<PAGE>
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 Section 240.14a-11(c) or Section 240.14a-12
Natural Microsystems Corporation
- --------------------------------------------------------------------------------
(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:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
NATURAL MICROSYSTEMS CORPORATION
100 CROSSING BOULEVARD
FRAMINGHAM, MASSACHUSETTS 01702
(508) 620-9300
March 31, 1999
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
Natural MicroSystems Corporation (the "Company"), which will be held on April
30, 1999 at 1:00 p.m. at its corporate offices at 100 Crossing Boulevard,
Framingham, Massachusetts.
The following Notice of Annual Meeting of Stockholders and Proxy Statement
describe the items to be considered by the stockholders and contain
information about the Company and its directors and officers.
Please sign and return the enclosed proxy card as soon as possible in the
envelope provided so that your shares can be voted at the meeting in
accordance with your instructions. Even if you plan to attend the meeting, we
urge you to sign and promptly return the proxy card. You can revoke it at any
time before it is exercised at the meeting or vote your shares personally if
you attend.
We look forward to seeing you.
Sincerely,
/s/ Robert P. Schechter
-------------------------------------
Robert P. Schechter
Chairman and Chief Executive Officer
<PAGE>
NATURAL MICROSYSTEMS CORPORATION
100 CROSSING BOULEVARD
FRAMINGHAM, MASSACHUSETTS 01702
(508) 620-9300
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 30, 1999
The Annual Meeting of Stockholders of Natural MicroSystems Corporation (the
"Company") will be held at its corporate offices at 100 Crossing Boulevard,
Framingham, Massachusetts on April 30, 1999 at 1:00 p.m., for the following
purposes:
1. To elect one director for a three-year term.
2. To approve an amendment to the Company's 1993 Employee Stock Purchase
Plan increasing the maximum number of shares issuable thereunder by
300,000.
3. To approve an amendment to the Company's 1993 Non-Employee Directors'
Stock Option Plan increasing the maximum number of shares issuable
thereunder by 120,000.
4. To ratify the Board of Directors' selection of PricewaterhouseCoopers
LLP as the Company's independent auditors for the year ending December 31,
1999.
5. To transact such other business as may properly come before the
meeting and any adjournments thereof.
Stockholders of record at the close of business on March 19, 1999 will be
entitled to notice of and to vote at the meeting and any adjournments thereof.
By Order of the Board of Directors
Dianne Callan
Secretary
Dated: March 31, 1999
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND
SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE IN ORDER
TO ASSURE REPRESENTATION OF YOUR SHARES.
<PAGE>
NATURAL MICROSYSTEMS CORPORATION
100 Crossing Boulevard
Framingham, Massachusetts 01702
(508) 620-9300
PROXY STATEMENT FOR
ANNUAL MEETING OF STOCKHOLDERS
This Proxy Statement is furnished to the holders of common stock, $.01 par
value ("Common Stock"), of Natural MicroSystems Corporation, a Delaware
corporation (the "Company"), in connection with the solicitation of proxies
for use at the Annual Meeting of Stockholders to be held on April 30, 1999 and
at any adjournment of that meeting. The enclosed proxy is solicited on behalf
of the Board of Directors of the Company. Each properly signed proxy will be
voted in accordance with the instructions contained therein and, if no choice
is specified, the proxy will be voted in favor of the proposals set forth in
the Notice of Annual Meeting.
A person giving the enclosed proxy has the power to revoke it by written
notice to the Secretary of the Company, by giving a later-dated proxy, or by
revoking it in person at the meeting.
The approximate date on which this Proxy Statement and the enclosed proxy
will first be sent to stockholders is April 5, 1999. The Company's Annual
Report to Stockholders for 1998 is being mailed together with this Proxy
Statement.
Only holders of Common Stock of record on the stock transfer books of the
Company at the close of business on March 19, 1999 (the "record date") will be
entitled to vote at the meeting and at any adjournment thereof. There were
11,023,120 shares of Common Stock outstanding at the close of business on the
record date.
Each share of Common Stock is entitled to one vote. The affirmative vote of
the holders of a plurality of the shares represented at the meeting, at which
a quorum is present, is required for the election of directors. Approval of
the other matters which are before the meeting will require the affirmative
vote at the meeting, at which a quorum is present, of the holders of a
majority of votes cast with respect to such matters. Votes will be tabulated
by the Company's transfer agent, subject to the supervision of persons
designated by the Board of Directors as inspectors.
Under the Company's By-Laws, a quorum at the meeting will consist of a
majority of the outstanding shares of Common Stock as of the record date.
Shares voted to abstain or to withhold as to a particular matter (including
shares as to which a nominee, such as a broker holding shares in street name
for a beneficial owner, has no voting authority in respect of such matter)
will be deemed represented for quorum purposes but will not be deemed to be
voting on such matters and, therefore, will not be the equivalent of negative
votes as to such matters. It is the position of the Securities and Exchange
Commission (the "SEC"), however, that, for purposes of approval pursuant to
Rule 16b-3 under the Securities Exchange Act of 1934 (the "1934 Act") of the
third proposal listed on the Notice of Annual Meeting, abstentions will be
deemed the equivalent of negative votes.
1
<PAGE>
STOCK OWNERSHIP OF DIRECTORS
EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 8, 1999 by (a) each
director of the Company, (b) each of the executive officers named in the
Summary Compensation Table below, (c) all directors and executive officers as
a group and (d) each person known to the Company to own beneficially 5% or
more of its Common Stock. Except as otherwise indicated, each such person has
sole investment and voting power with respect to the shares shown as being
beneficially owned by such person, based on information provided to the
Company.
<TABLE>
<CAPTION>
Number of Shares Percent of
Name Beneficially Owned(1) Outstanding Shares
---- --------------------- ------------------
<S> <C> <C>
Zenas W. Hutcheson, III (2)........... 72,312 *
W. Frank King......................... 16,900 *
Pamela D. A. Reeve.................... 9,950 *
Ronald W. White (3)................... 20,413 *
Robert P. Schechter................... 443,801 4.0
Charles T. Foskett.................... 176,365 2.0
Ronald J. Bleakney.................... 28,800 *
Dorothy A. Terrell.................... 43,065 *
George D. Kontopidis.................. 52,984 *
All directors and executive officers
as a group
(15 persons) (2) (3)................. 1,066,278 9.7
FMR Corp.(4).......................... 1,414,600 12.9
82 Devonshire Street
Boston, MA 02109
Franklin Resources, Inc. (5).......... 819,220 7.5
777 Mariners Island Boulevard, 6th
Floor San Mateo, CA 94404
</TABLE>
- --------
* Less than 1%.
(1) Includes shares which may be acquired within sixty days after March 8,
1999 by exercise of stock options by the directors and executive officers
as follows: Mr. Hutcheson, 5,000; Dr. King, 9,950; Ms. Reeve, 5,000; Mr.
White, 5,000; Mr. Schechter 25,625; Mr. Foskett, 4,062; Mr.Bleakney,
6,289; Ms. Terrell, 3,281; Dr. Kontopidis, 3,125 and all directors and
executive officers as a group, 82,330.
(2) Includes 22,456 shares held in trust for Mr. Hutcheson's children, as to
which shares Mr. Hutcheson disclaims beneficial ownership.
(3) Includes 900 shares held by Mr. White's children, as to which shares Mr.
White disclaims beneficial ownership.
(4) Consists of shares held by Fidelity Growth Company Fund (the "Fund") and
other registered investment companies which are advisory clients of FMR
Corp. ("FMR"). FMR may be deemed to have sole investment power as to all
such shares. The Fund has sole voting power as to 1,084,600 of such
shares. This information is based solely on a Schedule 13G filed with the
SEC.
(5) Consists of shares held by registered investment companies and other
advisory clients of wholly-owned subsidiaries of Franklin Resources Inc.
("FRI"). This information is based solely on a Schedule 13G filed with the
SEC.
2
<PAGE>
ELECTION OF DIRECTORS
(Item 1 of Notice)
There are currently six members of the Board of Directors, divided into
three classes with terms expiring respectively at the 1999, 2000 and 2001
annual meetings of stockholders. The Board has fixed the number of directors
for the ensuing year at five and nominated Mr. Hutcheson, whose term is
expiring, for reelection. The director elected at the meeting will serve a
three-year term expiring at the time of the annual meeting of stockholders in
2002 and when his successor is elected and qualified. The shares represented
by the enclosed proxy will be voted to elect the nominee unless such authority
is withheld by marking the proxy to that effect. The nominee has agreed to
serve, but in the event the nominee becomes unavailable for any reason, the
proxy, unless authority has been withheld as to the nominee, may be voted for
the election of a substitute.
Charles T. Foskett, whose term expires at the time of the annual meeting, is
not standing for reelection. The following information is furnished with
respect to the nominee for election as a director and for each director whose
term of office will continue after the meeting.
<TABLE>
<CAPTION>
Principal Occupation and Business
Director Experience During Last Five Years;
Name and Age as of March 16, 1999 Since Directorships of Public Companies
- --------------------------------- -------- ----------------------------------
<S> <C> <C>
Nominee for Reelection for Term Expiring in 2002
Zenas W. Hutcheson, III, 1989 Mr. Hutcheson has been, since September 1998,
45.............................. a general partner of St. Paul Venture
Capital, a venture capital firm. From 1982 to
1998, Mr. Hutcheson was president of
Hutcheson & Co., Inc., a management
consulting firm.
Directors Whose Terms Expire in 2000
Robert P. Schechter, 1995 Mr. Schechter has served as Chairman of the
50.............................. Board, President and Chief Executive Officer
of the Company since April 1995. From 1987 to
1994, Mr. Schechter held various senior
executive positions with Lotus Development
Corporation and from 1980 to 1987 he was a
partner of Coopers and Lybrand LLP. Mr.
Schechter is also a director of Infinium
Software, Inc. a developer of enterprise-
level business software applications.
Ronald W. White, 58.............. 1988 Mr. White has been, since October 1997, a
partner of GSM Capital, a venture capital
fund focused on wireless technology. Since
1983, Mr. White has been a partner of
Advanced Technology Development Fund, a
venture capital firm. Mr. White is also a
director of Preferred Networks, Inc., a
provider of paging services.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation and Business
Director Experience During Last Five Years;
Name and Age as of March 16, 1999 Since Directorships of Public Companies
- --------------------------------- -------- ----------------------------------
<S> <C> <C>
Directors Whose Terms Expire in 2001
W. Frank King, 59................ 1997 Dr. King has been, since November 1998, a
private investor. From 1992 through October
1998, he was President and Chief Executive
Officer of PSW Technologies, Inc. (formerly a
division of Pencom, Inc.),
a provider of software services. From 1988 to
1992 Dr. King was Senior Vice President of
Development of Lotus Development Corporation,
and for the previous 19 years he served in
various positions with IBM Corporation,
including his last position as Vice President
of Development for the entry system division.
He is also a director of Auspex Systems,
Inc., a provider of network-attached storage
devices, Cortelco Systems, Inc., a provider
of telecommunications applications, Excalibur
Technologies Corporation, a developer of
document management software, PSW
Technologies, Inc., and SystemSoft, Inc. a
provider of software for desktop and mobile
personal computer manufacturers.
Pamela D. A. Reeve, 49........... 1997 Ms. Reeve has been, since September 1993,
Chief Executive Officer and a director and,
from 1989 to September 1993, President, Chief
Operating Officer and a director of
Lightbridge, Inc., a provider of products and
services which enable wireless
telecommunications carriers to improve
customer acquisition and retention processes.
From 1978 to 1989, she was with The Boston
Consulting Group, a management consulting
firm. Ms. Reeve is a director of PageMart
Wireless, Inc., a provider of wireless
messaging services.
</TABLE>
BOARD OF DIRECTORS AND COMMITTEE MEETINGS
The Board of Directors has Audit and Compensation Committees. It does not
have a nominating or similar committee.
The Audit Committee reviews the internal accounting procedures of the
Company and consults with and reviews the services provided by the Company's
independent auditors. The directors currently serving on the Audit Committee
are Dr. King and Ms. Reeve. The Audit Committee held five meetings during
1998.
The Compensation Committee reviews and recommends to the Board the
compensation and benefits of all officers of the Company and reviews general
policy relating to compensation and benefits of employees of the Company. The
Compensation Committee also administers the issuance of stock options. The
directors currently serving on the Compensation Committee are Messrs. White
and Hutcheson. The Compensation Committee held two meetings during 1998.
During 1998, the Board of Directors of the Company held five meetings. Each
director attended at least 75% of the aggregate number of meetings of the
Board and the meetings of the committees of the Board on which he or she
served.
4
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid or accrued for services
rendered in 1998, 1997 and 1996 to the chief executive officer and the other
four executive officers of the Company who were most highly compensated in
1998 (the "Named Executive Officers").
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
----------------------------------------- ------------
Shares Under Other
Name and Principal Options Compensation
Position Year Salary ($) Commission($) Bonus ($) (#) (1) ($)(2)
------------------ ---- ---------- ------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Robert P. Schechter..... 1998 275,000 40,000 4,999
Chairman and Chief 1997 250,000 254,000 5,371
Executive Officer 1996 225,000 112,500 90,000 2,793
Ronald J. Bleakney...... 1998 225,000 94,943 100,625 4,999
Senior Vice President of
Sales 1997 170,000 129,172 24,000 5,343
1996 145,000 99,975 14,500 30,000 6,111
Dorothy A. Terrell...... 1998 201,635(3) 210,000 100,199
Senior Vice President of 1997
Operations
President of Services 1996
Charles T. Foskett...... 1998 175,000 75,498 55,000 4,999
Senior Vice President of 1997 155,000 109,951 15,500 5,371
International Market
Development 1996 145,000 54,931 14,500 15,000 6,359
George D. Kontopidis.... 1998 175,000 75,000 4,999
Vice President of
Engineering 1997 155,000 100,000 4,491
1996 135,000 54,000 25,000 4,893
</TABLE>
- --------
(1) Includes in 1998, except for Mr. Schechter, shares under options granted
pursuant to the option repricing program described below.
(2) Includes, for each of the Named Executive Officers, Company contributions
to the Company's 401(k) retirement plan and premiums paid by the Company
for term life insurance. Also includes, for Ms. Terrell, $100,000 which
she was paid as compensation for joining the Company.
(3) Ms. Terrell joined the company in February 1998.
5
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows all stock option grants to the Named Executive
Officers during 1998:
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------
Potential Realizable
% of Total Options Value at Assumed
Number of Shares Granted to Annual Rates of Stock
Underlying Options Employees in Exercise Price Expiration Price Appreciation
Name Granted (1) Fiscal Year ($/sh) Date for Option Term (2)
---- ------------------ ------------------ -------------- ---------- ---------------------
5% 10%
---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert P. Schechter..... 40,000 2.2 34.31 1-26-08 2,235,690 3,559,963
Ronald J. Bleakney...... 40,000(3) 2.2 34.31 1-26-08 2,235,690 3,559,963
60,625(4) 3.3 10.19 7-09-05 869,091 1,203,619
Dorothy A. Terrell...... 105,000(3) 5.7 29.44 4-16-08 5,034,897 8,017,232
105,000(4) 5.7 10.19 7-9-05 1,505,232 2,084,621
Charles T. Foskett...... 20,000(3) 1.1 34.31 1-26-08 1,117,845 1,779,982
35,000(4) 1.9 10.19 7-9-05 501,744 694,874
George D. Kontopidis.... 25,000(3) 1.3 34.31 1-26-08 1,206,940 1,671,512
50,000(4) 2.7 10.19 7-9-05 716,777 992,676
</TABLE>
- --------
(1) All options become exercisable (vest) over a four-year period.
(2) As required by the rules of the Securities and Exchange Commission,
potential values are stated based on the prescribed assumption that the
stock will appreciate in value from the date of grant to the end of the
option term at the indicated rates (compounded annually) and therefore are
not intended to forecast possible future appreciation, if any, in the
price of the stock.
(3) Canceled pursuant to the option repricing program described below.
(4) Granted pursuant to the option repricing program described below.
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table sets forth, for the Named Executive Officers, the number
of shares for which stock options were exercised in 1998, the realized value
or spread (the difference between the exercise price and market value on the
date of exercise) and the number and unrealized spread of the unexercised
options held by each at fiscal year-end.
<TABLE>
<CAPTION>
Number of Shares
Underlying Value of Unexercised
Unexercised In-the-Money Options
Options at FY-End at FY-End
------------------------ ---------------------
Number of
Shares
Acquired on Value
Name Exercise(1) Realized($) Vested Unvested Total Vested Unvested Total
---- ----------- ----------- ------- -------- ------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert P. Schechter..... 297,625 116,875 414,500 -- -- --
Ronald J. Bleakney...... 25,313 400,339 10,351 68,399 78,750 -- -- --
Dorothy A. Terrell...... 26,250 78,750 105,000 -- -- --
Charles T. Foskett...... 5,341 12,210 52,812 42,188 95,000 -- -- --
George D. Kotopidis..... 15,286 468,147 21,250 50,000 71,250 -- -- --
</TABLE>
- --------
(1) Does not include shares purchased by the Named Executive Officers during
1998 under the Company's 1993 Employee Stock Purchase Plan, as follows:
800 shares each by Messrs. Schechter, Bleakney, Foskett and Kontopidis,
and 400 shares by Ms. Terrell.
6
<PAGE>
OPTION REPRICING TABLE
As discussed in the Compensation Committee Report on Executive Compensation
below, in 1998 the Company gave holders of stock options, including executive
officers other than the chief executive officer, the opportunity to exchange
options for new options with a lower exercise price and with a new vesting
schedule beginning on the grant date of the new option. The following option
repricing table sets forth information concerning such exchange of stock
options by the executive officers of the Company. Except for such repricing in
1998, the Company has never repriced any stock options.
<TABLE>
<CAPTION>
Market Price
Number of of Stock at
Options Time of Exercise Price Length of Original
Repriced Repricing Before New Exercise Term Remaining
Name Date (#Shares) ($) Repricing ($) Price ($) at Date of Repricing
---- ------ --------- ------------ -------------- ------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
Ronald J. Bleakney...... 7/9/98 20,625 10.19 26.75 10.19 8
7/9/98 40,000 10.19 34.31 10.19 10
Dorothy A. Terrell...... 7/9/98 105,000 10.19 29.44 10.19 10
Charles T. Foskett...... 7/9/98 15,000 10.19 26.75 10.19 8
7/9/98 20,000 10.19 34.31 10.19 10
Allen P. Carney......... 7/9/98 75,000 10.19 13.25 10.19 8
7/9/98 20,000 10.19 26.75 10.19 8
7/9/98 20,000 10.19 34.31 10.19 10
Dianne Callan........... 7/9/98 15,000 10.19 19.88 10.19 9
George D. Kontopidis.... 7/9/98 25,000 10.19 26.75 10.19 9
7/9/98 25,000 10.19 34.31 10.19 10
Deborah Louis........... 7/9/98 50,000 10.19 19.88 10.19 9
R. Brough Turner........ 7/9/98 20,000 10.19 26.75 10.19 8
7/9/98 20,000 10.19 34.31 10.19 10
</TABLE>
SEVERANCE AND OPTION VESTING ON CHANGE-IN-CONTROL
The Company has agreed with each of its executive officers, including the
officers named in the Summary Compensation Table above, that he or she will,
upon termination of employment within one year following a change-in-control
of the Company, be entitled to severance compensation equal to one year's
salary and the full vesting of all options.
DIRECTOR COMPENSATION
Each director of the Company who is not also an employee is paid $2,500 per
quarter and is reimbursed for reasonable out-of-pocket expenses incurred in
attending meetings. Non-employee directors serving on committees of the Board
also receive $250 per committee meeting attended. In addition, non-employee
directors are entitled to certain option grants under the Company's 1993 Non-
Employee Directors Stock Option Plan. See "1993 Non-Employee Directors Stock
Option Plan" below.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's executive compensation program is administered by the
Compensation Committee of the Board of Directors, which is comprised of two
non-employee directors. The Compensation Committee works with management to
develop compensation plans for the Company and is responsible for determining
the compensation of each executive officer and recommending such compensation
to the Board of Directors.
The Company's executive compensation program is designed to align executive
compensation with the Company's business objectives and the executive's
individual performance and to enable the Company to attract, retain and reward
executive officers who contribute, and are expected to continue to contribute,
to the Company's long-term success. In establishing executive compensation,
the Compensation Committee is guided by the
7
<PAGE>
following principles: (i) the total compensation payable to executive officers
should be sufficiently competitive with the compensation paid by other
companies in the telecommunications industry for officers in comparable
positions so that the Company can attract and retain qualified executives and
(ii) individual compensation should include components that reflect the
financial performance of the Company and the performance of the individual,
including leadership and the achievement of corporate objectives.
The compensation of the Company's executive officers consists of a
combination of base salary, bonuses and equity-based compensation. The
Compensation Committee believes that executive compensation should be designed
to motivate executives to increase shareholder value and further believes that
executive officers can best increase shareholder value by managing the
operating profit of the Company and by conceiving, developing and positioning
the best products in the Company's chosen markets.
Compensation payments in excess of $1 million to the Chief Executive Officer
or other four most highly compensated executive officers are subject to a
limitation of deductibility by the Company under Section 162(m) of the
Internal Revenue Code of 1986. Certain performance-based compensation is not
subject to the limitation on deductibility. It is the policy of the Committee
to preserve the deductibility of the compensation to the extent compatible
with other compensation objectives but, if required by such other objectives,
to authorize benefits and compensation which may exceed the deduction
limitation. The Compensation Committee does not expect compensation in 1999 to
its Chief Executive Officer or any other executive officer will exceed the
deduction limitation.
BASE SALARY
The Compensation Committee sets the base salary for executives by reviewing
the salaries for comparable positions within the Company's industry, the
historical compensation levels of the Company's executives and the individual
performance of the executives in the preceding year. The Compensation
Committee utilizes salary surveys for reference purposes but its salary
determinations are not subject to specific criteria. In addition, executive
officers whose primary responsibilities are in sales are entitled to receive
commissions based primarily on the Company's revenues or a specific portion of
these revenues. At the beginning of 1998, the base salaries of the executive
officers were increased, based in part on the individual contributions of the
executives, at an average rate of 13% over 1997 base salaries.
MERIT BONUS PROGRAM
Each year the Compensation Committee adopts a management incentive plan
which reflects the Compensation Committee's belief that a significant portion
of each executive officer's compensation should be tied to the achievement by
the Company of its profit goals and by each executive officer of his or her
individual objectives as determined by the Compensation Committee. The 1998
Management Incentive Plan (the "1998 Incentive Plan") set operating profit
goals and merit bonus goals based on the 1998 operating plan approved by the
Board of Directors. In addition, the 1998 Incentive Plan prescribed both an
increase and a decrease in the merit bonus goals as a function of the
Company's actual operating profit and the fulfillment of the specific
management objectives for each executive. No merit bonuses were awarded to
executive officers under the 1998 Incentive Plan.
STOCK-BASED COMPENSATION
Awards of stock options under the Company's stock option plans are designed
to more closely tie the long-term interests of the Company's executives and
its shareholders and to assist in the retention of executives. The
Compensation Committee selects the executive officers, if any, to receive
stock options and determines the number of shares subject to each option. The
Compensation Committee's determination of the size of option grants is
generally intended to reflect an executive's position with the Company and his
or her contributions to the Company. Options generally have a four-year
vesting period to encourage key employees to continue in the employ of the
Company. The Compensation Committee reviews the outstanding unvested options
of the key
8
<PAGE>
executives from time to time and may grant additional options to encourage the
retention of key executives. Options for an aggregate of 170,000 shares were
granted to executive officers in 1998 to reward the executive officers for
their performance in 1997 and to establish appropriate ongoing incentives.
CHIEF EXECUTIVE OFFICER COMPENSATION
The Chief Executive Officer's compensation generally is based on the same
policies and criteria as the other executive officers. The Committee increased
Mr. Schechter's base salary by 10% over the 1997 level based upon, among
various factors, the Company's revenues and profits in 1997. Mr. Schechter was
also granted an option for 40,000 shares in 1998 based upon his performance in
1997 and to establish appropriate ongoing incentives.
OPTION REPRICING
The Committee determined in July 1998 that the exercise prices of many stock
options previously granted were at such high levels compared to existing
market value that the incentive and retention powers of the options had been
substantially negated. Accordingly, the Committee adopted a program whereby
all option holders, including executive officers other than the chief
executive officer, had the opportunity to exchange options on a one-for-one
basis for new options with an exercise price equal to the market value on the
date of the exchange. As a condition of the exchange, the new options had full
four-year vesting periods regardless of the extent to which the old options
had vested.
Compensation Committee
Ronald W. White
Zenas W. Hutcheson, III
9
<PAGE>
COMPARISON OF CUMULATIVE TOTAL STOCKHOLDER RETURN
The following performance graph assumes an investment of $100 on February
17, 1994 (the effective date of the Company's initial public offering) and
compares the change to December 31, 1998 in the market price of the Common
Stock with a broad market index (S&P 500) and an industry index (S&P
Communication Equipment-Manufacturers). The Company paid no dividends during
the periods shown; the performance of the indexes is shown on a total return
(dividend reinvestment) basis. The graph lines merely connect the prices on
the dates indicated and do not reflect fluctuations between those dates.
<TABLE>
<CAPTION>
2/18/94 12/30/94 12/29/95 12/31/96 12/31/97 12/31/98
------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Natural Microsystems Corporation 100 111.58 256.84 530.53 783.16 122.63
Industry Index 100 112.02 167.64 196.34 255.80 450.59
Broad Market 100 100.72 138.58 170.39 227.24 292.18
</TABLE>
THE COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION AND THE COMPARISON
OF CUMULATIVE TOTAL STOCKHOLDER RETURN ABOVE SHALL NOT BE DEEMED "SOLICITING
MATERIAL" OR INCORPORATED BY REFERENCE INTO ANY OF THE COMPANY'S FILINGS WITH
THE SECURITIES AND EXCHANGE COMMISSION.
10
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No person serving on the Compensation Committee at any time during 1998 was
a present or former officer or employee of the Company or any of its
subsidiaries. During 1998, no executive officer of the Company served as a
member of the board of directors or compensation committee (or other board
committee performing equivalent functions) of another entity one of whose
executive officers served on the Company's Board of Directors or Compensation
Committee.
SECTION 16 REPORTING
Section 16(a) of the 1934 Act requires the Company's directors and officers
and persons who own more than ten percent of the Common Stock to file reports
with the Securities and Exchange Commission disclosing their ownership of
stock in the Company and changes in such ownership. Copies of such reports are
also required to be furnished to the Company. Based solely on a review of the
copies of such reports received by it, or a written representation from
certain reporting persons that no Form 5 was required for such person, the
Company believes that all required filings were timely made during 1998 except
for late filings of a Form 4 by Mr. White, a director, and of Forms 3 by Mr.
Hult, the chief financial officer, and Mr. Toale, the vice president of human
resources.
LOAN TO OFFICER
The Company made loans during 1998 to R. Brough Turner, its senior vice
president of technology, in the aggregate amount of $483,690, which amount was
outstanding as of March 29, 1999. Mr. Turner's indebtedness to the Company is
evidenced by two promissory notes which become due, together with interest at
the rate of 9% per annum, on July 9, 1999 ($249,900) and October 13, 1999
($233,790).
AMENDMENT TO 1993 EMPLOYEE STOCK PURCHASE PLAN
(Item 2 of Notice)
On March 12, 1999, the Board of Directors of the Company adopted an
amendment to the 1993 Employee Stock Purchase Plan (the "Stock Purchase Plan")
increasing the number of shares issuable thereunder from 400,000 to 700,000.
The purpose of the increase is to permit the Company to continue to provide
its employees with an opportunity to participate in the Company through the
purchase of Common Stock at a discount from market value.
Approval by stockholders of this increase is required in order to meet the
stockholder approval requirements of (i) Section 423 of the Internal Revenue
Code, which governs stock purchase plans, (ii) the rules applicable to
Companies whose shares are traded on The Nasdaq Stock Market, and (iii) the
provisions of the plan regarding amendments.
The Stock Purchase Plan currently provides for the issuance of a maximum of
400,000 shares of Common Stock, of which all but 137,073 have been issued or
reserved for issuance pursuant to the current offering under the plan.
All employees of the Company whose customary employment is in excess of 20
hours per week and more than five months per year, other than those employees
who own 5% or more of the stock of the Company, are eligible to participate in
the Stock Purchase Plan. The Stock Purchase Plan is implemented by offerings
which to date have been and are expected to be six months in duration. An
eligible employee participating in an offering is able to purchase Common
Stock at a price equal to the lower of (i) 85% of its fair market value at the
commencement of the offering period and (ii) 85% of its fair market value on
the last day of the offering period. Payment for Common Stock purchased under
the Stock Purchase Plan is through regular payroll deductions or lump sum cash
payment, or both, as determined by the Compensation Committee. The maximum
value of
11
<PAGE>
Common Stock an employee may purchase during an offering period is 10% of the
employee's base compensation during such period, calculated on the basis of
the employee's compensation rate on the date the employee elects to
participate in the offering. To date, employees have also been limited to the
purchase of a maximum of 400 shares per offering, and it is not expected that
such limit will be changed.
The following table sets forth the number of shares purchased during 1998
under the Stock Purchase Plan by the Named Executive Officers, the current
executive officers as a group, and the non-executive officer employees.
<TABLE>
<S> <C>
Robert P. Schechter................................................... 800
Ronald J. Bleakney.................................................... 800
Dorothy A. Terrell.................................................... 400
Charles T. Foskett.................................................... 800
George D. Kontopidis.................................................. 800
Current executive officers as a group (11 persons).................... 6,280
Non-executive officer employees....................................... 60,556
</TABLE>
The Board of Directors recommends approval of the amendment because it
believes that the continuing availability of shares under the Stock Purchase
Plan is a very important factor in the Company's ability to attract and retain
experienced employees. The market for skilled personnel, especially those with
the technical abilities required by the Company, is currently very
competitive. This component of compensation is a important in recruiting and
retaining such skilled personnel.
AMENDMENT TO NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
(Item 3 of Notice)
On March 12, 1999, the Board of Directors of the Company adopted an
amendment to the 1993 Non-Employee Directors Stock Option Plan (the "Director
Plan") increasing the number of shares issuable thereunder from 120,000 to
240,000. The purpose of the increase is to continue to attract and retain
qualified directors of the Company and to align their interests with those of
the stockholders.
Stockholder approval of the amendment is sought in order to meet the
stockholder approval requirements of (i) Rule 16b-3 under the 1934 Act, (ii)
the rules applicable to companies whose shares are traded on The Nasdaq Stock
Market, and (iii) the provisions of the plan regarding amendments. The Board
of Directors recommends approval of this amendment so that the Director Plan
will remain an effective means of attracting and retaining non-employee
directors and further aligning their interests with those of the stockholders.
The Director Plan provides for the grant of non-qualified stock options to
directors who are not employees of the Company. On March 8, 1999, there were
outstanding under the plan options to purchase 88,025 shares of Common Stock
at prices ranging from $4.88 to $49.25 per share, and there remained 1,668
shares available to be issued in connection with future grants. Under the
Director Plan, each non-employee director currently receives (i) upon first
being elected to the board an option for 15,000 shares which vests over three
years and (ii) annually at the time of the annual meeting an option for 5,000
shares which vests at the time of the next annual meeting. For federal income
tax purposes, ordinary compensation income is recognized upon exercise of the
option in the amount of any excess of the then fair market value over the
exercise price, and the Company is entitled to a corresponding deduction.
12
<PAGE>
RATIFICATION OF SELECTION OF
INDEPENDENT AUDITORS
(Item 4 of Notice)
On the recommendation of the Audit Committee, the Board of Directors has
selected PricewaterhouseCoopers LLP, independent certified public accountants,
as auditors of the Company for the fiscal year ending December 31, 1999. This
firm has audited the accounts and records of the Company since 1997. A
representative of PricewaterhouseCoopers LLP will be present at the Annual
Meeting to answer questions from stockholders and will have an opportunity to
make a statement if desired.
The selection of independent auditors is not required to be submitted to a
vote of the stockholders. The Board believes, however, it is appropriate as a
matter of policy to request that the stockholders ratify the appointment. If
the stockholders do not ratify the appointment, the Board will reconsider its
selection.
STOCKHOLDER PROPOSALS FOR 2000 MEETING
Proposals of stockholders intended to be presented at the 2000 Annual
Meeting of Stockholders must be received on or before December 31, 1999 for
inclusion in the proxy materials relating to that meeting. Any such proposals
should be sent to the Company at its principal offices and addressed to the
Chief Financial Officer. Other requirements for inclusion are set forth in
Rule 14a-8 under the 1934 Act. In addition, if the Company receives notice of
a stockholder proposal after February 15, 2000, the persons named as proxies
for the 2000 Annual Meeting will have discretionary authority to vote on such
proposal.
OTHER MATTERS
The Company has no knowledge of any matters to be presented for action by
the stockholders at the Annual Meeting other than as set forth above. However,
the enclosed proxy gives discretionary authority to the persons named therein
to act in accordance with their best judgment in the event that any additional
matters should be presented.
The Company will bear the cost of the solicitation of proxies, including
charges and expenses of brokerage firms and others for forwarding solicitation
material to beneficial owners of Common Stock.
By order of the Board of Directors
Dianne Callan
Secretary
March 31, 1999
The Board of Directors hopes that stockholders will attend the meeting.
WHETHER OR NOT YOU PLAN TO ATTEND, YOU ARE URGED TO COMPLETE, DATE, SIGN AND
RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. A prompt response will
greatly facilitate arrangements for the meeting, and your cooperation will be
appreciated. Stockholders who attend the meeting may vote their stock
personally even though they have sent in their proxies.
13
<PAGE>
NATURAL MICROSYSTEMS CORPORATION
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR ANNUAL MEETING ON APRIL 30, 1999
The undersigned stockholder of Natural MicroSystems Corporation hereby
acknowledges receipt of the Notice of Annual Meeting and related Proxy Statement
and appoints Robert P. Schechier, Dianne Callan and Richard N. Hoehn, or any one
or more of them, attorneys and proxies for the undersigned with power of
substitution in each to act for and to vote, as designated on the reverse side,
with the same force and effect as the undersigned, all shares of Natural
MicroSystems Corporation common stock standing in the name of the undersigned at
the Annual Meeting of Stockholders of Natural MicroSystems Corporation to be
held at its corporate offices, 100 Crossing Boulevard, Framingham, Massachusetts
on April 30, 1999 at 1:00 p.m., local time and any adjournments thereof.
WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED "FOR" THE NOMINEE FOR DIRECTOR AND "FOR" ALL OTHER PROPOSALS. THE PROXY
WILL BE VOTED IN ACCORDANCE WITH THE HOLDERS' BEST JUDGMENT AS TO ANY OTHER
MATTER.
SEE REVERSE SIDE. If you wish to vote in accordance with the Board of Directors'
recommendations, just sign on the reverse side. You need not mark any boxes.
- --------------------------------------------------------------------------------
PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Please sign exactly as your name(s) appear(s) on the books of the Corporation.
Joint owners should each sign personally. Trustees and other fiduciaries should
indicate the capacity in which they sign, and where more than one name appears,
a majority must sign. If a corporation or partnership, this signature should be
that of an authorized officer who should state his or her title.
- --------------------------------------------------------------------------------
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
___________________________________ _______________________________________
___________________________________ _______________________________________
___________________________________ _______________________________________
<PAGE>
[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE
- --------------------------------------------------------------------------------
NATURAL MICROSYSTEMS CORPORATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1. Elect a Director,
Nominee:
With-
For hold
Zenas W. Hutcheson, III [_] [_]
Mark box at right if an address change or comment has been [_]
noted on the reverse side of this card.
For Against Abstain
CONTROL NUMBER: 2. Approve an amendment to the [_] [_] [_]
RECORD DATE SHARES: Company's Employee Stock
Purchase Plan increasing
the maximum number of shares
issuable thereunder.
3. Approve an amendment to the [_] [_] [_]
Company's Non-Employee
Directors' Stock Option Plan
increasing the maximum number
of shares issuable thereunder.
4. Ratify the Board of Directors' [_] [_] [_]
selection of
PricewaterhouseCoopers LLP as
independent auditors.
---------------
Please be sure to sign and date this Proxy. Date IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE
- ---------------------------------------------------------------------- UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE
MEETING OR ANY ADJOURNMENT THEREOF.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
- ------------------Stockholder sign here --------- Co-Owner sign here-- FOR PROPOSALS 1, 2, 3 AND 4.
DETACH CARD DETACH CARD
</TABLE>
NATURAL MICROSYSTEMS CORPORATION
Dear Stockholder:
Please mark the boxes on the proxy card to indicate how your
shares should be voted, then sign and date the card, detach it
and return it in the enclosed postage paid envelope.
Sincerely,
NATURAL MICROSYSTEMS CORPORATION
