<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
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
Applied Digital Access, 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)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE>
APPLIED DIGITAL ACCESS, INC.
9855 SCRANTON ROAD
SAN DIEGO, CA 92121
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 12, 1999
Dear Stockholder:
You are invited to attend the Annual Meeting of the Stockholders of Applied
Digital Access, Inc., a Delaware corporation (the "Company"), which will be held
on May 12, 1999, at 9:00 a.m., local time, at the Company, 9855 Scranton Road,
San Diego, California, for the following purposes:
1. To elect a Board of Directors. Management has nominated the following
people for election at the meeting: Gary D. Cuccio, John F. Malone,
Kenneth E. Olson, Christopher B. Paisley, Peter P. Savage, Donald L.
Strohmeyer.
2. To consider and vote upon a proposal to amend the Company's 1998
Employee Stock Purchase Plan to increase the maximum aggregate number
of shares reserved for issuance thereunder by 300,000.
3. To consider a proposal to ratify the appointment of
PricewaterhouseCoopers, LLP, as the Company's independent public
accountants for the fiscal year ending December 31, 1999.
Stockholders of record at the close of business on April 2, 1999, are
entitled to notice of, and to vote at, this meeting and any adjournments
thereof. For ten days prior to the meeting, a complete list of the stockholders
entitled to vote at the meeting will be available for examination by any
stockholder for any purpose relating to the meeting during ordinary business
hours at the Company.
By Order of the Board of Directors,
JAMES L. KEEFE
SECRETARY
San Diego, California
April 12, 1999
<PAGE>
APPLIED DIGITAL ACCESS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 12, 1999
<TABLE>
<S> <C>
GENERAL INFORMATION.................................................1
EXECUTIVE COMPENSATION AND OTHER MATTERS............................6
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION..........................................13
COMPARISON OF STOCKHOLDER RETURN...................................20
ELECTION OF DIRECTORS..............................................21
PROPOSAL TO AMEND 1998 EMPLOYEE STOCK PURCHASE PLAN................21
RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS......23
STOCKHOLDER PROPOSALS TO BE PRESENTED AT NEXT ANNUAL MEETING.......23
TRANSACTION OF OTHER BUSINESS......................................24
</TABLE>
<PAGE>
APPLIED DIGITAL ACCESS, INC.
9855 SCRANTON ROAD
SAN DIEGO, CALIFORNIA 92121
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS
The accompanying proxy is solicited by the Board of Directors of Applied
Digital Access, Inc., a Delaware corporation (the "Company"), for use at the
Annual Meeting of Stockholders to be held May 12, 1999, or any adjournment
thereof, for the purposes set forth in the accompanying Notice of Annual
Meeting. The date of this Proxy Statement is April 12, 1999, the approximate
date on which this Proxy Statement and the accompanying form of proxy were first
sent or given to stockholders.
GENERAL INFORMATION
ANNUAL REPORT. An annual report on Form 10-K for the fiscal year ended
December 31, 1998, is enclosed with this Proxy Statement.
VOTING SECURITIES. Only stockholders of record as of the close of business
on April 2, 1999, will be entitled to vote at the meeting and any adjournment
thereof. As of that date, there were 12,943,324 shares of Common Stock of the
Company, par value $0.001 per share, issued and outstanding. Stockholders may
vote in person or by proxy. Each holder of shares of Common Stock is entitled to
one (1) vote for each share of stock held on the proposals presented in this
Proxy Statement. The Company's by-laws provide that a majority of all of the
shares of the stock entitled to vote, whether present in person or represented
by proxy, shall constitute a quorum for the transaction of business at the
meeting. Abstentions and broker non-votes will each be counted as present for
purposes of determining the presence of a quorum.
SOLICITATION OF PROXIES. The cost of soliciting proxies will be borne by
the Company. The Company will solicit stockholders by mail through its regular
employees and will request banks and brokers, and other custodians, nominees and
fiduciaries, to solicit their customers who have stock of the Company registered
in the names of such persons and will reimburse them for their reasonable,
out-of-pocket costs. The Company also may use the services of its officers,
directors, and others to solicit proxies, personally or by telephone, without
additional compensation. In addition, the Company has engaged the services of
Corporate Investor Communications, Inc. ("CIC"), a proxy solicitation firm. The
Company will pay a fee for such services, which it reasonably expects to be no
more than $5,000, and will reimburse out-of-pocket expenses of CIC.
VOTING OF PROXIES. All valid proxies received prior to the meeting will be
voted. All shares represented by a proxy will be voted, and where a stockholder
specifies by means of the proxy a choice with respect to any matter to be acted
upon, the shares will be voted in accordance with the specification so made. If
no choice is indicated on the proxy, the shares will be voted in favor of the
director-nominees and the proposals. A stockholder giving a proxy has the power
to revoke his or her proxy, at any time prior to the time it is voted, by
delivery to the Secretary of the Company of a written instrument revoking the
proxy or a duly executed proxy with a later date, or by attending the meeting
and voting in person.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The
following table sets forth certain information, as of February 28, 1999, with
respect to the beneficial ownership of the Company's Common Stock by (i) all
persons known by the Company to be the beneficial owners of more than 5% of the
outstanding Common Stock of the Company, (ii) each director and director-nominee
of the Company, (iii) each executive officer of the Company named in the Summary
Compensation Table and (iv) all executive officers and directors of the Company
as a group.
1
<PAGE>
<TABLE>
<CAPTION>
SHARES OWNED (1)
-----------------------------------------
NAME AND ADDRESS OF NUMBER PERCENTAGE OF
BENEFICIAL OWNERS OF SHARES CLASS (2)
- ---------------------------------------------------------------------------------- ----------------- ----------------
<S> <C> <C>
Kopp Investment Advisors, Inc. (3).............................................. 2,106,940 16.3%
7701 France Avenue South, Suite 500
Edina, MN 55435
State of Wisconsin Investment Board (4)......................................... 1,209,800 9.4%
P.O. Box 7842
Madison, WI 53707
Brown Investment Advisory & Trust Company (5).................................. 952,773 7.4%
19 South Street
Baltimore, MD 21202
Merrill Lynch & Co., Inc. (6).................................................. 920,500 7.1%
World Financial Center, North Tower
250 Vesey Street
New York, NY 10381
Gary D. Cuccio ................................................................ -- --
John F. Malone (7)............................................................. 10,000 *
Kenneth E. Olson (8)........................................................... 28,750 *
Christopher B. Paisley (9)...................................................... 24,562 *
Peter P. Savage (10) ........................................................... 341,761 2.6%
Donald L. Strohmeyer (11)....................................................... 10,000 *
Paul R. Hartmann (12)........................................................... 101,788 *
Wayne M. Lettiere (13).......................................................... 91,530 *
Steven F.X. Murphy (14)......................................................... 22,920 *
Donald J. O'Connor ............................................................. 5,719 *
Executive Officers and Directors as a group (12 persons) (15)................... 708,527 5.3%
</TABLE>
- ---------------
(1) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them, subject to community
property laws, where applicable.
(2) Calculated on the basis of 12,918,599 shares of Common Stock outstanding,
except that shares of Common Stock underlying options exercisable within 60
days of February 28, 1999 are deemed to be outstanding for purposes of
calculating the beneficial ownership of securities of the holders of such
options.
(3) Based on an amendment to Schedule 13G filed with the Securities and
Exchange Commission ("SEC") on January 28, 1999 by Kopp Investment
Advisors, Inc. ("KIA"), Kopp Holding Company ("KHC") and LeRoy C. Kopp
("Kopp"). KIA is wholly owned by KHC which is wholly owned by Kopp.
Includes 300,000 shares as to which Kopp has sole voting and dispositive
power. Also includes 1,696,940 shares as to which KIA has shared
dispositive power and 110,000 shares as to which it has sole dispositive
power. Of these shares, KIA has sole voting power with respect to 357,500
shares.
(4) Based on an amendment to Schedule 13G filed with the SEC on February 2,
1999, by State of Wisconsin Investment Board ("SWIB"). SWIB has the sole
power to vote and dispose of all 1,209,800 shares.
2
<PAGE>
(5) Based on a Schedule 13G filed with the SEC on February 17, 1999, by Brown
Investment Advisory & Trust Company ("BIATC") and its wholly owned
subsidiary, Brown Advisory Incorporated ("BAI"). BIATC has sole power to
dispose of 279,663 shares and to vote 246,963 shares. BAI has sole power to
vote and dispose of 673,110 shares.
(6) Based on a Schedule 13G filed with the SEC on February 3, 1999, by Merrill
Lynch & Co., Inc. ("ML&Co."). ML&Co. is a holding company that has shared
power to vote and dispose of 920,500 shares held by its subsidiaries,
Merrill Lynch Asset Management, L.P. and Fund Asset Management, L.P. ML&
Co. disclaims beneficial ownership of such shares.
(7) Represents 10,000 shares subject to stock options exercisable within sixty
days of February 28, 1999.
(8) Includes 18,750 shares subject to stock options exercisable within sixty
days of February 28, 1999.
(9) Includes 24,562 shares subject to stock options exercisable within sixty
days of February 28, 1999.
(10) Includes 248,428 shares subject to stock options exercisable within sixty
days of February 28, 1999.
(11) Includes 10,000 shares subject to stock options exercisable within sixty
days of February 28, 1999.
(12) Includes 47,142 shares subject to stock options exercisable within sixty
days of February 28, 1999.
(13) Includes 26,857 shares subject to stock options exercisable within sixty
days of February 28, 1999.
(14) Includes 19,426 shares subject to stock options exercisable within sixty
days of February 28, 1999.
(15) Includes 415,292 shares subject to stock options exercisable within sixty
days of February 28, 1999.
DIRECTOR NOMINEES. The table below sets forth the Company's directors, who
are also the nominees to be elected at this meeting, and certain information, as
of February 28, 1999, with respect to age and background.
<TABLE>
<CAPTION>
POSITION DIRECTOR
NAME WITH THE COMPANY AGE SINCE
- -------------------------- ------------------------------- --------- -------------------
<S> <C> <C> <C>
Gary D. Cuccio Director 52 1999
John F. Malone Director 51 1998
Kenneth E. Olson Director 62 1996
Christopher B. Paisley Director 46 1996
Peter P. Savage Chairman of the Board 57 1990
Donald L. Strohmeyer Director and President and CEO 63 1999
</TABLE>
Mr. Cuccio has served as a director of the Company since March 1999. Since
July 1998, Mr. Cuccio has been the President of Airtouch Paging, the paging
operations business unit of Airtouch Communications, Inc. ("ATI"), a wireless
communications company. Prior to joining Airtouch Paging, Mr. Cuccio served as
Chief Operating Officer of Omnipoint Communications, Inc., a wireless personal
communications services company from September 1996 to July 1998. Prior to that,
Mr. Cuccio served as Vice President of International Operations for Europe and
Asia for ATI from May 1995 to September 1996 and as Chief Operations Officer for
Belgacom Mobile, a wireless communications subsidiary of ATI from April 1994 to
May 1995. Prior to that Mr. Cuccio held various senior management positions in
sales, marketing, and operations for Pacific Bell, a telecommunications company
that merged with Southwestern Bell Communications, Inc. in 1998. Mr. Cuccio also
serves as a director of Airtouch Paging - Canada, a subsidiary of ATI and two
privately held telecommunications companies.
Mr. Malone has served as a director of the Company since September 1998.
Mr. Malone has been President and Chief Executive Officer of Eastern Management
Group, a management consulting firm, since April 1979. Prior to founding Eastern
Management Group, Mr. Malone held various sales and marketing positions with
AT&T. Mr. Malone is also a director of a privately held company.
Mr. Olson has served as a director of the Company since December 1996. Mr.
Olson served as Chairman of the Board of Proxima Corporation, a manufacturer of
multimedia projection products, from July 1983 through June 1998 and as its
President and Chief Executive Officer from March 1997 through June 1998 and from
April 1995 through February 1996 and as Chief Executive Officer from December
1990 through April 1995. Mr. Olson also currently serves as a director of
AVANIR Pharmaceuticals.
3
<PAGE>
Mr. Paisley has served as a director of the Company since March 1996. Since
August 1996, Mr. Paisley has been the Senior Vice President, Finance and Chief
Financial Officer of 3Com Corporation, a global data networking company. Prior
to becoming Senior Vice President, Finance of 3Com Corporation, from September
1985 through July 1996 Mr. Paisley was Vice President, Finance and Chief
Financial Officer of 3Com Corporation.
Mr. Savage has served as Chairman of the Board of the Company since
February 1999, and prior to that served as its President, Chief Executive
Officer and as a director since November 1990. Prior to joining the Company, Mr.
Savage served as President and Chief Operating Officer of Xylogics, Inc., a
manufacturer of storage and communications controllers, from February 1989
through May 1990, and as Vice President, Engineering of Xylogics from September
1987 through January 1989. Prior to that, Mr. Savage served as President and
Chief Operating Officer of Alliance Telecommunications Corp. Commterm Division,
a manufacturer of voice messaging systems, from August 1986 through March 1987
and as Vice President, Engineering from February 1985 through July 1986. Mr.
Savage previously held a number of technical and management positions with the
telecommunications companies, Infinet, Plantronics and Bell Telephone
Laboratories.
Mr. Strohmeyer has served as the President and Chief Executive Officer and
as a director of the Company since February 1999. Mr. Strohmeyer spent his
career with BellSouth Telecommunications, Inc. ("BST") where he held the
positions of Vice President, Network Operations from January 1997 through March
1998, Vice President Network Operations, South from October 1994 to January
1997, and Vice President, Network Operations, North from October 1990 to October
1994. Prior to that, Mr. Strohmeyer held various senior management positions in
marketing and network operations for BST.
During the fiscal year ended December 31, 1998, the Board held eight (8)
meetings. Each director serving on the Board in fiscal year 1998 attended at
least 75% the meetings of the Board and the Committees on which he served.
The Company does not have a standing Nominating Committee, but does have an
Audit Committee and a Compensation Committee.
The Audit Committee's function is to review with the Company's independent
accountants and management the annual financial statements and independent
accountants' opinion, review the scope and results of the examination of the
Company's financial statements by the independent accountants, approve all
professional services performed by the independent accountants and related fees,
recommend the retention of the independent accountants to the Board and
periodically review the Company's accounting policies and internal accounting
and financial controls. The members of the Audit Committee are Christopher B.
Paisley and John F. Malone. During the fiscal year ended December 31, 1998, the
Audit Committee held one (1) meeting.
The Compensation Committee's function is to review and approve salary and
bonus levels and stock option grants for executive officers and key employees.
The members of the Compensation Committee are Kenneth E. Olson and Christopher
B. Paisley. During the fiscal year ended December 31, 1998, the Compensation
Committee held four (4) meetings. For additional information concerning the
Compensation Committee, see "REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD
OF DIRECTORS ON EXECUTIVE COMPENSATION."
4
<PAGE>
EXECUTIVE OFFICERS. The following executive officers of the Company held
the following positions as of February 28, 1999:
<TABLE>
<CAPTION>
NAME POSITION HELD WITH THE COMPANY AGE
- ------------------------- ----------------------------------------------------- -------
<S> <C> <C>
Donald L. Strohmeyer President, Chief Executive Officer and Director 63
Peter P. Savage Chairman of the Board 57
Paul R. Hartmann Vice President, Systems Engineering 56
James L. Keefe Vice President, Finance and Administration, Chief
Financial Officer and Secretary 38
Wayne M. Lettiere Vice President, Operations 59
Donald J. O'Connor Vice President, Network Systems 44
Kevin T. Pope Vice President, Development Engineering 41
</TABLE>
Messrs. Strohmeyer and Savage are being considered for re-election to the
position of director of the Company. See "Director Nominees" for a discussion of
Messrs. Strohmeyer's and Savage's business experience.
Mr. Hartmann has served as Vice President, Systems Engineering of the
Company since July 1988. Prior to joining the Company, Mr. Hartmann served as
Director of Advanced Technology and as Director of Transmission Systems
Technology for the Rockwell Communications Systems Division of Rockwell
International, a manufacturer of telecommunications transmissions equipment,
from September 1984 through July 1988.
Mr. Keefe has served as Vice President, Finance and Administration, Chief
Financial Officer and Secretary of the Company since May 1996 and previously
served as Controller of the Company from December 1993 to May 1996 and as
Accounting Manager of the Company from March 1992 to December 1993. Prior to
joining the Company, Mr. Keefe served as Accounting Manager of U.S. Fiberline
Communications, Inc., a privately-held telecommunications service provider, from
January 1990 to October 1991 and as Accounting Manager for Scientific Computer
Systems, Inc., a computer manufacturer, from February 1987 through December
1989. Prior to that, Mr. Keefe held financial accounting positions with
Honeywell, Inc. and Coopers & Lybrand, L.L.P.
Mr. Lettiere has served as Vice President, Operations of the Company since
July 1991. Prior to joining the Company, Mr. Lettiere served as Vice President,
Operations of Digital Communication Associates (and its successor corporations),
a manufacturer of telecommunications products, from April 1984 through July
1991.
Mr. O'Connor has served as Vice President, Customer Support since May 1995.
Prior to joining the Company, Mr. O'Connor was with NYNEX Corporation for 14
years where he served as Managing Director, Service Delivery from February 1995
through May 1995, as Director of Operations, Business Customer Service Center
from June 1994 through February 1995, as Director of Operations, Inter-exchange
Carrier Services from March 1992 through June 1994 and as Director of
Operations, Digital Center from August 1990 to March 1992.
Mr. Pope has served as Vice President, Development Engineering since April
1995. Mr. Pope joined the Company in June 1988. Mr. Pope served as Senior
Director of Development Engineering from December 1994 through March 1995, as
Director of Hardware Development from July 1993 through December 1994 and as
Manager of Circuit Design from April 1990 through July 1993. Prior to joining
the Company, Mr. Pope served as Senior Project Engineer for ASEA HAFO Inc., an
integrated circuit design company, from February 1986 through June 1988 and
prior to that was a member of the Technical Staff for Bell Laboratories.
5
<PAGE>
EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table sets forth information for the fiscal years ended
December 31, 1998, 1997 and 1996 concerning the compensation of the Chief
Executive Officer of the Company and the four most highly compensated executive
officers of the Company as of December 31, 1998, whose total salary and bonus
for the year ended December 31, 1998, exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------------- -------------
OTHER ANNUAL SECURITIES
COMPENSATION UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) (2) OPTIONS COMPENSATION
- ---------------------------- ---- -------- -------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Peter P. Savage (3) 1998 $200,000 -- -- 139,000 (4) $5,640 (5)
President and 1997 $200,000 $50,000 -- -- $4,138 (5)
Chief Executive 1996 $175,000 $17,500 -- -- $5,477 (5)
Officer
Paul R. Hartmann 1998 $140,500 -- -- 74,000 (6) --
Vice President, 1997 $140,500 $27,234 -- -- --
Systems Engineering 1996 $134,500 $19,504 -- -- --
Wayne M. Lettiere 1998 $126,000 -- -- 52,000 (7) --
Vice President, 1997 $126,000 $25,746 -- -- --
Operations 1996 $120,000 $18,211 -- -- --
Steven F.X. Murphy (8) 1998 $212,592 -- $35,812 (9) 85,000 (10) --
Vice President, 1997 $113,077 $37,494 $27,182 (9) -- --
Sales and Marketing 1996 -- -- -- -- --
Donald J. O'Connor 1998 $133,000 -- -- 94,000 (12) --
Vice President, 1997 $133,000 $34,678 -- -- --
Customer Support 1996 $125,000 $17,500 $23,062 (11) -- --
</TABLE>
- ------------------
(1) Amounts paid pursuant to a Management Team Incentive Compensation Plan
approved by the Company's Compensation Committee. See "REPORT OF THE
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION."
(2) "Other Annual Compensation" includes only amounts totaling more than the
lesser of either $50,000 or 10% of the reported salary and bonus for the
years covered.
(3) On February 20, 1999, Mr. Savage was appointed to the position of Chairman
of the Board of the Company, and resigned from the positions of President
and Chief Executive Officer.
(4) Represents an option grant for 35,000 shares originally granted in August
1994 which was canceled and regranted in June 1995 and then cancelled and
regranted in November 1998; an option grant for 30,000 shares originally
granted in November 1995 which was canceled and regranted in November 1998;
an option grant for 50,000 shares originally granted in February 1997 which
was canceled and regranted in November 1998; and an option grant for 24,000
shares originally granted in January 1998 which was canceled and regranted
in November 1998. See "REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF
DIRECTORS ON EXECUTIVE COMPENSATION--Report on 1998 Cancellation and
Regrant of Options" and "TEN YEAR OPTION REPRICINGS."
(5) Amounts paid in connection with reimbursement of premiums on life insurance
and disability insurance policies for Mr. Savage in accordance with his
employment agreement.
6
<PAGE>
(6) Represents an option grant for 20,000 shares originally granted in August
1994 which was canceled and regranted in June 1995 and then cancelled and
regranted in November 1998; an option grant for 20,000 shares originally
granted in November 1995 which was canceled and regranted in November 1998;
an option grant for 20,000 shares originally granted in February 1997 which
was canceled and regranted in November 1998; and an option grant for 14,000
shares originally granted in January 1998 which was canceled and regranted
in November 1998. See "REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF
DIRECTORS ON EXECUTIVE COMPENSATION--Report on 1998 Cancellation and
Regrant of Options" and "TEN YEAR OPTION REPRICINGS."
(7) Represents an option grant for 15,000 shares originally granted in August
1994 which was canceled and regranted in June 1995 and then cancelled and
regranted in November 1998; an option grant for 15,000 shares originally
granted in November 1995 which was canceled and regranted in November 1998;
an option grant for 10,000 shares originally granted in February 1997 which
was canceled and regranted in November 1998; and an option grant for 12,000
shares originally granted in January 1998 which was canceled and regranted
in November 1998. See "REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF
DIRECTORS ON EXECUTIVE COMPENSATION--Report on 1998 Cancellation and
Regrant of Options" and "TEN YEAR OPTION REPRICINGS."
(8) Mr. Murphy became an employee of the Company in March 1997. On January 25,
1999, Mr. Murphy resigned from his position of Vice President, Sales and
Marketing with the Company.
(9) Amounts paid in connection with the reimbursement of relocation expenses
and related tax liability pursuant to Mr. Murphy's employment arrangement.
(10) Represents an option grant for 75,000 shares originally granted in April
1997 which was canceled and regranted in November 1998; and an option grant
for 10,000 shares originally granted in January 1998 which was canceled and
regranted in November 1998. See "REPORT OF THE COMPENSATION COMMITTEE OF
THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION--Report on 1998
Cancellation and Regrant of Options" and "TEN YEAR OPTION REPRICINGS."
(11) Amounts paid in connection with the reimbursement of relocation expenses
and related tax liability pursuant to Mr. O'Connor's employment
arrangement.
(12) Represents an option grant for 50,000 shares originally granted in June
1995 which was canceled and regranted in November 1998; an option grant for
25,000 shares originally granted in February 1997 which was canceled and
regranted in November 1998; and an option grant for 19,000 shares
originally granted in January 1998 which was canceled and regranted in
November 1998. See "REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF
DIRECTORS ON EXECUTIVE COMPENSATION--Report on 1998 Cancellation and
Regrant of Options" and "TEN YEAR OPTION REPRICINGS."
7
<PAGE>
The following table provides the specified information concerning grants of
options to purchase the Company's Common Stock made during the fiscal year ended
December 31, 1998, to the persons named in the Summary Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM (1)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -------------------------
NAME GRANTED (2) FISCAL YEAR (3) SHARE (4) DATE 5% 10%
----------------------- ------------- -------------- ----------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Peter P. Savage (5) 139,000 (7)(8) 4.6% $2.75 11/06/08 $240,395 $609,208
Paul R. Hartmann 74,000 (7)(9) 2.5% $2.75 11/06/08 $127,980 $324,327
Wayne M. Lettiere 52,000 (7)(10) 1.7% $2.75 11/06/08 $ 89,932 $227,905
Steven F. X. Murphy (6) 85,000 (7)(11) 2.8% $2.75 11/06/08 $147,004 $372,537
Donald J. O'Connor 94,000 (7)(12) 3.1% $2.75 11/06/08 $162,569 $411,982
</TABLE>
- -----------------
(1) Potential gains are net of exercise price, but before taxes associated with
exercise. These amounts represent certain assumed rates of appreciation
only, in accordance with the SEC's rules. Actual gains, if any, on stock
option exercises are dependent on the future performance of the Common
Stock, overall market conditions and the option holders' continued
employment through the vesting period. The amounts reflected in this table
may not necessarily be achieved.
(2) Options granted in fiscal 1998 under the Company's 1994 Stock Option/Stock
Issuance Plan (the "1994 Option Plan") generally vest and become
exercisable over a four year period at the rate of 1/48 per month for each
full month of the optionee's continuous employment with the Company. Under
the 1994 Option Plan, the Board retains discretion to modify the terms,
including the price, of outstanding options. The shares subject to each
option will immediately vest in the event the Company is acquired by a
merger or asset sale unless the option is assumed by the successor entity.
See "--Severance and Change of Control Arrangements", "REPORT OF THE
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION--Report on 1998 Cancellation and Regrant of Options" and "TEN
YEAR OPTION REPRICINGS."
(3) Based upon options granted to purchase an aggregate of 2,990,941 shares of
Common Stock of which approximately 2,304,133 represent regranted options
subject to the Company's Option Cancellation/Regrant Program in October and
November 1998. See "REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF
DIRECTORS ON EXECUTIVE COMPENSATION--Report on 1998 Cancellation and
Regrant of Options" and "TEN YEAR OPTION REPRICINGS."
(4) All options listed were granted at market value on the date of grant, based
on the closing selling price of the Company's Common Stock on such date.
(5) On February 20, 1999, Mr. Savage was appointed to the position of Chairman
of the Board of the Company and resigned from the positions of President
and Chief Executive Officer.
(6) On January 25, 1999, Mr. Murphy resigned from his position of Vice
President, Sales and Marketing with the Company.
(7) In September 1998 and November 1998, as a result of a broad decline in the
fair market value of the Company's Common Stock, the Compensation Committee
determined that it was in the best interests of the Company to offer to all
current employees who were option holders, including executive officers,
whom the Committee considered separately, the opportunity to have
outstanding options with an exercise price above the then current market
price cancelled in exchange for new options with an exercise price equal to
the then current fair market value. For details concerning the
8
<PAGE>
cancellation and regrant of options, see "REPORT OF THE COMPENSATION
COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION--Report on
1998 Cancellation and Regrant of Options" and "TEN YEAR OPTION REPRICINGS."
(8) Includes an option grant for 35,000 shares originally granted in August
1994 which was canceled and regranted in June 1995 and then cancelled and
regranted in November 1998; an option grant for 30,000 shares originally
granted in November 1995 which was canceled and regranted in November 1998;
an option grant for 50,000 shares originally granted in February 1997 which
was canceled and regranted in November 1998; and an option grant for 24,000
shares originally granted in January 1998 which was canceled and regranted
in November 1998.
(9) Includes an option grant for 20,000 shares originally granted in August
1994 which was canceled and regranted in June 1995 and then cancelled and
regranted in November 1998; an option grant for 20,000 shares originally
granted in November 1995 which was canceled and regranted in November 1998;
an option grant for 20,000 shares originally granted in February 1997 which
was canceled and regranted in November 1998; and an option grant for 14,000
shares originally granted in January 1998 which was canceled and regranted
in November 1998.
(10) Includes an option grant for 15,000 shares originally granted in August
1994 which was canceled and regranted in June 1995 and then cancelled and
regranted in November 1998; an option grant for 15,000 shares originally
granted in November 1995 which was canceled and regranted in November 1998;
an option grant for 10,000 shares originally granted in February 1997 which
was canceled and regranted in November 1998; and an option grant for 12,000
shares originally granted in January 1998 which was canceled and regranted
in November 1998.
(11) Includes an option grant for 75,000 shares originally granted in April 1997
which was canceled and regranted in November 1998, and an option grant for
10,000 shares originally granted in January 1998 which was canceled and
regranted in November 1998.
(12) Includes an option grant for 50,000 shares originally granted in June 1995
which was canceled and regranted in November 1998; an option grant for
25,000 shares originally granted in February 1997 which was canceled and
regranted in November 1998; and an option grant for 19,000 shares
originally granted in January 1998 which was canceled and regranted in
November 1998.
9
<PAGE>
The following table provides the specified information concerning
unexercised options held as of December 31, 1998, by the persons named in the
Summary Compensation Table.
AGGREGATED OPTION EXERCISES
AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS AT 12/31/98 OPTIONS AT 12/31/98(1)
ON VALUE -------------------------------- ---------------------------------
NAME EXERCISE REALIZED EXERCISABLE(2) UNEXERCISABLE EXERCISABLE(2) UNEXERCISABLE
- ------------------------ -------- -------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Peter P. Savage (3) -- -- 248,428 139,000 $598,935 --
Paul R. Hartmann 3,407 -- 47,142 74,000 $103,948 --
Wayne M. Lettiere 10,000 $60,800 26,857 52,000 $59,220 --
Steven F.X. Murphy (4) -- -- -- 85,000 -- --
Donald J. O'Connor -- -- -- 94,000 -- --
</TABLE>
- ------------------------------
(1) Based on a fair market value of $2.63, the closing price of the Common
Stock on December 31, 1998, as reported by the Nasdaq National Market. Does
not include options that had an exercise price greater than $2.63.
(2) Under the 1994 Option Plan, stock options generally vest and become
exercisable over a period of four years.
(3) On February 20, 1999, Mr. Savage was appointed to the position of Chairman
of the Board of the Company and resigned from the positions of President
and Chief Executive Officer.
(4) On January 25, 1999, Mr. Murphy resigned from his position of Vice
President, Sales and Marketing with the Company.
SEVERANCE AND CHANGE OF CONTROL ARRANGEMENTS
In November 1998, the Company entered into certain retention agreements
("agreements") with its chief executive officer and executive officers
("Executives") relating to a change in control of the Company. Under the
agreements, the termination of an Executive's employment without cause or for
"good reason", as defined in the agreement, within twelve months following a
change in control of the Company would be deemed a covered termination. A
covered termination provides for the continuation of an Executive's base salary
for a period of eighteen months for the chief executive officer and twelve
months for the executive officers. The Executive will be deemed a consultant of
the Company during these periods ("Consulting Periods"). The Executive's then
outstanding stock options will continue vesting and employee benefits will
continue to be provided by the Company during the Consulting Period.
In February 1999, the Company entered into an employment arrangement with
Donald L. Strohmeyer, the Company's President and Chief Executive Officer. If
Mr. Strohmeyer is terminated without cause, the Company has agreed to pay him
his monthly base salary for a period of twelve months after his termination. In
addition, during such twelve month period, Mr. Strohmeyer will continue to vest
in any outstanding stock options still subject to vesting. The arrangement does
not have an expiration date and is operative during Mr. Strohmeyer's employment
by the Company.
In November 1990, the Company entered into an employment arrangement with
Peter P. Savage, the Company's Chairman of the Board. If Mr. Savage is
terminated without cause, the Company has agreed to pay him his monthly base
salary for a period of six months after his termination or until he commences
employment with another company. In addition, he will be entitled to his pro
rata share of any guaranteed bonus or profit sharing plan in which he
participated (for the portion of the year that he was employed by the Company).
During the severance term, Mr. Savage would continue to be treated as a Company
employee for purposes of all Company-provided employee benefits (other than for
purposes of stock option vesting and vacation eligibility). The arrangement does
not have an expiration date and is operative during Mr. Savage's employment by
the Company.
10
<PAGE>
In January 1999, the Company entered into a separation agreement with
Steven F.X. Murphy, the Company's former Vice President, Sales and Marketing.
Under the separation agreement, Mr. Murphy will receive severance totaling
$100,000, paid in six equal monthly installments ending in June 1999.
In June 1988, the Company entered into an employment arrangement with Paul
R. Hartmann, the Company's Vice President, Systems Engineering. If Mr. Hartmann
is terminated without cause, the Company has agreed to pay him his monthly base
salary for a period of six months after the termination or until he commences
employment with another company. The arrangement does not have an expiration
date and is operative during Mr. Hartmann's employment by the Company.
In May 1995, the Company entered into an employment arrangement with Donald
J. O'Connor, the Company's Vice President, Customer Support. If Mr. O'Connor is
terminated involuntarily, the Company has agreed to pay him a severance payment
equal to three months of his monthly base salary upon such termination. The
arrangement does not have an expiration date and is operative during Mr.
O'Connor's employment by the Company.
Pursuant to the 1994 Option Plan, in the event the Company is acquired,
whether by merger or asset sale, each outstanding option which is not to be
assumed by the successor corporation or replaced with a comparable option to
purchase the capital stock of the successor corporation will automatically
accelerate vesting in full, and all unvested shares will automatically vest,
except to the extent such accelerated vesting is precluded by the terms of the
agreements evidencing those unvested shares.
The 1994 Option Plan also provides for the automatic acceleration of
vesting with respect to outstanding options or shares upon the following change
in control events: (i) the acquisition of more than 50% of the Company's voting
stock by hostile tender offer or (ii) a change in the composition of the Board
of Directors effected through one or more contested Board elections, except that
the Compensation Committee may at the time of a discretionary option grant or
stock issuance, provide that no such acceleration shall occur.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company receive annual compensation
totaling $10,000 for serving on the Company's Board of Directors. In addition,
members of the Audit and Compensation Committees receive payments of $500 for
each committee meeting they attend which is not held in conjunction with a
meeting of the Board of Directors. Also, the Company reimburses non-employee
directors for reasonable travel expenses incurred in attending Board of
Directors' meetings. Non-employee directors are eligible to participate in the
automatic option grant program whereby, upon election or re-election, each
director receives a non-qualified stock option for shares of the Company's
Common Stock. Directors who are employees of the Company receive no additional
compensation for serving on the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the last fiscal year, executive compensation was administered by the
Compensation Committee comprised of two non-employee directors of the Company,
Kenneth E. Olson and Christopher B. Paisley. Mr. Savage, the Company's President
and Chief Executive Officer during the last fiscal year, participated in the
deliberations of the Compensation Committee regarding executive stock options
and compensation that occurred during 1998, but did not take part in the
deliberations regarding his own stock options or compensation. Mr. Savage's
participation in the deliberations of the Compensation Committee included
providing information on the performance of people who work at the Company and
advisory recommendations regarding appropriate levels of compensation for the
Company's officers.
CERTAIN TRANSACTIONS
Donald L. Strohmeyer, the President and Chief Executive Officer and a
director of the Company, entered into an employment arrangement with the Company
in February 1999. See "--Severance and Change of Control Arrangements."
Steven F.X. Murphy, the Company's former Vice President, Sales and
Marketing, entered into a separation agreement with the Company in January 1999.
See "--Severance and Change of Control Arrangements."
11
<PAGE>
Peter P. Savage, the Chairman of the Board of Directors of the Company,
entered into an employment arrangement with the Company in November 1990. See
"--Severance and Change of Control Arrangements."
Paul R. Hartmann, the Vice President, Systems Engineering of the Company,
entered into an employment arrangement with the Company in June 1988. See
"--Severance and Change of Control Arrangements."
Donald J. O'Connor, the Vice President, Customer Support of the Company,
entered into an employment arrangement with the Company in May 1995. See
"--Severance and Change of Control Arrangements."
Officers and directors of the Company are indemnified pursuant to certain
provisions of the Delaware General Corporation Law, the Company's charter
documents and indemnity agreements, to the fullest extent permitted under
Delaware law.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers, directors and persons who beneficially own
more than 10% of the Company's Common Stock to file initial reports of ownership
and reports of changes in ownership with the SEC. Such persons are required by
SEC regulations to furnish the Company with copies of all Section 16(a) forms
filed by such persons.
Based solely on the Company's review of such forms furnished to the Company
and written representations from certain reporting persons, the Company believes
that all filing requirements applicable to the Company's executive officers,
directors and more than 10% stockholders were complied with and filed in a
timely manner.
CHANGES TO BENEFIT PLANS
1998 EMPLOYEE STOCK PURCHASE PLAN. The Board of Directors of the Company
has adopted, subject to stockholder approval, an amendment to the 1998 Employee
Stock Purchase Plan (the "1998 Purchase Plan") to increase the maximum number of
shares that may be issued thereunder by 300,000 shares. See "PROPOSAL TO AMEND
1998 EMPLOYEE STOCK PURCHASE PLAN." Currently, no purchases have been made by
any employee conditioned upon stockholder approval of the increase in the share
reserve of the 1998 Purchase Plan. Non-employee directors are not eligible to
participate in the 1998 Purchase Plan.
12
<PAGE>
NEW PLAN BENEFITS. The benefits to be received by executive officers and
employees under the 1998 Purchase Plan are not currently determinable. Under the
1998 Purchase Plan, the purchase price of all of shares to be purchased will not
be determined until the date such shares are purchased. Accordingly, the
following table sets forth issuances of stock made under the 1998 Purchase Plan
for the fiscal year ended December 31, 1998 to (i) the Chief Executive Officer
of the Company and the four other most highly compensated executive officers of
the Company as of December 31, 1998; (ii) all current executive officers as a
group; and (iii) all employees, including all current officers who are not
executive officers, as a group.
NEW PLAN BENEFITS
<TABLE>
<CAPTION>
1998 PURCHASE PLAN (1)
---------------------------------------
WEIGHTED
AVERAGE
NAME AND POSITION PURCHASE PRICE NO. OF SHARES
- ------------------------------------ ------------------- ----------------
<S> <C> <C>
Peter P. Savage $3.48 4,353
President, Chief Executive
Officer, Director (2)
Paul R. Hartmann $3.52 4,341
Vice President, Systems
Engineering
Wayne M. Lettiere -- --
Vice President, Operations
Steven F.X. Murphy $2.91 2,802
Vice President, Sales and
Marketing (3)
Donald J. O'Connor $3.58 2,444
Vice President, Network Systems
Executive Group $3.39 19,842
(7 persons)
Non-Executive Officer Employee $3.03 150,541
Group
</TABLE>
- -----------------
(1) Only employees are eligible to participate in the 1998 Purchase Plan.
Amounts in this column are based on actual purchases made pursuant to the
1998 Purchase Plan.
(2) On February 20, 1999, Mr. Savage was appointed to the position of Chairman
of the Board of the Company and resigned from the positions of President
and Chief Executive Officer.
(3) On January 25, 1999, Mr. Murphy resigned from his position of Vice
President, Sales and Marketing with the Company.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION
In fiscal 1998, the Compensation Committee of the Board of Directors was
comprised of Kenneth E. Olson and Christopher B. Paisley. The Compensation
Committee was responsible for setting and administering the policies governing
annual compensation of the executive officers of the Company. These policies are
based upon the philosophy that the Company's long term success in its
marketplace is best achieved through (i) recruitment and retention of the best
people in the industry and (ii) providing compensation that focuses executive
officer efforts on maximizing both short and long term financial performance of
the Company. The Compensation Committee applied this philosophy in determining
compensation for the Company's executive officers in four areas: salary, annual
incentive programs, long term incentive compensation and benefits.
13
<PAGE>
Each executive officer's aggregate compensation is designed to provide a
cumulative level of compensation roughly equivalent to the median paid by
comparably sized companies in similar industries and geographic locations. In
determining executive officers' compensation, the Compensation Committee
considers information contained in surveys such as the American Electronics
Association ("AEA") Executive Compensation Survey, the Radford Executive
Compensation survey, and various surveys published by venture capital firms. In
recent years, these surveys have experienced year to year increases of
approximately 5% each year.
In 1998, there were no compensation adjustments for the executive officers.
SALARY
The Company attempts to offer salaries to its executive officers which are
generally targeted near the median for similar positions in comparably sized
companies in the Company's industry and geographic location. The Company's Chief
Executive Officer evaluates the performance of all other executive officers, and
recommends salary adjustments which are subject to review by the Compensation
Committee. In addition to considering the results of performance evaluations and
information concerning competitive salaries, the Compensation Committee and the
Chief Executive Officer place weight on the financial condition of the Company
and the competitive employment situation in the Company's industry and
geographic area in considering salary adjustments.
The Company's Chief Executive Officer did not recommend any salary
adjustments for the Company's other executive officers in fiscal 1998.
ANNUAL INCENTIVE COMPENSATION
The Company seeks to provide additional incentives to executives who make
contributions of outstanding value to the Company. For this reason, the
Compensation Committee awards incentive compensation which can comprise a
substantial portion of the total compensation of executive officers when earned
and paid. Incentive compensation may be paid to executives pursuant to three
plans: the Management Team Incentive Compensation Plan, the Sales Management
Incentive Compensation Plan and the Gain Sharing Plan. The Compensation
Committee attempts to structure these plans so that if the maximum amount
available under these plans is earned by an executive officer, his total cash
compensation for the year will be slightly above the median paid to executive
officers in similar positions at comparably sized companies in similar
industries and geographic locations.
MANAGEMENT TEAM INCENTIVE COMPENSATION PLAN. Potential compensation paid
under this plan is set as a significant percent of each officer's base salary.
The total incentive compensation which could be awarded under this plan if all
performance targets and individual objectives were achieved comprised up to 40%
of base salary for executive officers, (other than the Chief Executive Officer).
If performance targets were exceeded, up to 50% of base salary could be awarded
to such officers under this plan. The incentive compensation under this plan is
based on the financial performance of the Company and each business unit,
quantitative departmental goals and the executive officer's personal
performance. Each executive officer (other than those who participate in the
Sales Management Incentive Compensation Plan, as described below) earns
incentive compensation based upon some or all of these areas of performance. The
Company and business unit targets are based upon attaining certain bookings,
revenue and operating profit goals set by the Board of Directors in consultation
with the Chief Executive Officer. Departmental performance is measured by
appropriate metrics, such as on-time completion of key projects, level of
quality, and inventory levels. Compensation for personal performance under this
plan is awarded by the Compensation Committee based upon its objective and
subjective evaluation of the performance of each officer.
Company and business unit performance bonuses are weighted so that
proportionately higher awards are received when the Company's performance
exceeds targets and proportionately smaller or no awards are made when the
Company does not meet targets. No incentive compensation is paid for Company or
business unit performance unless minimum Company and business unit financial
goals are achieved during the fiscal year.
In 1998, no compensation was earned by officers under the Management Team
Incentive Compensation Plan.
14
<PAGE>
The Compensation Committee reviews and adjusts the Management Team
Incentive Compensation Plan annually.
SALES MANAGEMENT INCENTIVE COMPENSATION PLAN. One executive officer of the
Company participated in the Company's Sales Management Incentive Compensation
Plan in 1998. Participation in this plan is in lieu of participation in the
Management Team Incentive Compensation Plan. The total incentive compensation
which could be awarded under this plan if all performance targets were achieved
comprised up to 67% of base salary for the executive officer. If performance
targets were exceeded, up to 100% of base salary could be awarded to the officer
under this plan. Incentive compensation is paid under this plan as a percentage
of bookings and revenue, to the extent that bookings and revenue exceed 80% of
the target goals set by the Board of Directors. In addition, the executive
officer could earn up to 17% of base salary based upon personal performance. In
1998, compensation earned by the officer who participated in the Sales
Management Incentive Compensation Plan was 25% of the officer's base salary.
GAIN SHARING PLAN. Under this plan, eligible employees (including the
Company's executive officers) may receive quarterly payments based on the
Company's financial results exceeding certain levels. Officers are only eligible
to participate after all other employees have received an annual allocation of
$3,000 per person. No amounts were earned under the Gain Sharing Plan in 1998.
LONG TERM INCENTIVE COMPENSATION
The Compensation Committee believes that long term incentive compensation
through employee equity ownership provides significant additional motivation to
executive officers to maximize value for the Company's stockholders, and
therefore, the Compensation Committee makes periodic grants of stock options
under the Company's option plans. Such options are granted at the prevailing
market price, and will only have value if the Company's stock price increases
over the exercise price. Therefore, the Compensation Committee believes that
stock options serve to align the interest of executive officers closely with
other stockholders because of the direct benefit executive officers receive
through improved stock performance. In addition, stock options vest over time to
provide financial incentive for the executive officers to remain with the
Company.
In fiscal 1998, the Compensation Committee granted additional options to
executive officers, after consideration of recommendations from the Chief
Executive Officer. Option grants were based upon relative position and
responsibilities of each executive officer, historical and expected
contributions of each executive officer to the Company, and previous option
grants to such executive officers. Options were granted with a goal to provide
equity compensation for the Company's executive officers that is competitive
with equity compensation provided to executive officers with similar positions
in comparably sized companies in similar industries and geographic locations.
All options granted in fiscal 1998 to executive officers in their capacities as
such were granted under the 1994 Option Plan. Generally, option grants under the
1994 Option Plan vest and become exercisable over four years. Option grants for
fiscal 1998 are set forth in the tables entitled "OPTION GRANTS IN LAST FISCAL
YEAR" in the section entitled "EXECUTIVE COMPENSATION AND OTHER MATTERS" and
"TEN YEAR OPTION REPRICINGS."
OTHER BENEFITS
The Company's executive officers participate in benefits programs available
generally to all employees.
CHIEF EXECUTIVE OFFICER COMPENSATION
The compensation of the Chief Executive Officer is based upon the same
criteria outlined above for the other executive officers of the Company. While
the CEO makes recommendations about the compensation levels, goals and
performance of the other executive officers, he does not participate in
discussions regarding his compensation or performance.
15
<PAGE>
The Compensation Committee did not adjust Mr. Savage's salary in 1998. Mr.
Savage's compensation under the Management Team Incentive Compensation Plan was
based upon the Company achieving financial performance goals. In 1998, Mr.
Savage could have received 50% of his base salary under the Management Team
Incentive Compensation Plan if the Company had met all of its performance
targets and up to 70% if those targets were exceeded by 10% or more. No
incentive compensation was earned by Mr. Savage in 1998. Mr. Savage received
additional option grants under the 1994 Option Plan to purchase 139,000 shares
which included an option grant for 35,000 shares granted in June 1995 which was
canceled and regranted in November 1998; an option grant for 30,000 shares
originally granted in November 1995 which was canceled and regranted in November
1998; an option grant for 50,000 shares originally granted in February 1997
which was canceled and regranted in November 1998; and an option grant for
24,000 shares originally granted in January 1998 which was canceled and
regranted in November 1998. See "REPORT OF THE COMPENSATION COMMITTEE OF THE
BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION--Report on 1998 Cancellation and
Regrant of Options" and "TEN YEAR OPTION REPRICINGS". In addition to
participating in benefit plans available to all employees, pursuant to his
employment agreement with the Company, Mr. Savage also receives reimbursement of
certain life and disability insurance premiums.
REPORT ON 1998 CANCELLATION AND REGRANT OF OPTIONS
In September and November of 1998, the Compensation Committee considered,
separately, the options held by the Company's employees and executive officers
and the fact that a broad decline in the price of the Common Stock of the
Company had resulted in a substantial number of stock options granted having
exercise prices well above the recent historical trading prices for the
Company's Common Stock. The Committee was advised by management that management
believed that key employee turnover was likely to increase in part because the
Company's total compensation package for long-term employees, which included
substantial options with exercise prices well above the current trading price,
was less attractive than compensation offered by other companies in the same
industry and geographic location. This is because options granted to new hires
at other companies would likely be granted at current trading prices, providing
more opportunity for appreciation than the Company's options.
The Committee believed that the Company's success in the future would
depend in large part on its ability to retain a number of its highly skilled
technical, managerial and marketing personnel and the loss of key employees
could have significant adverse impact on the Company's business. The Committee
also believed that unless an adjustment was made in option prices, existing
employees holding options would perceive a substantial inequity in comparison to
new employees granted stock options with exercise prices set at the current,
lower fair market value of the Company's Common Stock and that employee morale
would suffer as a consequence. The Committee concluded that it was important and
cost-effective to provide equity incentives to employees and executive officers
of the Company to improve the Company's performance and the value of the Company
for its stockholders. The Committee considered granting new options selectively
to current key employees at fair market value, but recognized that the size of
the option grants required to offset the decline in market price would result in
significant additional dilution to stockholders. The Committee recognized that
canceling existing options with exercise prices higher than fair market value
and regranting options at fair market value would provide additional incentives
to employees because of the increased potential for appreciation. The Committee
also recognized that the new options could require holding periods before they
became exercisable, providing optionees participating in the
cancellation/regrant program with an added incentive to remain with the Company.
Considering these factors, the Committee determined that it was in the best
interests of the Company and its stockholders to restore the incentives for
employees and executive officers to remain as employees of the Company and to
exert their maximum efforts on behalf of the Company by canceling and regranting
stock options under the Option Plan for those options with exercise prices above
recent trading prices.
In September 1998, the Compensation Committee approved the cancellation and
regrant of all outstanding options granted to non-officer employees at exercise
prices exceeding the fair market value of common stock as of October 23, 1998,
the effective date of the program. The exercise price of each regranted option
is $2.75, which is the closing market price of the Company's common stock on
October 23, 1998. Each optionee holding such an option had the opportunity to
(i) elect to retain the old option or (ii) accept a new option with an exercise
price equal to the fair market value of the Company's common stock on the
effective date and cancel the old option. Each regranted option covered the same
number of shares subject to the old option at the time of cancellation and
maintained the same vesting period as the previously canceled option. The
regranted options cannot be exercised for a period of six months following the
effective date. Any employee voluntarily leaving the Company during the six
month period will lose the affected options, including previously vested
portions of those options. All replacement options will terminate no later than
ten (10) years from the date of grant. Options to purchase a total
16
<PAGE>
of 1,706,275 shares of the Company's Common Stock at exercise prices ranging
from $2.80 per share to $9.88 per share have been canceled in exchange for
regranted options for an equal number of shares at an exercise price of $2.75
per share, the closing price of the Company's Common Stock on the effective date
of the program.
In November 1998, the Compensation Committee of the Company's Board of
Directors approved the cancellation and regrant of all outstanding options
granted to executive officers at exercise prices exceeding the fair market value
of common stock as of November 6, 1998, the effective date of the program. The
exercise price of each regranted option is $2.75, which was the closing market
price of the Company's common stock on November 6, 1998. Each executive officer
holding such an option had the opportunity to (i) elect to retain the old option
or (ii) accept two new options with exercise prices equal to the fair market
value of the Company's common stock on the effective date and cancel the old
option. Each regranted option covered one-half of the number of shares subject
to the old option at the time of cancellation. One of the regranted options
maintained the same vesting period as the previously canceled option. The other
regranted option vests in equal monthly installments over a 48 month period
beginning on the regrant date. The regranted options are subject to the
condition that the options cannot be exercised for a period of six months
following the effective date. Any executive officer voluntarily leaving the
Company during the six month period will lose the affected options, including
previously vested portions of those options. All replacement options will
terminate no later than ten (10) years from the date of grant. Options to
purchase a total of 597,858 shares of the Company's Common Stock at exercise
prices ranging from $4.75 per share to $15.25 per share have been canceled in
exchange for regranted options for an equal number of shares at an exercise
price of $2.75 per share, the closing price of the Company's Common Stock on the
effective date of the program.
The Compensation Committee believes the regranted options strike an
appropriate balance between the interests of the option holders and those of the
stockholders. The lower exercise prices in effect under the regranted options
make those options valuable to the executive officers and employees critical to
the Company's financial performance. However, those individuals will enjoy the
benefits of the regranted options only if they remain in the Company's employ
and contribute to the Company's and investor's financial success.
COMPENSATION COMMITTEE
Kenneth E. Olson
Christopher B. Paisley
TEN YEAR OPTION REPRICINGS
The table below sets forth (i) information with respect to each of the
Company's named executive officers concerning his participation in the option
cancellation/regrant program which was effected November 6, 1998 and (ii)
information with respect to all former or current executive officers of the
Company concerning their participation in other option repricing programs
implemented by the Company during the last ten fiscal years. Options referenced
in the table below that were repriced on November 6, 1998 represent two new
option agreements. Each such option agreement is for one-half of the number of
shares subject to the old option at the time of cancellation. One of the
regranted options maintained the same vesting period as the previously canceled
option, and the other regranted option vests in equal monthly installments over
a 48-month period beginning on the date of repricing.
17
<PAGE>
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF ORIGINAL
SECURITIES MARKET PRICE EXERCISE OPTION TERM
UNDERLYING OF STOCK AT PRICE AT NEW REMAINING AT
DATE OF OPTIONS TIME OF TIME OF EXERCISE DATE OF
NAME REPRICING REPRICED REPRICING REPRICING PRICE REPRICING
- ---- --------- -------- --------- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Peter P. Savage (1) 11/06/98 24,000(3) $ 2.75 $ 6.06 $ 2.75 110 Months
President and Chief 11/06/98 50,000(4) $ 2.75 $ 6.88 $ 2.75 100 Months
Executive Officer 11/06/98 30,000(5) $ 2.75 $ 11.75 $ 2.75 85 Months
11/06/98 35,000(6) $ 2.75 $ 12.50 $ 2.75 80 Months
6/29/95(2) 35,000(7) $ 12.50 $ 18.75 $ 12.50 110 Months
Paul R. Hartmann 11/06/98 14,000(3) $ 2.75 $ 6.06 $ 2.75 110 Months
Vice President, Systems 11/06/98 20,000(4) $ 2.75 $ 6.88 $ 2.75 100 Months
Engineering 11/06/98 20,000(5) $ 2.75 $ 11.75 $ 2.75 85 Months
11/06/98 20,000(6) $ 2.75 $ 12.50 $ 2.75 80 Months
6/29/95(2) 20,000(7) $ 12.50 $ 18.75 $ 12.50 110 Months
Wayne M. Lettiere 11/06/98 12,000(3) $ 2.75 $ 6.06 $ 2.75 110 Months
Vice President, 11/06/98 10,000(4) $ 2.75 $ 6.88 $ 2.75 100 Months
Operations 11/06/98 15,000(5) $ 2.75 $ 11.75 $ 2.75 85 Months
11/06/98 15,000(6) $ 2.75 $ 12.50 $ 2.75 80 Months
6/29/95(2) 15,000(7) $ 12.50 $ 18.75 $ 12.50 110 Months
Steven F.X. Murphy (8) 11/06/98 10,000(3) $ 2.75 $ 6.06 $ 2.75 110 Months
Vice President, Sales 11/06/98 75,000(9) $ 2.75 $ 4.75 $ 2.75 101 Months
and Marketing
Donald J. O'Connor 11/06/98 19,000(3) $ 2.75 $ 6.06 $ 2.75 110 Months
Vice President, Network 11/06/98 25,000(4) $ 2.75 $ 6.88 $ 2.75 100 Months
Systems 11/06/98 50,000(10) $ 2.75 $ 12.50 $ 2.75 80 Months
James L. Keefe 11/06/98 13,500(3) $ 2.75 $ 6.06 $ 2.75 110 Months
Vice President, Finance 11/06/98 20,000(4) $ 2.75 $ 6.88 $ 2.75 100 Months
Administration, 11/06/98 25,000(11) $ 2.75 $ 15.25 $ 2.75 91 Months
Chief Financial Officer 11/06/98 6,000(5) $ 2.75 $ 11.75 $ 2.75 85 Months
and Secretary 11/06/98 5,000(6) $ 2.75 $ 12.50 $ 2.75 80 Months
6/29/95(2) 5,000(7) $ 12.50 $ 18.75 $ 12.50 110 Months
Kevin T. Pope 11/06/98 16,000(3) $ 2.75 $ 6.06 $ 2.75 110 Months
Vice President, Network 11/06/98 25,000(4) $ 2.75 $ 6.88 $ 2.75 100 Months
Development 11/06/98 35,000(5) $ 2.75 $ 11.75 $ 2.75 85 Months
Engineering 11/06/98 535(12) $ 2.75 $ 7.00 $ 2.75 19 Months
11/06/98 107(13) $ 2.75 $ 7.00 $ 2.75 10 Months
11/06/98 216(14) $ 2.75 $ 7.00 $ 2.75 5 Months
11/06/98 7,500(6) $ 2.75 $ 12.50 $ 2.75 80 Months
6/29/95(2) 7,500(7) $ 12.50 $ 18.75 $ 12.50 110 Months
Richard W. Carter (15) 06/29/95 15,000(7) $ 12.50 $ 18.75 $ 12.50 110 Months
Chief Financial Officer
Howard J. Rutka (16) 06/29/95 13,000(7) $ 12.50 $ 18.75 $ 12.50 110 Months
Vice President, Sales
</TABLE>
18
<PAGE>
(1) On February 20, 1999, Mr. Savage was appointed to the position of Chairman
of the Board of the Company, and resigned from the positions of President
and Chief Executive Officer.
(2) Option was subsequently cancelled and regranted on November 6, 1998.
(3) Represents the regrant of a cancelled option originally granted in January
1998.
(4) Represents the regrant of a cancelled option originally granted in February
1997.
(5) Represents the regrant of a cancelled option originally granted in November
1995.
(6) Represents the regrant of a cancelled option originally granted in June
1995.
(7) Represents the regrant of a cancelled option originally granted in August
1994.
(8) On January 25, 1999, Mr. Murphy resigned from his position of Vice
President, Sales and Marketing with the Company.
(9) Represents the regrant of a cancelled option originally granted in April
1997.
(10) Represents the regrant of a cancelled option originally granted in June
1995.
(11) Represents the regrant of a cancelled option originally granted in May
1996.
(12) Represents the regrant of a cancelled option originally granted in May
1990.
(13) Represents the regrant of a cancelled option originally granted in
September 1989.
(14) Represents the regrant of a cancelled option originally granted in March
1989.
(15) Mr. Carter is no longer an employee of the Company.
(16) Mr. Rutka is no longer an employee of the Company.
19
<PAGE>
COMPARISON OF STOCKHOLDER RETURN
Set forth below is a line graph comparing the annual percentage change
in the cumulative total return on the Company's Common Stock with the cumulative
total return of (i) the S&P 500 and, (ii) a self-constructed peer group of
telecommunication companies that the Company considers to be peers and
competitors in the industry which is comprised of the following companies: ADC
Telecommunications, Inc., Adtran, Inc., Architel Systems Corporation, Clarify
Inc., Objective Systems Integrators, Inc., Pairgain Technologies, Inc., TSCI
Corporation, Tellabs, Inc., Teltrend Inc. and Westell Technologies, Inc. (the
"Peer Group"), for the period commencing March 29, 1994 and ending on December
31, 1998. The total stockholder returns of the companies comprising each Peer
Group have been weighted in accordance with their respective market
capitalizations.
COMPARISON OF CUMULATIVE TOTAL RETURN FROM MARCH 29, 1994, THROUGH
DECEMBER 31, 1998(1)
APPLIED DIGITAL ACCESS, INC., S&P 500, PEER GROUP (2)
[GRAPH]
<TABLE>
<CAPTION>
3/29/94 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Peer Group $ 100.00 $ 179.23 $ 294.45 $ 433.89 $465.70 $479.94
S&P 500 $ 100.00 $ 103.75 $ 142.74 $ 175.51 $234.07 $300.96
Applied Digital Access, Inc. $ 100.00 $ 211.46 $ 97.92 $ 45.83 $ 48.96 $ 21.88
</TABLE>
- ---------------------
(1) Assumes that $100.00 was invested on March 29, 1994, in the Company's
Common Stock and each index, and that all dividends were reinvested. No
dividends have been declared on the Company's Common Stock. Stockholder
returns over the indicated period should not be considered indicative of
future stockholder returns.
(2) The Peer Group is the same as the new peer group in the proxy statement
prepared for the 1998 Annual Meeting of Stockholders (the "1998 Peer
Group") except that it does not include Telco Systems, Inc. which was
acquired in June 1998 and ceased to be a separate corporate entity. Data
for the 1998 Peer Group is not available for the period ended December 31,
1998. Assuming $100.00 was invested in the 1998 Peer Group on March 29,
1994, that peer group had the following stockholder returns during the
period beginning on March 29, 1994 and ending on December 31, 1997: $100.00
on March 29, 1994; $179.23 on December 31, 1994; $288.58 on December 31,
1995; $426.10 on December 31, 1996; and $454.58 on December 31, 1997.
20
<PAGE>
ELECTION OF DIRECTORS
Management's nominees for election at the Annual Meeting of Stockholders to
the Board of Directors are Gary D. Cuccio, John F. Malone, Kenneth E. Olson,
Christopher B. Paisley, Peter P. Savage and Donald L. Strohmeyer. If elected,
the nominees will serve as directors until the Company's Annual Meeting of
Stockholders in 2000, and until their successors are elected and qualified. If a
nominee declines to serve or becomes unavailable for any reason, or if a vacancy
occurs before the election (although Management knows of no reason to anticipate
that this will occur), the proxies may be voted for such substitute nominee as
Management may designate.
If a quorum is present and voting, the six nominees for the positions of
directors receiving the highest number of votes will be elected. Abstentions and
broker non-votes will have no effect on the outcome of the vote. THE BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE NOMINEES NAMED ABOVE.
PROPOSAL TO AMEND 1998 EMPLOYEE STOCK PURCHASE PLAN
The Applied Digital Access, Inc. 1998 Employee Stock Purchase Plan was
adopted by the Board of Directors in March 1998 and approved by the Company's
Stockholders in May 1998. The 1998 Purchase Plan became effective on May 21,
1998. The 1998 Purchase Plan permits eligible employees to purchase share of the
Company's Common Stock at a discount through payroll deductions.
The Stockholders are now being asked to approve an amendment to increase by
300,000 shares the maximum aggregate number of shares issuable under the 1998
Purchase Plan. The Board of Directors believes that this amendment to the 1998
Purchase Plan is in the best interests of the Company and its stockholders
because providing employees of the Company with an opportunity to purchase
shares of Common Stock pursuant to the 1998 Purchase Plan should prove helpful
in attracting, retaining, and motivating valued employees.
SUMMARY OF THE PROVISIONS OF THE 1998 PURCHASE PLAN
The following summary of the 1998 Purchase Plan is qualified in its
entirety by the specific language of the 1998 Purchase Plan, a copy of which is
available to any stockholder upon request.
The 1998 Purchase Plan is intended to qualify as an "employee stock
purchase plan" under section 423 of the Internal Revenue Code of 1986, as
amended (the "Code"). Any employee of the Company or any present or future
parent or subsidiary corporation of the Company (including any director who is
also an employee) is eligible to participate in the 1998 Purchase Plan upon
completion of 90 days continuous service, so long as the employee is customarily
employed for at least 20 hours per week and more than five months in any
calendar year. However, employees of any subsidiary of the Company are eligible
to participate in the 1998 Purchase Plan only if the Company's Board of
Directors adopts a resolution approving such participation. Currently, employees
of the Company's Canadian subsidiary are not approved to participate in the 1998
Purchase Plan. No person who owns or holds options to purchase, or as a result
of participation in the 1998 Purchase Plan would own or hold options to
purchase, 5% or more of the total combined voting power or value of all classes
of stock of the Company is entitled to participate in the 1998 Purchase Plan. As
of March 31, 1999, approximately 130 employees were eligible to participate in
the 1998 Purchase Plan.
Each offering of Common Stock under the 1998 Purchase Plan is generally for
a period of twelve months (an "Offering Period"). Offering Periods under the
1998 Purchase Plan generally commence on or about July 1 of each year and end on
the next following June 30. At the end of each calendar quarter during the
Offering Period, shares are issued based on the payroll deductions accumulated
during that quarter. Participation in the 1998 Purchase Plan is limited to
eligible employees who authorize payroll deductions pursuant to the 1998
Purchase Plan. Such payroll deductions must be at least 1% but may not exceed
15% of an employee's compensation. Once an employee becomes a participant in the
1998 Purchase Plan, that employee will automatically participate in each
successive offering until such time as that employee withdraws from the 1998
Purchase Plan, becomes ineligible to participate in the 1998 Purchase Plan, or
his or her employment ceases.
21
<PAGE>
The purchase price per share at which the shares of the Company's Common
Stock are sold in an offering generally will be equal to 85% of the lesser of
the fair market value of the Common Stock on (a) the first day of the Offering
Period (the "Entry Date"), or (b) the last business day of the quarter. However,
if a participant commences participation in the offering period after the first
day of the offering period, his or her Entry Date will be the date on which he
or she commenced such participation, and the price described in clause (a) of
the preceding sentence will be the higher of the fair market value if a share of
the Company's stock on his or her Entry Date or the first day of the Offering
Period. As of March 31, 1999, the closing price of the Company's Common Stock,
as reported on the Nasdaq National Market, was $2.25 per share. Subject to
certain limitations, the number of shares of the Company's Common Stock a
participant purchases in an Offering Period is determined by dividing the total
amount of payroll deductions withheld from the participant's compensation during
the quarter by the purchase price per share. Participants may not purchase
shares of the Company's Common Stock having a fair market value exceeding
$25,000 in any calendar year (measured by the fair market value of the Company's
Common Stock on the Entry Date of the Offering Period in which the shares are
purchased). Any cash not applied to the purchase of shares will be returned to
the participant unless the amount of such cash is less than the amount necessary
to purchase a whole share of Common Stock, in which case the Company may
establish procedures to apply the remaining amount to a subsequent quarter.
A participant may withdraw from an offering at any time without affecting
his or her eligibility to participate in future offerings. However, once a
participant withdraws from an offering, that participant may not again
participate in the same offering.
The Board of Directors (or any committee of the Board appointed to
administer the 1998 Purchase Plan) may at any time amend or terminate the 1998
Purchase Plan, except that the approval of the Company's stockholders is
required within twelve months of the adoption of any amendment increasing the
number of shares authorized for issuance under the 1998 Purchase Plan, or
changing the definition of the corporations which may be designated by the Board
as corporations whose employees may purchase shares of the Company's Common
Stock under the 1998 Purchase Plan. The 1998 Purchase Plan will terminate at the
time determined by the Board of Directors or when all the shares reserved for
issuance under the 1998 Purchase Plan have been issued, whichever occurs first.
SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES OF THE 1998 PURCHASE PLAN
The following summary is intended only as a general guide as to the United
States federal income tax consequences under current law of participation in the
1998 Purchase Plan and does not attempt to describe all potential tax
consequences. Furthermore, the tax consequences are complex and subject to
change, and a taxpayer's particular situation may be such that some variation of
the described rules is applicable.
Generally, a participant recognizes no taxable income either as a result of
becoming a participant in the 1998 Purchase Plan or purchasing shares of the
Company's Common Stock under the 1998 Purchase Plan.
The tax consequences of a disposition of 1998 Purchase Plan shares vary
depending on the period that such stock is held before its disposition. If a
participant disposes of shares purchased under the 1998 Purchase Plan within two
years from the Entry Date or within one year from the date of purchase (a
"disqualifying disposition"), the participant will realize ordinary income in
the year of such disposition equal to the amount by which the fair market value
of the shares on the date the shares were purchased exceeds the purchase price.
The amount of the ordinary income will be added to the participant's basis in
the shares, and any additional gain or resulting loss recognized on the
disposition of the shares will be a capital gain or loss. A capital gain or loss
will be long term if the participant's holding period is more than twelve
months.
If the participant disposes of shares purchased under the 1998 Purchase
Plan at least two years after the Entry Date and at least one year after the
date of purchase, the participant will realize ordinary income in the year of
disposition equal to the lesser of (i) the excess of the fair market value of
the shares on the date of disposition over the purchase price or (ii) 15% of the
fair market value of the shares on the Entry Date. The amount of any ordinary
income will be added to the participant's basis in the shares, and any
additional gain recognized upon the disposition after such basis adjustment will
be a long term capital gain. If the fair market value of the shares on the date
of disposition is less than the purchase price, there will be no ordinary income
and any loss recognized will be a long term capital loss.
22
<PAGE>
The Company will generally be entitled to a deduction in the year of a
disqualifying disposition equal to the amount of ordinary income recognized by
the participant as a result of the disposition, except to the extent such
deduction is limited by applicable provisions of the Code or the regulations
thereunder. In all other cases, no deduction is allowed to the Company.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of a majority of the votes cast at the Annual Meeting
of Stockholders, at which a quorum is present and voting, either in person or by
proxy, is required for approval of this proposal. Abstentions will have the same
effect as a negative vote. Broker non-votes, on the other hand, will have no
effect on the outcome of the vote.
The Board of Directors believes that the amendment to the 1998 Purchase
Plan is in the best interests of the stockholders and the Company for the
reasons stated above. THEREFORE, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A
VOTE "FOR" APPROVAL OF THE AMENDMENT TO THE 1998 EMPLOYEE STOCK PURCHASE PLAN.
RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of the Company has selected PricewaterhouseCoopers,
LLP, as independent accountants to audit the financial statements of the Company
for the fiscal year ending December 31, 1999. A representative of
PricewaterhouseCoopers, LLP is expected to be present at the Annual Meeting with
the opportunity to make a statement if the representative desires to do so, and
is expected to be available to respond to appropriate questions.
The affirmative vote of a majority of the votes cast at the Annual Meeting
of Stockholders, at which a quorum is present and voting, either in person or by
proxy, is required for approval of this proposal. Abstentions and broker
non-votes will have no effect on the outcome of the vote. THE BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPOINTMENT OF PRICEWATERHOUSECOOPERS,
LLP, AS THE COMPANY'S INDEPENDENT ACCOUNTANTS FOR THE FISCAL YEAR ENDING
DECEMBER 31, 1999.
STOCKHOLDER PROPOSALS TO BE PRESENTED
AT NEXT ANNUAL MEETING
Company has an advance notice provision in its bylaws for stockholder
business to be presented at annual meetings of stockholders. This provision
states that in order for stockholder business to be properly brought before a
meeting by a stockholder, such stockholder must have given timely notice in
writing to the Secretary of the Company. In order to be timely, a stockholder
proposal for the next Annual Meeting of Stockholders of the Company must be
received at the Company's offices at 9855 Scranton Road, San Diego, California,
92121, not later than December 13, 1999.
Stockholder proposals to be included in the Company's proxy statement for
the next Annual Meeting of Stockholders of the Company must be received by the
Company not later than December 13, 1999 and satisfy conditions established by
the SEC for stockholder proposals to be included in the Company's proxy
statement for that meeting.
23
<PAGE>
TRANSACTION OF OTHER BUSINESS
At the date of this Proxy Statement, the only business which the Board of
Directors intends to present or knows that others will present at the meeting is
as set forth above. If any other matter or matters are properly brought before
the meeting, or any adjournment thereof, it is the intention of the persons
named in the accompanying form of proxy to vote the proxy on such matters in
accordance with their best judgment.
By Order of the Board of Directors
JAMES L. KEEFE
SECRETARY
April 12, 1999
24
<PAGE>
AMENDMENT OF THE
APPLIED DIGITAL ACCESS, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
Article VI of the Applied Digital Access, Inc. 1998 Employee Stock
Purchase Plan shall be amended in its entirety to read as follows:
"VI. STOCK SUBJECT TO PLAN
A. The maximum number of shares of Common Stock which may be issued
under the Plan shall be 600,000 shares of Common Stock (subject to adjustment
under Section VI.B below).
B. In the event any change is made to the Company's outstanding
Common Stock by reason of any stock dividend, stock split, combination of
shares or other change affecting such outstanding Common Stock as a class
without receipt of consideration, then appropriate adjustments shall be made
by the Plan Administrator to (i) the class and maximum number shares issuable
over the term of the Plan, (ii) the class and maximum number of shares
purchasable per Participant during any one option period and (iii) the class
and number of shares and the price per share in effect under each purchase
right at the time outstanding under the Plan. Such adjustments shall be
designed to preclude the dilution or enlargement of rights and benefits under
the Plan."
IN WITNESS WHEREOF, the undersigned Secretary of Applied Digital Access,
Inc. certifies that the foregoing amendment to the 1998 Employee Stock
Purchase Plan was duly adopted by the Board of Directors on March 12, 1999.
/s/ James L. Keefe
-----------------------------------
(James L. Keefe)
Secretary
<PAGE>
- --------------------------------------------------------------------------------
PROXY APPLIED DIGITAL ACCESS, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints Donald L. Strohmeyer and James L. Keefe, and
each of them, with full power of substitution to represent the undersigned
and to vote all of the shares of stock in Applied Digital Access, Inc. (the
"Company") which the undersigned is entitled to vote at the Annual Meeting of
Stockholders of the Company to be held at the Company in San Diego,
California on Wednesday, May 12, 1999 at 9:00 a.m., local time, and at any
adjournment thereof (1) as hereinafter specified upon the proposals listed on
the reverse side and as more particularly described in the Company's Proxy
Statement, receipt of which is hereby acknowledged, and (2) in their
discretion upon such other matters as may properly come before the meeting.
THE SHARES REPRESENTED HEREBY SHALL BE VOTED AS SPECIFIED. IF NO SPECIFICATION
IS MADE, SUCH SHARES SHALL BE VOTED FOR PROPOSALS 1, 2, AND 3.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
- --------------------------------------------------------------------------------
TRIANGLE FOLD AND DETACH HERE TRIANGLE
<PAGE>
- --------------------------------------------------------------------------------
Please mark
your votes as /X/
indicated in
this example
A vote FOR the following proposals is recommended by the Board of Directors:
FOR all nominees listed WITHHOLD AUTHORITY
below (except for indicated to vote for all nominees
to the contrary below). listed below.
1. ELECTION OF DIRECTORS: / / / /
Nominees: Gary D. Cuccio,
John F. Malone, Kenneth E. Olson, Christopher B. Paisley,
Peter P. Savage, Donald L. Strohmeyer.
INSTRUCTION: TO WITHHOLD AUTHORITY to vote for any individual nominee(s)
write that nominee's(s') name in the space provided below:
- --------------------------------------------------------------------------
2. To approve the amendment to the Company's 1998 Employee Stock
Purchase Plan to increase the number of shares reserved for issuance
thereunder by 300,000.
FOR AGAINST ABSTAIN
/ / / / / /
3. To approve the selection of PricewaterhouseCoopers LLP as the
Company's independent public accountants for the year ending
December 31, 1999.
FOR AGAINST ABSTAIN
/ / / / / /
Even if you are planning to attend the meeting in person, you are urged to
sign and mail the Proxy in the return envelope so that your stock may be
represented at the meeting.
Sign exactly as your name(s) appears on your stock certificates. If shares
of stock stand on record in the names of two or more persons or in the name
of husband and wife, whether as joint tenants or otherwise, both or all of
such persons should sign the above Proxy. If shares of stock are held of
record by a corporation, the Proxy should be executed by the President or
Vice President and the Secretary or Assistant Secretary, and the corporate
seal should be affixed thereto. Executors or administrators or other
fiduciaries who execute the above Proxy for a deceased stockholder should
give their title. Please date the Proxy.
Signature(s) Date
--------------------------------------------- ----------
- -------------------------------------------------------------------------------
TRIANGLE FOLD AND DETACH HERE TRIANGLE
