<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
FILED BY THE REGISTRANT /X/ FILED BY A PARTY OTHER THAN THE REGISTRANT / /
- --------------------------------------------------------------------------------
Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
TELCO SYSTEMS, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / 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 the filing fee is calculated and
state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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<PAGE> 2
TELCO SYSTEMS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JANUARY 24, 1996
The Annual Meeting of Stockholders of TELCO SYSTEMS, INC. (the "Company"),
will be held at Bank of Boston, 100 Federal Street, 35th Floor, Boston,
Massachusetts 02110, on Wednesday, January 24, 1996, at 10:00 a.m. local time,
for the following purposes:
1. To fix the number of directors constituting the full Board of Directors
of the Company at five, and to elect a Board of five directors.
2. To act upon a proposal to approve the amendment of the Company's 1990
Stock Option Plan to increase by 350,000 the number of shares covered by
the Plan.
3. To ratify the selection of Ernst & Young as the independent certified
public accountants for the Company.
4. To transact such other business as may properly come before the meeting.
Only stockholders of record at the close of business on November 24, 1995,
are entitled to notice of and to vote at the meeting and any adjournment
thereof.
BY ORDER OF THE BOARD OF DIRECTORS
Edward N. Gadsby, Jr.
Assistant Secretary
Norwood, Massachusetts
December 11, 1995
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN AND RETURN THE
ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN THE ENCLOSED POSTPAID ENVELOPE. IF
YOU ARE ABLE TO ATTEND THE MEETING AND WISH TO VOTE YOUR SHARES PERSONALLY, YOU
MAY DO SO AT ANY TIME BEFORE THE PROXY IS EXERCISED.
<PAGE> 3
PROXY STATEMENT
TELCO SYSTEMS, INC.
ANNUAL MEETING OF STOCKHOLDERS
JANUARY 24, 1996
The enclosed proxy is solicited on behalf of the Board of Directors of
TELCO SYSTEMS, INC., a Delaware corporation (the "Company"), for use at the
Annual Meeting of Stockholders to be held on Wednesday, January 24, 1996, and at
any adjournment thereof.
Only holders of record of the Company's common stock, $.01 par value
("Common Stock"), on November 24, 1995, will be entitled to notice of and to
vote at the meeting. At the close of business on November 24, 1995, 10,265,236
shares of Common Stock were issued and outstanding. Under the by-laws of the
Company, a majority of the shares of Common Stock issued and outstanding and
entitled to vote at the meeting will constitute a quorum for the meeting or any
adjournment thereof.
Holders of Common Stock are entitled to one vote for each share held on
each matter submitted to a vote, except in the election of directors. The
Company's certificate of incorporation contains a provision for cumulative
voting for the election of directors. Cumulative voting rights entitle a
stockholder to cast a number of votes equal to the number of directors to be
elected multiplied by the number of votes to which that stockholder's shares are
entitled without cumulative voting, and all such votes may be cast for a single
candidate or may be distributed among any or all of the candidates.
Votes withheld from any nominee for election as director, abstentions and
broker "non-votes" will be counted as present or represented at the meeting for
purposes of determining the presence or absence of a quorum for the meeting. A
broker "non-vote" occurs when a broker or other nominee who holds shares for a
beneficial owner withholds his vote on a particular proposal with respect to
which he does not have discretionary voting power or instructions from the
beneficial owner. Abstentions with respect to a proposal are included in the
number of shares present or represented and voting on such proposal. "Non-votes"
are not so included. An automated system administered by the Company's transfer
agent tabulates the votes.
Any proxy given may be revoked by a stockholder at any time before it is
voted by filing with the Secretary of the Company a notice in writing revoking
it or by duly executing a proxy bearing a later date. Proxies may also be
revoked by any stockholder present at the meeting who expresses a desire to vote
his or her shares in person. Subject to any such revocation, all shares
represented by properly executed proxies that are received prior to the meeting
will be voted in accordance with the specifications on the proxy. If no
specification is made with regard to any proposal set forth in the proxy, the
shares will be voted in favor of the proposal.
The principal executive offices of the Company are located at 63 Nahatan
Street, Norwood, Massachusetts 02062. The approximate date on which this proxy
statement and the accompanying proxy are being sent to stockholders is December
11, 1995.
ANNUAL REPORT TO STOCKHOLDERS
The Company's Annual Report for the fiscal year ended August 27, 1995 (the
"1995 Fiscal Year"), accompanies this proxy statement but is not incorporated
herein and is not deemed to be a part hereof.
ELECTION OF DIRECTORS
The Board of Directors has nominated and recommends the election of each of
the nominees set forth below as a director of the Company, to serve until his
successor has been elected and qualified or until he resigns or is removed in
the manner provided in the Company's by-laws. Unless otherwise instructed by the
stockholder, the persons named in the enclosed proxy intend to vote the shares
represented thereby for such nominees. Although management anticipates that all
of the nominees will be able to serve, if any nominee is unable or unwilling to
serve at the time of the meeting, the proxy holders will vote for the others and
may vote for a substitute nominee chosen by the present Board of Directors. If
additional persons are nominated for election as directors, the proxy holders
intend to vote all proxies received by them according to the cumulative voting
rules to assure the election of as many of the nominees listed below as
possible. In such event, the specific nominees to be voted for will be
determined by the proxy holders. The five nominees receiving the greatest number
of votes will be elected as directors of the Company.
1
<PAGE> 4
The Board has nominated each of the five current members of the Board as
nominees for re-election. The beneficial ownership of the Company's Common Stock
by the five nominees is set forth under "Voting Securities and Principal
Stockholders."
<TABLE>
<CAPTION>
DIRECTOR
NOMINEES AGE SINCE
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<S> <C> <C>
Mr. Dean C. Campbell...................... 45 1989
Dr. Steward S. Flaschen................... 69 1986
Dr. Sheldon Horing........................ 59 1995
Mr. John A. Ruggiero...................... 59 1988
Dr. William B. Smith...................... 51 1994
</TABLE>
Mr. Campbell is currently the managing general partner of Campbell Venture
Management, a venture capital fund. Previously he had been a partner of Norton
Venture Partners, L.P., the predecessor of Campbell Venture Management, since
1982. Mr. Campbell is also a director of Sequoia Systems, Inc., and RF
Monolithics, Inc.
Dr. Flaschen, the Chairman of the Board, has been an independent business
management consultant and President of Flaschen & Davies since January 1986.
From 1964 to 1986, he held various executive positions with ITT Corporation, the
most recent being Senior Vice President, member of the Management Policy Board
and General Technical Director. Dr. Flaschen is also a director of Merrill Lynch
Venture Capital Fund II, Advanced Technology Ventures, Inc., and Chairman of the
Board of TranSwitch Corporation.
Dr. Horing was elected to the Board of Directors of the Company in April
1995. Dr. Horing is retired from Cincinnati Bell, Inc., where he was Executive
Vice President, and from Cincinnati Bell Information Systems where he was
President and Chief Executive Officer. From 1957 to 1990, Dr. Horing held a
number of senior management positions at AT&T Bell Labs, including Executive
Director of the Data Communications and Business Operations Division and
Executive Director of Transmission Systems Engineering.
Mr. Ruggiero was appointed Chief Executive Officer of the Company in
September 1994 and also served as President of the Company from September 1994
to March 1995. Mr. Ruggiero joined the Company in December 1986 as Senior Vice
President, Chief Financial Officer, and in 1990 he was named Executive Vice
President. In 1993, Mr. Ruggiero was elected to the additional position of Chief
Operating Officer of the Company. For the previous 20 years, Mr. Ruggiero held
various senior management positions at Sanders Associates, Inc., an electronics
manufacturer; the last of these positions was Corporate Vice President and
Treasurer.
Dr. Smith was elected to the Board of Directors of the Company in February
1994 and was appointed President and Chief Operating Officer effective March
1995. From 1991 to February 1995, Dr. Smith served as Senior Vice President,
Chief Information and Technology Officer, of U S WEST, a Regional Bell Operating
Company, and he served as President of U S WEST Technologies, a research,
development and operations unit of U S WEST. From 1986 to 1991, Dr. Smith served
as Executive Director, Research and Development, at AT&T's Bell Laboratories.
The Company's Audit Committee, established by the Board of Directors, met
twice during the 1995 Fiscal Year. Responsibilities of the Audit Committee
include (1) reviewing and consulting with the Company's independent certified
public accountants concerning the Company's financial statements, accounting and
financial policies and internal controls, (2) reviewing the scope of the
independent certified public accountants' activities and the fees of the
independent certified public accountants, and (3) maintaining good
communications among the Committee, the Company's independent certified public
accountants and the Company's management on accounting matters.
Prior to October 11, 1995, the Company had a Compensation Committee and a
Stock Option Committee. The function of the Compensation Committee, which met
five times during the 1995 Fiscal Year, was to review and make recommendations
to the Board of Directors regarding the compensation of and employee benefits
for the Company's employees. The function of the Stock Option Committee was to
administer the 1988 Non-Statutory Stock Option Plan and the 1990 Stock Option
Plan of the Company. The Stock Option Committee met nine times during the 1995
Fiscal Year. On October 11, 1995, the Compensation Committee and Stock Option
Committee were merged by the Board into a single committee called the Stock
Option and Compensation Committee combining the functions of the two predecessor
committees and consisting of all the Board members who are not employees of the
Company (namely, Mr. Campbell, Dr. Flaschen and Dr. Horing). The Audit Committee
also consists of all of the Board members who are not employees of the Company.
The Board has not established a Nominating Committee.
The total number of meetings of the Board of Directors (including regularly
scheduled and special meetings) during the 1995 Fiscal Year was ten. Each of the
incumbent directors attended at least 75% of the aggregate of (i) the total
number of meetings of the Board during the year and (ii) the total number of
meetings of all committees of the Board on which he served.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE NOMINEES FOR DIRECTOR
LISTED IN THIS PROXY STATEMENT.
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<PAGE> 5
DIRECTORS' COMPENSATION
Directors who are not employees of the Company receive an annual retainer
of $17,500 and an additional $1,250 for attendance at each Board or Committee
meeting, unless both Board and Committee meetings are held on the same day, in
which case payment is reduced to $625 per meeting. Directors are also entitled
to reimbursement of expenses incurred in attending each Board or Committee
meeting. The Company's 1990 Stock Option Plan also provides for
non-discretionary grants of non-qualified stock options to non-employee
directors of the Company upon their initial election by the Company's
stockholders and annually thereafter. During the 1995 Fiscal Year, non-
discretionary grants of options pursuant to the Plan were made as follows: Mr.
Campbell, 10,000 shares; Dr. Flaschen, 10,000 shares. All such options were at
an exercise price of $16.75 per share, the fair market value of the Common Stock
on December 30, 1994, the date of grant. In addition, on December 16, 1994, and
December 30, 1994, Dr. Smith received non-discretionary options to purchase
5,000 and 8,956 shares of common stock at exercise prices of $16.25 and $16.75,
respectively. If each of the non-employee nominees is re-elected at the Annual
Meeting, he will on January 25, 1996 be granted, on a non-discretionary basis,
an option, at an exercise price equal to the fair market value of the Common
Stock on that date, to purchase the following number of shares of Common Stock:
Mr. Campbell, 10,000 shares; Dr. Flaschen, 10,000 shares; and Dr. Horing, 7,205
shares. In addition, if re-elected at the Annual Meeting, Dr. Horing will
immediately be granted, on a non-discretionary basis, an option to purchase
5,000 shares of Common Stock at an exercise price equal to the fair market value
on the date of the Meeting.
EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation for each
of the last three fiscal years awarded to or earned by (i) each person who
served as Chief Executive Officer of the Company at any time during the 1995
Fiscal Year, and (ii) each of the four other most highly compensated executive
officers of the Company whose salary and bonus exceeded $100,000 during the 1995
Fiscal Year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------ ------------
AWARDS
OTHER ANNUAL SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(1) COMPENSATION ($) OPTIONS/SARS (#) COMPENSATION ($)(2)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John A. Ruggiero 1995 $253,086 $ 54,851 -- 50,000 $ 8,588
Chief Executive Officer 1994 $230,933 $163,766 -- 25,000 $ 5,997
1993 $213,255 $ 49,648 -- -- $ 7,304
Howard C. Salwen (3) 1995 $ 18,460 -- -- -- $110,000
President & 1994 $203,086 $109,668 -- 100,000 $ 4,232
Chief Executive Officer
David J. McClure (4) 1995 $186,203 $ 24,616 -- -- $ 31,271
Vice President & 1994 $169,240 $ 99,878 -- 15,000 $ 4,318
General Manager 1993 $163,906 $ 65,800 -- -- $ 3,351
Access Business Unit
Kenneth J. Hamer Hodges (5) 1995 $173,420 $ 26,386 -- -- $ 4,643
Vice President &
Chief Technical Officer
Surya R. Panditi (6) 1995 $137,500 $ 18,985 -- 10,000 $ 3,750
Vice President &
General Manager
Access Products Group
William B. Smith (7) 1995 $106,154 $ 50,000 $55,498 (8) 113,956 (9) $ 533
President &
Chief Operating Officer
</TABLE>
See accompanying notes on following page.
3
<PAGE> 6
(1) Cash bonuses for services rendered have been included as compensation
for the fiscal year earned, even though such bonuses were actually calculated
and paid in the following fiscal year. Such bonuses were payable pursuant to the
Company's quarterly and annual Management Incentive Plan. This bonus plan is
based on the achievement by the Company of certain minimum and maximum financial
budget and other performance goals established by the Board of Directors and is
described below under the heading "Compensation Committee Report on Executive
Compensation."
(2) "All Other Compensation" for the 1995 Fiscal Year includes amounts as
follows: (i) Company contributions in the following amounts to match amounts
deferred by the executives pursuant to the Telco Systems, Inc. 401(k) Savings
Plan: Mr. Ruggiero ($4,620); Mr. McClure ($4,673); Mr. Hamer Hodges ($4,643);
Mr. Panditi ($3,750); and (ii) premium payments under life insurance policies
for the benefit of the executives at the following incremental costs to the
Company: Mr. Ruggiero ($3,968); Mr. McClure ($996); Dr. Smith ($533).
(3) Mr. Salwen resigned as President and Chief Executive Officer of the
Company, effective September 19, 1994. Amounts shown under "All Other
Compensation" for the 1995 Fiscal Year includes consulting payments in the
aggregate amount of $110,000 made subsequent to his resignation pursuant to his
Severance Agreement.
(4) Mr. McClure resigned as Vice President and General Manager of the
Access Business Unit effective August 8, 1995. "All Other Compensation" for the
1995 Fiscal Year includes the difference between the fair market value of Mr.
McClure's company automobile and the amount for which he purchased it following
his resignation.
(5) Mr. Hamer Hodges became an executive officer when he was named Chief
Technical Officer in September 1994.
(6) Mr. Panditi became an executive officer when he was named Vice
President and General Manager of the International Business Unit in June 1995.
(7) Dr. Smith became an executive officer when he joined the Company in
March 1995 and was named President and Chief Operating Officer at a base salary
of $230,000 per year.
(8) This amount includes $31,357 for moving expenses in connection with Dr.
Smith's hiring and relocation to Norwood, Massachusetts.
(9) Amount shown includes stock options for 13,956 shares awarded to Dr.
Smith on a non-discretionary basis in connection with his service as a
non-employee director prior to March 1995.
STOCK OPTIONS AND SAR GRANTS IN LAST FISCAL YEAR
The table below sets forth certain information with respect to stock
options granted during the 1995 Fiscal Year to the executive officers named in
the Summary Compensation Table above.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/ POTENTIAL REALIZABLE
UNDERLYING SARS VALUE AT ASSUMED
OPTIONS/ GRANTED TO EXERCISE ANNUAL RATES OF STOCK
SARS EMPLOYEES IN OR BASE PRICE APPRECIATION
GRANTED FISCAL PRICE EXPIRATION FOR OPTION TERM
NAME (#) YEAR ($/SH) DATE 5%($)(1) 10%($)(1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John A. Ruggiero 50,000 13.32% $12.875 10/03/04 $404,851 $1,025,972
Howard C. Salwen -- -- -- -- -- --
David J. McClure -- -- -- -- -- --
Kenneth J. Hamer Hodges -- -- -- -- -- --
Surya R. Panditi 10,000 2.66% $ 9.875 04/19/05 $ 62,103 $ 157,382
William B. Smith 5,000 (2) 1.33% $ 16.25 12/16/04 $ 51,098 $ 129,492
8,956 (2) 2.39% $ 16.75 12/30/04 $ 94,342 $ 239,082
100,000 26.63% $11.375 03/15/05 $715,368 $1,812,882
</TABLE>
(1) The amounts set forth represent the difference between (a) the
appreciated value of the shares subject to the option immediately prior to its
expiration, at the assumed rates of stock price appreciation set forth,
compounded annually, less (b) the exercise price of the option. There can be no
assurance that the value of the Company's securities will appreciate at the
assumed rates, or at any other rate. Actual gains, if any, on stock option
exercises are dependent on the future performance of the Company's Common Stock
and other factors such as the general condition of the stock markets and the
timing of the exercises of the options.
(2) Represents options awarded to Dr. Smith on a non-discretionary basis in
connection with his service as a non-employee director prior to March 1995.
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<PAGE> 7
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
The following table summarizes for each of the named executive officers the
number of stock options, if any, exercised during the 1995 Fiscal Year, the
aggregate dollar value realized upon such exercise, the total number of
unexercised options held at August 27, 1995, and the aggregate dollar value of
in-the-money unexercised options held at August 27, 1995. None of the named
executive officers held or exercised any SARs during the 1995 Fiscal Year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
OPTIONS/SARS AT FISCAL YEAR END (#) AT FISCAL YEAR END ($) (2)
---------------------------------------------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE (#) REALIZED (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John A. Ruggiero -- -- 80,001 59,999 $352,398 $75,102
Howard C. Salwen 170,001 $733,086 -- -- -- --
David J. McClure 57,917 $252,502 -- -- -- --
Kenneth J. Hamer Hodges -- -- 13,021 6,979 $ 66,082 $32,043
Surya R. Panditi -- -- 6,667 23,333 $ 4,167 $28,333
William B. Smith -- -- 2,140 111,816 -- $50,000
</TABLE>
(1) Amounts shown are calculated based upon the difference between the
closing price of the Common Stock on the date of exercise as reported by the
Nasdaq National Market and the exercise price of the options.
(2) Amounts shown are calculated on the basis of the difference between the
exercise price and the closing price of the Common Stock on August 27, 1995, as
reported by the Nasdaq National Market. These values have not been and may never
be realized by the named executives. Actual gains, if any, will depend on the
value of the Common Stock at the time of disposition, if any, of the shares. The
unexercised options indicated have, in some cases, been acquired over a number
of years of employment by the Company.
SEVERANCE AGREEMENTS
In connection with the resignation of Howard C. Salwen as President, Chief
Executive Officer and a Director of the Company on September 19, 1994, the
Company and Mr. Salwen entered into a Severance Agreement dated September 19,
1994 (the"Salwen Agreement"). The Salwen Agreement provides that Mr. Salwen will
serve as a consultant to the Company for a period of up to 18 months, in
exchange for consulting fees in the aggregate amount of $180,000, payable in 18
installments. In the event that prior to March 19, 1996, Mr. Salwen becomes
employed on a full-time basis, his engagement by the Company as a consultant
will terminate, and he will be entitled to receive a lump-sum payment for the
remaining balance of his unpaid consulting fees. The Salwen Agreement also
contains nondisclosure and noncompetition provisions binding upon Mr. Salwen.
The Stock Option Committee of the Company, pursuant to the provisions of the
1990 Stock Option Plan, authorized the extension of the termination date of
certain non-qualified stock options to purchase an aggregate of 50,000 shares of
the Company's common stock at an exercise price of $13.00 per share, granted to
Mr. Salwen in July 1994 under the Plan, so that such options would expire on
January 31, 1995, unless exercised prior to such date. Such options and other
non-qualified options to purchase an aggregate of 120,001 shares of Common
Stock, at exercise prices ranging from $3.75 to $15.50 per share, were exercised
by Mr. Salwen in accordance with their terms between September 19, 1994, and
January 31, 1995.
The following Compensation Committee Report and the Stock Performance Graph
on Page 7 shall not be deemed incorporated by reference by any general statement
incorporating by reference the proxy statement into any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934, except to the
extent that the Company specifically incorporates this information by reference,
and shall not otherwise be deemed filed under such Acts.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's executive compensation program is determined by the
Compensation Committee of the Board of Directors. The Compensation Committee
consists of the Company's non-employee directors. The Committee meets or takes
action as required during the year. A more complete description of the functions
of the Compensation Committee is set forth on Page 2 under the heading
"Election of Directors."
5
<PAGE> 8
COMPENSATION PHILOSOPHY. Under the direction of the Compensation Committee, the
executive compensation program of the Company has been designed to:
- Support a pay-for-performance policy that differentiates in compensation
amounts based on Company and individual performance;
- Motivate key senior officers to achieve Telco Systems' short-and
long-term strategic business initiatives and reward them for their achievement;
- Provide compensation opportunities that are comparable to those offered
by other leading companies in the telecommunications industry, thus allowing the
Company to compete for and retain talented executives who are critical to the
Company's long-term success; and
- Align the interests of executives with the long-term interests of
stockholders through award opportunities that can result in ownership of Common
Stock.
At present, the executive compensation program is comprised of base salary,
annual cash incentive opportunities, long-term incentive opportunities in the
form of stock options, and benefits typically offered to executives by
comparable high-technology corporations.
Consistent with the objectives of the compensation philosophy, the
percentage of an executive's potential total compensation that is based on
performance incentives increases with his level of responsibility. This results
in an executive's total compensation varying from year to year based on the
performance of the individual and the Company. In addition, executives' total
compensation is made dependent on the value of the Common Stock through
stock-based awards, thus aligning the compensation of executives with the
long-term interests of the stockholders of the Company.
FACTORS
Several important factors which were considered in establishing the
components of each executive officer's compensation package for the 1995 Fiscal
Year are summarized below. Additional factors may also be taken into account,
and the Committee may in its discretion apply entirely different factors,
particularly different measures of performance, in setting executive
compensation for future fiscal years. All compensation decisions are designed to
further the compensation philosophy indicated above.
BASE SALARY. Base compensation is established based on competitive market
rates, through comparisons with companies of similar size and complexity, at the
time the executive is first hired. Base compensation is reviewed from time to
time based on the executive officer's responsibilities and performance. When
establishing or reviewing base compensation levels for each executive officer,
the Committee considers numerous factors, including the qualifications of the
executive and the amount of relevant individual experience the officer brings to
the Company, strategic goals for which the executive officer has responsibility,
and competitive market rates.
INCENTIVE COMPENSATION. The Company's executive officers are eligible to
participate in an annual incentive compensation plan with awards based primarily
on achievement of financial targets or budgets and specific strategic business
objectives. Targeted awards for executive officers of the Company under this
plan are consistent with targeted awards of companies of similar size and
complexity to the Company. Actual awards are subject to decrease or increase on
the basis of the Company's performance and at the discretion of the Committee.
LONG-TERM INCENTIVE COMPENSATION. The Company has adopted the 1990 Stock
Option Plan (the "1990 Plan") and 1988 Non-Statutory Stock Option Plan (the
"1988 Plan") to provide executive officers and other key employees with
incentives to maximize long-term stockholder values. Awards under the 1990 Plan
can take a variety of forms, including non-statutory stock options and incentive
stock options. Awards under the 1988 Plan may only take the form of
non-statutory options. These incentives are designed to give the recipients a
significant equity stake in the Company and thereby closely align their
interests with those of the Company's stockholders. In the 1995 Fiscal Year, the
Compensation Committee granted options to Mr. Ruggiero, Mr. Panditi, and Dr.
Smith. The number of options granted to the respective executive officers
reflects the Compensation Committee's assessment of the particular officer's
level of responsibility and its desire to match the award level with the
executive's responsibility level.
C.E.O. COMPENSATION. The annual base compensation of the Company's Chief
Executive Officer is set based on competitive market rates, and the Committee's
review of the CEO's performance, consistent with the aforementioned philosophy.
In the 1995 Fiscal Year, a bonus was paid to Mr. Ruggiero based on the
achievement of certain assigned business objectives set by the Committee.
Upon his appointment to the position of CEO of the Company, Mr. Ruggiero's
annual base salary was increased 8.9% to $245,000, and his target payment level
under the Company's annual management incentive compensation plan was increased
by 10% to 70% of base salary. In addition, the Stock Option Committee of the
Company granted to Mr. Ruggiero a non-qualified option to purchase 50,000 shares
of Common Stock. During the remainder of the 1995 Fiscal Year, no changes were
made to Mr. Ruggiero's base salary.
6
<PAGE> 9
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162 (M)
Federal tax legislation enacted in 1993 prevents a publicly-held company
from taking a federal tax deduction for compensation paid to certain executive
officers, to the extent that such compensation exceeds $1 million in any year.
This limitation became effective August 29, 1994. At the 1994 Annual Meeting,
stockholders approved amendments to the Company's 1990 Stock Option Plan that
were intended to have the effect that any compensation deemed paid to an
executive officer in connection with his exercise of an outstanding option under
the 1990 Stock Option Plan would qualify as performance-based compensation which
is not subject to the $1 million limitation. The Compensation Committee will
continue to evaluate the impact of the foregoing federal tax legislation and
take such actions as it deems appropriate.
COMPENSATION COMMITTEE INTERLOCKS & INSIDER PARTICIPATION
No member of the Compensation Committee is a former or current officer or
employee of the Company or any of its subsidiaries, or a party to any other
relationship of a character required to be disclosed under Item 402(j) of
Regulation S-K promulgated by the Securities and Exchange Commission.
Compensation Committee
Dean C. Campbell
Steward S. Flaschen
Sheldon Horing
STOCK PERFORMANCE GRAPH
The following stock performance graph compares the yearly percentage change
in the cumulative total shareholder return of the Company's Common Stock with
the cumulative total return of the equity securities included in the Standard &
Poors 500 Stock Index and the Standard & Poors High Technology Index. The stock
performance graph assumes a $100 investment in each issuer on August 26, 1990,
and compares the market value of such investment (assuming reinvestment of
dividends, if any) as of the last day of each of the Company's five succeeding
fiscal years. The Company paid no dividends during the period shown.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG TELCO SYSTEMS, INC., THE S&P 500 INDEX AND A PEER GROUP
MADE UP OF THE COMPANIES IN THE S&P HIGH TECH COMPOSITE INDEX
[GRAPH POINTS PENDING]
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<PAGE> 10
SENIOR EXECUTIVE TERMINATION BENEFITS AND EMPLOYMENT AGREEMENTS
The Company entered into Senior Executive Termination Benefits Agreements
dated October 4, 1989, and March 6, 1995, respectively (the "Change-in-Control
Agreements"), with two executive officers, John A. Ruggiero and William B.
Smith. The Change-in-Control Agreements provide that in the event of (i) the
termination by the Company of the executive officer's employment within three
years after a change in control (as defined) of the Company (except for reasons
of death, disability or cause), or (ii) the termination by the officer within
three years after a change in control of the Company for specified reasons, such
officer will be entitled to termination benefits. The permissible reasons for
the executive officer to terminate his employment and receive termination
benefits include a substantial reduction in his duties and responsibilities, a
reduction in his compensation or benefits package, failure of the Company to
obtain an assumption of the Change-in-Control Agreement by the Company's
successor, failure of the Company or its stockholders to re-elect the officer to
his former position or any material breach by the Company of the Agreement.
The termination benefits to which the executive officer is entitled include
a lump sum payment of (i) one and one-half times the officer's annual base
salary at the time of termination, plus (ii) the equivalent of the highest
incentive compensation award paid or payable under the Company's Management
Incentive Compensation Plan, or otherwise paid or payable to the executive by
the Company as an incentive compensation award, for any consecutive 12-month
period during the three years prior to the termination date. In addition, the
officer would be entitled to purchase his Company automobile, to continue to
participate at no cost to him for up to 18 months after termination in various
benefit programs maintained by the Company prior to the termination, to
acceleration of the vesting of all of his outstanding stock options, and to the
payment of any additional tax liabilities arising under Sections 280G or 4999 of
the IRC as a result of termination payments under the Agreement. None of the
foregoing benefits would be affected or reduced if the officer were to obtain
new employment after his termination by the Company.
The Change-in-Control Agreements were approved by the Board as reasonable
termination compensation for the executives in order to encourage management to
remain with the Company and to continue to devote full attention to the
Company's business in the event of a threatened change in control of the
Company.
At the time of his joining the Company, the Company entered into a letter
agreement with Dr. Smith, dated February 2, 1995, which provides, among other
things, for severance payments of up to 150% of his annual salary if he is not
appointed to the office of Chief Executive Officer of the Company by March 31,
1996, and if he thereafter voluntarily terminates his employment on or before
May 31, 1996.
The Company has also entered into an Employment and Consulting Agreement
with Mr. Ruggiero, dated March 15, 1995, which provides that if prior to August
25, 1996, his employment is terminated by the Company (other than for cause), or
if his responsibilities as Chief Executive Officer are changed without his
consent (other than by reason of his election to the office of Chairman of the
Board), he will be entitled to certain severance benefits. In addition,
following any termination of his employment (other than for cause), or his
voluntary resignation from such employment, Mr. Ruggiero will serve as a
consultant to the Company for a period of not less than two years. The severance
benefits would amount to approximately 150% of Mr. Ruggiero's annual salary at
the time of termination. The total consulting payments during the minimum
two-year consulting term would amount to approximately 100% of such annual
salary. In addition, Mr. Ruggiero will receive for each year during the term of
the consulting arrangement an amount equal to 25% of the annual bonus that would
otherwise have been payable to him under the Company's Management Incentive Plan
for the fiscal year in which his employment terminated. He is also entitled
under the agreement to continuation of certain benefits pursuant to the
Company's health, life insurance and employee stock option plans.
CERTAIN TRANSACTIONS
Steward S. Flaschen, Chairman of the Company's Board of Directors, is also
Chairman of the Board of TranSwitch Corporation ("TranSwitch"), one of several
suppliers of components and design and fabrication services to the Company.
Payments by the Company to TranSwitch for such items in the 1995 Fiscal Year
totaled $313,380.
APPROVAL OF AMENDMENTS TO 1990 STOCK OPTION PLAN
AMENDMENT OF 1990 PLAN
The 1990 Plan was originally approved by the stockholders of the Company in
December 1990. The Board of Directors has amended the 1990 Plan as set forth
below and proposes that certain of such amendments be approved by the
stockholders. On November 16, 1995, the Plan was amended to increase the number
of shares of Common Stock covered by the 1990 Plan from 1,500,000 to 1,850,000.
Stockholder approval of this amendment is necessary
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<PAGE> 11
pursuant to the 1990 Plan and under rules of the National Association of
Securities Dealers applicable to issuers of NASDAQ National Market securities
in connection with option plans.
On October 11, 1995, the Board of Director also amended the 1990 Plan to
modify the timing of annual, non- discretionary grants of non-qualified options
to non-employee directors. This amendment does not extend or enlarge the type or
amount of benefits available to participants in the Plan and does not require
shareholder approval. Accordingly, this amendment is not being submitted for
consideration at the Annual Meeting.
DESCRIPTION OF THE 1990 PLAN AS AMENDED
The following description of certain features of the 1990 Plan is intended to be
a summary only. The summary is qualified in its entirety by the full text of the
1990 Plan which will be made available to any stockholder requesting it in
writing.
The 1990 Plan provides for the grant of incentive and non-qualified stock
ptions to officers, employees and directors of, and other persons providing
services to, the Company and its subsidiaries. The Plan, as amended, is
administered by a committee (the "Committee") consisting of at least two
"Outside Directors." An "Outside Director" means any director who (i) is not an
officer or employee of the Company or of any "affiliated group," as such term is
defined in Section 1504(a) of the Internal Revenue Code of 1986, as amended,
which includes the Company (an "Affiliate"), (ii) is not a former employee of
the Company or any Affiliate who is receiving compensation for prior services
(other than benefits under a tax-qualified retirement plan) during the Company's
or any Affiliate's taxable year, (iii) has not been an officer of the Company or
any Affiliate and (iv) does not receive remuneration from the Company or any
Affiliate, either directly or indirectly, in any capacity other than as a
director. It is the intention of the Company that the Plan shall be administered
by "disinterested persons" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934 (the "Exchange Act").
Subject to adjustment for stock splits, stock dividends and similar events,
the total number of shares of Common Stock with respect to which awards may be
granted under the 1990 Plan, as amended, is 1,850,000. The closing price of the
Company's Common Stock on November 24, 1995, as reported by the Nasdaq National
Market, was $9.875 per share. From August 29, 1994, to November 24, 1995,
non-qualified options to purchase an aggregate of 477,956 shares of Common
Stock, at a weighted average exercise price of $12.235 per share, have been
granted under the 1990 Plan, of which options to purchase an aggregate of
265,956 shares, at a weighted average exercise price of $12.15 per share, were
granted to officers and directors. At November 24, 1995, only 90,879 shares
remain available for grant under the 1990 Plan, therefore, the stockholders are
being asked to approve an additional 350,000 shares.
The 1990 Plan permits the granting of (i) options to purchase Common Stock
intended to qualify as incentive stock options ("Incentive Options") under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
(ii) options that do not so qualify ("Non-Qualified Options"). The option
exercise price of each option is determined by the Committee but may not be less
than 100% of the fair market value of the shares on the date of grant.
The term of each option is fixed by the Committee and may not exceed 10
years from date of grant in the case of an Incentive Option. The Committee
determines at what time or times each option may be exercised and, subject to
the provisions of the 1990 Plan, the period of time, if any, after death,
disability or termination of employment during which options may be exercised.
Options may be made exercisable in installments, and the exercisability of
options may be accelerated by the Committee. Under the Plan, as amended, awards
of options to purchase an aggregate maximum of not more than 100,000 shares of
Common Stock may be granted to any person in any fiscal year. The exercise price
of options granted under the 1990 Plan may be paid in cash or, with the consent
of the Committee, in shares of Common Stock. To qualify as Incentive Options,
options must meet additional requirements, including a $100,000 per year
limitation on the value of shares subject to Incentive Options which first
become exercisable in any one year, and a maximum 5-year term and exercise price
of at least 110% of fair market value in the case of greater-than-10%
stockholders.
The 1990 Plan also provides for non-discretionary grants of Non-Qualified
Options to non-employee directors of the Company ("Non-Employee Directors"). On
the first business day following the Company's Annual Meeting of Stockholders
or, if the Annual Meeting has not been held by the last business day of March in
any year, then on the last business day of March in such year (the "Grant
Date"), (i) any Non-Employee Director who was elected a director by the
stockholders of the Company for the first time at the most recent annual meeting
of stockholders is, without any action of the Committee, granted a Non-Qualified
Option to purchase 5,000 shares of the Common Stock, and (ii) each Non-Employee
Director (including, if applicable, any Non-Employee Director referred to in
clause (i) above) is, without any action of the Committee, granted a
Non-Qualified Option to purchase a number of
9
<PAGE> 12
shares of the Common Stock equal to the largest whole number resulting from the
product of 10,000 multiplied by a fraction, the numerator of which shall be the
number of days such Non-Employee Director served as a director of the Company
during the period ending on the Grant Date and beginning on the calendar day
following the Grant Date in the immediately preceding calendar year, and the
denominator of which is the number of days in such period. Each such option is
for a term of ten years and vests over a period of four years from the date of
grant.
The Board of Directors may at any time amend or discontinue the 1990 Plan
and the Committee may at any time amend or cancel outstanding awards (or provide
substitute awards at the same or a reduced exercise or purchase price) for the
purpose of satisfying changes in the law or for any other lawful purpose. Among
other things, the Committee has the authority to accelerate the exercisability
or vesting of an option or extend the period for exercise of an option.
If the 1990 Plan, as amended, is approved by the stockholders of the
Company, the Company intends to file a registration statement of Form S-8
covering the additional shares of Common Stock issuable pursuant to the 1990
Plan, and upon the effectiveness of such registration statement all such shares
will be, when issued, eligible for resale in the public market.
FEDERAL TAX ASPECTS OF THE 1990 PLAN
The following is a summary of the principal Federal income tax consequences
of transactions under the 1990 Plan. It does not describe all Federal tax
consequences under the 1990 Plan, nor does it describe state or local tax
consequences.
Incentive Options. No taxable income is realized by an optionee upon the
grant or exercise of an Incentive Option. If shares issued to an optionee
pursuant to the exercise of an Incentive Option are not sold or transferred
within two years from the date of grant or within one year after the date of
exercise, then (a) upon sale of such shares, any amount realized in excess of
the option price (the amount paid for the shares) will be taxed to the optionee
as a long-term capital gain and any loss sustained will be a long-term capital
loss, and (b) there will be no deduction for the Company for Federal income tax
purposes. The exercise of an Incentive Option will give rise to an item of tax
preference that may result in alternative minimum tax liability for the
optionee.
If shares of Common Stock acquired upon the exercise of an Incentive Option
are disposed of prior to the expiration of the two-year and one-year holding
periods described above (a "disqualifying disposition"), generally (a) the
optionee will realize ordinary income in the year of disposition in an amount
equal to the excess (if any) of the fair market value of the shares at exercise
(or, if less, the amount realized on a sale of such shares) over the option
price thereof, and (b) the Company will be entitled to deduct such amount.
Special rules apply where all or a portion of the exercise price of the
Incentive Option paid by tendering shares of Common Stock.
If an Incentive Option is exercised at a time when it no longer qualifies
for the tax treatment described above, the option is treated as a Non-Qualified
Option. Generally, an Incentive Option will not be eligible for the tax
treatment described above if it is exercised more than three months following
termination of employment (or one year in the case of termination of employment
by reason of disability).
Non-Qualified Options. With respect to Non-Qualified Options under the 1990
Plan, no income is realized by the optionee at the time of the option is
granted. Generally, (a) at exercise, ordinary income is realized by the optionee
in an amount equal to the difference between the option price and the fair
market value of the shares on the date of exercise, and the Company receives a
tax deduction for the same amount, and (b) at disposition of the shares acquired
upon exercise, appreciation or depreciation after the date of exercise is
treated as either short-term or long-term capital gain or loss depending on how
long the shares have been held.
NEW PLAN BENEFITS
The Company is unable to determine the dollar value and number of options
or other benefits or amounts, if any, which will be received by or allocated to
(i) any of the named executive officers, (ii) the current executive officers (as
a group), (iii) the current directors who are not executive officers (as a
group), as a result of the amendments to the 1990 Plan. The amendments to the
1990 Plan, if they had been effective during the 1995 Fiscal Year, would not
have affected the dollar value or number of options or other benefits or amounts
received by or allocated to such persons during such fiscal year.
If a quorum is present at the Annual Meeting, the vote of a majority of the
shares of Common Stock present or represented and entitled to vote at the Annual
Meeting will be necessary to approve the 1990 Plan, as amended.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO APPROVE
THE 1990 PLAN, AS AMENDED.
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<PAGE> 13
VOTING SECURITIES AND PRINCIPAL STOCKHOLDERS
The Company's only issued and outstanding class of voting securities is the
Common Stock. At the close of business on November 24, 1995, there were
10,265,236 shares of Common Stock issued and outstanding.
The following table sets forth certain information as of November 24, 1995,
regarding securities ownership by (i) each person known by the Company to own
beneficially more than 5% of the Common Stock, (ii) each director and each
nominee for director individually, (iii) by each executive officer named in the
Summary Compensation Table on Page 3 and (iv) all executive officers and
directors as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED (1)
---------------------------------
NAME OF STOCKHOLDER NUMBER PERCENT OF CLASS
- --------------------------------------------------------------------------------
<S> <C> <C>
Kopp Investment Advisors 3,950,796 (2) 39.2%
6600 France Avenue South
Suite 672, Edina, MN 55435
FMR Corp. 672,700 (3) 7.0%
82 Devonshire Street
Boston, MA 02109
Dimensional Fund Advisors, Inc. 483,700 (4) 5.0%
1299 Ocean Avenue
Santa Monica, CA 90401
John A. Ruggiero* 94,146 (5) .9%
Steward S. Flaschen* 74,000 (6) .7%
Dean C. Campbell* 44,500 (7) .4%
William B. Smith* 29,426 (8) .3%
Kenneth J. Hamer Hodges 15,516 (9) .2%
Surya R. Panditi 11,875 (10) .1%
David J. McClure 100 (11) --
Howard C. Salwen 1,000 (12) --
Sheldon Horing* -- (13) --
All executive officers and directors
as a group (14 persons) 279,633 (14) 2.7%
</TABLE>
*Nominee for director. Each director is currently a director.
(1) The persons named in the table have sole voting power and investment
power with respect to all shares of Common Stock shown as beneficially owned by
them, subject to community property laws where applicable and the information
contained in the footnotes to this table. All share amounts shown in this table
include shares acquirable upon exercise of stock options exercisable within 60
days of the date of this table. The percent of class has been determined in
accordance with Rule 13d-3 promulgated under the Exchange Act. Information about
greater-than-5% stockholders of the Company is based on filings on Schedule 13G
or 13D provided to the Company by the reporting entities.
(2) Kopp Investment Advisors, Inc., ("Kopp"), a registered investment
advisor, has filed an amended report on Schedule 13G as of June 30, 1995, in
which it states that it has sole voting power with respect to 125,000 shares and
shared dispositive power with respect to 3,825,796 shares for an aggregate
beneficial ownership of 3,950,796 shares of the Company's Common Stock. The
beneficial ownership includes shares with respect to which Kopp Investment
Advisors, Inc. ("KIA"), Kopp Investment Advisors, Inc., Profit Sharing Plan
("the KIA Plan"), the LeRoy C. Kopp Individual Retirement Account, the Caring
and Sharing Foundation, and LeRoy C. Kopp individually have sole voting power or
shared dispositive power. Of such shares, 3,842,296 are held in a fiduciary or
representative capacity for the benefit of persons other than those named above.
LeRoy C. Kopp is sole trustee of the KIA Plan and controls KIA, the Caring and
Sharing Foundation, and his individual retirement account.
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<PAGE> 14
(3) FMR Corp., has filed a report on Schedule 13G as of December 31, 1994,
in which it states that it has sole dispositive power and beneficial ownership
with respect to 672,700 shares of the Company's Common Stock.
(4) Dimensional Fund Advisors, Inc. ("Dimensional"), a registered
investment advisor, is deemed to have beneficial ownership of 483,700 shares of
the Company's Common Stock as of December 31, 1994, all of which shares are held
in portfolios of DFA Investment Dimensions Group, Inc., a registered open-end
investment company, or in a series of the DFA Investment Trust Company, a
Delaware business trust, or the DFA Group Trust and DFA Participation Group
Trust, investment vehicles for qualified employee benefit plans, all of which
Dimensional Fund Advisors, Inc., serves as investment manager. Dimensional
disclaims beneficial ownership of all such shares.
(5) Includes 3,000 shares held indirectly by Mr. Ruggiero in his wife's
name and 91,146 shares acquirable upon exercise of stock options.
(6) Includes 5,458 shares held indirectly by Dr. Flaschen and 68,542 shares
acquirable upon exercise of stock options.
(7) Represents 44,500 shares acquirable upon exercise of stock options by
Mr. Campbell.
(8) Includes 5,000 shares held directly by Dr. Smith and 24,426 acquirable
upon exercise of stock options.
(9) Includes 412 shares held directly by Mr. Hamer Hodges and 15,104
acquirable upon exercise of stock options.
(10) Includes 1,250 shares held directly by Mr. Panditi and 10,625
acquirable upon exercise of stock options.
(11) Represents 100 shares held directly by Mr. McClure.
(12) Represents 1,000 shares held directly by Mr. Salwen.
(13) If re-elected at the Annual Meeting, Dr. Horing will be granted options
to purchase 12,205 shares as provided for under the 1990 Stock Option Plan (see
Page 3, Directors' Compensation for details).
(14) Includes 279,633 shares acquirable upon exercise of stock options by
all executive officers and directors as a group (14 persons).
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of the Company's Common Stock, to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater-than-10% stockholders are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file.
Based solely upon a review of such forms furnished to the Company or
written representations that no Form 5 was required, the Company believes that
during the 1995 Fiscal Year all Section 16(a) filing requirements applicable to
its officers, directors and greater-than-10% stockholders were complied with,
except that the initial report on Form 3 of C. G. Waters, upon his becoming an
officer of the Company, was filed late.
RATIFICATION OF SELECTION OF AUDITORS
Ernst & Young is the Company's independent certified public accounting
firm. The firm has served as independent certified public accountants for the
Company since 1982. Representatives of Ernst & Young are expected to be present
at the stockholders' meeting, at which they may make a statement if they desire
to do so and will be available to respond to appropriate questions.
This matter is not required to be submitted for stockholder approval, but
the Board of Directors has elected to seek ratification of its selection of
independent certified public accountants by the affirmative vote of the holders
of a majority of the shares present and voting at the meeting. Management has
not determined what action it will take in the event the stockholders do not
ratify the selection of Ernst & Young.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR RATIFICATION OF ERNST &
YOUNG AS THE COMPANY'S INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.
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<PAGE> 15
PROPOSALS BY STOCKHOLDERS
Proposals by stockholders of the Company intended to be presented at the
next annual meeting must be received by the Company on or before July 13, 1996,
to be considered for inclusion in the Company's proxy statement and form of
proxy relating to that meeting.
EXPENSES OF SOLICITATION
The expense of preparing, assembling, printing and mailing the forms of
proxy and the material used in the solicitation of proxies will be paid by the
Company. In addition to the solicitation of proxies by use of the mails, special
solicitation of proxies may, in certain instances, be made personally or by
telephone or telegram by officers, directors, and regular employees of the
Company, or by BancBoston State Street Investor Services, the Company's transfer
agent. It is expected that the expense of such special solicitation will be
nominal. Arrangements will also be made for the forwarding of soliciting
material by nominees, custodians and fiduciaries to their principals. All
expenses incurred in connection with this solicitation will be borne by the
Company.
OTHER MATTERS
Management knows of no other matters that will be brought before the
meeting. If, however, any other matters are properly presented, the proxies
solicited hereby will be voted in accordance with the judgment of the persons
holding such proxies.
Norwood, Massachusetts
December 11, 1995
13
<PAGE> 16
PROXY
TELCO SYSTEMS, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR
ANNUAL MEETING OF STOCKHOLDERS
The undersigned hereby appoints JOHN A. RUGGIERO and WILLIAM B. SMITH,
or either of them, each with power of substitution and revocation, as the proxy
or proxies of the undersigned to represent the undersigned and vote all shares
of the Common Stock of TELCO SYSTEMS, INC., that the undersigned would be
entitled to vote if personally present at the Annual Meeting of Stockholders of
TELCO SYSTEMS, INC., to be held at Bank of Boston, 100 Federal Street, 35th
Floor, Boston, Massachusetts, on Wednesday, January 24, 1996, at 10:00 a.m.,
and at any adjournments thereof, upon the matters set forth on the reverse side
and more fully described in the Notice and Proxy Statement for said Meeting and
in their discretion upon all other matters which may properly come before said
Meeting.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE
SIDE
<PAGE> 17
/X/ PLEASE MARK VOTES AS IN THIS EXAMPLE.
THE SHARES COVERED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE CHOICES
MADE. WHEN NO CHOICE IS MADE, THIS PROXY WILL BE VOTED FOR ALL LISTED NOMINEES
FOR DIRECTOR AND FOR PROPOSALS 2 AND 3.
1. Election of Directors.
NOMINEES: Dean C. Campbell, Steward S. Flaschen, Sheldon Horing, John A.
Ruggiero, and William B. Smith.
FOR / / WITHHELD / /
MARK HERE IF YOU PLAN TO ATTEND THE MEETING / /
MARK HERE FOR ADDRESS CHANGE AND NOTE BELOW / /
/ /
--------------------------------------
For all nominees except as noted above
2. To approve the amendment of the Company's 1990 Stock Option Plan to increase
by 350,000 the number of shares covered by the Plan.
FOR / / AGAINST / / ABSTAIN / /
3. To ratify the selection of Ernst & Young LLP as certified public accountants
for the Company.
FOR / / AGAINST / / ABSTAIN / /
4. With discretionary authority on such other matters as may properly come
before the meeting.
The Annual Meeting may be held as scheduled only if a majority of the shares
outstanding are represented at the meeting by attendance or proxy. Accordingly,
please complete this proxy, and return it promptly in the enclosed envelope.
Please date and sign exactly as your name(s) appear on your shares. If signing
for estates, trusts or corporations, your title or capacity should be stated.
If shares are held jointly, each holder should sign.
Signature: Date
------------------------- -----------
Signature: Date
------------------------- -----------
