-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F/0NU2Ceiw4dWeEfCt7iw/sQWoZ75T+S348Qn7qR0DJ4vn2K9vcgcKiN34YQJ440 umeTb62wBrE2k2GoEyM59g== 0000891618-95-000602.txt : 19951019 0000891618-95-000602.hdr.sgml : 19951019 ACCESSION NUMBER: 0000891618-95-000602 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19951116 FILED AS OF DATE: 19951018 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: OCTEL COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000792723 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 770029449 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: DEF 14A SEC ACT: 1934 Act SEC FILE NUMBER: 000-16588 FILM NUMBER: 95581330 BUSINESS ADDRESS: STREET 1: 890 TASMAN DR CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4083212000 DEF 14A 1 DEFINITIVE PROXY STATEMENT 1 SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. ) Filed by the registrant /X/ Filed by a party other than the registrant / / Check the appropriate box: / / Preliminary proxy statement /X/ Definitive proxy statement / / Definitive additional materials / / Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12 OCTEL COMMUNICATIONS CORPORATION ---------------------------------------------------- Name of Registrant as Specified in its Charter) OCTEL COMMUNICATIONS CORPORATION ---------------------------------------------------- (Name of Person(s) Filing Proxy Statement) Payment of filing fee (Check the appropriate box): / / $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1) or 14a-6(j)(2). / / $500 per party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). / / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: - -------------------------------------------------------------------------------- (2) Aggregate number of securities to which transaction applies: - -------------------------------------------------------------------------------- (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11:1 - -------------------------------------------------------------------------------- (4) Proposed maximum aggregate value of transaction: - -------------------------------------------------------------------------------- /X/ 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: $125 (2) Form, schedule or registration statement no.: Schedule 14A (3) Filing party: Octel Communications Corporation (4) Date filed: September 28, 1995 (1) Set forth the amount on which the filing fee is calculated and state how it was determined. 2 OCTEL COMMUNICATIONS CORPORATION NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON NOVEMBER 16, 1995 TO THE STOCKHOLDERS: NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Octel Communications Corporation (the "Company") will be held on November 16, 1995 at 2:00 p.m., local time, at the Company's principal offices at 1001 Murphy Ranch Road, Milpitas, California 95035 for the following purposes: 1. To elect seven directors to serve until the next annual meeting of stockholders and until their successors are duly elected. 2. To amend the Company's 1985 Incentive Stock Plan (the "Option Plan") to extend the term of the Option Plan for an additional ten-year period and change the name of the Option Plan to the "1995 Incentive Stock Plan." 3. To approve an amendment to the Company's 1987 Employee Stock Purchase Plan (the "Purchase Plan") increasing the number of shares of Common Stock reserved for issuance by 475,000 shares. 4. To approve an amendment to the Company's Certificate of Incorporation to increase the authorized number of shares of Common Stock of the Company to 100,000,000. 5. To consider a stockholder proposal by the State of Wisconsin Investment Board requiring the Board of Directors to adopt a policy prohibiting the repricing of stock options without stockholder approval. 6. To ratify the appointment of KPMG Peat Marwick LLP as independent auditors of the Company for the fiscal year ending June 30, 1996. 7. To transact such other business as may properly come before the meeting or any adjournment thereof. Only stockholders of record at the close of business on September 19, 1995 are entitled to notice of and to vote at the meeting. All stockholders are cordially invited to attend the meeting in person. However, to assure your representation at the meeting, you are urged to sign and return the enclosed proxy as promptly as possible in the postage prepaid envelope enclosed for that purpose. Any stockholder attending the meeting may vote in person even if the stockholder has previously returned a proxy. By Order of the Board of Directors Derek S. Daley, Secretary Milpitas, California October 10, 1995 3 OCTEL COMMUNICATIONS CORPORATION PROXY STATEMENT FOR 1995 ANNUAL MEETING OF STOCKHOLDERS ------------------------ INFORMATION CONCERNING SOLICITATION AND VOTING GENERAL The enclosed Proxy is solicited on behalf of the Board of Directors of Octel Communications Corporation (the "Company") for use at the Annual Meeting of Stockholders to be held on Thursday, November 16, 1995 at 2:00 p.m., local time, or at any adjournment thereof, for the purposes set forth herein and in the accompanying Notice of Annual Meeting of Stockholders. The Annual Meeting will be held at the Company's principal offices at 1001 Murphy Ranch Road, Milpitas, California 95035. The proxy solicitation materials were mailed on or about October 17, 1995 to all stockholders entitled to vote at the meeting. RECORD DATE AND SHARE OWNERSHIP Stockholders of record at the close of business on September 19, 1995 (the "Record Date") are entitled to notice of the meeting and to vote at the meeting. At the Record Date, 24,593,596 shares of the Company's Common Stock were issued and outstanding and held of record by approximately 3,247 registered stockholders. Each stockholder is entitled to one vote for each share held. No shares of the Company's Preferred Stock were outstanding. See "Security Ownership of Certain Beneficial Owners and Management" below for information regarding beneficial owners of more than five percent of the Company's Common Stock. REVOCABILITY OF PROXIES Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before its use by delivering to the Secretary of the Company a written notice of revocation or a duly executed proxy bearing a later date or by attending the meeting and voting in person. VOTING AND SOLICITATION Each stockholder voting for the election of directors (Proposal No. 1) may cumulate his votes, giving one candidate a number of votes equal to the number of directors to be elected multiplied by the number of shares which the stockholder is entitled to vote, or distributing the stockholder's votes on the same principle among as many candidates as the stockholder chooses, provided that votes may not be cast for more than seven candidates. However, no stockholder shall be entitled to cumulate votes unless the candidates' names have been placed in nomination prior to the voting and the stockholder, or any other stockholder, has given notice at the meeting prior to the voting of the intention to cumulate the stockholder's votes. Any such notice should be directed to the Inspector of Elections at the meeting. On all other matters (Proposals No. 2-6), each share has one vote. This solicitation of proxies is made by the Company, and all related costs will be borne by the Company. The Company has retained Chemical Mellon to aid in the solicitation of proxies from brokers, banks and other institutional nominees. The fees and expenses of such firm are not expected to exceed $11,000. In addition, the Company may reimburse brokerage firms and other persons representing beneficial owners of shares for their expenses in forwarding solicitation material to such beneficial owners. Original solicitation of proxies by mail may be supplemented by telephone, telegraph or personal solicitations by directors, officers or employees of the Company. No additional compensation will be paid for any such services. 4 QUORUM; ABSTENTIONS; BROKER NON-VOTES The required quorum for the transaction of business at the Annual Meeting is a majority of the votes eligible to be cast by holders of shares of Common Stock issued and outstanding on the Record Date. Shares that are voted "FOR," "AGAINST" or "WITHHELD FROM" a matter are treated as being present at the meeting for purposes of establishing a quorum and are also treated as shares entitled to vote at the Annual Meeting (the "Votes Cast") with respect to such matter. While there is no definitive statutory or case law authority in Delaware as to the proper treatment of abstentions, the Company believes that abstentions should be counted for purposes of determining both (i) the presence or absence of a quorum for the transaction of business and (ii) the total number of Votes Cast with respect to a proposal (other than the election of directors). In the absence of a controlling precedent to the contrary, the Company intends to treat abstentions in this manner. Accordingly, abstentions will have the same effect as a vote against the proposal. In a 1988 Delaware case, Berlin v. Emerald Partners, the Delaware Supreme Court held that, while broker non-votes should be counted for purposes of determining the presence or absence of a quorum for the transaction of business, broker non-votes should not be counted for purposes of determining the number of Votes Cast with respect to the particular proposal on which the broker has expressly not voted. Accordingly, the Company intends to treat broker non-votes in this manner. Thus, a broker non-vote will not have any effect on the outcome of the voting on a proposal. DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS Proposals of stockholders of the Company which are intended to be presented by such stockholders at the Company's 1996 Annual Meeting of Stockholders must have been received by the Company no later than June 13, 1996 in order that they may be considered for inclusion in the proxy statement and form of proxy relating to that meeting. 2 5 PROPOSAL NO. 1 -- ELECTION OF DIRECTORS NOMINEES A board of seven directors is to be elected at the Annual Meeting of Stockholders. Unless otherwise instructed, the proxy holders will vote the proxies received by them for the Company's nominees named below. In the event that any nominee of the Company is unable or declines to serve as a director at the time of the Annual Meeting of the Stockholders, the proxies will be voted for any nominee who shall be designated by the present Board of Directors to fill the vacancy. It is not expected that any nominee will be unable or will decline to serve as a director. In the event that additional persons are nominated for election as directors, the proxy holders intend to vote all proxies received by them in such a manner (in accordance with cumulative voting) as will assure the election of as many of the nominees listed below as possible, and in such event the specific nominees to be voted for will be determined by the proxy holders. The term of office of each person elected as a director will continue until the next Annual Meeting of Stockholders or until a successor has been elected and qualified. The nominees, and certain information about them as of the Record Date, are set forth below:
DIRECTOR NAME OF NOMINEE AGE POSITION(S) SINCE - ------------------------------------------ --- ------------------------------------- -------- Robert Cohn............................... 46 Chairman of the Board, President and 1982 Chief Executive Officer Anson M. Beard, Jr........................ 59 Director 1994 Leo J. Chamberlain........................ 65 Director 1989 Deborah A. Coleman........................ 42 Director 1994 Nathaniel de Rothschild................... 49 Director 1994 Dag Tellefsen............................. 53 Director 1982 W. Michael West........................... 45 Vice Chairman of the Board 1995
Mr. Cohn, a founder of the Company, served as its President and Chief Executive Officer from the Company's inception in 1982 until October 1990, and then resumed those positions in November 1993. Mr. Cohn has served as a director from the Company's inception and, in June 1990, the Board of Directors appointed Mr. Cohn Chairman of the Board. Prior to founding the Company, he was employed by Acurex Corporation, a manufacturer of microprocessor-based measurement and control systems, from 1979 to 1982. From 1976 to 1979, he was employed by McKinsey & Co., Inc., a management consulting company. Mr. Cohn holds a B.S. in Mathematics and Computer Science from the University of Florida and an M.B.A. from Stanford University. Mr. Cohn is also a director of Global Village Communication, Inc., a manufacturer of communications hardware and software for personal computers. Mr. Beard has served as a director of the Company since June 1994. He joined Morgan Stanley & Co. Incorporated in May 1977, and from 1980 until his retirement in February 1994 served as Managing Director of its Worldwide Equity Division. In 1986, he was appointed as a director of Morgan Stanley Group, the holding company for Morgan Stanley & Co. Incorporated. He retains the position of Advisory Director of Morgan Stanley & Co. Incorporated. Mr. Beard is also a member of the Wheaton College Board of Trustees, and from 1990 to 1992 was a director of the National Association of Securities Dealers, Inc. (the "NASD"), serving as Vice Chairman of the NASD in 1992. Mr. Chamberlain has served as a director of the Company since March 1989. Until ROLM's acquisition by IBM in 1984, Mr. Chamberlain served on the Board of Directors of ROLM, where he had been employed as Executive Vice President until his retirement in 1982. Mr. Chamberlain is also a director of KLA Instruments Corporation, a manufacturer of semiconductor inspection equipment. Ms. Coleman has served as a director of the Company since March 1994. Since June 1994, Ms. Coleman has been Chairman and Chief Executive Officer of Merix Corporation, a manufacturer of technologically advanced components for sophisticated electronic equipment. From April 1993 to June 1994, Ms. Coleman 3 6 served as Vice President of Materials Operations for Tektronix, Inc., a worldwide high technology equipment design and manufacturing firm. From June 1985 to April 1993, she held officer-level positions with Apple Computer, Inc., including Vice President -- World Wide Operations and Vice President -- Chief Financial Officer. Ms. Coleman has been a director of Software Publishing Corporation, a publisher of personal computer software, since November 1991. Mr. de Rothschild has served as a director of the Company since June 1994. He is President of Nathaniel de Rothschild Holdings Ltd., a private investment company that he founded in 1988. Mr. de Rothschild is also Chairman of the Board of Global Asset Management (USA) Inc., the U.S. subsidiary of Global Asset Management Ltd., a worldwide money management firm, and a director of St. James Place Capital, Plc. Mr. Tellefsen has served as a director of the Company since September 1982. He is a general partner of Glenwood Management and Glenwood II Management Corporation, investment management firms and the general partners of Glenwood Ventures I and Glenwood Ventures II, respectively, which are venture capital funds. He has been with Glenwood Management since 1982. Mr. Tellefsen is also a director of KLA Instruments Corporation, a manufacturer of semiconductor inspection equipment, Arix Computer Corporation, a manufacturer of symmetrical multiprocessing UNIX systems, and Iwerks Entertainment, Inc., a producer of out-of-home entertainment systems and software. Mr. West serves as Vice Chairman of the Company. He joined the Company in September 1986 as Executive Vice President and was responsible for sales and customer service. From 1979 to September 1986, Mr. West was employed by ROLM, serving for three years during this period as President of an operating subsidiary of ROLM and then as General Manager of its National Sales Division. Mr. West attended Southern Illinois University. John Freidenrich, a director since January 1986, and Robert Hawk, a director since March 1987, will not be standing for reelection this year. Both have served the Company very well during their tenure and contributed to the Company's success and growth. The Company appreciates the enormous service that each of these board members has given and will miss their presence and contributions. The Company intends to fill one or both of these seats over the next few years. There are no family relationships between directors or executive officers of the Company. VOTE REQUIRED The seven nominees receiving the highest number of affirmative votes of the shares entitled to be voted for them shall be elected as directors. Votes withheld from any director are counted for purposes of determining the presence or absence of a quorum for the transaction of business, but have no legal effect under Delaware law. 4 7 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership as of the Record Date of the Company's Common Stock as to (i) each director, (ii) each of the executive officers listed in the Summary Compensation Table below, (iii) all executive officers and directors as a group and (iv) each person known by the Company to beneficially own five percent or more of the outstanding shares of Common Stock.
DIRECTORS, EXECUTIVE OFFICERS AND NO. OF SHARES FIVE PERCENT STOCKHOLDERS(1) BENEFICIALLY OWNED PERCENTAGE - --------------------------------------------------------------- ------------------ ---------- Capital Guardian Trust......................................... 1,751,000 7.1% 533 S. Hope Street Los Angeles, CA 90071 Capital Research & Management.................................. 1,925,000 7.8% 333 S. Hope Street Los Angeles, CA 90071 State of Wisconsin Investment Board............................ 2,371,000 9.6% 121 East Wilson Street Madison, WI 53702 Anson M. Beard, Jr.(2)......................................... 20,000 * Donald L. Campodonico(3)....................................... 41,612 * Leo J. Chamberlain(4).......................................... 26,603 * Robert Cohn(5)................................................. 708,567 2.8% Deborah A. Coleman(6).......................................... 11,000 * Derek S. Daley(7).............................................. 71,587 * John Freidenrich(8)............................................ 63,371 * Robert C. Hawk(9).............................................. 49,155 * David Ladd(10)................................................. 138,144 * Nathaniel de Rothschild(11).................................... 6,080 * Dag Tellefsen(12).............................................. 22,000 * W. Michael West(13)............................................ 191,935 * All Directors and executive officers as a group (18 1,488,810 5.9% persons)(14).................................................
- --------------- *Represents less than 1% of the outstanding shares of Common Stock. (1) The persons named in the table, to the Company's knowledge, have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable and the information contained in the footnotes hereunder. (2) Includes 5,000 shares issuable upon exercise of options that are exercisable within 60 days of the Record Date. (3) Includes 39,200 shares issuable upon exercise of options that are exercisable within 60 days of the Record Date. (4) Includes 21,000 shares issuable upon exercise of options that are exercisable within 60 days of the Record Date. (5) Includes shares held of record by a trust for the benefit of Mr. Cohn, his wife and their children. Also includes 376,330 shares issuable upon exercise of options which are exercisable within 60 days of the Record Date. 5 8 (6) Includes 5,000 shares issuable upon exercise of options that are exercisable within 60 days of the Record Date. (7) Includes 43,805 shares issuable upon exercise of options that are exercisable within 60 days of the Record Date. (8) Represents holdings by the Freidenrich Family Trust of 37,396 shares and by the Freidenrich Family Partnership (of which the Freidenrich Family Trust is a 50% beneficial owner) of 3,975 shares. Includes 21,000 shares issuable upon exercise of options which are exercisable within 60 days of the Record Date. (9) Includes 21,000 shares issuable upon exercise of options that are exercisable within 60 days of the Record Date. (10) Includes 45,000 shares issuable upon exercise of options that are exercisable within 60 days of the Record Date. (11) Includes 5,000 shares issuable upon exercise of options that are exercisable within 60 days of the Record Date. (12) Includes 21,000 shares issuable upon exercise of options that are exercisable within 60 days of the Record Date. (13) Includes 109,065 shares issuable upon exercise of options that are exercisable within 60 days of the Record Date. (14) Includes 848,035 shares issuable upon exercise of options that are exercisable within 60 days of the Record Date. As of the Record Date, the per share market value of the Company's Common Stock was $40.25, based on the closing price on that date on The Nasdaq National Market. BOARD MEETINGS AND COMMITTEES The Board of Directors of the Company held a total of seven meetings during the fiscal year ended June 30, 1995. The Audit Committee held seven meetings, the Compensation Committee held four meetings and the Nominating Committee held one meeting during the fiscal year ended June 30, 1995. Each director attended at least 75% of Board and, where applicable, committee meetings held during the fiscal 1995. Messrs. Beard and Freidenrich and Ms. Coleman served on the Audit Committee of the Board of Directors until the end of fiscal 1995. As of the beginning of fiscal 1996, Ms. Coleman and Mr. Beard serve on the Audit Committee. The purpose of the Audit Committee is to review with the Company's management and independent auditors the financial statements and internal financial reporting system and controls of the Company, recommend resolutions for any dispute between the Company's management and its auditors and review other matters relating to the relationship of the Company with its auditors. Messrs. Chamberlain, de Rothschild and Tellefsen and Ms. Coleman currently serve on the Compensation Committee. The purpose of the Compensation Committee is to review and approve the salaries of the Company's executive officers and certain highly compensated employees for each fiscal year. The compensation of the President and Chief Executive Officer of the Company remains subject to approval by the full Board of Directors. Messrs. Beard, Freidenrich, de Rothschild and Tellefsen served on the Nominating Committee until the end of fiscal 1995. As of the beginning of fiscal 1996, Messrs. Beard, de Rothschild and Tellefsen serve on the Nominating Committee. The purpose of the Nominating Committee is to develop criteria for nominating new members of the Board and to identify potential candidates for such nomination. The Nominating Committee will consider stockholder recommendations for new directors. However, the final determination of whether a candidate will be nominated to become a member of the Company's Board of Directors is reserved for the Nominating Committee. Any suggestions may be submitted in writing, attention "Nominating Committee of the Board of Directors," at the Company's principal offices. 6 9 COMPENSATION OF DIRECTORS During fiscal 1995, each of the directors was compensated for participating in Board and committee meetings as follows: $5,000 annual fee, provided that the director attended at least five of the six non-telephonic meetings of the Board during the fiscal year; $1,500 for each meeting of the Board which the director attended in person; $250 for each meeting of the Board which the director attended via telephone; $500 for each meeting of a committee of the board (except the Stock Option Committee) which the director attended in person; and $500 per year for each member of the Stock Option Committee. In addition, the Company reimburses all directors for travel and other necessary business expenses incurred in fulfilling their duties as directors. Directors also receive stock options granted pursuant to the 1988 Directors' Stock Option Plan. See "1988 Directors' Stock Option Plan" below. CERTAIN TRANSACTIONS Sales to U.S. West were approximately $22.9 million, 4.8% of the Company's total net revenues, during the Company's fiscal year ended June 30, 1995. Robert C. Hawk, a director of the Company who is not standing for reelection this year, is an executive officer of U.S. West. Based on its sales terms and prices for similar products to similar companies (RBOCs), the Company believes that sales to U.S. West were made on an arms' length basis. Sales to Hewlett-Packard Company, a holder of more than 5% of the Company's Common Stock for part of the fiscal year ended June 30, 1995, were approximately $3.1 million, 0.7% of the Company's total net revenues, during the year. Based on its sales terms and prices for similar products to similar companies, the Company believes that sales to Hewlett-Packard Company were made on an arms' length basis. In November 1993, prior to merging with the Company, VMX, Inc. ("VMX") loaned David Ladd, an officer of the Company, $100,000 for personal use pursuant to a promissory note currently secured by 8,000 shares of the Company's Common Stock and due in four years with interest at the Bank of America prime rate plus one percent. The note was repaid in full on September 27, 1994. In December 1994, the Company loaned $1,019,027 to Robert Cohn, an executive officer and director of the Company, in connection with the exercise of and payment of taxes regarding an incentive stock option to purchase 75,000 shares of Common Stock at $11.125 per share, with interest payable at a rate of 6.66%, compounded semi-annually, and a term of three years. The loan is secured by 50,952 shares of the Company's Common Stock having a market value of $2,050,818 at September 19, 1995. In February 1995, the Company loaned $267,000 to Derek S. Daley, an executive officer of the Company, in connection with the exercise of an incentive stock option to purchase 24,000 shares of Common Stock at $11.125 per share, with interest payable at a rate of 7.43%, compounded annually, and a term of three years. The loan is secured by 12,420 shares of the Company's Common Stock having a market value of $499,905 at September 19, 1995. As of September 19, 1995, the total amount outstanding on Mr. Cohn's notes was $1,070,126 and the total amount outstanding on Mr. Daley's note was $279,066. The stock option agreements between the Company and certain of its officers and key employees provide for full acceleration of exercisability if their employment is terminated or their compensation is reduced in connection with a change of control of the Company. See "Compensation Committee Report -- Chairman and CEO Compensation" and "Proposal No. 2 -- Approval of Amendment Extending the Term of the 1985 Incentive Stock Plan -- Terms Of Options." The Company has entered into indemnification agreements with each of its directors and officers. Such agreements require the Company to indemnify such individuals to the full extent permitted by Delaware law if certain claims are brought against them in their capacities with the Company. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company's executive officers and directors and persons who own more than ten percent of a registered class of the Company's equity securities to file reports of ownership on Form 3 and changes in ownership on Form 4 or 7 10 Form 5 with the Securities and Exchange Commission (the "SEC"). Such officers, directors and ten percent stockholders are also required by SEC rules to furnish the Company with copies of all Section 16(a) reports they file. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that Forms 5 have been filed for such persons as required, the Company believes that, during the year ended June 30, 1995, all reporting persons complied with Section 16(a) filing requirements applicable to them. COMPENSATION COMMITTEE REPORT The following is the Report of the Compensation Committee of the Company, describing the compensation policies and rationale applicable to the Company's executive officers with respect to the compensation paid to such executive officers for the year ended June 30, 1995. The information contained in the report shall not be deemed to be "soliciting material" or to be "filed" with the SEC nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Exchange Act except to the extent that the Company specifically incorporates it by reference into such filing. COMPENSATION COMMITTEE REPORT The Compensation Committee (the "Committee") of the Board of Directors of Octel Communications Corporation determines the Company's executive compensation policies. The Committee is comprised of four non-employee directors. The Chairman and CEO participates as a non-voting member. After evaluating management's performance, the Committee recommends compensation programs and pay levels to the full Board for approval. COMPENSATION PHILOSOPHY The goals of the executive compensation program are to attract, retain and reward executive officers who contribute to the success of the Company. Compensation opportunities are aligned with the Company's business objectives. The compensation programs are designed to motivate executive officers to meet annual corporate performance goals and enhance long-term stockholder value. In designing and administering the individual elements of the executive compensation program, the Committee strives to balance short- and long-term incentive objectives and use prudent judgment in establishing performance criteria, evaluating performance and determining actual incentive awards. Using the assistance of an independent compensation consulting firm, the Committee regularly evaluates the competitiveness and appropriateness of the Company's executive compensation program by comparing its pay practices with other companies in the industry. For this comparison, compensation levels are compared to those of a select group of similar high-technology companies with approximately the same market capitalization, revenues and growth pattern as the Company. The comparison group is subject to occasional changes as the Company or the selected companies change their focus, merge or are acquired, or as new companies emerge. Sales growth, operating income, P/E ratio, compound annual growth rate and market capitalization are evaluated to ensure the comparative companies have successful track records. COMPENSATION VEHICLES The Company's executive compensation program includes base salary, annual incentive and long-term incentive compensation components. BASE SALARY The Company reviews base salaries annually for market competitiveness. In determining competitive levels, the job responsibilities of each executive are matched with like jobs in the comparison group. Individual 8 11 base salary increases may vary and reflect individual performance. This allows the Company to attract and retain the key employees necessary to meet its business objectives and enhance stockholder value. As a cost-containment measure, fiscal year 1996 base salary increases for the executive officers were deferred for six months and will be reviewed again in January 1996. ANNUAL INCENTIVE PLAN The annual incentive portion of the 1995 executive compensation program provided cash rewards based on achievement of corporate financial goals and corporate business objectives. In 1995, the incentive target per individual was defined as a percentage of his or her base compensation. The annual incentive was based on the Company's achievement of revenue, operating income and customer satisfaction objectives and the Company's achievement of certain business objectives approved by the Board. The Company reviews the incentive targets annually for market competitiveness based on job level and responsibilities. The Company's philosophy is to leverage total compensation to provide competitive pay for the achievement of aggressive performance measures. The amount of compensation actually paid under this plan is variable or "at risk," because it is tied directly to achievement of specific corporate performance goals. In fiscal year 1995, all named executives received a cash award for the corporate performance portion of the Annual Incentive Plan. The Company met 98.7% of its revenue goals and 86.2% of its operating income goals, which (because the calculation of bonus payments for corporate financial achievement has aggressive downside slope and is further modified based on achievement of corporate business and customer satisfaction objectives) translated to bonus payments equal to 80% of the target bonus being paid. The Bonus Plan for fiscal year 1996 will have similar financial measures of revenue and operating income and, for certain executives, will be partially based on the performance of their respective business units. A portion of the bonus (80% of the target bonus percentage) will be paid on a semi-annual basis and will be based on these financial measures. The remaining 20% of the target bonus percentage will be paid annually and will be based on achievement of objectives regarding market share, customer satisfaction and performance on key corporate projects. CHAIRMAN AND CEO COMPENSATION The Committee bases compensation of all officers (except the Chairman and CEO) on the policies and procedures described above. The Chairman's base salary is $250,000 per year, well below competitive norms for a company of comparable size. He has no annual incentive bonus. The greatest portion of the Chairman and CEO's compensation is directly associated with the long-term capital growth of the Company. Although Mr. Cohn was not granted any options in fiscal 1995, he was, concurrent with his appointment to the position of Chairman and Chief Executive Officer of the Company in fiscal 1994, granted the following options to purchase Common Stock of the Company: 350,000 shares at $25.00 per share; 200,000 shares at $35.00 per share; and 200,000 shares at $50.00 per share. These options become exercisable as to 20% of the total shares under option one year after the date of grant and up to an additional 20% after the end of each subsequent twelve-month period. These options contain acceleration provisions consistent with other stock purchases and options Mr. Cohn has made and received. The Company believes that the rewards Mr. Cohn may receive are tied to the stock price performance of the Company, from which other stockholders will derive substantial benefit as well. STOCK OPTIONS To balance the annual incentive plan, stock options focus the executives' attention on the long-term performance of the Company and maximizing stockholder value. Stock options are granted with an exercise price equal to fair market value at the time of grant. Grant ranges have been established for each officer level 9 12 that are based on competitive norms of the comparison group. Individual grants may vary within the range to reflect individual performance and potential. The option program also utilizes vesting periods to encourage retention of key employees. No options were granted to the five highest paid officers during Fiscal Year 1995. Specific information regarding compensation of the Chief Executive Officer and other executive officers is contained in the accompanying table. TAX POLICY Section 162(m) of the Internal Revenue Code of 1986, as amended, limits deductions for certain executive compensation in excess of $1 million. The Company endeavors to structure its compensation plans to achieve maximum deductibility under Section 162(m) with minimal sacrifices in flexibility and corporate objectives. With respect to non-equity compensation arrangements, the Committee has reviewed the terms of those arrangements most likely to be subject to Section 162(m). COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee currently consists of directors Chamberlain, Coleman, de Rothschild and Tellefsen. Robert Cohn, the Chairman of the Board, President and Chief Executive Office of the Company, currently attends meetings of the Compensation Committee but does not vote. There are no interlocks between the Company's Board of Directors or Compensation Committee and boards of directors or compensation committees of other companies. LEO CHAMBERLAIN DEBORAH COLEMAN NATHANIEL DE ROTHSCHILD DAG TELLEFSEN 10 13 STOCK PERFORMANCE GRAPH In accordance with Exchange Act regulations, the following performance graph compares the cumulative total stockholder return on the Company's Common Stock to the cumulative total return on the Nasdaq Index and on the Hambrecht & Quist Technology Index over the same period. The graph assumes the value of the investment in the Company's Common Stock and each index was $100 at June 30, 1990 and that all dividends were reinvested.
Measurement Period (Fiscal Year Covered) Octel NASDAQ H&Q Tech 6/90 100.0 100.0 100.0 9/90 40.66 75.13 72.34 12/90 50.55 82.47 81.59 3/91 82.26 107.12 105.88 6/91 107.69 105.89 100.60 9/91 101.65 118.14 104.85 12/90 98.90 132.35 120.62 3/92 138.46 136.54 124.63 6/92 101.10 127.17 114.31 9/92 83.52 132.37 119.18 12/92 92.31 154.00 138.75 3/93 110.99 156.89 136.72 6/93 97.80 159.89 139.66 9/93 102.20 173.36 142.15 12/93 121.98 176.79 151.41 3/94 110.99 169.38 152.78 6/94 72.53 161.50 141.70 9/94 92.04 174.87 161.66 12/94 91.21 172.86 175.74 3/95 91.21 188.80 195.60 6/95 128.57 215.32 237.29
11 14 COMPENSATION OF EXECUTIVE OFFICERS SUMMARY COMPENSATION TABLE The following table sets forth, for the three fiscal years ended June 30, 1995, certain compensation information with respect to the Company's Chief Executive Officer during fiscal 1995 and each of the four other most highly compensated executive officers other than the Chief Executive Officer who were serving as executive officers as of June 30, 1995 (collectively, the "Named Executive Officers"), based upon salary and bonus earned by such executive officers and individuals in fiscal 1995.
LONG-TERM COMPENSATION ------------ AWARDS ------------ ANNUAL COMPENSATION SECURITIES ----------------------------------- UNDERLYING OTHER ANNUAL OPTIONS/ ALL OTHER BONUS COMPENSATION SARS COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY ($) ($)(1) ($) (#)(2) ($) - ----------------------------------------------- ---- ---------- ------- ------------ ------------ ------------ Robert Cohn.................................... 1995 $257,933 -- $ 6,167(3) -- 7,005(4) Chairman of the Board, 1994 237,692 -- 5,776(3) 750,000 9,318(4) President and Chief 1993 237,026 -- 5,522(3) -- 8,255(4) Executive Officer W. Michael West................................ 1995 231,888 92,400 -- -- 5,595(4) Vice Chairman of the Board 1994 238,658 92,450 -- 67,500 8,861(4) 1993 226,431 60,425 -- 20,000 8,389(4) David Ladd..................................... 1995 190,435 82,000 -- -- 7,364(4) Executive Vice President and 1994 185,208 53,199 -- 105,000 363(4) Chief Technology Officer 1993 162,292 59,193 -- -- 333(4) Donald L. Campodonico.......................... 1995 188,222 67,500 -- -- 9,511(4) Senior Vice President 1994 193,467 65,441 -- 60,000 8,493(4) 1993 175,496 30,975 -- 10,500 7,643(4) Derek S. Daley................................. 1995 178,183 306,800(5) -- -- 7,449(4) Vice President, General Counsel 1994 178,183 56,850 -- 35,500 6,793(4) and Secretary 1993 169,784 38,825 -- 9,500 6,153(4)
- --------------- (1) Includes bonuses earned in the applicable fiscal year but paid or to be paid in the following fiscal year. (2) No SARs were granted. (3) Comprised of Mr. Cohn's portion of the profit-sharing payments made to most employees of the Company. (4) Comprised of premiums for insurance policies where the officers are the beneficiaries. (5) Includes a one-time bonus in the amount of $250,000 in recognition of reduced outside legal fees and successful results in Octel v. Theis, a major patent lawsuit decided in favor of the Company. ANNUAL INCENTIVE PLAN The Company's Board of Directors has adopted an Annual Incentive Plan (the "Bonus Plan") providing for cash bonuses to officers and senior managers. Under the Bonus Plan, fiscal year 1995 bonuses to all officers, including executive officers, of the Company in an aggregate amount of approximately $1,031,000 were awarded as percentages of the individuals' salaries, based on the Company's achievement of revenue, operating income, corporate business and customer satisfaction objectives approved by the Board of Directors. The Bonus Plan for fiscal year 1996 will have similar financial measures of revenue and operating income and, for certain executives, will be partially based on the performance of their respective business units. A portion of the bonus (80% of the target bonus percentage) will be paid on a semi-annual basis and will be based on these financial measures. The remaining 20% of the target bonus percentage will be paid annually and will be based on achievement of objectives regarding market share, customer satisfaction and performance on key corporate projects. 12 15 EMPLOYEE STOCK PLANS The following is a brief summary of the Company's employee stock plans in effect during the fiscal year ended June 30, 1995 under which officers, employees, consultants and directors of the Company received benefits. The closing sale price of the Company's Common Stock on the Record Date, as reported by The Nasdaq National Market, was $40.25 per share. 1985 INCENTIVE STOCK PLAN The Company's 1985 Incentive Stock Plan (the "Option Plan"), under which 9,600,000 shares are currently reserved for issuance, was adopted by the Board of Directors in 1985 and approved by the Company's stockholders in 1985. Amendments to the Option Plan were approved by the Board of Directors and the stockholders in each of the last six years and by the Board of Directors in September 1995. The Option Plan permits the direct sale of shares and the grant of both "incentive stock options" (within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Tax Code")) and nonstatutory stock options to employees and officers of, and consultants to, the Company. As of the Record Date under the Option Plan, 690,070 shares had been sold directly, options to purchase 5,482,828 shares were outstanding at a weighted average exercise price of $22.69 per share, options for 2,695,035 shares had been exercised and 732,067 shares were available for future option grant or direct sale. During fiscal 1995, options to purchase 172,500 shares at a weighted average exercise price of $18.74 per share were granted to executive officers of the Company and options to purchase 1,090,500 shares at a weighted average exercise price of $21.47 per share were granted to other employees of the Company. The Option Plan is administered by the Board of Directors or a committee appointed by the Board. The Board or committee determines the terms of options granted, including the exercise price, number of shares subject to the option and the exercisability thereof. The exercise price of all options to purchase shares of Common Stock under the Option Plan must be at least equal to the fair market value of such shares on the date of grant, and the maximum term of each incentive stock option is ten years. Options granted to officers and certain key employees under the Option Plan provide for full acceleration of exercisability in the event that, following a change in control of the Company, the optionee's employment is terminated or the optionee's compensation and benefits are reduced. See Proposal No. 2 for a more detailed description of the Option Plan and a proposal to extend the term of the Option Plan for an additional ten years. AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1995 AND OPTION/SAR VALUES AS OF JUNE 30, 1995 The following table sets forth certain information regarding options for the purchase of the Company's Common Stock that were exercised or held by the Named Executive Officers during fiscal 1995.
NUMBER OF SECURITIES VALUE OF UNEXERCISED SHARES UNDERLYING UNEXERCISED IN-THE-MONEY ACQUIRED ON OPTIONS/SARS AT OPTIONS/SARS EXERCISE VALUE REALIZED JUNE 30, 1995 AT JUNE 30, 1995($)(2) NAME ($) ($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ---------------------------- ----------- --------------- ------------------------- ------------------------- Robert Cohn................. 75,000 $ 665,625 206,064/620,266 $ 1,313,660/1,557,321 W. Michael West............. -- -- 83,872/94,093 850,718/565,085 David Ladd.................. -- -- 37,500/82,500 480,375/675,375 Donald L. Campodonico....... 4,700 56,988 26,700/61,500 222,188/440,187 Derek S. Daley.............. 24,000 249,000 34,005/43,500 407,466/275,313
- --------------- (1) Difference between the fair market value of the Common Stock purchased and the exercise price on the date of exercise. (2) Difference between the fair market value of the underlying Common Stock and the exercise price, for in-the-money options, on June 30, 1995. 13 16 1987 EMPLOYEE STOCK PURCHASE PLAN The Company's 1987 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in October 1987 and approved by the stockholders in November 1987. Amendments to the Purchase Plan were approved by the Board of Directors and the stockholders in each of the last six years and by the Board of Directors in July 1995. A total of 1,650,000 shares of Common Stock is currently reserved for issuance under the Purchase Plan (see Proposal No. 3 for the proposed addition of 475,000 shares). The Purchase Plan, which is intended to qualify under Section 423 of the Tax Code, is implemented by one offering during each six-month period. Offering periods commence on or about May 1 and November 1 of each year. The Purchase Plan is administered by the Board of Directors of the Company or by a committee appointed by the Board. Employees are eligible to participate if they are employed by the Company for at least 20 hours per week and more than five months per year. The Purchase Plan permits eligible employees to purchase Common Stock through payroll deductions, which may not exceed 10% of an employee's compensation, at 85% of the lower of the fair market value of the Common Stock at the beginning or at the end of each offering period. See Proposal No. 3 for a more detailed description of the Purchase Plan. As of the Record Date, 1,619,061 shares had been sold under the Purchase Plan at a weighted average purchase price per share of $15.20 and 30,939 shares remained available for future issuance. See Proposal No. 3 regarding the addition of 475,000 shares to the Purchase Plan. PURCHASE PLAN The following table sets forth, as to the Named Executive Officers, all current executive officers as a group and all other employees who participated in the Purchase Plan: (i) the number of shares of the Company's Common Stock purchased under the Purchase Plan during the last fiscal year; and (ii) the dollar value of the benefit (see footnote (1) to the table):
(I) NUMBER OF (II) SHARES DOLLAR VALUE NAME OF INDIVIDUAL OR IDENTITY OF GROUP PURCHASED ($)(1) - ------------------------------------------------------------------- --------- ------------ Robert Cohn........................................................ 751 $ 8,188 W. Michael West.................................................... 804 8,240 David Ladd......................................................... -- -- Donald L. Campodonico.............................................. 642 4,991 Derek S. Daley..................................................... 954 8,379 All current executive officers as a group (11 persons)............. 4,206 36,805 All other employees as a group..................................... 365,551 3,060,226
- --------------- (1) Market value on date of purchase, minus the purchase price. 1988 DIRECTORS' STOCK OPTION PLAN The Company's 1988 Directors' Stock Option Plan (the "Directors' Plan") was adopted by the Board of Directors in November 1988, was amended in 1989 and was approved by the Company's stockholders in 1989. Amendments to the Directors' Plan were approved by the Board and the stockholders in 1990 and 1994 and by the Board in November 1991 and April 1992. A total of 350,000 shares of Common Stock is reserved for issuance under the Directors' Plan. The Directors' Plan is administered by the Board of Directors. Only non-employee directors are eligible to participate in the Directors' Plan. Eligible directors are automatically granted an option to purchase 25,000 shares of the Company's Common Stock on the date they are first elected a director, such option becoming exercisable cumulatively with respect to 5,000 shares on each of the first five anniversaries of the date of grant, unless accelerated because of a director's death or disability. On the date of the Annual Meeting of Stockholders each year, all non-employee directors who have served since the previous Annual Meeting of Stockholders and are reelected receive an immediately exercisable option for 3,000 shares. The exercise price of an option granted under the Directors' Plan is the fair market value (based on The Nasdaq National Market closing price) of the stock on the date the option is granted. 14 17 PROPOSAL NO. 2 -- APPROVAL OF AMENDMENT EXTENDING THE TERM OF THE 1985 INCENTIVE STOCK PLAN GENERAL The 1985 Incentive Stock Plan (the "Option Plan") was amended by the Board of Directors in June 1995, subject to approval by the Company's stockholders, to extend the term of the Option Plan for an additional ten-year period and to change the name of the Option Plan to the "1995 Incentive Stock Plan." The Option Plan is the principal means through which the Company provides equity incentives to its employees. The extension of the Option Plan's term will ensure that the Board of Directors can continue to create the equity incentives necessary to assist the Company in attracting, retaining and motivating the best available personnel for the successful conduct of the Company's business. VOTE REQUIRED The affirmative vote of the majority of the Votes Cast will be required under Delaware law to approve the amendment to the Option Plan. THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE OPTION PLAN, AS AMENDED. The essential features of the Option Plan are outlined below. PURPOSES The purposes of the Option Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to the employees and consultants of the Company and to promote the success of the Company's business. ADMINISTRATION; LIMITS ON GRANTS With respect to grants of options to employees who are also officers or directors of the Company, the Option Plan, as amended, shall be administered by (i) the Board of Directors of the Company if the Board may administer the Option Plan in compliance with Rule 16b-3 under the Exchange Act ("Rule 16b-3") with respect to a plan intended to qualify under Rule 16b-3 as a discretionary plan or (ii) a committee designated by the Board of Directors to administer the Option Plan, which committee shall be constituted in such a manner as to permit the Option Plan to comply with Rule 16b-3 with respect to a plan intended to qualify thereunder as a discretionary plan. With respect to grants of options to employees or consultants who are neither officers nor directors of the Company, the Option Plan shall be administered by (i) the Board of Directors or (ii) a committee designated by the Board, which committee shall be constituted in such a manner as to satisfy the legal requirements relating to the administration of incentive stock option plans, if any, of Delaware corporate law, federal and state and securities laws and the Tax Code. If permitted by Rule 16b-3, the Option Plan may be administered by different bodies with respect to directors, non-director officers and employees who are neither officers nor directors and consultants who are not directors. For the purposes of this plan description, "Board" shall mean either the Board of Directors or a committee appointed by the Board of Directors to administer the Option Plan. ELIGIBILITY The Option Plan provides for the grant of options and sale of shares to employees of and consultants to the Company. Only employees may be granted incentive stock options. The Board selects the purchasers and optionees and determines the number of shares to be sold or made subject to option. As of the date of this Proxy Statement, directors who are not also employees of the Company are not eligible to participate in the Option Plan. However, prior to March 10, 1988, such directors were eligible to participate in the Option Plan and they may still exercise options granted to them prior to that date. At the Record Date, the Company employed approximately 2,850 people, approximately 2,700 of whom were eligible to participate in the Option Plan. 15 18 TERMS OF OPTIONS Each option granted under the Option Plan is evidenced by a written stock option agreement between the Company and the optionee. Options are generally subject to the terms and conditions set forth below, but specific terms may vary. (a) Exercise of the Option. The Board determines when options may be exercised. In no event may any incentive stock option granted under the Option Plan be exercised more than ten years after the date of grant. Incentive stock options currently being granted generally expire after five years and six months. An option is exercised by giving written notice of exercise to the Company specifying the number of full shares of Common Stock to be purchased and by tendering payment of the purchase price. Payment for shares purchased upon exercise of an option shall be in such form of consideration as is authorized by the Option Plan and determined by the Board, and such form of consideration may vary for each option. (b) Exercise Price. The exercise price of options granted under the Option Plan is determined by the Board and may not be less than 100% of the fair market value of the Common Stock on the date the option is granted. In the case of incentive stock options granted to an optionee who owns more than 10% of the voting power or value of all classes of stock of the Company, the exercise price must not be less than 110% of the fair market value on the date of grant. The fair market value of the Common Stock is the closing sale price on The Nasdaq National Market on the date of grant. (c) Termination of Employment. If the optionee's employment or association with the Company terminates for any reason (other than death or disability), the optionee may, but only within 30 days (or such other period as may be determined by the Board, but not exceeding three months for incentive stock options) following the date of such termination, exercise any option granted under the Option Plan, but only to the extent such option was exercisable on the date of termination. To the extent that the option is not exercised within such 30-day (or other) period, the option terminates. (d) Disability. In the event that an employee or consultant is unable to continue his employment or consulting relationship with the Company as a result of his total and permanent disability (as defined in Section 22(e)(3) of the Tax Code), exercisability generally is accelerated from the usual four-year period to a three-year period, and the optionee may, but only within three months (or such other period of time not exceeding one year as is determined by the Board at the time of grant of the option) from the date of termination, exercise the option to the extent it was otherwise exercisable at the date of such termination. To the extent that the option is not exercised within such period, the option terminates. (e) Death. If an optionee should die while employed by, or within one month after termination of employment with, the Company, exercisability of options under the Option Plan generally is accelerated from the usual four-year period to a three-year period, and the option may be exercised at any time within six months after death by the optionee's estate, but only to the extent such options were exercisable on the date of death or termination, as the case may be. (f) Liquidation or Acquisition. In the event of a proposed dissolution or liquidation of the Company, options under the Option Plan terminate unless otherwise provided by the Board. In such event, the Board, in its sole discretion, may determine to make options immediately exercisable as to all shares. Current option agreements provide that in the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, options shall be assumed or equivalent options shall be substituted by such successor corporation or its affiliate. If such successor corporation refuses to assume an option or to substitute an equivalent option, the Board shall provide for the optionee to have the right to exercise the option as to all of the Common Stock subject to the option. Most options before December 1987 allowed the Board the right to accelerate the exercisability of options whether or not a successor corporation was willing to assume such options. 16 19 Option agreements for officers and certain key employees provide for full acceleration of exercisability in the event that, following a change in control of the Company, the optionee's employment is terminated or the optionee's compensation and benefits are reduced. The Board may, in its discretion, provide in individual option agreements for an optionee to have the right to return an option to the Company for a cash payment equal to the net value of the option upon the occurrence of a merger, sale of all or substantially all assets of the Company, tender offer or other transaction or series of related transactions resulting in a change of ownership of more than 50% of the voting securities of the Company. (g) Non-transferability of Options. An option is generally not transferable by the optionee, other than by will or the laws of descent and distribution. However, the Board may grant or amend options in individual cases to allow an option to be transferable to a trust for the benefit of an employee or the employee's family members. Options are generally exercisable during the optionee's lifetime only by the optionee unless transferred to a trust as described above. (h) Withholding of Shares to Pay Tax Liability. The Option Plan allows the Company to withhold shares as to which an option has been exercised in order to comply with regulations requiring the Company to withhold taxes upon certain exercises of options. See "Tax Information -- Nonstatutory Options." (i) Other Provisions. The option agreement may contain such other terms, provisions and conditions not inconsistent with the Option Plan as may be determined by the Board or its committee. OPTIONS OUTSTANDING Options granted under the Option Plan generally become exercisable in installments. Most options granted before June 2, 1994 become exercisable as to 20% of the total shares under option one year after the date of beginning employment (for new employees) or the date of option grant (for existing employees), and as to an additional 20% after each subsequent twelve-month period so long as the optionee remains an employee of the Company. Most options granted on and after June 2, 1994 become exercisable as to 25% of the total shares under option one year after the date of beginning employment (for new employees) or the date of option grant (for existing employees), and as to an additional 25% after each subsequent twelve-month period so long as the optionee remains an employee of the Company. Exercisability is accelerated in the case of death or disability or, in certain cases, by termination of employment or reduction in compensation following a change in control, as described above. Exercisability is delayed by leaves of absence or temporary reductions in work hours. Options being granted at this time generally expire five years and six months from the date of grant. At the Record Date, 690,070 shares had been sold directly, options to purchase 2,695,035 shares of the Company's Common Stock had been exercised, options to purchase 5,482,828 shares were outstanding, and 732,067 shares remained available for future sale or grant under the Option Plan. The range of exercise prices per share for options outstanding under the Option Plan at the Record Date was from $0.05 to $50.00, and the weighted average exercise price per share was approximately $22.69. Expiration dates for outstanding options range from September 22, 1995 to March 15, 2001. CAPITAL CHANGES In the event any change is made in the Company's capitalization which results in an exchange of Common Stock for a greater or lesser number of shares without receipt of consideration, appropriate adjustment will be made in the exercise price and in the number of shares subject to options outstanding under the Option Plan, as well as in the number of shares reserved for issuance under the Option Plan. AMENDMENT AND TERMINATION OF THE PLAN The Board may at any time amend, alter, suspend or discontinue the Option Plan, but no amendment, alteration, suspension or discontinuation shall be made which would impair the rights of any optionee under any grant theretofore made without such optionee's consent. In addition, to the extent necessary and desirable to comply with Rule 16b-3 or with Section 422 of the Tax Code (or any other applicable law or regulation, including the requirements of the NASD or an established stock exchange), the Company shall obtain stockholder approval of any amendment to the Option Plan in such a manner and to such a degree as required. 17 20 TAX INFORMATION -- THE OPTION PLAN Options granted under the Option Plan may be either "incentive stock options," as defined in Section 422 of the Tax Code, or nonstatutory options. An optionee who is granted an incentive stock option will not recognize taxable income either at the time the option is granted or upon its exercise, unless the exercise subjects the optionee to the alternative minimum tax. Upon the sale or exchange of the shares more than two years after grant of the option and one year after exercising the option, any gain or loss will be treated as long-term capital gain or loss. If these holding periods are not satisfied, the optionee will recognize ordinary income at the time of sale or exchange equal to the difference between the exercise price and the lower of (i) the fair market value of the shares at the date of the option exercise or (ii) the sale price of the stock. A different timing rule for measuring ordinary income upon such a premature disposition may apply if the optionee is also an officer, director or 10% stockholder of the Company. The Company will be entitled to a deduction in the same amount as the ordinary income recognized by the optionee. Any gain or loss recognized on such a premature disposition of the shares in excess of the amount treated as ordinary income will be characterized as long-term or short-term capital gain or loss, depending on the holding period. All other options which do not qualify as incentive stock options are referred to as "nonstatutory options." An optionee will not recognize any taxable income at the time of grant of a nonstatutory option. However, upon its exercise, the optionee will recognize taxable income generally measured as the excess of the then fair market value of the shares purchased over the purchase price. Any taxable income recognized in connection with an option exercise by an optionee who is also an employee of the Company will be subject to tax withholding by the Company. Upon resale of such shares by the optionee, any difference between the sales price and the optionee's purchase price, to the extent not recognized as taxable income as described above, will be treated as long-term or short-term capital gain or loss, depending on the holding period. The Company will be entitled to a tax deduction in the same amount as the ordinary income recognized by the Optionee with respect to shares acquired upon exercise of a nonstatutory option. THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION UPON THE OPTIONEE AND THE COMPANY WITH RESPECT TO THE GRANT AND EXERCISE OF OPTIONS UNDER THE OPTION PLAN AND DOES NOT PURPORT TO BE COMPLETE. REFERENCE SHOULD BE MADE TO THE APPLICABLE PROVISIONS OF THE TAX CODE. IN ADDITION, THIS SUMMARY DOES NOT DISCUSS THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE OPTIONEE MAY RESIDE. 18 21 PROPOSAL NO. 3 -- APPROVAL OF AMENDMENT TO THE 1987 EMPLOYEE STOCK PURCHASE PLAN The 1987 Employee Stock Purchase Plan (the "Purchase Plan") was amended by the Board of Directors in July 1995 to reserve an additional 475,000 shares of Common Stock for issuance thereunder, bringing the total number of shares under the Purchase Plan to 2,125,000. The Company believes that its Purchase Plan is an important factor in attracting and retaining skilled personnel. Each year the Company reviews the number of shares available for issuance under the Purchase Plan and, based on the Company's estimates of the number of shares expected to be purchased under the Purchase Plan during the coming year, management presents to the Board of Directors a recommendation for the addition of shares to the pool reserved for issuance under the Purchase Plan. The Board then reviews this recommendation and presents a proposal such as this one to the stockholders for approval. The initial offering period under the Purchase Plan began on February 26, 1988, and from that date to the Record Date 1,619,061 shares of the Company's Common Stock were sold under the Purchase Plan. The number of shares sold in each offering period will vary with the number of participants, the amount of their payroll deductions and the fair market value of the Company's Common Stock. VOTE REQUIRED The affirmative vote of the majority of the Votes Cast will be required under Delaware law to approve the amendment to the Purchase Plan. THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE PURCHASE PLAN AS AMENDED, INCLUDING THE ADDITION OF SHARES TO THE POOL RESERVED FOR ISSUANCE THEREUNDER. The essential features of the Purchase Plan are outlined below. GENERAL The Purchase Plan, and the right of participants to make purchase thereunder, is intended to qualify under the provisions of Sections 421 and 423 of the Tax Code. See "Tax Information -- The Purchase Plan." PURPOSE The purpose of the Purchase Plan is to provide employees of the Company with an opportunity to purchase Common Stock of the Company at a discount through accumulated payroll deductions. ADMINISTRATION The Purchase Plan is administered by the Board of Directors or a committee of members of the Board appointed by the Board, who receive no separate additional compensation for such service. All questions of interpretation or application of the Purchase Plan are determined by the Board or its appointed committee, whose decisions are final and binding upon all participants. Members of the Board who are eligible employees are permitted to participate in the Purchase Plan but may not vote on any matter affecting the administration of the Purchase Plan or the grant of any option pursuant to the Purchase Plan. ELIGIBILITY Any person who is customarily employed at least 20 hours per week and five months per calendar year by the Company during the applicable offering period is eligible to participate in the Purchase Plan, unless the employee would own five percent or more of the total combined voting power or value of all classes of stock of the Company or of its subsidiaries (including stock issuable upon exercise of options held by such person) at the end of the offering period, or the employee would receive more than $25,000 worth of stock (computed as of the date of grant) pursuant to the Purchase Plan in any calendar year. 19 22 At the Record Date, the Company employed approximately 2,850 people, approximately 2,700 of whom were eligible to participate in the Purchase Plan. Approximately 1,500 employees were participating in the Purchase Plan as of the Record Date. OFFERING DATES The Purchase Plan is generally implemented by one offering during each six-month period. Offering periods will commence on or about May 1 and November 1 of each year. Prior to this time offering periods began on January 1 and July 1 of each year, and the Company's current offering period began July 1, 1995 and will end April 30, 1996 in order to move the offering period to the new dates approved by the Board in June 1995. ENROLLMENT IN THE PLAN Eligible employees become participants in the Purchase Plan by delivering to the Company's payroll office a subscription agreement authorizing payroll deductions. Employees hired after the first day of an offering period (or who otherwise become eligible after such date) may begin participation in the Purchase Plan on the first business day of the calendar month following the month in which they are hired (or become eligible). Under the Purchase Plan, once an employee elects to participate in the Purchase Plan, enrollment in each successive offering period occurs automatically unless the employee withdraws from participation in the Purchase Plan. PURCHASE PRICE The purchase price per share under the Purchase Plan is the lower of (i) 85% of the fair market value of a share of Common Stock on the date of commencement of the offering (or for employees beginning participation later, the date such participation began) or (ii) 85% of the fair market value of a share of Common Stock on the last day of the offering period. The fair market value of the Common Stock on a given date is the closing sale price on The Nasdaq National Market. PAYMENT OF PURCHASE PRICE; PAYROLL DEDUCTIONS The purchase price of the shares is accumulated by after-tax payroll deductions over the offering period. The deductions may not exceed 10% of a participant's compensation. The total number of shares purchased by any participant shall in no event exceed, in any calendar year, the number of shares of Common Stock which $25,000 could purchase at the fair market value of a share of the Company's Common Stock, calculated as of the offering date. A participant may discontinue participation in the Purchase Plan, and may decrease but not increase the rate of payroll deductions, during the offering period. PURCHASE OF STOCK; EXERCISE OF OPTION By executing a subscription agreement to participate in the Purchase Plan, the employee is entitled to have shares placed under option to him. The maximum number of shares placed under option to a participant in an offering is that number determined by dividing the total amount of the participant's contribution for the offering period by the lower of (i) 85% of the fair market value of the Common Stock at the beginning of the offering period (or date his participation began) or (ii) 85% of the fair market value of the Common Stock at the end of the offering period, but in no event shall more than the number of shares of Common Stock which $25,000 could purchase at the fair market value of a share of the Company's Common Stock, calculated as of the offering date, be placed under option to a single participant in any one calendar year. Unless the employee's participation is discontinued, the option for the purchase of shares will be exercised automatically at the end of the offering period at the applicable price. No fractional shares will be issued upon exercise of the option. Any amounts insufficient to purchase a full share remaining in a participant's account after exercise of the option will be credited to the participant and used in a future offering period. No interest will accrue on the payroll deductions of a participant in the Purchase Plan. 20 23 WITHDRAWAL A participant's interest in a given offering may be terminated by signing and delivering to the Company a notice of withdrawal from the Purchase Plan. Upon withdrawal from the Purchase Plan, accrued but unused payroll deductions are returned to the employee. Such withdrawal may be elected at any time prior to the end of the applicable six-month offering period. A participant's withdrawal from an offering will not have any effect upon such participant's eligibility to participate in subsequent offering periods under the Purchase Plan. TERMINATION OF EMPLOYMENT Termination of a participant's employment for any reason, including retirement or death, cancels participation in the Purchase Plan immediately. In such event the payroll deductions credited to the participant's account will be returned without interest to such participant, or, in the case of death, to the person or persons entitled thereto as specified by the employee in the subscription agreement. CAPITAL CHANGES In the event of changes in the capitalization of the Company, such as stock splits or stock dividends, which result in an increase or decrease in the number of shares of Common Stock without receipt of consideration by the Company, appropriate adjustments will be made by the Company in the number of shares subject to purchase and in the price per share. EFFECT OF LIQUIDATION, DISSOLUTION, SALE OF ASSETS OR MERGER In the event of a liquidation or dissolution of the Company, an employee's participation in the Purchase Plan will be terminated immediately before consummation of such event unless otherwise provided by the Board. In the event of a sale of all or substantially all of the assets of the Company or a merger of the Company with or into another corporation, the employee's rights may be satisfied by assumption of the Company's obligations by such acquiring or successor corporation. If such corporation refuses to assume those obligations, the Board shall allow the immediate exercise of the employee's rights for 30 days, after which the employee's rights under the Purchase Plan shall terminate. NON-ASSIGNABILITY No rights or accumulated payroll deductions of an employee under the Purchase Plan may be pledged, assigned or transferred for any reason, and any such attempt may be treated by the Company as an election to withdraw from the Purchase Plan. REPORTS Individual accounting will be maintained for each participant in the Purchase Plan. Each participant receives as promptly as practicable after the end of the six-month offering period a report showing the details of the participant's account. AMENDMENT AND TERMINATION OF THE PLAN The Board may at any time amend, alter, suspend or discontinue the Purchase Plan, but, except under certain conditions, no amendment, alteration, suspension or discontinuation shall be made which would impair the rights of any participant arising out of any offering period which has already commenced without such participant's written consent. In addition, to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act or with Section 423 of the Tax Code (or any other applicable law or regulation, including the requirements of the NASD or an established stock exchange), the Company shall obtain stockholder approval of any Purchase Plan amendment in such a manner and to such a degree as required. 21 24 TAX INFORMATION -- THE PURCHASE PLAN The Purchase Plan, and the right of participants to make purchases thereunder, is intended to qualify under the provisions of Sections 421 and 423 of the Tax Code. Under these provisions, no income will be taxable to a participant until the shares purchased under the Plan are sold or otherwise disposed of. Upon sale or other disposition of the shares, the participant will generally be subject to tax and the amount of the tax will depend upon the holding period. If the shares are sold or otherwise disposed of more than two years from the first day of the offering period, the participant will recognize ordinary income measured as the lesser of (a) the excess of the fair market value of the shares at the time of such sale or disposition over the purchase price, or (b) an amount equal to 15% of the fair market value of the shares as of the first day of the offering period. Any additional gain will be treated as long-term capital gain. If the shares are sold or otherwise disposed of before the expiration of this holding period, the participant will recognize ordinary income generally measured as the excess of the fair market value of the shares on the date the shares are purchased over the purchase price. Any additional gain or loss on such sale or disposition will be long-term or short-term capital gain or loss, 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 AND DOES NOT PURPORT TO BE COMPLETE. REFERENCE SHOULD BE MADE TO THE APPLICABLE PROVISIONS OF THE TAX CODE. IN ADDITION, THIS SUMMARY DOES NOT DISCUSS THE TAX CONSEQUENCES OF A PARTICIPANT'S DEATH OR THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE PARTICIPANT MAY RESIDE. 22 25 PROPOSAL NO. 4 -- APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION The Company's Restated Certificate of Incorporation (the "Certificate"), as currently in effect, provides that the Company is authorized to issue 5,000,000 shares of Preferred Stock, par value $.001 per share, and 50,000,000 shares of Common Stock, par value $.001 per share. In June 1995, the Board of Directors authorized an amendment to the Certificate to increase the authorized number of shares of Common Stock to 100,000,000 shares. Under the proposed amendment, the Sections 1 and 2 of Article FOURTH of the Certificate would be amended to read as follows: "Section 1. The total number of shares which the Corporation shall have authority to issue is 105,000,000 shares of capital stock. "Section 2. Of such authorized shares, one hundred million (100,000,000) shares shall be designated 'Common Stock,' and have a par value of $.001." At the Record Date, 24,593,596 shares of Common Stock were issued and outstanding, approximately 6,265,689 additional shares were issuable upon exercise of outstanding options or purchase rights and approximately 874,067 shares were reserved for future grants under the Company's stock plans. PURPOSE AND EFFECT OF AMENDMENT The principal purpose of the proposed amendment to the Certificate is to authorize additional shares of Common Stock which will be available in the event that the Board of Directors determines to authorize stock dividends or stock splits, to raise additional capital through the sale of securities, to acquire another company or its business or assets or to establish a strategic relationship with a corporate partner. If the proposed amendment is adopted, 50,000,000 additional shares of Common Stock of the Company will be available for issuance by the Board of Directors without any further stockholder approval, although certain large issuances of shares may require stockholder approval in accordance with the requirements of The Nasdaq National Market. The Board of Directors believes it desirable that the Company have the flexibility to issue the additional shares without further stockholder approval. The holders of Common Stock have no preemptive rights to purchase any stock of the Company. The additional shares could be issued at such times and under such circumstances as to have a dilutive effect on earnings per share and on the equity ownership of the present holders of Common Stock. No actions are currently being taken with respect to any large issuance of additional shares. The flexibility of the Board of Directors to issue additional shares of stock could enhance the Board's ability to negotiate on behalf of the stockholders in a takeover situation. Although it is not the purpose of the proposed amendment, the authorized but unissued shares of Common Stock (as well as the authorized but unissued shares of Preferred Stock) also could be used by the Board of Directors to discourage, delay or make more difficult a change in the control of the Company. For example, such shares could be privately placed with purchasers who might align themselves with the Board of Directors in opposing a hostile takeover bid. The issuance of additional shares could serve to dilute the stock ownership of persons seeking to obtain control and thereby increase the cost of acquiring a given percentage of the outstanding stock. The Company has previously adopted certain measures that may have the effect of delaying or preventing an unsolicited takeover attempt, including a Common Shares Rights Agreement, provisions in the 1985 Incentive Stock Plan providing for the acceleration of exercisability of outstanding options under certain circumstances in the event of a sale of assets or merger and provisions of the Certificate authorizing the Board to issue up to 5,000,000 shares of Preferred Stock with terms, provisions and rights fixed by the Board. The Board of Directors is not aware of any pending or proposed effort to acquire control of the Company. VOTE REQUIRED The approval of the amendment to the Certificate requires the affirmative vote of a majority of the outstanding shares of Common Stock of the Company. An abstention or nonvote is not an affirmative vote and, therefore, will have the same effect as a vote against the proposal. THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION. 23 26 PROPOSAL NO. 5 -- STOCKHOLDER PROPOSAL REGARDING OPTION EXCHANGE PROGRAMS The Company receives many suggestions from stockholders, some as formal stockholder proposals. All are given careful attention by the Company, and management has adopted a number of the suggestions made. Management of the Company disagrees strongly with the adoption of the resolution proposed below and asks all stockholders to read through the Company's entire response which follows the stockholder's proposal. The author and proponent of the following resolution, the State of Wisconsin Investment Board ("SWIB"), Lake Terrace, 121 East Wilson Street, Madison, Wisconsin 53707, has required the Company to present the following proposal at the Annual Meeting of Stockholders. The proponent owns 2,371,000 shares of the Company's Common Stock as of the Record Date. The SWIB proposal is quoted verbatim below: STOCKHOLDER RESOLUTION "WHEREAS, the Octel Communications (OCTL) board has supported the adoption of numerous incentive compensation plans over the years, regardless of company or stock performance; and "WHEREAS, during the previous several years, the company has granted options for millions of OCTL shares pursuant to such plans; and "WHEREAS, this practice has led to an unacceptable level of potential dilution to existing shareholders, especially in light of company stock performance; and "WHEREAS, notwithstanding extreme levels of dilution and poor company stock performance over the past five years, OCTL continues to retain a policy that outstanding options can be repriced to a lower exercise price at such time as the board shall determine; "NOW THEREFORE, BE IT RESOLVED: "That OCTL shareowners request the OCTL board of directors to adopt a policy which prohibits the repricing of any stock options to a lower strike price, without shareowner approval." PROPONENT'S STATEMENT IN SUPPORT OF RESOLUTION "Stock option plans have been used by corporate management to incentivize, attract and retain qualified employees for many years. Shareholders generally support the use of reasonable incentive compensation to provide a competitive employment environment. However, excessive reliance on such plans is unfair to existing shareholders. "Certain companies have continued to expand the use of such plans to the point where existing shareholders face serious potential dilution. In 1994, OCTL had options granted or available for grant to employees of over 8 million shares, representing potential dilution of over 33%. OCTL has been identified by the Investor Responsibility Research Center as near the top of option plan dilution for all publicly traded companies. In all, the level of potential dilution and the trend toward even higher grants should not be encouraged. "Notwithstanding repeated requests, the company has refused to adopt a policy against repricing of 'underwater-options.' As if the current dilution isn't enough, this refusal allows existing option holders to replace options which are out-of-the-money for new options with a reduced exercise price. Notwithstanding stock price deterioration, OCTL has persistently made large option grants, while preserving the right to reprice if OCTL's stock drops. This raises serious questions as to management and director vigilance in monitoring the significant dilution impact to existing shareholders. We urge management to raise the stock price, not lower the exercise price. "We believe OCTL has been irresponsible in its use of incentive compensation, since options are authorized, issued and can be repriced without regard to performance. While we support the concept of incentive compensation, the above program is unjustified and inequitable to existing shareholders. The 24 27 above resolution will help restore a modicum of discipline and fairness to the use of incentive compensation at OCTL." MANAGEMENT'S RESPONSE Before responding to the specific proposal made by SWIB, management of Octel believes it is important to review the underlying facts and clarify potential misunderstandings that may arise out of a reading of SWIB's proposal reproduced above. Incentive Stock Plans As is typical among Silicon Valley businesses, which compete for skilled engineers, sales people and managers, Octel adopted a stock option plan in 1985. This plan was adopted after approval by both the Board of Directors and the stockholders of the Company. Both the Board of Directors and the stockholders were given full disclosure regarding the operation of the 1985 Incentive Stock Plan and understood that stock options were a means of aligning employee incentives with those of stockholders. At various times over the last ten years, management has proposed adding to the shares reserved for use under the 1985 Incentive Stock Plan in order to grant additional options. These additions of shares to the reserves were made only after full disclosure and careful consideration by the Board of Directors and upon the approval of both the Board of Directors and the stockholders. Addition of shares to the reserves and the grant of additional options was necessary in order to renew and create incentives for continuing and new employees as both older stock options were exercised and hundreds of new employees joined the Company. In addition, the Company assumed similar stock option plans of VMX, Inc. ("VMX") in connection with a merger with VMX completed in March of 1994. Because a stock option only becomes exercisable if an employee remains with the Company, stock options are an important means of motivating employees to remain at Octel. As stock options become fully exercisable and are exercised, their impact in motivating employees to remain with the Company dissipates, and it becomes necessary to grant new stock options to such employees. Nearly all large Silicon Valley companies use stock options to attract and retain outstanding employees, and there is significant competition to obtain skilled and experienced engineers, sales people and managers in Silicon Valley. Accordingly, stock option-based incentives are an important part of the benefits package for employees. The 1985 Incentive Stock Plan and the similar VMX plans are the major means by which Octel provides stock-based incentives to its employees. Other Plans In connection with becoming a publicly held company, Octel adopted two other stock-based incentive plans widely used in Silicon Valley and elsewhere: the 1987 Employee Stock Purchase Plan and the 1988 Directors' Stock Plan. The 1987 Employee Stock Purchase Plan allows employees to buy stock in the Company at a discount through payroll deductions. It does not permit the kind of option exchange program (what SWIB refers to as a "repricing") that SWIB's resolution is intended to affect. The 1988 Directors' Stock Plan provides for automatic grants of stock options to directors at fixed times as a means of attracting experienced directors and rewarding them for their service on the board in direct proportion to increases in the value of the Company's stock. While there is no restriction beyond their fiduciary obligations preventing the Board of Directors from creating an option exchange program with respect to their own options, the Board of Directors has never done so, even in times when it was felt necessary to create an option exchange program for employees. Use of Option Exchange Programs It is important to stockholders to understand the reason the Board of Directors might adopt an option exchange program. Under some market conditions, such as those experienced in 1990 and 1994, the exercise price that employees would have to pay in order to exercise their stock options exceeds the price at which 25 28 anyone could buy stock in the market. This can be because of a decline in the Company's stock price due to factors beyond the Company's control such as stock market pressures and trends or because of Company performance. Such "underwater" stock options have little incentive value to employees and may in fact be a cause of low morale and motivation. When, in the good faith judgment of the Board of Directors, this situation appears to be more damaging to the Company and its stockholders than would be the dilutive effect of an option exchange program, the Board of Directors needs to have the ability to replace such "underwater" stock options promptly with options having an exercise price equal to the then fair market value of the stock, thus restoring the opportunity for employees to receive value in the near term by building the Company and causing the market value of the stock to increase. A number of prestigious Silicon Valley businesses have used option exchange programs in the past few years. The Company has been judicious in its use of an option exchange program, authorizing such a program in only two of its thirteen years, 1990 and 1994. Contrary to SWIB's assertions, on each of these occasions, the Board of Directors carefully considered market conditions, employee turnover, employee morale and Company performance. The deliberations of the Board of Directors prior to authorizing such a program gave consideration to the effect on existing stockholders and determined that such a program would be in the best interest of all stockholders. Octel's policy of having the Board of Directors determine if and when an option exchange program can be authorized is conventional in the industry, and SWIB is the only entity that has written to the Company requesting a change to this policy. What Optionees Give Up; No Director Exchanges Even when an option exchange program has been approved, there have been restrictions and quid pro quo's for optionees. For example, in the 1994 program, optionees were required to give up 10% of their total options, restart their vesting on a four-year track and wait to exercise their options until either (i) the market price of the stock was as high as their original exercise price or (ii) they had held the option for over five years. In the 1990 program, which was instituted in the face of extraordinary declines in the value of technology stocks (including the Company's stock), all employees were offered the chance to participate in the program but were required to refrain from exercising their options for a nine-month "blackout" period and to delay their exercisability schedules for a full year. Senior management's options were excluded from the 1994 option exchange program in recognition of the potential unfairness in cases where managers may have been partly responsible for poor Company performance. The Board of Directors has never authorized an exchange program for its own options. Mischaracterization by SWIB After reviewing the facts presented, management believes that the stockholders will understand why Octel objects to SWIB's characterization of the Company's incentive compensation practices as "irresponsible." Stockholders should also note that the Company objects to a number of comparative phrases in SWIB's proposal that use unstated standards, such as "unacceptable level of potential dilution," "extreme levels of dilution," "excessive reliance," "persistently made large option grants" and "inequitable to existing shareholders." When viewed in light of the applicable circumstances, Octel believes these SWIB comments are incorrect and unfair. Some Current Facts Here are the facts as of the Record Date: Octel's stock-based incentive plans consist of the 1985 Incentive Stock Plan (see Proposals Nos. 2 and 3), the similar VMX plans, the 1987 Employee Stock Purchase Plan and the 1988 Director's Stock Option Plan. Under 1985 Incentive Stock Plan and the VMX plans, combined, 4,076,346 shares have been issued in the past, and such shares are in the "issued and outstanding category" shown on the Company's balance sheet. 6,059,750 more shares may be issued in the future upon exercise of outstanding stock options, and 732,067 shares are reserved for issuance upon exercise of options that may be granted in the future. 26 29 Octel also maintains the 1987 Employee Stock Purchase Plan, pursuant to which approximately 1,619,061 shares have been sold in the past and are in the "issued and outstanding category" shown on the Company's balance sheet. An additional 30,939 shares are currently reserved for issuance to employees on a payroll deduction plan. Option exchange programs do not affect this plan. See Proposal No. 3. Octel's director plan is the 1988 Director's Option Plan, pursuant to which 33,000 shares have been issued in the past, and such shares are in the "issued and outstanding category" shown on the Company's balance sheet. 175,000 more shares may be issued in the future upon exercise of outstanding stock options, and 142,000 shares are reserved for issuance upon exercise of options that may be issued in the future. Octel has a total of 24,593,596 shares issued and outstanding as of the Record Date (net of stock repurchased by the Company during the year, the effect of which is to increase both the stock price per share and the percentage of the outstanding shares represented by stock options). The outstanding options from all of Octel's plans combined represent 25.5% of the total number of outstanding shares, and this percentage increases to 29.0% when shares that are reserved for issuance pursuant to additional stock options that may be granted in the future are included. Efforts to Reduce Potential Dilution The Company recognizes that the number of outstanding stock options is relatively high in comparison to the number of shares outstanding and some other companies. The reasons for this are complex, and include (i) "entitlement" philosophies of some executives that have since been replaced, (ii) options granted in connection with mergers and acquisitions where the acquired companies' employees did not have an equity-based interest to the extent that Octel employees did and Octel's management believed that it would be essential to achieving integration and consistent motivation to grant options to such new employees, (iii) options granted in order to help the Company attract a CEO at a key time for the Company -- stockholders should note that the majority of Mr. Cohn's stock options were granted at exercise prices ($35 and $50 per share) well above the market price of the Company's stock at the time they were granted so that his incentives are tightly aligned with those of stockholders in increasing the value of the Company; and (iv) the effect of completely restarting vesting requirements in connection with the option exchange program in 1994. The Company and its management team are striving to improve the fundamentals of the business, be wise in the granting of new options, increase the value of the Company so that existing options will be exercised and continue to attract and retain the best individuals to build the value of the Company. The Company believes that the Board of Directors needs continued flexibility to create and approve an option exchange program without undue delay or expense if events in the market, whether or not directly related to Octel's performance, make it prudent for the good of the Company. The SWIB Proposal Turning to the specific proposal recommended by SWIB, the Company believes that requiring stockholders to approve the rare action of the Board of Directors in authorizing an option exchange program would be unnecessary, time consuming and wasteful of the Company's money. The Board of Directors is a group of experienced executives elected by the stockholders specifically because of their experience and judgment. Each director has a fiduciary obligation to the stockholders to approve only those actions that are for the benefit of the Company and its stockholders. The directors of the Company are personally sensitive to the morale, motivations and incentives of, as well as the competitive hiring environment faced by, Octel employees. Octel's management believes that to substitute the sometimes distant understanding of certain stockholders, many of whom may be unfamiliar with the operations of Octel and the use of equity compensation tools in Silicon Valley, for the judgment of directors who are in a better position to be well-informed about the Company's operations, would result in poorer management of the Company and decreased value to the stockholders. One of the alternatives to authorizing an option exchange program recommended by SWIB is payment of higher salaries. Because this would immediately reduce earnings significantly, stockholders would be likely to see an immediate drop in the value of their investments. Further, equity-based compensation is of significant 27 30 importance in Silicon Valley and the Company would either have to pay substantially increased salaries or forego hiring of some of the best and brightest employees. This proposed solution appears to the Company's Board of Directors to be a poor one for the Company and its stockholders. Corporate Governance Philosophy Octel believes that the American system of corporate governance using qualified directors to manage and oversee companies' operations on a day to day basis is sound and that stockholders who disagree with the decisions of directors and management should seek to replace such individuals rather than restrict their ability to make decisions. MANAGEMENT RECOMMENDATION AND VOTE REQUIRED The affirmative vote of the majority of the Votes Cast will be required under Delaware law to approve the above stockholder proposal. THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE AGAINST THE ABOVE PROPOSAL. 28 31 PROPOSAL NO. 6 -- RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS The Board of Directors has nominated KPMG Peat Marwick LLP to audit the consolidated financial statements of the Company for the fiscal year ending June 30, 1996. Such nomination is being presented to the stockholders for ratification at the meeting. A representative of KPMG Peat Marwick LLP is expected to be present at the meeting, will have the opportunity to make a statement and is expected to be available to respond to appropriate questions. The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote at the meeting is required to ratify the Board's selection. If the stockholders reject the nomination, the Board will reconsider its selection. THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" RATIFICATION OF THE SELECTION OF KPMG PEAT MARWICK LLP AS THE COMPANY'S AUDITORS. OTHER MATTERS The Company knows of no other matters to be submitted to the meeting. If any other matters properly come before the meeting, it is the intention of the persons named in the enclosed proxy card to vote the shares they represent as the Company may recommend. By Order of the Board of Directors Derek S. Daley, Secretary Milpitas, California October 10, 1995 29 32 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. OCTEL COMMUNICATIONS CORPORATION 1995 ANNUAL MEETING OF STOCKHOLDERS The undersigned stockholder(s) of Octel Communications Corporation, a Delaware corporation, hereby acknowledges receipt of the Notice of Annual Meeting of Stockholders and Proxy Statement, each dated October 10, 1995, and hereby appoints Robert Cohn and Derek S. Daley, and each of them, Proxies and Attorneys-in-Fact, with full power to each of substitution, on behalf and in the name of the undersigned, to represent the undersigned at the 1995 Annual Meeting of Stockholders of Octel Communications Corporation, to be held on November 16, 1995, at 2:00 p.m., local time, at the Company's principal offices at 1001 Murphy Ranch Road, Milpitas, California 95035, and at any adjournments thereof, and to vote all shares of Common Stock which the undersigned is entitled to vote on the matters set forth below: THIS BALLOT WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS INDICATED, WILL BE VOTED FOR PROPOSALS 1, 2, 3, 4 AND 6, AGAINST PROPOSAL 5 AND AS SAID PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING. (Continued and to be signed on the other side) 33 /X/ Please mark your votes in the box The Board of Directors recommends a vote FOR Proposals 1, 2, 3, 4 and 6. 1. ELECTION OF DIRECTORS: NOMINEES: Robert Cohn, Anson M. Beard, Jr., Leo J. Chamberlain, Deborah A. Coleman, Nathaniel de Rothschild, Dag Tellefsen, W. Michael West FOR all WITHHOLD authority to vote for all nominees listed nominees listed below (except as indicated) / / / / - -------------------------------------------------------------------------------- If you wish to withhold authority to vote for any individual nominee, write that nominee's name on the line above: 2. Proposal to amend the 1985 Incentive FOR AGAINST ABSTAIN Stock Plan (the "Option Plan") to extend the term of the Option Plan for an / / / / / / additional ten-year period and change the name of the Option Plan to the "1995 Incentive Stock Plan." 3. Proposal to amend the 1987 Employee Stock Purchase Plan to increase the / / / / / / number of shares reserved for issuance thereunder. 4. Proposal to amend the Company's Certificate of Incorporation to increase / / / / / / the authorized number of shares of Common Stock to 100,000,000 The Board of Directors recommends a vote AGAINST Stockholder Proposal 5. 5. Stockholder proposal requiring the board of directors to adopt a policy prohibiting the repricing of stock / / / / / / options without stockholder approval. 6. Proposal to ratify the appointment of KPMG Peat Marwick LLP as independent / / / / / / auditors of the Company for the 1996 fiscal year. In their discretion the Proxies are authorized to vote upon such other business as may properly come before the meeting. This Proxy should be marked, dated, signed by the stockholder(s) exactly as the stockholder's name appears herein and returned promptly in the enclosed envelope. Persons signing in a fiduciary capacity should so indicate. If shares are held by joint tenants or as community property, both should sign. 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