<PAGE> 1
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:
/X/ Preliminary Proxy Statement
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
PAIRGAIN TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or 14a-6(i)(2).
/ / $500 per each 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:
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(4) Proposed maximum aggregate value of transaction:
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Set forth the amount on which the filing fee is calculated and state how
it was determined.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
[PAIRGAIN LETTERHEAD]
TO THE STOCKHOLDERS OF PAIRGAIN TECHNOLOGIES, INC.
You are cordially invited to attend the Annual Meeting of Stockholders
of PairGain Technologies, Inc. ("PairGain" or the "Company") on Wednesday, June
12, 1996, at 10:00 a.m. Pacific Daylight Time. The Annual Meeting will be held
at the Company's offices at 14402 Franklin Avenue, Tustin, California 92680.
At the meeting you will be asked to consider and vote upon the
following proposals: (i) the election of three individuals to serve on the
Company's Board of Directors until 1999; (ii) the approval of the 1996
Non-Employee Directors Stock Option Plan; (iii) the approval of a proposal to
amend Article IV A. of the Company's Certificate of Incorporation to increase
the authorized Common Stock of the Company from thirty million (30,000,000)
shares, par value $.001 per share, to sixty million (60,000,000) shares, par
value $.0005 per share, and to effect a two-for-one split of the issued Common
Stock of the Company by changing each issued share of Common Stock into two
shares of Common Stock; and (iv) the approval of the selection of Deloitte &
Touche LLP as the Company's independent auditor for the fiscal year ending
December 31, 1996.
Whether or not you plan to attend the Annual Meeting, please mark,
sign, date and return the enclosed proxy card promptly in the accompanying
postage pre-paid envelope. By returning the proxy card, you can help the
Company avoid the expense of duplicate proxy solicitations and possibly having
to reschedule the Annual Meeting if a quorum of the outstanding shares are not
present or represented by proxy. If you decide to attend the Annual Meeting
and wish to change your proxy vote, you may do so simply by voting in person at
the Annual Meeting.
May ____, 1996
CHARLES S. STRAUCH
Chairman and Chief Executive Officer
<PAGE> 3
PAIRGAIN TECHNOLOGIES, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
JUNE 12, 1996
To the Stockholders of PairGain Technologies, Inc.:
NOTICE IS HEREBY GIVEN that the 1996 Annual Meeting of Stockholders (the
"Annual Meeting") of PairGain Technologies, Inc. ("PairGain" or the "Company"),
will be held at the Company's offices at 14402 Franklin Avenue, Tustin,
California 92680, on June 12, 1996, at 10:00 a.m. local time for the following
purposes:
1. To elect three directors to serve until the 1999 Annual Meeting;
2. To approve the 1996 Non-Employee Directors Stock Option Plan (the
"Directors Plan"), pursuant to which 100,000 shares of Common
Stock will be reserved for issuance;
3. To approve a proposal to amend Article IV A. of the Company's
Certificate of Incorporation to increase the authorized Common
Stock of the Company from thirty million (30,000,000) shares, par
value $.001 per share, to sixty million (60,000,000) shares, par
value $.0005 per share, and to effect a two-for-one split of the
issued Common Stock of the Company by changing each issued share
of Common Stock into two shares of Common Stock;
4. To approve the selection of Deloitte & Touche LLP as the Company's
independent auditor for the fiscal year ending December 31, 1996;
and
5. To conduct such other business as may properly come before the
Annual Meeting and any adjournment or adjournments thereof.
The close of business on April 22, 1996 has been fixed as the record date
for the determination of stockholders entitled to notice of and to vote at the
Annual Meeting and any adjournment thereof. Only stockholders of record at
such time will be entitled to vote.
You are cordially invited to attend the Annual Meeting in person. Even if
you plan to attend the Annual Meeting, please promptly complete, sign, date and
return the enclosed proxy card in the enclosed self-addressed, postage pre-paid
envelope. It will assist us in keeping down the expenses of the Annual Meeting
if all stockholders, whether you own a few shares or many shares, return your
signed proxies promptly.
A MAJORITY OF THE OUTSTANDING SHARES OF COMMON STOCK ENTITLED TO VOTE AT
THE ANNUAL MEETING MUST BE REPRESENTED AT THE ANNUAL MEETING, IN PERSON OR BY
PROXY, IN ORDER TO CONSTITUTE A QUORUM AT THE ANNUAL MEETING. PLEASE RETURN
YOUR PROXY CARD IN ORDER TO ENSURE THAT A QUORUM IS OBTAINED AND TO AVOID THE
ADDITIONAL COSTS TO THE COMPANY OF ADJOURNING THE ANNUAL MEETING AND
RESOLICITING PROXIES.
YOUR VOTE IS IMPORTANT
By Order of the Board of Directors,
CHARLES W. McBRAYER
Secretary and Chief Financial Officer
Tustin, California
May ___, 1996
<PAGE> 4
PAIRGAIN TECHNOLOGIES, INC.
14402 FRANKLIN AVENUE
TUSTIN, CALIFORNIA 92680
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 12, 1996
PROXY STATEMENT
GENERAL INFORMATION
This Proxy Statement is furnished to stockholders of PairGain
Technologies, Inc., a Delaware corporation ("PairGain" or the "Company"), in
connection with the solicitation of proxies by the Board of Directors for use
at the Annual Meeting of Stockholders to be held on Wednesday, June 12,
1996, at 10:00 a.m. local time, and at any and all adjournments or
postponements thereof for the purposes set forth in the Notice of Annual
Meeting accompanying this Proxy Statement. The Annual Meeting will be held at
the Company's offices at 14402 Franklin Avenue, Tustin, California 92680.
These proxy solicitation materials are first being mailed on or about
May 6, 1996 to all stockholders entitled to vote at the Annual Meeting.
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 Company (sent
to the attention of Mr. Charles W. McBrayer) a written notice of revocation or
a duly executed proxy bearing a later date, or by attending the Annual Meeting
and voting in person. Attendance at the meeting will not, by itself, revoke a
proxy.
VOTING AND SOLICITATION
The solicitation of proxies will be conducted by mail and the Company
will bear all attendant costs. These costs will include reimbursements paid to
brokerage firms and others for their expenses incurred in forwarding
solicitation material regarding the Annual Meeting to beneficial owners of the
Company's Common Stock. The Company may conduct further solicitation
personally or telephonically through its officers, directors and regular
employees, none of whom will receive additional compensation for assisting with
the solicitation.
Only stockholders of record at the close of business on April 22, 1996
are entitled to notice of and to vote at the Annual Meeting. As of April 22,
1996, 15,524,876 shares of Common Stock were issued and outstanding. On each
matter to be considered at the Annual Meeting, stockholders will be entitled
to cast one vote for each share held of record on April 22, 1996. The
Company's Bylaws do not provide for cumulative voting by stockholders.
A majority of the shares of Common Stock entitled to vote will
constitute a quorum for the transaction of business at the Annual Meeting.
Each matter to be submitted to a vote of the stockholders, other than the
election of directors, must receive an affirmative vote of the majority of
shares present, in person or represented by proxy, and entitled to vote at the
Annual Meeting. Directors shall be elected by a plurality of the votes cast.
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. The Company believes that abstentions should
be counted for purposes of determining whether a quorum is present at the
Annual Meeting for the transaction of business, and, except for the election
of directors, should also be counted in tabulating votes cast on proposals
presented to stockholders. The Company intends to count broker non-votes as
present or represented for purposes of determining the presence or absence of a
quorum for the transaction of business. Broker non-votes will not be counted
for purposes of determining whether a proposal has been approved.
The shares represented by all valid proxies will be voted in
accordance with the specifications therein. Unless otherwise directed in the
proxy, the persons named therein will vote FOR: 1) the election of the three
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<PAGE> 5
nominees listed below; 2) the approval of the 1996 Non-Employee Directors
Stock Option Plan; 3) the proposal to amend Article IV A. of the Company's
Certificate of Incorporation to increase the number of shares of Common Stock
authorized for issuance from thirty million (30,000,000) shares to sixty
million (60,000,000) shares and to effect a two-for-one split of the issued
Common Stock by changing each issued share of Common Stock into two shares of
Common Stock; and 4) the approval of the selection of Deloitte & Touche LLP as
the Company's independent auditor for the fiscal year ending December 31, 1996.
As to any other business which may properly come before the meeting, they will
vote in accordance with their best judgment. The Company does not presently
know of any other such business.
PROPOSAL 1:
ELECTION OF DIRECTORS
The Certificate of Incorporation of the Company provides for the
Company's Board of Directors to be divided into three classes, as nearly equal
in number as is reasonably possible, serving staggered terms so that directors'
current terms will expire either at the 1996, 1997, or 1998 Annual Meeting of
Stockholders. The preceding notwithstanding, directors serve until their
successors have been duly elected and qualified or until they resign, become
disqualified or disabled, or are otherwise removed. The class of directors
whose terms expires as of the Annual Meeting is comprised of Messrs. Strauch,
Hawk and Hoff.
Certain information about Messrs. Strauch, Hawk and Hoff is set forth
below.
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
------------------ --- ---------------------------- --------------
<S> <C> <C> <C>
Charles S. Strauch 60 Chief Executive Officer, 1991
PairGain Technologies, Inc.
Robert C. Hawk(1) 56 President, Carrier Division, 1992
US WEST Communications, Inc.
Robert A. Hoff(1)(2) 43 General Partner, 1989
Crosspoint Venture Partners
</TABLE>
- --------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Mr. Strauch became a director of the Company in October 1991, Chairman
of the Board of Directors of the Company in November 1991 and Chief Executive
Officer of the Company in April 1992. From May 1989 until December 1991, Mr.
Strauch was self-employed providing management services to technology
companies. From October 1991 to December 1991, in his self-employed role, Mr.
Strauch provided management services to the Company. Also as a part of
providing such management services, from May 1989 to May 1991 he served as Vice
Chairman of the Board of Directors of EECO, Inc., a manufacturer of
electronic switches and computer components. From November 1988 to May 1989,
Mr. Strauch served as President of MSI Data Corporation, a manufacturer
of hand-held data collection devices and then a subsidiary of Symbol
Technologies, Inc., having been acquired by Symbol Technologies in November
1988. Mr. Strauch also served as a member of the Board of Directors of Symbol
Technologies from November 1988 to May 1989. From August 1984 until November
1988, Mr. Strauch served as Chief Executive Officer of MSI Data Corporation.
Mr. Hawk became a director of the Company in November 1992. Since 1988,
Mr. Hawk has served as President--Carrier Division of US WEST Communications,
Inc., one of the seven Regional Bell Operating Companies ("RBOCs"). Prior to
that time, Mr. Hawk served as Vice President, Marketing of US WEST and as
Director, Advanced Services of AT&T. Mr. Hawk also serves as a director of
Premisys Communications and Xylan Corporation.
Mr. Hoff became a director of the Company in February 1989. Mr.
Hoff has been a general partner of Crosspoint Venture Partners, a private
venture capital investment company, since September 1983. Mr. Hoff also
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<PAGE> 6
serves as a director of privately-held Com21 Incorporated, Timeline Vista,
Efficient Networks, Accredited Home Lenders and US Web Corporation and
publicly-held STAC Inc. and Onyx Acceptance Corporation.
DIRECTOR CONTINUING TO SERVE UNTIL 1997
The name of and certain information about the director comprising the
class of directors whose term expires in 1997 are set forth below:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
--------------- --- ------------------------------------- --------------
<S> <C> <C> <C>
Howard S. Flagg 41 President, PairGain Technologies, Inc. 1991
</TABLE>
- -----------------
Mr. Flagg, a founder of the Company, has been President and a director
of the Company since November 1991. He served as Chief Executive Officer from
November 1991 to April 1992 and as Vice President, Research and Development from
February 1988 to November 1991. Prior to founding the Company, Mr. Flagg
founded and served as a principal of Advanced Telecommunications, Inc., an
aerospace telecommunications consulting firm.
DIRECTORS CONTINUING TO SERVE UNTIL 1998
The names of and certain information about the directors
comprising the class of directors whose term expires in 1998 are set forth
below:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
------------------ --- ---------------------------- --------------
<S> <C> <C> <C>
Benedict A. Itri 43 Vice President, Engineering, 1991
PairGain Technologies, Inc.
B. Allen Lay(1)(2) 60 General Partner, 1989
Southern California Ventures
</TABLE>
- -------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Mr. Itri, a founder of the Company, has been Vice President, Engineering
of the Company since its inception in February 1988 and a director of the
Company since November 1991. Prior to founding the Company, Mr. Itri founded
and served as a principal of Advanced Telecommunications, Inc.
Mr. Lay became a director of the Company in February 1989. Mr. Lay has
been a general partner of Southern California Ventures, a private venture
capital investment company, since May 1983. Mr. Lay also serves as a director
of privately-held Physical Optics Corporation, Medclone, FRS, Inc., Kofax
Imaging Corporation and Meridian Data, and of publicly-held Vestro Foods, a
natural food company.
There is no family relationship between any director or executive
officer of the Company.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors has two committees: the Audit Committee and the
Compensation Committee. During the fiscal year ended December 31, 1995,
PairGain's Board of Directors met ten times. No incumbent Director attended
fewer than 75% of the aggregate meetings of the Board of Directors and meetings
of the committees of the Board on which he served.
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<PAGE> 7
The Audit Committee, which held two meetings during fiscal 1995,
consists of Robert C. Hawk, Robert A. Hoff and B. Allen Lay. The Audit
Committee recommends engagement of the Company's independent auditor and is
primarily responsible for approving the services performed by the
Company's independent auditor and for reviewing and evaluating the Company's
accounting principles and its system of internal accounting controls.
The Compensation Committee of the Board of Directors consists of Robert
A. Hoff and B. Allen Lay. The Compensation Committee held five meetings during
fiscal 1995. The Compensation Committee is responsible for administering the
Company's Stock Option/Stock Issuance Plan (the "1993 Plan") and the Key
Management Incentive Compensation Plan. The Compensation Committee determines
recipients of awards, sets the exercise price of options granted, and
determines the terms, provisions and conditions of all rights granted. This
Committee also determines the recipients of and the amount of bonuses to be
paid to key management.
Directors who are not officers of the Company receive no compensation
for attending committee or regular or special Board meetings. Directors,
with the exception of Messrs. Hoff and Lay who serve on the Compensation
Committee, are eligible to receive stock options pursuant to the Company's 1993
Plan.
PROPOSAL 2:
APPROVAL OF 1996 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
The Company's stockholders are being asked to approve the 1996
Non-Employee Directors Stock Option Plan (the "Directors Plan"), pursuant to
which 100,000 shares of Common Stock will be reserved for issuance. The
Board of Directors (the "Board") adopted the Directors Plan on April 17, 1996,
as an equity incentive program to attract and retain the services of highly
qualified individuals to serve as non-employee Board members, subject to
stockholder approval of this Proposal 2 at the 1996 Annual Meeting.
The following is a summary of the principal features of the Directors
Plan. The summary, however, does not purport to be a complete description of
all the provisions of the Directors Plan. Any stockholder of the Company who
wishes to obtain a copy of the actual plan document may do so upon written
request to the Corporate Secretary at the Company's principal executive offices
in Tustin, California.
SHARE RESERVE
A total of 100,000 shares of Common Stock has been reserved for
issuance over the ten year term of the Directors Plan. Should one or more
outstanding options under the Directors Plan expire or terminate for any
reason prior to exercise in full, then the shares of Common Stock subject to
the portion of each option not so exercised will be available for subsequent
option grant under the Directors Plan.
In the event any change is made to the Common Stock issuable under the
Directors Plan by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Company's receipt of
consideration, appropriate adjustments will be made to (i) the maximum number
and/or class of securities issuable under the Directors Plan, (ii) the
number and/or class of securities for which automatic option grants are to
be subsequently made under the Directors Plan to newly-elected or continuing
non-employee Board members, and (iii) the number and/or class of securities and
price per share in effect under each option outstanding under the Directors
Plan.
ELIGIBILITY
Only the non-employee members of the Board will be eligible to
participate in the Directors Plan. As of April 17, 1996, three non-employee
Board members were eligible to participate in the Directors Plan. Non-employee
board members (other than those serving as members of the Compensation
Committee of the Board) will also be eligible to receive discretionary option
grants under the Company's 1993 Plan.
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<PAGE> 8
VALUATION
The fair market value per share of Common Stock on any relevant date
under the 1996 Plan will be the closing selling price per share on that
date on the Nasdaq National Market. On April 17, 1996, the closing selling
price per share was $90.00.
AUTOMATIC OPTION GRANT PROGRAM
At the 1996 Annual Meeting, each individual who will continue to serve
as a non-employee Board member will automatically be granted an option to
purchase 10,000 shares of Common Stock, provided such individual has not
previously received any other stock option grants from the Company. Each
individual who first becomes a non-employee Board member after the 1996 Annual
Meeting, whether through election by the Company's stockholders or appointment
by the Board, will automatically receive, at the time of such initial election
or appointment, a similar option grant to purchase 10,000 shares of Common
Stock, provided such individual has not previously been in the Company's
employ. In addition, on the date of each subsequent Annual Stockholders
Meeting, beginning with the 1997 Annual Meeting, each individual who is to
continue to serve as a non-employee Board member will automatically be granted,
whether or not that individual is standing for re-election at such Annual
Meeting, an option grant for 5,000 shares of Common Stock, provided such
individual has served as a Board member for at least six months. There will be
no limit on the number of such 5,000-share option grants any one non-employee
Board member may receive over his or her period of continued Board service, and
non-employee Board members who have previously been in the Company's employ or
who have received prior stock option grants from the Company other than
pursuant to the Directors Plan will be eligible to receive such annual grants.
Each option will have an exercise price per share equal to 100% of the
fair market value per share of Common Stock on the option grant date and a
maximum term of ten years measured from the option grant date.
The exercise price is payable in cash or in shares of Common Stock
valued at fair market value on the exercise date. The exercise price may also
be paid through a same-day sale program pursuant to which a designated
brokerage firm will effect an immediate sale of the shares purchased under the
option and pay over to the Company, out of the sale proceeds available on the
settlement date, sufficient funds to cover the exercise price of the purchased
shares.
Each option will be immediately exercisable for all the option shares,
but any purchased shares will be subject to repurchase by the Company, at the
exercise price paid per share, upon the optionee's cessation of Board service.
Each initial 10,000-share option grant will vest (and the Company's repurchase
rights will lapse) in four successive equal annual installments over the
optionee's period of Board service, with the first such installment to vest
upon the completion of one year of Board service measured from the option grant
date. Each annual 5,000-share option grant will vest (and the Company's
repurchase rights will lapse) upon the completion of one year of Board service
measured from the option grant date.
The shares subject to each automatic option grant will immediately vest
upon the occurrence of any of the following events while the optionee continues
in Board service: (i) the optionee's death or permanent disability; (ii) an
acquisition of the Company by merger or asset sale; or (iii) a hostile change
in control of the Company (whether by successful tender offer for more than 50%
of the outstanding voting stock or by proxy contest for the election of Board
members). In addition, upon the successful completion of a hostile tender
offer for more than 50% of the outstanding voting stock, each automatic option
grant which has been outstanding for at least six months may be surrendered to
the Company for a cash distribution per surrendered option share in an amount
equal to the excess of (a) the tender offer price paid per share over (b) the
exercise price payable for such share.
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<PAGE> 9
GENERAL PROVISIONS
ACCELERATION
The acceleration of vesting in the event of a change in the ownership or
control of the Company may be seen as an anti-takeover provision and may have
the effect of discouraging a merger proposal, a takeover attempt or other
efforts to gain control of the Company.
ASSIGNABILITY/STOCKHOLDER RIGHTS
During the optionee's lifetime, each automatic option grant will
generally be exercisable only by the optionee and will not be assignable or
transferable other than by will or by the laws of inheritance following
the optionee's death or in connection with the optionee's divorce or other
marital separation proceedings.
The holder of an automatic option grant will have no stockholder rights
with respect to any shares subject to such option until such individual
exercises the option, pays the exercise price for the purchased shares and
becomes the record holder of those shares.
AMENDMENT AND TERMINATION
The Board may amend or modify the Directors Plan in any or all respects
whatsoever subject to any required stockholder approval. The Board may
terminate the Directors Plan at any time, and the 1996 Plan will in all events
terminate on June 12, 2006.
FEDERAL INCOME TAX CONSEQUENCES
Options granted under the Directors Plan will be non-statutory options
which are not intended to satisfy the requirements of Section 422 of the
Internal Revenue Code. The Federal income tax treatment for such options is as
follows:
No taxable income is recognized by an optionee upon the grant of a
non-statutory option. The optionee will in general recognize ordinary
income, in the year in which the option is exercised, equal to the excess
of the fair market value of the purchased shares on the exercise date over
the exercise price paid for the shares.
If the shares acquired upon exercise of the non-statutory option
are unvested and subject to repurchase by the Company in the event of the
optionee's termination of service prior to vesting in those shares, then
the optionee will not recognize any taxable income at the time of exercise
but will have to report as ordinary income, as and when the Company's
repurchase right lapses, an amount equal to the excess of (i) the fair
market value of the shares on the date the repurchase right lapses over
(ii) the exercise price paid for the shares. The optionee may, however,
elect under Section 83(b) of the Internal Revenue Code to include as
ordinary income in the year of exercise of the option an amount equal to
the excess of (i) the fair market value of the purchased shares on the
exercise date over (ii) the exercise price paid for such shares. If the
Section 83(b) election is made, the optionee will not recognize any
additional income as and when the repurchase right lapses.
The Company will be entitled to an income tax deduction equal to
the amount of ordinary income recognized by the optionee with respect to
the exercised non-statutory option. The deduction will in general be
allowed for the taxable year of the Company in which such ordinary income
is recognized by the optionee.
6
<PAGE> 10
ACCOUNTING TREATMENT
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation ("Statement No. 123"), which became effective for the
Company beginning January 1, 1996. Statement No. 123 requires expanded
disclosures of stock-based compensation arrangements and encourages (but does
not require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Companies are permitted, however, to continue to
apply APB Opinion No. 25, which recognizes compensation cost based on the
intrinsic value of the equity instrument awarded. Accordingly, the Company
will continue to apply APB Opinion No. 25 to its stock-based compensation
awards, including awards under the Directors Plan. As such, option grants with
exercise prices equal to the fair market value of the shares on the grant date
will not result in any direct charge to the Company's reported earnings.
However, Statement No. 123 will require pro forma statements and footnote
disclosure to the Company's financial statements indicating the impact which
those options would have upon the Company's reported earnings were the value of
those options treated as compensation expense at the time of grant.
Additionally, the number of outstanding options may be a factor in
determining the Company's weighted average common and common equivalent shares
outstanding for purposes of computing earnings per share.
STOCKHOLDER APPROVAL
The affirmative vote of a majority of the outstanding voting shares of
the Company present or represented and entitled to vote at the 1996 Annual
Meeting is required for approval of the Directors Plan. Should such
stockholder approval not be obtained, then the Directors Plan will not become
effective and no option grants will be made under the Directors Plan.
However, non-employee Board members (other than those serving as members of the
Compensation committee of the Board) will remain eligible to receive
discretionary option grants in accordance with the terms and provisions of the
Company's 1993 Plan.
THE BOARD BELIEVES THAT IT IS IN THE BEST INTERESTS OF THE COMPANY TO
IMPLEMENT A COMPREHENSIVE EQUITY INCENTIVE PROGRAM FOR THE COMPANY WHICH
WILL PROVIDE A MEANINGFUL OPPORTUNITY FOR NON-EMPLOYEE BOARD MEMBERS TO ACQUIRE
A SUBSTANTIAL PROPRIETARY INTEREST IN THE ENTERPRISE AND THEREBY ENCOURAGE SUCH
INDIVIDUALS TO REMAIN IN THE COMPANY'S SERVICE AND MORE CLOSELY ALIGN THEIR
INTERESTS WITH THOSE OF THE STOCKHOLDERS.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR PROPOSAL 2.
NEW PLAN BENEFITS
The following table sets forth certain information regarding the options
expected to be granted under the Directors Plan on the date of the 1996 Annual
Meeting to continuing non-employee Board members provided this Proposal 2 is
approved at the meeting. Each option will have an exercise price per share
equal to the closing selling price per share of Common Stock on that date on
the Nasdaq National Market.
<TABLE>
<CAPTION>
Number of
Name Option Shares Exercise Price
------------------------ ------------- --------------
<S> <C> <C>
Robert A. Hoff, Director 10,000 (1)
B. Allen Lay, Director 10,000 (1)
All non-employee directors as a group
(three persons)(2) 20,000 (1)
</TABLE>
- ------------------
1. Closing price on Grant Date
2. Includes Robert C. Hawk, who is ineligible to receive the automatic grant
of options to purchase 10,000 shares due to options previously granted
under the Company's 1993 Plan, including 4,000 shares granted in January
1995.
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<PAGE> 11
PROPOSAL 3:
APPROVAL OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION
The Board of Directors is requesting stockholder approval of a proposal
to amend Article IV A. of the Company's Certificate of Incorporation (the
"Certificate") to increase the authorized Common Stock of the Company from
thirty million (30,000,000) shares, par value $.001 per share, to sixty million
(60,000,000) shares, par value $.0005 per share, and to effect a two-for-one
split of the issued Common Stock of the Company by changing each issued share
of Common Stock into two shares of Common Stock. The Certificate presently
provides that the Company is authorized to issue two classes of stock
consisting of thirty million (30,000,000) shares of Common Stock, $.001 par
value, and two million (2,000,000) shares of Preferred Stock, $.001 par value.
The Board of Directors authorized this proposed amendment to the Certificate on
April 17, 1996. The Board of Directors determined that such amendment is
advisable and directed that the proposed amendment be considered at the Annual
Meeting of Stockholders to be held June 12, 1996. The affirmative vote of the
holders of a majority of the outstanding shares of Common Stock of the Company
is required to approve the proposed amendment.
The full text of the proposed amendment to Article IV A. of the
Company's Certificate of Incorporation is set forth in Appendix A to this Proxy
Statement. The amendment will not affect the number of shares of Preferred
Stock authorized, which is 2,000,000 shares of Preferred Stock, par value $.001
per share.
PURPOSE AND EFFECT OF AMENDMENT
The proposed amendment would increase the number of shares of Common
Stock which the Company is authorized to issue from 30,000,000 to 60,000,000.
The additional 30,000,000 shares would be part of the existing class of Common
Stock and, if and when issued, would have the same rights and privileges as the
shares of Common Stock presently issued and outstanding.
The Board of Directors believes it desirable to preserve the relative
proportion of issued to unissued shares. If the proposed amendment is adopted,
there would be approximately 20,714,728 authorized shares that are not
outstanding, reserved for issuance or held in the treasury of the Company. The
present proportion of authorized and unissued shares to issued shares would be
unchanged by the proposed stock split. The Company, as of April 22, 1996, had
15,524,876 shares of Common Stock outstanding. Following the proposed
two-for-one split of the Common Stock (the "Stock Split"), shares outstanding
would be 31,049,752 (assuming no change in shares outstanding after April 22,
1996 other than the Stock Split).
The Board of Directors anticipates that the increase in the number of
outstanding shares of Common Stock of the Company resulting from the Stock
Split will place the market price of the Common Stock in a range more
attractive to investors, particularly individuals, and may result in a broader
market for the shares. The Company will apply for inclusion on the Nasdaq
National Market of the additional shares of Common Stock to be issued as part
of the Stock Split.
If the amendment is approved, the Company proposes to cause it to become
effective at the close of business on June 15, 1996 (the "Effective Date") by
filing a Restated Certificate of Incorporation (the "New Certificate") in the
Office of the Secretary of State of the State of Delaware. The New Certificate
would incorporate only those changes made by the amendment as set forth in
Appendix A to this Proxy Statement.
The increase in the authorized Common Stock would allow the remaining
unissued shares to be used at some future date for proper corporate
purposes without further stockholder action. Such future activities may
include, without limitation, financings, establishing strategic relationships
with corporate partners, providing equity incentives to employees, officers or
directors, or effecting future stock splits or dividends. The additional
shares of Common Stock authorized but not required to effect the Stock Split
may also be used to acquire or invest in complementary business or products or
to obtain the right to use complementary technologies. Although the Company
has no present obligation to issue additional shares of Common Stock (except
pursuant to employee stock-based plans), the Company continues to evaluate and
conduct discussions with third parties with respect to potential acquisitions
or investments. However, the probability that the Company will enter into any
such transactions is presently uncertain.
8
<PAGE> 12
The additional shares of Common Stock issuable upon the Stock Split
would have rights identical to the currently outstanding shares of Common Stock
of the Company. Adoption of the New Certificate would not affect the rights of
the holders of currently outstanding shares of Common Stock of the Company,
except for the effects incidental to increasing the number of shares of the
Company's Common Stock outstanding. If the Restated Certificate is approved,
appropriate adjustments will be made, as of the Effective Date of the Stock
Split, in the number and price of shares reserved for issuance under the
employee stock-based plans and the number and price per share in effect for
such options or purchase rights outstanding under such plans.
The Board believes that the Stock Split will provide additional
benefits such as broadening the stockholder base and increasing the public
float, both of which would increase the liquidity for the Company's
stockholders.
POSSIBLE EFFECTS OF THE PROPOSED AMENDMENT
If the stockholders approve the proposed Certificate of Amendment, the
Board of Directors may cause the issuance of additional shares of Common Stock
without further vote of the stockholders of the Company, except as provided
under Delaware corporate law or under the rules of any national securities
exchange on which shares of Common Stock of the Company are then listed.
Current holders of Common Stock have no preemptive or like rights. The
issuance of additional shares of Common Stock would decrease the proportionate
equity interest of the Company's current stockholders and depending upon the
price paid for such additional shares, could result in dilution to the
Company's current stockholders.
In addition, the Board of Directors could use authorized but unissued
shares to create impediments to a takeover or a transfer of control of the
Company. Accordingly, the increase in the number of authorized shares of Common
Stock may deter a future takeover attempt which holders of Common Stock may
deem to be in their best interest or in which holders of Common Stock may be
offered a premium for their shares over the market price. The Board of
Directors is not currently aware of any attempt to take over or acquire
the Company. While it may be deemed to have potential anti-takeover effects,
the proposed amendment to increase the authorized Common Stock is not prompted
by any specific effort or takeover threat currently perceived by management.
INFORMATION RELATING TO PROPOSED STOCK SPLIT
Assuming stockholder approval of Proposal No. 3, the proposed Stock
Split will be effective as of June 15, 1996. Stockholders will receive new
stock certificates reflecting the Stock Split when such stock certificates are
submitted to the Company's transfer agent in connection with the transfer of
securities represented by such stock certificate. Stock certificates
representing shares issued prior to the Effective Date will continue to
represent the same number of shares of the Company's stock as they did prior
to the Effective Date and will, upon the Effective Date, represent the right to
receive a stock certificate reflecting the Stock Split. Stockholders should
not destroy their existing certificates and should not mail them to the Company
or its transfer agent.
The Company believes that the Stock Split will not result in any
taxable income or in any gain or loss to stockholders for U.S. Federal income
tax purposes. Immediately after the Stock Split, the tax basis of each share of
Common Stock will be one-half of the tax basis before the Stock Split. For tax
purposes, each new share will be deemed to have been acquired at the same time
as the original share with respect to which the new share was issued.
If stockholders dispose of their shares after the Stock Split, they may
pay higher brokerage commissions on the same relative interest in the Company
because that interest is represented by a greater number of shares.
Since the rate of brokerage commissions may vary, the Company is unable to
specify the amount of this increase. Stockholders desiring this information
may wish to consult their brokers to ascertain the brokerage commission that
would be charged for disposing of the greater number of shares.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR PROPOSAL 3.
9
<PAGE> 13
PROPOSAL 4:
RATIFICATION OF SELECTION OF INDEPENDENT AUDITOR
The Board of Directors has selected Deloitte & Touche LLP as the
Company's independent auditor for the fiscal year ending December 31, 1996 and
has further directed that management submit the selection of independent
auditor for ratification by stockholders at the Annual Meeting.
Representatives of Deloitte & Touche LLP are expected to be present at the
Annual Meeting, will have an opportunity to make a statement if they so desire
and will be available to respond to appropriate questions.
Stockholder ratification of the selection of Deloitte & Touche LLP as
the Company's independent auditor is not required by the Company's Bylaws or
otherwise. However, the Board is submitting the selection of Deloitte &
Touche LLP to the stockholders for ratification as a matter of good corporate
practice. If the stockholders fail to ratify the selection, the Audit
Committee and the Board of Directors will reconsider whether to retain that
firm. Even if the selection is ratified, the Audit Committee and the Board of
Directors in their discretion may direct the appointment of a different
independent accounting firm at any time during the year if they determine that
such a change would be in the best interests of the Company and its
stockholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR PROPOSAL 4.
10
<PAGE> 14
STOCK OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth information concerning the beneficial
ownership of shares of the Company's Common Stock by (i) each beneficial owner
of more than 5% of the outstanding shares of Common Stock; (ii) each Director
of the Company; (iii) the Chief Executive Officer and the four most highly
compensated other Executive Officers; and (iv) by all directors and executive
officers of the Company as a group. This information is presented as of April
22, 1996. Except as otherwise noted, each beneficial owner listed has sole
investment and voting power with respect to the Common Stock indicated.
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL NUMBER OF SHARES
OR NUMBER OF POSITION WITH OF COMMON STOCK PERCENT
PERSONS IN GROUP COMPANY BENEFICIALLY OWNED OF CLASS
------------------ -------------- ------------------ --------
<S> <C> <C> <C>
Putnam Investments, Inc.(1) 1,986,457 12.8%
One Post Office Square
Boston, MA 02109
A I M Management Group, Inc.(2) 1,150,200 7.4%
11 Greenway Plaza Suite 1919
Houston, TX 77046
Robert C. Hawk(3) Director 4,876 *
Robert A. Hoff Director 12,495 *
B. Allen Lay Director 38,120 *
Charles S. Strauch(4) Chairman, Chief 479,545 3.0%
Executive Officer
Howard S. Flagg(5) President and Director 348,009 2.2%
Benedict A. Itri(6) Vice President, 333,609 2.1%
Engineering and Director
Joseph R. Leonardi(7) Vice President, 47,889 *
International Sales
Stuart R. Davis(8) Vice President, 17,392 *
Field Sales
All Directors and Officers
as a Group (10 persons)(9) 1,323,313 8.0%
</TABLE>
- -----------------
* Less than 1%
(1) Information obtained from Schedule 13G filed with the Securities and
Exchange Commission on September 7, 1995 and Amendment No. 1 to Schedule
13G filed on January 15, 1996. This information was also confirmed
telephonically.
(2) Information obtained from Schedule 13G filed with the Securities and
Exchange Commission on February 12, 1996. This information was also
confirmed telephonically.
11
<PAGE> 15
(3) Includes 4,876 shares subject to options exercisable within 60 days of
April 22, 1996.
(4) Includes 377,610 shares subject to options exercisable within 60 days of
April 22, 1996.
(5) Includes 259,317 shares subject to options exercisable within 60 days of
April 22, 1996.
(6) Includes 261,151 shares subject to options exercisable within 60 days of
April 22, 1996.
(7) Includes 6,773 shares subject to options exercisable within 60 days of
April 22, 1996.
(8) Includes 17,227 shares subject to options exercisable within 60 days of
April 22, 1996.
(9) Includes 957,670 shares subject to options exercisable within 60 days of
April 22, 1996.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires the Company's officers and directors, and persons who own more
than 10% of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities
Commission ("SEC") and the Common Stock of the Company are required by SEC
Regulation to furnish the Company with copies of all reports filed pursuant to
Section 16(a).
Based solely on its review of copies of such reports received by it, or
written representations of certain reporting persons that no Form 5's were
required for such persons, the Company believes that, during 1995, all filing
requirements applicable to its executive officers, directors and greater than
ten percent stockholders were complied with, with the following exceptions:
Mr. Strauch failed to timely file a Form 4 for the month of August 1995
reporting a change in beneficial ownership of 5,000 shares of the Company's
Common Stock. Mr. Strauch filed a Form 4 on September 18, 1995 reporting
this change.
Mr. Flagg filed an amended Form 4 to report the change in beneficial
ownership of 1,000 shares of the Company's Common Stock. The amended Form 4
was filed on March 31, 1996.
Mr. Itri failed to timely file a Form 4 for the month of November 1995
reporting a change in beneficial ownership of 16,000 shares of the Company's
Common Stock. Mr. Itri filed a Form 4 on December 18, 1995 reporting this
change.
12
<PAGE> 16
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the
Executive Officers and Directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------ --- -------------------------------------------------
<S> <C> <C>
Charles S. Strauch 60 Chairman of the Board and Chief Executive Officer
Howard S. Flagg 41 President and Director
Benedict A. Itri 43 Vice President, Engineering and Director
Stuart R. Davis 43 Vice President, Field Sales
Joseph R. Leonardi 56 Vice President, International Sales
Charles W. McBrayer 47 Vice President, Finance and Administration and
Chief Financial Officer
Dennis Young 53 Vice President, Operations
Robert C. Hawk(1) 56 Director
Robert A. Hoff(1)(2) 43 Director
B. Allen Lay(1)(2) 60 Director
</TABLE>
- -----------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Information regarding Messrs. Strauch, Flagg, Itri, Hawk, Hoff and Lay
is included under the heading "Election of Directors".
Mr. Davis joined the Company in August 1989. He became Vice President,
Telco Sales in February 1992 and Vice President, Field Sales in January 1996.
From July 1986 to 1989 Mr. Davis served as Regional Manager, Bell Atlantic
for NEC in its transmission division.
Mr. Leonardi joined the Company in April 1994 as Vice President,
International Sales. Mr. Leonardi served as President of Conveyant Systems,
Inc., a telecommunications software manufacturer, from 1989 to 1994.
Mr. McBrayer joined the Company in March 1995 as Vice President, Finance
and Administration and Chief Financial Officer. Mr. McBrayer served as Vice
President, Finance and Chief Financial Officer for Triconex Corporation, a
publicly held corporation, from 1986 to March 1995 and as a director of Triconex
Corporation in 1993 and 1994.
Mr. Young joined the Company in September 1993 as Director, European
Sales and assumed the position of Vice President, Operations in December 1994.
From 1985 to 1993 Mr. Young served in various capacities for the U.K. subsidiary
of EECO, Inc. and for Talley Industries. These companies manufactured and sold
consumer electronic products throughout the European market.
The Company's Certificate of Incorporation provides for the Company's
Board of Directors to be divided into three classes, as nearly equal in number
as is reasonably possible, serving staggered terms so that Directors' current
terms will expire either at the 1996, 1997 or 1998 Annual Meeting of
Stockholders. At each Annual Meeting of the Company's stockholders, one class of
directors is elected for a three-year term. The terms of Messrs. Strauch, Hoff
and Hawk expire at the 1996 Annual Meeting, Mr. Flagg's expires at the 1997
Annual Meeting, Messrs. Itri and Lay at the 1998 Annual Meeting.
Officers serve at the discretion of the Board of Directors. The Board
of Directors has a Compensation Committee (the "Compensation Committee"), which
administers the Company's stock option plan, and an Audit Committee which
reviews the results and scope of the audit and other services provided by the
Company's independent auditor. The Directors do not receive compensation for
services on the Board of Directors or any committee thereof but are reimbursed
for their out-of pocket expenses. There are no family relationships among any
of the Executive Officers or Directors of the Company. One Director was granted
an option to purchase shares of the Company's Common Stock in connection with
his appointment to the Board of Directors.
13
<PAGE> 17
EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid by the
Company to the Chief Executive Officer and to each of the four additional most
highly compensated Executive Officers (the "Named Executive Officers") for the
year ended December 31, 1995. During 1995, no Named Executive Officer received
other compensation in excess of the lesser of $50,000 or 10% of such Officer's
compensation, nor did any such Officer receive any restricted stock award,
stock appreciation right or payment under any long term incentive plan.
TABLE I
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------
----------------------------------------------- SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING
POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#)
------------------- ---- --------- -------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Charles S. Strauch 1995 255,000 35,000 212,375 (1) 20,000
Chief Executive 1994 253,269 -- 960,750 (2) 70,000
Officer 1993 240,000 -- -- --
Howard S. Flagg 1995 119,615 56,635 639,487 (1) 10,000
President 1994 113,269 -- 259,463 (2) 30,000
1993 100,000 -- -- --
Benedict A. Itri 1995 114,615 54,135 572,250 (1) 15,000
Vice President, 1994 108,269 -- 224,025 (2) 30,000
Engineering 1993 95,000 -- -- --
Joseph R. Leonardi 1995 109,154 78,038 611,299 (1) 5,000
Vice President, 1994 72,692 (3) -- -- 105,000
International Sales 1993 -- -- -- --
Stuart R. Davis 1995 97,116 59,189 764,332 (1) 20,000
Vice President, 1994 93,846 27,812 29,995 (4) 20,000
Field Sales 1993 85,000 -- 25,844 (4) 16,666
</TABLE>
- ---------------
(1) "Other Annual Compensation" for Messrs. Strauch, Flagg, Itri, Leonardi
and Davis in the fiscal year ended December 31, 1995 represents the
value received from the exercise of stock options. The amounts shown
are the difference between the exercise price and the closing price of
the Company's Stock on the date of exercise.
(2) "Other Annual Compensation" for Messrs. Strauch, Flagg and Itri in the
fiscal year ended December 31, 1994 represents the value received from
the exercise of stock options. The amounts shown are the difference
between the exercise price and the closing price of the Company's
Stock on the date of exercise
(3) Mr. Leonardi joined the Company in April, 1994. Had Mr. Leonardi been
employed by the Company for all of 1994, his salary would have been
$108,000.
(4) "Other Annual Compensation" for Mr. Davis in the fiscal years ended
December 31, 1994 and 1993 represents the payment of commissions to
Mr. Davis.
14
<PAGE> 18
OPTION GRANTS
The following table sets forth information concerning stock option
grants made to each of the Named Executive Officers for the year ended December
31, 1995. No stock appreciation rights were granted to these individuals
during such fiscal year.
TABLE II
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
--------------------------------------------------------- Value at Assumed
No. of Annual Rates of
Securities Percent of Stock price
Underlying Total Options Appreciation For
Options Granted to Exercise of Option Term(s)(3)
Granted Employees in Basic Price Expiration -------------------
Name (#)(1) 1995 ($/Sh)(2) Date 5% ($) 10% ($)
------------------ ---------- ------------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Charles S. Strauch 20,000 1.6 30.500 10/05/05 383,626 972,183
Howard S. Flagg 10,000 0.8 30.500 10/05/05 191,813 486,091
Benedict A. Itri 15,000 1.2 30.500 10/05/05 287,719 729,137
Joseph R. Leonardi 5,000 0.4 30.500 10/05/05 95,906 243,046
Stuart R. Davis 20,000 1.6 18.875 06/22/05 237,408 601,638
</TABLE>
- ----------------
(1) All of the options were granted under the Company's 1993 Plan. The
option shares will vest in 48 equal monthly installments upon the
completion of each month of service beginning one month after the date
of grant. Each option will have a maximum term of 10 years, subject
to earlier termination following the optionee's cessation of service
with the Company.
(2) The exercise price per share of the options granted represented the
fair market value of the underlying shares of Common Stock on the
dates the respective options were granted. The exercise price may be
paid in cash or in shares of Common Stock Valued at fair market value
on the exercise date. The Company may also finance the option
exercise by loaning the optionee sufficient funds to pay the exercise
price for the purchased shares.
(3) There is no assurance provided to any executive officer or any other
holder of the Company's securities that the actual stock price
appreciation over the 10-year option term will be at the assumed 5% and
10% levels or at any other defined level. Unless the market price of
the Common Stock does in fact appreciate over the option term, no
value will be realized from the option grants made to the executive
officers.
15
<PAGE> 19
The following table sets forth information concerning option exercises
and option holdings for the fiscal year ended December 31, 1995 with
respect to the Named Executive Officers.
TABLE III
AGGREGATE OPTION EXERCISE IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options at In-the-Money Options at
Shares Value December 31, 1995 December 31, 1995($)
Acquired on Realized --------------------------- ---------------------------
Name Exercise(#) ($) (1) Exercisable Unexercisable Exercisable Unexercisable
------------------ ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles S. Strauch 10,000 212,375 366,360 (2) 61,252 19,677,355 2,370,779
Howard S. Flagg 31,000 639,487 286,418 (3) 36,857 15,499,904 1,546,793
Benedict A. Itri 20,000 572,250 287,627 (4) 41,649 15,558,989 1,663,000
Joseph R. Leonardi 31,563 611,299 11,144 67,293 518,339 3,048,434
Stuart R. Davis 30,565 764,332 20,082 36,019 1,003,242 1,530,406
</TABLE>
- --------------
(1) Based on the market price at the time of exercise less the exercise
price.
(2) Of these, 50,397 shares are subject to immediately exercisable options
but are unvested and, if purchased, are subject to repurchase by the
Company upon termination of the optionee's service prior to vesting.
There were 315,963 vested shares as of December 31, 1995 with a value
of $16,931,348.
(3) Of these, 16,421 shares are subject to immediately exercisable options
but are unvested and, if purchased, are subject to repurchase by the
Company upon termination of the optionee's service prior to vesting.
There were 269,997 vested shares as of December 31, 1995 with a value
of $14,605,165.
(4) Of these, 16,421 shares are subject to immediately exercisable options
but are unvested and, if purchased, are subject to repurchase by the
Company upon termination of the optionee's service prior to vesting.
There were 271,206 vested shares as of December 31, 1995 with a value
of $14,664,250.
16
<PAGE> 20
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Company's Compensation Committee (the "Committee")
are Messrs. Hoff and Lay. Neither of these individuals was an officer or
employee of the Company at any time during the year ended December 31,
1995.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors is composed of two
independent outside directors, Messrs. Hoff and Lay. The Committee reviews the
salary levels of all officers and administers the Company's various plans,
including the Company's Key Management Incentive Compensation Plan and the
Company's 1993 Plan.
GENERAL COMPENSATION POLICY. The Committee's fundamental compensation
policy is to make a substantial portion of an executive's compensation
contingent upon the financial performance of the Company. Accordingly, in
addition to each executive's base salary, the Company offers bonuses and stock
option awards which are tied to the Company's and executive's performance
goals. Prior to January 1, 1994, executive compensation consisted of salary,
benefits and stock options. Effective January 1, 1994, the Board of Directors
approved a new compensation package for key management which added an incentive
compensation component. The Committee believes that providing incentives to
the executive officers through both a cash bonus and an equity interest in the
Company benefits stockholders by aligning the long-term interests of
stockholders and employees.
There are four components of key management's compensation package:
1. Salary;
2. Benefits, which include only medical, dental, and life insurance
and participation in a 401(k) plan;
3. Eligibility for equity purchase on more favorable terms than those
available to the outside common stockholder (through the 1993 Plan
and through the Company's Stock Purchase Plan); and
4. Eligibility for annual incentive compensation.
The overriding principle of the Key Management Incentive Compensation
Plan is to motivate and reward key management to achieve above average results.
There were 29 participants in the fiscal 1995 Key Management Incentive
Compensation Plan. There are approximately 43 participants in the fiscal 1996
Management Incentive Compensation Plan. Participation is approved on a
year-by-year basis. A bonus plan is offered only to management because they
can influence corporate results more than the other employee group. The bonus
element of the participant's total compensation package is therefore, more
results-oriented than any other element.
FACTORS. Several of the more important factors which were considered in
establishing the components of each executive officer's compensation package
for the 1995 fiscal year are summarized below. Additional factors were also
taken into account, and the Committee may, in its discretion, apply entirely
different factors, particularly different measures of financial performance, in
setting executive compensation for future fiscal years. However, all
compensation decisions will be designed to further the general compensation
policy indicated above.
BASE SALARY. The base salary for each executive officer is set on the
basis of personal performance, the salary levels in effect for comparable
positions with the Company's principal competitors and the Company's financial
performance relative to such competitors. Factors relating to individual
performance that are assessed in setting base compensation are based on the
particular duties and areas of responsibility of the individual executive
officer. Factors relating to the Company's financial performance that may be
related to increasing or decreasing base salary include revenues and earnings.
The establishment of base compensation involves a subjective assessment and
weighing of the foregoing criteria and is not based on any specific
formula.
ANNUAL INCENTIVE COMPENSATION. The Company's Management Incentive
Compensation Plan is intended to provide the opportunity for participants to
make long-term investments or special one-time purchases. The plan is
administered by the Committee. The Committee will, in general, rely on the CEO
to establish participant eligibility for the Management Incentive Compensation
Plan, set objectives, and establish awards,
17
<PAGE> 21
except that the Committee will specifically approve the objectives for the CEO,
approve the total amount proposed for the final payments, interpret, change or
establish new rules as required, and may alter any proposed objectives or
awards. The full Board of Directors must approve awards to the CEO. The Board
of Directors, through the Committee, may amend the Management Incentive
Compensation Plan or discontinue the Management Incentive Compensation Plan at
any time.
Participants receive an annual cash award, most of which is based on
goals to achieve above average corporate results and some of which is based on
goals to achieve above average performance of the individual and their function
or business unit. Predetermined formulas are used whenever possible to assure
the participants' ability to manage toward their objectives. Final judgment as
to award amounts for all officers except the CEO is determined solely by the
CEO and the Committee regardless of predetermined formulas, in order to assure
fairness of awards relative to special circumstances. Extraordinary
performance can be rewarded above the maximum bonuses allowed, special
circumstances may warrant increasing a bonus above that determined by the plan
formula, or a bonus can be reduced based on special circumstances. For
example, the fiscal 1995 Management Incentive Compensation Plan limited the
maximum level for the CEO's cash bonus to assure that his total cash
compensation did not exceed generally accepted levels for comparable
companies.
Assessment of any adjustment to bonuses earned is determined by the
Committee. No bonuses are paid to participants if the Company does not achieve
a predetermined threshold level of planned earnings as approved by the Board.
The corporate goals and the threshold level differ from year to year, but are
always aligned with the objective of improving shareholder value.
STOCK OPTIONS. All stock options are granted under the 1993 Plan and
are intended to align the interests of each officer-optionee with those of the
stockholders and provide them with a significant incentive to manage the
Company from the perspective of an owner with an equity interest in the success
of the business. The size of the option grant made to each executive officer
under the 1993 Plan is based upon that individual's current position with the
Company, internal comparability with option grants made to other Company
executives and the individual's potential for future responsibility and
promotion over the option term. The Compensation Committee has established
certain general guidelines in making option grants to the Company's executive
officers in an attempt to target a fixed number of unvested option shares for
each officer based upon his or her position with the Company and his or her
existing holdings of unvested option shares.
Options granted under the Discretionary Option Grant Program may be
immediately exercisable for all the option shares, on either a vested or
unvested basis, or may become exercisable for fully-vested shares in
installments over the participant's period of service. Any unvested shares are
subject to repurchase or cancellation by the Company upon the participant's
cessation of service or the Company's non-attainment of the applicable
performance goals. However, the Compensation Committee has full discretionary
authority under the 1993 Plan to accelerate the vesting and the exercisability
of any outstanding option, or to accelerate the vesting of any issued shares,
in whole or in part at any time.
CEO COMPENSATION. The annual base salary for the Company's Chief
Executive Officer, Mr. Charles S. Strauch, was established by the Committee on
February 7, 1994 at $255,000. The Committee's decision was made primarily on
Mr. Strauch's personal performance and the rate of base salary paid to the
chief executive officers of the Company's competitors and at a level equivalent
to the amounts paid by comparably sized companies. Mr. Strauch earned no
bonus during fiscal 1995.
The Committee considers equity-based compensation, in the form of stock
options to be an important component of Mr. Strauch's compensation. Such
options are intended to motivate leadership for long-term Company growth and
profitability. Mr. Strauch was granted options to purchase 20,000 shares on
October 5, 1995, based on the standards discussed above.
18
<PAGE> 22
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m)
As a result of Section 162(m) of the Internal Revenue Code, which was
enacted into law in 1993, the Company will not be allowed a federal income tax
deduction for compensation paid to certain executive officers, to the extent
that compensation exceeds $1 million per officer in any one year. This
limitation will be in effect for each fiscal year of the Company beginning
after December 31, 1993 and will apply to all compensation paid to the covered
executive officers which is not considered to be performance based.
Compensation which does qualify as performance-based compensation will not have
to be taken into account for purposes of this limitation.
The Compensation Committee does not expect that the compensation to be
paid to the Company's executive officers for the 1996 fiscal year will exceed
the $1 million limit per officer. Accordingly, until final Treasury
regulations are issued with respect to the new $1 million limitation, the
Committee will defer any decision on whether or not to restructure one or more
components of the compensation paid to the executive officers so as to qualify
those components as performance-based compensation that will not be subject
to the $1 million limitation.
We conclude our report with the acknowledgment that no member of the
Committee is a former or current officer or employee of the Company or any
of its subsidiaries.
COMPENSATION COMMITTEE
Robert A. Hoff
B. Allen Lay
19
<PAGE> 23
PERFORMANCE MEASUREMENT COMPARISON (1)
The following graph shows a comparison of cumulative total returns for
the Company, the Standard and Poor's 500, the Center for Research in Securities
Prices Index for the Nasdaq Stock Market Telecommunication Stocks (the "CRSP
Nasdaq Telecommunication Index") and the Company's self-determined peer group
(the "Peer Group", detailed below) for the period that commenced September 15,
1993 (the date on which the Company's Common Stock was first traded on the
Nasdaq National Market System) and ended on December 31, 1995. The cumulative
total return assumes that a stockholder invested $100 at the beginning of the
period in PairGain Common Stock, the S&P 500, the Nasdaq Telecommunications
Index and the Peer Group. It also assumes that all dividends have been
reinvested and is adjusted for any stock splits. Past financial performance
should not be considered to be a reliable indicator of future performance, and
investors should not use historical trends to anticipate results or
trends in future periods.
The Peer Group consists of the following companies: Comdial
Corporation; Communications Systems, Inc.; Converse Technology, Inc.; EIS
International, Inc.; Intervoice, Inc.; Microcom, Inc.; Porta Systems
Corporation; and Zoom Telephonics, Inc. The Peer Group was determined by the
Company for comparison in the Proxy for the 1995 Annual Meeting and is
comprised of companies sharing PairGain's SIC number and having 1994 year-end
sales within $10 million of the Company's 1994 year-end sales. This Peer Group
will not be used in future years for Performance Measurement Comparisons. The
CRSP Nasdaq Telecommunication Index was chosen for comparison purposes for this
and subsequent years because it was determined to be a broader and more
comprehensive representation of the Company's industry than the previously
chosen Peer Group.
COMPARISON OF CUMULATIVE TOTAL RETURNS
(PAIRGAIN TECHNOLOGIES, INC., S&P 500,
CRSP NASDAQ TELECOMMUNICATION INDEX, PEER GROUP)
[GRAPH]
The data points depicted on the graph are as follows:
<TABLE>
<CAPTION>
Index Description 9/15/93 12/31/93 12/31/94 12/31/95
----------------- ------- -------- -------- --------
<S> <C> <C> <C> <C>
PairGain Technologies, Inc. 100.000 98.21 101.79 391.07
S&P 500 Index 100.000 101.53 99.50 133.43
CRSP Nasdaq Telecommunication Index 100.000 101.66 85.10 102.50
Peer Group 100.000 102.06 97.49 138.74
</TABLE>
20
<PAGE> 24
Percentage annual returns for the Company's stock and the Indexes
listed above are shown below:
<TABLE>
<CAPTION>
ANNUAL RETURN PERIOD
------------------------------------------------------------
Index Description 9/15/93-12/31/93(a) 12/31/93-12/31/94 12/31/94-12/31/95
----------------- ------------------- ----------------- -----------------
<S> <C> <C> <C>
PairGain Technologies, Inc. -1.79% 3.64% 284.21%
S&P 500 Index 1.53% -2.00% 34.11%
CRSP Nasdaq Telecommunication Index 1.66% -16.28% 20.44%
Peer Group 2.06% -4.48% 42.31%
</TABLE>
- ----------------
(a) Indicates the return for the 105 day period only
(1) This Section is not "soliciting material", is not deemed filed with
the SEC and is not to be incorporated by reference into any filing of the
Company under the Securities Act or the Exchange Act whether made before
or after the date hereof and irrespective of any general incorporation
language in such filing.
MANAGEMENT CONTRACTS AND CHANGE IN CONTROL AGREEMENTS
None of the Company's executive officers have employment agreements
with the Company, and their employment may be terminated at any time at the
discretion of the Board of Directors. The Compensation Committee has the
discretionary authority as administrator of the Company's 1993 Plan to provide
for the accelerated vesting of the shares of Common Stock subject to
outstanding options upon the happening of certain events, including, without
limitation, a change in control of the Company whether by successful tender
offer for more than 50% of the outstanding voting stock or by a proxy contest
for the election of Board of Directors members or the subsequent termination of
the optionee's service within a designated time period following the change
in control.
CERTAIN TRANSACTIONS
INDEMNIFICATION AGREEMENTS
The Company has entered into an Indemnity Agreement with each of its
directors and officers (the "Indemnity Agreements") which provides that, with
certain exceptions, the Company will hold harmless and indemnify its directors
and officers to the fullest extent permitted under Delaware Law. Under the
Indemnity Agreements, the Company is obligated to indemnify each of its
directors and officers against all expenses (including attorneys' fees), fines,
judgments and settlement amounts that such director or officer may incur in
connection with any action or proceeding (including actions brought by or on
behalf of the Company such as stockholder derivative actions) to which the
director or officer is or may be made a party to by reason of such director's
or officer's position as a director, officer, employee or agent of the Company
or any other company or enterprise to which the person provides services at the
request of the Company. This additional indemnity goes beyond the rights
expressly provided under the Delaware Law primarily in the availability of
indemnification in connection with actions brought by or on behalf of the
Company, such as stockholder derivative actions, and in the provisions for
advancement of litigation expenses prior to settlement or judgment.
APPOINTMENT OF INDEPENDENT AUDITOR
The firm of Deloitte & Touche LLP, the Company's independent auditor
for the fiscal year ended December 31, 1995, was selected by the Board of
Directors, upon recommendation of the Audit Committee, to act in the same
capacity for the fiscal year ending December 31, 1996. Neither the firm of
Deloitte & Touche LLP nor any of its members has any relationship with the
Company or any of its affiliates except in the firm's capacity as the
Company's Auditor.
Representatives of Deloitte & Touche LLP are expected to be present at
the Annual Meeting and will have the opportunity to make statements if they so
desire and respond to appropriate questions from stockholders.
21
<PAGE> 25
STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company which are intended to be
presented by stockholders at the Company's 1997 Annual Meeting must be received
by the Company no later than January 10, 1997 to be included in the proxy
statement and form of proxy relating to the 1997 Annual Meeting.
OTHER MATTERS
The Company knows of no other matters to be brought before the Annual
Meeting. If any other business should properly come before the Annual Meeting,
the persons named in the proxy intend to vote thereon in accordance with
their best judgment.
The Company's Annual Report for the fiscal year ended December 31, 1995,
including audited financial statements, is being sent with this Proxy Statement
to all stockholders of record as of April 22, 1996.
COPIES OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1995 AS FILED WITH THE SEC WILL BE PROVIDED TO STOCKHOLDERS
WITHOUT CHARGE UPON WRITTEN REQUEST TO MR. CHARLES W. McBRAYER, PAIRGAIN
TECHNOLOGIES, INC., 14402 FRANKLIN AVENUE, TUSTIN, CALIFORNIA 92680.
By Order of the Board of Directors
CHARLES W. McBRAYER
Secretary and Chief Financial Officer
Tustin, California
May ___, 1996
22
<PAGE> 26
APPENDIX A
AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
PAIRGAIN TECHNOLOGIES, INC.
* * * * *
ARTICLE IV
A. Classes of Stock; Stock Split.
1. Classes of Stock. The corporation is authorized to issue two
classes of stock to be designated, respectively, "Common Stock" and "Preferred
Stock". The total number of shares which the corporation is authorized to
issue is 62,000,000 shares, of which 60,000,000 shares shall be Common Stock,
par value $.0005 per share, and 2,000,000 shares shall be Preferred Stock, par
value $.001 per share.
2. Stock Split. Upon the filing of this Amended and Restated
Certificate of Incorporation with the Secretary of State of the State of
Delaware and the effectiveness thereof (the "Effective Time"), each share of
Common Stock of the corporation which is issued and outstanding immediately
prior to the Effective Time will automatically be converted at the Effective
Time, without any further action on the part of the holder thereof, into two
(2) shares of Common Stock authorized under this Amended and Restated
Certificate of Incorporation, each having a par value of $.0005 per share. The
conversion of the Common Stock shall hereinafter be referred to as the "Stock
Split". Stockholders owning shares prior to the Effective Time will receive new
stock certificates reflecting the Stock Split when such stock certificates are
submitted to the Company's transfer agent in connection with any subsequent
transfer of Common Stock represented by such certificates. Stock certificates
representing shares of Common Stock issued prior to the Effective Time will
continue to represent the same number of shares as they did prior to the
Effective Time and will upon the Effective Time, represent the right to receive
stock certificates reflecting shares converted in the Stock Split.
1
<PAGE> 27
PAIRGAIN TECHNOLOGIES, INC.
1996 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1996 Non-Employee Directors Stock Option Plan is intended
to promote the interests of Pairgain Technologies, Inc., a Delaware
corporation, by providing the non-employee members of the Board with the
opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Corporation as an incentive for them to remain in
the service of the Corporation.
Capitalized terms shall have the meanings assigned to such
terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The terms of each option grant (including the timing and
pricing of the option grant) shall be determined by the express terms of the
Plan, and neither the Board nor any committee of the Board shall exercise any
discretionary functions with respect to option grants made pursuant to the
Plan.
III. ELIGIBILITY
A. The individuals eligible to receive option grants
under the Plan shall be limited to (i) those individuals serving as
non-employee Board members on the date of the 1996 Annual Stockholders Meeting,
provided they have not previously received one or more stock option grants from
the Corporation, (ii) those individuals who are first elected or appointed as
non-employee Board members after date of the 1996 Annual Stockholders Meeting,
whether through appointment by the Board or election by the Corporation's
stockholders, and (iii) those individuals who are to continue to serve as
non-employee Board members following one or more Annual Stockholders Meetings
beginning with the 1997 Annual Meeting. A non-employee Board member who has
previously been in the employ of the Corporation (or any Parent or Subsidiary)
shall not be eligible to receive an initial option grant under the Plan at the
time he or she first becomes a non-employee Board member, but shall be eligible
to receive periodic option grants under the Plan upon his or her continued
service as a non-employee Board member following one or more Annual
Stockholders Meetings.
<PAGE> 28
IV. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares
repurchased by the Corporation on the open market. The maximum number of
shares of Common Stock which may be issued over the term of the Plan shall not
exceed 100,000 shares.
B. Shares of Common Stock subject to outstanding options
shall be available for subsequent issuance under the Plan to the extent the
options expire or terminate for any reason prior to exercise in full. Shares
subject to any option or portion thereof surrendered in accordance with Article
Two and all shares issued under the Plan, whether or not those shares are
subsequently repurchased by the Corporation pursuant to its repurchase rights
under the Plan, shall reduce on a share-for-share basis the number of shares of
Common Stock available for subsequent issuance under the Plan. In addition,
should the exercise price of an option under the Plan be paid with shares of
Common Stock, then the number of shares of Common Stock available for issuance
under the Plan shall be reduced by the gross number of shares for which the
option is exercised, and not by the net number of shares of Common Stock issued
to the holder of such option.
C. Should any change be made to the Common Stock by
reason of any stock split, stock dividend, recapitalization, combination of
shares, exchange of shares or other change affecting the outstanding Common
Stock as a class without the Corporation's receipt of consideration,
appropriate adjustments shall be made to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the number and/or class of securities
for which option grants are to be subsequently made per Eligible Director and
(iii) the number and/or class of securities and the exercise price per share in
effect under each outstanding option in order to prevent the dilution or
enlargement of benefits thereunder. The adjustments to the outstanding options
shall be made by the Board and shall be final, binding and conclusive.
2.
<PAGE> 29
ARTICLE TWO
OPTION GRANT PROGRAM
I. OPTION TERMS
A. GRANT DATES. Option grants shall be made on the
dates specified below:
1. Each individual who is serving as a
non-employee Board member on the date of the 1996 Annual Stockholders Meeting
shall automatically be granted on that date a Non-Statutory Option to purchase
10,000 shares of Common Stock less shares previously granted (but not less than
zero), provided such individual has not been in the prior employ of the
Corporation (or any Parent or Subsidiary) and has not received any prior
stock option grants from the Corporation.
2. Each individual who is first elected or
appointed as a non-employee Board member after the date of the 1996 Annual
Stockholders Meeting shall automatically be granted, on the date of such
initial election or appointment, a Non-Statutory Option to purchase 10,000
shares of Common Stock, provided such individual has not been in the prior
employ of the Corporation (or any Parent or Subsidiary).
3. On the date of each Annual Stockholders
Meeting, beginning with the 1997 Annual Meeting, each individual who is to
continue to serve as a non-employee Board member shall automatically be
granted, whether or not such individual is standing for re-election as a Board
member at that Annual Meeting, a Non-Statutory Option to purchase an additional
5,000 shares of Common Stock, provided such individual has served as a
non-employee Board member for at least six (6) months. There shall be no limit
on the number of such 5,000-share option grants any one non-employee Board
member may receive over his or her period of Board service, and non-employee
Board members who have previously been in the employ of the Corporation (or any
Parent or Subsidiary) or who have received prior stock option grants from the
Corporation shall be eligible to receive such annual grants.
B. EXERCISE PRICE.
1. The exercise price per share shall be equal
to one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
2. The exercise price shall become immediately
due upon exercise of the option and shall be payable in one or more of the
forms specified below:
(i) cash or check made payable to the
Corporation,
3.
<PAGE> 30
(ii) shares of Common Stock held for the
requisite period necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes and valued at Fair Market
Value on the Exercise Date, or
(iii) to the extent the option is
exercised for vested shares, through a special sale and remittance
procedure pursuant to which the Optionee shall concurrently provide
irrevocable written instructions to (a) a Corporation-designated
brokerage firm to effect the immediate sale of the purchased shares
and remit to the Corporation, out of the sale proceeds available on
the settlement date, sufficient funds to cover the aggregate exercise
price payable for the purchased shares plus all applicable Federal,
state and local income and employment taxes required to be withheld by
the Corporation by reason of such exercise and (b) the Corporation to
deliver the certificates for the purchased shares directly to such
brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is
utilized, payment of the exercise price for the purchased shares must be made
on the Exercise Date.
C. OPTION TERM. Each option shall have a term of ten
(10) years measured from the option grant date.
D. EXERCISE AND VESTING OF OPTIONS. Each option shall
be immediately exercisable for any or all of the option shares. However, any
shares purchased under the option shall be subject to repurchase by the
Corporation, at the exercise price paid per share, upon the Optionee's
cessation of Board service prior to vesting in those shares. Each initial
grant shall vest, and the Corporation's repurchase right shall lapse, in a
series of four (4) successive equal annual installments over the Optionee's
period of continued service as a Board member, with the first such installment
to vest upon the Optionee's completion of one (1) year of Board service
measured from the option grant date. Each annual grant shall vest, and the
Corporation's repurchase right shall lapse, upon the Optionee's completion of
one (1) year of Board service measured from the option grant date.
E. EFFECT OF TERMINATION OF BOARD SERVICE. The
following provisions shall govern the exercise of any options held by the
Optionee at the time the Optionee ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's
death, the personal representative of the Optionee's estate or the
person or persons to whom the option is transferred pursuant to the
Optionee's will or in accordance with the laws of descent and
distribution) shall have a twelve (12)-month period following the date
of such cessation of Board service in which to exercise each such
option.
4.
<PAGE> 31
(ii) During the twelve (12)-month exercise period,
the option may not be exercised in the aggregate for more than the
number of vested shares for which the option is exercisable at the
time of the Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board
member by reason of death or Permanent Disability, then all shares at
the time subject to the option shall immediately vest so that such
option may, during the twelve (12)-month exercise period following
such cessation of Board service, be exercised for all or any portion
of such shares as fully-vested shares.
(iv) In no event shall the option remain
exercisable after the expiration of the option term. Upon the
expiration of the twelve (12)-month exercise period or (if earlier)
upon the expiration of the option term, the option shall terminate and
cease to be outstanding for any vested shares for which the option has
not been exercised. However, the option shall, immediately upon the
Optionee's cessation of Board service for any reason other than death
or Permanent Disability, terminate and cease to be outstanding, to the
extent it is not exercisable for vested shares on the date of such
cessation of Board service.
F. STOCKHOLDER RIGHTS. The holder of an option shall
have no stockholder rights with respect to the shares subject to the option
until such person shall have exercised the option, paid the exercise price and
become a holder of record of the purchased shares.
G. LIMITED TRANSFERABILITY OF OPTIONS. During the
lifetime of the Optionee, the option shall be exercisable only by the Optionee
and shall not be assignable or transferable other than by will or by the laws
of descent and distribution following the Optionee's death. However, an option
may be assigned in accordance with the terms of a Qualified Domestic Relations
Order. The assigned option may only be exercised by the person or persons who
acquire a proprietary interest in the option pursuant to such Qualified
Domestic Relations Order. The terms applicable to the assigned option (or
portion thereof) shall be the same as those in effect for the option
immediately prior to such assignment and shall be set forth in such documents
issued to the assignee as the Plan Administrator may deem appropriate.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares
of Common Stock at the time subject to each outstanding option but not
otherwise vested shall automatically vest in full so that each such option
shall, immediately prior to the specified effective date of the Corporate
Transaction, become fully exercisable for all of the shares of Common Stock at
the time subject to such option and may be exercised for all or any portion of
such shares as fully-vested shares of Common Stock. Immediately following the
consummation of the Corporate
5.
<PAGE> 32
Transaction, each option shall terminate and cease to be outstanding, except
to the extent assumed by the successor corporation (or parent thereof).
B. In connection with any Change in Control, the shares
of Common Stock at the time subject to each outstanding option but not
otherwise vested shall automatically vest in full so that each such option
shall, immediately prior to the effective date of the Change in Control, become
fully exercisable for all of the shares of Common Stock at the time subject to
such option and may be exercised for all or any portion of such shares as
fully-vested shares of Common Stock. Each such option shall remain exercisable
for such fully-vested option shares until the expiration or sooner termination
of the option term or the surrender of the option in connection with a Hostile
Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the
Optionee shall have a thirty (30)-day period in which to surrender to the
Corporation each option held by him or her for a period of at least six (6)
months. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to the surrendered option
(whether or not the Optionee is otherwise at the time vested in those shares)
over (ii) the aggregate exercise price payable for such shares. Such cash
distribution shall be paid within five (5) days following the surrender of the
option to the Corporation. No approval of the Board or any committee of the
Board shall be required in connection with such option surrender and cash
distribution.
D. Each option which is assumed in connection with a
Corporate Transaction shall be appropriately adjusted, immediately after such
Corporate Transaction, to apply to the number and class of securities which
would have been issuable to the Optionee in consummation of such Corporate
Transaction had the option been exercised immediately prior to such Corporate
Transaction. Appropriate adjustments shall also be made to the exercise price
payable per share under each outstanding option, provided the aggregate
exercise price payable for such securities shall remain the same.
E. The grant of options under the Plan shall in no way
affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
6.
<PAGE> 33
ARTICLE THREE
MISCELLANEOUS
I. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on April 17, 1996.
The Plan shall become effective immediately upon its approval by the
Corporation's stockholders at the 1996 Annual Stockholders Meeting. If such
stockholder approval is obtained, then the initial option grants shall be made
on the date of the Annual Meeting to those non-employee Board members who are
to eligible to receive such grants in accordance with the applicable provisions
of Article Two. If such stockholder approval is not obtained, then the Plan
shall terminate, and no options shall be granted under the Plan.
B. The Plan shall terminate upon the earliest of (i)
June 12, 2006, (ii) the date on which all shares available for issuance under
the Plan shall have been issued or cancelled pursuant to the exercise or
cash-out of the options under the Plan or (iii) the termination of all
outstanding options in connection with a Corporate Transaction. Upon such Plan
termination, all option grants and unvested stock issuances outstanding on such
date shall thereafter continue to have force and effect in accordance with the
provisions of the documents evidencing such grants or issuances.
II. AMENDMENT OF THE PLAN
The Board shall have complete and exclusive power and
authority to amend or modify the Plan in any or all respects. However, (i) the
Plan, together with the option grants outstanding thereunder, may not be
amended at intervals more frequently than once every six (6) months, other than
to the extent necessary to comply with applicable Federal income tax laws and
regulations, and (ii) no such amendment or modification shall adversely affect
the rights and obligations with respect to options at the time outstanding
under the Plan unless the Optionee consents to such amendment or modification.
In addition, the Board shall not, without the approval of the Corporation's
stockholders, (i) materially increase the maximum number of shares issuable
under the Plan or the number of shares for which options may be granted to each
Eligible Director, except for permissible adjustments in the event of certain
changes in the Corporation's capitalization, (ii) materially modify the
eligibility requirements for Plan participation or (iii) materially increase
the benefits accruing to Plan participants.
III. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
7.
<PAGE> 34
IV. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any
option under the Plan and the issuance of any shares of Common Stock upon the
exercise of any option shall be subject to the Corporation's procurement of all
approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the options granted under it and the shares of Common Stock
issued pursuant to it.
B. No shares of Common Stock or other assets shall be
issued or delivered under the Plan unless and until there shall have been
compliance with all applicable requirements of Federal and state securities
laws, including the filing and effectiveness of the Form S-8 registration
statement for the shares of Common Stock issuable under the Plan, and all
applicable listing requirements of any stock exchange (or the Nasdaq National
Market, if applicable) on which Common Stock is then listed for trading.
V. NO IMPAIRMENT OF RIGHTS
Nothing in the Plan shall interfere with or otherwise restrict
in any way the rights of the Corporation and the Corporation's stockholders to
remove the Optionee from the Board at any time.
8.
<PAGE> 35
APPENDIX
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
B. CHANGE IN CONTROL shall mean a change in ownership or control
of the Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by
any person or related group of persons (other than the Corporation or
a person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation), of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities pursuant to a tender
or exchange offer made directly to the Corporation's stockholders
which the Board does not recommend such stockholders to accept, or
(ii) a change in the composition of the Board over
a period of thirty-six (36) consecutive months or less such that a
majority of the Board members ceases, by reason of one or more
contested elections for Board membership, to be comprised of
individuals who either (A) have been Board members continuously since
the beginning of such period or (B) have been elected or nominated for
election as Board members during such period by at least a majority of
the Board members described in clause (A) who were still in office at
the time such election or nomination was approved by the Board.
C. CODE shall mean the Internal Revenue Code of 1986, as amended.
D. COMMON STOCK shall mean the Corporation's common stock.
E. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined
voting power of the Corporation's outstanding securities are
transferred to a person or persons different from the persons
holding those immediately prior to such transaction; or
A-1.
<PAGE> 36
(ii) the sale, transfer or other disposition of
all or substantially all of the Corporation's assets in complete
liquidation or dissolution of the Corporation.
F. CORPORATION shall mean Pairgain Technologies, Inc., a Delaware
corporation.
G. DOMESTIC RELATIONS ORDER shall mean any judgment, decree or
order (including approval of a property settlement agreement) which provides or
otherwise conveys, pursuant to applicable State domestic relations laws
(including community property laws), marital property rights to any spouse or
former spouse of the Optionee.
H. EXERCISE DATE shall mean the date on which the Corporation
shall have received written notice of the option exercise.
I. FAIR MARKET VALUE per share of Common Stock on any relevant
date shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on
the Nasdaq National Market, then the Fair Market Value shall be the
closing selling price per share of Common Stock on the date in
question, as such price is reported by the National Association of
Securities Dealers on the Nasdaq National Market or any successor
system. If there is no closing selling price for the Common Stock on
the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation
exists.
(ii) If the Common Stock is at the time listed on
any Stock Exchange, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question on the
Stock Exchange which serves as the primary market for the Common
Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price
for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date
for which such quotation exists.
J. HOSTILE TAKE-OVER shall mean a change in ownership of the
Corporation effected through the following transaction:
(i) any person or related group of persons (other
than the Corporation or a person that directly or indirectly controls,
is controlled by, or is under common control with, the Corporation)
directly or indirectly acquires beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or
A-2.
<PAGE> 37
exchange offer made directly to the Corporation's stockholders which
the Board does not recommend such stockholders to accept, and
(ii ) more than fifty percent (50%) of the
securities so acquired are accepted from persons other than Section 16
Insiders.
K. 1934 ACT shall mean the Securities Exchange Act of 1934, as
amended.
L. NON-STATUTORY OPTION shall mean an option not intended to
satisfy the requirements of Code Section 422.
M. OPTIONEE shall mean any person to whom an option is granted
under the Plan.
N. PARENT shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
O. PERMANENT DISABILITY shall mean the inability of the Optionee
to perform his or her usual duties as a Board member by reason of any medically
determinable physical or mental impairment expected to result in death or to be
of continuous duration of twelve (12) months or more.
P. PLAN shall mean the Corporation's 1996 Non-Employee Directors
Stock Option Plan, as set forth in this document.
Q. QUALIFIED DOMESTIC RELATIONS ORDER shall mean a Domestic
Relations Order which substantially complies with the requirements of Code
Section 414(p).
R. STOCK EXCHANGE shall mean either the American Stock Exchange
or the New York Stock Exchange.
S. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
T. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market
Value per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over.
A-3.
<PAGE> 38
PAIRGAIN TECHNOLOGIES, INC.
PROXY
ANNUAL MEETING OF STOCKHOLDERS, JUNE 12, 1996
14402 FRANKLIN AVENUE
TUSTIN, CALIFORNIA 92680
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Charles S. Strauch, Howard S. Flagg, Benedict
A. Itri, Robert C. Hawk, Robert A. Hoff, B. Allen Lay, or any of them, each with
full power of substitution, to represent the undersigned and to vote all shares
of stock of PairGain Technologies, Inc. which the undersigned would be entitled
to vote if personally present at the 1996 Annual Meeting of Stockholders of
PairGain Technologies, Inc. to be held at 14402 Franklin Avenue, Tustin,
California 92680 on June 12, 1996 at 10:00 a.m. local time, and at any and all
adjournments or postponements thereof, as follows on the reverse side.
The undersigned acknowledges receipt of the Notice of Annual Meeting and
Proxy Statement for the 1996 Annual Meeting.
Whether or not the undersigned plans to attend the 1996 Annual Meeting, the
undersigned is urged to execute and return this Proxy, which may be revoked at
any time prior to the voting hereof.
All other proxies heretofore given by the undersigned to vote shares of stock
of PairGain Technologies, Inc. which the undersigned would be entitled to vote
if personally present at said Annual Meeting or any other adjournment thereof
are hereby expressly revoked.
The shares represented by this Proxy will be voted as directed, but when no
direction is given, they will be voted FOR the nominees named below and FOR
approval of the proposals named below. The nominations for members of the Board
of Directors, the proposal of the adoption of the 1996 Non-Employee Directors
Stock Option Plan, the proposal for the approval of the amendment to the
Certificate of Incorporation and the proposal to approve the appointment of
Deloitte & Touche LLP as independent auditor of the Company for 1996 have been
made by PairGain Technologies, Inc. Your vote on each matter is neither
conditioned on nor related to your vote on any other matter.
1. To elect the following directors to serve for a term of three years:
<TABLE>
<S> <C> <C>
FOR WITHHOLD AUTHORITY TO VOTE
Charles S. Strauch / / / /
Robert C. Hawk / / / /
Robert A. Hoff / / / /
</TABLE>
2. To approve the adoption of the 1996 Non-Employee Directors Stock Option Plan:
FOR / / AGAINST / / ABSTAIN / /
Continued and to be Signed on Reverse Side
<PAGE> 39
3. To approve a proposal to amend Article IV A of the Company's Certificate of
Incorporation to increase the authorized Common Stock of the Company from
thirty million (30,000,000) shares, par value $.001 per share, to sixty
million (60,000,000) shares, par value $.0005 per share, and to effect a
two-for-one split of the issued Common Stock of the Company by changing each
issued share of Common Stock into two shares of Common Stock:
FOR / / AGAINST / / ABSTAIN / /
4. To approve the appointment of Deloitte & Touche LLP as independent auditor of
the Company for 1996:
FOR / / AGAINST / / ABSTAIN / /
In addition, the proxies are authorized, in their discretion, to vote upon
such other matters as may properly come before the Annual Meeting or any
adjournments thereof. The Board of Directors recommends a vote FOR the nominees
listed above and FOR Proposal 2, Proposal 3 and Proposal 4. This Proxy, when
properly executed, will be voted as specified above. This Proxy will be voted
FOR the nominees listed above and FOR Proposal 2, Proposal 3 and Proposal 4 if
no specification is made.
Date:
----------------------------------
----------------------------------
Signature
Date:
----------------------------------
----------------------------------
Signature
Please sign your name exactly as
it appears on your stock
certificate, date and return this
Proxy as promptly as possible in
the reply envelope provided. When
signing as attorney, executor,
trustee, or guardian, please give
full title as such. If a
corporation, please sign in full
corporate name by a duly
authorized officer. If a
partnership, please sign in
partnership name by authorized
person. Joint owners must each
sign personally.
PLEASE BE CERTAIN YOU HAVE DATED AND SIGNED THIS PROXY
