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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:
/X/ Preliminary proxy statement
/ / Definitive proxy statement
/ / Definitive additional materials
/ / Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
OCTEL COMMUNICATIONS CORPORATION
----------------------------------------------------
Name of Registrant as Specified in its Charter)
OCTEL COMMUNICATIONS CORPORATION
----------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of filing fee (Check the appropriate box):
/X/ $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1) or 14a-6(j)(2).
/ / $500 per party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:1
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
/ / 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:
- ---------------------------------------
(1) Set forth the amount on which the filing fee is calculated and state how it
was determined.
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OCTEL COMMUNICATIONS CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 16, 1995
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Octel
Communications Corporation (the "Company") will be held on November 16, 1995 at
2:00 p.m., local time, at the Company's principal offices at 1001 Murphy Ranch
Road, Milpitas, California 95035 for the following purposes:
1. To elect seven directors to serve until the next annual meeting of
stockholders and until their successors are duly elected.
2. To amend the Company's 1985 Incentive Stock Plan (the "Option Plan") to
extend the term of the Option Plan for an additional ten-year period and change
the name of the Option Plan to the "1995 Incentive Stock Plan."
3. To approve an amendment to the Company's 1987 Employee Stock Purchase
Plan (the "Purchase Plan") increasing the number of shares of Common Stock
reserved for issuance by 475,000 shares.
4. To approve an amendment to the Company's Certificate of Incorporation to
increase the authorized number of shares of Common Stock of the Company to
200,000,000.
5. To consider a stockholder proposal by the State of Wisconsin Investment
Board requiring the Board of Directors to adopt a policy prohibiting the
repricing of stock options without stockholder approval.
6. To ratify the appointment of KPMG Peat Marwick LLP as independent
auditors of the Company for the fiscal year ending June 30, 1996.
7. To transact such other business as may properly come before the meeting
or any adjournment thereof.
Only stockholders of record at the close of business on September 19, 1995
are entitled to notice of and to vote at the meeting.
All stockholders are cordially invited to attend the meeting in person.
However, to assure your representation at the meeting, you are urged to sign and
return the enclosed proxy as promptly as possible in the postage prepaid
envelope enclosed for that purpose. Any stockholder attending the meeting may
vote in person even if the stockholder has previously returned a proxy.
By Order of the Board of Directors
Derek S. Daley, Secretary
Milpitas, California
October 10, 1995
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OCTEL COMMUNICATIONS CORPORATION
PROXY STATEMENT FOR 1995
ANNUAL MEETING OF STOCKHOLDERS
------------------------
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed Proxy is solicited on behalf of the Board of Directors of
Octel Communications Corporation (the "Company") for use at the Annual Meeting
of Stockholders to be held on Thursday, November 16, 1995 at 2:00 p.m., local
time, or at any adjournment thereof for the purposes set forth herein and in the
accompanying Notice of Annual Meeting of Stockholders. The Annual Meeting will
be held at the Company's principal offices at 1001 Murphy Ranch Road, Milpitas,
California 95035.
The proxy solicitation materials were mailed on or about October [4], 1995
to all stockholders entitled to vote at the meeting.
RECORD DATE AND SHARE OWNERSHIP
Stockholders of record at the close of business on September 19, 1995 (the
"Record Date") are entitled to notice of the meeting and to vote at the meeting.
At the Record Date, 24,593,596 shares of the Company's Common Stock were issued
and outstanding and held of record by approximately 3,247 registered
stockholders. Each stockholder is entitled to one vote for each share held. No
shares of the Company's Preferred Stock were outstanding. See "Security
Ownership of Certain Beneficial Owners and Management" below for information
regarding beneficial owners of more than five percent of the Company's Common
Stock.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Secretary of the
Company a written notice of revocation or a duly executed proxy bearing a later
date or by attending the meeting and voting in person.
VOTING AND SOLICITATION
Each stockholder voting for the election of directors (Proposal No. 1) may
cumulate his votes, giving one candidate a number of votes equal to the number
of directors to be elected multiplied by the number of shares which the
stockholder is entitled to vote, or distributing the stockholder's votes on the
same principle among as many candidates as the stockholder chooses, provided
that votes may not be cast for more than seven candidates. However, no
stockholder shall be entitled to cumulate votes unless the candidates' names
have been placed in nomination prior to the voting and the stockholder, or any
other stockholder, has given notice at the meeting prior to the voting of the
intention to cumulate the stockholder's votes. Any such notice should be
directed to the Inspector of Elections at the meeting. On all other matters
(Proposals No. 2-6), each share has one vote.
This solicitation of proxies is made by the Company, and all related costs
will be borne by the Company. The Company has retained Chemical Mellon to aid in
the solicitation of proxies from brokers, banks and other institutional
nominees. The fees and expenses of such firms are not expected to exceed
$11,000. In addition, the Company may reimburse brokerage firms and other
persons representing beneficial owners of shares for their expenses in
forwarding solicitation material to such beneficial owners. Original
solicitation of proxies by mail may be supplemented by telephone, telegraph or
personal solicitations by directors, officers or employees of the Company. No
additional compensation will be paid for any such services.
<PAGE> 4
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The required quorum for the transaction of business at the Annual Meeting
is a majority of the votes eligible to be cast by holders of shares of Common
Stock issued and outstanding on the Record Date. Shares that are voted "FOR,"
"AGAINST" or "WITHHELD FROM" a matter are treated as being present at the
meeting for purposes of establishing a quorum and are also treated as shares
entitled to vote at the Annual Meeting (the "Votes Cast") with respect to such
matter.
While there is no definitive statutory or case law authority in Delaware as
to the proper treatment of abstentions, the Company believes that abstentions
should be counted for purposes of determining both (i) the presence or absence
of a quorum for the transaction of business and (ii) the total number of Votes
Cast with respect to a proposal (other than the election of directors). In the
absence of a controlling precedent to the contrary, the Company intends to treat
abstentions in this manner. Accordingly, abstentions will have the same effect
as a vote against the proposal.
In a 1988 Delaware case, Berlin v. Emerald Partners, the Delaware Supreme
Court held that, while broker non-votes should be counted for purposes of
determining the presence or absence of a quorum for the transaction of business,
broker non-votes should not be counted for purposes of determining the number of
Votes Cast with respect to the particular proposal on which the broker has
expressly not voted. Accordingly, the Company intends to treat broker non-votes
in this manner. Thus, a broker non-vote will not have any effect on the outcome
of the voting on a proposal.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company which are intended to be presented
by such stockholders at the Company's 1996 Annual Meeting of Stockholders must
have been received by the Company no later than June 13, 1996 in order that they
may be considered for inclusion in the proxy statement and form of proxy
relating to that meeting.
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PROPOSAL NO. 1 -- ELECTION OF DIRECTORS
NOMINEES
A board of seven directors is to be elected at the Annual Meeting of
Stockholders. Unless otherwise instructed, the proxy holders will vote the
proxies received by them for the Company's nominees named below. In the event
that any nominee of the Company is unable or declines to serve as a director at
the time of the Annual Meeting of the Stockholders, the proxies will be voted
for any nominee who shall be designated by the present Board of Directors to
fill the vacancy. It is not expected that any nominee will be unable or will
decline to serve as a director. In the event that additional persons are
nominated for election as directors, the proxy holders intend to vote all
proxies received by them in such a manner (in accordance with cumulative voting)
as will assure the election of as many of the nominees listed below as possible,
and in such event the specific nominees to be voted for will be determined by
the proxy holders. The term of office of each person elected as a director will
continue until the next Annual Meeting of Stockholders or until a successor has
been elected and qualified.
The nominees, and certain information about them as of the Record Date, are
set forth below:
<TABLE>
<CAPTION>
DIRECTOR
NAME OF NOMINEE AGE POSITION(S) SINCE
- ------------------------------------------ --- ------------------------------------- --------
<S> <C> <C> <C>
Robert Cohn............................... 46 Chairman of the Board, President and 1982
Chief Executive Officer
Anson M. Beard, Jr........................ 59 Director 1994
Leo J. Chamberlain........................ 65 Director 1989
Deborah A. Coleman........................ 42 Director 1994
Nathaniel de Rothschild................... 49 Director 1994
Dag Tellefsen............................. 53 Director 1982
W. Michael West........................... 45 Vice Chairman of the Board 1995
</TABLE>
Mr. Cohn, a founder of the Company, served as its President and Chief Executive
Officer from the Company's inception in 1982 until October 1990, and then
resumed those positions in November 1993. Mr. Cohn has served as a director from
the Company's inception and, in June 1990, the Board of Directors appointed Mr.
Cohn Chairman of the Board. Prior to founding the Company, he was employed by
Acurex Corporation, a manufacturer of microprocessor-based measurement and
control systems, from 1979 to 1982. From 1976 to 1979, he was employed by
McKinsey & Co., Inc., a management consulting company. Mr. Cohn holds a B.S. in
Mathematics and Computer Science from the University of Florida and an M.B.A.
from Stanford University. Mr. Cohn is also a director of Global Village
Communication, Inc., a manufacturer of communications hardware and software for
personal computers.
Mr. Beard has served as a director of the Company since June 1994. He
joined Morgan Stanley & Co. Incorporated in May 1977, and from 1980 until his
retirement in February 1994 served as Managing Director of its Worldwide Equity
Division. In 1986, he was appointed as a director of Morgan Stanley Group, the
holding company for Morgan Stanley & Co. Incorporated. He retains the position
of Advisory Director of Morgan Stanley & Co. Incorporated. Mr. Beard is also a
member of the Wheaton College Board of Trustees, and from 1990 to 1992 was a
director of the National Association of Securities Dealers, Inc. (the "NASD"),
serving as Vice Chairman of the NASD in 1992.
Mr. Chamberlain has served as a director of the Company since March 1989.
Until ROLM's acquisition by IBM in 1984, Mr. Chamberlain served on the Board of
Directors of ROLM, where he had been employed as Executive Vice President until
his retirement in 1982. Mr. Chamberlain is also a director of KLA Instruments
Corporation, a manufacturer of semiconductor inspection equipment.
Ms. Coleman has served as a director of the Company since March 1994. Since
June 1994, Ms. Coleman has been Chairman and Chief Executive Officer of Merix
Corporation, a manufacturer of technologically advanced components for
sophisticated electronic equipment. From April 1993 to June 1994, Ms. Coleman
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served as Vice President of Materials Operations for Tektronix, Inc., a
worldwide high technology equipment design and manufacturing firm. From June
1985 to April 1993, she held officer-level positions with Apple Computer, Inc.,
including Vice President -- World Wide Operations and Vice President -- Chief
Financial Officer. Ms. Coleman has been a director of Software Publishing
Corporation, a publisher of personal computer software, since November 1991.
Mr. de Rothschild has served as a director of the Company since June 1994.
He is President of Nathaniel de Rothschild Holdings Ltd., a private investment
company that he founded in 1988. Mr. de Rothschild is also Chairman of the Board
of Global Asset Management (USA) Inc., the U.S. subsidiary of Global Asset
Management Ltd., a worldwide money management firm, and a director of St. James
Place Capital, Plc.
Mr. Tellefsen has served as a director of the Company since September 1982.
He is a general partner of Glenwood Management and Glenwood II Management
Corporation, investment management firms and the general partners of Glenwood
Ventures I and Glenwood Ventures II, respectively, which are venture capital
funds. He has been with Glenwood Management since 1982. Mr. Tellefsen is also a
director of KLA Instruments Corporation, a manufacturer of semiconductor
inspection equipment, Arix Computer Corporation, a manufacturer of symmetrical
multiprocessing UNIX systems, and Iwerks Entertainment, Inc., a producer of
out-of-home entertainment systems and software.
Mr. West serves as Vice Chairman of the Company. He joined the Company in
September 1986 as Executive Vice President and was responsible for sales and
customer service. From 1979 to September 1986, Mr. West was employed by ROLM,
serving for three years during this period as President of an operating
subsidiary of ROLM and then as General Manager of its National Sales Division.
Mr. West attended Southern Illinois University.
John Freidenrich, a director since January 1986, and Robert Hawk, a
director since March 1987, will not be standing for reelection this year. Both
have served the Company very well during their tenure and contributed to the
Company's success and growth. The Company appreciates the enormous service that
each of these board members have given and will miss their presence and
contributions. The Company intends to fill one or both of these seats over the
next few years.
There are no family relationships between directors or executive officers
of the Company.
VOTE REQUIRED
The seven nominees receiving the highest number of affirmative votes of the
shares present or represented entitled to be voted for them shall be elected as
directors. Votes withheld from any director are counted for purposes of
determining the presence or absence of a quorum for the transaction of business,
but have no legal effect under Delaware law.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership as of the Record Date of the Company's Common Stock as to (i) each
director, (ii) each of the executive officers listed in the Summary Compensation
Table below, (iii) all executive officers and directors as a group and (iv) each
person known by the Company to beneficially own five percent or more of the
outstanding shares of Common Stock.
<TABLE>
<CAPTION>
DIRECTORS, EXECUTIVE OFFICERS AND NO. OF SHARES
FIVE PERCENT STOCKHOLDERS(1) BENEFICIALLY OWNED PERCENTAGE
-------------------------------- ------------------ ----------
<S> <C> <C>
Capital Guardian Trust......................................... 1,751,000 7.4%
533 S. Hope Street
Los Angeles, CA 90071
Capital Research & Management.................................. 1,925,000 8.13%
333 S. Hope Street
Los Angeles, CA 90071
State of Wisconsin Investment Board............................ 2,371,000 10.02%
121 East Wilson Street
Madison, WI 53702
KOPP Investment Advisors....................................... 1,202,740 5.08%
6600 France Avenue South, #672
Edina, MN 55435
Anson M. Beard, Jr.(2)......................................... 20,000 *
Donald L. Campodonico(3)....................................... 41,612 *
Leo J. Chamberlain(4).......................................... 26,603 *
Robert Cohn(5)................................................. 708,567 2.88%
Deborah A. Coleman(6).......................................... 11,000 *
Derek S. Daley(7).............................................. 71,587 *
John Freidenrich(8)............................................ 63,371 *
Robert C. Hawk(9).............................................. 49,155 *
David Ladd(10)................................................. 138,144 *
Nathaniel de Rothschild(11).................................... 6,080 *
Dag Tellefsen(12).............................................. 22,000 *
W. Michael West(13)............................................ 191,935 *
All Directors and executive officers as a group (18 1,488,810 6.05%
persons)(14).................................................
</TABLE>
- ---------------
*Represents less than 1% of the outstanding shares of Common Stock.
(1) The persons named in the table, to the Company's knowledge, have sole
voting 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 hereunder.
(2) Includes 5,000 shares issuable upon exercise of options that are
exercisable within 60 days of the Record Date.
(3) Includes 39,200 shares issuable upon exercise of options that are
exercisable within 60 days of the Record Date.
(4) Includes 21,000 shares issuable upon exercise of options that are
exercisable within 60 days of the Record Date.
(5) Includes 376,330 shares held of record by a trust for the benefit of Mr.
Cohn, his wife and their children. Also includes 376,330 shares issuable
upon exercise of options which are exercisable within 60 days of the Record
Date.
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(6) Includes 5,000 shares issuable upon exercise of options that are
exercisable within 60 days of the Record Date.
(7) Includes 43,805 shares issuable upon exercise of options that are
exercisable within 60 days of the Record Date.
(8) Represents holdings by the Freidenrich Family Trust of 37,396 shares and by
the Freidenrich Family Partnership (of which the Freidenrich Family Trust
is a 50% beneficial owner) of 3,975 shares. Includes 21,000 shares issuable
upon exercise of options which are exercisable within 60 days of the Record
Date.
(9) Includes 21,000 shares issuable upon exercise of options that are
exercisable within 60 days of the Record Date.
(10) Includes 45,000 shares issuable upon exercise of options that are
exercisable within 60 days of the Record Date.
(11) Includes 5,000 shares issuable upon exercise of options that are
exercisable within 60 days of the Record Date.
(12) Includes 21,000 shares issuable upon exercise of options that are
exercisable within 60 days of the Record Date.
(13) Includes 109,065 shares issuable upon exercise of options that are
exercisable within 60 days of the Record Date.
(14) Includes 848,035 shares issuable upon exercise of options that are
exercisable within 60 days of the Record Date.
As of the Record Date, the per share market value of the Company's Common
Stock was $40.25, based on the closing price on that date on The Nasdaq National
Market.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held a total of seven meetings during
the fiscal year ended June 30, 1995. The Audit Committee held seven meetings,
the Compensation Committee held four meetings and the Nominating Committee held
one meeting during the fiscal year ended June 30, 1995. Each director attended
at least 75% of Board and, where applicable, committee meetings held during the
fiscal 1995.
Messrs. Beard and Freidenrich and Ms. Coleman served on the Audit Committee
of the Board of Directors until the end of fiscal 1995. As of the beginning of
fiscal 1996, Ms. Coleman and Mr. Beard serve on the Audit Committee. The purpose
of the Audit Committee is to review with the Company's management and
independent auditors the financial statements and internal financial reporting
system and controls of the Company, recommend resolutions for any dispute
between the Company's management and its auditors and review other matters
relating to the relationship of the Company with its auditors.
Messrs. Chamberlain, de Rothschild and Tellefsen and Ms. Coleman currently
serve on the Compensation Committee. The purpose of the Compensation Committee
is to review and approve the salaries of the Company's executive officers and
certain highly compensated employees for each fiscal year. The compensation of
the President and Chief Executive Officer of the Company remains subject to
approval by the full Board of Directors.
Messrs. Beard, Freidenrich, de Rothschild and Tellefsen served on the
Nominating Committee until the end of fiscal 1995. As of the beginning of fiscal
1996, Messrs. Beard, de Rothschild and Tellefsen serve on the Nominating
Committee. The purpose of the Nominating Committee is to develop criteria for
nominating new members of the Board and to identify potential candidates for
such nomination. The Nominating Committee will consider stockholder
recommendations for new directors. However, the final determination of whether a
candidate will be nominated to become a member of the Company's Board of
Directors is reserved for the Nominating Committee. Any suggestions may be
submitted in writing, attention "Nominating Committee of the Board of
Directors," at the Company's principal offices.
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COMPENSATION OF DIRECTORS
During fiscal 1995, each of the directors was compensated for participating
in Board and committee meetings as follows: $5,000 annual fee, provided that the
director attended at least five of the six non-telephonic meetings of the Board
during the fiscal year; $1,500 for each meeting of the Board which the director
attended in person; $250 for each meeting of the Board which the director
attended via telephone; $500 for each meeting of a committee of the board
(except the Stock Option Committee) which the director attended in person; and
$500 per year for each member of the Stock Option Committee. In addition, the
Company reimburses all directors for travel and other necessary business
expenses incurred in fulfilling their duties as directors. Directors also
receive stock options granted pursuant to the 1988 Directors' Stock Option Plan.
See "1988 Directors' Stock Option Plan" below.
CERTAIN TRANSACTIONS
Sales to U.S. West were approximately $22.9 million, 4.8% of the Company's
total net revenues, during the Company's fiscal year ended June 30, 1995. Robert
C. Hawk, a director of the Company who is not standing for reelection this year,
is an executive officer of U.S. West. Based on its sales terms and prices for
similar products to similar companies (RBOCs), the Company believes that sales
to U.S. West were made on an arms' length basis.
Sales to Hewlett-Packard Company, a holder of more than 5% of the Company's
Common Stock for part of the fiscal year ended June 30, 1995, were approximately
$3.1 million, 0.7% of the Company's total net revenues, during the year. Based
on its sales terms and prices for similar products to similar companies, the
Company believes that sales to Hewlett-Packard Company were made on an arms'
length basis.
In November 1993, prior to merging with the Company, VMX, Inc. ("VMX")
loaned David Ladd, an officer of the Company, $100,000 for personal use pursuant
to a promissory note secured by 8,000 shares of the Company's Common Stock and
due in four years with interest at the Bank of America prime rate plus one
percent. The note was repaid in full on September 27, 1994.
In December 1994, the Company loaned $1,019,027 to Robert Cohn, an
executive officer and director of the Company, in connection with the exercise
of and payment of taxes regarding an incentive stock option to purchase 75,000
shares of Common Stock at $11.125 per share, with interest payable at a rate of
6.66%, compounded semi-annually, and a term of three years. The loan is secured
by 50,952 shares of the Company's Common Stock having a market value of
$2,050,818 at September 19, 1995. In February 1995, the Company loaned $267,000
to Derek S. Daley, an executive officer of the Company, in connection with the
exercise of an incentive stock option to purchase 24,000 shares of Common Stock
at $11.125 per share, with interest payable at a rate of 7.43%, compounded
annually, and a term of three years. The loan is secured by 12,420 shares of the
Company's Common Stock having a market value of $499,905 at September 19, 1995.
As of September 19, 1995, the total amount outstanding on Mr. Cohn's notes was
$1,070,126 and the total amount outstanding on Mr. Daley's note was $279,066.
The stock option agreements between the Company and certain of its officers
and key employees provide for full acceleration of exercisability if their
employment is terminated or their compensation is reduced in connection with a
change of control of the Company. See "Compensation Committee Report -- Chairman
and CEO Compensation" and "Proposal No. 2 -- Approval of Amendment Extending the
Term of the 1985 Incentive Stock Plan -- Terms Of Options."
The Company has entered into indemnification agreements with each of its
directors and officers. Such agreements require the Company to indemnify such
individuals to the full extent permitted by Delaware law if certain claims are
brought against them in their capacities with the Company.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's executive officers and directors and
persons who own more than ten percent of a registered class of the Company's
equity securities to file reports of ownership on Form 3 and changes in
ownership on Form 4 or
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<PAGE> 10
Form 5 with the Securities and Exchange Commission (the "SEC"). Such officers,
directors and ten percent stockholders are also required by SEC rules to furnish
the Company with copies of all Section 16(a) reports they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that Forms 5 have been
filed for such persons as required, the Company believes that, during the year
ended June 30, 1995, all reporting persons complied with Section 16(a) filing
requirements applicable to them.
COMPENSATION COMMITTEE REPORT
The following is the Report of the Compensation Committee of the Company,
describing the compensation policies and rationale applicable to the Company's
executive officers with respect to the compensation paid to such executive
officers for the year ended June 30, 1995. The information contained in the
report shall not be deemed to be "soliciting material" or to be "filed" with the
SEC nor shall such information be incorporated by reference into any future
filing under the Securities Act of 1933, as amended, or the Exchange Act except
to the extent that the Company specifically incorporates it by reference into
such filing.
COMPENSATION COMMITTEE REPORT
The Compensation Committee (the "Committee") of the Board of Directors of
Octel Communications Corporation determines the Company's executive compensation
policies. The Committee is comprised of four non-employee directors. The
Chairman and CEO participates as a non-voting member. After evaluating
management's performance, the Committee recommends compensation programs and pay
levels to the full Board for approval.
COMPENSATION PHILOSOPHY
The goals of the executive compensation program are to attract, retain and
reward executive officers who contribute to the success of the Company.
Compensation opportunities are aligned with the Company's business objectives.
The compensation programs are designed to motivate executive officers to meet
annual corporate performance goals and enhance long-term stockholder value.
In designing and administering the individual elements of the executive
compensation program, the Committee strives to balance short- and long-term
incentive objectives and use prudent judgment in establishing performance
criteria, evaluating performance and determining actual incentive awards.
Using the assistance of an independent compensation consulting firm, the
Committee regularly evaluates the competitiveness and appropriateness of the
Company's executive compensation program by comparing its pay practices with
other companies in the industry. For this comparison, compensation levels are
compared to those of a select group of similar high-technology companies with
approximately the same market capitalization, revenues and growth pattern as the
Company. The comparison group is subject to occasional changes as the Company or
the selected companies change their focus, merge or are acquired, or as new
companies emerge. Sales growth, operating income, P/E ratio, compound annual
growth rate, and market capitalization are evaluated to ensure the comparative
companies have successful track records.
COMPENSATION VEHICLES
The Company's executive compensation program includes base salary, annual
incentive and long-term incentive compensation components.
BASE SALARY
The Company reviews base salaries annually for market competitiveness. In
determining competitive levels, the job responsibilities of each executive are
matched with like jobs in the comparison group. Individual
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base salary increases may vary and reflect individual performance. This allows
the Company to attract and retain the key employees necessary to meet its
business objectives and enhance stockholder value.
As a cost-containment measure, fiscal year 1996 base salary increases for
the executive officers were deferred for six months and will be reviewed again
in January 1996.
ANNUAL INCENTIVE PLAN
The annual incentive portion of the 1995 executive compensation program
provided cash rewards based on achievement of corporate financial goals and
corporate business objectives. In 1995, the incentive target per individual was
defined as a percentage of his or her base compensation. The annual incentive
was based on the Company's achievement of revenue, operating income, customer
satisfaction objectives and the Company's achievement of certain business
objectives approved by the Board. The Company reviews the incentive targets
annually for market competitiveness based on job level and responsibilities. The
Company's philosophy is to leverage total compensation to provide competitive
pay for the achievement of aggressive performance measures. The amount of
compensation actually paid under this plan is variable or "at risk," because it
is tied directly to achievement of specific corporate performance goals.
In fiscal year 1995, all named executives received a cash award for the
corporate performance portion of the Annual Incentive Plan. The Company met
98.7% of its revenue goals and 86.2% of its operating income goals, which
(because the calculation of bonus payments for corporate financial achievement
has aggressive downside slope and is further modified based on achievement of
corporate business and customer satisfaction objectives) translated to bonus
payments equal to 80% of the target bonus being paid.
The Bonus Plan for fiscal year 1996 will have similar financial measures of
revenue and operating income and, for certain executives, will be partially
based on the performance of their respective business units. A portion of the
bonus (80% of the target bonus percentage) will be paid on a semi-annual basis
and will be based on these financial measures. The remaining 20% of the target
bonus percentage will be paid annually and will be based on achievement of
market share, customer satisfaction, and/or performance on key corporate
projects.
CHAIRMAN AND CEO COMPENSATION
The Committee bases compensation of all officers (except the Chairman and
CEO) on the policies and procedures described above. The Chairman's base salary
is $250,000 per year, well below competitive norms for a company of comparable
size. He has no annual incentive bonus. The greatest portion of the Chairman and
CEO's compensation is directly associated with the long-term capital growth of
the Company. Although Mr. Cohn was not granted any options in fiscal 1995, he
was, concurrent with his appointment to the position of Chairman and Chief
Executive Officer of the Company in fiscal 1994, granted the following options
to purchase Common Stock of the Company:
350,000 shares at $25.00 per share;
200,000 shares at $35.00 per share; and
200,000 shares at $50.00 per share.
These options become exercisable as to 20% of the total shares under option
one year after the date of grant and up to an additional 20% after the end of
each subsequent twelve-month period. These options contain acceleration
provisions consistent with other stock purchases and options Mr. Cohn has made
and received. The Company believes that the rewards Mr. Cohn may receive are
tied to the stock price performance of the Company, from which other
stockholders will derive substantial benefit as well.
STOCK OPTIONS
To balance the annual incentive plan, stock options focus the executives'
attention on the long-term performance of the Company and maximizing stockholder
value. Stock options are granted with an exercisable price equal to current fair
market value. Grant ranges have been established for each officer level
9
<PAGE> 12
which are based on competitive norms of the comparison group. Individual grants
may vary within the range to reflect individual performance and potential. The
option program also utilizes vesting periods to encourage retention of key
employees.
No options were granted to the five highest paid officers during Fiscal
Year 1995.
Specific information regarding compensation of the Chief Executive Officer
and other executive officers is contained in the accompanying table.
TAX POLICY
Section 162(m) of the Internal Revenue Code of 1986, as amended, limits
deductions for certain executive compensation in excess of $1 million. The
Company endeavors to structure its compensation plans to achieve maximum
deductibility under Section 162(m) with minimal sacrifices in flexibility and
corporate objectives. With respect to non-equity compensation arrangements, the
Committee has reviewed the terms of those arrangements most likely to be subject
to Section 162(m).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of directors Chamberlain,
Coleman, de Rothschild and Tellefsen. Robert Cohn, the Chairman of the Board,
President and Chief Executive Office of the Company, currently attends meetings
of the Compensation Committee but does not vote. There are no interlocks between
the Company's Board of Directors or Compensation Committee and boards of
directors or compensation committees of other companies.
LEO CHAMBERLAIN
DEBORAH COLEMAN
NATHANIEL DE ROTHSCHILD
DAG TELLEFSEN
10
<PAGE> 13
STOCK PERFORMANCE GRAPH
In accordance with Exchange Act regulations, the following performance
graph compares the cumulative total stockholder return on the Company's Common
Stock to the cumulative total return on the Nasdaq Index and on the Hambrecht &
Quist Technology Index over the same period. The graph assumes the value of the
investment in the Company's Common Stock and each index was $100 at June 30,
1990 and that all dividends were reinvested.
<TABLE>
<CAPTION>
OCTEL NASDAQ H&Q TECH
----- ------ --------
<S> <C> <C> <C>
6/90 $100.00 $100.00 $100.00
6/91 $107.69 $105.89 $100.60
6/92 $101.10 $127.17 $114.31
6/93 $ 97.80 $159.89 $139.66
6/94 $ 72.53 $161.50 $141.70
6/95 $128.57 $215.32 $237.29
</TABLE>
11
<PAGE> 14
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth, for the three fiscal years ended June 30,
1995, certain compensation information with respect to the Company's Chief
Executive Officer during fiscal 1995 and each of the four other most highly
compensated executive officers other than the Chief Executive Officer who were
serving as executive officers as of June 30, 1995 (collectively, the "Named
Executive Officers"), based upon salary and bonus earned by such executive
officers and individuals in fiscal 1995.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
----------------------------------- UNDERLYING
OTHER ANNUAL OPTIONS/ ALL OTHER
BONUS COMPENSATION SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) ($)(1) ($) (#)(2) ($)
- --------------------------- ---- ---------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Robert Cohn.................................... 1995 $257,933 -- $ 6,167(3) -- 7,005(4)
Chairman of the Board, 1994 237,692 -- 5,776(3) 750,000 9,318(4)
President and Chief 1993 237,026 -- 5,522(3) -- 8,255(4)
Executive Officer
W. Michael West................................ 1995 231,888 92,400 -- -- 5,595(4)
Vice Chairman of the Board 1994 238,658 92,450 -- 67,500 8,861(4)
1993 226,431 60,425 -- 20,000 8,389(4)
David Ladd..................................... 1995 190,435 82,000 -- -- 7,364(4)
Executive Vice President and 1994 185,208 53,199 -- 105,000 363(4)
Chief Technology Officer 1993 162,292 59,193 -- -- 333(4)
Donald L. Campodonico.......................... 1995 188,222 67,500 -- -- 9,511(4)
Senior Vice President 1994 193,467 65,391 -- 60,000 8,493(4)
1993 175,496 30,975 -- 10,500 7,643(4)
Derek S. Daley................................. 1995 178,183 306,800(5) -- -- 7,449(4)
Vice President, General Counsel 1994 178,183 56,850 -- 35,500 6,793(4)
and Secretary 1993 169,784 38,825 -- 9,500 6,153(4)
</TABLE>
- ---------------
(1) Includes bonuses earned in the applicable fiscal year but paid or to be
paid in the following fiscal year.
(2) No SARs were granted.
(3) Comprised of Mr. Cohn's portion of the profit-sharing payments made to most
employees of the Company.
(4) Comprised of premiums for insurance policies where the officers are the
beneficiaries.
(5) Includes a one-time bonus in the amount of $250,000 in recognition of
reduced outside legal fees and successful results in Theis v. Octel,
et.al., a major patent lawsuit decided in favor of the Company.
ANNUAL INCENTIVE PLAN
The Company's Board of Directors has adopted an Annual Incentive Plan (the
"Bonus Plan") providing for cash bonuses to officers and senior managers. Under
the Bonus Plan, fiscal year 1995 bonuses to all officers, including executive
officers, of the Company in an aggregate amount of approximately $1,031,000 were
awarded as percentages of the individuals' salaries, based on the Company's
achievement of revenue, operating income, corporate business and customer
satisfaction objectives approved by the Board.
The Bonus Plan for fiscal year 1996 will have similar financial measures of
revenue and operating income and, for certain executives, will be partially
based on the performance of their respective business units. A portion of the
bonus (80% of the target bonus percentage) will be paid on a semi-annual basis
and will be based on these financial measures. The remaining 20% of the target
bonus percentage will be paid annually
12
<PAGE> 15
and will be based on achievement of market share, customer satisfaction, and/or
performance on key corporate projects.
EMPLOYEE STOCK PLANS
The following is a brief summary of the Company's employee stock plans in
effect during the fiscal year ended June 30, 1995 under which officers,
employees, consultants and directors of the Company received benefits. The
closing sale price of the Company's Common Stock on the Record Date, as reported
by The Nasdaq National Market, was $40.25 per share.
1985 INCENTIVE STOCK PLAN
The Company's 1985 Incentive Stock Plan (the "Option Plan"), under which
9,600,000 shares are currently reserved for issuance, was adopted by the Board
of Directors in 1985 and approved by the Company's stockholders in 1985.
Amendments to the Option Plan were approved by the Board of Directors and the
stockholders in each of the last six years and by the Board of Directors in
September 1995. The Option Plan permits the direct sale of shares and the grant
of both "incentive stock options" (within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Tax Code")) and nonstatutory
stock options to employees and officers of, and consultants to, the Company.
As of the Record Date under the Option Plan, 690,070 shares had been sold
directly, options to purchase 5,482,828 shares were outstanding at a weighted
average exercise price of $22.687 per share, options for 2,695,035 shares had
been exercised and 732,067 shares were available for future option grant or
direct sale.
The Option Plan is administered by the Board of Directors or a committee
appointed by the Board. The Board or committee determines the terms of options
granted, including the exercise price, number of shares subject to the option
and the exercisability thereof. The exercise price of all options to purchase
shares of Common Stock under the Option Plan must be at least equal to the fair
market value of such shares on the date of grant, and the maximum term of each
incentive stock option is ten years. Options granted to officers and certain key
employees under the Option Plan provide for full acceleration of exercisability
in the event that, following a change in control of the Company, the optionee's
employment is terminated or the optionee's compensation and benefits are
reduced. See Proposal No. 2 for a more detailed description of the Option Plan
and a proposal to extend the term of the Option Plan for an additional ten
years.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1995
AND OPTION/SAR VALUES AS OF JUNE 30, 1995
The following table sets forth certain information regarding options for
the purchase of the Company's Common Stock that were exercised or held by the
Named Executive Officers during fiscal 1995.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED ON OPTIONS/SARS AT OPTIONS/SARS
EXERCISE VALUE REALIZED JUNE 30, 1995 AT JUNE 30, 1995($)(2)
NAME ($) ($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ----------- --------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Robert Cohn................. 75,000 $ 665,625 206,064/620,266 $ 1,313,660/1,557,321
W. Michael West............. -- -- 83,872/94,093 850,718/565,085
David Ladd.................. -- -- 37,500/82,500 480,375/675,375
Donald L. Campodonico....... 4,700 56,988 26,700/61,500 222,188/440,187
Derek S. Daley.............. 24,000 249,000 34,005/43,500 407,466/275,313
</TABLE>
- ---------------
(1) Difference between the fair market value of the Common Stock purchased and
the exercise price on the date of exercise.
(2) Difference between the fair market value of the underlying Common Stock
and the exercise price, for in-the-money options, on June 30, 1995.
13
<PAGE> 16
1987 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1987 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in October 1987 and approved by the
stockholders in November 1987. Amendments to the Purchase Plan were approved by
the Board of Directors and the stockholders in each of the last six years and by
the Board of Directors in July 1995. A total of 1,650,000 shares of Common Stock
is currently reserved for issuance under the Purchase Plan (see Proposal No. 3
for the proposed addition of 475,000 shares). The Purchase Plan, which is
intended to qualify under Section 423 of the Tax Code, is implemented by one
offering during each six-month period. Offering periods commence on or about May
1 and November 1 of each year. The Purchase Plan is administered by the Board of
Directors of the Company or by a committee appointed by the Board. Employees are
eligible to participate if they are employed by the Company for at least 20
hours per week and more than five months per year. The Purchase Plan permits
eligible employees to purchase Common Stock through payroll deductions, which
may not exceed 10% of an employee's compensation, at 85% of the lower of the
fair market value of the Common Stock at the beginning or at the end of each
offering period. See Proposal No. 3 for a more detailed description of the
Purchase Plan.
As of the Record Date, 1,619,061 shares had been sold under the Purchase
Plan at a weighted average purchase price per share of $15.20 and 30,939 shares
remained available for future issuance. See Proposal No. 3 regarding the
addition of 475,000 shares to the Purchase Plan.
PURCHASE PLAN
The following table sets forth, as to the Named Executive Officers, all
current executive officers as a group and all other employees who participated
in the Purchase Plan: (i) the number of shares of the Company's Common Stock
purchased under the Purchase Plan during the last fiscal year; and (ii) the
dollar value of the benefit (see footnote (1) to the table):
<TABLE>
<CAPTION>
(I)
NUMBER OF (II)
SHARES DOLLAR VALUE
NAME OF INDIVIDUAL OR IDENTITY OF GROUP PURCHASED ($)(1)
- ------------------------------------------------------------------- --------- ------------
<S> <C> <C>
Robert Cohn........................................................ 751 $ 8,188
W. Michael West.................................................... 804 8,240
David Ladd......................................................... -- --
Donald L. Campodonico.............................................. 642 4,991
Derek S. Daley..................................................... 954 8,379
All current executive officers as a group (11 persons)............. 4,206 36,805
All other employees as a group..................................... 365,551 3,060,226
</TABLE>
- ---------------
(1) Market value on date of purchase, minus the purchase price.
1988 DIRECTORS' STOCK OPTION PLAN
The Company's 1988 Directors' Stock Option Plan (the "Directors' Plan") was
adopted by the Board of Directors in November 1988, was amended in 1989 and was
approved by the Company's stockholders in 1989. Amendments to the Directors'
Plan were approved by the Board and the stockholders in 1990 and 1994 and by the
Board in November 1991 and April 1992. A total of 350,000 shares of Common Stock
is reserved for issuance under the Directors' Plan. The Directors' Plan is
administered by the Board of Directors. Only non-employee directors are eligible
to participate in the Directors' Plan. Eligible directors are automatically
granted an option to purchase 25,000 shares of the Company's Common Stock on the
date they are first elected a director, such option becoming exercisable
cumulatively with respect to 5,000 shares on each of the first five
anniversaries of the date of grant, unless accelerated because of a director's
death or disability. On the date of the Annual Meeting of Stockholders each
year, all non-employee directors who have served since the previous Annual
Meeting of Stockholders and are reelected receive an immediately exercisable
option for
14
<PAGE> 17
3,000 shares. The exercise price of an option granted under the Directors' Plan
is the fair market value (based on The Nasdaq National Market closing price) of
the stock on the date the option is granted.
PROPOSAL NO. 2 -- APPROVAL OF AMENDMENT EXTENDING THE TERM
OF THE 1985 INCENTIVE STOCK PLAN
GENERAL
The 1985 Incentive Stock Plan (the "Option Plan") was amended by the Board
of Directors in June 1995, subject to approval by the Company's stockholders, to
extend the term of the Option Plan for an additional ten-year period and to
change the name of the Option Plan to the "1995 Incentive Stock Plan."
The Option Plan is the principal means through which the Company provides
equity incentives to its employees. The extension of the Option Plan's term and
the subsequent reservation of shares under the Option Plan will ensure that the
Board of Directors can continue to create the equity incentives necessary to
assist the Company in attracting, retaining and motivating the best available
personnel for the successful conduct of the Company's business.
VOTE REQUIRED
The affirmative vote of the majority of the Votes Cast will be required
under Delaware law to approve the amendment to the Option Plan.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE
OPTION PLAN, AS AMENDED.
The essential features of the Option Plan are outlined below.
PURPOSES
The purposes of the Option Plan are to attract and retain the best
available personnel for positions of substantial responsibility, to provide
additional incentive to the employees and consultants of the Company and to
promote the success of the Company's business.
ADMINISTRATION; LIMITS ON GRANTS
With respect to grants of options to employees who are also officers or
directors of the Company, the Option Plan, as amended, shall be administered by
(i) the Board of Directors of the Company if the Board may administer the Option
Plan in compliance with Rule 16b-3 under the Exchange Act ("Rule 16b-3") with
respect to a plan intended to qualify under Rule 16b-3 as a discretionary plan
or (ii) a committee designated by the Board of Directors to administer the
Option Plan, which committee shall be constituted in such a manner as to permit
the Option Plan to comply with Rule 16b-3 with respect to a plan intended to
qualify thereunder as a discretionary plan. With respect to grants of options to
employees or consultants who are neither officers nor directors of the Company,
the Option Plan shall be administered by (i) the Board of Directors or (ii) a
committee designated by the Board, which committee shall be constituted in such
a manner as to satisfy the legal requirements relating to the administration of
incentive stock option plans, if any, of Delaware corporate law, federal and
state and securities laws and the Tax Code. If permitted by Rule 16b-3, the
Option Plan may be administered by different bodies with respect to directors,
non-director officers and employees who are neither officers nor directors and
consultants who are not directors. For the purposes of this plan description
"Board" shall mean either the Board of Directors or a committee appointed by the
Board of Directors to administer the Option Plan.
ELIGIBILITY
The Option Plan provides for the grant of options and sale of shares to
employees of and consultants to the Company. Only employees may be granted
incentive stock options. The Board selects the purchasers and optionees and
determines the number of shares to be sold or made subject to option. As of the
date of this
15
<PAGE> 18
Proxy Statement, directors who are not also employees of the Company are not
eligible to participate in the Option Plan. However, prior to March 10, 1988,
such directors were eligible to participate in the Option Plan and they may
still exercise options granted to them prior to that date.
At the Record Date, the Company employed approximately people,
of whom were eligible to participate in the Option Plan.
TERMS OF OPTIONS
Each option granted under the Option Plan is evidenced by a written stock
option agreement between the Company and the optionee. Options are generally
subject to the terms and conditions set forth below, but specific terms may
vary.
(a) Exercise of the Option. The Board determines when options may be
exercised. In no event may any incentive stock option granted under the Option
Plan be exercised more than ten years after the date of grant. Incentive stock
options currently being granted generally expire after five years and six
months. An option is exercised by giving written notice of exercise to the
Company specifying the number of full shares of Common Stock to be purchased and
by tendering payment of the purchase price. Payment for shares purchased upon
exercise of an option shall be in such form of consideration as is authorized by
the Option Plan and determined by the Board, and such form of consideration may
vary for each option.
(b) Exercise Price. The exercise price of options granted under the Option
Plan is determined by the Board and may not be less than 100% of the fair market
value of the Common Stock on the date the option is granted. In the case of
incentive stock options granted to an optionee who owns more than 10% of the
voting power or value of all classes of stock of the Company, the exercise price
must not be less than 110% of the fair market value on the date of grant. The
fair market value of the Common Stock is the closing sale price on The Nasdaq
National Market on the date of grant.
(c) Termination of Employment. If the optionee's employment or association
with the Company terminates for any reason (other than death or disability), the
optionee may, but only within 30 days (or such other period as may be determined
by the Board, but not exceeding three months for incentive stock options)
following the date of such termination, exercise any option granted under the
Option Plan, but only to the extent such option was exercisable on the date of
termination. To the extent that the option is not exercised within such 30-day
(or other) period, the option terminates.
(d) Disability. In the event that an employee or consultant is unable to
continue his employment or consulting relationship with the Company as a result
of his total and permanent disability (as defined in Section 22(e)(3) of the Tax
Code), exercisability generally is accelerated from the usual four-year period
to a three-year period, and the optionee may, but only within three months (or
such other period of time not exceeding one year as is determined by the Board
at the time of grant of the option) from the date of termination, exercise the
option to the extent it was otherwise exercisable at the date of such
termination. To the extent that the option is not exercised within such period,
the option terminates.
(e) Death. If an optionee should die while employed by, or within one
month after termination of employment with, the Company, exercisability of
options under the Option Plan generally is accelerated from the usual four-year
period to a three-year period, and the option may be exercised at any time
within six months after death by the optionee's estate, but only to the extent
such options were exercisable on the date of death or termination, as the case
may be.
(f) Liquidation or Acquisition. In the event of a proposed dissolution or
liquidation of the Company, options under the Option Plan terminate unless
otherwise provided by the Board. In such event, the Board, in its sole
discretion, may determine to make options immediately exercisable as to all
shares.
Current option agreements provide that in the event of a proposed sale of
all or substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, options shall be assumed or equivalent
options shall be substituted by such successor corporation or its affiliate. If
such successor corporation refuses to assume an option or to substitute an
equivalent option, the Board shall provide
16
<PAGE> 19
for the optionee to have the right to exercise the option as to all of the
Common Stock subject to the option. Most options before December 1987 allowed
the Board the right to accelerate the exercisability of options whether or not a
successor corporation was willing to assume such options.
Option agreements for officers and certain key employees provide for full
acceleration of exercisability in the event that, following a change in control
of the Company, the optionee's employment is terminated or the optionee's
compensation and benefits are reduced. The Board may, in its discretion, provide
in individual option agreements for an optionee to have the right to return an
option to the Company for a cash payment equal to the net value of the option
upon the occurrence of a merger, sale of all or substantially all assets of the
Company, tender offer or other transaction or series of related transactions
resulting in a change of ownership of more than 50% of the voting securities of
the Company.
(g) Non-transferability of Options. An option is generally not
transferable by the optionee, other than by will or the laws of descent and
distribution. However, the Board may grant or amend options in individual cases
to allow an option to be transferable to a trust for the benefit of an employee
or the employee's family members. Options are generally exercisable during the
optionee's lifetime only by the optionee unless transferred to a trust as
described above.
(h) Withholding of Shares to Pay Tax Liability. The Option Plan allows the
Company to withhold shares as to which an option has been exercised in order to
comply with regulations requiring the Company to withhold taxes upon certain
exercises of options. See "Tax Information -- Nonstatutory Options."
(i) Other Provisions. The option agreement may contain such other terms,
provisions and conditions not inconsistent with the Option Plan as may be
determined by the Board or its committee.
OPTIONS OUTSTANDING
Options granted under the Option Plan generally become exercisable in
installments. Most options granted before June 2, 1994 become exercisable as to
20% of the total shares under option one year after the date of beginning
employment (for new employees) or the date of option grant (for existing
employees), and as to an additional 20% after each subsequent twelve-month
period so long as the optionee remains an employee of the Company. Most options
granted on and after June 2, 1994 become exercisable as to 25% of the total
shares under option one year after the date of beginning employment (for new
employees) or the date of option grant (for existing employees), and as to an
additional 25% after each subsequent twelve-month period so long as the optionee
remains an employee of the Company. Exercisability is accelerated in the case of
death or disability or, in certain cases, by termination of employment or
reduction in compensation following a change in control, as described above.
Exercisability is delayed by leaves of absence or temporary reductions in work
hours. Options being granted at this time generally expire five years and six
months from the date of grant.
At the Record Date, 690,070 shares had been sold directly, options to
purchase 2,695,035 shares of the Company's Common Stock had been exercised,
options to purchase 5,482,828 shares were outstanding, and 732,067 shares
remained available for future sale or grant under the Option Plan. The range of
exercise prices per share for options outstanding under the Option Plan at the
Record Date was from $0.05 to $50.00, and the weighted average exercise price
per share was approximately $22.687. Expiration dates for outstanding options
range from September 22, 1995 to March 15, 2001.
CAPITAL CHANGES
In the event any change is made in the Company's capitalization which
results in an exchange of Common Stock for a greater or lesser number of shares
without receipt of consideration, appropriate adjustment will be made in the
exercise price and in the number of shares subject to options outstanding under
the Option Plan, as well as in the number of shares reserved for issuance under
the Option Plan.
17
<PAGE> 20
AMENDMENT AND TERMINATION OF THE PLAN
The Board may at any time amend, alter, suspend or discontinue the Option
Plan, but no amendment, alteration, suspension or discontinuation shall be made
which would impair the rights of any optionee under any grant theretofore made
without such optionee's consent. In addition, to the extent necessary and
desirable to comply with Rule 16b-3 or with Section 422 of the Tax Code (or any
other applicable law or regulation, including the requirements of the NASD or an
established stock exchange), the Company shall obtain stockholder approval of
any amendment to the Option Plan in such a manner and to such a degree as
required.
TAX INFORMATION -- THE OPTION PLAN
Options granted under the Option Plan may be either "incentive stock
options," as defined in Section 422 of the Tax Code, or nonstatutory options.
An optionee who is granted an incentive stock option will not recognize
taxable income either at the time the option is granted or upon its exercise,
unless the exercise subjects the optionee to the alternative minimum tax. Upon
the sale or exchange of the shares more than two years after grant of the option
and one year after exercising the option, any gain or loss will be treated as
long-term capital gain or loss. If these holding periods are not satisfied, the
optionee will recognize ordinary income at the time of sale or exchange equal to
the difference between the exercise price and the lower of (i) the fair market
value of the shares at the date of the option exercise or (ii) the sale price of
the stock. A different timing rule for measuring ordinary income upon such a
premature disposition may apply if the optionee is also an officer, director or
10% stockholder of the Company. The Company will be entitled to a deduction in
the same amount as the ordinary income recognized by the optionee. Any gain or
loss recognized on such a premature disposition of the shares in excess of the
amount treated as ordinary income will be characterized as long-term or
short-term capital gain or loss, depending on the holding period.
All other options which do not qualify as incentive stock options are
referred to as "nonstatutory options." An optionee will not recognize any
taxable income at the time of grant of a nonstatutory option. However, upon its
exercise, the optionee will recognize taxable income generally measured as the
excess of the then fair market value of the shares purchased over the purchase
price. Any taxable income recognized in connection with an option exercise by an
optionee who is also an employee of the Company will be subject to tax
withholding by the Company. Upon resale of such shares by the optionee, any
difference between the sales price and the optionee's purchase price, to the
extent not recognized as taxable income as described above, will be treated as
long-term or short-term capital gain or loss, depending on the holding period.
The Company will be entitled to a tax deduction in the same amount as the
ordinary income recognized by the Optionee with respect to shares acquired upon
exercise of a nonstatutory option.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON THE OPTIONEE AND THE COMPANY WITH RESPECT TO THE GRANT AND EXERCISE OF
OPTIONS UNDER THE OPTION PLAN, DOES NOT PURPORT TO BE COMPLETE, AND REFERENCE
SHOULD BE MADE TO THE APPLICABLE PROVISIONS OF THE TAX CODE. IN ADDITION, THIS
SUMMARY DOES NOT DISCUSS THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR
FOREIGN COUNTRY IN WHICH THE OPTIONEE MAY RESIDE.
PROPOSAL NO. 3 -- APPROVAL OF AMENDMENT TO
THE 1987 EMPLOYEE STOCK PURCHASE PLAN
The 1987 Employee Stock Purchase Plan (the "Purchase Plan") was amended by
the Board of Directors in July 1995 to reserve an additional 475,000 shares of
Common Stock for issuance thereunder, bringing the total number of shares under
the Purchase Plan to 2,125,000.
The Company believes that its Purchase Plan is an important factor in
attracting and retaining skilled personnel. Each year the Company reviews the
number of shares available for issuance under the Purchase Plan and, based on
the Company's estimates of the number of shares expected to be purchased under
the Purchase Plan during the coming year, management presents to the Board of
Directors a recommendation for
18
<PAGE> 21
the addition of shares to the pool reserved for issuance under the Purchase
Plan. The Board then reviews this recommendation and presents a proposal such as
this one to the stockholders for approval.
The initial offering period under the Purchase Plan began on February 26,
1988, and from that date to the Record Date 1,619,061 shares of the Company's
Common Stock were sold under the Purchase Plan. The number of shares sold in
each offering period will vary with the number of participants, the amount of
their payroll deductions and the fair market value of the Company's Common
Stock.
VOTE REQUIRED
The affirmative vote of the majority of the Votes Cast will be required
under Delaware law to approve the amendment to the Purchase Plan.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE
PURCHASE PLAN AS AMENDED, INCLUDING THE ADDITION OF SHARES TO THE POOL RESERVED
FOR ISSUANCE THEREUNDER.
The essential features of the Purchase Plan are outlined below.
GENERAL
The Purchase Plan, and the right of participants to make purchase
thereunder, is intended to qualify under the provisions of Sections 421 and 423
of the Tax Code. See "Tax Information -- The Purchase Plan."
PURPOSE
The purpose of the Purchase Plan is to provide employees of the Company
with an opportunity to purchase Common Stock of the Company at a discount
through accumulated payroll deductions.
ADMINISTRATION
The Purchase Plan is administered by the Board of Directors or a committee
of members of the Board appointed by the Board, who receive no separate
additional compensation for such service. All questions of interpretation or
application of the Purchase Plan are determined by the Board or its appointed
committee, whose decisions are final and binding upon all participants. Members
of the Board who are eligible employees are permitted to participate in the
Purchase Plan but may not vote on any matter affecting the administration of the
Purchase Plan or the grant of any option pursuant to the Purchase Plan.
ELIGIBILITY
Any person who is customarily employed at least 20 hours per week and five
months per calendar year by the Company during the applicable offering period is
eligible to participate in the Purchase Plan, unless the employee would own five
percent or more of the total combined voting power of value of all classes of
stock of the Company or of its subsidiaries (including stock issuable upon
exercise of options held by such person) at the end of the offering period, or
the employee would receive more than $25,000 worth of stock (computed as of the
date of grant) pursuant to the Purchase Plan in any calendar year.
At the Record Date, the Company employed approximately people,
of whom were eligible to participate in the Purchase Plan.
Approximately employees were participating in the Purchase Plan as of
the Record Date.
OFFERING DATES
The Purchase Plan is generally implemented by one offering during each
six-month period. Offering periods will commence on or about May 1 and November
1 of each year. Prior to this time offering periods began on January 1 and July
1 of each year, and the Company's current offering period began July 1, 1995 and
will end April 30, 1996 in order to move the offering period to the new dates
approved by the Board in June 1995.
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ENROLLMENT IN THE PLAN
Eligible employees become participants in the Purchase Plan by delivering
to the Company's payroll office a subscription agreement authorizing payroll
deductions. Employees hired after the first day of an offering period (or who
otherwise become eligible after such date) may begin participation in the
Purchase Plan on the first business day of the calendar month following the
month in which they are hired (or become eligible). Under the Purchase Plan,
once an employee elects to participate in the Purchase Plan, enrollment in each
successive offering period occurs automatically unless the employee withdraws
from participation in the Purchase Plan.
PURCHASE PRICE
The purchase price per share under the Purchase Plan is the lower of (i)
85% of the fair market value of a share of Common Stock on the date of
commencement of the offering (or for employees beginning participation later,
the date such participation began) or (ii) 85% of the fair market value of a
share of Common Stock on the last day of the offering period. The fair market
value of the Common Stock on a given date is the closing sale price on The
Nasdaq National Market.
PAYMENT OF PURCHASE PRICE; PAYROLL DEDUCTIONS
The purchase price of the shares is accumulated by after-tax payroll
deductions over the offering period. The deductions may not exceed 10% of a
participant's compensation. The total number of shares purchased by any
participant shall in no event exceed, in any calendar year, the number of shares
of Common Stock which $25,000 could purchase at the fair market value of a share
of the Company's Common Stock, calculated as of the offering date. A participant
may discontinue participation in the Purchase Plan, and may decrease but not
increase the rate of payroll deductions, during the offering period.
PURCHASE OF STOCK; EXERCISE OF OPTION
By executing a subscription agreement to participate in the Purchase Plan,
the employee is entitled to have shares placed under option to him. The maximum
number of shares placed under option to a participant in an offering is that
number determined by dividing the total amount of the participant's contribution
for the offering period by the lower of (i) 85% of the fair market value of the
Common Stock at the beginning of the offering period (or date his participation
began) or (ii) 85% of the fair market value of the Common Stock at the end of
the offering period, but in no event shall more than the number of shares of
Common Stock which $25,000 could purchase at the fair market value of a share of
the Company's Common Stock, calculated as of the offering date, be placed under
option to a single participant in any one calendar year. Unless the employee's
participation is discontinued, the option for the purchase of shares will be
exercised automatically at the end of the offering period at the applicable
price. No fractional shares will be issued upon exercise of the option. Any
amounts insufficient to purchase a full share remaining in a participant's
account after exercise of the option will be credited to the participant and
used in a future offering period. No interest will accrue on the payroll
deductions of a participant in the Purchase Plan.
WITHDRAWAL
A participant's interest in a given offering may be terminated by signing
and delivering to the Company a notice of withdrawal from the Purchase Plan.
Upon withdrawal from the Purchase Plan, accrued but unused payroll deductions
are returned to the employee. Such withdrawal may be elected at any time prior
to the end of the applicable six-month offering period. A participant's
withdrawal from an offering will not have any effect upon such participant's
eligibility to participate in subsequent offering periods under the Purchase
Plan.
TERMINATION OF EMPLOYMENT
Termination of a participant's employment for any reason, including
retirement or death, cancels participation in the Purchase Plan immediately. In
such event the payroll deductions credited to the
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participant's account will be returned without interest to such participant, or,
in the case of death, to the person or persons entitled thereto as specified by
the employee in the subscription agreement.
CAPITAL CHANGES
In the event of changes in the capitalization of the Company, such as stock
splits or stock dividends, which result in an increase or decrease in the number
of shares of Common Stock without receipt of consideration by the Company,
appropriate adjustments will be made by the Company in the number of shares
subject to purchase and in the price per share.
EFFECT OF LIQUIDATION, DISSOLUTION, SALE OF ASSETS OR MERGER
In the event of a liquidation or dissolution of the Company, an employee's
participation in the Purchase Plan will be terminated immediately before
consummation of such event unless otherwise provided by the Board. In the event
of a sale of all or substantially all of the assets of the Company or a merger
of the Company with or into another corporation, the employee's rights may be
satisfied by assumption of the Company's obligations by such acquiring or
successor corporation. If such corporation refuses to assume those obligations,
the Board shall allow the immediate exercise of the employee's rights for 30
days, after which the employee's rights under the Purchase Plan shall terminate.
NON-ASSIGNABILITY
No rights or accumulated payroll deductions of an employee under the
Purchase Plan may be pledged, assigned or transferred for any reason, and any
such attempt may be treated by the Company as an election to withdraw from the
Purchase Plan.
REPORTS
Individual accounting will be maintained for each participant in the
Purchase Plan. Each participant receives as promptly as practicable after the
end of the six-month offering period a report showing the details of the
participant's account.
AMENDMENT AND TERMINATION OF THE PLAN
The Board may at any time amend, alter, suspend or discontinue the Purchase
Plan, but, except under certain conditions, no amendment, alteration, suspension
or discontinuation shall be made which would impair the rights of any
participant arising out of any offering period which has already commenced
without such participant's written consent. In addition, to the extent necessary
and desirable to comply with Rule 16b-3 under the Exchange Act or with Section
423 of the Tax Code (or any other applicable law or regulation, including the
requirements of the NASD or an established stock exchange), the Company shall
obtain stockholder approval of any Purchase Plan amendment in such a manner and
to such a degree as required.
TAX INFORMATION -- THE PURCHASE PLAN
The Purchase Plan, and the right of participants to make purchases
thereunder, is intended to qualify under the provisions of Sections 421 and 423
of the Tax Code. Under these provisions, no income will be taxable to a
participant until the shares purchased under the Plan are sold or otherwise
disposed of. Upon sale or other disposition of the shares, the participant will
generally be subject to tax and the amount of the tax will depend upon the
holding period. If the shares are sold or otherwise disposed of more than two
years from the first day of the offering period, the participant will recognize
ordinary income measured as the lesser of (a) the excess of the fair market
value of the shares at the time of such sale or disposition over the purchase
price, or (b) an amount equal to 15% of the fair market value of the shares as
of the first day of the offering period. Any additional gain will be treated as
long-term capital gain. If the shares are sold or otherwise disposed of before
the expiration of this holding period, the participant will recognize ordinary
income generally measured as the excess of the fair market value of the shares
on the date the shares are purchased over the purchase price. Any additional
gain or loss on such sale or disposition will be long-term or short-term capital
gain or loss,
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depending on the holding period. The Company is not entitled to a deduction for
amounts taxed as ordinary income or capital gain to a participant except to the
extent of ordinary income recognized by participants upon a sale or disposition
of shares prior to the expiration of the holding period(s) described above.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON THE PARTICIPANT AND THE COMPANY WITH RESPECT TO THE SHARES PURCHASED UNDER
THE PURCHASE PLAN, DOES NOT PURPORT TO BE COMPLETE, AND REFERENCE SHOULD BE MADE
TO THE APPLICABLE PROVISIONS OF THE TAX CODE. IN ADDITION, THIS SUMMARY DOES NOT
DISCUSS THE TAX CONSEQUENCES OF A PARTICIPANT'S DEATH OR THE INCOME TAX LAWS OF
ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE PARTICIPANT MAY RESIDE.
PROPOSAL NO. 4 -- APPROVAL OF AMENDMENT TO
CERTIFICATE OF INCORPORATION
The Company's Restated Certificate of Incorporation (the "Certificate"), as
currently in effect, provides that the Company is authorized to issue 5,000,000
shares of Preferred Stock, par value $.001 per share, and 50,000,000 shares of
Common Stock, par value $.001 per share. In June 1995, the Board of Directors
authorized an amendment to the Certificate to increase the authorized number of
shares of Common Stock to 200,000,000 shares.
Under the proposed amendment, the Sections 1 and 2 of Article FOURTH of the
Certificate would be amended to read as follows:
"Section 1. The total number of shares which the Corporation shall
have authority to issue is 205,000,000 shares of capital stock.
"Section 2. Of such authorized shares, two hundred million
(200,000,000) shares shall be designated 'Common Stock,' and have a par
value of $.001."
As of September 19, 1995, shares of Common Stock were issued and
outstanding, approximately additional shares were issuable upon
exercise of outstanding options or purchase rights and approximately
shares were reserved for future grants under the Company's stock plans.
PURPOSE AND EFFECT OF AMENDMENT
The principal purpose of the proposed amendment to the Certificate is to
authorize additional shares of Common Stock which will be available in the event
that the Board of Directors determines to authorize stock dividends or stock
splits, to raise additional capital through the sale of securities, to acquire
another company or its business or assets or to establish a strategic
relationship with a corporate partner. If the proposed amendment is adopted,
150,000,000 additional shares of Common Stock of the Company will be available
for issuance by the Board of Directors without any further stockholder approval,
although certain large issuances of shares may require stockholder approval in
accordance with the requirements of the Nasdaq National Market. The Board of
Directors believes it desirable that the Company have the flexibility to issue
the additional shares without further stockholder approval. The holders of
Common Stock have no preemptive rights to purchase any stock of the Company. The
additional shares could be issued at such times and under such circumstances as
to have a dilutive effect on earnings per share and on the equity ownership of
the present holders of Common Stock. No actions are currently being taken with
respect to any large issuance of additional shares.
The flexibility of the Board of Directors to issue additional shares of
stock could enhance the Board's ability to negotiate on behalf of the
stockholders in a takeover situation. Although it is not the purpose of the
proposed amendment, the authorized but unissued shares of Common Stock (as well
as the authorized but unissued shares of Preferred Stock) also could be used by
the Board of Directors to discourage, delay or make more difficult a change in
the control of the Company. For example, such shares could be privately placed
with purchasers who might align themselves with the Board of Directors in
opposing a hostile takeover bid. The issuance of additional shares could serve
to dilute the stock ownership of persons seeking to obtain control and thereby
increase the cost of acquiring a given percentage of the outstanding stock. The
Company has
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previously adopted certain measures that may have the effect of delaying or
preventing an unsolicited takeover attempt, including a Common Shares Rights
Agreement, provisions in the 1985 Incentive Stock Plan providing for the
acceleration of exercisability of outstanding options under certain
circumstances in the event of a sale of assets or merger and provisions of the
Certificate authorizing the Board to issue up to 5,000,000 shares of Preferred
Stock with terms, provisions and rights fixed by the Board. The Board of
Directors is not aware of any pending or proposed effort to acquire control of
the Company.
VOTE REQUIRED
The approval of the amendment to the Certificate requires the affirmative
vote of a majority of the outstanding shares of Common Stock of the Company. An
abstention or nonvote is not an affirmative vote and, therefore, will have the
same effect as a vote against the proposal.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE
AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION.
PROPOSAL NO. 5 -- STOCKHOLDER PROPOSAL REGARDING
OPTION EXCHANGE PROGRAMS
The Company receives many suggestions from stockholders, some as formal
stockholder proposals. All are given careful attention by the Company, and
management has adopted a number of the suggestions made.
Management of the Company disagrees strongly with the adoption of the
resolution proposed below and asks all stockholders to read through the
Company's entire response which follows the stockholder's proposal.
The author and proponent of the following resolution, the State of
Wisconsin Investment Board ("SWIB"), Lake Terrace, 121 East Wilson Street,
Madison, Wisconsin 53707, has required the Company to present the following
proposal at the Annual Meeting of Stockholders. The proponent owns 2,371,000
shares of the Company's Common Stock as of the Record Date. The SWIB proposal is
quoted verbatim below:
STOCKHOLDER RESOLUTION
"WHEREAS, the Octel Communications (OCTL) board has supported the
adoption of numerous incentive compensation plans over the years,
regardless of company or stock performance; and
"WHEREAS, during the previous several years, the company has granted
options for millions of OCTL shares pursuant to such plans; and
"WHEREAS, this practice has led to an unacceptable level of potential
dilution to existing shareholders, especially in light of company stock
performance; and
"WHEREAS, notwithstanding extreme levels of dilution and poor company
stock performance over the past five years, OCTL continues to retain a
policy that outstanding options can be repriced to a lower exercise price
at such time as the board shall determine;
"NOW THEREFORE, BE IT RESOLVED:
"That OCTL shareowners request the OCTL board of directors to adopt a
policy which prohibits the repricing of any stock options to a lower strike
price, without shareowner approval."
PROPONENT'S STATEMENT IN SUPPORT OF RESOLUTION
"Stock option plans have been used by corporate management to incentivize,
attract and retain qualified employees for many years. Shareholders
generally support the use of reasonable incentive compensation to provide a
competitive employment environment. However, excessive reliance on such
plans is unfair to existing shareholders.
"Certain companies have continued to expand the use of such plans to the
point where existing shareholders face serious potential dilution. In 1994,
OCTL had options granted or available for grant to
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employees of over 8 million shares, representing potential dilution of over
33%. OCTL has been identified by the Investor Responsibility Research
Center as near the top of option plan dilution for all publicly traded
companies. In all, the level of potential dilution and the trend toward
even higher grants should not be encouraged.
"Notwithstanding repeated requests, the company has refused to adopt a
policy against repricing of 'underwater-options.' As if the current
dilution isn't enough, this refusal allows existing option holders to
replace options which are out-of-the-money for new options with a reduced
exercise price. Notwithstanding stock price deterioration, OCTL has
persistently made large option grants, while preserving the right to
reprice if OCTL's stock drops. This raises serious questions as to
management and director vigilance in monitoring the significant dilution
impact to existing shareholders. We urge management to raise the stock
price, not lower the exercise price.
"We believe OCTL has been irresponsible in its use of incentive
compensation, since options are authorized, issued and can be repriced
without regard to performance. While we support the concept of incentive
compensation, the above program is unjustified and inequitable to existing
shareholders. The above resolution will help restore a modicum of
discipline and fairness to the use of incentive compensation at OCTL."
MANAGEMENT'S RESPONSE
Before responding to the specific proposal made by SWIB, management of
Octel believes it is important to review the underlying facts and clarify
potential misunderstandings that may arise out of a reading of SWIB's proposal
reproduced above.
INCENTIVE STOCK PLANS
As is typical among Silicon Valley businesses, which compete for skilled
engineers, sales people and managers, Octel adopted a stock option plan in 1985.
This plan was adopted after approval by both the Board of Directors and the
stockholders of the Company. Both the Board of Directors and the stockholders
were given full disclosure regarding the operation of the 1985 Incentive Stock
Plan and understood that stock options were a means of aligning employee
incentives with those of stockholders.
At various times over the last ten years, management has proposed adding to
the shares reserved for use under the 1985 Incentive Stock Plan in order to
grant additional options. These additions of shares to the reserves were made
only after full disclosure and careful consideration by the Board of Directors
and upon the approval of both the Board of Directors and the stockholders.
Addition of shares to the reserves and the grant of additional options was
necessary in order to renew and create incentives for continuing and new
employees as both older stock options were exercised and hundreds of new
employees joined the Company. In addition, the Company assumed similar stock
option plans of VMX, Inc. ("VMX") in connection with a merger with VMX completed
in March of 1994.
Because a stock option only becomes exercisable if an employee remains with
the Company, stock options are an important means of motivating employees to
remain at Octel. As stock options become fully exercisable and are exercised,
their impact in motivating employees to remain with the Company dissipates, and
it becomes necessary to grant new stock options to such employees. Nearly all
large Silicon Valley companies use stock options to attract and retain
outstanding employees, and there is significant competition to obtain skilled
and experienced engineers, sales people and managers in Silicon Valley.
Accordingly, stock option-based incentives are an important part of the benefits
package for employees.
The 1985 Incentive Stock Plan and the similar VMX plans are the major means
by which Octel provides stock-based incentives to its employees.
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OTHER PLANS
In connection with becoming a publicly held company, Octel adopted two
other stock-based incentive plans widely used in Silicon Valley and elsewhere:
the 1987 Employee Stock Purchase Plan and the 1988 Directors' Stock Plan. The
1987 Employee Stock Purchase Plan allows employees to buy stock in the Company
at a discount through payroll deductions. It does not permit the kind of option
exchange program (what SWIB refers to as a "repricing") that SWIB's resolution
is intended to affect.
The 1988 Directors' Stock Plan provides for automatic grants of stock
options to directors at fixed times as a means of attracting experienced
directors and rewarding them for their service on the board in direct proportion
to increases in the value of the Company's stock. While there is no restriction
beyond their fiduciary obligations preventing the Board of Directors from
creating an option exchange program with respect to their own options, the Board
of Directors has never done so, even in times when it was felt necessary to
create an option exchange program for employees.
USE OF OPTION EXCHANGE PROGRAMS
It is important to stockholders to understand the reason the Board of
Directors might adopt an option exchange program. Under some market conditions,
such as those experienced in 1990 and 1994, the exercise price that employees
would have to pay in order to exercise their stock options exceeds the price at
which anyone could buy stock in the market. This can be because of a decline in
the Company's stock price due to factors beyond the Company's control such as
stock market pressures and trends or because of Company performance. Such
"underwater" stock options have little incentive value to employees and may in
fact be a cause of low morale and motivation. When, in the good faith judgment
of the Board of Directors, this situation appears to be more damaging to the
Company and its stockholders than would be the dilutive effect of an option
exchange program, the Board of Directors needs to have the ability to replace
such "underwater" stock options promptly with options having an exercise price
equal to the then fair market value of the stock, thus restoring the opportunity
for employees to receive value in the near term by building the Company and
causing the market value of the stock to increase. A number of prestigious
Silicon Valley businesses have used option exchange programs in the past few
years.
The Company has been judicious in its use of an option exchange program,
authorizing such a program in only two of its thirteen years, 1990 and 1994.
Contrary to SWIB's assertions, on each of these occasions, the Board of
Directors carefully considered market conditions, employee turnover, employee
morale and Company performance. The deliberations of the Board of Directors
prior to authorizing such a program gave consideration to the effect on existing
stockholders and determined that such a program would be in the best interest of
all stockholders. Octel's policy of having the Board of Directors determine if
and when an option exchange program can be authorized is conventional in the
industry, and SWIB is the only entity that has written to the Company requesting
a change to this policy.
WHAT OPTIONEES GIVE UP; NO DIRECTOR EXCHANGES
Even when an option exchange program has been approved, there have been
restrictions and quid pro quo's for optionees. For example, in the 1994 program,
optionees were required to give up 10% of their total options, restart their
vesting on a four-year track and wait to exercise their options until either (i)
the market price of the stock was as high as their original exercise price or
(ii) they had held the option for over five years. In the 1990 program, which
was instituted in the face of extraordinary declines in the value of technology
stocks (including the Company's stock), all employees were offered the chance to
participate in the program but were required to refrain from exercising their
options for a nine-month "blackout" period and to delay their exercisability
schedules for a full year. Senior management's options were excluded from the
1994 option exchange program in recognition of the potential unfairness in cases
where managers may have been partly responsible for poor Company performance.
The Board of Directors has never authorized an exchange program for its own
options.
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MISCHARACTERIZATION BY SWIB
After reviewing the facts presented, management believes that the
stockholders will understand why Octel objects to SWIB's characterization of the
Company's incentive compensation practices as "irresponsible." Stockholders
should also note that the Company objects to a number of comparative phrases in
SWIB's proposal that use unstated standards, such as "unacceptable level of
potential dilution," "extreme levels of dilution," "excessive reliance,"
"persistently made large option grants" and "inequitable to existing
shareholders." When viewed in light of the applicable circumstances, Octel
believes these SWIB comments are incorrect and unfair.
SOME CURRENT FACTS
Here are the facts as of September 19, 1995: Octel's stock-based incentive
plans consist of the 1985 Incentive Stock Plan (see Proposals Nos. 2 and 3), the
similar VMX plans, the 1987 Employee Stock Purchase Plan and the 1988 Director's
Stock Option Plan. Under 1985 Incentive Stock Plan and the VMX plans, combined,
4,076,346 shares have been issued in the past, and such shares are in the
"issued and outstanding category" shown on the Company's balance sheet.
6,059,750 more shares may be issued in the future upon exercise of outstanding
stock options, and 732,067 shares are reserved for issuance upon exercise of
options that may be granted in the future.
Octel also maintains the 1987 Employee Stock Purchase Plan, pursuant to
which approximately 1,619,061 shares have been sold in the past and are in the
"issued and outstanding category" shown on the Company's balance sheet. An
additional 30,939 shares are currently reserved for issuance to employees on a
payroll deduction plan. Option exchange programs do not affect this plan. See
Proposal No. 4.
Octel's director plan is the 1988 Director's Option Plan, pursuant to which
[33,000] shares have been issued in the past, and such shares are in the "issued
and outstanding category" shown on the Company's balance sheet. [175,000] more
shares may be issued in the future upon exercise of outstanding stock options,
and [142,000] shares are reserved for issuance upon exercise of options that may
be issued in the future.
Octel has a total of 24,593,596 shares issued and outstanding as of
September 19, 1995 (net of stock repurchased by the Company during the year, the
effect of which is to increase both the stock price per share and the percentage
of the outstanding shares represented by stock options). The outstanding options
from all of Octel's plans combined represent 25.48% of the total number of
outstanding shares, and this percentage increases to 29.03% when shares that are
reserved for issuance pursuant to additional stock options that may be granted
in the future are included.
EFFORTS TO REDUCE POTENTIAL DILUTION
The Company recognizes that the number of outstanding stock options is
relatively high in comparison to the number of shares outstanding and some other
companies. The reasons for this are complex, and include (i) "entitlement"
philosophies of some executives that have since been replaced, (ii) options
granted in connection with mergers and acquisitions where the acquired
companies' employees did not have an equity-based interest to the extent that
Octel employees did and Octel's management believed that it would be essential
to achieving integration and consistent motivation to grant options to such new
employees, (iii) options granted in order to help the Company attract a CEO at a
key time for the Company -- stockholders should note that the majority of Mr.
Cohn's stock options were granted at exercise prices ($35 and $50 per share)
well above the market price of the Company's stock at the time they were granted
so that his incentives are tightly aligned with those of stockholders in
increasing the value of the Company; and (iv) the effect of completely
restarting vesting requirements in connection with the option exchange program
in 1994. The Company and its management team are striving to improve the
fundamentals of the business, be wise in the granting of new options, increase
the value of the Company so that existing options will be exercised and continue
to attract and retain the best individuals to build the value of the Company.
The Company believes that the Board of Directors needs continued flexibility to
create and approve an option exchange program without undue delay or expense if
events in the market, whether or not directly related to Octel's performance,
make it prudent for the good of the Company.
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THE SWIB PROPOSAL
Turning to the specific proposal recommended by SWIB, the Company believes
that requiring stockholders to approve the rare action of the Board of Directors
in authorizing an option exchange program would be unnecessary, time consuming
and wasteful of the Company's money. The Board of Directors is a group of
experienced executives elected by the stockholders specifically because of their
experience and judgment. Each director has a fiduciary obligation to the
stockholders to approve only those actions that are for the benefit of the
Company and its stockholders. The directors of the Company are personally
sensitive to the morale, motivations and incentives of, as well as the
competitive hiring environment faced by, Octel employees. Octel's management
believes that to substitute the sometimes distant understanding of certain
stockholders, many of whom may be unfamiliar with the operations of Octel and
the use of equity compensation tools in Silicon Valley, for the judgment of
directors who are in a better position to be well-informed about the Company's
operations, would result in poorer management of the Company and decreased value
to the stockholders.
One of the alternatives to authorizing an option exchange program
recommended by SWIB is payment of higher salaries. Because this would
immediately reduce earnings significantly, stockholders would be likely to see
an immediate drop in the value of their investments. Further, equity-based
compensation is of significant importance in Silicon Valley and the Company
would either have to pay substantially increased salaries or forego hiring of
some of the best and brightest employees. This proposed solution appears to the
Company's Board of Directors to be a poor one for the Company and its
stockholders.
CORPORATE GOVERNANCE PHILOSOPHY
Octel believes that the American system of corporate governance using
qualified directors to manage and oversee companies' operations on a day to day
basis is sound and that stockholders who disagree with the decisions of
directors and management should seek to replace such individuals rather than
restrict their ability to make decisions.
MANAGEMENT RECOMMENDATION AND VOTE REQUIRED
The affirmative vote of the majority of the Votes Cast will be required
under Delaware law to approve the above stockholder proposal.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE AGAINST THE ABOVE
PROPOSAL.
PROPOSAL NO. 6 -- RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has nominated KPMG Peat Marwick LLP to audit the
consolidated financial statements of the Company for the fiscal year ending June
30, 1996. Such nomination is being presented to the stockholders for
ratification at the meeting. A representative of KPMG Peat Marwick LLP is
expected to be present at the meeting, will have the opportunity to make a
statement and is expected to be available to respond to appropriate questions.
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and entitled to vote at the meeting is required
to ratify the Board's selection. If the stockholders reject the nomination, the
Board will reconsider its selection.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" RATIFICATION
OF THE SELECTION OF KPMG PEAT MARWICK LLP AS THE COMPANY'S AUDITORS.
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OTHER MATTERS
The Company knows of no other matters to be submitted to the meeting. If
any other matters properly come before the meeting, it is the intention of the
persons named in the enclosed proxy card to vote the shares they represent as
the Company may recommend.
By Order of the Board of Directors
Derek S. Daley, Secretary
Milpitas, California
October 10, 1995
28
<PAGE> 31
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
OCTEL COMMUNICATIONS CORPORATION
1995 ANNUAL MEETING OF STOCKHOLDERS
The undersigned stockholder(s) of Octel Communications Corporation, a
Delaware corporation, hereby acknowledges receipt of the Notice of Annual
Meeting of Stockholders and Proxy Statement, each dated October 10, 1995, and
hereby appoints Robert Cohn and Derek S. Daley, and each of them, Proxies and
Attorneys-in-Fact, with full power to each of substitution, on behalf and in the
name of the undersigned, to represent the undersigned at the 1995 Annual Meeting
of Stockholders of Octel Communications Corporation, to be held on November 16,
1995, at 2:00 p.m., local time, at the Company's principal offices at 1001
Murphy Ranch Road, Milpitas, California 95035, and at any adjournments thereof,
and to vote all shares of Common Stock which the undersigned is entitled to vote
on the matters set forth below:
THIS BALLOT WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED FOR PROPOSALS 1, 2, 3, 4 AND 6, AGAINST PROPOSAL 5 AND
AS SAID PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE
THE MEETING.
(Continued and to be signed on the other side)
<PAGE> 32
/X/ Please mark your
votes in the box
The Board of Directors recommends a vote FOR Proposals 1, 2, 3, 4 and 6.
1. ELECTION OF DIRECTORS:
NOMINEES: Robert Cohn, Anson M. Beard, Jr., Leo J. Chamberlain, Deborah A.
Coleman, Nathaniel de Rothschild, Dag Tellefsen, W. Michael West
FOR all WITHHOLD authority to vote for all
nominees listed nominees listed below
(except as indicated)
/ / / /
- --------------------------------------------------------------------------------
If you wish to withhold authority to vote for any individual nominee, write that
nominee's name on the line above:
2. Proposal to amend the 1985 Incentive FOR AGAINST ABSTAIN
Stock Plan (the "Option Plan") to extend
the term of the Option Plan for an / / / / / /
additional ten-year period and change
the name of the Option Plan to the "1995
Incentive Stock Plan."
3. Proposal to amend the 1987 Employee
Stock Purchase Plan to increase the / / / / / /
number of shares reserved for issuance
thereunder.
4. Proposal to amend the Company's
Certificate of Incorporation to increase / / / / / /
the authorized number of shares of
Common Stock to 200,000,000
The Board of Directors recommends a vote
AGAINST Stockholder Proposal 5.
5. Stockholder proposal requiring the
board of directors to adopt a policy
prohibiting the repricing of stock / / / / / /
options without stockholder approval.
6. Proposal to ratify the appointment of
KPMG Peat Marwick LLP as independent / / / / / /
auditors of the Company for the 1996
fiscal year.
In their discretion the Proxies are authorized to vote upon such other business
as may properly come before the meeting.
This Proxy should be marked, dated, signed by the stockholder(s) exactly as the
stockholder's name appears herein and returned promptly in the enclosed
envelope. Persons signing in a fiduciary capacity should so indicate. If shares
are held by joint tenants or as community property, both should sign.
Signature: Date
--------------------------------------------------- -------------
Signature: Date
--------------------------------------------------- -------------
<PAGE> 33
OCTEL COMMUNICATIONS CORPORATION
1995 INCENTIVE STOCK PLAN
As amended June 1995
1. Purposes of the Plan. The purposes of this Incentive Stock Plan
are to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to the Employees and
Consultants of the Company and to promote the success of the Company's business.
Options granted hereunder may be either "incentive stock
options," as defined in Section 422 of the Internal Revenue Code of 1986, or
"nonstatutory stock options," at the discretion of the Board and as reflected in
the terms of the written option agreement. The Board may also grant Stock
Purchase Rights under this Plan.
2. Definitions. As used herein, the following definitions shall
apply:
(a) "Board" shall mean the Committee, if one has been
appointed, or the Board of Directors of the Company, if no Committee is
appointed.
(b) "Code" shall mean the Internal Revenue Code of 1986,
as amended.
(c) "Common Stock" shall mean the Common Stock of the
Company.
(d) "Company" shall mean Octel Communications
Corporation, a Delaware corporation.
(e) "Committee" shall mean the Committee appointed by the
Board of Directors in accordance with paragraph (a) of Section 4 of the Plan, if
one is appointed.
(f) "Consultant" shall mean any person who is engaged by
the Company or any subsidiary to render consulting services and is compensated
for such consulting services, and any director of the Company whether
compensated for such services or not; provided that if and in the event the
Company registers any class of any equity security pursuant to Section 12 of the
Exchange Act, the term Consultant shall thereafter not include directors who are
not compensated for their services or are paid only a director's fee by the
Company.
(g) "Continuous Status as an Employee or Consultant" shall
mean the absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of sick leave, military leave, or any other
leave of absence approved by the Board; provided that such leave is for a period
of not more than 90 days or reemployment upon the expiration of such leave is
guaranteed by contract or statute.
(h) "Employee" shall mean any person, including officers
and directors, employed by the Company or any Parent or Subsidiary of the
Company. The payment of a director's fee by the Company shall not be sufficient
to constitute "employment" by the Company.
(i) "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended.
<PAGE> 34
(j) "Incentive Stock Option" shall mean an Option intended
to qualify as an incentive stock option within the meaning of Section 422 of the
Code.
(k) "Option" shall mean a stock option granted pursuant
to the Plan.
(l) "Optioned Stock" shall mean the Common Stock subject
to an Option.
(m) "Optionee" shall mean an Employee or Consultant who
receives an Option.
(n) "Parent" shall mean a "parent corporation", whether
now or hereafter existing, as defined in Section 425(e) of the Code.
(o) "Plan" shall mean this 1995 Incentive Stock Plan.
(p) "Purchaser" shall mean an Employee or Consultant who
exercises a Stock Purchase Right.
(q) "Share" shall mean a share of the Common Stock, as
adjusted in accordance with Section 11 of the Plan.
(r) "Stock Purchase Right" shall mean a right, other than
an Option, to purchase Common Stock pursuant to the Plan.
(s) "Subsidiary" shall mean a "subsidiary corporation,"
whether now or hereafter existing, as defined in Section 425(f) of the Code.
(t) "Tax Date" shall mean the date that the amount of tax
to be withheld by the Company is to be determined.
3. Stock Subject to the Plan. Subject to the provisions of
Section 11 of the Plan, the maximum aggregate number of shares which may be
optioned and/or sold under the Plan is 9,600,000 shares of Common Stock. The
Shares may be authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any
reason without having been exercised in full, the unpurchased Shares which were
subject thereto shall, unless the Plan shall have been terminated, become
available for future grant under the Plan. Repurchased shares shall not become
available for future grant under the Plan.
4. Administration of the Plan.
(a) Procedure.
(i) Administration With Respect to Directors and
Officers. With respect to grants of Options or Stock Purchase Rights to
Employees who are also officers or directors of the Company, the Plan shall be
administered by (A) the Board if the Board may administer the Plan in compliance
with Rule 16b-3 promulgated under the Exchange Act or any successor thereto
("Rule 16b-3") with respect to a plan intended to qualify thereunder as a
discretionary plan, or (B) a Committee designated by the Board to administer the
Plan, which Committee shall be constituted in such a manner as to permit the
Plan to comply with Rule 16b-3 with respect to a plan intended to qualify
thereunder as a discretionary plan. Once appointed, such Committee shall
continue to serve in its designated
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<PAGE> 35
capacity until otherwise directed by the Board. From time to time the Board may
increase the size of the Committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in substitution
therefor, fill vacancies, however caused, and remove all members of the
Committee and thereafter directly administer the Plan, all to the extent
permitted by Rule 16b-3 with respect to a plan intended to qualify thereunder as
a discretionary plan.
(ii) Multiple Administrative Bodies. If permitted
by Rule 16b-3, the Plan may be administered by different bodies with respect to
directors, non-director officers and Employees who are neither directors nor
officers.
(iii) Administration With Respect to Consultants
and Other Employees. With respect to grants of Options or Stock Purchase Rights
to Employees or Consultants who are neither directors nor officers of the
Company, the Plan shall be administered by (A) the Board or (B) a Committee
designated by the Board, which Committee shall be constituted in such a manner
as to satisfy the legal requirements relating to the administration of incentive
stock option plans, if any, of Delaware corporate and securities laws and of the
Code (the "Applicable Laws"). Once appointed, such Committee shall continue to
serve in its designated capacity until otherwise directed by the Board. From
time to time the Board may increase the size of the Committee and appoint
additional members thereof, remove members (with or without cause) and appoint
new members in substitution therefor, fill vacancies, however caused, and remove
all members of the Committee and thereafter directly administer the Plan, all to
the extent permitted by the Applicable Laws.
(b) Powers of the Board. Subject to the provisions of the
Plan, the Board shall have the authority, in its discretion: (i) to grant
Incentive Stock Options, in accordance with Section 422 of the Code,
"non-statutory stock options," or Stock Purchase Rights; (ii) to determine, upon
review of relevant information and in accordance with Section 7(b) of the Plan,
the fair market value of the Common Stock; (iii) to determine the exercise price
per share of Options or Stock Purchase Rights to be granted, which exercise
price shall be determined in accordance with Section 7(a) of the Plan; (iv) to
determine the Employees or Consultants to whom, and the time or times at which,
Options or Stock Purchase Rights shall be granted and the number of shares to be
represented by each Option or Stock Purchase Right; (v) to interpret the Plan;
(vi) to prescribe, amend and rescind rules and regulations relating to the Plan;
(vii) to determine the terms and provisions of each Option or Stock Purchase
Right granted (which need not be identical) and, with the consent of the holder
thereof, modify or amend each Option or Stock Purchase Right; (viii) to
accelerate or defer (with the consent of the Optionee) the exercise date of any
Option, consistent with the provisions of Section 5 of the Plan; (ix) to
authorize any person to execute on behalf of the Company any instrument required
to effectuate the grant of an Option or Stock Purchase Right previously granted
by the Board; and (x) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
(c) Effect of Board's Decision. All decisions,
determinations and interpretations of the Board shall be final and binding on
all Optionees, Purchasers and any other holders of any Options or Stock Purchase
Rights granted under the Plan.
5. Eligibility.
(a) Options and Stock Purchase Rights may be granted only
to Employees or Consultants. Incentive Stock Options may be granted only to
Employees. An Employee or Consultant who has been granted an Option or Stock
Purchase Right may, if he is otherwise eligible, be granted an additional Option
or Options or Stock Purchase Right or Rights.
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<PAGE> 36
(b) Each Option shall be designated in the written option
agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designations, to the extent that the aggregate
fair market value of the Shares with respect to which Options designated as
Incentive Stock Options are exercisable for the first time by any Optionees
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options.
(c) For purposes of Section 5(b), Incentive Stock Options
shall be taken into account in the order in which they were granted, and the
fair market value of the Shares shall be determined as of the time the Option
with respect to such Shares is granted.
(d) The Plan shall not confer upon any Optionee, Purchaser
or holder of a Stock Purchase Right any right with respect to continuation of
employment or consulting relationship with the Company, nor shall it interfere
in any way with his right or the Company's right to terminate his employment or
consulting relationship at any time.
(e) The following limitations shall apply to grants of
Options and Stock Purchase Rights to Employees:
(i) No Employee shall be granted, in any fiscal
year of the Company, Options and Stock Purchase Rights to purchase more than
150,000 Shares.
(ii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 11.
(iii) If an Option or Stock Purchase Right is
canceled in the same fiscal year of the Company in which it was granted (other
than in connection with a transaction described in Section 11), the canceled
Option or Stock Purchase Right will be counted against the limit set forth in
Section V(e)(i). For this purpose, if the exercise price of an Option or Stock
Purchase Right is reduced, the transaction will be treated as a cancellation of
the Option or Stock Purchase Right and the grant of a new Option.
6. Term of Plan. The Plan shall become effective upon approval by
the stockholders of the Company in November 1995 as described in Section 17 of
the Plan. It shall continue in effect for a term of ten (10) years thereafter
unless sooner terminated under Section 13 of the Plan.
7. Exercise Price and Consideration.
(a) The per Share exercise price for the Shares to be
issued pursuant to exercise of an Option or Stock Purchase Right shall be such
price as is determined by the Board, but shall be subject to the following:
(i) In the case of any Incentive Stock Option
granted to any Employee, the per Share exercise price shall be no less than 100%
of the fair market value per Share on the date of grant.
(ii) In the case of any Option, other than an
Incentive Stock Option, or any Stock Purchase Right, the per Share exercise
price shall be no less than 85% of the fair market value per Share on the date
of grant.
(iii) In the case of any Option granted to any
person who, at the time of the grant of such Option, owns stock representing
more than ten percent (10%) of the voting power of all classes of stock of the
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<PAGE> 37
Company or any Parent or Subsidiary, the per Share exercise price shall be no
less than 110% of the fair market value per Share on the date of grant.
(iv) In the case of any Option or Stock Purchase
Right granted on or after the effective date of registration of any class of
equity security of the Company pursuant to Section 12 of the Exchange Act and
prior to six months after the termination of such registration, the per Share
exercise price shall be no less than 100% of the fair market value per Share on
the date of grant.
(b) The fair market value shall be determined by the Board
in its discretion; provided, however, that where there is a public market for
the Common Stock, the fair market value per Share shall be the mean of the bid
and asked prices of the Common Stock for the date of grant of the Option or
Stock Purchase Right, as reported in The Wall Street Journal (or, if not so
reported, as otherwise reported by The Nasdaq National Market) or, in the event
the Common Stock is listed on a stock exchange, the fair market value per Share
shall be the closing price on such exchange on the date of grant of the Option
or Stock Purchase Right, as reported in The Wall Street Journal.
(c) Subject to compliance with applicable provisions of
Section 16(b) of the Exchange Act, (or other applicable law), the consideration
to be paid for the Shares to be issued upon exercise of an Option or Stock
Purchase Right, including the method of payment, shall be determined by the
Board (and, in the case of an Incentive Stock Option, shall be determined at the
time of grant) and may consist entirely of (i) cash, (ii) check, (iii)
promissory note, (iv) other Shares which (X) in the case of Shares acquired upon
exercise of an Option either have been owned by the Optionee for more than six
months on the date of surrender or were not acquired, directly or indirectly,
from the Company, and (Y) have a fair market value on the date of exercise equal
to the aggregate exercise price of the Shares as to which said Option or Stock
Purchase Right shall be exercised, (v) authorization for the Company to retain
from the total number of Shares as to which the Option or Stock Purchase Right
is exercised that number of Shares having a fair market value on the date of
exercise equal to the exercise price for the total number of Shares as to which
the Option is exercised, (vi) delivery of a properly executed exercise notice
together with irrevocable instructions to a broker to promptly deliver to the
Company the amount of sale or loan proceeds required to pay the exercise price,
(vii) by delivering an irrevocable subscription agreement for the Shares which
irrevocably obligates the option holder to take and pay for the Shares not more
than twelve months after the date of delivery of the subscription agreement,
(viii) any combination of the foregoing methods of payment, (ix) or such other
consideration and method of payment for the issuance of Shares to the extent
permitted under applicable laws. In making its determination as to the type of
consideration to accept, the Board shall consider whether acceptance of such
consideration may be reasonably expected to benefit the Company (Section 153 of
the Delaware General Corporation Law).
8. Options.
(a) Term of Option. The term of each Incentive Stock
Option shall be ten (10) years from the date of grant thereof or such shorter
term as may be provided in the Stock Option Agreement. The term of each Option
that is not an Incentive Stock Option shall be ten (10) years and one (1) day
from the date of grant thereof or such shorter term as may be provided in the
Stock Option Agreement. However, in the case of an Option granted to an Optionee
who, at the time the Option is granted, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, (i) if the Option is an Incentive Stock Option, the term
of the Option shall be five (5) years from the date of grant thereof or shorter
time as may be provided in the Stock Option Agreement, or (ii) if the Option is
not an Incentive Stock Option, the term of the Option shall be five (5) years
and one (1) day from the date of grant thereof or such shorter time as may be
provided in the Stock Option Agreement.
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<PAGE> 38
(b) Exercise of Option.
(i) Procedure for Exercise; Rights as a
Stockholder. Any Option granted hereunder shall be exercisable at such times
and under such conditions as determined by the Board, including performance
criteria with respect to the Company and/or the Optionee, and as shall be
permissible under the terms of the Plan; provided, however, that an Incentive
Stock Option granted prior to January 1, 1987 shall not be exercisable while
there is outstanding any incentive stock option which was granted, before the
granting of such Incentive Stock Option, to the same Optionee to purchase stock
of the Company, any Parent or Subsidiary, or any predecessor corporation of such
corporations. For purposes of this provision, an incentive stock option shall be
treated as outstanding until such option is exercised in full or expires by
reason of lapse of time.
An Option may be exercisable over a period of time or may be
immediately exercisable as determined by the Board and may grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the Optionee's employment with the Company for any reason (including death or
disability). The purchase price for shares repurchased pursuant to the
repurchase option shall be the original price paid by the Optionee and may be
paid by cancellation of any indebtedness of the Optionee to the Company. The
repurchase option shall lapse at such a rate as the Board may determine.
Notwithstanding any other provisions of this Plan, no Option
may be exercised after the expiration of the term of the Option as set forth in
the Stock Option Agreement.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice
of such exercise has been given to the Company in accordance with the terms of
the Option by the person entitled to exercise the Option and full payment for
the Shares with respect to which the Option is exercised has been received by
the Company. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 7(c) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. No adjustment will be made for a
dividend or other right for which the record date is prior to the date the stock
certificate is issued, except as provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease
in the number of Shares which thereafter shall be available, both for purposes
of the Plan and for sale under the Option, by the number of Shares as to which
the Option is exercised.
(ii) Termination of Status as an Employee or
Consultant. If an Employee or Consultant ceases to serve as an Employee or as a
Consultant (as the case may be), he may exercise his Option at such times and to
such extent as determined by the Board at the time of grant of the Option;
provided that, in the case of an Incentive Stock Option, the Option may be
exercised only within thirty (30) days (or such other period of time not
exceeding three (3) months as determined by the Board at the time of grant of
the option) after the date he ceases to be an Employee of the Company, and only
to the extent that he was entitled to exercise it at the date of such
termination. To the extent that the Employee was not entitled to exercise such
Incentive Stock Option at the date of such termination, or if he does not
exercise such Option (which he was entitled to exercise) within the time
specified herein, the Option shall terminate.
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<PAGE> 39
(iii) Disability. Notwithstanding the provisions of
Section 8(b)(ii) above, in the event an Employee or Consultant is unable to
continue his employment or consulting relationship (as the case may be) with the
Company as a result of his total and permanent disability (as defined in Section
22(e)(3) of the Code), he may, but only within three (3) months (or such other
period of time not exceeding one (1) year as is determined by the Board at the
time of grant of the Option) from the date of termination, exercise his Option
to the extent he was entitled to exercise it at the date of such termination. To
the extent that he was not entitled to exercise the Option at the date of
termination, or if he does not exercise such Option (which he was entitled to
exercise) within the time specified herein, the Option shall terminate.
(iv) Death of Optionee. In the event of the death
of an Optionee, such Optionee's Option may be exercised at such times and to
such extent as determined by the Board at the time of grant of the Option;
provided that, in the case of an Incentive Stock Option, in the event of the
death of an Optionee:
(A) during the term of the Option who is
at the time of his death an Employee or Consultant of the Company and
who shall have been in Continuous Status as an Employee or Consultant
since the date of grant of the Option, the Option may be exercised, at
any time within six (6) months following the date of death, by the
Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent of the right
to exercise that had accrued at the date of death; or
(B) within thirty (30) days (or such
other period of time not exceeding three (3) months as is determined by
the Board at the time of grant of the Option) after the termination of
Continuous Status as an Employee, the Option may be exercised, at any
time within six (6) months following the date of death, by the
Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent of the right
to exercise that had accrued at the date of termination.
(v) Rule 16b-3. Options granted to persons
subject to Section 16(b) of the Exchange Act must comply with Rule 16b-3 and
shall contain such additional conditions or restrictions as may be required
thereunder to qualify for the maximum exemption from Section 16 of the Exchange
Act with respect to Plan transactions.
9. Stock Purchase Rights.
(a) Rights to Purchase. After the Board of Directors
determines that it will offer an Employee or Consultant the right to purchase
Shares under the Plan, it shall advise the offeree in writing of the terms,
conditions and restrictions relating to the offer, including the number of
Shares that such person shall be entitled to purchase, and the time within which
such person must accept such offer, which shall in no event exceed thirty (30)
days from the date upon which the Board of Directors or its Committee made the
determination to grant the Stock Purchase Right. The offer shall be accepted by
execution of a Restricted Stock Purchase Agreement in the form determined by the
Board of Directors.
(b) Issuance of Shares. Forthwith after payment therefor,
the Shares purchased shall be duly issued; provided, however, that the Board may
require that the Purchaser make adequate provision for any Federal and State
withholding obligations of the Company as a condition to such purchase.
(c) Repurchase Option. Unless the Board of Directors or
its Committee determines otherwise, the Restricted Stock Purchase Agreement
shall grant the Company a repurchase option exercisable upon the voluntary
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<PAGE> 40
or involuntary termination of the Purchaser's employment with the Company for
any reason (including death or disability). The purchase price for shares
repurchased pursuant to the Restricted Stock Purchase Agreement shall be the
original price paid by the Purchaser and may be paid by cancellation of any
indebtedness of the Purchaser to the Company. The repurchase option shall lapse
at such a rate as the Board of Directors may determine.
(d) Other Provisions. The Restricted Stock Purchase
Agreement shall contain such other terms, provisions and conditions not
inconsistent with the Plan as may be determined by the Board of Directors.
(e) Rights as a Stockholder. Until the issuance (as
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company) of the stock certificate evidencing
the shares as to which a Stock Purchase Right has been exercised, no right to
vote or to receive dividends or any other rights as a stockholder shall exist
with respect to shares of Common Stock subject to a Stock Purchase Right,
notwithstanding the exercise of a Stock Purchase Right. No adjustment will be
made for a dividend or other right for which the record date is prior to the
date the stock certificate is issued, except as provided in Section 11 of the
Plan.
(f) Shares Available Under the Plan. Exercise of a Stock
Purchase Right in any manner shall result in a decrease in the number of Shares
that thereafter shall be available, both for purposes of the Plan and for sale
under the Stock Purchase Right, by the number of Shares as to which the Stock
Purchase Right is exercised. Shares repurchased by the Company pursuant to
Section 9(c) hereof shall not be available for reissuance under the Plan.
10. Non-Transferability of Options and Stock Purchase Rights.
Options and Stock Purchase Rights may not be sold, pledged, assigned,
hypothecated, transferred, or disposed of in any manner other than by will or by
the laws of descent or distribution and may be exercised, during the lifetime of
the Optionee or holder of a Stock Purchase Right, only by such Optionee or
holder of a Stock Purchase Right.
11. Adjustments Upon Changes in Capitalization or Merger. Subject
to any required action by the stockholders of the Company, the number of shares
of Common Stock covered by each outstanding Option and Stock Purchase Right, and
the number of shares of Common Stock which have been authorized for issuance
under the Plan but as to which no Options or Stock Purchase Rights have yet been
granted or which have been returned to the Plan upon cancellation or expiration
of an Option or Stock Purchase Right, as well as the price per share of Common
Stock covered by each such outstanding Option or Stock Purchase Right, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued shares of Common Stock effected
without receipt of consideration by the Company; provided, however, that
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Board, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock subject to an
Option or Stock Purchase Right.
In the event of the proposed dissolution or liquidation of the
Company, any outstanding Options or Stock Purchase Rights shall terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Board. The Board may, in the exercise of its sole discretion in
such instances, declare that any Option or Stock Purchase Right shall terminate
as of a date fixed by the Board, and may give each Optionee or holder of a Stock
Purchase Right the right to exercise his Option or Stock Purchase Right as to
all or any part of the
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<PAGE> 41
Common Stock subject to such Option or Stock Purchase Right, including Shares as
to which the Option or Stock Purchase Right would not otherwise be exercisable.
In the event of a proposed sale of all or substantially all of
the assets of the Company, or the merger of the Company with or into another
corporation, Options and Stock Purchase Rights shall be assumed or equivalent
options or rights shall be substituted by such successor corporation or a parent
or subsidiary of such successor corporation. In the event that such successor
corporation refuses to assume the Option or Stock Purchase Right or to
substitute an equivalent option or stock purchase right, the Board shall, in
lieu of such assumption or substitution, provide for the Optionee to have the
right to exercise the Option or Stock Purchase Right as to all of the Common
Stock subject to such Option or Stock Purchase Right, including Shares as to
which the Option or Stock Purchase Right would not otherwise be exercisable. If
the Board makes an Option or Stock Purchase Right fully exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the Board
shall notify the Optionee or holder of a Stock Purchase Right that the Option or
Stock Purchase Right shall be fully exercisable for a period of fifteen (15)
days from the date of such notice, and the Option or Stock Purchase Right will
terminate upon the expiration of such period. The Board may provide in
individual Option Agreements for the repurchase of Options in return for a cash
payment by the Company upon the occurrence of a merger, sale of all or
substantially all assets of the Company, tender offer or other transaction or
series of related transactions resulting in a change of ownership of more than
50% of the voting securities of the Company.
12. Time of Granting Options or Stock Purchase Rights. The date of
grant of an Option or Stock Purchase Right shall, for all purposes, be the date
on which the Board makes the determination granting such Option or Stock
Purchase Right. Notice of the determination shall be given to each Employee to
whom an Option or Stock Purchase Right is so granted within a reasonable time
after the date of such grant.
13. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time
amend, alter, suspend or discontinue the Plan, but no amendment, alteration,
suspension or discontinuation shall be made which would impair the rights of any
Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with Rule 16b-3 under
the Exchange Act or with Section 422 of the Code (or any other applicable law or
regulation, including the requirements of the NASD or an established stock
exchange), the Company shall obtain stockholder approval of any Plan amendment
in such a manner and to such a degree as required.
(b) Effect of Amendment or Termination. Any such amendment
or termination of the Plan shall not affect Options or Stock Purchase Rights
already granted and such Options and Stock Purchase Rights shall remain in full
force and effect as if this Plan had not been amended or terminated, unless
mutually agreed otherwise between the Board and the Optionee, Purchaser or
holder of a Stock Purchase Right, which agreement must be in writing and signed
by the Company and the Optionee, Purchaser or holder of the Stock Purchase
Right.
14. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the Shares may then be listed, and
shall be further subject to the approval of counsel for the Company with respect
to such compliance.
As a condition to the exercise of an Option or Stock Purchase
Right, the Company may require the person exercising such Option or Stock
Purchase Right to represent and warrant at the time of any such exercise that
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<PAGE> 42
the Shares are being purchased only for investment and without any present
intention to sell or distribute such Shares if, in the opinion of counsel for
the Company, such a representation is required by any of the aforementioned
relevant provisions of law.
15. Reservation of Shares. The Company, during the term of this
Plan, will at all times reserve and keep available such number of Shares as
shall be sufficient to satisfy the requirements of the Plan.
Inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such Shares as to which such requisite authority shall not have been
obtained.
16. Option and Stock Purchase Agreements. Options shall be
evidenced by written Stock Option Agreements in such form as the Board shall
approve. Upon the exercise of Stock Purchase Rights, a Purchaser shall execute
a Restricted Stock Purchase Agreement in such form as the Board of Directors
shall approve.
17. Stockholder Approval. Continuance of the Plan shall be subject
to approval by the stockholders. If such stockholder approval is obtained at a
duly held stockholders' meeting, it may be obtained by the affirmative vote of
the holders of a majority of the issued and outstanding shares of the Company.
If and in the event that the Company registers any class of any equity security
pursuant to Section 12 of the Exchange Act, the approval of such stockholders of
the Company shall be:
(a) (i) solicited substantially in accordance with Section
14(a) of the Exchange Act and the rules and regulations promulgated thereunder,
or (ii) solicited after the Company has furnished in writing to the holders
entitled to vote substantially the same information concerning the Plan as that
which would be required by the rules and regulations in effect under Section
14(a) of the Exchange Act at the time such information is furnished; and
(b) obtained at or prior to the first annual meeting of
stockholders held subsequent to the first registration of any class of equity
securities of the Company under Section 12 of the Exchange Act.
If such stockholder approval is obtained by written consent, it
must be obtained by the unanimous written consent of all stockholders of the
Company.
18. Information to Optionees and Holders of Stock Purchase Rights.
The Company shall provide to each Optionee and each holder of a Stock Purchase
Right, during the period for which such Optionee or holder of a Stock Purchase
Right has one or more Options or Stock Purchase Rights outstanding, copies of
all annual reports and other information which are provided to all stockholders
of the Company. The Company shall not be required to provide such information if
the issuance of Options and Stock Purchase Rights under the Plan is limited to
key employees whose duties in connection with the Company assure their access to
equivalent information.
19. Stock Withholding to Satisfy Withholding Tax Obligations.
(a) Withholding. At the discretion of the Board,
Purchasers and Optionees may satisfy withholding obligations as provided in this
Section 19. When a Purchaser or an Optionee incurs tax liability in connection
with a Stock Purchase Right or an Option, which tax liability is subject to tax
withholding under applicable tax laws, and the Purchaser or Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Purchaser or Optionee may satisfy the withholding tax obligation
by electing to have the Company withhold from the Shares to be issued in
connection with the Stock Purchase Right or the Shares to be
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issued upon exercise of the Option, if any, that number of Shares having a fair
market value equal to the amount required to be withheld. The fair market value
of the Shares to be withheld shall be determined on the Tax Date.
(b) Form of Election. All elections by a Purchaser or an
Optionee to have Shares withheld for this purpose shall be made in writing in a
form acceptable to the Secretary of the Company and shall be subject to the
following restrictions:
(i) the election must be made on or prior to the
applicable Tax Date;
(ii) once made, the election shall be irrevocable
as to the particular Shares of the Option or Right as to which the election is
made;
(iii) all elections shall be subject to the consent
or disapproval of the Board;
(iv) if the Purchaser or Optionee is subject to
Section 16 of the Exchange Act, the election must comply with the applicable
provisions of the rules promulgated under Section 16(b) of the Exchange Act and
shall be subject to such additional conditions or restrictions as may be
required thereunder to qualify for the maximum exemption from Section 16 of the
Exchange Act with respect to the Plan transactions.
(c) Section 83. In the event the election to have Shares
withheld is made by a Purchaser or Optionee and the Tax Date is deferred under
Section 83 of the Code because no election is filed under Section 83(b) of the
Code, the Purchaser or Optionee shall receive the full number of Shares with
respect to which the Stock Purchase Right or Option is exercised but such
Purchaser or Optionee shall be unconditionally obligated to tender back to the
Company the proper number of Shares on the Tax Date.
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<PAGE> 44
OCTEL COMMUNICATIONS CORPORATION
1987 EMPLOYEE STOCK PURCHASE PLAN
As amended July 1995
The following constitute the provisions of the Employee Stock Purchase
Plan of Octel Communications Corporation.
1. Purpose. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the intention
of the Company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan shall, accordingly, be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the
Company.
(b) "Code" shall mean the Internal Revenue Code of 1986,
as amended.
(c) "Common Stock" shall mean the Common Stock, no par
value, of the Company.
(d) "Company" shall mean Octel Communications
Corporation, a Delaware corporation.
(e) "Compensation" shall mean all regular gross earnings,
including payments for overtime, shift premium, incentive compensation,
incentive payments, bonuses, commissions or other compensation.
(f) "Continuous Status as an Employee" shall mean the
absence of any interruption or termination of service as an Employee. Continuous
Status as an Employee shall not be considered interrupted in the case of a leave
of absence agreed to in writing by the Company, provided that such leave is for
a period of not more than 90 days or reemployment upon the expiration of such
leave is guaranteed by contract or statute.
(g) "Designated Subsidiaries" shall mean the Subsidiaries
which have been designated by the Board from time to time in its sole discretion
as eligible to participate in the Plan.
(h) "Employee" shall mean any person, including an
officer, who is customarily employed for at least twenty (20) hours per week and
more than five (5) months in a calendar year by the Company or one of its
Designated Subsidiaries.
(i) "Exercise Date" shall mean the last day of each
offering period of the Plan.
(j) "Offering Date" shall mean the first business day of
each offering period of the Plan, except that in the case of an individual who
becomes an eligible Employee after the first business day of an offering period
but prior to the first business day of the last calendar month of such offering
period,
<PAGE> 45
the term "Offering Date" shall mean the first business day of the calendar month
following the month in which that individual becomes an eligible Employee.
Options granted after the first business day of an offering period will be
subject to the same terms as the options granted on the first business day of
such offering period except that they will have a different grant date (thus,
potentially, a different exercise price) and, because they expire at the same
time as the options granted on the first business day of such offering period, a
shorter term.
(k) "Plan" shall mean this Employee Stock Purchase Plan.
(l) "Subsidiary" shall mean a corporation, domestic or
foreign, of which not less than 50% of the voting shares are held by the Company
or a Subsidiary, whether or not such corporation now exists or is hereafter
organized or acquired by the Company or a Subsidiary.
3. Eligibility.
(a) Any person who is an Employee as of an Offering Date
of a given offering period shall be eligible to participate in such offering
period under the Plan, provided that such person was not eligible to participate
in such offering period as of any prior Offering Date, and further subject to
the requirements of paragraph 5(a) and the limitations imposed by Section 423(b)
of the Code. Notwithstanding the foregoing sentence, any Employee who becomes an
eligible Employee in the months of July or August, 1988 may begin participation
in the Plan on September 1, 1988.
(b) Any provisions of the Plan to the contrary
notwithstanding, no Employee shall be granted an option under the Plan (i) if,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 425(d) of the Code)
would own stock and/or hold outstanding options to purchase stock possessing
five percent (5%) or more of the total combined voting power or value of all
classes of stock of the Company or of any Subsidiary of the Company, or (ii)
which permits his rights to purchase stock under all employee stock purchase
plans (described in Section 423 of the Code) of the Company and its Subsidiaries
to accrue at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) of fair
market value of such stock (determined at the time such option is granted) for
each calendar year in which such option is outstanding at any time.
4. Offering Periods.
The Plan shall be implemented by one offering during each
six-month period of the Plan, commencing on or about the first day following the
end of the prior offering period, and continuing thereafter until terminated in
accordance with paragraph 19 or 23 hereof. The Board of Directors of the Company
shall have the power to change the duration of offering periods with respect to
future offerings without stockholder approval if such change is announced at
least fifteen (15) days prior to the scheduled beginning of the first offering
period to be affected.
5. Participation.
(a) An eligible Employee may become a participant in the
Plan by completing a subscription agreement authorizing payroll deduction on the
form provided by the Company and filing it with the Company's payroll office at
such time as is specified by the Company and is prior to the applicable Offering
Date (unless a later time for filing the subscription agreement is set by the
Board for all eligible
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<PAGE> 46
Employees with respect to a given offering period). Once properly made, an
eligible Employee's election to participate shall be automatically renewed for
each subsequent offering period, subject to any termination or withdrawal as
provided in paragraph 10.
(b) Payroll deductions for a participant shall commence on
the first payroll following the Offering Date and shall end on the Exercise Date
of the offering period to which such authorization is applicable, unless sooner
terminated by the participant as provided in paragraph 10.
6. Payroll Deductions.
(a) At the time a participant files his subscription
agreement, he shall elect to have payroll deductions made on each payday during
the offering period in an amount not exceeding ten percent (10%) of the
Compensation which he receives on each payday during the offering period, and
the aggregate of such payroll deductions during the offering period shall not
exceed ten percent (10%) of his aggregate Compensation during said offering
period.
(b) All payroll deductions made by a participant shall be
credited to his account under the Plan. A participant may not make any
additional payments into such account.
(c) A participant may discontinue his participation in the
Plan as provided in paragraph 10, or may decrease (but not increase) the rate of
his payroll deductions during the offering period by completing or filing with
the Company a new authorization for payroll deduction. The change in rate shall
be effective fifteen (15) days following the Company's receipt of the new
authorization.
(d) Notwithstanding the foregoing, to the extent necessary
to comply with Section 423(b)(8) of the Code and paragraph 3(b) herein, a
participant's payroll deductions may be decreased to 0% at such time during any
Offering Period that the aggregate of all payroll deductions accumulated with
respect to such Offering Period and any other Offering Period ending within the
same calendar year equal $21,250. Payroll deductions shall recommence at the
rate provided in such participant's subscription agreement at the beginning of
the first Offering Period which is scheduled to end in the following calendar
year, unless terminated by the participant as provided in paragraph 11.
7. Grant of Option.
(a) On each Offering Date of each offering period, each
eligible Employee beginning participation in such offering period on such
Offering Date shall be granted an option to purchase (at the per share option
price) up to a number of shares of the Company's Common Stock determined by
dividing such Employee's payroll deductions to be accumulated during such
offering period by the lower of (i) eighty-five percent (85%) of the fair market
value of a share of the Company's Common Stock on the Offering Date, or (ii)
eighty-five percent (85%) of the fair market value of a share of the Company's
Common Stock on the Exercise Date; provided that in no event shall an Employee
be permitted to purchase during any offering period more than a number of shares
determined by dividing $25,000 by the fair market value of a share of the
Company's Common Stock on the first day of such offering period, and provided
further that such purchase shall be subject to the limitations set forth in
Section 3(b) and 12 hereof. Fair market value of a share of the Company's Common
Stock shall be determined as provided in Section 7(b) herein.
(b) The option price per share of the shares offered in a
given offering period shall be the lower of: (i) 85% of the fair market value
of a share of the Common Stock of the Company on the
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<PAGE> 47
Offering Date; or (ii) 85% of the fair market value of a share of the Common
Stock of the Company on the Exercise Date. The fair market value of the
Company's Common Stock on a given date shall be determined by the Board in its
discretion; provided, however, that where there is a public market for the
Common Stock, the fair market value per Share shall be the closing sale price
or, if not so reported, the mean of the bid and asked prices of the Common Stock
for such date, as reported in either case in The Wall Street Journal (or, if not
so reported, as otherwise reported by the National Association of Securities
Dealers Automated Quotation (NASDAQ) System) or, in the event the Common Stock
is listed on a stock exchange, the fair market value per Share shall be the
closing price on such exchange on such date, as reported in The Wall Street
Journal.
8. Exercise of Option. Unless a participant withdraws from the
Plan as provided in paragraph 10, his option for the purchase of shares will be
exercised automatically on the Exercise Date of the offering period, and the
maximum number of full shares subject to option will be purchased for him at the
applicable option price with the accumulated payroll deductions in his account.
The shares purchased upon exercise of an option hereunder shall be deemed to be
transferred to the participant on the Exercise Date. During his lifetime, a
participant's option to purchase shares hereunder is exercisable only by him.
9. Delivery. As promptly as practicable after the Exercise Date of
each offering period, the Company shall arrange the delivery to each
participant, as appropriate, of a certificate representing the shares purchased
upon exercise of his option. Any cash remaining to the credit of a participant's
account under the Plan after a purchase by him of shares at the termination of
each offering period, or which is insufficient to purchase a full share of
Common Stock of the Company, shall be retained in the participant's account for
the subsequent offering period, subject to earlier withdrawal by the participant
as provided in paragraph 10.
10. Withdrawal; Termination of Employment.
(a) A participant may withdraw all but not less than all
the payroll deductions credited to his account under the Plan at any time prior
to the Exercise Date of the offering period by giving written notice to the
Company. All of the participant's payroll deductions credited to his account
will be paid to him promptly after receipt of his notice of withdrawal and his
option for the current period will be automatically terminated, and no further
payroll deductions for the purchase of shares will be made during the offering
period.
(b) Upon termination of the participant's Continuous
Status as an Employee prior to the Exercise Date of the offering period for any
reason, including retirement or death, the payroll deductions credited to his
account will be returned to him or, in the case of his death, to the person or
persons entitled thereto under paragraph 14, and his option will be
automatically terminated.
(c) In the event an Employee fails to remain in Continuous
Status as an Employee of the Company for at least twenty (20) hours per week
during the offering period in which the employee is a participant, he will be
deemed to have elected to withdraw from the Plan and the payroll deductions
credited to his account will be returned to him and his option terminated.
(d) A participant's withdrawal from an offering period
will not have any effect upon his eligibility to participate in a succeeding
offering period or in any similar plan which may hereafter be adopted by the
Company.
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<PAGE> 48
11. Interest. No interest shall accrue on the payroll deductions
of a participant in the Plan.
12. Stock.
(a) The maximum number of shares of the Company's Common
Stock which shall be made available for sale under the Plan shall be 2,125,000
shares, subject to adjustment upon changes in capitalization of the Company as
provided in paragraph 18. If the total number of shares which would otherwise be
subject to options granted pursuant to Section 7(a) hereof during an offering
period exceeds the number of shares then available under the Plan (after
deduction of all shares for which options have been exercised or are then
outstanding), the Company shall make a pro rata allocation of the shares
remaining available for option grant in as uniform a manner as shall be
practicable and as it shall determine to be equitable. In such event, the
Company shall give written notice of such reduction of the number of shares
subject to the option to each Employee affected thereby and shall similarly
reduce the rate of payroll deductions, if necessary.
(b) The participant will have no interest or voting right
in shares covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan
will be registered in the name of the participant or jointly (with right of
survivorship) in the name of the participant and another person, such as his
spouse, whom the participant designates.
13. Administration. The Plan shall be administered by the Board of
the Company or a committee of members of the Board appointed by the Board. The
administration, interpretation or application of the Plan by the Board or its
committee shall be final, conclusive and binding upon all participants. Members
of the Board who are eligible Employees are permitted to participate in the
Plan, provided that:
(a) Members of the Board who are eligible to participate
in the Plan may not vote on any matter affecting the administration of the Plan
or the grant of any option pursuant to the Plan.
(b) If a Committee is established to administer the Plan,
no member of the Board who is eligible to participate in the Plan may be a
member of the Committee.
14. Designation of Beneficiary.
(a) A participant may file a written designation of a
beneficiary who is to receive any shares and cash, if any, from the
participant's account under the Plan in the event of such participant's death
subsequent to the end of the offering period but prior to delivery to him of
such shares and cash. In addition, a participant may file a written designation
of a beneficiary who is to receive any cash from the participant's account under
the Plan in the event of such participant's death prior to the Exercise Date of
the offering period.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its
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<PAGE> 49
discretion, may deliver such shares and/or cash to the spouse or to any one or
more dependents or relatives of the participant, or if no spouse, dependent or
relative is known to the Company, then to such other person as the Company may
designate.
15. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in paragraph 14 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds in accordance with paragraph 10.
16. Use of Funds. All payroll deductions received or held by the
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such payroll deductions.
17. Reports. Individual accounts will be maintained for each
participant in the Plan. Statements of account will be given to participating
Employees promptly following the Exercise Date, which statements will set forth
the amounts of payroll deductions, the per share purchase price, the number of
shares purchased and the remaining cash balance, if any.
18. Adjustments Upon Changes in Capitalization. Subject to any
required action by the stockholders of the Company, the number of shares of
Common Stock covered by each option under the Plan which has not yet been
exercised and the number of shares of Common Stock which have been authorized
for issuance under the Plan but have not yet been placed under option
(collectively, the "Reserves"), as well as the price per share of Common Stock
covered by each option under the Plan which has not yet been exercised, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issue by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an option.
In the event of the proposed dissolution or liquidation of the Company,
the offering period will terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Board. The Board may, in the
exercise of its sole discretion in such instances, declare that any offering
period shall terminate as of a date fixed by the Board and give each Plan
participant the right to exercise his option as to all or any part of the shares
subject to option thereunder, including shares as to which the option would not
otherwise be exercisable. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each option under the Plan shall be assumed or
an equivalent option shall be substituted by such successor corporation or a
parent or subsidiary of such successor corporation. In the event that such
successor corporation refuses to assume the option or to substitute an
equivalent option, the Board shall, in lieu of such assumption or substitution,
provide for the Plan participant to have the right to exercise the option as to
all of the shares subject to option thereunder, including shares as to which the
option would not otherwise be exercisable. If
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<PAGE> 50
the Board makes an option fully exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the Board shall notify
the Plan participant that the option shall be fully exercisable for a period of
thirty (30) days from the date of such notice, and the option will terminate
upon the expiration of such period.
The Board may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the Reserves, as well as the price
per share of Common Stock covered by each outstanding option, in the event that
the Company effects one or more reorganizations, recapitalizations, rights
offerings or other increases or reductions of shares of its outstanding Common
Stock, and in the event of the Company being consolidated with or merged into
any other corporation.
19. Amendment and Termination. The Board may at any time amend,
alter, suspend or discontinue the Plan, but, except as provided in paragraph 18,
no amendment, alteration, suspension or discontinuation shall be made which
would impair the rights of any participant arising out of any offering period
which has already commenced without his or her written consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 under the Exchange
Act or with Section 423 of the Code (or any other applicable law or regulation,
including the requirements of the NASD or an established stock exchange), the
Company shall obtain stockholder approval of any Plan amendment in such a manner
and to such a degree as required.
20. Notices. All notices or other communications by a participant
to the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof.
21. Stockholder Approval.
(a) Continuance of the Plan shall be subject to approval
by the stockholders of the Company within twelve (12) months before or after the
date the Plan is adopted. If such stockholder approval is obtained at a duly
held stockholders' meeting, it must be obtained by the affirmative vote of the
holders of a majority of the outstanding shares of the Company, or if such
stockholder approval is obtained by written consent, it must be obtained by the
unanimous written consent of all stockholders of the Company; provided, however,
that approval at a meeting or by written consent may be obtained by a lesser
degree of stockholder approval if the Board determines, in its discretion after
consultation with the Company's legal counsel, that such a lesser degree of
stockholder approval will comply with all applicable laws and will not adversely
affect the qualification of the Plan under Section 423 of the Code.*
(b) If and in the event that the Company registers any
class of equity securities pursuant to Section 12 of the Exchange Act, any
required approval of the stockholders of the Company obtained after such
registration shall be solicited substantially in accordance with Section 14(a)
of the Exchange Act and the rules and regulations promulgated thereunder.
(c) If any required approval by the stockholders of the
Plan itself or of any amendment thereto is solicited at any time otherwise than
in the manner described in paragraph 21(b) hereof, then the Company shall, at or
prior to the first annual meeting of stockholders held subsequent to the later
of (1) the
- ------------------
* The Plan was approved at a duly held Shareholder's meeting in November
of 1987.
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<PAGE> 51
first registration of any class of equity securities of the Company under
Section 12 of the Exchange Act or (2) the granting of an option hereunder to an
officer or director after such registration, do the following:
(i) furnish in writing to the holders entitled to
vote for the Plan substantially the same information which would be required (if
proxies to be voted with respect to approval or disapproval of the Plan or
amendment were then being solicited) by the rules and regulations in effect
under Section 14(a) of the Exchange Act at the time such information is
furnished; and
(ii) file with, or mail for filing to, the
Securities and Exchange Commission four copies of the written information
referred to in subsection (i) hereof not later than the date on which such
information is first sent or given to stockholders.
22. Conditions Upon Issuance of Shares. Shares shall not be issued
with respect to an option unless the exercise of such option and the issuance
and delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier
to occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company as described in paragraph 21. It shall continue in
effect for a term of twenty (20) years unless sooner terminated under paragraph
19.
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<PAGE> 52
OCTEL COMMUNICATIONS CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
ENROLLMENT FORM
Date of enrollment:
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1. I, ________________________, hereby elect to participate in the Octel
Communications Corporation 1987 Employee Stock Purchase Plan (the
"Stock Purchase Plan") and subscribe to purchase shares of the
Company's Common Stock, without par value, in accordance with this
enrollment form and the Stock Purchase Plan.
2. I hereby authorize the Company to deduct from each paycheck ____% of my
GROSS PAY for each payday during this Offering Period, and each
subsequent offering period during which I am eligible to participate,
in accordance with the provisions of the Stock Purchase Plan. I also
understand that this calculated amount will be deducted from my NET
PAY, or after all payroll taxes.
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock, without par value, at the
applicable purchase price determined in accordance with the Stock
Purchase Plan. I further understand that, except as otherwise set forth
in the Stock Purchase Plan, unless I withdraw from the Stock Purchase
Plan by giving written notice to the Company, shares will be purchased
for me automatically on the Exercise Date of each offering period
subsequent to my filing of this enrollment form.
4. I understand that, before the Exercise Date for this Offering Period,
the Company will provide me with a copy of the Company's most recent
prospectus describing the 1987 Employee Stock Purchase Plan, and
thereafter will provide me with annual updates and copies of any
revised versions of the prospectus. Therefore, before my options
received under the Plan are exercised to purchase Shares, I will have
the opportunity (after receiving the prospectus and before the Exercise
Date) to withdraw from the Plan and have returned to me all the money
that was deducted from my pay for the purpose of purchasing shares. I
acknowledge that I have received a copy of the complete "Octel
Communications Corporation 1987 Employee Stock Purchase Plan." I
understand that my partici pation in the Stock Purchase Plan is in all
respects subject to the terms of the Plan.
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5. Shares purchased for me under the Stock Purchase Plan should be issued
in the name(s) of:
Your name
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As you wish it to appear on the stock certificate
and
Other*
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As you wish it to appear on the stock certificate
* Please Note: If you wish for another person's name to appear on the stock
certificate in addition to you own, you must check off one of the selections
below to specify the type of ownership. This selection will be indicated on your
stock certificate.
_____ TENANTS IN COMMON - Abbreviated as "TEN COM," may be specified to
identify two or more owners.
_____ JOINT TENANCY WITH RIGHT OF SURVIVORSHIP AND NOT AS TENANTS IN COMMON -
Abbreviated as "JT TEN," may be specified to identify two or more joint
owners.
_____ TENANTS BY THE ENTIRETIES - Abbreviated as "TEN ENT," (not appropriate
for California residents) may be specified for ownership by husband and
wife.
_____ COMMUNITY PROPERTY - If specified, will not be abbreviated.
6. I understand that if I dispose of any shares received by me pursuant to
the Plan, either (1) within 2 years after the Offering Date (the first
day of the offering period during which I purchased such shares) or (2)
within 1 year after the date on which such shares were transferred to
me, I will be treated for federal income tax purposes as having
received ordinary income at the time of such disposition in an amount
equal to the excess of the fair market value of the shares at the time
such shares were transferred to me over the price which I paid for the
shares.
I HEREBY AGREE TO NOTIFY THE COMPANY IN WRITING WITHIN 30 DAYS AFTER
THE DATE OF ANY SUCH DISPOSITION.
However, if I dispose of such shares at any time after the expiration
of the 2-year and 1-year holding periods, I understand that I will be
treated for federal income tax purposes as having received income only
at the time of such disposition, and that such income will be treated
as ordinary income only to the extent of an amount equal to the lesser
of (1) the excess of the fair market value of the shares at the time of
such disposition over the purchase price which I paid for the shares
under the option, or (2) the excess of the fair market value of the
shares over the option price, measured as if the option had been
exercised on the Offering Date. The remainder of the gain or loss, if
any, recognized on such disposition will be treated as capital gain or
loss. The federal income tax treatment of ordinary income and capital
gain and loss is described in the Company's prospectus relating to the
Stock Purchase Plan.
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7. I hereby agree to be bound by the terms of the Stock Purchase Plan. I
understand that my enrollment is dependent upon my eligibility to
participate in the Stock Purchase Plan.
8. I FURTHER ACKNOWLEDGE AND UNDERSTAND THAT THE COMPANY'S OBLIGATION TO
SELL SHARES TO ME IS CONDITIONAL UPON COMPLIANCE WITH ALL APPLICABLE
FEDERAL AND STATE SECURITIES LAWS, AND SPECIFICALLY CONDITIONAL UPON
THE EXISTENCE OF AN EFFECTIVE REGISTRATION STATEMENT REGARDING THE
SHARES WHICH I WILL PURCHASE ON THE DATE OF THAT PURCHASE.
9. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Stock Purchase Plan:
NAME: (Please print)
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(First) (Middle) (Last)
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Relationship
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(Address)
NAME: (Please print)
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(First) (Middle) (Last)
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Relationship
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(Address)
NAME: (Please print)
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(First) (Middle) (Last)
- -------------------------- --------------------------
Relationship
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(Address)
NAME: (Please print)
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(First) (Middle) (Last)
- -------------------------- --------------------------
Relationship
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(Address)
Note: You may use the back side of this form to list any additional
beneficiary(ies) than those above or attach a list of your own.
Dated:
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Signature of Employee Print Name
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