<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)
TELCO SYSTEMS, INC.
(Name of Person(s) Filing Proxy Statement)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which 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 LOGO]
TELCO SYSTEMS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD FEBRUARY 11, 1998
The Annual Meeting of Stockholders of TELCO SYSTEMS, INC. (the
"Company"), will be held at the Hilton at Dedham Place, 95 Dedham Place, 3rd
Floor, Dedham, Massachusetts, on Wednesday, February 11, 1998, 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 250,000 the number of
shares covered by the Plan.
3. To act upon a proposal to increase by 100,000 the number of
shares covered by the Company's 1983 Employee Stock Purchase
Plan.
4. To ratify the selection of Ernst & Young LLP as the independent
certified public accountants for the Company for fiscal year
1998.
5. To transact such other business as may properly come before the
meeting.
Only stockholders of record at the close of business on December 18,
1997, 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 29, 1997
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
FEBRUARY 11, 1998
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, February 11, 1998, and
at any adjournment thereof.
Only holders of record of the Company's common stock, $.01 par value
("Common Stock"), on December 18, 1997, will be entitled to notice of and to
vote at the meeting. At the close of business on December 18, 1997, 10,884,083
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
29, 1997.
ANNUAL REPORT TO STOCKHOLDERS
The Company's Annual Report for the fiscal year ended August 31, 1997
(the "1997 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 four of the current members of the Board as
nominees for reelection. Mr. John Ruggiero, a director of the Company since
1988, has advised the Board of Directors that he does not intend to stand for
reelection at the Annual Meeting, in order to devote additional time to other
business commitments. Mr. Ruggiero, who had held a number of senior management
positions with the Company, most recently as Chief Executive Officer from
September 1994 to March 1996, has also acted as a consultant to the Company
since March 1996. The Board has nominated Mr. Edward J. Fontenot to fill the
vacancy created by the decision of Mr. Ruggiero not to stand for reelection. The
beneficial ownership of the Company's Common Stock by the five nominees is set
forth under "Voting Securities and Principal Stockholders."
1
<PAGE> 4
Director
Nominees Age Since
- --------------------------------------------------------------------------------
Dr. Steward S. Flaschen ............................. 71 1986
Dr. William B. Smith ................................ 53 1994
Mr. Dean C. Campbell ................................ 47 1989
Dr. Sheldon Horing .................................. 61 1995
Mr. Edward J. Fontenot .............................. 52 --
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 SIPEX Corporation, and Chairman of the Board of TranSwitch
Corporation.
Dr. Smith was appointed President and Chief Executive Officer of the
Company 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.
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 Texas Microsystems, Inc.
(formerly Sequoia Systems, Inc.), and RF Monolithics, Inc.
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. Fontenot joined Astarte Fiber Networks, Inc. located in Boulder,
Colorado in January 1997 and was appointed President and Chief Executive Officer
in April 1997. From 1995 to 1996, Mr. Fontenot was Chief Technical Officer of
Electronic Shopping Services, a joint venture of Pacific Telesis and Times
Mirror Corporation. From 1992 to 1995, he was responsible for the Network
Systems Engineering and Development Group at US West, a Regional Bell Operating
Company. During the previous twenty years, Mr. Fontenot held management
positions with Rockefeller Group Telecommunications Services, Inc., AT&T and
AT&T Bell Labs.
The Company's Audit Committee, established by the Board of Directors,
met twice during the 1997 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. The Audit
Committee consists of all of the Board members who are not employees of the
Company. The Board has not established a Nominating Committee.
Prior to 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. In 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 Mr.
Campbell, Dr. Flaschen and Dr. Horing. The Compensation Committee met thirteen
times during the 1997 Fiscal Year.
The total number of meetings of the Board of Directors (including
regularly scheduled and special meetings) during the 1997 Fiscal Year was
fourteen. During the 1997 Fiscal Year, each of the incumbent directors attended
at least 75% of the aggregate of (i) the total number of meetings of the Board
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 1997 Fiscal Year,
non-discretionary grants of options pursuant to the Plan were made as follows:
Mr. Campbell, 5,000 shares; Dr. Flaschen, 5,000 shares, and Dr. Horing, 10,000
shares. All such options were at an exercise price of $19.00 per share, the fair
market value of the Common Stock on January 23, 1997, the date of grant. If each
of the non-employee nominees is re-elected at the Annual Meeting, he will on
February 12, 1998, 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. In addition,
if elected at the Annual Meeting, Mr. Fontenot will immediately be granted, on a
non-discretionary basis, an option to purchase 10,000 shares of Common Stock at
an exercise price equal to the fair market value on February 12, 1998.
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 1997
Fiscal Year, and (ii) each of the five other most highly compensated executive
officers of the Company whose salary and bonus exceeded $100,000 during the 1997
Fiscal Year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------ ---------------------
AWARDS
NAME AND OTHER ANNUAL SECURITIES UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) COMPENSATION($) OPTIONS/SARs(#)(2) COMPENSATION($)(3)
- ------------------ ---- -------- ---------- -------------- --------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
William B. Smith 1997 $283,841 $ 90,004 -- 300 $ 6,653
President and Chief 1996 $242,963 $111,677 -- 100,000 $ 7,746
Executive Officer 1995 $106,154 $ 50,000 $ 55,498(8) 113,956 $ 533
Kenneth J. Hamer Hodges(4) 1997 $182,575 $ 11,698 -- 200 $55,462
Vice President, Chief 1996 $163,144 $ 39,718 -- $ 4,511
Technical Officer 1995 $173,420 $ 26,386 -- $ 4,643
Philip D. Wilson(5) 1997 $181,830 $ 30,917 -- 300 $ 5,146
Vice President, Engineering 1996 $ 66,046 $ 22,500 -- 15,000 $ 1,385
Anand S. Parikh 1997 $154,769 $ 33,290 -- 13,300 $ 2,375
Vice President, Marketing 1996 $141,159 $ 53,114 -- 17,000 $ 2,375
& Business Development 1995 $ 39,500 $ 15,000 -- 15,000
Richard J. Nardone(6) 1997 $144,724 $ 28,572 -- 300 $ 3,528
Vice President, 1996 $107,758 $ 22,779 -- 15,000 $ 2,680
Corporate Resources
William J. Stuart(7) 1997 $138,538 $ 22,575 $122,198(9) 50,100 $ 3,330
Vice President,
Chief Financial Officer
</TABLE>
(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."
3
<PAGE> 6
(2) "Long Term Compensation" for the 1997 Fiscal Year does not include options
granted prior to the 1997 Fiscal Year that were repriced on May 20, 1997,
pursuant to the Company's decision to reduce to $9.625 per share the
exercise prices of certain stock options issued between May 15, 1996 and
May 13, 1997. See "--Ten Year Option/SAR Repricing" and "Compensation
Committee Report on Executive Compensation--Stock Option Repricing."
(3) "All Other Compensation" for the 1997 Fiscal Year includes amounts as
follows; 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 ($6,653); Mr. Hamer Hodges ($1,616); Mr. Wilson
($5,146); Mr. Parikh ($2,375); Mr. Nardone ($3,528); Mr. Stuart ($3,330).
(4) Mr. Hamer Hodges resigned effective May 23, 1997. Amounts shown under "All
Other Compensation" for the 1997 Fiscal Year include payments in the
aggregate amount of $53,846 made subsequent to his resignation, pursuant to
a severance agreement.
(5) Mr. Wilson became an executive officer when he joined the Company in March
1996 and was named Vice President, Engineering.
(6) Mr. Nardone became an executive officer when he joined the Company in
September 1995 and was named Vice President, Human Resources.
(7) Mr. Stuart became an executive officer when he joined the Company in
January 1997 and was named Vice President, Chief Financial Officer.
(8) This amount includes $31,357 for moving expenses in connection with Dr.
Smith's hiring and relocation to Norwood, Massachusetts.
(9) This amount includes $32,529 for home selling costs and $50,587 for moving
expenses in connection with Mr. Stuart's hiring and relocation to Norwood,
Massachusetts.
STOCK OPTIONS AND SAR GRANTS IN LAST FISCAL YEAR
The table below sets forth certain information with respect to stock
options granted during the 1997 Fiscal Year to the executive officers named in
the Summary Compensation Table above.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------
NUMBER OF % OF TOTAL POTENTIAL REALIZABLE
SECURITIES OPTIONS/ VALUE AT ASSUMED
UNDERLYING SARs ANNUAL RATES OF STOCK
OPTIONS/ GRANTED TO EXERCISE PRICE APPRECIATION
SARs EMPLOYEES OR BASE FOR OPTION TERM
GRANTED IN FISCAL PRICE EXPIRATION ---------------------
NAME (#) YEAR ($/SH) DATE 5%($)(1) 10%($)(1)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William B. Smith 100 0.01% $ 9.625 05/20/07 $ 605 $ 1,534
200 0.02% $13.875 03/05/07 $ 1,745 $ 4,423
25,000 2.84% $ 9.625 11/05/06 $141,192 $352,355
Kenneth J. Hamer Hodges 200 0.02% $13.875 03/05/07 $ 1,745 $ 4,423
Philip D. Wilson (2) 5,000 0.57% $ 9.625 01/22/07 $ 29,039 $ 72,911
100 0.01% $ 9.625 05/20/07 $ 605 $ 1,534
200 0.02% $13.875 03/05/07 $ 1,745 $ 4,423
Anand S. Parikh (2) 100 0.01% $ 9.625 05/20/07 $ 605 $ 1,534
200 0.02% $13.875 03/05/07 $ 1,745 $ 4,423
8,000 0.91% $ 9.625 01/22/07 $ 46,462 $116,658
5,000 0.57% $ 9.500 07/23/07 $ 29,872 $ 75,703
Richard J. Nardone (2) 200 0.02% $13.875 03/05/07 $ 1,745 $ 4,423
100 0.01% $ 9.625 05/20/07 $ 605 $ 1,534
5,000 0.57% $ 9.625 01/22/07 $ 29,039 $ 72,911
William J. Stuart 50,000 5.69% $ 9.625 01/22/07 $290,388 $729,114
100 0.01% $ 9.625 05/20/07 $ 605 $ 1,534
</TABLE>
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<PAGE> 7
(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
options 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) Does not include options to purchase the following numbers of shares of
Common Stock granted prior to the 1997 Fiscal Year that were repriced on
May 20, 1997: Mr. Wilson, 5,000 shares; Mr. Parikh, 7,000 shares; and Mr.
Nardone, 5,000 shares. See "--Ten Year Option/SAR Repricings" and
"Compensation Committee Report on Executive Compensation--Stock Option
Repricing."
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 1997 Fiscal Year, the
aggregate dollar value realized upon such exercise, the total number of
unexercised options held at August 31, 1997, and the aggregate dollar value of
in-the-money unexercised options held at August 31, 1997. None of the named
executive officers held or exercised any SARs during the 1997 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 -- -- 112,534 126,722 $218,276 $303,730
Kenneth J. Hamer Hodges 19,271 $72,644 -- -- $ -- $ --
Anand S. Parikh 2,521 $25,319 13,146 29,633 $ 33,953 $ 87,791
Philip D. Wilson -- -- 5,625 14,675 $ 16,422 $ 43,919
Richard J. Nardone 2,708 $18,279 4,167 13,425 $ 6,901 $ 26,560
William J. Stuart -- -- 7,292 42,808 $ 24,158 $141,823
</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 last sale price of the Common Stock on August 31,
1997, 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.
5
<PAGE> 8
TEN-YEAR OPTION/SAR REPRICING
The following table sets forth information concerning the repricing
during the 1997 Fiscal Year of certain options previously granted to the named
executive officers. (Except as set forth below, no option held by any executive
officer of the Company was repriced during the Company's ten most recently
completed fiscal years.)
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF ORIGINAL
SECURITIES MARKET PRICE OPTION TERM
UNDERLYING OF STOCK AT EXERCISE PRICE REMAINING AT
OPTIONS/SARs TIME OF AT TIME OF NEW DATE OF
REPRICED OR REPRICING OR REPRICING OR EXERCISE REPRICING OR
NAME DATE AMENDED(#) AMENDMENT $ AMENDMENT $ PRICE AMENDMENT
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William B. Smith 5/20/97 25,000 $9.625 $18.125 $9.625 9.50 years
President and Chief
Executive Officer
Kenneth J. Hamer Hodges -- -- -- -- -- --
Vice President,
Chief Technical Officer
Philip D. Wilson 5/20/97 5,000 $9.625 $13.750 $9.625 9.25 years
Vice President, 5/20/97 5,000 $9.625 $19.125 $9.625 9.75 years
Engineering
Anand S. Parikh 5/20/97 7,000 $9.625 $13.750 $9.625 9.25 years
Vice President, Marketing 5/20/97 8,000 $9.625 $19.125 $9.625 9.75 years
& Business Development
Richard Nardone 5/20/97 5,000 $9.625 $13.750 $9.625 9.25 years
Vice President, 5/20/97 5,000 $9.625 $19.125 $9.625 9.75 years
Corporate Resources
William J. Stuart 5/20/97 50,000 $9.625 $19.125 $9.625 9.75 years
Vice President,
Chief Financial Officer
</TABLE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The following Compensation Committee Report and the Stock Performance Graph
on Page 8 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.
The Company's executive compensation program is determined by the
Compensation Committee of the Board of Directors. The Compensation Committee
consists of non-employee directors, Messrs. Campbell, Flaschen and Horing. 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.
6
<PAGE> 9
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 1997 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 1997 Fiscal Year, the
Compensation Committee granted options to Dr. Smith, Mr. Wilson, Mr. Parikh, Mr.
Nardone and Mr. Stuart. 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.
In addition, each of the above individuals also received grants under the
Telco Options Program (TOPs). The TOPs program, introduced in the 1997 Fiscal
Year, is designed to provide greater employee ownership in Telco Systems and a
vehicle for long-term incentive and reward for performance against key Company
goals. The program includes all employees and is administered within the rules
of the 1990 Stock Option Plan.
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 1997 Fiscal Year, a bonus was paid to Dr.
Smith based on the achievement of certain assigned business and individual
objectives set by the Committee.
In September 1996, Dr. Smith's annual base salary was increased 15.2% to
$265,000.
STOCK OPTION REPRICING. On May 20, 1997, the Stock Option and Compensation
Committee of the Board voted to reduce the option price of each option granted
by the Company between May 15, 1996 and May 13, 1997 (other than options to
purchase an aggregate of 25,000 shares granted on January 23, 1997 to directors
of the corporation and options to purchase an aggregate of 28,800 shares granted
on March 5, 1997 pursuant to the Company's TOPs program) to $9.625, the last
sale price of the Company's Common Stock on that date. The options remained
otherwise unchanged.
The amendment to the 1990 Stock Option Plan was an acknowledgment by the
Committee of the importance to the Company of providing adequate equity
incentives to its employees. Stock options whose exercise prices are
significantly above the trading prices of the Company's Common Stock do not
provide adequate equity incentives to its employees. In order to retain key
employees, particularly certain key employees recruited during the prior twelve
months, the Committee considered it necessary and in the best interest of the
Company to reduce to the current market price the exercise price of certain
stock options. This action was consistent with the policy of the Company that
option repricing is to be employed only in exceptional circumstances, where
necessary to restore the incentive value of outstanding options and where the
Committee had determined that the option repricing is necessary to fulfill a
legitimate corporate purpose, including the retention of one or more key
employees. See "Approval of Amendments to 1990 Stock Option Plan--Description of
1990 Plan as Amended."
7
<PAGE> 10
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 & Poor's 500 Index and the Standard & Poor's Technology Sector Index.
The stock performance graph assumes a $100 investment in each issuer on August
30, 1992, 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>
Cumulative Total Return
---------------------------------------------------------
8/30/92 8/29/93 8/28/94 8/27/95 8/25/96 8/31/97
<S> <C> <C> <C> <C> <C> <C> <C>
Telco Sys Inc TELC 100 143 202 207 259 225
PEER GROUP PPEER1 100 124 158 241 266 447
S & P 500 I500 100 115 122 148 175 246
</TABLE>
* $100 INVESTED ON 8/30/92 IN STOCK OR INDEX - INCLUDING REINVESTMENT OF
DIVIDENDS.
8
<PAGE> 11
SENIOR EXECUTIVE TERMINATION BENEFITS AND EMPLOYMENT AGREEMENTS
The Company has entered into a Senior Executive Termination Benefits
Agreement dated March 6, 1995 (the "Change-in-Control Agreement"), with William
B. Smith, the President and Chief Executive Officer of the Company. Dr. Smith's
Change-in-Control Agreement provides that in the event of (i) the termination by
the Company of his 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 him within three years after a change in control of the
Company for specified reasons, Dr. Smith will be entitled to termination
benefits. The permissible reasons for Dr. Smith 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 him
to his former position or any material breach by the Company of the Agreement.
The termination benefits to which Dr. Smith is entitled include a lump sum
payment of (i) one and one-half times his 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, Dr. Smith would be
entitled 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 Dr.
Smith were to obtain new employment after his termination by the Company.
The Company entered into additional Change-in-Control Agreements dated
August 7, 1997 with Messrs. Stuart, Parikh and Nardone, the Vice President and
Chief Financial Officer, Vice President, Marketing and Business Development, and
Vice President, Corporate Resources, of the Company, respectively. These
Change-in-Control Agreements provide that in the event of (i) termination by the
Company of the executive officer's employment within eighteen months after a
Change-in-Control (as defined) of the Company (except for reasons of death,
disability or cause), or (ii) the termination by the executive officer within
eighteen months after a Change-in-Control of the Company for specified reasons,
such executive 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, or any material breach by the Company of the Agreement.
The termination benefits to which the executive officer is entitled to
include (i) thirteen monthly payments equal to one-twelfth times the executive
officer's effective annual base salary as of the Termination Date 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, to be paid monthly during the 13 months commencing on the Termination
Date. The executive officer may, by notice to the Company at any time during
such 13-month period, elect to receive his remaining compensation in a lump sum
payment. The executive officer for a period of 13 months commencing on the
Termination Date will also receive at no cost to him continued participation in
various benefit programs maintained by the Company prior to termination. All
stock options held by the executive officer shall remain outstanding and shall
continue to vest until the earlier of (a) 13 months after the Termination Date
or (b) the date on which the Company pays the executive officer the remaining
lump sum compensation, if that option was so chosen. None of the foregoing
benefits would be affected or reduced if the executive 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 provided that he would 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 was terminated by the
Company prior to such date without cause, or by reason of his death or
disability, Mr. Ruggiero or his legal representative would 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 was paid 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 1997 Fiscal Year
totaled $1,192,116.
9
<PAGE> 12
APPROVAL OF AMENDMENTS TO 1990 STOCK OPTION PLAN
AMENDMENT OF 1990 PLAN
The 1990 Stock Option Plan (the "1990 Plan") was originally approved by the
stockholders of the Company in December 1990. On November 19, 1997, the Plan was
amended by the Board of Directors to increase the number of shares of Common
Stock covered by the 1990 Plan from 2,300,000 to 2,550,000. Stockholder approval
of this amendment is necessary pursuant to the 1990 Plan and, to the extent that
the 1990 Plan is intended to permit the grant of incentive options, under
provisions of the Internal Revenue Code.
On May 20, 1997, the Board of Directors amended the 1990 Plan to provide
for the automatic acceleration and exercisability in full of all unexercised and
unexpired stock options in the event of a sale or change in control of the
Company, unless in the opinion of the company's independent certified public
accountants such acceleration would prevent the Company and the acquiring
corporation from accounting for the business combination using the pooling of
interest accounting method. On May 20, 1997, the Board of Directors also amended
provisions of the Plan setting forth the Company's policy concerning the
repricing of stock options. The amendments adopted on May 20, 1997, 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.
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
2,300,000. At December 18, 1997, only 129,953 shares were available for grant
under the 1990 Plan. Therefore, stockholders are being asked to approve the
amendment of the 1990 Plan to include an additional 250,000 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 last
sale price of the Company's Common Stock on December 18, 1997, as reported by
the Nasdaq National Market, was $10.75 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 1990 Plan, as amended, provides that it is the policy of the Company
that option repricing is to be employed only in exceptional circumstances, where
necessary to restore the incentive value of outstanding options and where the
Committee has determined that such option repricing is necessary to fulfill a
legitimate corporate purpose, including the retention of one or more key
employees.
10
<PAGE> 13
The 1990 Plan, as amended, also provides that if the Company is merged or
consolidated with another corporation under circumstances in which the
stockholders of the Company immediately prior to such merger or consolidation do
not own after such merger or consolidation shares representing at least fifty
percent (50%) of the voting power of the merger or consolidated corporations, or
if the Company is liquidated or sells or otherwise disposes of substantially all
of its assets (each hereinafter referred to as a "Transaction"), then in such
event, immediately prior to the effective time of the Transaction and without
any further action by the Committee or the Board of Directors, all unexercised
and unexpired options outstanding under the Plan shall automatically be
accelerated so as to be exercisable in full immediately prior to the effective
time of the Transaction. Notwithstanding the foregoing, outstanding unexercised
and unexpired options shall not be automatically accelerated if, in the opinion
of the Company's independent auditors, to do so would adversely affect pooling
of interest treatment intended to be effected in connection with the
Transaction.
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 amendment to increase the number of shares issuable pursuant to the
1990 Plan is approved by the stockholders of the Company, the Company intends to
file a registration statement on Form S-8 covering the additional shares of
Common Stock issuable pursuant to the 1990 Plan. 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. Under current law, the rate of federal tax on capital gain from the
disposition of shares issued upon exercise of incentive options ranges from 20%
(if the shares have been held for at least eighteen months after exercise of the
option) to 28% (if the shares have been held for at least twelve but less than
eighteen months). 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 is 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 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 amendments to the
1990 Plan, if they had been effective during the 1997 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.
PROPOSED AMENDMENT OF EMPLOYEE STOCK PURCHASE PLAN
On November 19, 1997, the Board of Directors amended the Company's 1983
Employee Stock Purchase Plan (the "1983 Plan") to increase by 100,000 the number
of shares of Common Stock covered by the 1983 Plan, to a total of 700,000
shares. If this amendment is approved by the stockholders, 137,842 shares would
be available for future issuance under the Plan.
11
<PAGE> 14
The Company's 1983 Plan was adopted in 1983 to encourage and assist its
employees in acquiring a stock ownership interest in the Company and to help
them provide for their future security. All employees who have been employed by
the Company or any majority-owned subsidiary an average of at least 20 hours per
week for 90 days are eligible to participate in the 1983 Plan, except employees
who own or hold options to acquire 5% or more of the capital stock of the
Company or any subsidiary. No employee may purchase shares of stock under the
1983 Plan if the aggregate fair market value of such shares and all shares
acquired pursuant to other purchase plans of the Company (and any parent or
subsidiary) would exceed $25,000 in any calendar year.
Each employee enrolling in the 1983 Plan elects to make contributions by
payroll deductions of 2%, 5% or 10% of his or her base pay. The election is
effective at the commencement of the next semiannual plan period (March 1
through August 31, or September through the last day of February), and
thereafter may be changed effective at the commencement of another semiannual
period.
At the end of each semiannual period, each participant's contributions for
the period are used to purchase shares of Common Stock at 85% of the lower of
the fair market value of the shares on (i) the first trading day of the
semiannual period or (ii) the last trading day of the semiannual period. An
employee may elect prior to the end of the period not to purchase shares at the
end of the period, in which event his or her contributions for the period are
returned. Shares may be purchased only if they are covered by an effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), or by an exemption therefrom. All shares issuable under the
1983 Plan are currently registered under the Securities Act. If the amendment to
increase the number of shares issuable pursuant to the 1983 Plan is approved by
the stockholders of the Company, the Company intends to file a registration
statement on Form S-8 covering the additional shares of Common Stock issuable
pursuant to the 1983 Plan. Upon the effectiveness of such registration
statement, all such shares will be, when issued, eligible for resale in the
public market.
Participation in the 1983 Plan terminates when the employee (i) voluntarily
elects to withdraw his or her account, (ii) resigns or is discharged from the
Company or its subsidiaries, (iii) dies, or (iv) does not receive pay from the
Company for 12 consecutive months (with certain exceptions for illness, injury
or other such occurrences). A terminated participant may rejoin the 1983 Plan at
the commencement of a later semiannual period. Each participant designates a
beneficiary or beneficiaries to whom his or her account is paid upon the
participant's death. A participant's rights under the 1983 Plan are not
otherwise assignable.
The 1983 Plan requires that appropriate and proportionate adjustments be
made in the number and class of shares of stock subject to the 1983 Plan, and to
the rights granted thereunder and the prices applicable to such rights, in the
event of a stock dividend, stock split, reverse stock split, recapitalization,
reorganization, merger, consolidation, acquisition or like change in the capital
structure of the Company.
The Plan is administered by the Company's Board of Directors and such
officers and employees as it delegates. Although the Company intends to continue
the Plan until all of the shares covered under the Plan have been sold, the
Company has the right to amend or terminate the Plan in any respect in its
discretion.
FEDERAL TAX ASPECTS OF THE 1983 EMPLOYEE STOCK PURCHASE PLAN
The following is a summary of the principal Federal income tax consequences
of transactions under the 1983 Plan. It does not describe all Federal tax
consequences under the 1983 Plan, nor does it describe state or local tax
consequences.
If an employee acquires shares pursuant to the Plan and does not dispose of
them within two years after the commencement date of the semiannual offering
period pursuant to which the shares were acquired, nor within one year after the
date on which the shares were acquired (a "disqualifying disposition"), any gain
realized upon disposition of the shares will be taxable as a long-term capital
gain, except that the portion of such gain equal to the lesser of (a) the excess
of the fair market value of the shares on the date of disposition over the
purchase price of the shares or, (b) the excess of the fair market value of the
shares on the offering commencement date over the purchase price, is recognized
in the year of disposition of the shares. If the employee sells the shares at a
price less than their purchase price, the employee realizes no ordinary income
and has a long-term capital loss measured by the difference between the purchase
price and the selling price. In the event of a disqualifying disposition, the
difference between the purchase price and the fair market value of the shares at
the time of purchase is taxable as ordinary income to the employee in the year
of disposition, the Company may deduct from its gross income an amount equal to
the ordinary income to such employee, and any difference between the selling
price and the fair market value of the shares at the time of purchase is taxable
as a capital gain or loss, as the case may be.
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 amendment to the 1983 Plan. The amendment to the Plan,
if effective during the 1997 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 the fiscal year.
If a quorum is present at the meeting, the vote of a majority of the shares
of Common Stock present or represented at the meeting and entitled to vote is
necessary to approve the proposed amendment.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO INCREASE BY
100,000 THE NUMBER OF SHARES COVERED BY THE 1983 EMPLOYEE STOCK PURCHASE PLAN,
AS DESCRIBED IN THIS PROXY STATEMENT.
12
<PAGE> 15
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 December 18, 1997, there were
10,884,083 shares of Common Stock issued and outstanding.
The following table sets forth certain information as of December 18, 1997
regarding beneficial ownership of the Company's securities 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 4,651,310 (2) 42.7%
7701 France Avenue South
Suite 500, Edina, MN 55435
Dimensional Fund Advisors, Inc. 588,700 (3) 5.4%
1299 Ocean Avenue
11th Floor, Santa Monica, CA 90401
William B. Smith* 147,296 (4) 1.4%
John A. Ruggiero 89,750 (5) **
Steward S. Flaschen* 64,583 (6) **
Dean C. Campbell* 63,458 (7) **
Anand S. Parikh 19,128 (8) **
William J. Stuart 12,784 (9) **
Richard J. Nardone 8,483(10) **
Sheldon Horing* 8,603(11) **
Philip D. Wilson 8,008(12) **
Edward J. Fontenot* 0(13) **
Kenneth J. Hamer Hodges 0(14) **
All executive officers and directors
as a group (10 persons) 422,093(15) 3.9%
</TABLE>
* Nominee for director.
** Less than 1.0%
(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 a report on Schedule 13G as of December 31, 1996, in which it
states that it has sole voting power with respect to 472,000 shares and
shared dispositive power with respect to 4,179,310 shares for an aggregate
beneficial ownership of 4,651,310 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 Kopp
Family Foundation, and LeRoy C. Kopp individually have sole voting power or
shared dispositive power. Of such shares, 4,481,310 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 Kopp Family Foundation, and his individual retirement account.
(3) Dimensional Fund Advisors, Inc. ("Dimensional"), a registered investment
advisor, has filed a report on Schedule 13G as of December 31, 1996, in
which it states that it has sole voting power with respect to 454,800
shares and sole dispositive power with respect to 133,900 shares for an
aggregate beneficial ownership of 588,700 shares of the Company's Common
Stock, all of which shares are held in portfolios of DFA Investment
Dimensions Group, Inc., (the "Fund") or the DFA Investment Trust Company
(the "Trust"), each a registered open-end investment company.
(4) Includes 6,237 shares held directly by Dr. Smith and 141,059 acquirable
upon exercise of stock options exercisable within 60 days of the date of
this table.
(5) Include 3,000 shares held indirectly by Mr. Ruggiero in his wife's name and
86,750 shares acquirable upon exercise of stock options exercisable within
60 days of the date of this table. Mr. Ruggiero, a current director, has
indicated that he does not intend to stand for reelection at the Annual
Meeting.
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<PAGE> 16
(6) Includes 10,937 shares held indirectly by Dr. Flaschen in the Steward S.
Flaschen Revocable Investment Trust and 10,938 shares held by Dr. Flaschen
in the Joyce D. Flaschen Revocable Investment Trust and 42,708 shares
acquirable upon exercise of stock options exercisable within 60 days of the
date of this table.
(7) Represents 63,458 shares acquirable upon exercise of stock options
exercisable within 60 days of the date of this table.
(8) Includes 682 shares held directly by Mr. Parikh and 18,446 shares
acquirable upon exercise of stock options exercisable within 60 days of the
date of this table.
(9) Includes 184 shares held directly by Mr. Stuart and 12,600 shares
acquirable upon exercise of stock options exercisable within 60 days of the
date of this table.
(10) Includes 1,724 shares held directly by Mr. Nardone and 6,759 shares
acquirable upon exercise of stock options exercisable within 60 days of the
date of this table.
(11) Represents 8,603 shares acquirable upon exercise of stock options
exercisable within 60 days of the date of this table.
(12) Represents 8,008 shares acquirable upon exercise of stock options
exercisable within 60 days of the date of this table.
(13) Mr. Fontenot does not own any shares as of the close of business on
December 18, 1997.
(14) Mr. Hamer Hodges resigned effective May 23, 1997 and does not own any
shares as of the close of business on December 18, 1997.
(15) Includes 388,391 shares acquirable upon exercise of stock options
exercisable within 60 days of the date of this 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, the
Company believes that during the 1997 Fiscal Year all Section 16(a) filing
requirements applicable to its officers, directors and greater-than-10%
stockholders were complied with, except that the year-end Form 5 filings for all
officers and directors were filed two days past the required due date. Each late
Form 5 disclosed from one to three transactions, which in each case consisted of
the grant during the 1997 Fiscal Year of a stock option that was exempt from the
provisions of Section 16(b) of the Exchange Act.
RATIFICATION OF SELECTION OF AUDITORS
Ernst & Young LLP 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 LLP are expected to be
present at the Annual 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 LLP.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR RATIFICATION OF ERNST &
YOUNG LLP 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 31,
1998, 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 29, 1997
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<PAGE> 17
PROXY
TELCO SYSTEMS, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR ANNUAL MEETING OF STOCKHOLDERS
The undersigned hereby appoints WILLIAM B. SMITH and WILLIAM J. STUART, 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 the Hilton at Dedham Place, 95 Dedham Place, 3rd
Floor, Dedham, Massachusetts on Wednesday, February 11, 1998, 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, Edward J. Fontenot,
Sheldon Horing 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 the Company's 1990 Stock Plan to increase by
250,000 the number of shares covered by the Plan.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. To approve the amendement of the Company's Employee Stock Purchase Plan to
increase by 100,000 the number of shares covered by the Plan.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
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<PAGE> 18
4. To ratify the selection of Ernst & Young LLP as certified public
accountants for the Company.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
5. 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: _________________________
2
