Telco Systems Logo
TELCO SYSTEMS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JANUARY 22, 1997
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 22, 1997, at 10:00 a.m.
local time, for the following purposes:
1. 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 450,000 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 25,
1996, 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 12, 1996
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.
PROXY STATEMENT
TELCO SYSTEMS, INC.
Annual Meeting of Stockholders
January 22, 1997
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 22, 1997,
and at any adjournment thereof.
Only holders of record of the Company's common stock, $.01 par value
("Common Stock"), on November 25, 1996, will be entitled to notice of and to
vote at the meeting. At the close of business on November 25, 1996,
10,692,296 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 12, 1996.
ANNUAL REPORT TO STOCKHOLDERS
The Company's Annual Report for the fiscal year ended August 25, 1996
(the "1996 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.
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
- --------------------------------------------------------------
<S> <C> <C>
Mr. Dean C. Campbell 46 1989
Dr. Steward S. Flaschen 70 1986
Dr. Sheldon Horing 60 1995
Mr. John A. Ruggiero 60 1988
Dr. William B. Smith 52 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., SIPEX Corporation, 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 Vice Chairman of the Board in March 1996.
He also served as Chief Executive Officer of the Company from September 1994
to March 1996 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 appointed President and Chief Executive Officer in March
1996. Dr. Smith was elected to the Board of Directors of the Company in
February 1994 and also served as President and Chief Operating Officer from
March 1995 to March 1996. 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 at AT&T's Bell
Laboratories.
The Company's Audit Committee, established by the Board of Directors,
met twice during the 1996 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
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.
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 (the "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 Compensation Committee met ten times during
the 1996 Fiscal Year. 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 1996 Fiscal Year was
twelve. 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.
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 1996 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, and
Dr. Horing, 12,205 shares. All such options were at an exercise price of
$11.375 per share, the fair market value of the Common Stock on January 25,
1996, the date of grant. If each of the non-employee nominees is re-elected
at the Annual Meeting, he will on January 23, 1997, 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, 5,000 shares; Dr. Flaschen,
5,000 shares; and Dr. Horing, 10,000 shares.
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
1996 Fiscal Year, and (ii) each of the four other most highly compensated
executive officers of the Company whose salary and bonus exceeded $100,000
during the 1996 Fiscal Year.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------------- -----------------
Awards Securities
Other Annual Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($)(1) Compensation ($) Options/SARs (#) Compensation ($)(2)
- --------------------------- ---- ---------- ------------ ---------------- ---------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
William B. Smith (3) 1996 $242,963 $111,677 -- 100,000 $7,746
President and Chief 1995 $106,154 $ 50,000 $55,498 (8) 113,956 (9) $ 533
Executive Officer
John A. Ruggiero (4) 1996 $244,432 $109,631 -- 25,000 $7,405
Vice Chairman and 1995 $253,086 $ 54,851 -- 50,000 $5,997
Chief Financial Officer 1994 $230,933 $163,766 -- 25,000 $7,304
C.G. (Bill) Waters (5) 1996 $211,564 $ 31,560 -- 4,000 $ --
Vice President, Global Sales 1995 $149,808 $ 20,227 -- 15,000 $ --
Kenneth J. Hamer Hodges 1996 $163,144 $ 39,718 -- -- $4,511
Vice President, 1995 $173,420 $ 26,386 -- -- $4,643
Chief Technical Officer
Anand S. Parikh (6) 1996 $141,519 $ 53,114 -- 17,000 $2,375
Vice President, Marketing & 1995 $ 39,500 $ 15,000 -- 15,000 $ --
Business Development
Wayne R. Lasson (7) 1996 $132,471 $ 47,813 $57,530 62,500 $3,727
Group Vice President &
General Manager
<F1> 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."
<F2> "All Other Compensation" for the 1996 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: Dr. Smith ($7,008); Mr. Ruggiero ($5,130); Mr.
Waters ($ 0); Mr. Hamer Hodges ($4,511); Mr. Parikh ($2,375); Mr.
Lasson ($2,680) and (ii) premium payments under life insurance
policies for the benefit of the executives at the following
incremental costs to the Company: Dr. Smith ($738); Mr. Ruggiero
($2,275).
<F3> Dr. Smith was named to the additional position of Chief Executive
Officer in March 1996. In March 1995, Dr. Smith was named President
and Chief Operating Officer.
<F4> Mr. Ruggiero was named to the position of Vice Chairman of the Board
of Directors in March 1996. He retains the position of Chief
Financial Officer to which he was appointed in December 1986.
<F5> Mr. Waters became an executive officer when he was named Vice
President, Corporate Sales in May 1995. (In June 1996, Mr. Waters was
named Vice President, Global Sales.)
<F6> Mr. Parikh became an executive officer when he joined the Company in
May 1995 and was named Vice President, Marketing and Business
Development.
<F7> Mr. Lasson became an executive officer when he joined the Company in
November 1995 and was named Group Vice President and General Manager.
<F8> This amount includes $31,357 for moving expenses in connection with
Dr. Smith's hiring and relocation to Norwood, Massachusetts.
<F9> Amount shown includes stock options for 13,956 shares awarded to Dr.
Smith on a non-discretionary basis in connection with his service as a
non-employee director prior to March 1995.
</TABLE>
Stock Options and SAR Grants in Last Fiscal Year
The table below sets forth certain information with respect to stock
options granted during the 1996 Fiscal Year to the executive officers named
in the Summary Compensation Table above.
<TABLE>
<CAPTION>
Individual Grants
-------------------------
Number of % of Total
Securities Options/ Potential Realizable
Underlying SARs Value at Assumed
Options/ Granted to Exercise Annual Rates of Stock
SARs Employees in or Base Price Appreciation
Granted Fiscal Price Expiration for Option Term
Name (#) Year ($/Sh) Date 5%($)(1) 10%($)(1)
- ---- ---------- ------------ -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
William B. Smith 30,000 5.55% $ 9.625 12/13/05 $181,593 $460,193
20,000 3.70% $10.500 01/24/06 $132,068 $334,686
50,000 9.26% $10.250 03/26/06 $322,309 $816,793
John A. Ruggiero 25,000 4.63% $10.250 03/26/06 $161,154 $408,397
C. G. (Bill) Waters 4,000 0.74% $10.250 03/26/06 $ 25,785 $ 65,343
Kenneth J. Hamer Hodges -- -- -- -- -- --
Anand S. Parikh 5,000 0.93% $13.250 09/12/05 $ 41,664 $105,585
5,000 0.93% $ 9.625 12/13/05 $ 30,266 $ 76,699
7,000 1.30% $13.750 07/24/06 $ 60,531 $153,398
Wayne R. Lasson 50,000 9.26% $ 9.625 12/13/05 $302,656 $766,989
12,500 2.31% $13.625 05/15/06 $107,109 $271,434
<F1> The amounts set forth represent the difference between (a) the
appreciated value of the shares subject to the option immediately
prior to its expiration, at the assumed rates of stock price
appreciation set forth, compounded annually, less (b) the exercise
price of the option. There can be no assurance that the value of the
Company's securities will appreciate at the assumed rates, or at any
other rate. Actual gains, if any, on stock option exercises
are dependent on the future performance of the Company's Common Stock
and other factors such as the general condition of the stock markets
and the timing of the exercises of the options.
</TABLE>
Aggregate Option/SAR Exercises In Last Fiscal Year And
Fiscal Year End Option/SAR Values
The following table summarizes for each of the named executive
officers the number of stock options, if any, exercised during the 1996
Fiscal Year, the aggregate dollar value realized upon such exercise, the
total number of unexercised options held at August 25, 1996, and the
aggregate dollar value of in-the-money unexercised options held at August
25, 1996. None of the named executive officers held or exercised any SARs
during the 1996 Fiscal Year.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised in-the-Money Options/SARs
Shares Options/SARs at Fiscal Year End (#) at Fiscal Year End ($) (2)
Acquired on Value ----------------------------------- ----------------------------
Name Exercise (#) Realized (1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William B. Smith -- -- 48,962 164,994 $162,971 $663,279
John A. Ruggiero -- -- 104,584 60,416 $689,170 $223,956
C. G. (Bill) Waters -- -- 14,000 19,000 $ 74,813 $ 95,688
Kenneth J. Hamer Hodges -- -- 18,021 1,979 $144,677 $ 13,449
Anand S. Parikh -- -- 6,042 25,958 $ 26,551 $ 90,700
Wayne R. Lasson -- -- 8,333 54,167 $ 43,748 $234,377
<F1> 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.
<F2> Amounts shown are calculated on the basis of the difference between
the exercise price and the closing price of the Common Stock on
August 25, 1996, 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.
</TABLE>
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."
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 1996
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, specific
strategic business objectives, and predetermined individual 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 or individual'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 1996
Fiscal Year, the Compensation Committee granted options to Dr. Smith, Mr.
Ruggiero, Mr. Waters,Mr. Parikh, and Mr. Lasson. 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.
Chief Executive Officer 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 1996 Fiscal Year, a bonus was paid to
Dr. Smith based on the achievement of certain assigned business and
individual objectives set by the Committee.
Upon his appointment to the position of CEO of the Company, the
Compensation Committee of the Company granted to Dr. Smith a non-qualified
option to purchase 50,000 shares of Common Stock. During the remainder of
the 1996 Fiscal Year, no changes were made to Dr. Smith's base salary.
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.
Stock Option and 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 Index and the Standard & Poors Technology Sector
Index. The stock performance graph assumes a $100 investment in each issuer
on August 25, 1991, 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 TECHNOLOGY SECTOR INDEX
<TABLE>
<CAPTION>
8/25/91 8/30/92 8/29/93 8/28/94 8/27/95 8/25/96
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
TELCO SYSTEMS, INC. $100 $ 36 $ 52 $ 73 $ 74 $ 93
PEER GROUP $100 106 127 164 255 278
S & P 500 $100 108 124 131 159 189
</TABLE>
Senior Executive Termination Benefits and Employment Agreements
The Company has 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.
The Company has entered into a Restated Employment and Consulting
Agreement with John A. Ruggiero, dated March 26, 1996, which provides that
he will be employed on a full-time basis until January 1, 1997. Upon the
termination of such employment, he will serve as a consultant to the Company
for a period of not less than two years. In the event that his employment is
terminated by the Company prior to such date without cause, or by reason of
his death or disability, Mr. Ruggiero or his legal representative will
receive severance benefits amounting to approximately 150% of his annual
salary at the time of termination. During the minimum two-year consulting
term, Mr. Ruggiero will receive consulting fees at the rate of $165,375 per
year of which the first year's installment shall be payable in advance and
the remainder shall be payable monthly. He is also entitled under the
agreement to the use of an office in Boston, Massachusetts, and 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 1996
Fiscal Year totaled $429,034.
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 5, 1996, the Plan was amended by the Board
of Directors to increase the number of shares of Common Stock covered by the
1990 Plan from 1,850,000 to 2,300,000. Stockholder approval of this
amendment is necessary 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 November 5, 1996, the Board of Director also amended the 1990 Plan
to (i) state that it is the intention of the Company that the Plan shall be
administered by "Non-Employee Directors" within the meaning of Rule 16b-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
(ii) increase the portion of the total number of shares issuable under the
Plan that may be subject to non-discretionary options granted to Non-
Employee Directors from 150,000 to 325,000, (iii) modify the formula under
which annual, non-discretionary grants of non-qualified options are made to
Non-Employee Directors, with the general effect of reducing the number of
shares as to which such options may be granted to those Non-Employee
Directors currently in office, and (iv) eliminate certain restrictions on
the Board's authority to modify the formula provisions of the Plan relating
to grants of non-discretionary options to Non-Employee Directors. These
amendments, which do not extend or enlarge the type or amount of benefits
available to participants in the Plan, do not require shareholder approval.
Accordingly, these additional amendments are 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, as
amended, is intended to be a summary only. The summary is qualified in its
entirety by the full text of the 1990 Plan, as amended, 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 options 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 of the Board of Directors (the
"Committee") consisting of at least two "Outside Directors." An "Outside
Director" means a 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 "Non-Employee Directors" 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, prior to the amendment described herein, is 1,850,000.
At November 25, 1996, only 2,391 shares would have been available for grant
under the 1990 Plan. Therefore, stockholders are being asked to approve the
amendment of the 1990 Plan to include an additional 450,000 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 closing price of the Company's Common Stock on November 25,
1996, as reported by the Nasdaq National Market, was $17.8125 per share.
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 10,000 shares of
Common Stock, (ii) each Non-Employee Director elected prior to January 22,
1997 who holds Non-Qualified Options to purchase fewer than 50,000 shares of
Common Stock is, without any action of the Committee, granted a Non-
Qualified Option to purchase 10,000 shares of Common Stock, and (iii) each
other Non-Employee Director is, without any action of the Committee, granted
a Non-Qualified Option to purchase 5,000 shares of Common Stock. 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 any of the named executive officers or the current executive
officers (as a group) as a result of the amendments to the 1990 Plan. The
number of shares of Common Stock as to which the Company's Non-Employee
Directors will be granted non-discretionary options under the 1990 Plan in
the Company's 1997 fiscal year are set forth above under "Election of
Directors -- Directors' Compensation." The amendments to the 1990 Plan, if
they had been effective during the 1996 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, except that the
number of shares of Common Stock as to which the Company's Non-Employee
Directors were granted non-discretionary options would have been reduced to
the following: Mr. Campbell, 5,000 shares; Dr. Flaschen, 5,000 shares; and
Dr. Horing, 10,000 shares.
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.
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 25, 1996, there
were 10,692,296 shares of Common Stock issued and outstanding.
The following table sets forth certain information as of November 25,
1996, 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 4,341,496 (2) 40.6%
6600 France Avenue South
Suite 672, Edina, MN 55435
William B. Smith* 80,417 (3) **
John A. Ruggiero* 80,396 (4) **
Steward S. Flaschen* 74,792 (5) **
Dean C. Campbell* 54,292 (6) **
Kenneth J. Hamer Hodges 19,683 (7) **
C. G. (Bill) Waters 7,876 (8) **
Anand S. Parikh 7,000 (9) **
Wayne R. Lasson 5,209 (10) **
Sheldon Horing* 2,797 (11) **
All executive officers and
directors as a group (11 persons) 336,212 (12) 3.1%
<F*> Nominee for director. Each director is currently a director.
<F**> Less than 1.0%
<F1> 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.
<F2> Kopp Investment Advisors, Inc., ("Kopp"), a registered investment
advisor, has filed a report on Schedule 13G as of February 7, 1996, in
which it states that it has sole voting power with respect to 125,000
shares and shared dispositive power with respect to 4,216,496 shares
for an aggregate beneficial ownership of 4,341,496 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, 4,235,496 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.
<F3> Includes 5,002 shares held directly by Dr. Smith and 75,415 acquirable
upon exercise of stock options.
<F4> Includes 3,000 shares held indirectly by Mr. Ruggiero in his wife's
name and 77,396 shares acquirable upon exercise of stock options.
<F5> Includes 19,375 shares held indirectly by Dr. Flaschen and 55,417
shares acquirable upon exercise of stock options.
<F6> Represents 54,292 shares acquirable upon exercise of stock options by
Mr. Campbell.
<F7> Includes 829 shares held directly by Mr. Hamer Hodges and 18,854
acquirable upon exercise of stock options.
<F8> Represents 7,876 shares acquirable upon exercise of stock options by
Mr. Waters.
<F9> Represents 7,000 shares acquirable upon exercise of stock options by
Mr. Parikh.
<F10> Represents 5,209 shares acquirable upon exercise of stock options by
Mr. Lasson.
<F11> Represents 2,797 shares acquirable upon exercise of stock options by
Dr. Horing.
<F12> Includes 336,212 shares acquirable upon exercise of stock options by
all executive officers and directors as a group (11 persons).
</TABLE>
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 1996 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 Wayne Lasson,
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.
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 August
14, 1997, 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 Bank of Boston c/o Boston EquiServe, 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 12, 1996
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 22,
1997, 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
[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
For all nominees except as noted above NOTE BELOW
2. To approve the amendment of FOR AGAINST ABSTAIN
the Company's 1990 Stock [ ] [ ] [ ]
Option Plan to increase by
450,000 the number of
shares covered by the Plan.
3. To ratify the selection of FOR AGAINST ABSTAIN
Ernst & Young LLP as [ ] [ ] [ ]
certified public accountants
for the Company.
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: _____
