<PAGE>
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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] 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
TelCom Semiconductor, 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):
-------------------------------------------------------------------------
(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 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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Notes:
<PAGE>
[TELCOM LOGO]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of TelCom
Semiconductor, Inc., a Delaware corporation (the "Company"), will be held on
Thursday, April 16, 1998, at 2:00 p.m., local time, at the Company's offices
located at 1300 Terra Bella Avenue, Mountain View, California, for the following
purposes:
1. To elect five (5) directors to serve for the ensuing year and until their
successors are duly elected and qualified.
2. To amend the Company's 1994 Stock Option Plan to increase the number of
shares available for issuance thereunder by 1,000,000 shares to an
aggregate of 4,300,000 shares.
3. To amend the Company's Employee Stock Purchase Plan to increase the number
of shares available for issuance thereunder by 500,000 shares to an
aggregate of 900,000 shares.
4. To ratify the appointment of Price Waterhouse LLP as independent
accountants for the Company for the 1998 fiscal year.
5. To transact such other business as may properly come before the meeting or
any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only stockholders of record at the close of business on February 25, 1998
are entitled to notice of and to vote at the meeting.
All stockholders are cordially invited to attend the meeting in person.
However, to assure your representation at the meeting, you are urged to mark,
sign and return the enclosed proxy as promptly as possible in the postage-
prepaid envelope enclosed for that purpose. Any stockholder attending the
meeting may vote in person even if he or she has returned a proxy.
FOR THE BOARD OF DIRECTORS
R. Michael O'Malley
Secretary
Mountain View, California
March 11, 1998
- --------------------------------------------------------------------------------
IMPORTANT: Whether or not you plan to attend the meeting, you are requested to
complete and promptly return the enclosed proxy in the envelope provided.
- --------------------------------------------------------------------------------
<PAGE>
TELCOM SEMICONDUCTOR, INC.
1300 TERRA BELLA AVENUE
MOUNTAIN VIEW, CALIFORNIA
PROXY STATEMENT FOR 1998
ANNUAL MEETING OF STOCKHOLDERS
The enclosed Proxy is solicited on behalf of the Board of Directors of
TelCom Semiconductor, Inc. (the "Company") for use at the Annual Meeting of
Stockholders to be held on Thursday, April 16, 1998 at 2:00 p.m., local time, or
at any adjournment thereof, for the purposes set forth herein and in the
accompanying Notice of Annual Meeting of Stockholders. The Annual Meeting will
be held at the Company's offices located at 1300 Terra Bella Avenue, Mountain
View, California.
The proxy solicitation materials were mailed on or about March 13, 1998 to
all stockholders of record on February 25, 1998.
INFORMATION CONCERNING SOLICITATION AND VOTING
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it any time before its use by delivering to the Secretary of the Company
at the above address of the Company, written notice of revocation or a duly
executed proxy bearing a later date, or by attending the meeting and voting in
person.
RECORD DATE AND VOTING SECURITIES
Stockholders of record at the close of business on February 25, 1998 (the
"Record Date") are entitled to notice of the meeting and to vote at the meeting.
At the record date, 16,474,512 shares of the Company's Common Stock, $0.001 par
value per share, were issued and outstanding.
VOTING AND SOLICITATION
Proxies properly executed, duly returned to the Company and not revoked,
will be voted in accordance with the specifications made. Where no
specifications are given, such proxies will be voted as the management of the
Company may propose. If any matter not described in this Proxy Statement is
properly presented for action at the meeting, the persons named in the enclosed
form of proxy will have discretionary authority to vote according to their best
judgment.
Each stockholder is entitled to one (1) vote for each share of Common Stock
on all matters presented at the meeting. The required quorum for the
transaction of business at the Annual Meeting is a majority of the votes
eligible to be cast by holders of shares of Common Stock issued and outstanding
on the Record Date. Shares that are voted "FOR," "AGAINST," "WITHHELD" or
"ABSTAIN" are treated as being present at the meeting for purposes of
establishing a quorum and are also treated as shares entitled to vote at the
Annual Meeting (the "Votes Cast") with respect to such matter. Abstentions will
have the same effect as a vote against a proposal. Broker non-votes will be
counted for purposes of determining the presence or absence of a quorum for the
transaction of business, but such non-votes will not be counted for purposes of
determining the number of Votes Cast with respect to the particular proposal on
which a broker has expressly not voted. Thus, a broker non-vote will not effect
the outcome of the voting on a proposal.
-1-
<PAGE>
The cost of soliciting proxies will be borne by the Company. The Company
may also reimburse brokerage firms and other persons representing beneficial
owners of shares for their expenses in forwarding solicitation materials to such
beneficial owners. Proxies may also be solicited by certain of the Company's
directors, officers, and employees, without additional compensation, personally
or by telephone or telegram.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
Proposals by stockholders of the Company which such stockholders intend to
present at the Company's 1999 Annual Meeting of Stockholders must be received by
the Company no later than November 13, 1998 so that they may be considered for
inclusion in the proxy statement and form of proxy relating to that meeting.
PROPOSAL ONE
ELECTION OF DIRECTORS
NOMINEES
A board of five (5) directors is to be elected at the Annual Meeting of
Stockholders. Unless otherwise instructed, the proxy holders will vote the
proxies received by them for the Company's five (5) nominees named below, all of
whom are presently directors of the Company. If any nominee of the Company is
unable or declines to serve as a director at the time of the Annual Meeting, the
proxies will be voted for the nominee designated by the present Board of
Directors to fill the vacancy. It is not expected that any nominee will be
unable or will decline to serve as a director. The term of office of each
person elected as a director will continue until the next Annual Meeting or
until a successor has been elected and qualified.
VOTE REQUIRED; RECOMMENDATION OF BOARD OF DIRECTORS
The five (5) candidates receiving the highest number of "FOR" votes shall
be elected to the Company's Board of Directors. An abstention will have the
same effect as a vote withheld for the election of directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE NOMINEES
LISTED BELOW:
<TABLE>
<CAPTION>
Name Age Principal Occupation
- --------------------- --- ------------------------------------------------------
<S> <C> <C>
Phillip M. Drayer.... 52 Chief Executive Officer, President and Director of the
Company
T. Peter Thomas...... 51 General Partner, Institutional Venture Partners
Donald E. Fowler..... 59 President and Chief Executive Officer, eT Communications
Frank Gill........... 54 Executive Vice President, Intel Corporation
R. Michael O'Malley.. 51 Chief Operating Officer, Chief Financial Officer
and Director of the Company
</TABLE>
Except as set forth below, each nominee has been engaged in his principal
occupation described above during the past five (5) years. There is no family
relationship among any directors or executive officers of the Company.
Phillip M. Drayer has been Chief Executive Officer, President and a
director of the Company since the Company commenced operations in December 1993.
From 1990 through 1993, Mr. Drayer was President and Chief Executive Officer of
the Teledyne Components division of Teledyne, Inc. From 1980 to 1990, he was
-2-
<PAGE>
President and Chief Executive Officer of EPI Technologies, a semiconductor
testing company, and from 1976 and 1979, he was Manufacturing Manager at Mostek,
a semiconductor manufacturer. Mr. Drayer earned his B.S.E.E. degree from Lamar
University and his J.D. degree from South Texas College of Law. Mr. Drayer is a
member of the Texas bar.
T. Peter Thomas has served as a director of the Company since June 1994.
Mr. Thomas is a general partner of Institutional Venture Management III, IV, V,
VI and VII, the General Partners of Institutional Venture Partners III, IV, V,
VI and VII, respectively, all of which are venture capital funds. Mr. Thomas
has been a general partner with Institutional Venture Partners since 1985. He
received his B.S.E.E. degree from Utah State University and his M.S. in Computer
Science from the University of Santa Clara. Mr. Thomas is also a director of
Atmel and Adaptive Solutions.
Donald E. Fowler has served as a director of the Company since January
1998. Since 1996, Mr. Fowler has been President and Chief Executive Officer of
eT Communications, an early stage company which supplies home-based transaction
processing systems to enable delivery of multiple information services to homes
and small businesses. From 1986 to 1996, he was a Senior Vice President and
Executive Committee Member of Tandem Computer Corporation, a computer company.
Prior to 1986, Mr. Fowler held executive positions at Bechtel Corporation and
IBM. He earned his B.S. degree and M.B.A. degree from the University of
Washington. He is also a director of eT Communications and ECCS Corporation.
Mr. Fowler also serves as Chairman of the President's Cabinet at Cal Poly
University in San Luis Obispo, California.
Frank Gill has served as a director of the Company since January 1998.
Since 1989, Mr. Gill has been an Executive Vice President of Intel Corp., a
semiconductor company. Since 1997, he has been in charge of the Small Business
and Networking Group. From 1995 to 1997, he was in charge of the Internet and
Communications Group. From 1990 to 1995, Mr. Gill was in charge of the Intel
Products Group. From 1987 to 1990, he headed Intel's North American Sales
Force. From 1986 to 1975, Mr. Gill held various managerial positions in the
sales department of Intel. He earned his B.S.E.E. degree from the University
of California at Davis.
R. Michael O'Malley has been a director of the Company since March 1998,
Chief Operating Officer of the Company since January 1997 and Vice President,
Finance and Administration and Chief Financial Officer of the Company since
December 1993. From 1991 to 1993, he was Vice President, Finance and Operations
for Concurrent Logic, a semiconductor manufacturer, and from 1989 to 1990, he
was Executive Vice President and Chief Financial Officer for Dest Corporation, a
computer peripherals company. He was also Vice President, Finance and Chief
Financial Officer at Domain Technology, a manufacturer of media for disk drives,
from 1987 to 1989, and Vice President, Finance and Chief Financial Officer at
Linear Technology Corporation, a semiconductor manufacturer, from 1982 to 1987.
Mr. O'Malley earned his B.S. degree from the University of Virginia and his
M.B.A. degree from Stanford University.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held seven (7) meetings during fiscal
1997.
The Audit Committee, which consisted of Messrs. Irwin Federman, Robert
Loarie and Peter Thomas during fiscal 1997, held two (2) meetings during the
fiscal year. The Audit Committee currently consists of Messrs. Fowler, Gill and
Thomas. The Audit Committee reviews the financial statements and the internal
financial reporting system and controls of the Company with the Company's
management and independent accountants, recommends resolutions for any dispute
between the Company's management and its auditors, and reviews other matters
relating to the relationship of the Company with its independent accountants.
-3-
<PAGE>
The Compensation Committee, which consisted of Messrs. Federman, Loarie and
Thomas during fiscal 1997, held five (5) meetings during the fiscal year. The
Compensation Committee currently consists of Messrs. Fowler, Gill and Thomas.
The Compensation Committee makes recommendations to the Board of Directors
regarding the Company's executive compensation policies and administers the
Company's stock option plan and employee stock purchase plan.
The Board of Directors currently has no nominating committee or committee
performing a similar function.
Each director attended all of (i) the meetings of the Board of Directors
held during fiscal 1997 and (ii) the meetings held by all committees of the
Board of Directors during fiscal 1997 on which such director served.
COMPENSATION OF DIRECTORS
Through fiscal 1997, directors received no cash remuneration for serving on
the Board of Directors. Beginning in fiscal 1998, each non-employee director
will receive $500 for each Board meeting attended. Non-employee directors also
participate in the Company's 1996 Director Stock Option Plan (the "Director
Plan"). Under the Director Plan, each non-employee director who joins the Board
will automatically be granted a non- statutory option to purchase 12,000 shares
of Common Stock on the date upon which such person first becomes a director. In
addition, each non-employee director will automatically receive a non-statutory
option to purchase 3,000 shares of Common Stock upon such director's annual re-
election to the Board, provided the director has been a member of the Board for
at least six (6) months upon the date of re-election. The exercise price of
each option granted under the Director Plan must be equal to the fair market
value of the Common Stock on the date of grant. The 12,000 share grant vests at
the rate of twenty five percent (25%) of the option shares upon the first
anniversary of the date of grant and as to twenty-five percent (25%) of the
shares each year thereafter and the 3,000 share grant vests monthly over a
twelve (12) month period. Options granted under the Director Plan have a term
of ten (10) years unless terminated sooner, whether upon termination of the
optionee's status as a director or otherwise pursuant to the Director Plan. In
fiscal 1997, Messrs. Federman, Loarie and Thomas were each granted an option to
purchase 3,000 shares of Common Stock under the Director Plan at an exercise
price of $4.25 per share. In addition, upon their initial election to the Board
in January 1998, Messrs. Gill and Fowler were each granted an option to purchase
12,000 shares of Common Stock under the Director Plan at an exercise price of
$8.625 per share.
PROPOSAL TWO
APPROVAL OF AMENDMENT TO 1994 STOCK OPTION PLAN
The Company's Board of Directors and stockholders have previously adopted
and approved the Company's 1994 Stock Option Plan (the "Option Plan"). A total
of 3,300,000 shares of Common Stock are presently reserved for issuance under
the Option Plan. In January 1998, the Board of Directors approved an amendment
to the Option Plan, subject to stockholder approval, to increase the shares
reserved for issuance thereunder by 1,000,000 shares, bringing the total number
of shares issuable under the Option Plan to 4,300,000.
As of February 25, 1998, 187,468 shares were available for future issuance
under the Option Plan.
At the Annual Meeting, the stockholders are being requested to consider and
approve the proposed amendment to the Option Plan to increase the number of
shares of Common Stock reserved for issuance thereunder by 1,000,000 shares,
bringing the total number of shares issuable under the Option Plan to
-4-
<PAGE>
4,300,000. The Board believes that the amendment will enable the Company to
continue its policy of widespread employee stock ownership as a means to
motivate high levels of performance and to recognize key employee
accomplishments.
Options granted under the Option Plan are intended to meet the requirements
of being performance-based within the meaning of Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"). The Option Plan provides that no
employee shall be granted, in any fiscal year of the Company, options to
purchase more than 250,000 shares of Common Stock.
For a description of the principal features of the Option Plan, see
"Appendix A--Description of 1994 Stock Option Plan."
VOTE REQUIRED; RECOMMENDATION OF BOARD OF DIRECTORS
The approval of the amendment to the Option Plan requires the affirmative
vote of a majority of the Votes Cast on the proposal at the Annual Meeting.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
AMENDMENT OF THE OPTION PLAN TO INCREASE THE NUMBER OF SHARES RESERVED FOR
ISSUANCE THEREUNDER.
PROPOSAL THREE
APPROVAL OF AMENDMENT TO EMPLOYEE STOCK PURCHASE PLAN
The Company's Board of Directors and stockholders have previously adopted
and approved the Company's Employee Stock Purchase Plan (the "Purchase Plan").
A total of 400,000 shares of Common Stock are presently reserved for issuance
under the Purchase Plan. In January 1998, the Board of Directors approved an
amendment to the Purchase Plan, subject to stockholder approval, to increase the
shares reserved for issuance thereunder by 500,000 shares, bringing the total
number of shares issuable under the Purchase Plan to 900,000.
At the Annual Meeting, the stockholders are being requested to consider and
approve the proposed amendment to the Purchase Plan to increase the number of
shares of Common Stock reserved for issuance thereunder by 500,000 shares,
bringing the total number of shares issuable under the Purchase Plan to 900,000.
Employee participation in the Purchase Plan has been broad-based. Approximately
35% of the Company's eligible employees are currently participating in the
Purchase Plan. The Board believes that the amendment will enable the Company to
continue its policy of widespread employee stock ownership as a means to
motivate high levels of performance.
For a description of the principal features of the Purchase Plan, see
"Appendix B - Description of Employee Stock Purchase Plan."
VOTE REQUIRED; RECOMMENDATION OF BOARD OF DIRECTORS
The approval of the amendment to the Purchase Plan requires the affirmative
vote of a majority of the Votes Cast on the proposal at the Annual Meeting.
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<PAGE>
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
AMENDMENT OF THE PURCHASE PLAN TO INCREASE THE NUMBER OF SHARES RESERVED FOR
ISSUANCE THEREUNDER.
PROPOSAL FOUR
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors has selected Price Waterhouse LLP, independent
accountants, to audit the financial statements of the Company for the 1998
fiscal year. This nomination is being presented to the stockholders for
ratification at the meeting. Price Waterhouse LLP has audited the Company's
financial statements since the Company's inception. A representative of Price
Waterhouse LLP is expected to be present at the meeting, will have the
opportunity to make a statement, and is expected to be available to respond to
appropriate questions.
VOTE REQUIRED; RECOMMENDATION OF BOARD OF DIRECTORS
The affirmative vote of a majority of the Votes Cast on the proposal at the
Annual Meeting is required to ratify the Board's selection. If the stockholders
reject the nomination, the Board will reconsider its selection.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
RATIFICATION OF THE APPOINTMENT OF PRICE WATERHOUSE LLP AS THE COMPANY'S
INDEPENDENT ACCOUNTANTS FOR THE 1998 FISCAL YEAR.
ADDITIONAL INFORMATION
PRINCIPAL SHARE OWNERSHIP
As of February 25, 1998, the following persons were known by the Company to
be the beneficial owners of more than 5% of the Company's Common Stock:
<TABLE>
<CAPTION>
Name Number Percent
- --------------------------------------- --------- -------
<S> <C> <C>
Institutional Venture Partners.......... 3,026,684 18.4%
T. Peter Thomas
3000 Sand Hill Road
Building 2, Suite 290
Menlo Park, CA 94025(1)
Phillip M. Drayer....................... 1,153,750 7.0
TelCom Semiconductor, Inc.
1300 Terra Bella Avenue
Mountain View, CA 94035
</TABLE>
- ----------------------
(1) Includes 2,931,037 shares held by Institutional Venture Partners VI ("IVP"),
60,377 shares held by Institutional Venture Management VI ("IVM") and 27,420
shares held by Institutional Venture Partners Founders Fund I ("IVPF"). IVM
is the general partner of IVP and IVPF. Mr. Thomas is a general partner of
IVM. Mr. Thomas disclaims beneficial ownership of all such shares, except
as to the pecuniary interest therein arising from his interest in such
funds. Also includes 5,750 shares issuable upon the exercise of options to
purchase Common Stock which are exercisable within 60 days of February 25,
1998 held by Mr. Thomas.
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<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the beneficial ownership of the Company's
Common Stock as of February 25, 1998 (i) by each director of the Company, (ii)
by the Company's Chief Executive Officer, the four (4) other most highly
compensated executive officers of the Company for fiscal year 1997 and one (1)
former executive officer of the Company (such officers are collectively referred
to as the "Named Executive Officers"), and (iii) by all current directors and
executive officers as a group:
<TABLE>
<CAPTION>
Number of Percent of
Name Shares Total
- ------------------------------------------------ --------- ----------
<S> <C> <C>
Phillip M. Drayer................................ 1,153,750 7.0%
Gary P. Pinelli.................................. 557,850 3.4
R. Michael O'Malley(l)........................... 270,400 1.6
Edward D. Mitchell(2)............................ 85,667 *
Kenneth J. Rose(3)............................... 51,603 *
Donald R. Herman(4).............................. 8,847 *
T. Peter Thomas(5)............................... 3,026,684 18.4
Donald E. Fowler................................. -- --
Frank Gill....................................... -- --
All executive officers and directors as a group
(9 persons) (6)............................... 5,160,201 30.9
</TABLE>
- ----------------------
* Less than 1%
(1) Includes 106,978 shares issuable upon the exercise of options to purchase
Common Stock which are exercisable within 60 days of February 25, 1998.
(2) Includes 53,667 shares issuable upon the exercise of options to purchase
Common Stock which are exercisable within 60 days of February 25, 1998.
(3) Includes 36,887 shares issuable upon the exercise of options to purchase
Common Stock which are exercisable within 60 days of February 25, 1998.
(4) Includes 7,292 shares issuable upon the exercise of options to purchase
Common Stock which are exercisable within 60 days of February 25, 1998.
(5) Includes 5,750 shares issuable upon the exercise of options to purchase
Common Stock which are exercisable within 60 days of February 25, 1998.
Also includes 3,018,834 shares held by funds affiliated with Institutional
Venture Partners and 2,100 shares held by Mr. Thomas' wife. Mr. Thomas
disclaims beneficial ownership of all shares held by such funds, except as
to the pecuniary interest therein arising from his interest in such funds.
See "Principal Share Ownership."
(6) Includes 210,574 shares issuable upon exercise of options to purchase Common
Stock which are exercisable within 60 days of February 25, 1998. Also
includes 3,018,834 shares held by funds affiliated with Institutional
Venture Partners. See note (5) above.
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<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information concerning compensation paid to
the Named Executive Officers during the Company's last three fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------
Annual Compensation (1) Securities
Fiscal ------------------------- Underlying
Name and Principal Position Year Salary Bonus Options
- ------------------------------------------------------ ------ -------- ------- ------------
<S> <C> <C> <C> <C>
Phillip M. Drayer..................................... 1997 $210,970 -- --
Chief Executive Officer and President 1996 185,799 -- --
1995 175,854 -- --
Gary P. Pinelli (2)................................... 1997 138,910 $15,637 --
Former Vice President, Sales and Tactical Marketing 1996 138,566 -- --
1995 129,050 -- --
R. Michael O'Malley................................... 1997 143,086 -- 10,000
Vice President, Chief Operating Officer and Chief 1996 123,261 -- 100,000
Financial Officer 1995 114,917 -- 75,000
Edward D. Mitchell.................................... 1997 139,629 -- 67,500
Vice President, Engineering and Chief Technical 1996 111,259 -- 40,000
Officer 1995 105,267 -- 25,000
Kenneth J. Rose....................................... 1997 114,094 -- 22,400
Chief Accounting Officer and Corporate Controller 1996 102,911 -- 20,000
1995 97,402 -- 15,000
Donald R. Herman (3).................................. 1997 99,524 -- 42,000
Vice President, Human Resources
</TABLE>
(1) Excludes perquisites and other personal benefits which for each Named
Executive Officer did not exceed the lesser of $50,000 or 10% of the total
annual salary and bonus for such officer during any fiscal year.
(2) Mr. Pinelli left the Company in January 1998.
(3) Mr. Herman joined the Company in February 1997.
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<PAGE>
OPTION INFORMATION
The following tables set forth information regarding stock options granted
to the Named Executive Officers during fiscal 1997, as well as options held by
such officers as of December 31, 1997, the last day of the Company's 1997 fiscal
year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential
Realizable Values
Assumed Annual Rates
of Stock Price
Appreciation (Through
Individual Grants(1) Expiration Date) (2)
--------------------------------------------------------- -------------------------
Options % of Total Exercise
Name Granted Option Grants Price ($/Sh) Expiration Date 5% Per Year 10% Per Year
- -------------------------- ------- ------------- ------------ --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Phillip M. Drayer.......... -- -- -- -- -- --
Gary P. Pinelli............ -- -- -- -- -- --
R. Michael O'Malley........ 10,000 1.0% $7.875 12/31/07 $ 49,525 $125,507
Edward D. Mitchell......... 50,000 5.0 5.000 01/28/07 157,224 398,436
10,000 1.0 8.375 07/16/07 52,670 133,476
7,500 0.8 7.875 12/31/07 37,144 94,130
Kenneth J. Rose............ 10,000 1.0 5.000 01/28/07 31,445 79,687
8,000 0.8 8.375 07/16/07 42,136 106,781
4,400 0.4 7.875 12/31/07 21,791 55,223
Donald R. Herman........... 25,000 2.5 4.375 04/16/07 68,785 174,316
15,000 1.5 4.313 04/30/07 40,686 103,107
2,000 0.2 7.875 12/31/07 9,905 25,101
</TABLE>
- -----------------
(1) Each of these options was granted pursuant to the Option Plan and is subject
to the terms of such plan. These options were granted at an exercise price
equal to the fair market value of the Company's Common Stock as determined
by the Board of Directors of the Company on the date of grant and, as long
as the optionee maintains continuous employment with the Company, vest over
a four year period at a rate of one-fourth of the shares on the first
anniversary of the date of grant and 1/36th of the remaining shares per
month thereafter.
(2) Potential gains are net of the exercise price but before taxes associated
with the exercise. Amounts represent hypothetical gains that could be
achieved for the respective options if they were exercised at the end of the
option term. The assumed 5% and 10% rates of stock appreciation are based
on appreciation from the exercise price per share. These rates are provided
in accordance with the rules of the Securities and Exchange Commission and
do not represent the Company's estimate or projection of the future Common
Stock price. Actual gains, if any, on stock option exercises are dependent
on the future financial performance of the Company, overall stock market
conditions and the option holders' continued employment through the vesting
period.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION> Number of Number of
Unexercised Options Unexercised Options
Shares at Fiscal Year End at Fiscal Year End(1)
Acquired on Value -------------------- -----------------------
Name Exercise Realized Vested Unvested Vested Unvested
- ---------------------- ------------ --------- ------ -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Phillip M. Drayer....... -- -- -- -- -- --
Gary P. Pinelli......... -- -- -- -- -- --
R. Michael O'Malley..... 40,100 $335,525 86,982 82,918 $684,983 $652,979
Edward D. Mitchell...... -- -- 39,790 102,710 313,346 808,841
Kenneth J. Rose......... 5,000 63,750 31,208 40,255 245,763 317,008
Donald R. Herman........ -- -- __ 42,000 __ 330,750
</TABLE>
- ----------------
(1) Represents the difference between the exercise price of the options and the
closing price of the Company's Common Stock on December 31, 1997 of $7.875
per share.
-9-
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors during fiscal 1997
consisted of Messrs. Federman, Loarie and Thomas, none of whom was an officer or
employee of the Company. No member of the Compensation Committee or executive
officer of the Company has a relationship that would constitute an interlocking
relationship with executive officers or directors of another entity. In
November 1995, the Company entered into certain agreements with IC WORKS, Inc.,
a privately-held company located in San Jose, California. Pursuant to such
agreements, the Company purchased $3.0 million of preferred stock of IC WORKS
and provided $10.0 million in capital equipment. In return for this investment,
the Company received a guarantee of submicron wafer capacity for a period of
five years, projected to start in late 1997. In the fourth quarter of 1997, the
Company sold the $10.4 million of equipment at IC WORKS for $5.2 million and
invested an additional $1.5 million in preferred stock of IC WORKS. This
agreement terminates the Company's operating agreement with IC WORKS and its
wafer production arrangement was amended to allow the Company to purchase wafers
for a period of time prior to finding an alternative supplier, up to April 1998.
During fiscal 1997, Irwin Federman and Peter Thomas were directors of the
Company and of IC WORKS. In addition, venture capital funds affiliated with
Messrs. Federman and Thomas were principal shareholders of IC WORKS. See
"Certain Transactions."
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
During fiscal 1997, the Compensation Committee (the "Committee") was
comprised of Irwin Federman, Robert Loarie and Peter Thomas, all of whom were
non-employee directors. The Committee sets, reviews and administers the
Company's executive compensation program. The role of the Committee is to
establish and recommend salaries and other compensation paid to executive
officers of the Company and to administer the Company's stock option plan and
employee stock purchase plan. The Company's Board of Directors reviews and
approves all stock option grants to employees and all executive officer base
salaries and any cash bonus payments to the executive officers.
The Company's executive pay programs are designed to attract and retain
executives who will contribute to the Company's long-term success, to mesh
executive and stockholder interests through stock option based plans and to
provide a compensation package that recognizes individual contributions and
Company performance.
At this time in the Company's growth, the Committee has determined that the
most effective means of compensation are base salaries, cash bonuses, profit
sharing and long-term incentives through the Company's stock option program.
Base Salary. The base salaries of executive officers are initially
determined by evaluating the responsibilities of the position held and the
experience and performance of the individual, with reference to the competitive
marketplace for executive talent, including a comparison to base salaries for
comparable positions in high growth, technology-based companies of reasonably
similar size. The Committee reviews executive salaries annually and adjusts
them as appropriate to reflect changes in the market conditions and individual
performance and responsibility. During fiscal 1997, salaries for executive
officers were increased by 0% to 19%. The Chief Executive Officer's annual
salary was increased from $185,000 in fiscal 1996 to $220,000 in fiscal 1997.
Stock Options. Under the Company's Option Plan, stock options may be
granted to executive officers and other employees of the Company. Upon joining
the Company, an individual's initial option grant is based on the individual's
responsibilities and position. The size of any annual stock option awards is
based primarily on an individual's performance and responsibilities. The
Committee believes stock option grants are an effective method of ensuring that
the executive is taking a longer term view of the Company's performance and that
the executive's and the stockholder's interests are in alignment.
-10-
<PAGE>
Cash Bonuses. In fiscal 1997, the Board approved bonuses for the Company's
executive officers. These bonuses ranged from $5,000 to $45,000 and were based
on achievement of Company and individual performance goals. The Chief Executive
Officer received a bonus of $45,000. Although such bonuses were accrued in
fiscal 1997, they were paid in January 1998. The Board also awarded a special
sales incentive bonus to one executive officer during 1997.
Profit Sharing. In fiscal 1996, the Board of Directors approved a profit
sharing program which provides that 4% of the Company's pre-tax profit will be
distributed to all employees of the Company. The amount received by each
employee is determined based on the proportion of the Company's overall payroll
represented by each such employee's compensation.
Other elements of executive compensation include Company-wide medical and
life insurance benefits and the ability to defer compensation pursuant to a
401(k) plan. The Company matches annual contributions under the 401(k) plan up
to a maximum of $1,500. The maximum amount of the matching contribution was
increased to $2,000 for fiscal 1998.
The Company's Chief Executive Officer does not receive any other special or
additional compensation other than as described above.
The Committee has considered the potential impact of Section 162(m) of the
Code, and the regulations thereunder (the "Section"). The Section disallows a
tax deduction for any publicly-held corporation for individual compensation
exceeding $1 million in any taxable year for any of the Named Executive
Officers, unless such compensation is performance-based. Since the cash
compensation of each of the Named Executive Officers is below the $1 million
threshold and the Committee believes that any options granted under the Option
Plan will meet the requirements of being performance-based, the Committee
believes that the Section will not reduce the tax deduction available to the
Company. The Company's policy is to qualify, to the extent reasonable, its
executive officers' compensation for deductibility under applicable tax laws.
However, the Committee believes that its primary responsibility is to provide a
compensation program that will attract, retain and reward the executive talent
necessary to the Company's success. Consequently, the Committee recognizes that
the loss of a tax deduction could be necessary in some circumstances.
Compensation Committee of the Board of Directors
Irwin Federman
Robert J. Loarie
T. Peter Thomas
-11-
<PAGE>
COMPARISON OF TOTAL CUMULATIVE STOCKHOLDER RETURN
The following graph sets forth the Company's total cumulative stockholder
return compared to the Standard & Poor's 500 Index and the Standard & Poor's
Semiconductor Index for the period July 28, 1995 (the date of the Company's
initial public offering) through December 31, 1997. Total stockholder return
assumes $100 invested at the beginning of the period in the Common Stock of the
Company, the stocks represented in the Standard & Poor's 500 Index and the
stocks represented in the Standard & Poor's Semiconductor Index, respectively.
Total return also assumes reinvestment of dividends; the Company has paid no
dividends on its Common Stock.
Historical stock price performance should not be relied upon as indicative
of future stock price performance.
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
TELCOM S&P S&P
SEMICONDUCTOR 500 INDEX SEMICONDUCTOR INDEX
------------- --------- -------------------
<S> <C> <C> <C>
07/28/95 $100 $100 $100
09/31/95 82 104 97
12/31/96 52 110 75
03/31/96 37 117 71
06/30/96 37 121 82
09/30/96 34 125 103
12/31/96 29 138 136
03/31/97
06/30/97
09/30/97
12/31/97
</TABLE>
-12-
<PAGE>
CERTAIN TRANSACTIONS
In November 1995, the Company entered into certain agreements with IC
WORKS, Inc., a privately-held company located in San Jose, California. Pursuant
to such agreements, the Company purchased $3.0 million of preferred stock of IC
WORKS and provided $10.0 million in capital equipment. In return for this
investment, the Company received a guarantee of submicron wafer capacity for a
period of five years. The shortage of wafer capacity projected in late 1995 has
diminished and since late 1995, substantial foundry capacity has been available
worldwide while overall demand has not increased proportionately. Consequently,
wafer pricing has decreased dramatically, which has changed the economic
viability of the foundry business in which the Company invested. As a result, in
1997, the Company recorded a loss of $8.3 million on its foundry investment
which consists of a $3.0 million write down of the preferred stock, a loss on
the sale of the equipment of $5.2 million, and $0.1 million of costs associated
with prepayment penalties on financing of the equipment and legal fees. In the
fourth quarter of 1997, the Company sold the $10.4 million of equipment at IC
WORKS for $5.2 million and invested an additional $1.5 million in preferred
stock of IC WORKS. This agreement terminates the Company's operating agreement
with IC WORKS and its wafer production arrangement was amended to allow the
Company to purchase wafers for a period of time prior to finding an alternative
supplier, up to April 1998. From 1995 through 1997, Irwin Federman and Peter
Thomas were directors of the Company and of IC WORKS. In addition, venture
capital funds affiliated with Messrs. Federman and Thomas are principal
shareholders of IC WORKS.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on its review of copies of filings under Section 16(a) of the
Securities Exchange Act of 1934, as amended, received by it, or written
representations from certain reporting persons, the Company believes that during
fiscal 1997 all Section 16 filing requirements were met, except that Michael
O'Malley filed two (2) late Forms 4.
OTHER MATTERS
The Company knows of no other matters to be submitted at the Annual
Meeting. If any other matters properly come before the meeting, it is the
intention of the persons named in the enclosed proxy to vote the shares they
represent as the Board of Directors of the Company may recommend.
THE BOARD OF DIRECTORS
Mountain View, California
March 11, 1998
-13-
<PAGE>
APPENDIX A
DESCRIPTION OF THE 1994 STOCK OPTION PLAN
General. The Company's 1994 Stock Option Plan (the "Option Plan") was
adopted by the Board of Directors and approved by the stockholders in February
1994. The Option Plan authorizes the Board, or one or more committees which the
Board may appoint from among its members (the "Committee"), to grant stock
options. Prior to the proposed amendment to the Option Plan to be voted on at
the Annual Meeting, a total of 3,300,000 shares of Common Stock has been
reserved for issuance under the Option Plan. Options granted under the Option
Plan may be either "incentive stock options" as defined in Section 422 of the
Code, or nonstatutory stock options, as determined by the Board or the
Committee.
Purpose. The general purpose of the Option Plan is to attract and retain
the best available personnel for positions of substantial responsibility, to
provide additional incentive to employees and consultants and to promote the
success of the Company's business.
Administration. The Option Plan may be administered by the Board or the
Committee. Subject to the other provisions of the Option Plan, the Board has
the authority to: (i) determine the fair market value of the stock; (ii) approve
forms of agreement for use under the Plan; (iii) select the persons to whom
options are to be granted; (iv) determine the number of shares to be made
subject to each option; (v) determine whether and to what extent options are to
be granted; (vi) prescribe the terms and conditions of each option (including
the exercise price, whether an option will be classified as an incentive stock
option or a nonstatutory option and the provisions of the stock option or stock
purchase agreement to be entered into between the Company and the grantee); and
(vii) reduce the exercise price of an option to the then current fair market
value. All decisions, interpretations and other actions of the Committee shall
be final and binding on all holders of options and on all persons deriving their
rights therefrom.
Eligibility. The Option Plan provides that options may be granted to the
Company's Employees and Consultants (as such terms are defined in the Option
Plan). Incentive stock options may be granted only to Employees. Any optionee
who owns more than 10% of the combined voting power of all classes of
outstanding stock of the Company (a "10% Stockholder") is not eligible for the
grant of an option unless the exercise price of the option is at least 110% of
the fair market value of the Common Stock on the date of grant.
Terms and Conditions of Options. Each option granted under the Option Plan
is evidenced by a written stock option agreement between the optionee and the
Company and is subject to the following terms and conditions:
(a) Exercise Price. The Board or Committee determines the exercise price
of options to purchase shares of Common Stock at the time the options are
granted. However, excluding options issued to 10% Stockholders, the exercise
price under an incentive stock option must not be less than 100% of the fair
market value of the Common Stock on the date the option is granted and the
exercise price of a nonstatutory stock option must not be less than 85% of the
fair market value of the Common Stock on the date the option is granted.
Generally, the fair market value shall be the closing sales price for such stock
(or the closing bid, if no sales were reported) as quoted on The Nasdaq National
Market on the last market trading day prior to the date of determination.
(b) Form of Consideration. The means of payment for shares issued upon
exercise of an option is specified in each option agreement and generally may be
made by cash, check, promissory note, other shares of Common Stock of the
Company owned by the optionee, delivery of an exercise notice together with
irrevocable instructions to a broker to deliver the exercise price to the
Company from the sale or loan proceeds,
A-1
<PAGE>
reduction in the amount of any Company liability to the optionee, authorization
for the Company to retain the number of shares having a fair market value on the
date of exercise equal to the exercise price, or by a combination thereof.
(c) Exercise of the Option. Each stock option agreement will specify the
term of the option and the date when the option is to become exercisable.
However, in no event shall an option granted under the Option Plan be exercised
more than ten ( 10) years after the date of grant. Moreover, in the case of an
incentive stock option granted to a 10% Stockholder, the term of the option
shall be for no more than five (5) years from the date of grant.
(d) Termination of Employment. If an optionee's employment terminates for
any reason (other than death or permanent disability), the optionee may exercise
his or her option, but only within such period of time as is determined by the
Board or Committee at the time of grant (such period not to exceed ninety (90)
days in the case of an Incentive Stock Option) from the date of such
termination, and only to the extent that the optionee was entitled to exercise
it at the date of such termination (but in no event later than the expiration of
the term of such option as set forth in the option agreement). To the extent
that the optionee was not entitled to exercise an option at the date of such
termination, and to the extent that the optionee does not exercise such option
(to the extent otherwise so entitled) within the time permitted, the option
shall terminate.
(e) Permanent Disability. If an employee is unable to continue employment
with the Company as a result of disability, then all options held by such
optionee under the Option Plan shall expire upon the earlier of (i) six (6)
months after the date of termination of the optionee's employment or (ii) the
expiration date of the option. However, if such disability is not a disability
as defined in Section 22(e)(3) of the Code, then any incentive stock options
shall convert into nonstatutory stock options after three (3) months. The
optionee may exercise all or part of his or her option at any time before such
expiration to the extent that such option was exercisable at the time of
termination of employment.
(f) Death. If an optionee dies while employed by the Company, his or her
option shall expire upon the earlier of (i) twelve (12) months after the
optionee's death or (ii) the expiration date of the option. The executor or
other legal representative of the optionee may exercise all or part of the
optionee's option at any time before such expiration to the extent that such
option was exercisable at the time of death.
(g) Termination of Options. Each stock option agreement will specify the
term of the option and the date when all or any installment of the option is to
become exercisable. Notwithstanding the foregoing, however, the term of any
incentive stock option shall not exceed ten (10) years from the date of grant.
No options may be exercised by any person after the expiration of its term.
(h) Nontransferability of Options. During an optionee's lifetime, his or
her option(s) shall be exercisable only by the optionee and shall not be
transferable other than by will or laws of descent and distribution.
(i) Value Limitation. If the aggregate fair market value of all shares of
Common Stock subject to an optionee's incentive stock option which are
exercisable for the first time during any calendar year exceeds $100,000, the
excess options shall be treated as nonstatutory options.
(j) Rule 162(m) Limitation. The Option Plan provides that no employee
shall be granted, in any fiscal year of the Company, options to purchase more
than 250,000 shares of Common Stock.
A-2
<PAGE>
Stock Withholding. The administrator may allow optionees to satisfy their
withholding obligations by electing to have a certain number of shares of stock
withheld by the Company which would otherwise be received pursuant to the
exercise of the option.
Adjustment Upon Change in Capitalization, Change in Control. In the event
that the stock of the Company is changed by reason of any stock split, reverse
stock split, stock dividend, recapitalization or other increase or decrease in
the number of issued shares of Common Stock effected without receipt of
consideration by the Company, appropriate proportional adjustments shall be made
in the number and class of shares of stock subject to the Option Plan, the
number of shares of stock subject to any option or right outstanding under the
Option Plan, and the exercise price of any such outstanding option or right.
Any such adjustment will be made by the Board, whose determination shall be
conclusive.
In connection with any merger, consolidation, acquisition of assets or like
event involving the Company, each outstanding option and right may be assumed or
an equivalent option or right substituted by a successor corporation. If the
successor corporation does not assume the options or substitute substantially
equivalent options, the option will terminate.
Amendments, Suspensions and Termination of the Option Plan. The Board may
amend, suspend or terminate the Option Plan at any time; provided, however, that
stockholder approval is required for any amendment to the extent necessary to
comply with Rule 16b-3 promulgated under the Exchange Act or Section 422 of the
Code, or any similar rule or statute. In any event, the Option Plan will
terminate automatically in 2004.
Federal Tax Information for Option Plan. Options granted under the Option
Plan may be either "incentive stock options," as defined in Section 422 of the
Code, or nonstatutory options.
An optionee who is granted an incentive stock option will not recognize
taxable income either at the time the option is granted or upon its exercise,
although the exercise may subject the optionee to the alternative minimum tax.
Upon the sale or exchange of the shares more than two (2) years after grant of
the option and one (1) year after exercising the option, any gain or loss will
be treated as long term capital gain or loss. If these holding periods are not
satisfied, the optionee will recognize ordinary income at the time of sale or
exchange equal to the difference between the exercise price and the lower of (i)
the fair market value of the shares at the date of the option exercise or (ii)
the sale price of the shares. A different rule for measuring ordinary income
upon such a premature disposition may apply if the optionee is also an officer,
director, or 10% Stockholder of the Company. The Company will be entitled to a
deduction in the same amount as the ordinary income recognized by the optionee.
Any gain or loss recognized on such a premature disposition of the shares in
excess of the amount treated as ordinary income will be characterized as long-
term or short-term capital gain or loss, depending on the holding period.
All options which do not qualify as incentive stock options are referred to
as nonstatutory options. An optionee will not recognize any taxable income at
the time he or she is granted a nonstatutory option. However, upon its exercise,
the optionee will recognize taxable income generally measured as the excess of
the then fair market value of the shares purchased over the purchase price. Any
taxable income recognized in connection with an option exercise by an optionee
who is also an employee of the Company will be subject to tax withholding by the
Company. Upon resale of such shares by the optionee, any difference between the
sales price and the optionee's purchase price, to the extent not recognized as
taxable income as described above, will be treated as long-term or short-term
capital gain or loss, depending on the holding period.
The Company will be entitled to a tax deduction in the same amount as the
ordinary income recognized by the optionee with respect to shares acquired upon
exercise of a nonstatutory option.
A-3
<PAGE>
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON THE OPTIONEE AND THE COMPANY WITH RESPECT TO THE GRANT AND EXERCISE OF
OPTIONS UNDER THE OPTION PLAN, DOES NOT PURPORT TO BE COMPLETE, AND DOES NOT
DISCUSS THE TAX CONSEQUENCES OF THE OPTIONEE'S DEATH OR THE INCOME TAX LAWS OF
ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH AN OPTIONEE MAY RESIDE.
Option Plan Benefits. The Company is unable to predict the amount of
benefits that will be received by or allocated to any particular participant
under the Option Plan. The following table sets forth the dollar amount and the
number of shares granted under the Option Plan during the last fiscal year to
(i) each of the Company's Named Executive Officers, (ii) all executive officers
as a group, (iii) all non-employee directors as a group and (iv) all employees
other than executive officers as a group:
OPTION PLAN BENEFITS TABLE
<TABLE>
<CAPTION>
Number of Value of
Name Shares Granted Shares Granted (1)
- ------------------------------------------------------- -------------- ------------------
<S> <C> <C>
Phillip M. Drayer....................................... --- ---
Gary P. Pinelli......................................... --- ---
R. Michael O'Malley..................................... 10,000 $ 78,750
Edward D. Mitchell...................................... 67,500 392,813
Kenneth J. Rose......................................... 22,400 151,650
Donald R. Herman........................................ 42,000 189,813
All executive officers as a group (9 persons)........... 361,900 2,545,526
All non-employee directors as a group (3 persons)....... --- ---
All employees other than executive officers as a group.. 637,843 4,621,438
- ---------------
</TABLE>
(1) The dollar value of option grants under the Option Plan was computed by
multiplying the number of shares granted times the exercise price of the
option. All options granted under the Option Plan were granted at an
exercise price equal to the fair market value of the Common Stock on the
date of grant.
A-4
<PAGE>
APPENDIX B
DESCRIPTION OF THE EMPLOYEE STOCK PURCHASE PLAN
General. The Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in June 1995 and by the stockholders in June
1995. Prior to the proposed amendment to the Purchase Plan to be voted on at
the Annual Meeting, a total of 400,000 shares of Common Stock has been reserved
for issuance under the Purchase Plan. The purpose of the Purchase Plan is to
provide employees with an opportunity to purchase Common Stock of the Company
through payroll deductions. The Purchase Plan is implemented by offering
periods lasting for two (2) years, with a new offering period commencing every
six (6) months.
Administration. The Purchase Plan may be administered by the Board or a
committee appointed by the Board. All questions of interpretation or
application of the Purchase Plan are determined by the Board of Directors or its
appointed committee, and its decisions are final, conclusive and binding upon
all participants.
Eligibility. Each employee of the Company (including officers), who works
at least 20 hours per week and has been employed by the Company for at least
five (5) months in any calendar year, is eligible to participate in an offering
period, subject to certain limitations imposed by Section 423(b) of the Code and
limitations on stock ownership as set forth in the Purchase Plan. Eligible
employees become participants in the Purchase Plan by filing with the Company a
subscription agreement authorizing payroll deductions prior to the beginning of
each Offering Period (as defined below) unless a later time for filing the
subscription agreement has been set by the Board.
Participation in an Offering. The Purchase Plan has consecutive,
overlapping two (2) year offering periods (an "Offering Period"). Each two (2)
year Offering Period consists of four six month purchase periods (a "Purchase
Period"). The Board may change the duration of the Offering Periods. To
participate in the Purchase Plan, each eligible employee must authorize payroll
deductions pursuant to the Purchase Plan. Such payroll deductions may not
exceed 10% of a participant's compensation. Once an employee becomes a
participant in the Purchase Plan, the employee will automatically participate in
each successive Offering Period until such time as the employee withdraws from
the Purchase Plan or the employee's employment with the Company terminates. At
the beginning of each Offering Period, each participant is automatically granted
an option to purchase shares of the Company's Common Stock. The option expires
at the end of the Offering Period or upon termination of employment, whichever
is earlier, but is exercised at the end of each Purchase Period to the extent of
the payroll deductions accumulated during such Purchase Period. The number of
shares subject to the option may not exceed a number determined by dividing
$12,500 by the fair market value of the Common Stock on the first day of the
Purchase Period.
Purchase Price, Shares Purchased. Shares of Common Stock may be purchased
under the Purchase Plan at a price not less than 85% of the lesser of the fair
market value of the Common Stock on (i) the first day of the Offering Period or
(ii) the last day of Purchase Period. The "fair market value" of the Common
Stock on any relevant date will be the closing price per share as reported on
The Nasdaq National Market (or the mean of the closing bid and asked prices, if
no sales were reported) as quoted on such exchange or reported in The Wall
Street Journal. The number of shares of Common Stock a participant purchases in
each Purchase Period is determined by dividing the total amount of payroll
deductions withheld from the participant's compensation during that Purchase
Period by the purchase price.
Termination of Employment. Termination of a participant's employment for
any reason, including disability or death, or the failure of the participant to
remain in the continuous scheduled employ of the Company for at least 20 hours
per week, cancels his or her option and participation in the Purchase Plan
B-1
<PAGE>
immediately. In such event, the payroll deductions credited to the
participant's account will be returned to him or her or, in the case of death,
to the person or persons entitled thereto as provided in the Purchase Plan.
Adjustment Upon Change in Capitalization, Change in Control. In the event
that the stock of the Company is changed by reason of any stock split, reverse
stock split, stock dividend, combination, reclassification or other change in
the capital structure of the Company, appropriate proportional adjustments shall
be made in the number and class of shares of stock subject to the Purchase Plan,
the number and class of shares of stock subject to options outstanding under the
Purchase Plan, and the exercise price of any such outstanding options. Any such
adjustment shall be made by the Board, whose determination shall be conclusive.
Notwithstanding the above, in connection with any merger or acquisition of
assets involving the Company, each outstanding option shall be assumed or an
equivalent option substituted by a successor corporation unless the Board
determines, in its sole discretion, to shorten the Offering Period then in
progress or to cancel each outstanding right to purchase and refund all sums
collected from participants during the Offering Period then in progress.
Amendment and Termination of the Plan. The Board of Directors may at any
time terminate or amend the Purchase Plan. An Offering Period may be terminated
by the Board of Directors at the end of any Purchase Period if the Board
determines that termination of the Purchase Plan is in the best interests of the
Company and its stockholders. No amendment shall be effective unless it is
approved by the holders of a majority of the votes cast at a duly held
stockholders' meeting, if such amendment would require stockholder approval in
order to comply with Rule 16b-3 under the Exchange Act or Section 423 of the
Code. The Purchase Plan will terminate in 2005.
Withdrawal. Generally, a participant may withdraw from an Offering Period
at any time without affecting his or her eligibility to participate in future
Offering Periods. However, once a participant withdraws from a particular
offering, that participant may not participate again in the same offering.
Federal Tax Information for Purchase Plan. The Purchase Plan, and the
right of participants to make purchases thereunder, is intended to qualify under
the provisions of Sections 421 and 423 of the Code. Under these provisions, no
income will be taxable to a participant until the shares purchased under the
Purchase Plan are sold or otherwise disposed of. Upon sale or other disposition
of the shares, the participant will generally be subject to tax and the amount
of the tax will depend upon the holding period. If the shares are sold or
otherwise disposed of more than two (2) years from the first day of the Offering
Period or more than one (1) year from the date of transfer of the stock to the
participant, then the participant will recognize ordinary income measured as the
lesser of (i) the excess of the fair market value of the shares at the time of
such sale or disposition over the purchase price, or (ii) an amount equal to 15%
of the fair market value of the shares as of the first day of the Offering
Period. Any additional gain will be treated as long-term capital gain. If the
shares are sold or otherwise disposed of before the expiration of this holding
period, the participant will recognize ordinary income generally measured as the
excess of the fair market value of the shares on the date the shares are
purchased over the purchase price. Any additional gain or loss on such sale or
disposition will be long-term or short-term capital gain or loss, depending on
the holding period. The Company is not entitled to a deduction for amounts
taxed as ordinary income or capital gain to a participant except to the extent
of ordinary income recognized by participants upon, a sale or disposition of
shares prior to the expiration of the holding period (s) described above.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON THE PARTICIPANT AND THE COMPANY WITH RESPECT TO THE SHARES PURCHASED UNDER
THE PURCHASE PLAN. REFERENCE SHOULD BE MADE TO THE APPLICABLE PROVISIONS OF THE
CODE. IN ADDITION, THE SUMMARY DOES NOT DISCUSS THE TAX CONSEQUENCES OF A
PARTICIPANT'S DEATH OR THE INCOME TAX LAWS OF ANY STATE OR FOREIGN COUNTRY IN
WHICH THE PARTICIPANT MAY RESIDE.
B-2
<PAGE>
Purchase Plan Activity. Participation in the Purchase Plan is voluntary
and is dependent on each eligible employee's election to participate and his or
her determination as to the level of payroll deductions. Accordingly, future
purchases under the Purchase Plan are not determinable. Nonemployee directors
are not eligible to participate in the Purchase Plan. The following table sets
forth certain information regarding shares purchased under the Purchase Plan
during the Company's last fiscal year by each of the Named Executive Officers,
all current executive officers as a group and all employees (excluding the
executive officers) as a group:
<TABLE>
<CAPTION>
Number of Shares
Name Dollar Value (1) Purchased
- ----------------------------------------------- ---------------- ---------------------------------
<S> <C> <C>
Phillip M. Drayer.............................. --- ---
Gary P. Pinelli................................ --- ---
R. Michael O'Malley............................ $30,549 4,413
Edward D. Mitchell............................. --- ---
Kenneth J. Rose................................ 19,354 2,779
Donald R. Herman............................... 7,914 1,005
All executive officers as a group (9 persons).. 57,817 8,197
All other employees (excluding executive officers)
as a group................................... 1,292,899 202,001
- ---------------
</TABLE>
(1) Represents the market value of the shares on the date of purchase. The
purchase price paid by each participant in the Purchase Plan is 15% below
the lower of the fair market value of the Common Stock on the (i) first day
or (ii) last day of the applicable purchase period.
B-3
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TELCOM SEMICONDUCTOR, INC.
PROXY
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Phillip M. Drayer and R. Michael
O'Malley, jointly and severally, proxies with full power of substitution, to
vote all shares of Common Stock of TelCom Semiconductor, Inc., a Delaware
corporation, which the undersigned is entitled to vote at the Annual Meeting
of Stockholders to be held at the Company's offices located at 1300 Terra
Bella Avenue, Mountain View, California, on Thursday, April 16, 1998 at 2:00
p.m., local time, or any adjournment thereof. The proxies are being directed
to vote as specified on the reverse side hereof or, if no specification is
made, FOR the election of directors, FOR the proposal to amend the Company's
1994 Stock Option Plan, FOR the proposal to amend the Company's Employee Stock
Purchase Plan, FOR the appointment of Price Waterhouse LLP as independent
accountants and in accordance with their discretion on such other matters that
may properly come before the meeting.
THE DIRECTORS RECOMMEND A FOR VOTE ON EACH ITEM.
(Continued and to be signed on reverse side)
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Please mark [X]
your votes
as indicated
FOR AGAINST ABSTAIN
1. ELECTION OF DIRECTORS 2. Proposal to amend the Company's 1994 Stock Option [ ] [ ] [ ]
Plan to increase the number of shares reserved for
issuance thereunder by 1,000,000 shares.
FOR all nominees WITHHOLD AUTHORITY
listed (except as to vote for 3. Proposal to amend the Company's Employee Stock [ ] [ ] [ ]
withheld) nominees listed Purchase Plan to increase the number of shares
[ ] [ ] reserved thereunder by 500,000 shares.
(Instructions: To withhold authority to 4. Proposal to ratify the appointment of Price [ ] [ ] [ ]
vote for any individual nominee, strike that Waterhouse LLP as independent accountants
nominee's name below.) for the 1998 fiscal year.
I plan to attend the meeting. [ ]
Signature(s)____________________________________________________________ Dated______________________, 1999
(Signature(s) must be exactly as name(s) appear on this proxy.) (If signing as attorney, executor, administrator, trustee or
guardian, please give full title as such, and, if signing for a corporation, please give your title. When shares are in the name of
more than one person, each should sign the proxy.)
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