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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
FILED BY THE REGISTRANT [X]
FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]
CHECK THE APPROPRIATE BOX:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant Rule 14a-12
ANDREA ELECTRONICS CORPORATION
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(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
N/A
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(NAME OF PERSON(S) FILING PROXY STATEMENT, 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:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing for which the offsetting fee was paid previously.
Identify the previous filing by registration statement number, or the Form
or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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ANDREA ELECTRONICS CORPORATION
45 MELVILLE PARK ROAD
MELVILLE, NEW YORK 11747
------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD AUGUST 7, 2001
------------------------------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of ANDREA
ELECTRONICS CORPORATION ("Company") will be held at the Melville Marriot Long
Island, 1350 Old Walt Whitman Road, Melville, New York 11747, on Tuesday, August
7, 2001 at [9:30 A.M.] local time, for the following purposes:
1. To elect eight directors to hold office until the next Annual Meeting of
Shareholders and until their respective successors have been duly
elected and qualified;
2. To authorize an amendment to the Restated Certificate of Incorporation,
as amended, of the Company to increase the authorized shares of Common
Stock to 70,000,000 shares from 35,000,000 shares;
3. To authorize an amendment to the Andrea Electronics Corporation 1998
Stock Plan, to increase the number of shares of the Company's common
stock issuable thereunder to 4,375,000 shares from 3,675,000 shares;
4. To approve the issuance of shares of Common Stock upon the conversion of
the Company's Series B convertible preferred stock and upon exercise of
the related warrant to the extent such issuance would require
stockholder approval under standards of the American Stock Exchange.
5. To approve the issuance of shares of Common Stock upon the conversion of
the Company's Series C convertible preferred stock to the extent such
issuance would require stockholder approval under the standards of the
American Stock Exchange.
6. To ratify the selection of Arthur Andersen LLP as the Company's
independent accountants for the year ending December 31, 2001; and
7. To transact such other business as may properly come before the meeting
and any adjournment thereof.
The transfer books will not be closed for the Annual Meeting. Only
shareholders of record at the close of business on June __, 2001 will be
entitled to notice of, and to vote at, the meeting and any adjournments thereof.
Our 2000 Annual Report, which is not a part of the proxy soliciting material, is
enclosed.
YOU ARE URGED TO READ THE ATTACHED PROXY STATEMENT, WHICH CONTAINS
INFORMATION RELEVANT TO THE ACTIONS TO BE TAKEN AT THE MEETING. IN ORDER TO
ASSURE THE PRESENCE OF A QUORUM, WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING
IN PERSON, PLEASE SIGN AND DATE THE ACCOMPANYING PROXY CARD AND MAIL IT PROMPTLY
IN THE ENCLOSED ADDRESSED, POSTAGE PREPAID ENVELOPE. YOU MAY REVOKE YOUR PROXY
IF YOU SO DESIRE AT ANY TIME BEFORE IT IS VOTED.
By Order of the Board of Directors
Richard A. Maue
Secretary
Melville, New York
________, 2001
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ANDREA ELECTRONICS CORPORATION
-------------------------
PROXY STATEMENT
-------------------------
GENERAL INFORMATION
ANNUAL MEETING
This Proxy Statement and the enclosed form of proxy are furnished in
connection with solicitation of proxies by the Board of Directors of Andrea
Electronics Corporation ("Company") to be used at the Annual Meeting of
Shareholders of the Company to be held on August 7, 2001 and any adjournment or
adjournments thereof ("Annual Meeting"). The matters to be considered at the
meeting are set forth in the attached Notice of Meeting.
The Company's executive offices are located at 45 Melville Park Road,
Melville, New York 11747. On or about June __, 2001, this Proxy Statement, the
enclosed form of proxy and the Company's Annual Report to Shareholders for the
fiscal year ended December 31, 2000, which contains audited financial
statements, are to be mailed to shareholders of record as of the close of
business on June __, 2001. The Company will furnish to any shareholder copies of
any exhibits listed in the Form 10-K contained in the Annual Report upon such
shareholder's request and payment of a fee not exceeding the reasonable expenses
of furnishing such copies.
SOLICITATION AND REVOCATION
Proxies in the form enclosed are solicited by and on behalf of the Board
of Directors. The persons named in the proxy have been designated as proxies by
the Board of Directors. Any proxy given pursuant to such solicitation and
received in time for the Annual Meeting will be voted as specified in such
proxy. If no instructions are given, proxies will be voted "FOR" the election of
the nominees listed below under the caption "Election Of Directors," "FOR" the
increase in the number of authorized shares of the Company's common stock (the
"Common Stock") to 70,000,000 shares from 35,000,000 shares, "FOR" the amendment
to the Andrea Electronics Corporation 1998 Stock Plan (the "1998 Plan") under
which the issuable number of shares of the Common Stock would be increased to
4,375,000 shares from 3,675,000 shares, "FOR" the issuance of Common Stock upon
conversion of the Company's Series B convertible preferred stock (the "B
Preferred Stock"), and upon exercise of the related warrant, to the extent such
issuance would require stockholder approval under standards of the American
Stock Exchange, "FOR" the issuance of Common Stock upon conversion of the
Company's Series C convertible preferred stock (the "C Preferred Stock") to the
extent such issuance would require stockholder approval under standards of the
American Stock Exchange, "FOR" the selection of Arthur Andersen LLP to serve as
the Company's independent accountants for the year ending December 31, 2001,
and, in the discretion of the proxies named on the proxy card, with respect to
any other matters properly brought before the meeting and any adjournments
thereof. In the unanticipated event that any other matters are properly
presented at the Annual Meeting for action, the persons named in the proxy will
vote the proxies in accordance with their best judgment. Any proxy given
pursuant to this solicitation may be revoked by the shareholder at any time
before it is exercised by written notification delivered to the Secretary of the
Company, by voting in person at the Annual Meeting, or by delivering another
proxy bearing a later date. Attendance by a shareholder at the Annual Meeting
does not alone serve to revoke his or her proxy.
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REQUIRED VOTE
The presence, in person or by proxy, of the holders of a majority of the shares
entitled to vote at the Annual Meeting is necessary to constitute a quorum.
Abstentions and broker "non-votes" are counted as present and entitled to vote
for purposes of determining a quorum. A broker "non-vote" occurs when a nominee
holding shares for a beneficial owner does not vote on a particular proposal
because the nominee does not have discretionary voting power for that particular
item and has not received instructions from the beneficial owner.
A plurality of the votes cast is required for the election of Directors.
Abstentions and broker "non-votes" are not counted as votes cast for purposes of
the election of Directors. The affirmative vote of a majority of outstanding
shares of common stock entitled to vote is required to approve the amendment to
the Restated Certificate of Incorporation. Abstentions and broker "non-votes"
will have the effect of a vote against this proposal. The affirmative vote of a
majority of the votes cast is required to approve the amendment to the 1998
Plan, the issuance of Common Stock upon conversion of the B Preferred Stock and
related warrant, the issuance of Common Stock upon conversion of the C Preferred
Stock and the appointment of Arthur Andersen 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 June __, 2001 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 June __, 2001, an aggregate of 14,786,857 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 June __, 2001
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.
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AMOUNT AND
NATURE OF
NAME OF BENEFICIAL BENEFICIAL PERCENT
OWNER OWNERSHIP (1) 0F CLASS (12)
------------------------------------ ------------------- -------------
Camille Andrea Casling (2) 753,507 5.10%
ANC-I Limited Partnership (2) 247,000 1.67
Douglas J. Andrea (2) 694,838 (3) 4.51
John N. Andrea (2) 583,992 (4) 3.82
Christopher P. Sauvigne 241,250 (5) 1.61
Richard A. Maue 110,750 (6) *
Paul M. Morris 34,750 (7) *
Scott Koondel 43,750 (8) *
Gary A. Jones 49,500 (9) *
Jack Lahav -- *
John R. Larkin 31,750 (10) *
Directors and Executive Officers 1,790,580 (11) 10.96%
as 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) Camille Andrea Casling is the aunt of John N. Andrea and Douglas J.
Andrea. ANC-I Limited Partnership is a Delaware limited partnership, of
which John N. Andrea and Douglas J. Andrea are limited partners. The
address of each of these individuals and the ANC-I Limited Partnership is
c/o Andrea Electronics Corporation, 45 Melville Park Road, Melville, New
York 11747.
(3) Includes (i) 69,088 shares owned directly by Douglas J. Andrea, Mr.
Andrea's spouse and Mr. Andrea's daughter, (ii) 12,000 of the 247,000
shares owned by ANC-I Limited Partnership, and (iii) 613,750 shares
issuable upon the exercise of options which are currently exercisable and
exercisable within 60 days from the date hereof. Does not include 181,250
shares issuable upon exercise of options that are not currently
exercisable or exercisable within 60 days from the date hereof.
(4) Includes (i) 50,438 shares owned directly by John N. Andrea and Mr.
Andrea's spouse, (ii) 39,804 shares owned by Mr. Andrea's minor children,
and (iii) 493,750 shares issuable upon the exercise of options which are
currently exercisable and exercisable within 60 days from the date hereof.
Does not include 181,250 shares issuable upon exercise of options that are
not currently exercisable or exercisable within 60 days from the date
hereof.
(5) Includes (i) 15,000 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) 206,250 shares issuable upon the
exercise of options which are currently exercisable and exercisable within
60 days from the date hereof. Does not include 293,750 shares issuable
upon the exercise of options that are not currently exercisable or
exercisable within 60 days from the date hereof.
(6) Includes (i) 2,000 shares owned directly by Richard A. Maue and Mr. Maue's
spouse and (ii) 108,750 shares issuable upon the exercise of options which
are currently exercisable and exercisable within 60 days from the date
hereof. Does not include 98,750 shares issuable upon the exercise of
options that are not currently exercisable or exercisable within 60 days
from the date hereof.
(7) Includes (i) 1,000 shares owned directly by Paul M. Morris, and (ii)
33,750 shares issuable upon the exercise of options which are currently
exercisable and exercisable within 60 days from the date hereof. Does not
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include 36,250 shares issuable upon exercise of options that are not
currently exercisable or exercisable within 60 days from the date
hereof.
(8) Includes 43,750 shares issuable upon the exercise of options that are
currently exercisable and exercisable within 60 days from the date
hereof. Does not include 36,250 shares issuable upon exercise of options
that are not currently exercisable or exercisable within 60 days from
the date hereof.
(9) Includes (i) 2,000 shares owned directly by Gary A. Jones, and (ii)
47,500 shares issuable upon the exercise of options that are currently
exercisable and exercisable within 60 days from the date hereof. Does
not include 12,500 shares issuable upon exercise of options that are not
currently exercisable or exercisable within 60 days from the date
hereof.
(10) Includes (i) 23,000 shares owned directly by John R. Larkin and (ii)
8,750 shares issuable upon the exercise of options that are currently
exercisable and exercisable within 60 days from the date hereof. Does
not include 36,250 shares issuable upon exercise of options that are not
currently exercisable or exercisable within 60 days from the date
hereof.
(11) Includes the shares directly owned and the shares issuable upon the
exercise of the options, which are currently exercisable and exercisable
within 60 days from the date hereof, discussed in notes (3) through (10)
above.
(12) Percentages with respect to each person or group of persons have been
calculated on the basis of 14,786,857 shares of Company's common stock,
the number of shares of the Company's common stock outstanding and
entitled to vote as of June __, 2001, plus the number of shares of the
Company's common stock which such person or group of persons has the
right to acquire within 60 days after June __, 2001, by the exercise of
stock options.
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 written representation that no other reports were required, during the
fiscal year ended December 31, 2000, the Company's directors, officers and
greater-than-ten percent holders met all applicable Section 16(a) filing
requirements.
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. Such persons include the Co-Chief Executive Officers and the
President and Chief Operating Officer of the Company. Unless otherwise specified
in the form of proxy, the proxies solicited by management will be voted "FOR"
the election of these candidates. The election of directors requires a plurality
of those shares voted at the meeting with respect to the election of directors.
The nominees receiving the highest vote totals will be elected as the directors
of the Company. Accordingly, abstentions and broker "non-votes" will not affect
the outcome of the election of directors of the Company. In case any of these
nominees become unavailable for election to the Board of Directors, an event
which is not anticipated, the persons named as proxies, or their substitutes,
shall have full discretion and authority to vote or refrain from voting for any
other nominee in accordance with their judgment.
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INFORMATION ABOUT NOMINEES
Information on Director nominees of the Company follows:
JOHN N. ANDREA, age 43, has been Co-Chairman and Co-Chief Executive
Officer since November 1998 and a Director of the Company since 1992. He served
as Co-President of the Company from November 1992 to November 1998, as Executive
Vice President of the Company from January 1992 to November 1992, and as Sales &
Marketing Director from September 1991 to November 1992. Mr. Andrea is the
brother of Douglas J. Andrea.
DOUGLAS J. ANDREA, age 38, has been Co-Chairman and Co-Chief Executive
Officer since November 1998 and a Director of the Company since 1991. He served
as Co-President of the Company from November 1992 to November 1998, as Vice
President - Engineering of the Company from December 1991 to November 1992, and
as Secretary of the Company from 1989 to January 1993. Mr. Andrea is the brother
of John N. Andrea.
CHRISTOPHER P. SAUVIGNE, age 41, has been President and Chief Operating
Officer of the Company since November 1998 and a Director since June 2000. From
1982 until joining the Company in November 1998, Mr. Sauvigne was employed by
Arthur Andersen LLP, where he served in various capacities, the last of which
was as Partner.
GARY A. JONES, age 55, has been a Director of the Company since April
1996. He served as President of Digital Technologies, Inc. from 1994 to 1998,
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 37, has been a Director of the Company since April
1995. He has been the Eastern Manager, Off-Network Television, Paramount
Pictures, a subsidiary of Viacom International since June 1993, and was the
National Sales Manager for WPIX-TV, a division of Tribune Broadcasting, from
June 1990 to June 1993.
JACK LAHAV, age 53, has been a Director of the Company since November
1998. He co-founded Lamar Signal Processing Ltd., a subsidiary of the Company
that was acquired in May 1998. Since August 1996, he has been the President of
Advanced Technology Inc., a manufacturer of robotic routing equipment used in
manufacturing printed circuit boards for advanced semiconductors, and from 1990
to 1996, was a Director of Vocaltec Communications Ltd., an Israeli Internet
telephony software company. In 1980, he founded Remarkable Products, Inc., a
direct mail company, and served as its President until the company was sold by
him in 1993.
JOHN R. LARKIN, age 57, has been a Director of the Company since June
1999. He has been a Managing Director of Shields/Alliance, a division of
Alliance Capital Management LP, a global asset management company, since 1994.
He joined Shields Asset Management Inc., the predecessor of Shields/Alliance, in
1986 and held various positions at that company, the last of which was Managing
Director, until that company was sold by Xerox Corporation to Alliance Capital
Management in 1994. Prior to 1986, Mr. Larkin was a Principal of Smilen & Safian
Inc., a New York-based economic consulting firm, and a Director and Member of
the Investment Committee of the Sector Investment Fund, a publicly held mutual
fund. Mr. Larkin has over 25 years experience in the investment management
community in both investment and marketing capacities.
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PAUL M. MORRIS, age 39, has been a Director of the Company since 1992.
Since 1999, he has been a partner at Buena Vista Capital Partners, a limited
partnership for investments. From 1996 to 1999, Mr. Morris was Senior Managing
Director at Schroder Capital Management. From July 1995 to December 1996, he was
a Partner at Weiss, Peck & Greer, and from 1987 to June 1995 he was employed by
Union Bank of Switzerland, where his last position was Managing Director -
Equities.
INFORMATION ABOUT EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
RICHARD A. MAUE, age 31, has been the Company's Senior Vice President,
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 Gary Jones, Jack
Lahav and Paul M. Morris. The Audit Committee meets with management and Company
financial personnel, as well as with the Company's independent accountants, to
consider the adequacy of the internal controls of the Company and the
objectivity of the Company's financial reporting. The Audit Committee met 3
times during 2000. The Compensation Committee is comprised of Scott Koondel,
John R. Larkin and Paul M. Morris. The Compensation Committee administers the
Company's stock option plans and makes recommendations to the Board of Directors
with respect to the compensation of management. The Compensation Committee met 4
times during 2000. The Board of Directors held 5 meetings during 2000. In fiscal
2000, each of the Company's Directors attended at least 75% of such meetings.
During 2000, directors who are not officers or employees of the Company were
each paid $1,000 for physical attendance at meetings of the Board.
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EXECUTIVE COMPENSATION
The following table sets forth information for the last three fiscal
years relating to compensation earned by the Co-Chief Executive Officers and the
other most highly compensated executive officers who received salary and bonuses
over $100,000 during the year ended December 31, 2000.
STOCK
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS($)(1) OPTIONS(#)
------------------------------------------------------------------------------------------------
John N. Andrea, Co-Chairman and Co-Chief 2000 $207,410 $150,000 125,000
Executive Officer 1999 208,505 150,000 150,000
1998 203,846 150,000 150,000
Douglas J. Andrea, Co-Chairman and 2000 206,350 150,000 125,000
Co-Chief Executive Officer 1999 208,505 150,000 150,000
1998 203,846 150,000 150,000
Christopher P. Sauvigne, President and Chief 2000 211,718 150,000 125,000
Operating Officer 1999 208,409 150,000 125,000
1998(2) 19,230 16,849 250,000
Richard A. Maue, Senior Vice President, 2000 145,528 25,000 70,000
Chief Financial Officer and Corporate 1999(3) 93,815 27,115 25,000
Secretary
---------------------------------------
(1) Total bonus received by each of John N. Andrea, Douglas J. Andrea, and
Christopher P. Sauvigne was the minimum bonus payment pursuant to his
employment agreement. See "Employment Agreements and Change in Control
Arrangements."
(2) Christopher P. Sauvigne, age 42, joined the Company on November 20, 1998.
From 1982 until joining the Company, Mr. Sauvigne was employed by Arthur
Andersen LLP, where he served in various capacities, the last of which was
as Partner. See "Employment Agreements and Change in Control Arrangements"
for information regarding Mr. Sauvigne's employment agreement with the
Company.
(3) Richard A. Maue, age 31, joined the Company in April 1997 and served as
Vice President, Controller, Treasurer and Corporate Secretary until
November 4, 1999. Since November 4, 1999, Mr. Maue has served as the
Company's Senior Vice President, Chief Financial Officer and Corporate
Secretary. See "Employment Agreements and Change in Control Agreements"
for information regarding Mr. Maue's employment agreement with the
Company.
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The following table summarizes for each of the named executive officers
the number of shares covered by options granted during 2000, 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.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS (2) OPTION TERM
------------------------------------------------------------ -----------------------
PERCENTAGE
NUMBER OF OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO
DATE OF OPTIONS EMPLOYEES IN EXERCISE EXPIRATION
NAME GRANT GRANTED(#) FISCAL YEAR PRICE DATE 5%(1) 10%(1)
----------------------------------------------------------------------------------------------------------------
John N. Andrea 04/17/00 75,000 6.1% $6.875 04/17/10 $324,274 $822,746
08/01/00 50,000 4.1 6.00 08/01/10 188,668 478,123
Douglas J. Andrea 04/17/00 75,000 6.1% $6.875 04/17/10 $324,274 $822,746
08/01/00 50,000 4.1 6.00 08/01/10 188,668 478,123
Christopher P. Sauvigne 04/17/00 75,000 6.1% $6.875 04/17/10 $324,274 $822,746
08/01/00 50,000 4.1 6.00 08/01/10 188,668 478,123
Richard A. Maue 04/17/00 35,000 2.8% $6.875 04/17/10 $151,328 $383,948
08/01/00 35,000 2.8 6.00 08/01/10 132,068 334,686
-----------------------------------
(1) The dollar amounts represent certain assumed rates of appreciation. Actual
gains, if any, on stock option exercises and common stock holdings are
dependent upon future performance of the Company's common stock and
overall stock market conditions. There can be no assurance that the
amounts reflected in this table will be realized.
(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.
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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 2000 and the aggregate dollar value of in-the-money, unexercised options
at December 31, 2000. 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
VALUE OF
NUMBER OF SECURITIES UNEXERCISABLE
UNDERLYING IN-THE-MONEY
UNEXERCISABLE OPTIONS OPTIONS AT FISCAL
SHARES AT FISCAL YEAR END-- YEAR END --
ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE VALUE REALIZED UNEXERCISABLE (6) UNEXERCISABLE (1)
---------------------------------------------------------------------------------------------------------------
John N. Andrea -- $ -- 362,500/312,500 (2) $ -- / $ --
Douglas J. Andrea 15,000 $94,875 482,500/312,500 (3) $170,400 / $ --
Christopher P. Sauvigne -- $ -- 156,250/343,750 (4) $ -- / $ --
Richard A. Maue -- $ -- 73,750/118,750 (5) $ -- / $ --
------------------------------
(1) Values were based on a closing trade price for the Company's Common Stock
on December 31, 2000 of $2.10 per share.
(2) John N. Andrea was granted options to purchase 75,000 shares at a price of
$6.875 on April 14, 2000; and 50,000 shares at a price of $6.00 per share
on August 1, 2000.
(3) Douglas J. Andrea was granted options to purchase 75,000 shares at a price
of $6.875 on April 14, 2000; and 50,000 shares at a price of $6.00 per
share on August 1, 2000.
(4) Christopher P. Sauvigne was granted options to purchase 75,000 shares at a
price of $6.875 on April 14, 2000; and 50,000 shares at a price of $6.00
per share on August 1, 2000.
(5) Richard A. Maue was granted options to purchase 35,000 shares at a price
of $6.875 on April 14, 2000; and 35,000 shares at a price of $6.00 per
share on August 1, 2000.
(6) Of the shares covered by each option granted, none can be purchased during
the first year following the grant; 25% can be purchased after the first
anniversary of the grant; an additional 25% can be purchased after the
second anniversary of the grant; and the remaining 50% can be purchased
after the third anniversary.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
The Company entered into three-year employment agreements that commenced
on March 26, 2000 with John N. Andrea and Douglas J. Andrea, each as Co-Chairman
and Co-Chief Executive Officers of the Company. Under these agreements, the
annual base salaries of John N. Andrea and Douglas J. Andrea are $200,000. Each
agreement provides for additional short-term incentive compensation in the form
of annual cash bonuses based on the achievement of performance goals and which
shall not be less than $150,000 per annum, and long-term incentive compensation
in the form of cash or equity-based awards.
The Company entered into a two-year employment agreement that commenced
on March 26, 2000 with Richard A. Maue, as Senior Vice President and Chief
Financial Officer of the Company. The agreement provides an annual base salary
of not less than $150,000 per annum, plus additional short-term incentive
compensation in the form of annual cash bonuses, based on the achievement of
performance goals and which shall not be less than $25,000 per annum, and
long-term incentive compensation in the form of cash or equity-based awards.
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The Company entered into an employment agreement with Christopher P.
Sauvigne, as President and Chief Operating Officer of the Company, that
commenced on November 20, 1998 and expires on December 31, 2002. The agreement
provides an annual base salary of not less than the greater of (i) $200,000 per
annum and (ii) the higher of the base salaries of the Co-Chief Executive
Officers of the Company, plus additional short-term incentive compensation in
the form of annual cash bonuses, based on the achievement of performance goals
and which shall not be less than $150,000 per annum, and long-term incentive
compensation in the form of cash or equity-based awards.
Under each of the aforementioned agreements, upon the occurrence of a
Change in Control (as defined in each of the employment agreements), the Company
shall pay the Executive, or in the event of his subsequent death, his
beneficiary or beneficiaries, or his estate, as the case may be, a sum equal to
the greater of (A) the payments due for the remaining term of the agreement or
(B) the product of (i) five (in the case of John N. Andrea, Douglas J. Andrea
and Christopher P. Sauvigne) and three (in the case of Richard A. Maue)
multiplied by (ii) the Executive's average annual total compensation for the
five (in the case of John N. Andrea, Douglas J. Andrea and Christopher P.
Sauvigne) and three (in the case of Richard A. Maue) preceding taxable years, or
if his employment by the Company is then less than five (in the case of John N.
Andrea, Douglas J. Andrea and Christopher P. Sauvigne) and three (in the case of
Richard A. Maue) preceding taxable years, the Executive's average annual
compensation during his employment by the Company.
In addition, under each of the aforementioned employment agreements, on
the occurrence of a Change in Control, all restrictions on any restricted stock
then held by Executive will lapse immediately, incentive stock options and stock
appreciation rights then held will become immediately exercisable, and any
performance shares or units then held will vest immediately in full, and
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 in each employment agreement), or Executive resigns for Good Reason
(as defined in each employment agreement), the Company shall pay to him the
product of (A) a sum equal to (i) the amount of the remaining salary payments
that he would have earned if he continued his employment with the Company during
the remaining unexpired term of his employment agreement at his base salary at
the date of termination, (ii) the highest amount of bonus and any other
compensation paid to the executive, in any year, during the term of his
employment agreement times the remaining number of years of the agreement and
any fraction thereof and (iii) an amount equal to the highest amount of annual
contributions that were made on Executive' behalf, in any year, to any employee
benefit plans of the Company during the term of the agreement, multiplied by (B)
the remaining number of years of the agreement and any fraction thereof.
COMPENSATION COMMITTEE REPORT
For the year ended December 31, 2000, the Compensation Committee of the
Board of Directors for the Company was composed of independent directors.
Currently, the Compensation Committee is comprised of Scott Koondel, John R.
Larkin and Paul M. Morris. The Compensation Committee is responsible for
establishing and monitoring compensation policies of the Company, evaluating the
performance of executives and establishing salary rates and increases.
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It is the policy of the Company to evaluate the performance of senior
management annually using subjective criteria established by the Committee.
Compensation increases are determined by the Committee based on annual
evaluations. In addition, the Committee supplements its criteria with
consultative studies of best compensation practices within the industry in which
the Company is engaged.
The Compensation Committee considerations include management skills,
long-term performance, shareholder returns, operating results, new product and
technological developments and introductions, asset-liability management, and
unusual accomplishments as well as economic conditions and other external events
that affect the operations of the Company. Compensation policies must promote
the attraction and retention of highly qualified executives and the motivation
of these executives for performance related to a financial interest in the
success of the Company and the enhancement of long-term shareholders' value.
In addition to salaries, the Company's compensation plan includes the
awarding of stock options based on performance, length of service and salary
grades. The awards of stock options should provide increased motivation to work
for the success of the Company, thereby increasing the potential for personal
financial success. Options granted to executives and employees are at a price
equal to the closing price of the Company's stock on the date of grant.
The Compensation Committee annually reviews and approves the
compensation of Douglas J. Andrea and John J. Andrea, the Co-Chief Executive
Officers of the Company. The Committee believes that the Co-Chief Executive
Officers are paid a reasonable salary, and the options granted to them are
consistent with corporate financial incentives provided to the other executive
officers of the Company. To the extent their performance translates into an
increase in the value of the Company's stock, all shareholders share the
benefits. The Committee believes that the Company continues to enhance its
position as a global provider of communications products for the emerging
natural language human/machine interface markets.
COMPENSATION COMMITTEE
Scott Koondel
John R. Larkin
Paul M. Morris
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STOCK PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the
cumulative total shareholder return for the five years ended December 31, 2000
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 29,
1995 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
[STOCK PERFORMANCE GRAPH APPEARS HERE]
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Summary
12/29/95 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
-------- -------- -------- -------- -------- --------
Andrea Electronics Corporation $100.00 $ 90.72 $295.88 $197.96 $126.80 $ 34.64
AMEX Market Index $100.00 $105.52 $126.97 $214.39 $407.93 $211.85
SIC Code Industry Index $100.00 $101.89 $107.56 $239.83 $156.15 $154.23
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 29, 1995.
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PROPOSAL TWO:
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Board of Directors recommends the adoption by shareholders of an
Amendment to Article Third of the Company's Certificate of Incorporation, to
increase the number of shares of Common Stock that may be issued. The
Certificate of Incorporation currently authorizes the issuance of 35,000,000
shares of Common Stock, having a par value of $.50 per share. The Board of
Directors believes it to be in the best interests of the Company, and has
therefore proposed and declared advisable, that the Certificate of Incorporation
be amended to increase the number of authorized shares of Common Stock, par
value $.50 per share, to 70,000,000 shares. Such amendment is required to be
approved by the shareholders by an affirmative vote of a majority of outstanding
shares of common stock entitled to vote at the Annual Meeting. Abstentions and
broker "non-votes" will have the effect of a vote against this proposal.
As of June 12, 2001, the Company had available for future issuance
approximately 8,074,236 of its 35,000,000 authorized shares, which were not
outstanding or reserved for possible future issuance. The Company has 14,786,857
shares outstanding and has reserved approximately 12,138,907 shares for future
issuance. These reserved shares relate to the following: 1,604,000 shares and
2,996,875 shares for issuance upon exercise of awards granted under the
Company's 1991 Performance Equity Plan and 1998 Stock Plan, respectively, 92,250
shares and 522,500 shares for additional awards which may be granted under the
1991 Performance Equity Plan and 1998 Stock Plan, respectively, 4,726,532 shares
for issuance upon conversion of the outstanding B Preferred Stock and related
warrant, and 2,196,750 shares for issuance upon conversion of the outstanding C
Preferred Stock. Further, on July 10, 2001, the conversion price of the C
Preferred Stock will be reset based on then-applicable trading price data for
the Common Stock. As a result, based on the current trading market price of the
Common Stock, the Company likely will be required by its contractual obligations
relating to the C Preferred Stock to substantially increase the number of shares
of Common Stock reserved for possible issuance upon the conversion of the C
Preferred Stock. Such required increase in reserved shares could restrict the
significant portion of the currently unissued and unreserved shares and could
even exceed the number of unissued and unreserved shares currently available.
For additional information regarding the B and C Preferred Stock, see Proposals
Four and Five below.
In addition, as discussed under Proposal Three below, the Company also is
seeking shareholder approval for an increase of 700,000 shares in the number of
shares which may be subject to options granted under the Company's 1998 Stock
Plan. Also, as discussed under Proposals Four and Five below, the Company is
seeking shareholder approval to satisfy requirements of the American Stock
Exchange which, unless such shareholder approval is obtained, currently serve to
limit the number of shares which the Company can issue upon conversion of the B
and C Preferred Stock. The shares of Common Stock currently reserved by the
Company (or which the Company will reserve in the future) for possible issuance
upon conversion of the B and C Preferred Stock, as required by contractual
obligations, already take (or will be required to take) into account shares
whose issuance might be permitted by shareholder approval of Proposals Four and
Five. Thus, shareholder action on Proposals Four and Five below will not change
the number of shares the Company will be obligated to reserve out of authorized
but unissued shares for the possible conversion of the B and C Preferred Stock.
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The Company believes that its proposed increase in authorized shares is
important to provide for flexibility in future planning and to enable the
Company to seek to obtain financing on suitable terms. The Company last
increased its authorized shares of Common Stock in 2000, and the Board of
Directors believes it important in the years ahead for the Company to maintain
an authorized capitalization that will permit a broad range of financing
alternatives. The Company does not have an specific plan or arrangement to issue
any of the proposed increased authorized shares. If the proposal to amend the
Certificate of Incorporation is approved, the additional shares will be
available for issuance from time to time for use in obtaining funds for present
and future operations, for use in conjunction with possible acquisitions of
businesses or properties, for the conversion or exercise of previously or to be
issued convertible securities, warrants and options, for use in possible stock
dividends and stock splits, or for any other proper corporate purpose. The Board
of Directors does not intend to seek further shareholder approval prior to the
issuance of any additional shares in future transactions unless required by law,
by the Company's Certificate of Incorporation, or by the rules of any stock
exchange upon which the stock may be listed, or unless the Company deems it
advisable to do so to qualify (or to continue to qualify) an employee benefit
plan under the Securities Exchange Act of 1934. Common Stock would be issued
only if the Company believed the issuance favorable to, and in the interests of,
the Company and its shareholders.
The newly authorized shares of Common Stock will have voting and other
rights identical to those of the currently authorized shares of Common Stock.
Any issuance of additional shares of Common Stock of the Company would
dilute the equity of the outstanding shares of Common Stock.
Under the Certificate of Incorporation of the Company, holders of Common
Stock do not have preemptive rights.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ADOPTION OF THIS
PROPOSAL.
PROPOSAL THREE:
APPROVAL AND AUTHORIZATION OF AN INCREASE
IN THE NUMBER OF SHARES SUBJECT TO THE
ANDREA ELECTRONICS CORPORATION 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 June 12, 2001, awards
covering an aggregate of 2,996,875 shares of the Company's common stock had been
granted under the 1998 Stock Plan with 522,500 shares remaining for additional
awards thereunder, and unexercised awards covering an aggregate of 1,604,000
shares remain outstanding under the Company's 1991 Performance Equity Plan with
92,250 shares remaining for additional grants thereunder. The Board of Directors
has therefore approved an amendment to the 1998 Plan to increase the number of
shares of common stock available for grant under the 1998 Plan to 4,375,000
shares from 3,675,000 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.
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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, (ii) Stock Purchase
Rights and/or (iii) other stock-based awards (collectively "Awards"). Subject to
the provisions of the 1998 Plan, the Administrator determines, among other
things, the persons to whom from time to time Awards may be granted ("Holders"
or "Participants"), the specific type of Awards to be granted, the number of
shares subject to each Award, share prices, any restrictions or limitations on
such Awards, and any vesting, exchange, deferral, surrender, cancellation,
acceleration, termination, exercise or forfeiture provisions related to such
Awards. The interpretation and construction by the Administrator of any
provisions of, and the determination by the Administrator of any questions
arising under, the 1998 Plan or any rule or regulation established by the
Administrator pursuant to the 1998 Plan are final, conclusive and binding on all
persons interested in the 1998 Plan. Awards under the 1998 Plan are evidenced by
agreements ("Agreements").
In the event of a merger or sale of substantially all of the assets of the
Company, each outstanding Award shall be assumed or an equivalent award
substituted by the successor corporation, unless full and immediate vesting is
otherwise provided in the Agreement covering that award or in the employment
agreement of the Holder. In the event that a successor corporation refuses to
assume or substitute for Awards, Holders shall fully vest in and have the right
to exercise such Awards as to all shares of Common Stock issuable thereunder,
including shares which would not otherwise be vested or exercisable.
In order to prevent the dilution or enlargement of the rights of Holders
under the 1998 Plan, the number of shares of Common Stock covered by each
outstanding Stock Option and Stock Purchase Right, and the number of shares of
Common Stock authorized by the 1998 Plan is subject to adjustment by the Board
in the event of any increase or decrease in the number of shares of outstanding
Common Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company. The shares of Common Stock acquirable pursuant
to the Awards are made available from authorized and unissued shares of Common
Stock. If any unexercised Award granted under the 1998 Plan is forfeited or
terminated, the shares of Common Stock that were available pursuant to such
Award are again available for distribution under the 1998 Plan.
Unless determined otherwise by the Administrator, Awards granted under the
1998 Plan may not be sold, pledged, assigned, hypothecated, transferred, or
disposed of in any manner other than by will or by the laws of descent and
distribution and may be exercised only by the Holder during his or her lifetime.
ELIGIBILITY. Subject to the provisions of the 1998 Plan, Awards may be
granted to employees, officers, directors and consultants who are deemed to be
engaged by the Company to render services and who are compensated for such
services. Incentive Stock Options may be awarded only to persons who, at the
time of such awards, are employees of the Company.
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TYPES OF AWARDS
OPTIONS. The 1998 Plan provides both for "incentive" stock options
("Incentive Options") as defined in Section 422 of the Internal Revenue Code of
1986, as amended (the "Code") and for options not qualifying as Incentive
Options ("Non-Statutory Stock Options"), both of which may be granted with any
other stock based award under the 1998 Plan. The Administrator will determine
the exercise price per share of Common Stock purchasable under each Incentive
Option or Non-Statutory Stock Option (collectively, "Options"). The exercise
price of an Incentive Option may not be less than 100% of the fair market value
on the last trading day before the date of grant (or, in the case of an
Incentive Option granted to a person possessing more that 10% of the total
combined voting power of all classes of stock of the Company, not less than 110%
of such fair market value). The exercise price of a Non-Statutory Stock Option
which is intended to be performance-based compensation under Section 162(m) of
the Code may not be less that 100% of the fair market value on the last trading
day before the date of the grant. An Incentive Option may only be exercised
within 10 years of the date of the grant (or within five years in the case of an
Incentive Option granted to a person who, at the time of the grant, owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company) or such other lesser period as the Administrator may
specify at the time of the grant. Subject to any limitations or conditions the
Administrator may impose, Options may be exercised, in whole or in part, at any
time during the term of the Option by giving written or electronic notice of
exercise from the person entitled to exercise the Option. Such notice must be
accompanied by payment in full of the purchase price, such payment consisting of
any consideration and/or method of payment authorized by the Administrator and
permitted by the Agreement.
Generally, if the Holder ceases to be an employee, officer, director or
consultant of the Company other than as a result of death or disability, then
the portion of any Option that has vested by the date of such termination may be
exercised for such period as is specified in the Agreement or, if not specified,
for the shorter of three months after termination or the remainder of the
Option's term. In the event the Holder's employment with the Company is
terminated due to disability, the Holder may still exercise the portion of his
or her Option that had vested by the date of termination for a period of twelve
months (or such other shorter period as the Administrator may specify at the
time of grant) from the date of such termination or until the expiration of the
stated term of the Option, whichever period is shorter. Similarly, should a
Holder die while in the employment of the Company or a Subsidiary, his or her
legal representative or legatee under his or her will may exercise the portion
of the decedent Holder's Option that had vested by the time of death for a
period of twelve months from such death (or such other greater or lesser period
as the Administrator specifies at the time of grant) or until the expiration of
the stated term of the Option, whichever is shorter.
STOCK PURCHASE RIGHTS. The Administrator may grant Stock Purchase Rights
in conjunction with any Option granted under the 1998 Plan. The Administrator
shall determine, in its sole discretion, the terms, provisions and conditions of
each Agreement under which Stock Purchase Rights may be granted. Unless
otherwise provided in the Agreement, the Company will have a repurchase option,
at a price equal to the original price paid by the purchaser, which is
exercisable upon the voluntary or involuntary termination of the purchaser's
service with the Company, including death or disability.
WITHHOLDING TAXES. Upon the exercise of any Award granted under the 1998
Plan, the Administrator may allow, subject to the provisions of the 1998 Plan,
Holders to satisfy Federal, state and local withholding tax obligations by
electing to have the Company withhold from the shares of Common Stock to be
issued upon exercise of an Option or Stock Purchase Right that number of shares
which have a fair market value (determined on the last trading day before the
date the amount of tax to be withheld is determined) equal to the amount of the
withholding tax due under applicable Federal, state and local laws.
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TERMS AND AMENDMENTS. Unless terminated by the Board, the 1998 Plan shall
continue in effect for a term of 10 years. The Board may at any time, and from
time to time, amend, alter, suspend or terminate the 1998 Plan.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion of the federal income tax consequences of
participation in the 1998 Plan is only a summary of the general rules applicable
to the grant and exercise of Options and does not give specific details or
cover, among other things, state, local and foreign tax treatment of
participation in the 1998 Plan. The information contained in this section is
based on present law and regulations, which are subject to being changed
prospectively or retroactively.
INCENTIVE OPTIONS. The Participant will recognize no taxable income upon
the grant or exercise of an Incentive Option. The Company will not qualify for
any deduction in connection with the grant or exercise of Incentive Options.
Upon a disposition of the shares after the later of two years from the date of
grant or one year after the transfer of the shares to the Participant, the
Participant will recognize the difference, if any, between the amount realized
and the exercise price as long-term capital gain or long-term capital loss (as
the case may be) if the shares are capital assets. The excess, if any, of the
fair market value of the shares on the date of exercise of an Incentive Option
over the exercise price will be treated as an item of tax preference for a
Participant's taxable year in which the exercise occurs and may result in an
alternative minimum tax liability for the Participant. The Participant will
recognize the excess, if any, of the amount realized over the fair market value
of the shares on the date of exercise, if the shares are capital assets, as
short-term or long-term capital gain, depending on the length of time that the
Participant held the shares, and the Company will not qualify for a deduction
with respect to such excess.
If Common Stock acquired upon the exercise of an Incentive Option is
disposed of prior to the expiration of the holding periods described above, (i)
the Participant will recognize ordinary compensation income in the taxable year
of disposition in an amount equal to the excess, if any, of the lesser of the
fair market value of the shares on the date of exercise or the amount realized
on the disposition of the shares, over the exercise price paid for such shares;
and (ii) the Company will qualify for a deduction equal to any such amount
recognized, subject to the limitation that the compensation be reasonable. In
the case of a disposition of shares in the same taxable year as the exercise of
the option, there will be no item of tax preference for alternative minimum tax
purposes.
NON-STATUTORY STOCK OPTIONS. With respect to Non-Statutory Stock Options
(i) upon grant of the option, the Participant will recognize no income; (ii)
upon exercise of the option (if the shares of Common Stock are not subject to a
substantial risk of forfeiture), the Participant will recognize ordinary
compensation income in an amount equal to the excess, if any, of the fair market
value of the shares on the date of exercise over the exercise price, and the
Company will qualify for a deduction in the same amount, subject to the
requirement that the compensation be reasonable; and (iii) the Company will be
required to comply with applicable Federal income tax withholding requirements
with respect to the amount of ordinary compensation income recognized by the
Participant. On a disposition of the shares, the Participant will recognize gain
or loss equal to the difference between the amount realized and the sum of the
exercise price and the ordinary compensation income recognized. Such gain or
loss will be treated as capital gain or loss if the shares are capital assets
and as short-term or long-term capital gain or loss, depending upon the length
of time that the participant held the shares. If the shares acquired upon
exercise of a Non-Statutory Stock Option are subject to a substantial risk of
forfeiture, the Participant will recognize income at the time when the
substantial risk of forfeiture is removed and the Company will qualify for a
corresponding deduction at such time.
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THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ADOPTION OF
THIS PROPOSAL.
PROPOSALS FOUR AND FIVE:
PROPOSAL FOUR: ISSUANCE OF COMMON STOCK UPON CONVERSION
OF THE SERIES B CONVERTIBLE PREFERRED STOCK, AND EXERCISE OF THE
RELATED WARRANT, TO THE EXTENT SUCH ISSUANCE WOULD REQUIRE
STOCKHOLDER APPROVAL UNDER STANDARDS OF THE AMERICAN STOCK
EXCHANGE
PROPOSAL FIVE: ISSUANCE OF COMMON STOCK UPON CONVERSION
OF THE SERIES C CONVERTIBLE PREFERRED STOCK TO THE
EXTENT SUCH ISSUANCE WOULD REQUIRE STOCKHOLDER APPROVAL
UNDER STANDARDS OF THE AMERICAN STOCK EXCHANGE
BACKGROUND
SERIES B CONVERTIBLE PREFERRED STOCK AND WARRANT. On June 18, 1999, the
Company issued 750 shares of the B Preferred Stock, $10,000 stated value per
share, and a warrant to purchase, at an exercise price of $8.725 per share,
75,000 shares of Common Stock, for $7.5 million in a private placement to one
investor (the "Investor"). At June 12, 2001, 348 shares of B Preferred Stock
remain outstanding; 402 shares (including the applicable premium) of B Preferred
Stock have been converted into a total of 1,233,694 shares of Common Stock.
Subject to various terms and conditions, the B Preferred Stock, among
other things, is convertible into shares of Common Stock at the election of the
holder and mandatorily at the maturity date of the B Preferred Stock, June 18,
2004 (unless extended under the terms of the B Preferred Stock). The aggregate
number of shares of Common Stock issuable upon conversion of the B Preferred
Stock (without giving effect to limitations on the conversion of the B Preferred
Stock into Common Stock) is a variable number calculated at the time of
conversion based, in general, upon the trading market price of the Common Stock,
subject to a minimum number of shares required to be issued. See "- - THE SERIES
B CONVERTIBLE PREFERRED STOCK" below for a more detailed explanation of the
terms and conditions of the B Preferred Stock.
In particular, unless the Company obtains the approval of its shareholders
for the issuance of a greater number of shares of Common Stock, the Company is
not obligated to issue shares of Common Stock upon conversion of the B Preferred
Stock to the extent such issuance would cause the Company to breach its
obligations under the rules and regulations of the American Stock Exchange (the
"Exchange Cap"). The Company believes that the Exchange Cap applicable to the B
Preferred Stock would limit the Company's issuance of shares upon the conversion
of the B Preferred Stock and the exercise of the warrant to approximately
2,646,507 shares, representing approximately 19.99% of the shares of Common
Stock outstanding immediately prior to the June 18, 1999 issuance of the B
Preferred Stock.
The Company could be required to redeem for cash the shares of B Preferred
Stock which cannot be converted into Common Stock, among other reasons, because
of the Exchange Cap. In general, under those circumstances, the cash redemption
price per share of B Preferred Stock would be the product of
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the number of shares of Common Stock required to be issued upon the conversion
of a share of B Preferred Stock and the trading market price of a share of
Common Stock as of the date of conversion.
In addition, to the extent that the Company is unable to issue shares of
its Common Stock upon the exercise of the warrant, the Company could be subject
to a penalty payment for each day it fails to satisfy the exercise of the
warrant equal to .5% of the trading market price of the shares of Common Stock
required to be issued by the Company, in addition to any other liability the
Company could have.
Assuming a conversion of the 348 outstanding shares of B Preferred Stock
based on a conversion price equal to the closing price of the Common Stock on
the American Stock Exchange on June 12, 2001, the Company could be required to
issue (without giving effect to a limitation on the conversion of the B
Preferred Stock into Common Stock) approximately 2,215,995 shares of Common
Stock (including shares issued to satisfy the applicable annual premium with
respect to the B Preferred Stock). Such shares together with the 1,233,694
shares of Common Stock previously issued upon the conversion of shares of B
Preferred Stock and the 75,000 shares of Common Stock issuable upon exercise of
the warrant would exceed the Exchange Cap by approximately 878,182 shares of
Common Stock.
SERIES C CONVERTIBLE PREFERRED STOCK. On October 10, 2000, the Company
issued 750 shares of the C Preferred Stock, $10,000 stated value per share, for
$7.5 million in a private placement to the Investor. Subject to various terms
and conditions, the C Preferred Stock, among other things, is convertible into
shares of Common Stock at the election of the holder and mandatorily at the
maturity date of the C Preferred Stock. The C Preferred Stock has an initial
maturity date of October 10, 2002 for those outstanding shares of C Preferred
Stock which can be converted into shares of Common Stock on that date without
exceeding various limitations on such conversion. In general, for the
outstanding shares of C Preferred Stock in excess of those subject to the
October 10, 2002 maturity date, the maturity date is extended until five trading
days after such shares can be converted into Common Stock without violating the
applicable limitations on conversion (or after a triggering event as discussed
below under "THE SERIES C CONVERTIBLE PREFERRED STOCK").
The aggregate number of shares of Common Stock issuable upon conversion of
the C Preferred Stock (without giving effect to limitations on the conversion of
the C Preferred Stock into Common Stock) is based on a fixed conversion price
until July 10, 2001 and thereafter the conversion price is subject to downward
adjustment on July 10, 2001 and subsequent price reset dates for the C Preferred
Stock to the extent, in general, that the applicable trading market price of the
Common Stock determined as of those reset dates is lower than the previous
conversion price. See "-- THE SERIES C CONVERTIBLE PREFERRED STOCK" below for a
more detailed explanation of the terms and conditions of the C Preferred Stock.
In particular, unless the Company obtains the approval of its shareholders
for the issuance of a greater number of shares of Common Stock, the Company is
not obligated to issue shares of Common Stock upon conversion of the C Preferred
Stock to the extent such issuance would cause the Company to violate the
Exchange Cap. The Company believes that the Exchange Cap applicable to the C
Preferred Stock would limit the Company's issuance of shares upon the conversion
of the C Preferred Stock to approximately 2,773,513 shares, representing
approximately 19.99% of the shares of Common Stock outstanding immediately prior
to the October 10, 2000 issuance of the C Preferred Stock.
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The Company could be required to redeem for cash the shares of C Preferred
Stock which cannot be converted into Common Stock, among other reasons, because
of the Exchange Cap. In general, under those circumstances, the cash redemption
price per share of C Preferred Stock would be the product of the number of
shares of Common Stock required to be issued upon the conversion of a share of C
Preferred Stock and the trading market price of a share of Common Stock.
Assuming a conversion of the 750 shares of C Preferred Stock at a
conversion price equal to the closing price of the Common Stock on the American
Stock Exchange on June 12, 2001, the Company would be required to issue (without
giving effect to limitations on the conversion of the C Preferred Stock into
Common Stock) approximately 4,428,963 shares of Common Stock (including shares
issued to satisfy the applicable annual premium with respect to the C Preferred
Stock, but not including shares which would be issued to the extent the Investor
exercises its option to purchase up to an additional 250 shares of C Preferred
Stock). Such shares would exceed the Exchange Cap by approximately 1,655,450
shares of Common Stock.
The Company is using the net proceeds from the issuance of the B and C
Preferred Stock primarily for costs associated with: research and development;
creating and maintaining strategic alliances, which include, among other things,
sales and marketing salaries, substantial travel costs to market our products
and technologies, product fulfillment costs and technical assistance, and other
general support costs for existing and potential partners; payment of certain
debt obligations; professional fees; and general working capital requirements.
EFFECT OF PROPOSALS FOUR AND FIVE
The Company is requesting that shareholders approve the issuance of the
shares of Common Stock upon the conversion of the B Preferred Stock, the
exercise of the related warrant and the conversion of the C Preferred Stock
(including shares issuable at the option of the Company to satisfy the premiums
applicable to the B Preferred Stock and the C Preferred Stock, and shares
issuable upon the conversion of any additional shares of C Preferred Stock
issued to the Investor pursuant to its option to purchase such additional
shares) to the extent such issuances exceed the respective Exchange Caps. The
Company is requesting shareholder approval in order to satisfy its obligations
under the rules and regulations of the American Stock Exchange and to fulfill
its contractual obligations to the Investor to seek such approval. See
"RECOMMENDATION OF THE BOARD OF DIRECTORS" for additional information.
Assuming the applicable calculations were made as of June 12, 2001 and are
made based on the assumption that the closing price of the Common Stock on that
date is the conversion price, shareholder approval of Proposals Four and Five
would mean (without giving effect to other limits on conversion of the B and C
Preferred Stock) that the Company could issue a total of approximately 2,533,632
shares of Common Stock in excess of the Exchange Caps upon the conversion of
currently outstanding shares of B and C Preferred Stock and the exercise of the
warrant. This number of shares would equal approximately 12% of the total
outstanding shares of Common Stock after such issuance. As a result, the
ownership interest in the Company of existing outstanding shares of Common Stock
would be reduced to approximately 88% of outstanding shares. However, the
conversion of
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the B and C Preferred Stock into shares of Common Stock is limited by the 4.99%
and 9.99% beneficial ownership limitations applicable to the B and C Preferred
Stock. See -- THE SERIES B PREFERRED STOCK -- LIMITATIONS ON CONVERSION" and "--
THE SERIES C PREFERRED STOCK -- LIMITATIONS ON CONVERSION" for information
regarding these beneficial ownership limitations.
If shareholder approval to issue shares in excess of the Exchange Caps is
not obtained, the Company could be obligated to redeem for cash the outstanding
shares of B and C Preferred Stock (including the applicable premium) which
cannot be converted into Common Stock because of the Exchange Caps. Based on a
calculation, assuming the conversion price for both the B and C Preferred Stock
is equal to the closing market price for the Common Stock on June 12, 2001, the
cost to the Company to redeem, if required to do so, the outstanding shares of B
and C Preferred Stock which might not be able to be converted into shares of
Common Stock because of the Exchange Caps (and without giving effect to other
limits on conversion) could be approximately $4.3 million.
THE SERIES B CONVERTIBLE PREFERRED STOCK
GENERAL TERMS OF THE SERIES B CONVERTIBLE PREFERRED STOCK. The B Preferred
Stock has no voting rights, other than as required by law and is not entitled to
the payment of dividends. However, the holder is entitled to receive an
additional amount in cash or shares of Common Stock, at the Company's option,
upon conversion of the B Preferred Stock. The additional amount is calculated
based on an annual premium of 4% on the $10,000 per share stated value of the B
Preferred Stock.
In the event of the Company's liquidation or dissolution, the holder of
the B Preferred Stock is entitled to receive in cash out of the Company's assets
an amount per share equal to $10,000 plus the additional amount described above.
The holder of B Preferred Stock is entitled to these amounts in preference to
the holders of Company's Common Stock and any other junior class of the
Company's capital stock.
CONVERSION. Each share of B Preferred Stock is convertible into shares of
the Common Stock at the option of the holder, at the option of the Company under
certain circumstances after June 18, 2002, and mandatorily on the maturity date
for the B Preferred Stock, which, subject to a possible required extension, is
June 18, 2004. The number of shares of Common Stock into which a share may be
converted (the "conversion rate") is equal to $10,000 divided by the conversion
price of the B Preferred Stock. The conversion price is variable and, at the
time of conversion, will be equal to the average of the two lowest closing bid
prices of the Common Stock during the 15 consecutive trading days immediately
preceding conversion. However, the conversion price cannot exceed $8.775 per
share. There is no minimum conversion price, but the number of shares that may
be converted at any one time may be limited. For more information about
limitations, see "-- LIMITATIONS ON CONVERSION."
The Company has reserved 4,726,532 shares of Common Stock for issuance
upon conversion of shares of the B Preferred Stock (including to satisfy the
additional amounts discussed above) and the exercise of the warrant. Depending
on the conversion price, this amount may or may not be adequate to account for
the total number of shares of Common Stock issuable upon such conversion.
REDEMPTION. The holder of the B Preferred Stock has the right to require
the Company to redeem all or a portion of its shares upon the announcement of a
major transaction or the happening of a triggering event. Major transactions
include a merger, consolidation, tender offer or sale of substantially all the
Company's assets. Triggering events include a default under the Company's
registration
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obligations with respect to the Series B convertible preferred stock, the
delisting of the Common Stock and a default with respect to the Company's
conversion obligations, among other things.
The redemption price upon the happening of these events would be equal to
the greater of 120% of the liquidation value of the B Preferred Stock, and
o in the case of a major transaction, the product of the conversion
rate in effect for the B Preferred Stock and the closing bid price
on the date of the public announcement of the transaction;
o in the case of a triggering event, the product of the conversion
rate in effect for the B Preferred Stock and the closing bid price
immediately before the triggering event or on the date of the
holder's redemption notice.
In addition, to the extent that the Company is not able to issue the
shares of Common Stock required to be issued upon the voluntary or mandatory
conversion of the B Preferred Stock, the Company could be required to redeem the
shares of B Preferred Stock that cannot be converted into Common Stock. The
Company might be unable to issue the requisite number of shares of Common Stock
because of the Exchange Cap or the number of authorized shares available to be
issued.
The redemption price for the B Preferred Stock under these circumstances
would be the product of the conversion rate in effect for the B Preferred Stock
and the closing bid price for the Common Stock on the applicable conversion
date. If the Company does not timely pay the redemption price, such unpaid
amount bears interest at the rate of 2% per month.
LIMITATIONS ON CONVERSION. The issuance of shares of Common Stock upon
conversion of the B Preferred Stock is limited to an amount which, after giving
effect to the conversion, would cause the holder to beneficially own in excess
of 4.99%, or, together with other shares beneficially owned during the 60-day
period prior to such conversion, beneficially own in excess of 9.99% of the
outstanding shares of the Common Stock. This calculation excludes the number of
shares of Common Stock which would be issuable upon:
o conversion of the remaining, nonconverted shares of B Preferred
Stock beneficially owned by the holder and its affiliates;
o exercise or conversion of any of the unexercised or unconverted
portion of any other of the Company's securities (including, without
limitation, any warrants or convertible preferred stock) subject to
a limitation on conversion or exercise analogous to this limitation
beneficially owned by the holder and its affiliates.
This limitation does not prevent the holder from reducing its beneficial
ownership by sale or other transfer of Common Stock, and then acquiring
additional shares of Common Stock, up to the beneficial ownership limits, by
conversion of shares of B Preferred Stock.
Conversion of the B Preferred Stock also is subject to the Exchange Cap
discussed above.
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GENERAL TERMS OF THE WARRANT
In connection with the sale of the B Preferred Stock, the Company issued a
warrant to purchase up to 75,000 shares of Common Stock, exercisable at the
price of $8.775 per share. The warrant expires on June 18, 2004, subject to
certain possible extensions. The right to exercise the warrant may also be
limited to the 4.99% and 9.99% beneficial ownership limitations described above
with respect to the B Preferred Stock. The exercise price and number of shares
that may be purchased upon exercise of the warrants are subject to adjustment
upon the occurrence of certain dilution events (as defined in the warrant). The
Company intends to use the proceeds, if the warrants are exercised, for working
capital and general corporate purposes.
THE SERIES C CONVERTIBLE PREFERRED STOCK
ADDITIONAL CLOSINGS. In addition to the issuance of 750 shares of C
Preferred Stock on October 10, 2000 as described above, the holder of the C
Preferred Stock has an option to purchase additional shares. During the period
beginning on October 10, 2000, the initial closing date, and ending on April 11,
2002, the holder, on not more than two occasions, may purchase from the Company
up to an aggregate of 250 additional shares of the C Preferred Stock for up to
an additional $2,500,000. The terms and conditions of these additional shares of
C Preferred Stock would be identical to existing C Preferred Stock.
GENERAL TERMS OF THE SERIES C CONVERTIBLE PREFERRED STOCK. The C Preferred
Stock has no voting rights other than as required by law, and is not entitled to
receive dividends. However, the holder of C Preferred Stock is entitled to
receive an additional amount in cash or shares of Common Stock, at the Company's
option, upon conversion of the C Preferred Stock. The additional amount is
calculated based on an annual premium of 5% on the $10,000 per share stated
value of the C Preferred Stock.
In the event of the Company's liquidation or dissolution, the holder of
the C Preferred Stock is entitled to receive in cash out of the Company's assets
an amount per share of equal to $10,000 plus the additional amount described
above. The holder of C Preferred Stock is entitled to receive these amounts in
preference to the holders Company's Common Stock and any other junior class of
the Company's capital stock.
CONVERSION. Each share of C Preferred Stock is convertible into shares of
the Common Stock at the option of the holder, at the option of the Company under
certain circumstances after October 10, 2001, and mandatorily on the "maturity
date" for the C Preferred Stock. The C Preferred Stock has an initial maturity
date of October 10, 2002 for those outstanding shares of C Preferred Stock which
can be converted into shares of Common Stock on that date without exceeding
various limitations on such conversion. In general, for the outstanding shares
of C Preferred Stock in excess of those subject to the October 10, 2002 maturity
date, the maturity date is extended until five trading days after such shares
can be converted into Common Stock without violating the applicable limitations
on conversion (or after a triggering event as discussed below).
The number of shares of Common Stock into which a share of C Preferred
Stock may be converted (the "conversion rate"), is equal to $10,000 divided by
the conversion price of the C Preferred Stock. The conversion price is initially
equal to $7.0565 per share for the first nine months after the October 10, 2000
issuance date. After the first nine months (the "first reset date"), and every
six months after the first reset date, the conversion price is required to be
reset, if such reset involves a downward adjustment. The reset would be to the
average of the two lowest closing bid prices of the Common Stock during the five
consecutive trading days immediately preceding the reset date if that average is
less than the then applicable conversion price. There is no minimum conversion
price, but the number of shares that may be converted at any one time may be
limited. For more information about limitations, see "--LIMITATIONS ON
CONVERSION."
The Company has reserved 2,196,750 shares of Common Stock for issuance
upon conversion of the shares of the C Preferred Stock (including to satisfy the
additional amounts discussed above). Depending on the conversion price, this
amount may or may not be adequate to account for the total number of shares of
Common Stock issuable upon such conversion.
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REDEMPTION. The holder of the C Preferred Stock has the right to require
the Company to redeem all or a portion of its shares upon the announcement of a
major transaction or the happening of a triggering event. Major transactions
include a merger, consolidation, tender offer or sale of substantially all the
Company's assets. Triggering events include a default under the Company's
registration obligations with respect to the C Preferred Stock, the delisting of
the Common Stock and a default with respect to the Company's conversion
obligations, among other things.
The redemption price upon the happening of these events would be equal to
the greater of 120% of the liquidation value of the C Preferred Stock, and:
o in the case of a major transaction, the product of the conversion
rate in effect for the C Preferred Stock and the closing bid price
on the date of the public announcement of the transaction; or
o in the case of a triggering event, the product of the conversion
rate in effect for the C Preferred Stock and the closing bid price
immediately before the triggering event or on the date of the
holder's redemption notice.
In addition, to the extent that the Company is not able to issue the
shares of Common Stock required to be issued upon the voluntary or mandatory
conversion of the C Preferred Stock, the Company could be required to redeem the
shares of C Preferred Stock that cannot be converted into Common Stock. The
Company might be unable to issue the requisite number of shares of Common Stock
because of the Exchange Cap.
The redemption price for the C Preferred Stock under these circumstances
would be the product of the conversion rate in effect for the C Preferred Stock
and the closing bid price for the Common Stock on the applicable conversion
date. If the Company does not timely pay the redemption price, such unpaid
amount bears interest at the rate of 2% per month.
LIMITATIONS ON CONVERSION. The issuance of shares of Common Stock upon
conversion of the C Preferred Stock is limited to that amount which, after
giving effect to the conversion, would cause the holder to beneficially own in
excess of 4.99% or, together with other shares beneficially owned during the
60-day period prior to such conversion, beneficially own in excess of 9.99% of
the outstanding shares of the Common Stock. These calculations exclude the
number of shares of Common Stock which would be issuable upon:
o conversion of the remaining, nonconverted shares of C Preferred
Stock beneficially owned by the holder and its affiliates;
o conversion of any of the B Preferred Stock or exercise of the
warrants issued in connection with the B Preferred Stock
beneficially owned by the holder and its affiliates; and
o exercise or conversion of any of the unexercised or unconverted
portion of any other of the Company's securities (including, without
limitation, any warrants or convertible preferred stock) subject to
a limitation on conversion or exercise analogous to this limitation
beneficially owned by the holder and its affiliates.
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These limitations do not prevent the holder from reducing its beneficial
ownership by sale or other transfer of Common Stock, and then acquiring
additional shares of Common Stock, up to the beneficial ownership limits, by
conversion of shares of C Preferred Stock.
Conversion of the C Preferred Stock also is subject to the Exchange Cap
discussed above.
STOCKHOLDER DILUTION
The conversion of the B Preferred Stock and the C Preferred Stock may
result in substantial dilution to other shareholders of the Common Stock.
The following table illustrates the varying amounts of shares of Common
Stock that would be issuable upon conversion of all 348 outstanding shares of B
Preferred Stock and all 750 outstanding shares of C Preferred Stock at the
indicated conversion prices (without regard to any limitation on conversion),
assuming that all additional amounts are not paid in shares of the applicable
preferred stock.
NUMBER OF SHARES OF PERCENTAGE OF
COMMON STOCK ISSUABLE OUTSTANDING COMMON
CONVERSION PRICE(1) UPON CONVERSION(2) STOCK AFTER CONVERSION(2)(3)
------------------------------- ----------------------------- ------------------------------
$0.50 22,912,599 61%
$1.00 11,456,299 44%
$1.50 7,637,533 34%
$2.00 5,728,150 28%
$3.00 3,818,766 21%
Maximum conversion price(4) 1,519,810 9%
-------------------------
(1) Although the provisions governing the B and C Preferred Stock with respect
to their conversion prices are significantly different, the calculation
assumes that the conversion price of the B and C Preferred Stock are
equal. Until July 10, 2001, the conversion price of the C Preferred Stock
is the maximum conversion price set forth in the table.
(2) Conversion into shares of Common Stock is subject to certain limitations
(for example, the 4.99% and 9.99% beneficial ownership limitations and the
availability of authorized shares, see "The Series B Convertible Preferred
Stock" and "The Series C Convertible Preferred Stock").
(3) Based on 14,786,857 shares of common stock outstanding as of June __,
2001, plus the number of shares of Common Stock issuable upon conversion
at the assumed conversion price.
(4) The shares issuable upon conversion are subject to a maximum conversion
price for the B Preferred Stock of $8.775 per share and a maximum
conversion price for the C Preferred Stock of $7.0565 per share.
ADDITIONAL INFORMATION REGARDING THE TERMS OF THE SERIES B CONVERTIBLE PREFERRED
STOCK AND WARRANTS AND THE SERIES C CONVERTIBLE PREFERRED STOCK
Copies of the relevant documents regarding the issuance of the B Preferred
Stock and the C Preferred Stock were filed with the Securities and Exchange
Commission as exhibits to the Company's Reports on Form 8-K, dated June 22, 1999
and October 12, 2000, respectively. Shareholders desiring a more complete
understanding of these securities are urged to refer to such disclosures and
exhibits.
The Company will furnish to any shareholder upon receipt of a written or
oral request, copies of these Reports on Form 10-K and Form 8-K, including
exhibits, without charge, to the Corporate
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Secretary, Andrea Electronics Corporation, 45 Melville Park Road, Melville, New
York 11747 (631) 719-1800.
In connection with the Company's issuance of the B Preferred Stock and
the related warrant and the C Preferred Stock, the Company filed registration
statements on Form S-3 with the Securities and Exchange Commission on July 17,
1999, as amended September 13, 1999 and October 13, 1999, and on December 7,
2000, as amended January 16, 2001, January 31, 2001 and February 14, 2001,
respectively. Those registration statements relate to the resale of the shares
of Common Stock that are issuable upon conversion of the B Preferred Stock, and
upon exercise of the warrants, and upon conversion of the C Preferred Stock.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors understands that the approval by the shareholders
of the issuance of the Common Stock upon conversion of the B Preferred Stock,
upon the exercise of the warrant, and upon conversion of the C Preferred Stock,
including any of the additional 250 shares of C Preferred Stock which the
Investor has the option to purchase, has the potential to substantially dilute
the interests of the existing holders of the Common Stock. Nevertheless, if the
Company does not obtain shareholder approval necessary to issue the Common
Stock, the Company could be required to redeem for cash the outstanding shares
of B and C Preferred Stock which could not be converted into Common Stock
because of the Exchange Caps in an amount equivalent to the market price of the
Common Stock which it otherwise could issue upon such conversion. Therefore, in
order to protect the interests of the Company and the holders of its Common
Stock, the Board of Directors has determined that approving both Proposal Four
and Proposal Five is advisable and in the best interest of the Company and its
shareholders. In addition, the Company is contractually obligated to the
Investor to seek stockholder approval for the issuance of shares in excess of
the Exchange Caps once the market trading price of the Common Stock is at a
level which could involve an issuance of shares upon conversion in excess of the
Exchange Caps. If the Company does not timely seek such stockholder approval,
the Company could be subject to a penalty of $250 per each outstanding share of
B and C Preferred Stock for every 30 days the submission for stockholder
approval is not timely.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL FOUR, THE
APPROVAL OF THE ISSUANCE OF COMMON STOCK UPON CONVERSION OF THE COMPANY'S SERIES
B CONVERTIBLE PREFERRED STOCK AND EXERCISE OF THE RELATED WARRANT.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL FIVE, THE
ISSUANCE OF COMMON STOCK UPON CONVERSION OF THE SERIES C CONVERTIBLE PREFERRED
STOCK.
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PROPOSAL SIX:
RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
The Audit Committee of the Board of Directors has selected the firm of
Arthur Andersen LLP to serve as the Company's independent accountants for the
fiscal year ending December 31, 2001, subject to ratification by the
shareholders. Arthur Andersen LLP served as the Company's independent
accountants for the year ended December 31, 2000. A representative of Arthur
Andersen LLP is expected to be present at the meeting with an opportunity to
make a statement if such representative desires to do so and is expected to be
available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" RATIFICATION OF THIS
SELECTION.
AUDIT FEES. The aggregate fees the Company incurred with Arthur Andersen
LLP for the annual audit and for the review of the Company's Forms 10-Q for the
fiscal year 2000 totaled $89,000.
ALL OTHER FEES. The aggregate fees the Company incurred with Arthur
Andersen LLP for all other non-audit services, including fees for tax-related
services, during fiscal year 2000 totaled $139,936, which included fees for
tax-related employee benefits, and other accounting related services. The Audit
Committee has determined that the non-audit fees paid to Arthur Andersen LLP are
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 this proxy statement as Appendix B. The Audit Committee
reviewed and discussed the annual 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 Standard 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
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, 2000 for filing with the Securities and Exchange Commission.
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. The
Company has retained Georgeson Shareholder, a proxy solicitation firm, to assist
in soliciting proxies. The Company will pay Georgeson Shareholder a
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fee of $7,000 plus reimbursement of out-of-pocket expenses. 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 2001 must be received at the Company's offices by January
__, 2002 for inclusion in the proxy materials relating to that meeting.
The Company's Bylaws provide that in order for a stockholder to make
nominations for the election of directors or proposals for business to be
brought before the annual meeting, a stockholder 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 meeting on
the date provided in the Notice of the Annual Meeting or any date or dates to
which an original or later adjournment of such meeting may be adjourned. As of
the date of this Proxy Statement, the management does not know of any other
matters to be presented at the Annual Meeting. If, however, other matters
properly come before the Annual Meeting, whether on the original date provided
in the Notice of Annual Meeting or any dates to which any original or later
adjournment of such meeting may be adjourned, it is intended that the holders of
the proxy will vote in accordance with their best judgment. Unless otherwise
required, any such matter properly coming before the Annual Meeting will be
decided by a majority of the votes cast with respect to such matter, with
abstentions and broker "non-votes" not considered as votes cast and,
accordingly, having no effect on the vote with respect to such matter.
By Order of the Board of Directors
Richard A. Maue
Secretary
Melville, New York
July__, 2001
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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
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Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
l. "Exchange Act" means the Securities Exchange Act of 1934, as amended.
m. "Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:
(i) if the Common Stock is listed on any established stock
exchange or a national market system, including without
limitation the Nasdaq National Market or The Nasdaq Small
Cap Market of The Nasdaq Stock Market, its Fair Market
Value shall be the closing sales price for such stock (or
the closing bid, if no sales were reported) as quoted on
such exchange or system for the last market trading day
prior to the time of determination, as reported in The
Wall Street Journal or such other source as the
Administrator deems reliable;
(ii) if the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the
Fair Market Value of a Share of Common Stock shall be the
mean between the high bid and low asked prices for the
Common Stock on the last market trading day prior to the
day of determination, based on such source as the
Administrator deems reliable;
(iii) in the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good
faith by the Administrator.
n. "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
o. "Nonstatutory Stock Option" means an Option not intended to qualify as
an Incentive Stock Option.
p. "Notice of Grant" means a written or electronic notice evidencing
certain terms and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement.
q. "Section 16(b) Officer" means a person who is an officer of the
Company within the meaning of Section 16(b) of the Exchange Act and the rules
and regulations promulgated thereunder.
r. "Option" means a stock option granted pursuant to the Plan.
s. "Option Agreement" means an agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
t. "Option Exchange Program" means a program whereby outstanding options
are surrendered in exchange for options with a lower exercise price.
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u. "Optioned Stock" means the Common Stock subject to an Option or Stock
Purchase Right.
v. "Optionee" means the holder of an outstanding Option or Stock Purchase
Right granted under the Plan.
w. "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
x. "Plan" means this 1998 Stock Plan.
y. "Restricted Stock" means shares of Common Stock acquired pursuant to a
grant of Stock Purchase Rights under Section 11 below.
z. "Restricted Stock Purchase Agreement" means a written agreement
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
aa. "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to
Rule 16b-3, as in effect when discretion is being exercised with respect to the
Plan.
bb. "Section 16(b)" means Section 16(b) of the Securities Exchange Act of
1934, as amended.
cc. "Service Provider" means an Employee, Director or Consultant.
dd. "Share" means a share of the Common Stock, as adjusted in accordance
with Section 13 of the Plan.
ee. "Stock Purchase Right" means the right to purchase Common Stock
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
ff. "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13 of the
Plan, the maximum aggregate number of Shares that may be optioned and sold under
the Plan is 3,675,000 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.
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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;
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(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.
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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.
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(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
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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
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Grant), by the Optionee's estate or by a person who acquires the
right to exercise the Option by bequest or inheritance, but only
to the extent that the Optionee would have been entitled to
exercise the Option on the date of death. If, at the time of
death, the Optionee is not entitled to exercise his or her entire
Option, the Shares covered by the unexercisable portion of the
Option shall immediately revert to the Plan. The Option may be
exercised by the executor or administrator of the Optionee's
estate or, if none, by the person(s) entitled to exercise the
Option under the Optionee's will or the laws of descent or
distribution. If the Option is not so exercised within the time
specified herein, the Option shall terminate, and the Shares
covered by such Option shall revert to the Plan.
e. BUYOUT PROVISIONS. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously
granted based on such terms and conditions as the Administrator
shall establish and communicate to the Optionee at the time that
such offer is made.
11. STOCK PURCHASE RIGHTS.
a. RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted
under the Plan and/or cash awards made outside of the Plan. After
the Administrator determines that it will offer Stock Purchase
Rights under the Plan, it shall advise the offeree in writing or
electronically, by means of a Notice of Grant, of the terms,
conditions and restrictions related to the offer, including the
number of Shares that the offeree shall be entitled to purchase,
the price to be paid, and the time within which the offeree must
accept such offer. The offer shall be accepted by execution of a
Restricted Stock Purchase Agreement in the form determined by the
Administrator.
b. REPURCHASE OPTION. Unless the Administrator determines otherwise,
the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's service with the Company for any
reason (including death or Disability). The purchase price for
Shares repurchased pursuant to the Restricted Stock Purchase
Agreement shall be the original price paid by the purchaser and
may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate
determined by the Administrator.
c. OTHER PROVISIONS. The Restricted Stock Purchase Agreement shall
contain such other terms, provisions and conditions not
inconsistent with the Plan as may be determined by the
Administrator in its sole discretion.
d. RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to
those of a shareholder, and shall be a shareholder when his or
her purchase is entered upon the records of the duly authorized
transfer agent of the Company. No adjustment will be made for a
dividend or other right for which the record date is prior to the
date the Stock Purchase Right is exercised, except as provided in
Section 13 of the Plan.
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12. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Unless
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR
ASSET SALE.
a. CHANGES IN CAPITALIZATION. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock
covered by each outstanding Option and Stock Purchase Right, and
the number of shares of Common Stock which have been authorized
for issuance under the Plan but as to which no Options or Stock
Purchase Rights have yet been granted or which have been returned
to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock
covered by each such outstanding Option or Stock Purchase Right,
shall be proportionately adjusted for any increase or decrease in
the number of issued shares of Common Stock resulting from a
stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected
without receipt of consideration by the Company; provided,
however, that conversion of any convertible securities of the
Company shall not be deemed to have been "effected without
receipt of consideration." Such adjustment shall be made by the
Board, whose determination in that respect shall be final,
binding and conclusive.
Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into
shares of stock of any class, shall affect, and no adjustment by
reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option or Stock Purchase
Right.
b. DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Administrator
shall notify each Optionee as soon as practicable prior to the
effective date of such proposed transaction. The Administrator in
its discretion may provide for an Optionee to have the right to
exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby,
including Shares as to which the Option would not otherwise be
exercisable. In addition, the Administrator may provide that any
Company repurchase option applicable to any Shares purchased upon
exercise of an Option or Stock Purchase Right shall lapse as to
all such Shares, provided the proposed dissolution or liquidation
takes place at the time and in the manner contemplated. To the
extent it has not been previously exercised, an Option or Stock
Purchase Right will terminate immediately prior to the
consummation of such proposed action.
c. MERGER OR ASSET SALE. In the event of a merger of the Company
with or into another corporation, or the sale of substantially
all of the assets of the Company, each outstanding Option and
Stock Purchase Right shall be assumed or an equivalent option or
right substituted by the successor corporation or a Parent or
Subsidiary of the
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successor corporation. In the event that the successor
corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Optionee shall fully vest in and have
the right to exercise the Option or Stock Purchase Right as to
all of the Optioned Stock, including Shares as to which it would
not otherwise be vested or exercisable. If an Option or Stock
Purchase Right becomes fully vested and exercisable in lieu of
assumption or substitution in the event of a merger or sale of
assets, the Administrator shall notify the Optionee in writing or
electronically that the Option or Stock Purchase Right shall be
fully vested and exercisable for a period of fifteen (15) days
from the date of such notice, and the Option or Stock Purchase
Right shall terminate upon the expiration of such period. For the
purposes of this paragraph, the Option or Stock Purchase Right
shall be considered assumed if, following the merger or sale of
assets, the option or right confers the right to purchase or
receive, for each Share of Optioned Stock subject to the Option
or Stock Purchase Right immediately prior to the merger or sale
of assets, the consideration (whether stock, cash, or other
securities or property) received in the merger or sale of assets
by holders of Common Stock for each Share held on the effective
date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of
a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is
not solely common stock of the successor corporation or its
Parent, the Administrator may, with the consent of the successor
corporation, provide for the consideration to be received upon
the exercise of the Option or Stock Purchase Right, for each
Share of Optioned Stock subject to the Option or Stock Purchase
Right, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger
or sale of assets.
14. DATE OF GRANT. The date of grant of an Option or Stock Purchase Right shall
be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall be
provided to each Optionee within a reasonable time after the date of such grant.
15. AMENDMENT AND TERMINATION OF THE PLAN.
a. AMENDMENT AND TERMINATION. The Board may at any time amend,
alter, suspend or terminate the Plan.
b. SHAREHOLDER APPROVAL. The Company shall obtain shareholder
approval of any Plan amendment to the extent necessary and
desirable to comply with Applicable Laws.
c. EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of
any Optionee, unless mutually agreed otherwise between the
Optionee and the Administrator, which agreement must be in
writing and signed by the Optionee and the Company.
16. CONDITIONS UPON ISSUANCE OF SHARES.
a. LEGAL COMPLIANCE. Shares shall not be issued pursuant to the
exercise of an Option or Stock Purchase Right unless the exercise
of such Option or Stock Purchase Right and the issuance and
delivery of such Shares shall comply with Applicable Laws
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and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
b. INVESTMENT REPRESENTATIONS. As a condition to the exercise of an
Option or Stock Purchase Right, the Company may require the
person exercising such Option or Stock Purchase Right to
represent and warrant at the time of any such exercise that the
Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is
required.
17. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
18. RESERVATION OF SHARES. The Company, during the term of this Plan, will at
all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
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APPENDIX B
ANDREA ELECTRONICS CORPORATION (THE "COMPANY")
THE AUDIT COMMITTEE CHARTER
The primary function of the Audit Committee is to assist the Company's
Board of Directors in fulfilling its oversight responsibilities by reviewing the
systems of internal controls that management and the Board of Directors have
established, the financial information that will be provided to the Company's
shareholders and others, and the overall audit process.
The Audit Committee shall have the power to conduct or authorize
investigations within the Committee's scope of responsibilities, as outlined
below. The Committee shall be empowered to retain independent counsel,
accountants, or others to assist in the conduct of any investigation.
The Committee shall meet at least four times per year or more frequently
as circumstances require. The Committee may ask members of management or others
to attend the meeting and provide pertinent information as necessary.
The Committee shall be comprised of at least three independent
directors, one of which shall be appointed as Chairman of the Committee by the
Company's Chairman of the Board of Directors. The membership of the Committee
shall be renewed annually by the Board of Directors.
The Committee will perform such other functions as assigned by law, the
Company's charter or bylaws, or the Board of Directors.
In meeting its responsibilities, the Audit Committee shall:
1. Inquire of management, the Chief Financial Officer, and the
Independent Public Accountants about significant risks or
exposures and assess the steps management has taken to minimize
such risks to the Company.
2. With input from internal and external auditors, periodically
discuss with management the state of the Company's internal
control system and provide guidance and oversight as needed.
Consider and review with the Independent Public Accountants and
the Chief Financial Officer:
a. The adequacy of the Company's internal controls including
computerized information systems controls and information
security;
b. Any related significant findings and recommendations of
the Independent Public Accountants together with
management's responses thereto;
3. Review and evaluate the audit scope and plan of the Independent
Public Accountants.
4. Review with management, including the Chief Financial Officer,
and the Independent Public Accountants at the completion of the
annual examination:
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a. The Company's annual financial statements and related
footnotes;
b. The Independent Public Accountant's audit of the financial
statements and their report thereon;
c. Any significant changes required in the Independent Public
Accountant's audit plan;
d. Any difficulties or disputes with management encountered
during the course of the audit;
e. Other matters related to the conduct of the audit, which
are to be communicated to the Committee under generally
accepted auditing standards;
5. Review and discuss, without management or the outside auditors
present, the information disclosed to the audit committee
described in 1 through 4, above.
6. Review legal and regulatory matters that may have a material
impact on the financial statements, related Company compliance
policies, and programs and reports received from regulators.
7. Require presentations from management personnel on key functional
activities of the Company, including information technology,
taxes, treasury, environmental and legal matters.
8. Review policies, procedures, and summary reports with respect to
officers' expense accounts and perquisites, including their use
of corporate assets, and consider the results of any review of
these areas by the Independent Public Accountants.
9. Review with the Independent Public Accountants the results of
their review of the Company's monitoring compliance with the
Company's code of conduct.
10. Meet with the Chief Financial Officer, the Independent Public
Accountants, and management in separate executive sessions to
discuss any matters that the Audit Committee or these groups
believe should be discussed privately with the Audit Committee.
11. Review filings with the SEC and other published documents
containing the Company financial statements and consider whether
the information contained in these documents is consistent with
the information contained in the financial statements.
12. Confirm and assure the independence of the Independent Public
Accountants by reviewing evidence of such presented orally or in
writing. Included in this confirmation shall be a review and
discussion of all outstanding job arrangement letters and
corresponding fees provided by the Independent Public
Accountants.
13. Review and update the Committee's charter with the Board of
Directors annually.
B-2
45
14. Recommend to the Board of Directors the Independent Public
Accountants to be nominated, approve the compensation of the
Independent Public Accountants, and review and approve the
discharge of the Independent Public Accountants should the need
occur.
15. Provide an open avenue of communication between the Chief
Financial Officer, the Independent Public Accountants, and the
Board of Directors.
16. Report Committee actions to the Board of Directors with such
recommendations, as the Committee may deem appropriate, including
an estimated timetable to complete such actions.
B-3
46
ANDREA ELECTRONICS CORPORATION
Solicited By The Board Of Directors for Annual Meeting To Be Held on June
28, 2001.
PROXY
The undersigned Shareholder(s) of ANDREA ELECTRONICS CORPORATION, a New York
corporation ("Company"), hereby appoints John N. Andrea and Douglas J. Andrea,
or either of them, with full power of substitution and to act without the other,
as the agents, attorneys and proxies of the undersigned, to vote the shares
standing in the name of the undersigned at the Annual Meeting of Shareholders of
the Company to be held on June 28, 2001 and at all adjournments thereof. This
proxy will be voted in accordance with the instructions given below. If no
instructions are given, this proxy will be voted "FOR" all of the following
proposals.
1. To elect the following Directors: John N. Andrea.; Douglas J. Andrea;
Christopher P. Sauvigne; Gary A. Jones; Scott Koondel; Jack Lahav; John
R. Larkin; and Paul M. Morris.
FOR ( ) WITHHELD ( )
(INSTRUCTION: To withhold authority to vote for any individual nominee, write
the nominee's name in the space provided)
2. To authorize an amendment to the Restated Certificate of Incorporation,
as amended, of the Company to increase the authorized shares of Common
Stock to 70,000,000 shares from 35,000,000 shares.
FOR ( ) AGAINST ( ) ABSTAIN ( )
3. 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 4,375,000 shares from 3,000,000 shares.
FOR ( ) AGAINST ( ) ABSTAIN ( )
4. To approve the issuance of shares of Common Stock upon the conversion of
the Company's Series B convertible preferred stock and upon exercise of
the related warrant to the extent such issuance would require
stockholder approval under standards of the American Stock Exchange.
FOR ( ) AGAINST ( ) ABSTAIN ( )
5. To approve the issuance of shares of Common Stock upon the conversion of
the Company's Series C convertible preferred stock to the extent such
issuance would require stockholder approval under the standards of the
American Stock Exchange.
FOR ( ) AGAINST ( ) ABSTAIN ( )
6. To ratify the selection of Arthur Andersen LLP as the Company's
independent accountants for the year ending December 31, 2001.
FOR ( ) AGAINST ( ) ABSTAIN ( )
47
( ) I plan on attending the Annual Meeting.
Date _____________, 2000
Signature
Signature if held jointly
Please sign exactly as name appears above. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.