<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
FILED BY THE REGISTRANT [X]
FILED BY A PARTY OTHER THAN THE REGISTRANT [_]
CHECK THE APPROPRIATE BOX:
[_Preliminary]proxy statement [_Confidential,]for use of the
[XDefinitive]proxy materials Commission only (as permitted by
[_Definitive]additional materials Rule 14a-6(e)(2))
[_Soliciting]material pursuant to
Rule 14a-11(c) or Rule 14a-12
EXCEL SWITCHING CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-----------------------------------------
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN 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)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which filing
fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_Fee]paid previously with preliminary materials.
[_Check]box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[EXCEL SWITCHING CORPORATION LOGO APPEARS HERE]
255 INDEPENDENCE DRIVE, HYANNIS, MASSACHUSETTS 02601
TELEPHONE: 508-862-3000
FAX: 508-862-3155
April 3, 1998
Dear Stockholder:
You are cordially invited to attend the annual meeting of stockholders of
Excel Switching Corporation (the "Company") to be held at 2:00 p.m., Boston
time, on Friday, May 8, 1998, at the Cape Codder Hotel, Route 132, Hyannis,
Massachusetts.
At this meeting, you will be asked to:
(i) fix the size of the Company's Board of Directors at four (4) and elect
the Company's Board of Directors for the ensuing year; and
(ii) ratify the selection of Arthur Andersen LLP as the Company's
independent auditors for the fiscal year ending December 26, 1998.
The Board of Directors unanimously recommends that you vote FOR each of
these proposals.
Details regarding each of the matters to be acted upon at this meeting
appear in the accompanying Proxy Statement. Please give this material your
careful attention.
Whether or not you plan to attend the meeting, please complete, sign and
date the accompanying proxy card and return it in the enclosed postage prepaid
envelope. It is important that your shares be voted whether or not you attend
the meeting in person. If you attend the meeting, you may vote in person even
if you have previously returned your proxy card. Your prompt cooperation will
be greatly appreciated.
Very truly yours,
/s/ Robert P. Madonna
Robert P. Madonna
President, Chief Executive Officer
and Chairman
<PAGE>
[EXCEL SWITCHING CORPORATION LOGO APPEARS HERE]
255 INDEPENDENCE DRIVE, HYANNIS, MA 02601
TELEPHONE: 508-862-3000
FAX: 508-862-3155
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON FRIDAY, MAY 8, 1998 AT 2:00 P.M.
To the Stockholders of Excel Switching Corporation:
Notice is hereby given that the annual meeting of stockholders of Excel
Switching Corporation, a Massachusetts corporation (the "Company"), will be
held at 2:00 p.m., Boston time, on Friday, May 8, 1998, at the Cape Codder
Hotel, Route 132, Hyannis, Massachusetts, to consider and vote upon the
following proposals:
1. To fix the Company's Board of Directors at four (4) and elect the
Company's Board of Directors for the ensuing year, until their
successors are elected and qualified or until their earlier resignation
or removal.
2. To ratify the selection of Arthur Andersen LLP, independent public
accountants, as auditors for the fiscal year ending December 26, 1998.
3. To transact such other business as may properly come before the meeting
or any postponements or adjournments thereof.
Only stockholders of record at the close of business on March 23, 1998 are
entitled to notice of and to vote at the meeting. All stockholders are
cordially invited to attend the meeting in person. TO ENSURE YOUR
REPRESENTATION AT THE MEETING, HOWEVER, YOU ARE URGED TO SIGN AND RETURN THE
ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE ENCLOSED POSTAGE-PREPAID
ENVELOPE. You may revoke your proxy in the manner described in the
accompanying Proxy Statement at any time before it has been voted at the
annual meeting. Any Stockholder attending the annual meeting may vote in
person even if he or she has returned a proxy.
By Order of the Board of Directors,
/s/ Christopher Stavros
Christopher Stavros
Vice President, Director, General
Counsel and Clerk
Hyannis, Massachusetts
April 3, 1998
<PAGE>
EXCEL SWITCHING CORPORATION
----------------
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
----------------
TO BE HELD ON FRIDAY, MAY 8, 1998
This Proxy Statement is being furnished to holders of common stock, par
value $.01 per share (the "Common Stock"), of EXCEL SWITCHING CORPORATION, a
Massachusetts corporation ("Excel" or the "Company"), in connection with the
solicitation of proxies by the Board of Directors of the Company (the "Board")
for use at the annual meeting of the Company's stockholders to be held at 2:00
P.M., Boston time, on FRIDAY, MAY 8, 1998, and at any adjournments or
postponements thereof (the "Meeting"), AT THE CAPE CODDER HOTEL, ROUTE 132,
HYANNIS, MASSACHUSETTS. The Company's Annual Report to Stockholders,
containing audited consolidated financial statements for the fiscal year ended
December 27, 1997, is being mailed contemporaneously with this Proxy Statement
to all stockholders entitled to vote at the Meeting. This Proxy Statement and
the form of proxy were first mailed to stockholders on or about April 3, 1998.
The purpose of the Meeting is:
1. To fix the Company's Board of Directors at four (4) and elect the
Company's Board of Directors for the ensuing year, until their
successors are elected and qualified or until their earlier resignation
or removal.
2. To ratify the selection of Arthur Andersen LLP, independent public
accountants, as auditors for the fiscal year ending December 26, 1998.
The Board has fixed the close of business on March 23, 1998 as the record
date (the "Record Date") for the determination of the Company's stockholders
entitled to notice of, and to vote at, the Meeting. Accordingly, only holders
of record of Common Stock as of the close of business on the Record Date will
be entitled to notice of, and to vote at, the Meeting or an adjournment
thereof.
As of the Record Date, 32,722,200 shares of the Company's Common Stock were
issued and outstanding. The holders of Common Stock are entitled to one vote
per share on any proposal presented at the Meeting. Stockholders may vote in
person or by proxy. Execution of a proxy will not in any way affect a
stockholder's right to attend the Meeting and vote in person.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (1) filing
with the Clerk of the Company, before the taking of the vote at the Meeting, a
written notice of revocation bearing a later date than the proxy; (2) duly
executing a later dated proxy relating to the same shares and delivering it to
the Clerk of the Company before the taking of the vote at the Meeting; or (3)
attending the Meeting and voting in person (although attendance at the Meeting
will not in and of itself constitute a revocation of a proxy). Any written
notice of revocation or subsequent proxy should be sent so as to be delivered
to Excel Switching Corporation, 255 Independence Drive, Hyannis, Massachusetts
02601, Attention: Clerk, at or before the taking of the vote at the Meeting.
<PAGE>
The persons named as attorneys in the proxy are officers of the Company. All
properly executed proxies returned in time to be counted at the Meeting will
be voted and, with respect to the election of the Board, will be voted as
stated below under "Election of Director." Any stockholder submitting a proxy
has the right to withhold authority to vote for the nominee to the Board by so
marking the box provided on the proxy.
In addition to the election of the Company's directors for the ensuing year,
the stockholders will consider and vote upon a proposal to ratify the
selection of auditors, as further described in this Proxy Statement. All
proxies will be voted in accordance with the instructions contained therein,
and if no choice is specified, the proxies will be voted in favor of the
matters set forth in the accompanying Notice of Meeting.
The representation in person or by proxy of at least a majority of the
outstanding shares of Common Stock entitled to vote at the Meeting is
necessary to establish a quorum for the transaction of business at the
Meeting. Votes withheld from a nominee, abstentions and broker non-votes are
counted as present or represented for purposes of determining the presence or
absence of a quorum.
A "non-vote" occurs when a broker holding shares for a beneficial owner
votes on one proposal, but does not vote on another proposal because the
broker does not have discretionary voting power and has not received
instructions from the beneficial owner.
Directors are elected by a plurality of the votes cast by stockholders
entitled to vote at the Meeting. All other matters being submitted to
stockholders require the affirmative vote of a majority of the outstanding
shares of Common Stock present in person or represented by proxy at the
Meeting. An automated system administered by the Company's transfer agent
tabulates the votes. The vote on each matter submitted to stockholders is
tabulated separately. Abstentions are included in the number of shares present
or represented and voting on each matter and, therefore, with respect to votes
on specific proposals, will have the effect of negative votes. Broker "non-
votes" are not so included.
Where a choice has been specified on the proxy with respect to the foregoing
matters, the shares represented by the proxy will be voted in accordance with
the specification. THE SHARES WILL BE VOTED FOR THE MATTER IN QUESTION IF NO
SPECIFICATION IS MADE.
The Board knows of no other matter to be presented at the Meeting. If any
other matters are properly presented for consideration at the Meeting (or any
adjournment or postponements thereof), the persons named in the enclosed form
of proxy and voting thereunder will have the discretion to vote on such
matters in accordance with their best judgment.
2
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 23, 1998 (unless otherwise
indicated) (i) by each person who is known by the Company to own beneficially
more than 5% of the outstanding shares of Common Stock, (ii) by each current
director or director nominee of the Company, (iii) by each executive officer
of the Company named in the Summary Compensation Table, and (iv) by all
current directors, director nominees and executive officers of the Company as
a group. Unless otherwise indicated below, to the knowledge of the Company,
all persons listed below have sole voting and investment power with respect to
their shares of Common Stock, except to the extent authority is shared by
spouses under applicable law.
<TABLE>
<CAPTION>
PERCENTAGE
SHARES OF SHARES
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED(1) OWNED(1)
------------------------ ------------ ------------
<S> <C> <C>
The Madonna Family Limited Partnership(2)........... 4,191,840 12.8%
c/o Excel Switching Corporation
255 Independence Drive
Hyannis, MA 02601
Robert P. Madonna(3)................................ 27,243,400 83.3%
Robert W. Ross(4)................................... 38,200 *
Gadi Tamari(5)...................................... 121,000 *
Stephen S. Galliker(6).............................. 60,000 *
Christopher Stavros(7).............................. 450,000 *
Edward L. Breslow(8)................................ 10,000 *
John Loughlin(9).................................... 11,000 *
All executive officers, directors and director
nominees as a group (12 persons)(10)............... 30,042,830 84.6%
</TABLE>
- --------
* Less than 1% of the outstanding Common Stock.
(1) Applicable percentage of ownership as of the Record Date is based upon
32,722,200 shares of Common Stock outstanding as of that date. Beneficial
ownership is determined in accordance with the rules of the Securities
and Exchange Commission (the "Commission"), and includes voting and
investment power with respect to shares. Common Stock subject to options
currently exercisable or exercisable within 60 days of the Record Date
("presently exercisable stock options") are deemed outstanding for
computing the percentage ownership of the person holding such options,
but are not deemed outstanding for computing the percentage of any other
person.
(2) The Partnership has shared voting and investment power with Mr. Madonna
with respect to all of its shares.
(3) Includes 4,191,840 shares of Common Stock owned by The Madonna Family
Limited Partnership of which Mr. Madonna is a general partner and a trust
called The Madonna Family GRAT is the Limited Partner.
(4) Includes 37,200 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(5) Includes 120,000 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(6) Consists of 60,000 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(7) Consists of 450,000 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(8) Consists of 10,000 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(9) Includes 10,000 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(10) Includes 2,794,480 shares of Common Stock issuable pursuant to presently
exercisable stock options.
3
<PAGE>
ELECTION OF DIRECTORS
The directors of the Company are elected annually and hold office until the
next annual meeting of the stockholders and until their successors shall have
been elected and qualified or until earlier resignation or removal. Shares
represented by all proxies received by the Board of Directors and not so
marked as to withhold authority to vote for any individual director will be
voted (unless one or more nominees are unable or unwilling to serve) for
fixing the size of the Board of Directors for the ensuing year at four (4)
directors and for the election of the nominees named below.
The Board of Directors has nominated and recommended that Robert P. Madonna,
Christopher Stavros, Edward L. Breslow and John Loughlin, the current members
of the Board of Directors, be elected to hold office until the next Annual
Meeting of Stockholders or until their successors have been duly elected and
qualified or until their earlier resignation or removal. The Board of
Directors knows of no reason why any such nominee should be unable or
unwilling to serve, but if such should be the case, proxies will be voted for
the election of some other person as the Board of Directors may recommend in
the place of such nominee or for fixing the number of directors at a lesser
number.
The information below sets forth for each member of the Board such person's
age, principal occupations during the past five years and certain other
information:
Robert P. Madonna, age 38, founded the Company in January 1988 and has
served as its Chief Executive Officer, President and a Director since that
time. Mr. Madonna was elected Chairman of the Board of Directors in September
1997. Mr. Madonna also served as the Company's Treasurer until June 1996 and
Clerk until May 1997. From August 1984 to October 1987, Mr. Madonna was
Director of Hardware Engineering for Lan-Tel, Inc., a developer and
manufacturer of PBX voice and data switches. From January 1983 to July 1984,
Mr. Madonna was a principal engineer at American Science and Engineering,
Inc., a manufacturer of CAT scan and other medical imaging technology.
Christopher Stavros, age 45, joined the Company in August 1995 as General
Counsel and was elected a director in December 1995 and Vice President in
September 1997. From January 1992 to August 1995, Mr. Stavros was a member of
the law firm of DeVito, Pransky and Stavros, P.A. Prior to 1992, Mr. Stavros
maintained his own private practice concentrating in small business and
general corporate law in Boston, Massachusetts. Mr. Stavros has represented
the Company on various matters since its incorporation.
Edward L. Breslow, age 50, first became a director of the Company in
November 1997 upon the Company's initial public offering. Mr. Breslow has been
Vice President, Corporate Business Development of EMC Corporation since
December 1988. EMC Corporation is a supplier of enterprise-wide intelligent
information storage and retrieval solutions. Prior to joining EMC Corporation,
Mr. Breslow held various financial management positions at Bose Corporation, a
consumer electronics company, and Texas Instruments, Inc., a diversified
technology company.
John Loughlin, age 46, first became a director of the Company in November
1997 upon the Company's initial public offering. Mr. Loughlin has been a human
resources consultant providing staffing and human resource services to
technology and financial services clients, including the Company, since 1986.
From 1981 to 1986, Mr. Loughlin serviced as Director of Human Resources at
American Science & Engineering, Inc. a manufacturer of CAT scan and other
medical imaging technology.
4
<PAGE>
COMPENSATION OF DIRECTORS
Directors receive no cash compensation for their services as directors,
except for reimbursement of expenses incurred in connection with attending
meetings of the Board of Directors and its committees. The Company's non-
employee directors are entitled to participate in the Company's 1997 Non-
Employee Director Stock Option Plan. See "Stock Plans--1997 Non-Employee
Director Stock Option Plan."
MEETINGS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board took action by unanimous written consent 30 times during the
fiscal year ended December 27, 1997 but held no meetings. Currently, the Board
has a standing Audit Committee and Compensation Committee. Prior to the
initial public offering, the Company had no separate Compensation or Audit
Committees or other board committees performing equivalent functions, and
these functions were performed by the Company's Board of Directors which
consisted of Robert P. Madonna, the Company's President, Chief Executive
Officer, Chairman of the Board and principal stockholder, and Christopher
Stavros, Vice President and General Counsel of the Company. The Audit
Committee, which oversees the accounting and financial functions of the
Company, did not meet during the fiscal year ended December 27, 1997. The
Audit Committee did meet to discuss and review the audited financial
statements of the Company for the year ended December 27, 1997 in February
1998. Messrs. Breslow and Loughlin are the current members of the Audit
Committee. The Compensation Committee, which reviews and makes recommendations
concerning executive compensation and reviews and approves option grants and
administers the Company's stock option plans, met one time during the fiscal
year ended December 27, 1997 and all members attended. Messrs. Breslow and
Loughlin are the current members of the Compensation Committee. Mr. William
Cadogan served as a member of both the Compensation and Audit Committees
during a portion of the fiscal year ended December 27, 1997 but resigned from
both committees and as a member of the Board of Directors on March 16, 1998.
EXECUTIVE OFFICERS
Executive officers serve at the discretion of the Board on an annual basis
and serve until their successors have been duly elected and qualified or until
their earlier resignation or removal. The current executive officers of the
Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Robert P. Madonna............... 38 President, Chief Executive Officer and
Chairman of the Board
David C. Brajczewski............ 38 Vice President, Research and Development
and Engineering
Robert J. Buttel................ 49 Vice President, Advanced Technology
James W. Carroll................ 38 Vice President, Customer Engineering and
Quality
Stephen S. Galliker............. 51 Vice President, Finance and Administration,
and Chief Financial Officer
Russell M. Levesque............. 37 Vice President, Product Management
Robert C. Panoff................ 51 Vice President, Marketing
Robert W. Ross.................. 49 Vice President, Sales
Christopher Stavros............. 45 Vice President, General Counsel, Director
and Clerk
Gadi Tamari..................... 52 Chief Operating Officer
</TABLE>
5
<PAGE>
David C. Brajczewski joined the Company in April 1997 as Vice President,
Research and Development and now serves as Vice President, Research and
Development and Engineering. From September 1988 to April 1997, Mr.
Brajczewski was employed by the Otis Elevator Company, a supplier of elevator
systems and a division of United Technologies Corporation, as part of its
engineering management team. From September 1987 to September 1988, Mr.
Brajczewski was a Project Engineer at Microtechnologies, Inc., a designer of
microprocessor and PC-based test and control systems. From May 1986 to
September 1987, Mr. Brajczewski was an Electrical Engineer at Lan-Tel, Inc.
Robert J. Buttel joined the Company in May 1989 as a design engineer. Prior
to his current position as Vice President, Advanced Technology, a position Mr.
Buttel has held since April 1997, Mr. Buttel held several positions at Excel
including Vice President, Research and Development, Vice President of
Engineering, Director of Hardware Development, Director of Software
Development and Manager of Manufacturing. From December 1985 to March 1989,
Mr. Buttel was employed by GTECH Holdings Corporation, a supplier of
computerized, on-line lottery products and services. While at GTECH, Mr.
Buttel held several positions including Design Engineer, Manager of Firmware
and Research and Development Engineer. From July 1984 to December 1985, Mr.
Buttel was a design engineer at Lan-Tel, Inc.
James W. Carroll joined the Company in August 1995 as Director of Corporate
Quality. Since November 1996, Mr. Carroll has served as Vice President,
Engineering and since January 1998, as Vice President, Customer Engineering
and Quality. From December 1993 to August 1995 and from November 1990 to May
1992, Mr. Carroll was employed by Boston Technology, Inc., a designer and
manufacturer of central office enhanced services. From December 1993 to August
1995, Mr. Carroll was Manager of Operations and Customer Service Quality
Assurance and from November 1990 to May 1992, he was Senior Supplier, Quality
Assurance. From May 1992 to December 1993, Mr. Carroll was employed by Brite
Voice Systems, Inc., a manufacturer of voice processing systems. At Brite
Voice, Mr. Carroll was Director of Quality until March 1993 and Director of
Research and Development until December 1993.
Stephen S. Galliker joined the Company in July 1996 as Chief Financial
Officer and was elected Vice President, Finance and Administration in
September 1997. From September 1992 to June 1996, Mr. Galliker was employed by
Ultracision, Inc., a developer and manufacturer of ultrasonically powered
surgical instruments. At Ultracision, Inc., Mr. Galliker was Chief Financial
Officer and Vice President of Finance until November 1995 and Chief Operating
Officer from December 1995 to June 1996. From June 1989 to September 1992, Mr.
Galliker was Senior Vice President, Operations/Finance and Chief Financial
Officer at Tylink Corporation, a manufacturer of high speed telecommunications
equipment. Mr. Galliker is a Certified Public Accountant.
Russell M. Levesque joined the Company in May 1992 as Director of Software.
In January 1998, Mr. Levesque was made Vice President, Product Management.
From June 1995 until January 1998, Mr. Levesque served as the Company's
Director of Product Management. From July 1986 to April 1992, Mr. Levesque
served as Software Engineering Manager at Imaging Technologies, Inc., a
manufacturer of image processing hardware and software products for the image
inspection and image analysis markets.
Robert C. Panoff joined the Company in January 1997 as Vice President,
Marketing. From February 1986 to December 1996, Mr. Panoff was employed by
Natural MicroSystems Corporation, a designer and manufacturer of PC-based call
processing hardware and software components where he held several positions
including Vice President and General Manager of the European group from
September 1994 through December 1996, Vice President of New Business
Development from 1990 to 1994, Vice President Sales and Marketing from 1987 to
1990 and Vice President, Marketing from 1986 to 1987.
6
<PAGE>
Robert W. Ross joined the Company in February 1995 as Director of Sales and
became Vice President, Sales in August 1996. From June 1994 to January 1995,
Mr. Ross was a Director of Telecommunications Sales for Switchcraft, a
division of Raytheon Company and a supplier of components for the audio/video,
telecommunications, computer, medical, military, appliance, transportation and
instrumentation industries. From January 1994 to June 1994, Mr. Ross was
Regional Vice President of Sales for a division of Augat, Inc., a manufacturer
of telecommunications equipment. From September 1982 to October 1993, Mr. Ross
was employed by ADC Telecommunications, Inc., a manufacturer and designer of
transmission, networking and connectivity products. During his tenure at ADC,
Mr. Ross held several different positions, including National Sales Manager
and Regional Sales Manager for the NYNEX region.
Gadi Tamari joined the Company in November 1996 as Chief Operating Officer.
From February 1990 until joining Excel, Mr. Tamari was a consultant to various
telecommunications companies based in both Israel and the United States. In
addition to his work as a consultant, from February 1990 to October 1996, Mr.
Tamari was President of ALNO Networks USA, an importer and distributor of
household goods. From February 1988 to January 1990, Mr. Tamari served as
Director of East Coast Operations at Credence Systems Corporation, a designer
and manufacturer of automatic test equipment for digital and mixed signal
semiconductors. From September 1986 to January 1988, Mr. Tamari was Vice
President, Operations at Lan-Tel, Inc.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to September 1997, the Company had no separate compensation committee
or other board committee performing equivalent functions, and these functions
were performed by the Company's Board of Directors which consisted of Mr.
Madonna, the Company's Chief Executive Officer and President and Mr. Stavros,
the Company's General Counsel and Clerk. Currently, the Board has a standing
Compensation Committee. Messrs. Breslow and Loughlin are the current members
of the Compensation Committee. Mr. William Cadogan served as a member of the
Compensation Committee during a portion of the fiscal year ended December 27,
1997 but resigned on March 16, 1998. No executive officer of the Company
served as a member of the compensation committee (or other board of director
committee performing equivalent functions or, in the absence of any such
committee, the entire board of directors of such entity) of another entity,
one of whose executive officers served as a director of the Company.
7
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
annual and long-term compensation paid or accrued by the Company for services
rendered to the Company, in all capacities, for the past two fiscal years by
its Chief Executive Officer (the "CEO") and the four other most highly
compensated executive officers other than the CEO, in each case whose total
salary and bonus exceeded $100,000 (collectively, the "Named Executive
Officers"). The Company did not grant any restricted stock awards or stock
appreciation rights or make any long-term incentive plan payouts during the
fiscal years 1997 or 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION
------------------------- -------------
AWARDS
SECURITIES
NAME AND PRINCIPAL FISCAL UNDERLYING/ ALL OTHER
POSITION YEAR SALARY BONUS OPTIONS(#)(2) COMPENSATION(3)
------------------ ------ ----------- ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Robert P. Madonna....... 1997 $ 301,556 $ 74,250 -- $10,080
President, Chief 1996 240,773 69,000 -- 9,300
Executive Officer and
Chairman of the Board
of Directors
Robert W. Ross.......... 1997 88,122 201,598(4) 80,000 10,080
Vice President, Sales 1996 83,296 123,924(4) 60,000 9,300
Gadi Tamari............. 1997 175,000(5) 42,857 -- 10,080
Chief Operating Officer 1996 39,135 2,200 600,000 --
Stephen S. Galliker..... 1997 145,250(6) 31,124 -- 10,080
Vice President, Finance 1996 67,993 10,000 300,000 4,836
and Administration, and
Chief Financial Officer
Christopher Stavros..... 1997 139,154 32,760 -- 10,080
Vice President, General 1996 128,077 16,800 -- 9,298
Counsel and Clerk
</TABLE>
- --------
(1) The compensation described in this table does not include medical, group
life insurance or other benefits received by the Named Executive Officers
which are available generally to all salaried employees of the Company and
certain perquisites and other personal benefits, securities or property
received by the Named Executive Officers which do not exceed the lesser of
$50,000 or 10% of any such officer's salary and bonus disclosed in this
table.
(2) Represents stock options granted during the fiscal year ended December 27,
1997. The Company did not grant any restricted stock awards or stock
appreciation rights or make any long-term incentive plan payouts during
1996 or 1997.
(3) Represents contributions made by the Company to the Named Executive
Officer under the Company's 401(k) plan.
(4) Includes commissions.
(5) Mr. Tamari joined the Company in November 1996. Mr. Tamari would have
earned a total annual salary of $175,000 in fiscal 1996 had he been
employed as an executive officer of the Company for the entire fiscal year
ended December 28, 1996.
(6) Mr. Galliker joined the Company in July 1996. Mr. Galliker would have
earned a total annual salary of $140,000 in fiscal 1996 had he been
employed as an executive officer of the Company for the entire fiscal year
ended December 28, 1996.
8
<PAGE>
EMPLOYEE AGREEMENTS
All employees of the Company, including the Named Executive Officers, are
bound by the terms of an Employee Non-Disclosure, Invention and Covenant Not
To Compete Agreement, pursuant to which (1) the employee agrees to assign to
the Company all inventions, discoveries and improvements made, devised or
discovered by the employee during and until one (1) year subsequent to the
term of employment; (2) confidential information proprietary to the Company
obtained during the term of employment by the Company may not be disclosed by
the employee during or subsequent to such term of employment; and (3) the
employee agrees not to compete with the business of the Company during and for
a three (3) year period subsequent to the term of employment.
OPTIONS AND STOCK PLANS
Option Grants. The following table sets forth certain information concerning
grants of stock options made during the fiscal year ended December 27, 1997 to
the Named Executive Officers. The Company did not grant any stock appreciation
rights ("SARs") during the fiscal year ended December 27, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------
POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(4)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------------------
NAME GRANTED(1) FISCAL YEAR(2) SHARE(3) DATE 5% 10%
---- ---------- -------------- --------- ---------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert P. Madonna....... -- -- -- -- -- --
Stephen S. Galliker..... -- -- -- -- -- --
Robert W. Ross.......... 80,000 5.4% $14.50 09/01/07 $ 729,518 $ 1,848,741
Christopher Stavros..... -- -- -- -- -- --
Gadi Tamari............. -- -- -- -- -- --
</TABLE>
- --------
(1) 20% of the total option shares become exercisable on each anniversary of
the date of grant.
(2) Based on an aggregate of 1,484,100 shares subject to options granted in
the fiscal year ended December 27, 1997 to employees of the Company.
(3) The exercise price per share was determined by the Board of Directors to
be equal to the fair market value per share of the Common Stock on the
date of grant.
(4) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date, and are not intended to forecast possible future
appreciation, if any, in the price of the Common Stock. The gains shown
are net of the option exercise price, but do not include deductions for
federal or state income taxes or other expenses associated with the
exercise of the options or the sale of the underlying shares. The actual
gains, if any, on the stock option exercises will depend on the future
performance of the Common Stock, the optionholder's continued employment
through the option period and the date on which the options are exercised.
9
<PAGE>
Option Exercises and Fiscal Year-End Option Table. The following table sets
forth certain information concerning options granted to the Named Executive
Officers, including (i) the number of unexercised stock options outstanding as
of December 27, 1997; and (ii) the value of such unexercised options at
December 27, 1997. No SARs or stock options were exercised by the Named
Executive Officers during the fiscal year ended December 27, 1997.
AGGREGATED FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED,
OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS
END AT FISCAL YEAR-END(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert P. Madonna........... -- -- -- --
Stephen S. Galliker......... 60,000 240,000 $ 834,999 $3,339,996
Robert W. Ross.............. 37,200 162,800 567,099 1,232,900
Christopher Stavros......... 450,000 -- 7,162,493 --
Gadi Tamari................. 120,000 480,000 1,350,000 5,400,000
</TABLE>
- --------
(1) Value is based on the difference between the option exercise price and the
fair market value at December 27, 1997, the fiscal year-end ($16.25 per
share as quoted on the Nasdaq National Market) multiplied by the number of
shares underlying the option.
Stock Plans. The Company currently has four stock ownership plans: the
Company's Stock Option Program, the 1997 Stock Option Plan, the 1997 Employee
Stock Purchase Plan and the 1997 Non-Employee Director Stock Option Plan.
Stock Option Program. Prior to the initial public offering, the Company had
an informal stock option program under which selected employees were granted
non-qualified options to purchase shares of Common Stock. The primary purpose
of this program had been to provide long-term incentives to the Company's
selected employees and to further align their interests with those of the
Company. The selection of the participants, the determination of the number of
shares of Common Stock offered to each participant, the terms of the
repurchase rights for each participant and other terms of sale had been made
by the Company's President and Chief Executive Officer, Robert P. Madonna, and
Christopher Stavros, Vice President and General Counsel. Options granted under
this informal plan were generally exercisable within ten years of the original
grant date and generally vested over a period of five years from the date of
grant. As of December 27, 1997, options to purchase 11,702,440 shares of
Common Stock, at a weighted average exercise price of $2.06 per share, were
granted under this program, of which options to purchase 146,400 shares of
Common Stock have been exercised and options to purchase 250,200 shares of
Common Stock have been canceled. The Board of Directors voted in September
1997 to terminate this program effective as of November 4, 1997.
1997 Stock Option Plan. The Company's 1997 Stock Option Plan (the "1997
Plan") was adopted by the Board of Directors and approved by the Company's
sole voting stockholder in September 1997. Under the terms of the 1997 Plan,
the Company is authorized to grant incentive ("ISO") and non-qualified stock
options (collectively, "Stock Options") to officers and other employees of and
consultants to the Company. The aggregate number of shares of Common Stock
which may be issued pursuant to the Plan is 3,000,000.
The 1997 Plan will be administered by the Compensation Committee of the
Board of Directors, which is expected to consist of two disinterested
directors. Subject to the provisions of the 1997 Plan, the Compensation
Committee has the authority to select the optionees and determine the terms of
the stock options granted under the 1997 Plan, including: (i) the time or
times at which stock options may be granted; (ii) whether the stock option
granted will be an ISO or a non-qualified stock option; (iii) the number of
shares subject to each stock option; (iv) when the stock option becomes
exercisable; (v) the exercise price of the stock option, which in the case of
an ISO cannot be less than the fair market value of the Common Stock as of the
date of grant, or not less than 110% of the fair market value in the case of
ISO's granted to an employee or officer holding 10% or more
10
<PAGE>
of the voting stock of the Company; (vi) the duration of the stock option; and
(vii) the time, manner and form of payment upon exercise of a Stock Option. A
Stock Option is not transferable by the recipient except by will or by the
laws of descent and distribution, or in the case of non-qualified stock
options, only to the extent set forth in the agreement relating to such option
or pursuant to a valid domestic relations order. Generally, no ISO may be
exercised more than 90 days following termination of employment and no stock
options may be exercised following termination of employment for cause.
However, in the event that termination is due to death or disability, the
stock option is exercisable for a maximum of 180 days after such termination.
The term of the 1997 Plan is ten years, unless sooner terminated by vote of
the Board of Directors. As of the Record Date, options to purchase 108,800
shares of Common Stock were outstanding under the 1997 Plan, of which no
shares were then exercisable and 2,891,200 shares remained available for grant
under the 1997 Plan.
1997 Employee Stock Purchase Plan. The 1997 Employee Stock Purchase Plan
(the "1997 Purchase Plan") was adopted by the Board of Directors and approved
by the Company's sole voting stockholder in September 1997. The 1997 Purchase
Plan provides for the issuance of a maximum of 400,000 shares of Common Stock
pursuant to the exercise of nontransferable options granted to participating
employees.
The 1997 Purchase Plan is administered by the Compensation Committee of the
Board of Directors. All employees of the Company whose customary employment is
more than 20 hours per week and for more than five months in any calendar year
are eligible to participate in the 1997 Purchase Plan. Employees who would own
5% or more of the total combined voting power or value of the Company's stock
immediately after the grant and non-employee directors may not participate in
the 1997 Purchase Plan. To participate in the 1997 Purchase Plan, an employee
must authorize the Company to deduct an amount (not less than one percent nor
more than ten percent of a participant's total cash compensation) from his or
her pay during six-month payment periods (the "Payment Period"). The first
Payment Period commenced upon the initial offering of the Company's Common
Stock to the public and will end on June 30, 1998. Thereafter, the Payment
Periods will commence on January 1 and July 1 of each year, but in no case
shall an employee be entitled to purchase more than 500 shares in any one
Payment Period. The exercise price for the option granted in each Payment
Period is 85% of the lesser of the market price of the Common Stock on the
first or last business day of the Payment Period. If an employee is not a
participant on the last day of the Payment Period, such employee is not
entitled to exercise his or her option, and the amount of his or her
accumulated payroll deductions will be refunded. Options granted under the
1997 Purchase Plan may not be transferred or assigned. An employee's rights
under the 1997 Purchase Plan terminate upon his or her voluntary withdrawal
from the plan at any time or upon termination of employment. No options have
been granted to date under the 1997 Purchase Plan.
The 1997 Non-Employee Director Stock Option Plan. The Company's 1997 Non-
Employee Director Stock Option Plan (the "Director Option Plan") was adopted
by the Board of Directors and approved by the Company's sole voting
stockholder in September 1997. The Director Option Plan provides for the grant
of options to purchase a maximum of 225,000 shares of Common Stock of the
Company to non-employee directors of the Company.
The Director Option Plan is administered by the Compensation Committee of
the Board of Directors. Under the Director Option Plan, each non-employee
director who (i) is a member of the Board of Directors on September 16, 1997
(the "Approval Date") shall be automatically granted on the Approval Date, or
(ii) first becomes a member of the Board of Directors shall be granted on the
date such person first becomes a non-employee director, an option to purchase
30,000 shares of Common Stock. In addition, each non-employee director will be
automatically granted an option to purchase 15,000 shares of Common Stock for
each of the two years following the date such person first became a non-
employee director, through December 1999. Options granted upon election to the
Board under the Director Option Plan will vest as to one third of the total
shares underlying the option immediately upon grant and one third of the total
shares underlying the option on the anniversary of the date of grant for each
of the following two years, provided that the optionee has continuously served
as a director through such vesting dates. All other options granted under the
Director Option Plan will vest at a rate of one third of the total shares
underlying the option per year over a period of three years provided that the
optionee has continuously served as a director through such vesting dates. The
optionee may forfeit a
11
<PAGE>
portion of his or her exercise rights with respect to options vesting in any
fiscal year unless the optionee attends at least 75% of the Board meetings
held in that year. All options granted under the Director Option Plan will
have an exercise price equal to the fair market value of the Common Stock on
the date of grant and a term of ten years from the date of grant. Options may
be transferred by will or by the laws of descent and distribution, pursuant to
a domestic relations order or pursuant to and in accordance with the
Optionee's stock option agreement. If the optionee ceases to be a member of
the Board for any reason other than death or disability, any unvested options
immediately terminate and become void and any unexercised portion of an option
which is then vested may be exercised at any time prior to the scheduled
expiration date of the option. However, if an optionee ceases to serve as a
director of the Company due to death or disability, all unvested options
become fully vested and are exercisable for a period of one year thereafter
and any options that are vested and exercisable when the optionee ceases to
serve as a director are exercisable at any time until the scheduled expiration
date of the option. The term of the Director Option Plan is ten years, unless
sooner terminated by vote of the Board of Directors. Upon joining the Board,
each of Messrs. Breslow and Loughlin were granted options for the purchase of
30,000 shares of Common Stock at an exercise price equal to the initial public
offering price of $21.00. In addition, Mr. William Cadogan, a former member of
the Board of Directors, received options to purchase 30,000 shares of Common
Stock upon joining the Board of Directors. Upon his resignation in March 1998,
Mr. Cadogan held options to purchase 10,000 shares of Common Stock which were
then exercisable.
Federal Income Tax Consequences. THE FOLLOWING DISCUSSION OF UNITED STATES
FEDERAL INCOME TAX CONSEQUENCES OF THE ISSUANCE AND EXERCISE OF OPTIONS
GRANTED UNDER THE STOCK OPTION PROGRAM, THE 1997 PLAN, THE 1997 PURCHASE PLAN
AND THE DIRECTOR OPTION PLAN, AND OF CERTAIN OTHER RIGHTS GRANTED UNDER THE
1997 PLANS, IS BASED UPON THE PROVISIONS OF THE CODE AS IN EFFECT ON THE DATE
OF THIS PROXY STATEMENT, CURRENT REGULATIONS, AND EXISTING ADMINISTRATIVE
RULINGS OF THE INTERNAL REVENUE SERVICE. IT IS NOT INTENDED TO BE A COMPLETE
DISCUSSION OF ALL OF THE FEDERAL INCOME TAX CONSEQUENCES OF THESE PLANS OR OF
THE REQUIREMENTS THAT MUST BE MET IN ORDER TO QUALIFY FOR THE DESCRIBED TAX
TREATMENT.
A. Incentive Stock Options (individually, an "ISO," and collectively,
"ISOs"). The following general rules are applicable under current United
States federal income tax law to ISOs granted under the 1997 Plan:
1. In general, an optionee will not recognize any income upon grant of an
ISO or upon the issuance of shares to him or her upon the exercise of an
ISO, and the Company will not be entitled to a federal income tax deduction
upon either the grant or the exercise of an ISO.
2. If shares acquired upon exercise of an ISO are not disposed of within
(i) two years from the date the ISO was granted or (ii) one year from the
date the shares are issued to the optionee pursuant to the ISO exercise
(the "Holding Periods"), the difference between the amount realized on any
subsequent disposition of the shares and the exercise price will generally
be treated as capital gain or loss to the optionee.
3. If shares acquired upon exercise of an ISO are disposed of and the
optionee does not satisfy the Holding Periods (a "Disqualifying
Disposition"), then in most cases the lesser of (i) any excess of the fair
market value of the shares at the time of exercise of the ISO over the
exercise price or (ii) the actual gain on disposition, will be taxed to the
optionee as ordinary income in the year of such disposition.
4. In any year that an optionee recognizes ordinary income on a
Disqualifying Disposition of shares acquired upon exercise of an ISO, the
Company generally will be entitled to a corresponding federal income tax
deduction.
5. The difference between the amount realized by an optionee as the
result of a Disqualifying Disposition and the sum of (i) the exercise price
and (ii) the amount of ordinary income recognized under the above rules
generally will be treated as capital gain or loss.
6. An optionee may be entitled to exercise an ISO by delivering shares of
the Company's Common Stock to the Company in payment of the exercise price,
if the optionee's ISO agreement so provides. If an optionee exercises an
ISO in such fashion, special rules will apply.
7. In addition to the tax consequences described above, the exercise of
an ISO may result in an "alternative minimum tax." In general, the amount
by which the value of the shares received upon exercise
12
<PAGE>
of the ISO exceeds the exercise price is included in the optionee's
alternative minimum taxable income. A taxpayer is required to pay the
higher of his regular tax liability or the alternative minimum tax. A
taxpayer who pays alternative minimum tax attributable to the exercise of
an ISO may be entitled to a tax credit against his or her regular tax
liability in later years.
8. Capital gain or loss recognized on a disposition of shares will be
long-term capital gain or loss if the optionee's holding period for the
shares exceeds one year. An optionee may be entitled to a reduced long-term
capital gain rate if the holding period for the shares exceeds 18 months.
9. Special rules apply if the shares acquired upon the exercise of an ISO
are subject to vesting, or are subject to certain restrictions on resale
under federal securities laws applicable to directors, officers or 10%
stockholders.
B. Non-Qualified Stock Options. The following general rules are applicable
under current federal income tax law to options granted under the 1997 Plan
which do not qualify as ISOs, and to all options granted under the Director
Plan (individually, a "Non-qualified Option", and collectively, "Non-qualified
Options"):
1. In general, an optionee will not recognize any taxable income upon the
grant of a Non-qualified Option, and the Company will not be entitled to a
federal income tax deduction upon such grant.
2. An optionee generally will recognize ordinary income at the time of
exercise of the Non-qualified Option 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. The Company may be required to withhold income tax on
this amount.
3. When an optionee sells the shares acquired upon the exercise of a Non-
qualified Option, he or she generally will recognize capital gain or loss
in an amount equal to the difference between the amount realized upon the
sale of the shares and his or her basis in the shares (generally, the
exercise price plus the amount taxed to the optionee as ordinary income).
If the optionee's holding period for the shares exceeds one year, such gain
or loss will be a long-term capital gain or loss. If the optionee's holding
period for the shares exceeds 18 months, the optionee may be entitled to a
reduced long-term capital gain rate.
4. When an optionee recognizes ordinary income attributable to a Non-
qualified Option, the Company generally will be entitled to a corresponding
federal income tax deduction.
5. An optionee may be entitled to exercise a Non-qualified Option by
delivering shares of the Company's Common Stock to the Company in payment
of the exercise price. If an optionee exercises a Non-qualified Option in
such fashion, special rules will apply.
6. Special rules apply if the shares acquired upon the exercise of a Non-
qualified Option are subject to vesting, or are subject to certain
restrictions on resale under federal securities laws applicable to
directors, officers or 10% stockholders.
C. Stock Awards and Purchases. The following general rules are applicable
under current federal income tax law to Awards and Purchases (each as defined
below) under the 1997 Plan:
Under current federal income tax law, persons receiving Common Stock under
the 1997 Plan pursuant to an award of Common Stock ("Award") or a grant of an
opportunity to purchase Common Stock ("Purchase") generally will recognize
ordinary income equal to the fair market value of the shares received reduced
by any purchase price paid. The Company generally will be entitled to a
corresponding federal income tax deduction. When such shares are sold, the
seller generally will recognize capital gain or loss. Special rules apply if
the shares acquired are subject to vesting, or are subject to certain
restrictions on resale under federal securities laws applicable to directors,
officers or 10% stockholders.
D. Options Granted under the 1997 Employee Stock Purchase Plan. The
following general rules are currently applicable under current federal income
tax law to options under the 1997 Purchase Plan:
1. The amounts deducted from an employee's pay under the 1997 Purchase
Plan will be included in the employee's compensation subject to federal
income tax. In general, no additional income will be
13
<PAGE>
recognized by the employee either at the time options are granted pursuant
to the 1997 Purchase Plan or at the time the employee purchases shares
pursuant to the 1997 Purchase Plan.
2. If the employee disposes of shares purchased pursuant to the 1997
Purchase Plan more than two years after the first business day of the
Payment Period in which the employee acquired the shares, then upon such
disposition the employee will recognize ordinary income in an amount equal
to the lesser of:
(a) the excess, if any, of the fair market value of the shares at the
time of disposition over the amount the employee paid for the shares,
or
(b) 15% of the fair market value of the shares on the first business
day of the Payment Period.
In addition, the employee generally will recognize capital gain or loss
in an amount equal to the difference between the amount realized upon the
sale of shares and the employee's tax basis in the shares (generally, the
amount the employee paid for the shares plus the amount, if any, taxed as
ordinary income).
3. If the employee disposes of shares purchased pursuant to the 1997
Purchase Plan within two years after the first business day of the Payment
Period in which the employee acquired the shares, then upon disposition the
employee will recognize ordinary income in an amount equal to the excess,
if any, of the fair market value of the shares on the last business day of
the Payment Period over the amount the employee paid for the shares.
In addition, the employee generally will recognize capital gain or loss
in an amount equal to the difference between the amount realized upon the
sale of shares and the employee's tax basis in the shares (generally, the
amount the employee paid for the shares plus the amount, if any, taxed as
ordinary income). Capital gain or loss recognized on a disposition of
shares will be long-term capital gain or loss if the employee's holding
period for the shares exceeds one year. An employee may be entitled to a
reduced long-term capital gain rate if the holding period for the shares
exceeds 18 months.
4. If the employee disposes of shares purchased pursuant to the 1997
Purchase Plan more than two years after the first business day of the
Payment Period, the Company will not be entitled to any federal income tax
deduction with respect to the options or the shares issued upon their
exercise. If the employee disposes of such shares prior to the expiration
of this two-year holding period, the Company generally will be entitled to
a federal income tax deduction in an amount equal to the amount which is
treated as ordinary income as a result of such disposition.
14
<PAGE>
STOCK PERFORMANCE GRAPH
The Stock Price Performance Graph set forth below compares the cumulative
total stockholder return on the Company's Common Stock from November 4, 1997,
the date of the Company's initial public offering, through December 27, 1997,
with the cumulative total return on the Center for Research in Security Prices
Total Return Index for the Nasdaq Stock Market (US) and the S&P's
Communication--Equipment Manufacturers Index over the same period. The
comparison assumes $100 was invested on November 4, 1997 in the Company's
Common Stock, in the Nasdaq Stock Market Index (US) and in the S&P's
Communication--Equipment Manufacturers Index and assumes reinvestment of
dividends, if any.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG EXCEL SWITCHING
CORPORATION, THE NASDAQ STOCK MARKET INDEX (US) AND S&P'S
COMMUNICATION--EQUIPMENT MANUFACTURERS INDEX
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
NOVEMBER 4, 1997 DECEMBER 27, 1997
---------------- -----------------
<S> <C> <C>
Excel Switching Corporation................ $100 $77.38
The Nasdaq Stock Market Index (US)......... 100 93.11
S&P's Communication--Equipment
Manufacturers Index....................... 100 89.37
</TABLE>
Prior to November 4, 1997, the Company's Common Stock was not publicly
traded. Comparative data is provided only for the period since that date. The
stock price performance shown on the graph above is not necessarily indicative
of future price performance. Information used in the graph with respect to the
Nasdaq Stock Market Index (US) was obtained from The Nasdaq Stock Market, a
source believed to be reliable, but the Company is not responsible for any
errors or omissions in such information.
15
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Overview. This report is submitted by the Board of Directors, which
administered the Company's executive compensation program until the Company's
initial public offering, and by the Compensation Committee (the "Compensation
Committee"), which was established by the Board of Directors in connection
with the Company's initial public offering and which, along with the Company's
Chief Executive Officer, carried out such functions for the remainder of the
year. Pursuant to authority delegated by the Board of Directors, and based in
part upon recommendations from the Company's Chief Executive Officer, the
Compensation Committee will be responsible for establishing each year the non-
equity and equity compensation of senior management and review, as
appropriate, other compensation standards of the Company. In addition, the
Compensation Committee will administer the Company's Stock Option Program,
1997 Stock Plan, 1997 Purchase Plan and Director Plan.
The current members of the Compensation Committee, Edward L. Breslow and
John Loughlin, both non-employee directors, bring expertise in executive
compensation matters to their service on the Compensation Committee through
their experience on boards of directors, as executive officers or as
consultants to other companies. Mr. William Cadogan served as a member of the
Compensation Committee during a portion of the fiscal year ended December 27,
1997, but resigned on March 16, 1998.
Principal Objectives. The principal objective of the Company's executive
compensation program is to enhance the Company's short-term and long-term
financial results for the benefit of the Company's stockholders. To achieve
this objective, the Company's executive compensation program is designed to
provide levels of compensation that assist the Company in attracting,
motivating and retaining qualified executive officers and aligning the
financial interests of the Company's executive officers with those of its
stockholders. The Company performs periodic reviews of each executive
officer's compensation package to confirm competitiveness of the Company's
executive compensation policies with the policies of companies with which the
Company competes for prospective employees possessing the skills necessary for
developing, manufacturing and marketing successful telecommunications products
and associated services. The Committee will review the recommendations of the
Chief Executive Officer, taking into account some or all of the following
factors: external market data; the Company's performance; the individual's
contribution to the Company's success; and the internal equity of compensation
levels among executive officers.
Elements of Executive Compensation. An executive officer's compensation
package includes: (i) base salary, (ii) annual performance-based bonuses,
which are based upon the individual executive officer's contribution to the
Company's success, and (iii) long-term incentive compensation, in the form of
stock options, granted with the objective of aligning executive officers'
long-term interests with those of the stockholders, encouraging the
achievement of superior results over an extended period and balancing the
equity compensation levels among the executive officers. In addition, the
compensation program is comprised of various benefits, including medical and
insurance plans, the Company's profit sharing plan and the Company's 1997
Purchase Plan, which are generally available to all employees of the Company.
Base Compensation. Base salaries for executive officers are generally set at
competitive market levels for each officer's respective position, level of
responsibility and experience. In recommending, reviewing and setting base
cash compensation levels for executive officers, the Chief Executive Officer
and the Compensation Committee will generally take into account some or all of
the following factors: (i) the Company's past financial performance and future
expectations; (ii) the general and industry-specific business environment;
(iii) the individual executive officer's base compensation in the prior year;
and (iv) individual performance by the executive. Review of the foregoing
factors is intended to be subjective and no fixed value or weight is assigned
to any specific factor when making decisions regarding the salary of executive
officers.
Performance-Based Compensation. Each executive officer is eligible to
receive a cash bonus at the end of the fiscal year based both upon the
Company's and the individual's performance. Bonus awards for each of the
Company's executive officers, other than the Company's Chief Executive
Officer, are based upon the recommendations of the Chief Executive Officer.
The initial determination of the amount of the cash bonus to be received by an
executive officer is determined according to a methodology and rating system
which take into
16
<PAGE>
account the following factors: (i) performance of the Company and the
individual as compared to performance objectives set by the Company for both
the Company and the individual, (ii) relative experience base of the
individual, and (iii) the individual's past performance and longevity as an
employee with the Company. After the initial determination is made, the Chief
Executive Officer and Compensation Committee adjust the bonus amount based
upon a review of the individual's expected contribution to the Company's
growth and in a manner which is intended to set the bonus at an amount which
would be equitable when compared to the bonus amounts of other executive
officers. The final determination as to performance based compensation is
intended to be subjective and the Chief Executive Officer and Compensation
Committee will not assign a fixed value or weight to any specific factor when
making decisions regarding the bonus of executive officers.
Stock Options. Long-term incentive compensation, in the form of stock
options, allows executive officers to share in any appreciation in the value
of the Company's Common Stock. The Company believes that stock option
participation aligns executive officers' interests with those of its
stockholders. In addition, the Compensation Committee believes that equity
ownership by executive officers helps to balance the short-term focus of
annual incentive compensation with a longer-term view that may support the
retention of key executive officers. Generally, executive officers are granted
stock options upon hiring by the Company. The Compensation Committee will
generally take into account competitive market levels for option grants, the
general and industry-specific business environment and the expected
contribution of the executive officer to the Company over the short and long
term when determining option grant levels for new executive officers. When
establishing stock option grant levels for existing executive officers, the
Compensation Committee considers existing levels of stock ownership, previous
grants of stock options, vesting schedules of outstanding options and current
stock price. Stock options to be granted under the Company's 1997 stock plans
will generally have an exercise price equal to the fair market value of the
Company's Common Stock on the date of grant. Generally, these stock options
will become exercisable over five years as follows: 20% of the total option
shares to become exercisable on each anniversary of the date of grant. In the
fiscal year ended December 27, 1997, four executive officers of the Company,
including one Named Executive Officer, were awarded non-qualified stock
options to purchase an aggregate of 600,000 shares of Common Stock.
Tax Considerations. The Company does not believe Section 162(m) of the Code,
which generally disallows a tax deduction for compensation in excess of $1
million to any of the executive officers appearing in the Summary Compensation
Table above, will have an effect on the Company. The Committee has considered
the requirements of Section 162(m) of the Code and the related regulations. It
is the Committee's present intention that, so long as it is consistent with
its overall compensation objectives, substantially all executive compensation
will be deductible for federal income tax purposes.
CEO Compensation. Mr. Madonna, the Company's President and Chief Executive
Officer, may participate in the same compensation programs that are available
to the Company's other executive officers except with respect to equity
compensation. Mr. Madonna is precluded from participating in the Company's
stock option program and plans. His non-equity compensation is determined in
accordance with the policies and factors applicable to other executive
officers as described above. The Board believed that, at the beginning of
fiscal 1997, Mr. Madonna's annual compensation was not competitive with the
compensation paid by other companies in its industry to their chief executive
officers. In that regard, in fiscal 1997 the Board increased Mr. Madonna's
base salary to $300,000 from $254,100 and the Compensation Committee awarded
him a cash bonus for fiscal 1997 of $74,250. The Board considered (i) an
assessment of salaries believed to be paid to chief executive officers at
comparable companies, (ii) an assessment of Mr. Madonna's qualifications,
performance and expected contributions to the Company's future growth and
(iii) the Company's strong financial performance in fiscal 1996 and 1997. Mr.
Madonna received no stock options in fiscal 1997. The Compensation Committee
will review Mr. Madonna's compensation package periodically to ensure that it
remains competitive.
Respectfully submitted by the: BOARD OF DIRECTORS: COMPENSATION COMMITTEE:
Edward L. Breslow Edward L. Breslow
John Loughlin John Loughlin
Robert P. Madonna
Christopher Stavros
17
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has adopted a policy whereby all transactions between the
Company and its officers, directors and affiliates will be on terms no less
favorable to the Company than could be obtained from unrelated third parties
and will be approved by a majority of the disinterested members of the
Company's Board of Directors.
RATIFICATION OF SELECTION OF AUDITORS
The Board has selected the firm of Arthur Andersen LLP, independent public
accountants, to serve as auditors for the year ending December 26, 1998.
Arthur Andersen LLP has served as the Company's auditors since 1992. The Board
recommends a vote FOR ratification of this selection.
It is expected that a member of the firm of Arthur Andersen LLP will be
present at the Meeting, will have an opportunity to make a statement if so
desired and will be available to respond to appropriate questions from the
Company's stockholders. The ratification of this selection is not required
under the laws of the Commonwealth of Massachusetts, where the Company is
incorporated, but the results of this vote will be considered by the Board in
selecting auditors for future fiscal years.
OTHER MATTERS
The Board does not intend to bring any matters before the Meeting other than
those specifically set forth in the Notice of Annual Meeting and it knows of
no matters to be brought before the meeting by others. If any other matters
properly come before the Meeting, it is the intention of the persons named in
the accompanying proxies to vote such proxies in accordance with the judgment
of the Board.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities Exchange Commission.
Officers, directors and greater-than-ten percent stockholders are required by
SEC regulation to furnish the Company will all Section 16 forms they file.
Based solely on its review of the copies of such forms received by it, the
Company believes that during the fiscal year ended December 27, 1997 all of
its officers, directors and greater-than-ten-percent stockholders complied
with all Section 16(a) filing requirements.
STOCKHOLDER PROPOSALS
The Company currently intends to hold its 1998 Annual Meeting of
Stockholders during May 1999. To be included in the Proxy Statement and form
of proxy for the Company's 1998 Annual Meeting of Stockholders, stockholder
proposals must be received by the Company by February 5, 1999. Such
stockholder proposals should be submitted to Excel Switching Corporation, 255
Independence Drive, Hyannis, Massachusetts 02601, Attention: Clerk.
EXPENSES AND SOLICITATION
The cost of solicitation of proxies will be borne by the Company, and in
addition to soliciting stockholders by mail through its regular employees, the
Company may request banks, brokers and other custodians, nominees and
fiduciaries to solicit their customers who have Common Stock registered in the
names of a nominee and, if so, will reimburse such banks, brokers and other
custodians, nominees and fiduciaries for their reasonable out-of-pocket costs.
Solicitation by the Company's officers and employees may also be made of some
stockholders in person or by mail, telephone or telegraph following the
original solicitation. The Company may retain a proxy solicitation firm to
assist in the solicitation of proxies. The Company will bear all reasonable
solicitation fees and expenses if such a proxy solicitation firm is retained.
18
<PAGE>
1669-PS-98
<PAGE>
SIDE A
EXCEL SWITCHING CORPORATION
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
MAY 8, 1998
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
OF EXCEL SWITCHING CORPORATION
The undersigned, revoking all prior proxies, hereby appoints Christopher
Stavros and Stephen S. Galliker, and each of them alone, proxies, with full
power of substitution, to vote all shares of Common Stock of Excel Switching
Corporation (the "Corporation") which the undersigned is entitled to vote at
the Annual Meeting of Stockholders of the Corporation, to be held on Friday,
May 8, 1998, at 2:00 p.m., local time, at the Cape Codder Hotel, Route 132,
Hyannis, Massachusetts, and at any adjournments thereof, upon the matters set
forth in the Notice of Annual Meeting of Stockholders and related Proxy
Statement dated April 3, 1998, a copy of which has been received by the
undersigned, AND IN THEIR DISCRETION UPON ANY OTHER BUSINESS THAT MAY PROPERLY
COME BEFORE THE MEETING OR ANY ADJOURNMENTS THEREOF. Attendance of the
undersigned at the meeting or at any adjourned session thereof will not be
deemed to revoke this proxy unless the undersigned shall affirmatively
indicate thereat the intention of the undersigned to vote said shares in
person.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO
DIRECTION IS GIVEN, WILL BE VOTED FOR THE ELECTION OF ALL OF THE DIRECTORS,
FOR THE PROPOSAL IN ITEM 2 AND DISCRETIONARY AUTHORITY WILL BE DEEMED GRANTED
UNDER ITEM 3.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
<PAGE>
SIDE B
1. To elect a Board of Directors for the ensuing year.
[_] FOR all nominees listed below [_] WITHHOLD AUTHORITY to vote
(except as marked to the contrary below) for all nominees listed
below
Robert P. Madonna, Christopher Stavros, Edward L. Breslow, John
Loughlin
INSTRUCTIONS: To withhold authority to vote for any individual nominee, write
that nominee's name in the space provided below:
------------------------------------------------------------------------
2. To ratify the selection of the firm of Arthur Andersen LLP as independent
auditors of the Corporation for the fiscal year ending December 26, 1998.
[_] FOR [_] AGAINST [_] ABSTAIN
3. To transact such other business as may properly come before the meeting.
[_] FOR [_] AGAINST [_] ABSTAIN
Dated: , 1998
--------------
-------------------------------------
Signature(s) of Stockholder(s)
-------------------------------------
Please Print Name:
(If signing as attorney, executor,
trustee or guardian, please give
your full title as such. If stock is
held jointly, each owner should
sign.)
