<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
Advanced Fibre Communications, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(4) Date Filed:
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<PAGE> 2
AFC LOGO
ADVANCED FIBRE COMMUNICATIONS, INC.
1 WILLOW BROOK COURT
PETALUMA, CALIFORNIA 94954
NOTICE OF 1999 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 25, 1999
TO OUR STOCKHOLDERS:
You are cordially invited to attend the 1999 Annual Meeting of Stockholders
of ADVANCED FIBRE COMMUNICATIONS, INC. (the "Company"), which will be held at
the offices of the Company, 2200 South McDowell Boulevard, Petaluma, California
94954 at 2:00 p.m. on Tuesday, May 25, 1999 (the "Annual Meeting") for the
following purposes:
1. To elect two directors to the Board of Directors to serve a three-year
term, such directors to constitute Class III of the Company's Board of
Directors;
2. To consider and vote upon a proposal to ratify the selection of KPMG LLP
as independent public accountants for the Company for the fiscal year
ending December 31, 1999; and
3. To act upon such other business as may properly come before the Annual
Meeting or any adjournment or postponement thereof.
These matters are more fully described in the Proxy Statement accompanying
this Notice.
The Board of Directors has fixed the close of business on April 5, 1999 as
the record date for determining those stockholders who will be entitled to vote
at the Annual Meeting or any adjournment or postponement thereof. A list of
stockholders entitled to vote at the Annual Meeting will be available for
inspection ten days prior to the Annual Meeting at the principal offices of the
Company, 1 Willow Brook Court, Petaluma, California 94954. The stock transfer
books will not be closed between the record date and the date of the Annual
Meeting.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, DATE
AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE. Your
proxy may be revoked at any time prior to the time it is voted.
Please read the proxy material carefully. Your vote is important and the
Company appreciates your cooperation in considering and acting on the matters
presented.
Sincerely yours,
/s/ DONALD GREEN
_____________________
Donald Green
Chairman of the Board
April 14, 1999
Petaluma, California
<PAGE> 3
STOCKHOLDERS SHOULD READ THE ENTIRE PROXY STATEMENT CAREFULLY PRIOR TO RETURNING
THEIR PROXIES
PROXY STATEMENT
FOR
1999 ANNUAL MEETING OF STOCKHOLDERS
OF
ADVANCED FIBRE COMMUNICATIONS, INC.
TO BE HELD ON MAY 25, 1999
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of ADVANCED FIBRE COMMUNICATIONS, INC. ("AFC" or the
"Company") of proxies to be voted at the 1999 Annual Meeting of Stockholders
(the "Annual Meeting") which will be held at the offices of the Company, 2200
South McDowell Boulevard, Petaluma, California 94954 on Tuesday, May 25, 1999 at
2:00 p.m., or at any adjournments or postponements thereof, for the purposes set
forth in the accompanying Notice of 1999 Annual Meeting of Stockholders. This
Proxy Statement and the proxy card were first mailed to stockholders on or about
April 14, 1999. The Company's 1998 Annual Report is being mailed to stockholders
concurrently with this Proxy Statement. The 1998 Annual Report is not to be
regarded as proxy soliciting material or as a communication by means of which
any solicitation of proxies is to be made.
VOTING RIGHTS AND SOLICITATION
The close of business on April 5, 1999 was the record date for stockholders
entitled to notice of and to vote at the Annual Meeting. As of that date, AFC
had 76,634,372 shares of Common Stock, $.01 par value, issued and outstanding.
All of the shares of the Company's Common Stock outstanding on the record date
are entitled to vote at the Annual Meeting, and stockholders of record entitled
to vote at the Annual Meeting will have one vote for each share of Common Stock
so held with regard to each matter to be voted upon. Representation of at least
a majority of all outstanding shares of Common Stock of AFC is required to
constitute a quorum. Accordingly, it is important that your shares be
represented at the Annual Meeting.
Shares of the Company's Common Stock represented by proxies in the
accompanying form which are properly executed and returned to AFC will be voted
at the Annual Meeting in accordance with the stockholders' instructions
contained therein. In the absence of contrary instructions, shares represented
by such proxies will be voted FOR the election of each of the directors as
described herein under "Proposal 1-Election of Directors" and FOR ratification
of the selection of accountants as described herein under "Proposal
2-Ratification of Selection of Independent Public Accountants." Management does
not know of any matters to be presented at the Annual Meeting other than those
set forth in this Proxy Statement and in the Notice accompanying this Proxy
Statement. If other matters should properly come before the Annual Meeting, the
proxy holders will vote on such matters in accordance with their best judgment.
Any stockholder has the right to revoke his or her proxy at any time before it
is voted at the Annual Meeting. Election of directors by stockholders shall be
determined by a majority of the votes cast by the stockholders entitled to vote
at the election present in person or represented by proxy. Abstentions and
broker non-votes are each included in the determination of the number of shares
present for quorum purposes. Abstentions are counted in tabulations of the votes
cast on proposals presented to stockholders, whereas broker non-votes are not
counted for purposes of determining whether a proposal has been approved.
The entire cost of distribution and solicitation of proxies will be borne
by AFC. Arrangements may be made with brokerage houses and other custodians,
nominees and fiduciaries to send proxies and proxy material to the beneficial
owners of the Company's Common Stock, and such persons may be reimbursed for
their expenses. Innisfree M&A Incorporated, New York, has been retained at an
estimated cost of $12,000, plus reasonable out-of-pocket expenses, to assist in
the solicitation of proxies. This solicitation will be by mail, telephone, and
other means.
<PAGE> 4
PROPOSAL 1
ELECTION OF DIRECTORS
The Company's Certificate of Incorporation provides for a classified Board
of Directors composed of seven directors. Accordingly, the terms of the office
of the Board of Directors are divided into three classes. Class I will expire at
the annual meeting of stockholders to be held in 2000, Class II will expire at
the annual meeting to be held in 2001, and Class III will expire at the Annual
Meeting. At each annual meeting of stockholders, the successors to directors
whose terms will then expire will be elected to serve from the time of election
and qualification until the third annual meeting following election and until
their successors have been duly elected and qualified, or until their earlier
resignation or removal, if any. To the extent there is an increase in the number
of directors, additional directorships resulting therefrom will be distributed
among the three classes so that, as nearly as possible, each class will consist
of an equal number of directors. There are no family relationships among any of
the Company's directors and executive officers. The Board of Directors has
adopted a policy pursuant to which directors are generally required to retire
from the Board of Directors upon attaining the age of 70.
The proxy holders named on the proxy card intend to vote all proxies
received by them in the accompanying form FOR the election of the two Class III
nominees listed below, unless instructions to the contrary are marked on the
proxy. These nominees have been selected by the Board of Directors and are both
currently members of the Board. If you do not wish your shares to be voted for
particular nominees, please identify the exceptions on the proxy card.
In the event that a nominee is unable or declines to serve as a director at
the time of the Annual Meeting, the proxies will be voted for any nominee who
shall be designated by the present Board of Directors to fill the vacancy. In
the event that additional persons are nominated for election as directors, the
proxy holders intend to vote all proxies received by them for the nominees
listed below. As of the date of this Proxy Statement, the Board of Directors is
not aware of any nominee who is unable or will decline to serve as a director.
CLASS III -- NOMINEES FOR ELECTION:
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION DIRECTOR SINCE AGE
---- -------------------- -------------- ---
<S> <C> <C> <C>
Donald Green...................... Chairman of the Board, 1992 67
Advanced Fibre Communications, Inc.
Dan Rasdal........................ Director, Symmetricom, Inc. 1993 65
</TABLE>
CLASS I -- DIRECTORS CONTINUING IN OFFICE UNTIL THE 2000 ANNUAL MEETING OF
STOCKHOLDERS:
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION DIRECTOR SINCE AGE
---- -------------------- -------------- ---
<S> <C> <C> <C>
Clifford H. Higgerson............... General Partner, 1993 59
Communications Ventures
Alex Sozonoff....................... Vice President of Customer Advocacy, 1997 61
Hewlett-Packard Company
</TABLE>
CLASS II -- DIRECTORS CONTINUING IN OFFICE UNTIL THE 2001 ANNUAL MEETING OF
STOCKHOLDERS:
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION DIRECTOR SINCE AGE
---- -------------------- -------------- ---
<S> <C> <C> <C>
Herbert M. Dwight, Jr............. Chairman of the Board, 1998 68
Optical Coating Laboratory, Inc.
Ruann F. Ernst.................... Chief Executive Officer & President, 1998 51
Digital Island, Inc.
</TABLE>
2
<PAGE> 5
HERBERT M. DWIGHT, JR. has served as a director of the Company since May
1998. Mr. Dwight has served as Chairman of the Board of Optical Coating
Laboratory, Inc. ("OCLI"), an optical coating and specialty ink manufacturer,
since 1991. From 1991 to April 1998, Mr. Dwight also served as Chief Executive
Officer of OCLI and from 1991 to 1997, he served as President of OCLI. Mr.
Dwight is also a director of Applied Magnetics, Inc. and Applied Materials, Inc.
RUANN F. ERNST has served as a director of the Company since May 1998. Ms.
Ernst has served as President and Chief Executive Officer of Digital Island,
Inc., a telecommunications service provider, since June 1998. From 1994 to 1998
she was General Manager, Financial Services Business Unit for Hewlett-Packard
Company, an electronics equipment and computer company, and from 1993 to 1994
she was Worldwide Financial Services Marketing Manager for Hewlett-Packard
Company. Ms. Ernst is also a director of Phoenix International Corporation and
two private organizations.
DONALD GREEN was a co-founder of the Company and has served as the
Company's Chairman of the Board since May 1992. Mr. Green served as Chief
Executive Officer of the Company from June 1998 through March 1999, and from May
1992 to June 1997. Mr. Green is also a director of TCSI Corporation, Larscom,
Inc., two private companies and a non-profit foundation.
CLIFFORD H. HIGGERSON has served as a director of the Company since January
1993. Mr. Higgerson has served as a general partner of Communications Ventures,
a venture capital firm, since 1987 and a general partner of Vanguard Venture
Partners, a venture capital firm and a stockholder of the Company, since July
1991. Mr. Higgerson is also a director of Digital Microwave Corporation, Ciena
Corporation and eleven private companies.
DAN RASDAL has served as a director of the Company since February 1993. Mr.
Rasdal has served as a director of Symmetricom, Inc. ("Symmetricom"), a
telecommunications company, since 1985. From 1988 to July 1998, Mr. Rasdal was
Chairman of the Board and Chief Executive Officer of Symmetricom. From 1985 to
July 1988 he served as President and Chief Executive Officer of Symmetricom. Mr.
Rasdal is also a director of Celeritek, Inc.
ALEX SOZONOFF has served as a director of the Company since October 1997.
Mr. Sozonoff has served as Vice President of Customer Advocacy for
Hewlett-Packard Company, an electronics equipment and computer company, since
1998. From 1994 to 1998, he was Vice President of Marketing for Hewlett-Packard
Company.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held a total of 11 meetings during
the fiscal year ended December 26, 1998 (the "1998 fiscal year"). No director
attended fewer than 75 percent of the aggregate number of Board meetings and
meetings of committees on which he or she served, with the exception of Mr.
Sozonoff and Ms. Ernst.
The Board has several committees including an Audit Committee, a
Compensation Committee, a Nominating Committee and a Governance Committee.
The Audit Committee, currently consisting of Mr. Rasdal, Mr. Sozonoff and
Ms. Ernst, meets with the Company's financial management and its independent
public accountants at various times during each year and reviews internal
control conditions, audit plans and results, and financial reporting procedures.
This Committee held four meetings during the 1998 fiscal year.
The Compensation Committee, currently consisting of Mr. Higgerson, Mr.
Sozonoff and Mr. Dwight, reviews and approves the Company's compensation
arrangements for key employees and administers the Company's 1996 Stock
Incentive Plan (the "1996 Plan") and the Company's Employee Stock Purchase Plan.
This Committee held seven meetings during the 1998 fiscal year.
The Nominating Committee, currently consisting of Mr. Green, Mr. Rasdal and
Ms. Ernst, was established in May 1998. The Nominating Committee's duties
include presenting to the Board of Directors suggestions for nominees to the
Board. Stockholders who wish to suggest qualified candidates to the
3
<PAGE> 6
Nominating Committee should write to Peter A. Darbee, Secretary of the Company,
at 1 Willow Brook Court, Petaluma, California 94954, stating in detail the
candidate's qualifications for consideration by the Committee. A stockholder who
wishes to nominate a director at a meeting of stockholders must comply with
certain procedures set out in the Company's By-Laws. This Committee held no
meetings during the 1998 fiscal year.
The Governance Committee, currently consisting of Ms. Ernst and Mr. Dwight,
was established in May 1998. The Governance Committee advises the Board of
Directors on corporate governance matters, recommends governance principals and
practices and assesses Board and Board Committee effectiveness. This Committee
held one meeting during the 1998 fiscal year.
DIRECTOR COMPENSATION
Prior to October 1998 non-employee Board members did not receive any cash
fees for their service on the Board or any Board committee. Effective October
27, 1998, non-employee Board members of the Company receive an annual retainer
of $6,000. In addition to the annual retainer, non-employee Board members
receive $1,000 for each regularly scheduled Board or committee meeting attended
and $500 for each unscheduled Board or committee meeting attended. If a Board
and a committee meeting are held on the same day, one meeting fee is paid.
Non-employee Board members are also entitled to reimbursement of all reasonable
out-of-pocket expenses incurred in connection with their attendance at Board and
Board committee meetings. In addition, non-employee Board members receive stock
options pursuant to the Automatic Option Grant Program in effect under the
Company's 1996 Plan.
Under the Automatic Option Grant Program, each individual who first joins
the Board after June 30, 1996 as a non-employee Board member will receive a
non-qualified stock option grant for 40,000 shares of Common Stock at the time
of his or her commencement of board service, provided such individual has not
otherwise been in the prior employ of the Company. In addition, at each annual
meeting of stockholders, each individual who is to continue to serve as a
non-employee Board member will receive a non-qualified stock option grant to
purchase 12,000 shares of Common Stock, whether or not such individual has been
in the prior employ of the Company and whether or not such individual first
joined the Board after June 30, 1996, provided that such individual has served
as a non-employee Board member for at least six months.
Each automatic grant will have an exercise price equal to the fair market
value per share of Common Stock on the grant date and will have a maximum term
of 10 years, subject to earlier termination following the optionee's cessation
of Board service. Each automatic option will be immediately exercisable;
however, any shares purchased upon exercise of the option will be subject to
repurchase, at the option exercise price paid per share, should the optionee's
service as a non-employee Board member cease prior to vesting in the shares.
Each automatic option grant will vest in a series of installments over the
optionee's period of Board service as follows: One-third of the option shares
upon completion of one year of Board service, and the balance in twenty-four
(24) successive equal monthly installments upon the optionee's completion of
each additional month of Board service thereafter. However, each outstanding
option will immediately vest upon (i) certain changes in the ownership or
control of the Company or (ii) the death or disability of the optionee while
serving as a Board member.
Upon her election to the Board on May 26, 1998, Ms. Ernst received a stock
option for 40,000 shares, with an exercise price of $34.00 per share, pursuant
to the Automatic Option Grant Program. Upon his appointment to the Board on May
13, 1998, Mr. Dwight received a stock option for 40,000 shares, with an exercise
price of $40.00 per share, pursuant to the Automatic Option Grant Program. Each
option was immediately exercisable for all of the option shares, but the shares
purchasable thereunder were subject to vesting in accordance with the three
(3)-year vesting schedule described above. On October 27, 1998, the Board
approved the cancellation of the options granted to Ms. Ernst and Mr. Dwight and
their replacement with new options for the same number of shares with an
exercise price of $8.625 per share, the fair market value per share of Common
Stock on October 27, 1998. The new options so granted may not be exercised until
October 27, 1999, at which time they will become exercisable for all of the
option shares. However, the shares purchasable upon exercise of the options are
subject to vesting in accordance with the vesting schedule which
4
<PAGE> 7
applied to the higher-priced, cancelled options. As of October 27, 1999, the
number of vested shares purchasable upon exercise of the options will be the
number of option shares which would have vested under the higher-priced,
cancelled options as of such date. Thereafter, the option shares will continue
to vest in accordance with the original vesting schedule established for the
higher-priced, cancelled options.
PROPOSAL 2
RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
The firm of KPMG LLP served as independent public accountants for the
Company for the fiscal year ended December 31, 1998. The Board of Directors
desires the firm to continue in this capacity for the current fiscal year.
Accordingly, a resolution will be presented to the Annual Meeting to ratify the
selection of KPMG LLP by the Board of Directors as independent public
accountants to audit the accounts and records of the Company for the fiscal year
ending December 31, 1999, and to perform other appropriate services. In the
event that stockholders fail to ratify the selection of KPMG LLP, the Board of
Directors would reconsider such selection.
A representative of KPMG LLP will be present at the Annual Meeting to
respond to appropriate questions and to make a statement if such representative
desires to do so.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 1, 1999 by each person (or
group of affiliated persons) who is known by the Company to own beneficially
more than five percent of the outstanding shares of the Common Stock of the
Company.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OF CLASS
------------------- ----------------------- --------
<S> <C> <C>
Tellabs, Inc.(2)................................. 3,868,045 5.1%
4951 Indiana Avenue
Lisle, IL 60532
</TABLE>
5
<PAGE> 8
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Stock as of March 1, 1999 by (i)
each director of the Company; (ii) each Named Executive Officer; and (iii) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
NAME OF BENEFICIAL OWNER OWNERSHIP(1) OF CLASS
------------------------ ------------ --------
<S> <C> <C>
Donald Green(3)........................................ 2,072,344 2.7%
Herbert M. Dwight, Jr.(4).............................. 48,556 *
Ruann F. Ernst(5)...................................... 40,000 *
Clifford H. Higgerson(6)............................... 347,246 *
Dan Rasdal(7).......................................... 150,000 *
Alex Sozonoff(8)....................................... 52,400 *
Carl J. Grivner........................................ 59,582 *
Peter A. Darbee(9)..................................... 12,392 *
Catherine Millet(10)................................... 32,590 *
Richard L. Stanfield(11)............................... 83,406 *
Gregory A. Peters(12).................................. 63,354 *
All executive officers and directors as a group (15
persons)(13)......................................... 6,141,769 8.0%
</TABLE>
- ---------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options and warrants currently exercisable within 60 days are deemed to
be outstanding for computing the percentage of the person holding such
options or warrants but are not deemed outstanding for computing the
percentage of any other person. Except as indicated by footnote, and
subject to community property laws where applicable, the persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them.
(2) Includes 600,000 shares that may be acquired upon exercise of a warrant.
(3) Includes 458,971 shares issuable upon exercise of options held by Mr.
Green, 442,304 of which shares will be vested as of 60 days from March 1,
1999. Also includes 123,130 shares held by the Green Venture Capital L.P.
of which Donald Green is the General Partner. Also includes 55,734 shares
subject to repurchase by the Company.
(4) Includes 40,000 shares issuable upon exercise of options held by Mr.
Dwight, none of which will be vested as of 60 days from March 1, 1999. Also
includes 8,556 shares held by the Herbert M. Dwight, Jr. and Jane Dwight
Trust.
(5) Includes 40,000 shares issuable upon exercise of options held by Ms. Ernst,
none of which will be vested as of 60 days from March 1, 1999.
(6) Includes 12,000 shares issuable upon exercise of options held by Mr.
Higgerson, none of which will be vested as of 60 days from March 1, 1999.
(7) Includes 150,000 shares issuable upon exercise of options held by Mr.
Rasdal, 121,167 of which shares will be vested as of 60 days from March 1,
1999.
(8) Includes 52,000 shares issuable upon exercise of options held by Mr.
Sozonoff, 19,999 of which shares will be vested as of 60 days from March 1,
1999.
(9) Includes 4,717 shares issuable upon exercise of options held by Mr. Darbee,
all of which shares will be vested as of 60 days from March 1, 1999. Also
includes 2,898 shares subject to a right of repurchase by the Company.
6
<PAGE> 9
(10) Includes 12,630 shares issuable upon exercise of options held by Ms.
Millet, all of which will be vested as of 60 days from March 1, 1999. Also
includes 12,077 shares subject to a right of repurchase by the Company.
(11) Includes 5,267 shares issuable upon exercise of options held by Mr.
Stanfield, 2,600 of which shares will be vested as of 60 days from March 1,
1999. Also includes 33,333 shares subject to a right of repurchase by the
Company.
(12) Includes 60,261 shares issuable upon exercise of options held by Mr.
Peters, all of which shares will be vested as of 60 days from March 1,
1999. Includes 1,448 shares subject to a right of repurchase by the
Company.
(13) Includes 1,085,220 shares issuable upon exercise of options, 880,385 of
which shares will be vested as of 60 days from March 1, 1999. Also includes
218,291 shares subject to a right of repurchase by the Company.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth the compensation earned by (i) the Company's
current Chief Executive Officer (ii) the Company's former Chief Executive
Officer, and (iii) the other four most highly compensated executive officers of
the Company serving as such as of the end of the last fiscal year, (the "Named
Executive Officers"), each of whose total salary and bonus for the year ended
December 31, 1998 was in excess of $100,000 for services rendered in all
capacities to the Company for such fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------- -----------------------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING
FISCAL SALARY BONUS COMPENSATION AWARDS OPTIONS
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($)(1) (#)(2)
--------------------------- ------ --------- -------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Donald Green(3)..................... 1998 $260,852 $100,261 -- -- 233,200
Chairman of the Board and 1997 295,769 225,993 -- -- 63,200
Chief Executive Officer 1996 275,000 138,903 -- -- 369,804
Carl J. Grivner(4).................. 1998 214,010 143,018 $35,457(5) -- 30,000
Former President and 1997 284,231 208,296 73,583(5) -- 302,310
Chief Executive Officer 1996 235,000 106,349 74,080(5) -- --
and Former Director
Peter A. Darbee(6).................. 1998 275,000 63,834 47,691(7) -- 320,467
Vice President, 1997 125,000 71,827 -- -- 300,000
Chief Financial Officer, 1996 -- -- -- -- --
Treasurer and Secretary
Catherine Millet(8)................. 1998 210,000 94,500 -- -- 252,630
Vice President, 1997 -- -- -- -- --
Development Engineering 1996 -- -- -- -- --
Richard L. Stanfield(9)............. 1998 242,417 12,000 -- -- 43,000
Vice President, 1997 -- -- -- -- --
North American Sales 1996 -- -- -- -- --
Gregory A. Peters(10)............... 1998 185,815 74,370 63,409(11) -- 227,413
Former Vice President, 1997 -- -- -- -- --
International Operations 1996 -- -- -- -- --
</TABLE>
- ---------------
(1) Aggregate number of unvested shares of restricted stock and their value at
fiscal year end, net of the consideration paid, are as follows: Mr.
Green -- 66,880 shares, $530,863; Mr. Darbee -- 3,105 shares, ($68,601);
Ms. Millet -- 12,199 shares, ($213,863); and Mr. Peters -- 1,552 shares,
($34,289). The
7
<PAGE> 10
fair market value at fiscal year end was $8.0938 per share, which in the
case of Mr. Darbee, Ms. Millet and Mr. Peters, was less than the
consideration paid.
(2) Includes options for the following number of shares which were granted
under the 1998 Stock Option Repricing Program to replace previously granted
options for the same numbers of shares which were cancelled in connection
with such program: Mr. Green -- 93,200; Mr. Grivner -- 0; Mr. Darbee --
291,000; Ms. Millet -- 150,000; Mr. Stanfield -- 23,000; and Mr.
Peters -- 208,000. See "Report of the Compensation Committee on Executive
Compensation -- 1998 Stock Option Repricing Program".
(3) Mr. Green assumed the role of Chief Executive Officer in June 1998.
(4) Mr. Grivner resigned from the Company in June 1998.
(5) Represents (i) forgiveness of indebtedness under a promissory note payable
to the Company in the following amounts: 1998 -- $35,457; 1997 -- $37,580;
1996 -- $39,703 and (ii) relocation expenses paid by the Company in the
following amounts: 1997 -- $36,003; 1996 -- $34,377. See "Certain
Relationships and Related Transactions".
(6) Mr. Darbee joined the Company on June 30, 1997.
(7) Represents forgiveness of indebtedness under a promissory note payable to
the Company. See "Certain Relationships and Related Transactions".
(8) Ms. Millet joined the Company in December 1997, and was appointed an
executive officer in February 1998.
(9) Mr. Stanfield joined the Company in December 1994, and was appointed an
executive officer in February 1998.
(10) Mr. Peters joined the Company in June 1997 and was appointed an executive
officer in February 1998. He served in this capacity until his separation
from the Company in February 1999.
(11) Represents (i) forgiveness of indebtedness under a promissory note payable
to the Company in the amount of $23,846 and (ii) relocation expenses paid
by the Company in the amount of $39,563. See "Certain Relationships and
Related Transactions".
8
<PAGE> 11
STOCK OPTION GRANTS TO NAMED EXECUTIVE OFFICERS
The following table sets forth certain information regarding stock option
grants made to each of the Named Executive Officers in 1998. No stock
appreciation rights were granted to the Named Executive Officers during such
year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
-------------------------------------------- POTENTIAL REALIZABLE VALUE
PERCENT OF EXERCISE AT ASSUMED ANNUAL RATES OF
NUMBER OF TOTAL OPTIONS OR BASE STOCK PRICE APPRECIATION FOR
SECURITIES GRANTED TO PRICE OPTION TERM(3)
UNDERLYING EMPLOYEES PER SHARE EXPIRATION -----------------------------
NAME OPTIONS GRANTED IN FISCAL YEAR (2) DATE 5% 10%
---- --------------- -------------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald Green.............. 30,000 0.4% $25.250 12/29/07 $ 476,388 $1,207,260
30,000(4) 0.4 7.875 09/14/08 148,576 376,522
3,200(4) 0.0 7.875 09/14/08 15,848 40,162
60,000(4) 0.8 7.875 09/14/08 297,153 753,043
60,000 0.8 8.625 10/27/08 325,453 824,762
50,000 0.7 8.500 12/07/08 267,280 677,341
Carl J. Grivner........... 30,000 0.4 25.250 12/29/07 476,388 1,207,260
Peter A. Darbee........... 11,000 0.1 25.250 12/29/07 174,675 442,662
280,000(4) 3.7 7.875 09/14/08 1,386,713 3,514,202
11,000(4) 0.1 7.875 09/14/08 54,478 138,058
3,467 0.0 8.500 12/07/08 18,533 46,967
15,000 0.2 8.500 12/07/08 80,184 203,202
Catherine Millet.......... 75,000 1.0 17.875 08/05/08 843,112 2,136,611
15,608(4) 0.2 7.875 09/14/08 77,299 195,892
59,392(4) 0.8 7.875 09/14/08 294,142 745,412
75,000(4) 1.0 7.875 09/14/08 371,441 941,304
10,778 0.1 7.875 12/22/08 53,379 135,272
1,852 0.0 7.875 12/22/08 9,172 23,244
15,000 0.2 8.500 12/07/08 80,184 203,202
Richard L. Stanfield...... 8,000 0.1 25.250 12/29/07 126,993 321,799
8,000(4) 0.1 7.875 09/14/08 39,620 100,406
15,000(4) 0.2 7.875 09/14/08 74,288 188,261
12,000 0.2 8.500 12/07/08 64,147 162,562
Gregory A. Peters......... 8,000 0.1 25.250 12/29/07 127,037 321,936
8,000(4) 0.1 7.875 09/14/08 39,620 100,406
200,000(4) 2.7 7.875 09/14/08 990,509 2,510,144
1,513 0.0 8.500 12/07/08 8,088 20,496
9,900 0.1 8.500 12/07/08 52,921 134,113
</TABLE>
- ---------------
(1) Except as otherwise indicated under footnote (4) below, each option becomes
exercisable for twenty five percent (25%) of the option shares upon the
optionee's completion of one year of service measured from the vesting date,
and the balance in successive equal monthly installments over the next 36
months of service thereafter. The options will immediately accelerate and
become exercisable in full in the event the Company is acquired by merger or
asset sale, unless the options are assumed by the acquiring entity.
(2) The exercise price for the shares of Common Stock subject to option grants
made under the 1996 Plan may be paid in cash or in shares of Common Stock
valued at the fair market value on the exercise date. The option may also be
exercised through a same-day sale program without any cash outlay by the
optionee. In addition, the Plan Administrator may provide financial
assistance to one or more optionees in the exercise of their outstanding
options by allowing such individuals to deliver a full-recourse, interest-
bearing promissory note in payment of the exercise price and any associated
withholding taxes incurred in connection with such exercise.
(3) Realizable values are reported net of the option exercise price. The dollar
amounts under these columns are the result of calculations based upon stock
price appreciation at the assumed 5% and 10% compounded annual rates (as
applied to the estimated fair market value of the option shares on the date
9
<PAGE> 12
of grant, not the current fair market value of those shares) and are not
intended to forecast any actual or potential future appreciation, if any, in
the value of the Company's stock price. Actual gains, if any, on stock
option exercises will be dependent upon the future performance of the Common
Stock as well as the option holder's continued employment through the
vesting period. The potential realizable value calculation assumes that the
option holder waits until the end of the option term to exercise the option.
(4) Each option was granted on September 14, 1998 in replacement of an option
for the same number of shares, with a higher option exercise price per
share, which was cancelled as of such date pursuant to the 1998 Stock Option
Repricing Program. The options may not be exercised prior to September 14,
1999. As of such date, each option will become exercisable for the number of
option shares which would have been exercisable and vested as of such date
under the higher-priced, cancelled option such new option replaced. After
September 14, 1999, each option will continue to become exercisable in
accordance with the vesting schedule which applied under the higher-priced,
cancelled option. See "Report of the Compensation Committee on Executive
Compensation -- 1998 Stock Option Repricing Program".
OPTION EXERCISES AND HOLDINGS
The following table sets forth certain information with respect to the
Named Executive Officers concerning their option exercises during 1998 and their
option holdings as of December 26, 1998. None of the Named Executive Officers
held any stock appreciation rights at the end of that fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
SHARES UNEXERCISED OPTIONS AS OF OPTIONS AS OF
ACQUIRED DECEMBER 26, 1998(2)(3) DECEMBER 26, 1998(4)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald Green............. 185,000 $3,679,250 406,088 191,916 $725,409 $160,423
Carl J. Grivner.......... 86,001 2,797,475 -- -- -- --
Peter A. Darbee.......... 20,000 381,875 118,467 191,000 25,162 38,509
Catherine Millet......... -- -- 12,630 165,000 2,763 32,820
Richard L. Stanfield..... 125,733 2,199,181 8,339 30,928 9,427 26,941
Gregory A. Peters........ -- -- 59,848 159,565 12,764 32,747
</TABLE>
- ---------------
(1) Based upon the difference between the option exercise price paid and the
fair market value of the Company's Common Stock on the date of exercise.
(2) Certain of these options were granted under the 1996 Plan. In general, the
option becomes exercisable for twenty five percent (25%) of such option
shares upon the optionee's completion of one year of service measured from
the vesting date, and the balance in successive equal monthly installments
over the next 36 months of service thereafter. Accordingly, the table
reflects such vested option shares in the "exercisable" column as follows:
Mr. Green -- 31,284; Mr. Grivner -- 0; Mr. Darbee -- 118,467; Ms.
Millet -- 12,630; Mr. Stanfield -- 7,272; and Mr. Peters -- 59,848. In
addition, the table reflects such unvested option shares in the
"unexercisable" column as follows: Mr. Green -- 171,916; Mr. Grivner -- 0;
Mr. Darbee -- 191,000; Ms. Millet -- 165,000; Mr. Stanfield -- 27,728; and
Mr. Peters -- 159,565.
(3) Certain of these options were granted under the predecessor equity incentive
plan to the 1996 Plan (the "Predecessor Plan"). Each such option is
immediately exercisable for all the option shares, but any shares purchased
under the options are subject to repurchase by the Company, at the exercise
price paid per share, in the event the optionee terminates employment prior
to vesting in those shares. Accordingly, the table reflects such vested
option shares for which the Company's right of repurchase has lapsed in the
"exercisable" column as follows: Mr. Green -- 374,804; Mr. Grivner -- 0; Mr.
Darbee -- 0; Ms. Millet -- 0; Mr. Stanfield -- 1,067; and Mr. Peters -- 0.
In addition, the table reflects such unvested option shares for which the
Company's right of repurchase has not lapsed in the "unexercisable" column
10
<PAGE> 13
as follows: Mr. Green -- 20,000; Mr. Grivner -- 0; Mr. Darbee -- 0; Ms.
Millet -- 0; Mr. Stanfield -- 3,200; and Mr. Peters -- 0.
(4) Based on the fair market value of the Company's Common Stock on December 26,
1998 ($8.0938 per share) less the exercise price payable for such shares.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
The Compensation Committee as Plan Administrator of the 1996 Plan has the
authority to provide for the accelerated vesting of the shares of Common Stock
subject to outstanding options held by the Chief Executive Officer and the
Company's other executive officers or any unvested shares actually held by those
individuals under the 1996 Plan or the Predecessor Plan, in the event the
Company is acquired by merger or asset sale or there is a hostile change in
control effected by a successful tender or exchange offer for more than 50% of
the Company's outstanding voting securities or a change in the majority of the
Board as a result of one or more contested elections for board membership.
Alternatively, the Compensation Committee has provided for such accelerated
vesting upon the individual's involuntary termination of service within eighteen
(18) months following the acquisition or hostile change in control.
With respect to options granted to the Company's Chief Executive Officer
and other executive officers on September 14, 1998 under the 1998 Stock Option
Repricing Program, should the optionee's employment be terminated by the Company
other than for cause prior to September 14, 1999, the option will accelerate and
become exercisable for the number of vested option shares, if any, which were
exercisable as of September 14, 1998 under the higher-priced cancelled option,
which such option replaced.
Carl J. Grivner, the Company's former President and Chief Executive
Officer, resigned from the Company effective June 26, 1998. In connection with
his resignation, Mr. Grivner and the Company entered into a Termination
Agreement and General Release, pursuant to which the Company agreed to forgive
the outstanding loan balance on a note payable to the Company in the amount of
$35,457. See "Certain Relationships and Related Transactions".
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board of Directors currently
consists of Messrs. Higgerson, Sozonoff and Dwight. None of these individuals
was an officer or employee of the Company at any time during the 1998 fiscal
year or at any other time.
No current executive officer of the Company has ever served as a member of
the board of directors or compensation committee of any other entity that has or
has had one or more executive officers serving as a member of the Company's
Board of Directors or Compensation Committee.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Committee") is
composed of three outside directors within the meaning of Section 162(m) of the
Internal Revenue Code, and develops and oversees the Company's executive
compensation strategy. The Company's executive compensation strategy is designed
to facilitate recruiting and retaining highly qualified executives, supporting
achievement of the Company's business objectives and enhancing stockholder
value. The Committee reviews, on an ongoing basis, all aspects of executive
compensation. In addition, the Committee recommends for consideration and
approval by all of the outside directors, the compensation for the Chairman of
the Board.
The Committee's executive compensation philosophy is designed to address
the needs of the Company, its executives and its stockholders. The executive
compensation program is structured to:
- Reinforce the importance of management's focus on enhancing stockholder
value;
- Ensure alignment of management's compensation with the annual and
long-term performance of the Company;
11
<PAGE> 14
- Reward exceptional performance by means of competitive compensation
opportunities; and
- Enable the Company to attract and retain a highly qualified management
team.
The three key elements of the Company's compensation program are base
salary, a management incentive bonus plan and long-term incentives, which
consist primarily of stock options.
BASE SALARY
The Committee annually reviews each executive's base salary. The expected
salary range for each position is established at between the 50th and 75th
percentile of comparable positions of similar companies as determined by
external industry surveys of compensation of executives in similar positions.
Actual paid salaries are determined by the executives' experience and
performance. In making comparisons with the compensation of executives of
similar companies, the Committee considers national salary survey data for
companies comparable to the Company with respect to size and gross revenues. The
Committee believes that the Company competes with these organizations for
executive talent.
In determining salary adjustments, the Committee considers the Company's
growth in earnings and revenues and the executive's performance level, as well
as other factors relating to the executive's specific responsibilities.
Additional factors considered include the executive's length of time in the
position, experience, skills, potential for advancement, responsibility and
current salary in relation to the expected level of pay for the position. The
Committee does not apply a specific formula or weight to the factors considered.
For 1998 the Committee exercised its discretionary judgment based upon the
criteria listed above and the recommendations of the Chief Executive Officer to
determine the appropriate salary adjustments.
ANNUAL INCENTIVE COMPENSATION
All executives at the Director level and above participate in the AFC
Management Incentive Plan ("MIP"). At the beginning of each year, the Committee
establishes performance goals for the Company for that year. These goals are
tied to the Company's annual operating plan and include revenues, gross margins,
and operating profit. The MIP provides for payment of a designated amount based
upon achievement of specific financial objectives as well as individual
performance. Performance is measured as a percent of attainment against these
objectives.
Additionally, at the beginning of each year the Committee establishes
incentive award guidelines for the four levels of participants in the MIP. The
percentage of total annual pay attributable to incentive compensation increases
proportionately with the executive's level of management responsibility.
MIP bonuses are paid quarterly up to 125% of Company performance goals
determined by weighted financial parameters consisting of revenues, gross margin
and operating profit. In the event performance exceeds 125% of targeted goals
for the year, the additional bonus amount in excess of the 125% is paid out
annually. Once the potential bonus amount is determined for each level of
participation, the actual bonus paid per participant is composed of a
nondiscretionary amount of 70% and discretionary amount of 30% of the potential
bonus. Receipt of any or all of the 30% is based on the participant's
performance for the quarter.
LONG-TERM INCENTIVE COMPENSATION
Long-term incentives are linked to the growth in the value of the Company's
Common Stock and consist primarily of stock options. All stock options have been
granted with an exercise price equal to the fair market value of the stock at
the time of grant, and, therefore provide no compensation to the executive
unless the value of the stock increases. The Committee encourages executives to
maintain a long-term ownership position in the Company's Common Stock. The
Committee believes that through the use of stock options the interests of the
Company's executives are directly related to enhancing stockholder value.
Each year, the Committee establishes guidelines and incentive stock option
amounts based on position level, base salary and current competitive practice as
indicated by industry compensation surveys of comparable companies. Individual
departments then make their recommendations to the Chief Executive
12
<PAGE> 15
Officer based on each individual's past and expected contributions to the
achievement of the Company's long-term performance goals. The Chief Executive
Officer adjusts and/or approves the recommendations that are forwarded to the
Committee. The Committee approves incentive stock option awards to executives
based on its discretionary judgment, taking into consideration the above
mentioned criteria and recommendations. To ensure that these stock option grants
are linked to performance, the Committee does not consider prior stock option
grants when making these awards.
CHIEF EXECUTIVE OFFICER COMPENSATION
Carl J. Grivner was the President and Chief Executive Officer of the
Company until June 26, 1998, when the Board of Directors accepted his
resignation. Donald Green, one of the original founders of the Company, Chairman
of the Board and former Chief Executive Officer, assumed the role of Chief
Executive Officer upon Mr. Grivner's resignation.
Upon his assumption of the role of Chief Executive Officer in June 1998,
Mr. Green received an option to purchase 60,000 shares of the Company's Common
Stock at an exercise price of $8.625 per share, the fair market value per share
of Common Stock on the October 27, 1998 option grant date. The option was
scheduled to become exercisable for all of the option shares on the sixth
anniversary of the option grant date, subject to acceleration in full in the
event that Mr. Green satisfied certain performance criteria. On February 11,
1999, the Compensation Committee determined that Mr. Green had satisfied such
performance criteria and the option became exercisable in full as of that date.
In determining Messrs. Green and Grivner's base salary, incentive
compensation and long-term incentive compensation for 1998, the Committee
considered both the Company's performance and each individual's performance by
the same measures described above for determining executive compensation.
DEDUCTION LIMIT FOR EXECUTIVE COMPENSATION
Section 162(m) of the Internal Revenue Code limits federal income tax
deductions for compensation paid to the Chief Executive Officer and the four
other most highly compensated officers of a public company to $1 million per
officer in any year, but contains an exception for performance-based
compensation that satisfies certain conditions.
The Company's 1996 Stock Incentive Plan is structured so that any
compensation deemed paid to an executive officer when he or she exercises an
outstanding option under the 1996 Stock Incentive Plan will qualify as
performance-based compensation which will not be subject to the $1 million
limitation.
While it is unlikely that other compensation payable to any executive
officer would exceed the deduction limit in the near future, the Committee has
not yet considered whether it will seek to qualify compensation other than
options for the performance-based exception or will prohibit the payment of
compensation that would exceed the deduction limit. However, in approving the
amount and form of compensation for executive officers, the Committee will
continue to consider all elements of cost to the Company of providing that
compensation.
1998 STOCK OPTION REPRICING PROGRAM
Competition for skilled electrical engineers and other key employees in the
telecommunications industry is intense and the use of significant stock options
for retention and motivation of such personnel is widespread in the high
technology industries. The Committee and the Board believe that stock options
are a critical component of the compensation offered by the Company to promote
long-term retention of key employees, motivate high levels of performance and
recognize employee contributions to the success of the Company. During the first
three quarters of 1998, the market price of the Company's common stock decreased
substantially from a high of $44.50 to a low of $6.00 by the third quarter of
1998. In light of this substantial decline in market price, the Board believed
that the large numbers of outstanding stock options with an exercise price in
excess of the actual market price were no longer an effective tool to encourage
employee retention or to motivate high levels of performance.
13
<PAGE> 16
Accordingly, on August 26, 1998, the Board approved the Company's 1998
Stock Option Repricing Program. Pursuant to that program, each employee of the
Company, including the Company's executive officers, who held an outstanding
stock option with an exercise price of $12.50 or more (a "Higher-Priced
Option"), was given an opportunity to surrender such Higher-Priced Option for
cancellation and receive, as of September 14, 1998, a replacement option (a "New
Option"), for the same number of shares, at an exercise price of $7.875 per
share, the fair market value per share of Common Stock on September 14, 1998.
In accordance with the terms of the New Options granted to the Company's
executive officers and certain key employees, no option shares will become
exercisable for a period of one year from the September 14, 1998 repricing date.
As of September 14, 1999, each New Option will become exercisable for the number
of option shares which would have been exercisable and vested as of such date
under the Higher-Priced Option such new option replaced. After September 14,
1999, each New Option granted to the Company's executive officers and key
employees will continue to vest and become exercisable in accordance with the
original vesting schedule which applied under the Higher-Priced Option such
option replaced. With respect to all other employees, each New Option will
become exercisable on March 15, 1999 for the number of option shares which would
have been exercisable under the respective Higher-Priced Option as of that date
and, thereafter, each New Option will continue to vest in accordance with the
original vesting schedule which applied under such Higher-Priced Option.
As a result of the vesting schedules imposed on the New Options, the
Compensation Committee believes that the program strikes an appropriate balance
between the interests of the option holders and those of the stockholders. The
lower exercise prices in effect under the New Options make those options
valuable once again to the executive officers and key employees critical to the
Company's financial performance. However, those individuals will enjoy the
benefits of the New Options only if they remain in the Company "s employ and
contribute to the Company's financial success.
April 14, 1999
COMPENSATION COMMITTEE OF THE COMPANY'S BOARD OF DIRECTORS
Clifford H. Higgerson
Alex Sozonoff
Herb Dwight
14
<PAGE> 17
REPORT ON REPRICING OF OPTIONS/SARS
TEN-YEAR OPTION/SAR REPRICINGS
The following table sets forth information regarding all of the options
repriced between the date of the Company's initial public offering and December
26, 1998 that were held by persons who were executive officers of the Company at
the time of the applicable repricing:
<TABLE>
<CAPTION>
SECURITIES LENGTH OF
UNDERLYING MARKET PRICE ORIGINAL OPTION
NUMBER OF OF STOCK AT EXERCISE PRICE TERM REMAINING
OPTIONS/SARS TIME OF AT TIME OF NEW AT DATE OF
REPRICED OR REPRICING OR REPRICING OR EXERCISE REPRICING OR
NAME DATE AMENDED(#) AMENDMENT($) AMENDMENT($) PRICE($) AMENDMENT
---- -------- ------------ ------------ -------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Peter A. Darbee.............. 09/14/98 280,000 $7.875 $22.5000 $7.875 8.68 years
Vice President, Chief 09/14/98 11,000 7.875 25.2500 7.875 9.29 years
Financial Officer,
Treasurer and Secretary
Karen L. Godfrey............. 09/14/98 630 7.875 26.5000 7.875 8.34 years
Vice President and 09/14/98 8,000 7.875 26.5000 7.875 8.34 years
Controller................. 09/14/98 10,000 7.875 25.2500 7.875 9.29 years
Donald Green................. 09/14/98 3,200 7.875 26.5000 7.875 8.34 years
Chairman of the Board and 09/14/98 60,000 7.875 26.5000 7.875 8.34 years
Chief Executive Officer 09/14/98 30,000 7.875 25.2500 7.875 9.29 years
James T. Hoeck............... 09/14/98 960 7.875 26.5000 7.875 8.34 years
Vice President and Chief 09/14/98 20,000 7.875 26.5000 7.875 8.34 years
Technical Officer 09/14/98 10,000 7.875 25.2500 7.875 9.29 years
Glenn Lillich................ 09/14/98 1,300 7.875 26.5000 7.875 8.34 years
Former Vice President 09/14/98 21,150 7.875 26.5000 7.875 8.34 years
Strategic Programs 09/14/98 12,444 7.875 35.2500 7.875 9.01 years
09/14/98 37,556 7.875 35.2500 7.875 9.01 years
09/14/98 8,000 7.875 25.2500 7.875 9.29 years
09/14/98 5,000 7.875 31.0625 7.875 9.39 years
Catherine Millet............. 09/14/98 15,608 7.875 25.6250 7.875 9.27 years
Vice President, 09/14/98 59,392 7.875 25.6250 7.875 9.27 years
Development Engineering 09/14/98 75,000 7.875 17.8750 7.875 9.89 years
Gregory A. Peters............ 09/14/98 200,000 7.875 26.1250 7.875 9.16 years
Former Vice President, 09/14/98 8,000 7.875 25.2500 7.875 9.29 years
International Operations
Richard L. Stanfield......... 09/14/98 15,000 7.875 26.5000 7.875 8.34 years
Vice President, 09/14/98 8,000 7.875 25.2500 7.875 9.29 years
North American Sales
Gregory S. Steele............ 09/14/98 920 7.875 26.5000 7.875 8.34 years
Chief Operating Officer 09/14/98 22,000 7.875 26.5000 7.875 8.34 years
09/14/98 12,700 7.875 35.2500 7.875 9.01 years
09/14/98 37,300 7.875 35.2500 7.875 9.01 years
09/14/98 13,000 7.875 25.2500 7.875 9.29 years
John W. Webley............... 09/14/98 960 7.875 26.5000 7.875 8.34 years
Vice President, Marketing 09/14/98 20,000 7.875 26.5000 7.875 8.34 years
09/14/98 10,000 7.875 25.2500 7.875 9.29 years
</TABLE>
15
<PAGE> 18
PERFORMANCE GRAPH
The following performance graph compares the cumulative total return on the
Company's Common Stock with a comparable return of the S&P 500 Index (the "S&P
500") and the S&P High Technology Composite Index (the "Peer Group").
The graph assumes that $100 was invested at the time of the Company's
initial public offering on October 1, 1996 in each of the Company's Common
Stock, the S&P 500 and the Peer Group, and that dividends in the S&P 500 and
Peer Group were reinvested.
COMPARISON OF ADVANCED FIBRE COMMUNICATIONS, INC., THE S&P 500
AND THE COMPANY'S PEER GROUP
<TABLE>
<CAPTION>
AFC S&P 500 PEER GROUP
--- ------- ----------
<S> <C> <C> <C>
10/1/96 100 100 100
10/31/96 128 102 100
11/29/96 110 109 114
12/27/96 120 109 114
1/31/97 108 113 120
2/28/97 73 114 111
3/31/97 72 108 108
4/30/97 89 115 119
5/30/97 123 123 125
6/30/97 135 128 134
7/31/97 156 138 156
8/29/07 139 130 151
9/30/97 183 130 157
10/31/97 130 140 140
11/26/97 119 138 145
12/31/97 131 141 138
1/30/98 133 142 148
2/27/98 134 152 163
3/31/98 163 160 165
4/30/98 190 161 173
5/29/98 166 158 163
6/30/98 184 164 177
7/31/98 89 162 183
8/28/98 38 138 152
9/30/98 31 147 173
10/30/98 44 159 185
11/30/98 40 168 204
12/31/98 50 177 230
</TABLE>
16
<PAGE> 19
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1995, the Company loaned to Carl J. Grivner, then the President
and Chief Operating Officer of the Company, the sum of $100,000 to assist him in
relocating to Northern California. Such loan bore interest at the rate of 6.37%
per annum, with accrued interest due and payable annually on July 19 of each
year, and the principal of such loan due and payable in three equal installments
on July 19 of 1996, 1997 and 1998. In each of August 1996, August 1997 and June
1998, the Company forgave one-third of the principal balance and interest
accrued through July 19, 1996, July 19, 1997 and June 26, 1998, respectively.
In June 1997, the Company issued 4,968 shares of restricted Common Stock to
Peter A. Darbee, the Company's Vice President, Chief Financial Officer,
Treasurer and Secretary. The shares were issued at $30.1875 per share in
connection with his commencement of employment. Mr. Darbee delivered a
promissory note to the Company in the amount of $149,972 in payment for the
shares. The note is secured by shares of Common Stock owned by Mr. Darbee and
bears interest at the rate of 6.8% per annum, with the entire principal balance,
together with all accrued or unpaid interest, due and payable on July 1, 2002.
In October 1998, the Company agreed to forgive one-fourth of the principal
balance and interest accrued through June 30, 1998 equal to $47,691.
In June 1997, the Company issued 2,484 shares of restricted Common Stock to
Gregory A. Peters, the Company's former Vice President, International
Operations. The shares were issued at $30.1875 per share in connection with his
commencement of employment. Mr. Peters delivered a promissory note to the
Company in the amount of $74,896 in payment for the shares. The note is secured
by shares of Common Stock owned by Mr. Peters and bears interest at the rate of
6.8% per annum, with the entire principal balance, together with all accrued or
unpaid interest, due and payable on July 1, 2002. In October 1998, the Company
agreed to forgive one-fourth of the principal balance and interest accrued
through June 30, 1998 equal to $23,846.
In June 1997, the Company loaned to Mr. Peters the sum of $100,000 to
assist him in relocating to Northern California. Such loan bears interest at the
rate of 6.23% per annum, with accrued interest due and payable annually on June
30 of each year, and the principal of such loan due and payable in three equal
installments on June 30 of 1998, 1999 and 2000. In June 1998, the Company
forgave one-third of the principal balance and interest accrued through June 30,
1998 equal to $39,563.
In December 1997, the Company issued 2,926 shares of restricted Common
Stock at $25.625 per share to Catherine Millet, the Company's Vice President,
Development Engineering in connection with Ms. Millet's commencement of
employment. Ms. Millet delivered a promissory note to the Company in the amount
of $74,979 in payment for the shares. The note is secured by shares of Common
Stock owned by Ms. Millet and bears interest at the rate of 5.93% per annum,
with the entire balance of the note together with all accrued and unpaid
interest due and payable on December 23, 2002. In February 1999, the Company
agreed to pay a cash bonus to Ms. Millet equal to $23,257. The cash bonus
payment was applied to the indebtedness under the note that represented
one-fourth of the principal balance and interest accrued through December 22,
1998. The Company has also agreed to pay a cash bonus equal to one-fourth of the
principal and accrued interest in each of the 2000 through 2002 calendar years
to be applied to the indebtedness under the note, provided Ms. Millet remains in
the Company's service through such date.
In December 1997, the Company also issued 15,000 shares of restricted
Common Stock at $25.625 per share to Ms. Millet in connection with Ms. Millet's
commencement of employment. Ms. Millet delivered a promissory note to the
Company in the amount of $384,375 in payment for the shares. The note is secured
by shares of Common Stock owned by Ms. Millet and bears interest at the rate of
5.6% per annum, with the entire balance of the note together with all accrued
and unpaid interest due and payable on December 23, 2000. In February 1999 the
Company agreed to pay a cash bonus to Ms. Millet equal to $149,951. The cash
bonus payment was applied to the indebtedness under the note that represented
one-third of the principal balance and interest accrued through December 22,
1998. The Company has also agreed to pay a cash bonus equal to one-third of the
principal and accrued interest in each of the 2000 through 2001 calendar years
to be applied to the indebtedness under the note, provided Ms. Millet remains in
the Company's service through such date.
17
<PAGE> 20
The Company and Tellabs Operations, Inc. ("Tellabs Operations"), a
subsidiary of Tellabs, Inc., a stockholder of the Company, entered into a
License and Marketing Agreement on December 23, 1996. Under the License and
Marketing Agreement, the Company granted to Tellabs Operations a license to use
the UMC technology in the development, manufacture, and distribution of coaxial
systems for specified markets. In return, the Company will receive royalties
from the sale of these systems. The License and Marketing Agreement was
terminated on February 20, 1998 and replaced by a Letter of Agreement ("LOA").
In 1998, the Company received $6,189,480 in connection with the LOA.
The Company has granted options to certain of its directors and executive
officers. See "Executive Compensation" and "Security Ownership of Certain
Beneficial Owners and Management."
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. The Company intends that all future transactions,
including loans, between the Company and its officers, directors, principal
stockholders and their affiliates be approved by a majority of the Board of
Directors, including a majority of the independent and disinterested outside
directors on the Board of Directors, and be on terms no less favorable to the
Company than could be obtained from unaffiliated third parties.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers, and persons who own more than
ten percent of a registered class of the Company's equity securities, to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities of
the Company. Executive officers, directors and greater than ten percent
stockholders are required by Securities and Exchange Commission regulations to
furnish the Company with copies of all Section 16(a) reports they file.
Based solely upon review of the copies of Section 16(a) reports received by
the Company, and written representations that no other reports were required,
the Company believes that there was compliance for the 1998 fiscal year with all
Section 16(a) filing requirements applicable to the Company's officers,
directors and greater than ten percent stockholders, except that Mr. Green
inadvertently filed one Form 4 late reporting three transactions.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be considered at the 2000 Annual Meeting
of Stockholders (the "2000 Meeting") must be received by the Company no later
than December 15, 1999. The proposal must be mailed to the Company's principal
executive offices, 1 Willow Brook Court, Petaluma, California 94954. Such
proposals may be included in next year's proxy statement if they comply with
certain rules and regulations promulgated by the Securities and Exchange
Commission. Other matters may be put to a vote at the 2000 Meeting even if not
included in next year's proxy statement. However, the management proxies have
the discretion to disallow the matter to be put to a vote if it does not meet
Rule 14a-4(c)(1) under Regulation 14A of the Securities Exchange Act of 1934.
18
<PAGE> 21
OTHER MATTERS
Management does not know of any matters to be presented at the Annual
Meeting other than those set forth herein and in the Notice accompanying this
Proxy Statement.
It is important that your shares be represented at the Annual Meeting,
regardless of the number of shares that you hold. YOU ARE, THEREFORE, URGED TO
EXECUTE THE ACCOMPANYING PROXY PROMPTLY AND RETURN IT IN THE ENVELOPE THAT HAS
BEEN ENCLOSED FOR YOUR CONVENIENCE. Stockholders who are present at the Annual
Meeting may revoke their proxies and vote in person or, if they prefer, may
abstain from voting in person and allow their proxies to be voted.
By Order of the Board of Directors,
/s/ Donald Green
Donald Green
Chairman of the Board
April 14, 1999
Petaluma, California
19
<PAGE> 22
1563-PS-99
<PAGE> 23
[AFC LOGO]
DETACH HERE
- --------------------------------------------------------------------------------
PROXY
ADVANCED FIBRE COMMUNICATIONS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Advanced Fibre Communications, Inc. (the
"Corporation") hereby appoints Peter A. Darbee and Karen L. Godfrey, and each
or either of them, with full power of substitution in each of them, as proxies
of the undersigned, and hereby authorizes them to represent and to cast all
votes as designated below, which the undersigned stockholder is entitled to
cast at the Annual Meeting of Stockholders to be held at 2:00 p.m. on May 25,
1999, at the offices of the Corporation, 2200 South McDowell Blvd., Petaluma,
California 94954, and at any adjournments thereof, upon the following matters.
The undersigned stockholder hereby revokes any proxy or proxies heretofore
given.
This proxy will be voted as directed by the undersigned stockholder. The Board
recommends a vote FOR Proposals 1 and 2. UNLESS CONTRARY DIRECTION IS GIVEN,
THE PROXY WILL BE VOTED FOR THE ELECTION OF THE NOMINEES LISTED IN PROPOSAL 1
AND FOR PROPOSAL 2 TO RATIFY THE APPOINTMENT OF KPMG LLP AS INDEPENDENT
AUDITORS OF THE CORPORATION FOR THE YEAR ENDING DECEMBER 31, 1999 AND IN
ACCORDANCE WITH THE DETERMINATION OF A MAJORITY OF THE BOARD OF DIRECTORS AS TO
OTHER MATTERS. The undersigned stockholder may revoke this proxy at any time
before it is voted by delivering to the Secretary of the Corporation either a
written revocation of the proxy or a duly executed proxy bearing a later date,
or by appearing at the Annual Meeting and voting in person. The undersigned
stockholder hereby acknowledges receipt of the Notice of Annual Meeting and
Proxy Statement.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
SEE REVERSE SEE REVERSE
SIDE SIDE
<PAGE> 24
THIS IS YOUR PROXY.
YOUR VOTE IS IMPORTANT.
Dear Stockholder:
The officers and directors of Advanced Fibre Communications, Inc. ("AFC")
cordially invite you to attend the Annual Meeting of Stockholders to be held on
May 25, 1999 at 2:00 p.m. at the offices of AFC, 2200 South McDowell Blvd.,
Petaluma, California.
Please review the important information enclosed with this Proxy. Your vote
counts, and you are strongly encouraged to exercise your right to vote your
shares.
Please mark the boxes on the proxy card to indicate how your shares will be
voted. Then sign the card, detach it and return your proxy in the enclosed
postage paid envelope.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
/s/ DONALD GREEN
- -------------------------
Donald Green
Chairman of the Board
DETACH HERE
- -------------------------------------------------------------------------------
[X] Please mark
votes as in
this example.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1. Election of Directors. FOR AGAINST ABSTAIN
Nominees: Donald Green and Dan Rasdal 2. Ratify the appointment of [ ] [ ] [ ]
KPMG LLP as independent
FOR WITHHELD auditors of the Corporation.
[ ] [ ]
3. In their discretion, the Proxies are authorized to vote
upon any other business that may properly come before
the meeting.
[ ]_______________________________________
For both nominees except as noted above
MARK HERE IF YOU PLAN TO ATTEND THE MEETING [ ]
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [ ]
Please sign exactly as your name appears hereon. Joint
owners should each sign. Executors, administrators, trustees,
guardians or other fiduciaries should give full title as such.
If signing for a corporation, please sign in full corporate name
by a duly authorized officer. If signing for a partnership, please
sign in partnership name by an authorized person.
Signature:____________________________ Date:_____________ Signature:____________________________ Date:_____________
</TABLE>
