plan, to increase the number of shares of common
stock issuable thereunder to 5,275,000 shares from 4,375,000 shares.
FOR ( ) AGAINST ( ) ABSTAIN ( )
3. To ratify the selection of Marcum & Kliegman LLP as the Company's
independent accountants for the year ending December 31, 2002.
FOR ( ) AGAINST ( ) ABSTAIN ( )
( ) I plan on attending the Annual Meeting.
Date _____________, 2002
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.