<PAGE>
FILED PURSUANT TO RULE 424(B)(2)
Registration No. 333-25287
[ASCEND LOGO] ASCEND COMMUNICATIONS, INC.
ONE ASCEND PLAZA
1701 HARBOR BAY PARKWAY
ALAMEDA, CA 94502
April 28, 1997
Dear Stockholder:
As most of you are aware, Ascend Communications, Inc. ("Ascend") has agreed
to a strategic business combination with Cascade Communications Corp.
("Cascade"), in which Cascade will become a wholly-owned subsidiary of Ascend
(the "Merger") and Cascade stockholders will become stockholders of Ascend.
The completion of the Merger is subject to a number of conditions, including
approval by Ascend stockholders of the issuance of shares of common stock, par
value $.001 per share, of Ascend ("Ascend Common Stock") in the Merger. To
this end, you are cordially invited to attend a Special Meeting of
Stockholders of Ascend (the "Ascend Special Meeting") to be held on May 28,
1997, commencing at 12:00 noon, local time, at Ascend's principal executive
offices at One Ascend Plaza, 1701 Harbor Bay Parkway, Alameda, California. At
this meeting you will be asked to consider and approve the issuance of Ascend
Common Stock in the Merger.
The Ascend Board of Directors believes that the Merger represents a
significant strategic move for Ascend. Cascade is a premier supplier of Frame
Relay, ATM and IP switching products. The combination of Cascade's and
Ascend's technologies and products should enable the combined company to offer
a more complete portfolio of integrated wide area networking products and
enhance the combined company's ability to compete in the rapidly evolving
network infrastructure market.
In the Merger, each issued and outstanding share of common stock, par value
$.001 per share (the "Cascade Common Stock"), of Cascade will be converted
into the right to receive 0.70 of a share of Ascend Common Stock. Ascend will
also assume all outstanding, but unexercised options or rights to purchase
Cascade Common Stock.
The issuance of Ascend Common Stock in the Merger will require the
affirmative vote of the holders of a majority of the shares of Ascend Common
Stock voted at the Ascend Special Meeting. Holders of Ascend Common Stock at
the close of business on April 18, 1997 are entitled to vote at the Ascend
Special Meeting.
YOUR BOARD OF DIRECTORS HAS APPROVED THE MERGER AGREEMENT AND THE ISSUANCE
OF SHARES OF ASCEND COMMON STOCK IN CONNECTION WITH THE MERGER. THE BOARD
BELIEVES THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, ASCEND AND
ITS STOCKHOLDERS AND RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE ISSUANCE OF
ASCEND COMMON STOCK IN CONNECTION WITH THE MERGER.
Details of the proposed Merger and other important information concerning
Ascend and Cascade appear in the accompanying Joint Proxy Statement/
Prospectus. Please read this material carefully before you vote.
Whether or not you expect to attend the Ascend Special Meeting, please
complete, sign, date and return the enclosed proxy card in the postage-prepaid
envelope to assure that your shares will be represented. You may revoke your
proxy at any time before it has been voted, and if you attend the Ascend
Special Meeting you may vote in person even if you have previously returned
your proxy card.
Regardless of the number of shares you own, your vote for approval of the
issuance of Ascend Common Stock in the Merger is important.
Very truly yours,
/s/ Mory Ejabat
Mory Ejabat
President and Chief Executive Officer
WHETHER OR NOT YOU PLAN TO ATTEND THE ASCEND SPECIAL MEETING, PLEASE
COMPLETE, SIGN, DATE AND RETURN YOUR PROXY CARD FOR APPROVAL OF THE
ISSUANCE OF ASCEND COMMON STOCK IN CONNECTION WITH THE MERGER.
<PAGE>
ASCEND COMMUNICATIONS, INC.
ONE ASCEND PLAZA
1701 HARBOR BAY PARKWAY
ALAMEDA, CA 94502
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 28, 1997
To the Stockholders of Ascend Communications, Inc.:
PLEASE TAKE NOTICE that a Special Meeting of Stockholders (the "Ascend
Special Meeting") of Ascend Communications, Inc., a Delaware corporation
("Ascend"), will be held on Wednesday, May 28, 1997 at Ascend's principal
executive offices at One Ascend Plaza, 1701 Harbor Bay Parkway, Alameda,
California, commencing at 12:00 noon, local time, for the following purposes:
1. To consider and vote on a proposal to approve the issuance of shares
of common stock, par value $.001 per share, of Ascend ("Ascend Common
Stock"), pursuant to the Agreement and Plan of Reorganization, dated as of
March 30, 1997, by and among Ascend, Catskill Merger Corporation, a
Delaware corporation and a wholly-owned subsidiary of Ascend ("Sub"), and
Cascade Communications Corp., a Delaware corporation ("Cascade"), pursuant
to which, among other things, (a) Sub will be merged with and into Cascade,
with Cascade continuing as the surviving corporation and becoming a wholly-
owned subsidiary of Ascend (the "Merger"), (b) each outstanding share of
common stock, par value $.001 per share, of Cascade will be converted into
the right to receive 0.70 of a share (the "Exchange Ratio") of Ascend
Common Stock and (c) each outstanding option or right to purchase Cascade
Common Stock under the Cascade Amended and Restated 1991 Stock Plan, the
Cascade 1994 Non-Employee Director Stock Option Plan, the Sahara Networks,
Inc. 1995 Stock Plan, the Arris Networks, Inc. 1995 Stock Option Plan and
the Cascade 1994 Employee Stock Purchase Plan will be assumed by Ascend and
will become an option or right to purchase shares of Ascend Common Stock,
with appropriate adjustments to the number of shares issuable thereunder
and the exercise price thereof based on the Exchange Ratio.
2. To transact such other matters as may properly come before the Ascend
Special Meeting, including any motion to adjourn the Ascend Special Meeting
to a later date to permit further solicitation of proxies, or any
postponements or adjournments thereof.
The accompanying Joint Proxy Statement/Prospectus contains further
information with respect to these matters.
Stockholders of record at the close of business on April 18, 1997 are
entitled to notice of, and to vote at, the Ascend Special Meeting and any
adjournment or postponement thereof.
All stockholders are cordially invited to attend the Ascend Special Meeting
in person. However, to ensure your representation at the Ascend Special
Meeting, you are urged to complete, sign, date and return the enclosed proxy
card promptly in the enclosed postage-prepaid envelope.
By Order of the Board of Directors
LOGO
Mory Ejabat
President and Chief Executive
Officer
Alameda, California
April 28, 1997
WHETHER OR NOT YOU PLAN TO ATTEND THE ASCEND SPECIAL MEETING, PLEASE
COMPLETE, SIGN, DATE AND RETURN YOUR PROXY CARD FOR APPROVAL OF THE ISSUANCE
OF ASCEND COMMON STOCK IN CONNECTION WITH THE MERGER.
<PAGE>
CASCADE COMMUNICATIONS CORP.
5 CARLISLE ROAD
LOGO WESTFORD, MA 01886
April 28, 1997
Dear Stockholder:
As most of you are aware, Cascade Communications Corp. ("Cascade") has
entered into an agreement to combine with Ascend Communications, Inc.
("Ascend") in a strategic business combination (the "Merger"). You are
cordially invited to attend a Special Meeting of Stockholders (the "Cascade
Special Meeting") to be held on Wednesday, May 28, 1997, where you will be
asked to consider and approve the Agreement and Plan of Reorganization, dated
as of March 30, 1997, among Ascend, Catskill Merger Corporation, a wholly-
owned subsidiary of Ascend, and Cascade (the "Merger Agreement"). The
accompanying Joint Proxy Statement/Prospectus presents the details of the
Merger.
After careful consideration, Cascade's Board of Directors has approved the
Merger Agreement and recommends that you vote FOR the approval and adoption of
the Merger Agreement. The Board of Directors of Cascade believes the Merger
represents a significant strategic move for Cascade. Ascend's leading position
in the network access equipment market, combined with Cascade's Frame Relay,
ATM and IP switching products, should enable the combined company to offer a
more complete portfolio of integrated wide area networking products and
enhance the combined company's ability to compete in the rapidly evolving
network infrastructure market.
In the Merger, each issued and outstanding share of common stock, par value
$.001 per share (the "Cascade Common Stock"), of Cascade will be converted
into the right to receive 0.70 of a share of common stock, par value $.001 per
share, of Ascend. Ascend also will assume all outstanding, but unexercised
options or rights to purchase Cascade Common Stock.
The adoption of the Merger Agreement will require the affirmative vote of a
majority of the shares of Cascade Common Stock issued and outstanding at the
close of business on April 23, 1997.
YOUR BOARD OF DIRECTORS HAS APPROVED THE MERGER AGREEMENT AND BELIEVES THAT
THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, CASCADE AND ITS
STOCKHOLDERS. THE BOARD RECOMMENDS THAT YOU VOTE FOR THE APPROVAL AND ADOPTION
OF THE MERGER AGREEMENT.
You are urged to review carefully the information contained in the
accompanying Joint Proxy Statement/Prospectus, including in particular the
information under the captions "Risk Factors," "The Merger--Background of the
Merger," "--Reasons for the Merger; Recommendations of the Boards of
Directors," and "--Opinion of Financial Advisor to Cascade," prior to making a
voting decision with respect to your Cascade Common Stock.
Whether or not you expect to attend the Cascade Special Meeting, please
complete, sign, date and return the enclosed proxy card in the postage-prepaid
envelope to assure that your shares will be represented. You may revoke your
proxy at any time before it has been voted, and if you attend the Cascade
Special Meeting you may vote in person even if you have previously returned
your proxy card.
Regardless of the number of shares you own, your vote for the approval and
adoption of the Merger Agreement is important. Your prompt attention to this
matter is appreciated.
Very truly yours,
LOGO
Daniel E. Smith
President and Chief Executive Officer
YOUR PROXY IS IMPORTANT--PLEASE VOTE PROMPTLY
CASCADE STOCKHOLDERS SHOULD NOT SURRENDER OR OTHERWISE ATTEMPT TO
EXCHANGE THEIR CASCADE STOCK CERTIFICATES FOR ASCEND STOCK CERTIFICATES
UNLESS AND UNTIL THEY HAVE RECEIVED APPROPRIATE NOTICE AND INSTRUCTIONS
FOR EXCHANGE.
<PAGE>
CASCADE COMMUNICATIONS CORP.
5 CARLISLE ROAD
WESTFORD, MA 01886
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 28, 1997
To the Stockholders of Cascade Communications Corp.:
PLEASE TAKE NOTICE that a Special Meeting of Stockholders (the "Cascade
Special Meeting") of Cascade Communications Corp., a Delaware corporation
("Cascade"), will be held on Wednesday, May 28, 1997, commencing at 3:00 p.m.,
local time, at The Omni Parker House, 60 School Street, Boston, Massachusetts
for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Reorganization, dated as of March 30, 1997, by and
among Ascend Communications, Inc., a Delaware corporation ("Ascend"),
Catskill Merger Corporation, a Delaware corporation and a wholly-owned
subsidiary of Ascend ("Sub"), and Cascade, pursuant to which, among other
things, (a) Sub will be merged with and into Cascade, with Cascade
continuing as the surviving corporation and becoming a wholly-owned
subsidiary of Ascend (the "Merger"), and (b) each outstanding share of
common stock, par value $.001 per share, of Cascade will be converted into
the right to receive 0.70 of a share of common stock, par value $.001 per
share, of Ascend.
2. To transact such other matters as may properly come before the Cascade
Special Meeting, including any motion to adjourn the Cascade Special
Meeting to a later date to permit further solicitation of proxies, or any
postponements or adjournments thereof.
The accompanying Joint Proxy Statement/Prospectus contains further
information with respect to these matters.
Stockholders of record at the close of business on April 23, 1997 are
entitled to notice of, and to vote at, the Cascade Special Meeting and any
adjournment or postponement thereof.
All stockholders are cordially invited to attend the Cascade Special Meeting
in person. However, to ensure your representation at the Cascade Special
Meeting, you are urged to complete, sign, date and return the enclosed proxy
card promptly in the enclosed postage-prepaid envelope.
By Order of the Board of Directors
LOGO
Paul E. Blondin
Secretary
Westford, Massachusetts
April 28, 1997
WHETHER OR NOT YOU PLAN TO ATTEND THE CASCADE SPECIAL MEETING, PLEASE
COMPLETE, SIGN AND DATE YOUR PROXY CARD AND RETURN IT PROMPTLY IN THE
ENCLOSED POSTAGE-PREPAID ENVELOPE IN ORDER TO ASSURE REPRESENTATION OF YOUR
SHARES.
<PAGE>
[ASCEND LOGO] ASCEND COMMUNICATIONS, INC. PROSPECTUS [CASCADE LOGO]
ASCEND COMMUNICATIONS, INC. AND
CASCADE COMMUNICATIONS CORP.
JOINT PROXY STATEMENT
Ascend Communications, Inc., a Delaware corporation ("Ascend"), has filed a
Registration Statement on Form S-4 (together with all exhibits thereto, the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), covering up to 67,827,278 shares of its common stock, par
value $.001 per share ("Ascend Common Stock"), to be issued in the proposed
merger (the "Merger") of Catskill Merger Corporation, a Delaware corporation
and a wholly-owned subsidiary of Ascend ("Sub"), with and into Cascade
Communications Corp., a Delaware corporation ("Cascade"), pursuant to the
Agreement and Plan of Reorganization entered into by and among Ascend, Sub and
Cascade dated as of March 30, 1997 (the "Merger Agreement").
Pursuant to the Merger Agreement, at the effective time of the Merger (the
"Effective Time"), Cascade will become a wholly-owned subsidiary of Ascend, and
each outstanding share of common stock, par value $.001 per share ("Cascade
Common Stock"), of Cascade will be converted into the right to receive 0.70 of
a share of Ascend Common Stock (the "Exchange Ratio"), and each outstanding
option or right to purchase Cascade Common Stock under the Cascade Amended and
Restated 1991 Stock Plan, the Cascade 1994 Non-Employee Director Stock Option
Plan, the Sahara Networks, Inc. 1995 Stock Plan and the Arris Networks, Inc.
1995 Stock Option Plan (collectively, the "Cascade Option Plans") and the
Cascade 1994 Employee Stock Purchase Plan (the "Cascade Stock Purchase Plan")
will be assumed by Ascend and will become an option or right to purchase shares
of Ascend Common Stock, with appropriate adjustments based on the Exchange
Ratio to the number of shares issuable thereunder and the exercise price
thereof. Based upon Cascade's capitalization as of April 23, 1997, the Merger
Agreement provides that Ascend will issue approximately 66,144,168 shares of
Ascend Common Stock in exchange for all of the outstanding shares of Cascade
Common Stock and will assume all outstanding and unexercised options and rights
to purchase Cascade Common Stock which will become exercisable for
approximately 8,703,834 shares of Ascend Common Stock.
This Joint Proxy Statement/Prospectus ("Joint Proxy Statement/Prospectus")
constitutes (a) the Prospectus of Ascend filed as part of the Registration
Statement, (b) the Proxy Statement of Cascade relating to the special meeting
of stockholders of Cascade (the "Cascade Special Meeting") called to vote on
the approval and adoption of the Merger Agreement and (c) the Proxy Statement
of Ascend relating to the special meeting of stockholders of Ascend (the
"Ascend Special Meeting") called to vote on approval of the issuance of Ascend
Common Stock pursuant to the terms of the Merger Agreement. All unaudited pro
forma combined financial information herein has been prepared by Ascend using
historical financial information regarding Ascend and Cascade, which in turn
was furnished by Ascend and Cascade, respectively. This Joint Proxy
Statement/Prospectus and the accompanying forms of proxies are first being
mailed to the stockholders of Cascade and Ascend on or about April 28, 1997.
SEE "RISK FACTORS" COMMENCING ON PAGE 20 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED CAREFULLY BY BOTH CASCADE AND ASCEND STOCKHOLDERS IN
EVALUATING THE PROPOSALS TO BE VOTED ON AT THE ASCEND SPECIAL MEETING AND THE
CASCADE SPECIAL MEETING AND THE ACQUISITION OF THE SECURITIES OFFERED HEREBY.
NEITHER THIS TRANSACTION NOR THE SECURITIES OF ASCEND OFFERED HEREBY HAVE BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Joint Proxy Statement/Prospectus is April 28, 1997.
<PAGE>
AVAILABLE INFORMATION
Ascend and Cascade are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Commission. The reports, proxy statements and other information filed by
Ascend and Cascade with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and should be available for
inspection at the Commission's Regional Offices located at 7 World Trade
Center, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60611. Copies of such material also can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission maintains a website
(the "Commission Website") that contains reports, proxy and information
statements and other information regarding Ascend and Cascade. The address of
the Commission Website is http://www.sec.gov. Ascend Common Stock and Cascade
Common Stock are quoted on The Nasdaq National Market. Reports and other
information concerning Ascend and Cascade also can be inspected at the offices
of the National Association of Securities Dealers, Inc., Market Listing
Section, 1735 K Street, N.W., Washington, D.C. 20006.
Ascend has filed with the Commission the Registration Statement with respect
to the shares of Ascend Common Stock to be issued pursuant to the Merger
Agreement. This Joint Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement. A copy of the
Registration Statement may be obtained from the Commission's principal office
in Washington, D.C. or on the Commission Website. Statements contained in this
Joint Proxy Statement/Prospectus as to the contents of any contract or other
document referred to herein or therein are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
INCORPORATION OF DOCUMENTS BY REFERENCE
The following Ascend documents filed with the Commission are incorporated by
reference in this Joint Proxy Statement/Prospectus:
1. Ascend's Annual Report on Form 10-K for the fiscal year ended December
31, 1996; and
2. Ascend's Current Report on Form 8-K filed on April 8, 1997.
The following Cascade documents filed with the Commission are incorporated
by reference in this Joint Proxy Statement/Prospectus:
1. Cascade's Annual Report on Form 10-K for the fiscal year ended December
31, 1996;
2. Cascade's definitive Proxy Statement dated April 4, 1997 for the annual
meeting of Cascade's stockholders to be held on May 1, 1997; and
3. Cascade's Current Report on Form 8-K filed on April 8, 1997.
All documents and reports subsequently filed by Ascend or Cascade pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of
this Joint Proxy Statement/Prospectus and prior to the Effective Time shall be
deemed to be incorporated by reference in this Joint Proxy
Statement/Prospectus and to be part hereof from the dates of filing of such
documents or reports INCLUDING, WITHOUT LIMITATION, THE ASCEND QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997 AND THE CASCADE
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 29, 1997. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Joint Proxy Statement/Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Joint Proxy
Statement/Prospectus.
2
<PAGE>
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER
THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE) ARE AVAILABLE TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER OF ASCEND COMMON STOCK OR CASCADE COMMON STOCK, TO WHOM THIS
JOINT PROXY STATEMENT/PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST,
WITHOUT CHARGE, IN THE CASE OF DOCUMENTS RELATING TO ASCEND OR SUB, DIRECTED
TO ASCEND COMMUNICATIONS, INC., ONE ASCEND PLAZA, 1701 HARBOR BAY PARKWAY,
ALAMEDA, CALIFORNIA 94502 (TELEPHONE NUMBER (510) 769-6001), ATTENTION:
INVESTOR RELATIONS, OR, IN THE CASE OF DOCUMENTS RELATING TO CASCADE, DIRECTED
TO CASCADE COMMUNICATIONS CORP., 5 CARLISLE ROAD, WESTFORD, MASSACHUSETTS
01886 (TELEPHONE NUMBER (508) 692-2600), ATTENTION: INVESTOR RELATIONS. IN
ORDER TO ASSURE TIMELY DELIVERY OF THE REQUESTED MATERIAL BEFORE THE ASCEND
SPECIAL MEETING AND THE CASCADE SPECIAL MEETING, ANY REQUEST SHOULD BE MADE
PRIOR TO MAY 23, 1997.
INFORMATION PROVIDED BY ASCEND AND CASCADE
The information set forth in this Joint Proxy Statement/Prospectus
concerning Ascend and Sub has been provided by Ascend, and the information set
forth in this Joint Proxy Statement/Prospectus concerning Cascade and Sahara
Networks, Inc. ("Sahara") has been provided by Cascade.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE
OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ASCEND OR
CASCADE. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE
SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT
IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF ASCEND OR
CASCADE SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE.
Ascend, Multiband, Multiband RPM, Pipeline and RubberBandwidth are
registered trademarks of Ascend, and Multiband Bandwidth on Demand, Multiband
Plus, Multiband VSX, MAX, Pipeline Remote LAN Access Router, GRF, Ascend
Accelerated, MultiDSL, Multilink Protocol Plus (MP+) Pipeline 25, Pipeline 50
and Pipeline 400 are trademarks of Ascend. Cascade, Cascade with Logo,
CascadeView, Continuis, ASVC, Hyperpath, Sahara, Oasis, Oasis Design, IP
Navigator, Priority Frame, Virtual Private Routing, OASOS, PODCONNECT,
SAHARAVIEW and CROSS FLOW are trademarks of Cascade. This Joint Proxy
Statement/Prospectus also may include other trademarks and trade names which
are the property of their respective owners.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION..................................................... 2
INCORPORATION OF DOCUMENTS BY REFERENCE................................... 2
INFORMATION PROVIDED BY ASCEND AND CASCADE................................ 3
SUMMARY................................................................... 6
The Companies........................................................... 6
The Merger.............................................................. 7
Date and Place of the Meetings.......................................... 7
Securityholders Entitled to Vote........................................ 8
Purposes of the Meetings................................................ 8
Vote Required; Voting Agreements........................................ 8
Recommendations of the Boards of Directors.............................. 9
Opinions of Financial Advisors.......................................... 9
Reasons for the Merger.................................................. 10
No Solicitation......................................................... 10
Conditions to the Merger................................................ 10
Material Adverse Effect................................................. 11
Regulatory Requirements................................................. 11
Termination; Termination Fees and Expenses.............................. 11
Stock Option Agreements................................................. 11
Restrictions on Resale of Ascend Common Stock........................... 12
Surrender of Cascade Stock Certificates................................. 13
Certain Federal Income Tax Consequences................................. 13
Accounting Treatment.................................................... 13
Comparison of Stockholder Rights........................................ 13
SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA....... 14
COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA............. 17
MARKET PRICE INFORMATION.................................................. 18
RISK FACTORS.............................................................. 20
Risks Relating to the Merger............................................ 20
Risks Relating to Ascend, Cascade and the Combined Company.............. 22
THE MEETINGS.............................................................. 29
General................................................................. 29
Matters to be Considered at the Meetings................................ 29
Recommendations of the Boards of Directors.............................. 29
Voting at the Meetings; Record Dates.................................... 29
Adjournment of the Ascend Special Meeting or the Cascade Special
Meeting................................................................ 31
Proxies................................................................. 31
THE MERGER................................................................ 33
Background of the Merger................................................ 33
Reasons for the Merger; Recommendations of the Boards of Directors...... 38
Opinion of Financial Advisor to Ascend.................................. 42
Opinion of Financial Advisor to Cascade................................. 46
Interests of Certain Persons in the Merger.............................. 50
Voting Agreements....................................................... 51
Accounting Treatment.................................................... 51
Certain Federal Income Tax Consequences................................. 52
Regulatory Requirements................................................. 53
Federal Securities Law Consequences..................................... 54
Nasdaq National Market Quotation........................................ 54
</TABLE>
4
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
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<S> <C>
THE MERGER AGREEMENT..................................................... 55
The Merger............................................................. 55
Conversion of Securities............................................... 55
Representations and Warranties......................................... 56
Certain Covenants and Agreements....................................... 56
Material Adverse Effect................................................ 60
Conditions to Closing.................................................. 60
Termination; Termination Fees and Expenses............................. 61
Amendment and Waiver................................................... 63
STOCK OPTION AGREEMENTS.................................................. 64
General................................................................ 64
Repurchase Rights and Obligations...................................... 65
Limitations on Certain Amounts Payable................................. 65
Transfer Restrictions and Registration................................. 66
INFORMATION CONCERNING ASCEND............................................ 67
Business............................................................... 67
Selected Consolidated Financial Data................................... 79
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 80
Management............................................................. 83
Security Ownership of Certain Beneficial Owners and Management......... 86
Executive Compensation and Other Matters............................... 87
INFORMATION CONCERNING CASCADE........................................... 90
Business............................................................... 90
Selected Consolidated Financial Data................................... 97
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 97
Management............................................................. 101
Security Ownership of Certain Beneficial Owners and Management......... 103
Compensation and Other Information Concerning Cascade Directors and
Officers.............................................................. 105
UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS............. 108
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS.... 113
COMPARISON OF RIGHTS OF CASCADE STOCKHOLDERS AND ASCEND STOCKHOLDERS..... 114
DESCRIPTION OF ASCEND CAPITAL STOCK...................................... 115
Common Stock........................................................... 115
Certain Charter Provisions............................................. 115
Preferred Stock........................................................ 116
LEGAL MATTERS............................................................ 116
EXPERTS.................................................................. 116
INDEX TO ASCEND COMMUNICATIONS, INC., CASCADE COMMUNICATIONS CORP. AND
SAHARA NETWORKS, INC. FINANCIAL STATEMENTS.............................. F-1
ANNEX A--AGREEMENT AND PLAN OF REORGANIZATION............................ A-1
ANNEX B--CASCADE STOCK OPTION AGREEMENT.................................. B-1
ANNEX C--ASCEND STOCK OPTION AGREEMENT................................... C-1
ANNEX D--OPINION OF DEUTSCHE MORGAN GRENFELL INC. ....................... D-1
ANNEX E--OPINION OF MORGAN STANLEY & CO. INCORPORATED.................... E-1
</TABLE>
5
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Joint Proxy Statement/Prospectus. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information contained in this
Joint Proxy Statement/Prospectus and the Annexes hereto. Ascend stockholders
and Cascade stockholders are urged to read this Joint Proxy
Statement/Prospectus and the Annexes hereto in their entirety. This Joint Proxy
Statement/Prospectus contains a number of forward-looking statements which
reflect the current views of Ascend and/or Cascade with respect to future
events that are expected to have an effect on their future individual or
combined financial performance, including but not limited to forward-looking
statements regarding the expected benefits and synergies of the proposed
strategic business combination, and regarding the reasons for the transaction.
These forward-looking statements are subject to various risks and
uncertainties, including those set forth under "Risk Factors" and elsewhere
herein, that could cause actual results to differ materially from historical
results or those currently anticipated. Readers are cautioned not to place
undue reliance on these forward-looking statements. All share and per share
data of Ascend and Cascade in this Joint Proxy Statement/Prospectus reflect all
stock splits of Ascend Common Stock and Cascade Common Stock effected prior to
the date hereof.
THE COMPANIES
Ascend. Ascend develops, manufactures, markets, sells and supports a broad
range of high-speed integrated remote networking products that enable its
customers to build: (i) Internet access systems consisting of point-of-presence
("POP") termination equipment for Internet service providers ("ISPs") and
remote site Internet access equipment for Internet subscribers; (ii) high speed
Internet Protocol ("IP") switches for application in telecommunications
carriers and ISP backbone networks; (iii) extensions and enhancements to
corporate backbone networks that facilitate access to these networks by remote
offices, telecommuters and mobile computer users; and (iv) videoconferencing
and multimedia access facilities. These products support existing digital and
analog networks.
Ascend has four product families, each of which is focused on a major
application segment: MAX products for wide area network ("WAN") access to
corporate backbone networks, Internet access in POPs and multimedia access
facilities; GRF products for high performance IP switching in Internet and
carrier backbone networks; Pipeline and NetWarp products for telecommuting,
remote office access and Internet access by individual sites or users; and
Multiband products for videoconferencing and multimedia networks. Ascend's
products offer integrated security and network management functionality. These
products support a wide variety of application interfaces, switched digital
services, digital modem services and digital and analog access line types. This
wide range of connectivity and interoperability options significantly increases
the number of telecommunication carrier, ISP POP, corporate and individual
sites that can benefit from Ascend's products. Ascend's products are
distributed and serviced globally and Ascend maintains marketing and sales
relationships with ISPs, including UUNET, PSI, BBN, MCI, Demon Internet (UK)
and IIJ (Japan), with major telecommunications carriers, including AT&T,
Sprint, MCI, GTE, Pacific Bell, Southwestern Bell, British Telecom, France
Telecom, Deutsche Telecom and NTT in Japan, with video equipment providers,
including Compression Labs, PictureTel and VTEL, and with value-added resellers
and distributors throughout the world. See "Information Concerning Ascend--
Business."
Ascend was incorporated in California in 1989 and reincorporated in Delaware
in 1994. Ascend's principal executive offices are located at One Ascend Plaza,
1701 Harbor Bay Parkway, Alameda, California 94502, and its telephone number at
that location is (510) 769-6001.
Cascade. Cascade develops, manufactures, markets and supports a family of
high performance, multi-service WAN switches that enable public service
providers and private network managers to provide cost-effective, high-speed
data, video and voice communications services to end users. WANs built on
Cascade's switches are designed to support one or more of the major broadband
packet communications protocols and
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services, including Frame Relay, IP, Switched Multi-Megabit Data Service
("SMDS") and Asynchronous Transfer Mode ("ATM"). Users or other networking
devices access Cascade's products over a variety of media, including twisted
pair, coaxial and fiber optic leased line facilities, analog modem and
Integrated Services Digital Network ("ISDN") dial facilities and wireless
facilities. Cascade markets its products and services directly to public
service providers, including Interexchange Carriers ("IXCs"), Local Exchange
Carriers ("LECs"), Regional Bell Operating Companies ("RBOCs") and Competitive
Access Providers ("CAPs") in the U.S., Postal Telephone and Telegraph ("PTTs")
and Other Licensed Operators ("OLOs") internationally, and ISPs and Value Added
Network providers ("VANs") worldwide. See "Information Concerning Cascade--
Business."
Cascade was incorporated in Delaware in 1990. Cascade's principal executive
offices are located at 5 Carlisle Road, Westford, Massachusetts 01886, and its
telephone number at that location is (508) 692-2600.
Sub. Sub was incorporated in Delaware in 1997 for the purpose of effecting
the combination of Ascend and Cascade by means of the Merger. Sub has no
material assets and has not engaged in any activities except in connection with
the proposed combination of Ascend and Cascade. Sub's principal executive
offices are located at One Ascend Plaza, 1701 Harbor Bay Parkway, Alameda,
California 94502, and its telephone number at that location is (510) 769-6001.
THE MERGER
Upon consummation of the Merger pursuant to the Merger Agreement, Sub will be
merged with and into Cascade, with Cascade continuing as the surviving
corporation (the "Surviving Corporation") and becoming a wholly-owned
subsidiary of Ascend, and each share of Cascade Common Stock which is issued
and outstanding at the Effective Time will be converted into the right to
receive 0.70 of a share of Ascend Common Stock (and a proportionate cash
payment in lieu of any fractional shares). See "The Merger Agreement--
Conversion of Securities."
At the Effective Time, any outstanding, but unexercised, options or rights to
purchase Cascade Common Stock ("Cascade Options") under any of the Cascade
Option Plans and the Cascade Stock Purchase Plan will be assumed by Ascend and
will become options or rights to acquire shares of Ascend Common Stock,
adjusted to reflect the Exchange Ratio. See "The Merger Agreement--Certain
Covenants and Agreements--Assumption of Cascade Options."
The Merger Agreement provides that the Ascend Board of Directors (the "Ascend
Board") will increase the number of directors on the Ascend Board to ten and
will elect Daniel E. Smith, Paul J. Ferri, and Gururaj Deshpande, each of whom
is a current director of Cascade, to the Ascend Board effective upon
consummation of the Merger. In addition, following the Merger, certain
executive officers of Cascade, including Messrs. Smith and Deshpande, will
become executive officers and key management employees of Ascend. See "The
Merger-- Interests of Certain Persons in the Merger."
It is anticipated that the Merger will become effective as promptly as
practicable after the requisite stockholder approvals have been obtained and
all other conditions to the Merger have been satisfied or waived. If the Merger
is not consummated by August 14, 1997, Cascade and Ascend each has the right
(subject to certain limitations) to terminate the Merger Agreement, unless the
failure to complete the Merger is due to regulatory delay, in which case the
termination date may be extended by either party up to 90 days. See "The Merger
Agreement--Termination; Termination Fees and Expenses."
DATE AND PLACE OF THE MEETINGS
The Ascend Special Meeting will be held on May 28, 1997 at Ascend's principal
executive offices, located at One Ascend Plaza, 1701 Harbor Bay Parkway,
Alameda, California, commencing at 12:00 noon, local time. See "The Meetings."
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The Cascade Special Meeting will be held on May 28, 1997 at The Omni Parker
House, located at 60 School Street, Boston, Massachusetts, commencing at 3:00
p.m., local time. See "The Meetings."
SECURITYHOLDERS ENTITLED TO VOTE
Holders of record of shares of Ascend Common Stock at the close of business
on April 18, 1997 (the "Ascend Record Date") are entitled to notice of and to
vote at the Ascend Special Meeting. On the Ascend Record Date, there were
120,794,242 shares of Ascend Common Stock outstanding, each of which will be
entitled to one vote on each matter to be acted upon or which may properly come
before the Ascend Special Meeting. See "The Meetings--Voting at the Meetings;
Record Dates."
Holders of record of shares of Cascade Common Stock at the close of business
on April 23, 1997 (the "Cascade Record Date") are entitled to notice of and to
vote at the Cascade Special Meeting. On the Cascade Record Date, there were
approximately 94,491,669 shares of Cascade Common Stock outstanding. Each share
of Cascade Common Stock outstanding on the Cascade Record Date will be entitled
to one vote on each matter to be acted upon or which may properly come before
the Cascade Special Meeting. See "The Meetings--Voting at the Meetings; Record
Dates."
PURPOSES OF THE MEETINGS
Ascend Special Meeting. The purpose of the Ascend Special Meeting is to
consider and vote upon (i) a proposal to approve the issuance of Ascend Common
Stock in the Merger, and (ii) such other matters as may properly be brought
before the Ascend Special Meeting, including any motion to adjourn the Ascend
Special Meeting to a later date to permit further solicitation of proxies if
necessary to establish a quorum or to obtain additional votes, or any
adjournments or postponements thereof. See "The Meetings--Matters to be
Considered at the Meetings."
Cascade Special Meeting. The purpose of the Cascade Special Meeting is to
consider and vote upon (i) a proposal to approve and adopt the Merger
Agreement, and (ii) such other matters as may properly be brought before the
Cascade Special Meeting, including any motion to adjourn the Cascade Special
Meeting to a later date to permit further solicitation of proxies if necessary
to establish a quorum or to obtain additional votes, or any adjournments or
postponements thereof. See "The Meetings--Matters to be Considered at the
Meetings."
VOTE REQUIRED; VOTING AGREEMENTS
Ascend. The approval of the issuance of Ascend Common Stock in the Merger
will require the affirmative vote of a majority of the shares of Ascend Common
Stock voted at the Ascend Special Meeting. See "The Meetings--Voting at the
Meetings; Record Dates."
Directors and executive officers of Ascend have executed and delivered
agreements and irrevocable proxies to Cascade (the "Ascend Voting Agreements")
obligating them, among other things, to vote their shares of Ascend Common
Stock in favor of issuance of shares of Ascend Common Stock pursuant to the
Merger Agreement and any proposal or action which would, or could reasonably be
expected to, facilitate the Merger. Pursuant to the Ascend Voting Agreements,
all of the outstanding shares of Ascend Common Stock beneficially owned by the
directors and executive officers of Ascend and their respective affiliates on
the Ascend Record Date (representing approximately 1.4% of the total number of
shares of Ascend Common Stock outstanding at such date) will be voted for
approval of the issuance of shares of Ascend Common Stock pursuant to the
Merger Agreement and any proposal or action which would, or reasonably could be
expected to, facilitate the Merger. See "The Merger--Interests of Certain
Persons in the Merger" and "--Voting Agreements."
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Cascade. The approval and adoption of the Merger Agreement by Cascade
stockholders will require the affirmative vote of a majority of the outstanding
shares of Cascade Common Stock entitled to vote at the Cascade Special Meeting.
See "The Meetings--Voting at the Meetings; Record Dates."
Directors and executive officers of Cascade have executed and delivered
agreements and irrevocable proxies to Ascend (the "Cascade Voting Agreements")
obligating them, among other things, to vote their shares of Cascade Common
Stock in favor of approval and adoption of the Merger Agreement and any
proposal which would, or could reasonably be expected to, facilitate the
Merger. Pursuant to the Cascade Voting Agreements, all of the outstanding
shares of Cascade Common Stock beneficially owned by the directors and
executive officers of Cascade and their respective affiliates on the Cascade
Record Date (representing approximately 1.8% of the total number of shares of
Cascade Common Stock outstanding at such date) will be voted for approval and
adoption of the Merger Agreement and any proposal or action which would, or
reasonably could be expected to, facilitate the Merger. See "The Merger--
Interests of Certain Persons in the Merger" and "--Voting Agreements."
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
With the concurrence of all directors present and voting, the Ascend Board
has approved the Merger Agreement and the issuance of Ascend Common Stock in
the Merger. The Ascend Board believes that the terms of the Merger Agreement
are fair to, and that the Merger is in the best interests of, Ascend and its
stockholders. The Ascend Board therefore recommends that the stockholders of
Ascend vote FOR approval of the issuance of Ascend Common Stock in the Merger.
The Board of Directors of Cascade (the "Cascade Board") has approved the
Merger Agreement and the Merger and believes that the terms of the Merger
Agreement are fair to, and that the Merger is in the best interests of, Cascade
and its stockholders. The Cascade Board therefore recommends that the
stockholders of Cascade vote FOR approval and adoption of the Merger Agreement.
See "The Meetings; Recommendations of the Boards of Directors" and "The
Merger--Reasons for the Merger; Recommendations of the Boards of Directors."
OPINIONS OF FINANCIAL ADVISORS
Ascend. Deutsche Morgan Grenfell Inc. ("DMG") delivered its oral opinion to
the Ascend Board on March 29, 1997, confirmed in writing as of March 30, 1997,
to the effect that, as of the date of such opinion, the Exchange Ratio pursuant
to the Merger Agreement was fair from a financial point of view to Ascend. The
full text of the written opinion of DMG, dated March 30, 1997, which sets
forth, among other things, assumptions made, procedures followed, matters
considered and limitations on the scope of the review undertaken in connection
with the opinion, is attached hereto as Annex D and is incorporated herein by
reference. Holders of Ascend Common Stock are urged to, and should, read such
opinion in its entirety. See "The Merger--Opinion of Financial Advisor to
Ascend."
Cascade. Morgan Stanley & Co. Incorporated ("Morgan Stanley") delivered its
oral opinion to the Cascade Board on March 29, 1997, confirmed in writing as of
March 30, 1997, to the effect that, as of the date of such opinion, the
Exchange Ratio pursuant to the Merger Agreement was fair from a financial point
of view to the holders of Cascade Common Stock. The full text of the written
opinion of Morgan Stanley, dated March 30, 1997, which sets forth, among other
things, assumptions made, procedures followed, matters considered and
limitations on the scope of the review undertaken in connection with the
opinion, is attached hereto as Annex E and is incorporated herein by reference.
Holders of Cascade Common Stock are urged to, and should, read such opinion in
its entirety. See "The Merger--Opinion of Financial Advisor to Cascade."
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REASONS FOR THE MERGER
The Ascend Board and the Cascade Board believe that (i) the combined company
will provide a more complete portfolio of integrated, best-of-breed wide area
networking products, (ii) the management teams of Ascend and Cascade share a
common strategic vision, (iii) the combination of Ascend's and Cascade's
complementary distribution channels will accelerate deployment of the combined
company's products into each other's customer accounts and (iv) the two
companies' stockholders will benefit by the enhanced ability of the combined
company to compete in the rapidly evolving networking solutions market. There
can be no assurance, however, that these results or any of the efficiencies or
opportunities described in the following sections under the caption "Reasons
for the Merger" will be achieved through the consummation of the Merger. In
short, the Ascend Board and the Cascade Board both believe that the Merger will
result in a combined company that will be a leading provider of end-to-end
networking solutions for telecommunications carriers, ISPs, network service
providers and enterprises worldwide, with a more complete portfolio of
integrated best-of-breed wide area networking products, supported by a global
sales, distribution and support organization.
In addition to the anticipated joint reasons described above, the Ascend
Board and the Cascade Board each believes that the Merger will be beneficial to
Ascend and Cascade and their respective stockholders for the reasons described
below under the caption "The Merger--Reasons for the Merger; Recommendations of
the Boards of Directors." For further information, see "Risk Factors."
NO SOLICITATION
Except in certain circumstances where it would be contrary to the fiduciary
duties of their respective directors or where it would violate certain rules of
the Commission, each of Cascade and Ascend has agreed to refrain from directly
or indirectly (i) soliciting, initiating or encouraging a competing offer, (ii)
engaging in negotiations or discussions concerning a competing offer,
(iii) providing any non-public information to any person or entity relating to
a competing offer, or (iv) agreeing to, approving or recommending any competing
offer. See "The Merger Agreement--Certain Covenants and Agreements--No
Solicitation."
CONDITIONS TO THE MERGER
The consummation of the Merger is subject to the satisfaction of certain
conditions, including the following: (i) the Merger Agreement shall have been
approved and adopted by the requisite vote of holders of Cascade Common Stock
and the issuance of Ascend Common Stock in the Merger shall have been approved
by the requisite vote of holders of Ascend Common Stock pursuant to the
Delaware General Corporation Law (the "DGCL"); (ii) the waiting period required
by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), and any other material waiting periods under applicable foreign
laws shall have expired or been terminated and no action by the Antitrust
Division of the Department of Justice (the "Antitrust Division"), the Federal
Trade Commission (the "FTC") or any foreign governmental entity challenging or
seeking to enjoin the consummation of the Merger shall be pending or have been
instituted; (iii) all governmental approvals and filings required for the
Merger, the absence of which would be reasonably likely to have a material
adverse effect on either party or on the parties' ability to complete the
Merger, shall have been obtained or made; (iv) the Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings seeking a stop order, and all required state
securities laws authorizations shall have been received; (v) there shall be no
order, injunction or other legal or regulatory restraint or prohibition in
effect preventing or prohibiting the consummation of the Merger or restricting
the conduct of either Ascend's or Cascade's business after the consummation of
the Merger; (vi) each of Ascend and Cascade shall have received opinions from
their respective counsel that the Merger will be treated as a tax-free
reorganization for federal income tax purposes; (vii) Ascend shall have
received a letter from Ernst & Young LLP and Cascade shall have received a
letter from Coopers & Lybrand L.L.P., as to their concurrence with the
respective company's management regarding the appropriateness of pooling of
interests accounting for the Merger under Accounting Principles Board Opinion
No. 16 and applicable Commission regulations and releases if the Merger is
consummated in accordance with the Merger Agreement; (viii) the shares of
Ascend Common Stock to be issued
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in the Merger shall have been authorized for quotation on The Nasdaq National
Market; (ix) Ascend, Sub and Cascade shall have performed, in all material
respects, all obligations they are required to perform at or prior to the
closing date of the Merger; (x) the parties' representations and warranties
shall be accurate in all material respects when made and as of the closing date
of the Merger; (xi) certain ancillary agreements shall have been executed and
delivered by the directors and executive officers of Ascend and Cascade; and
(xii) no material adverse effect shall have occurred with respect to Ascend or
Cascade, and no event shall have occurred and no fact or circumstance shall
exist which could reasonably be expected to result in a material adverse effect
on Ascend or Cascade. See "The Merger Agreement--Conditions to Closing."
MATERIAL ADVERSE EFFECT
For purposes of the Merger Agreement, the following are not deemed to
constitute a material adverse effect, either alone or in combination: (i) a
change in the market price or trading volume of either Ascend Common Stock or
Cascade Common Stock, (ii) a failure by either party to meet the revenue or
earnings predictions of equity analysts as reflected in the First Call
consensus estimate or any other revenue or earnings predictions or expectations
for any period ending (or for which earnings are released) on or after March
30, 1997 and prior to the closing date of the Merger; (iii) conditions
affecting the computer networking industry, or the U.S. economy, as a whole;
(iv) any effect arising primarily out of or resulting primarily from actions
contemplated by the parties in connection with the Merger Agreement or which is
primarily attributable to the announcement of the Merger Agreement and the
transactions contemplated thereby (to the extent so attributable); (v) certain
matters identified by the parties in disclosure schedules to the Merger
Agreement; and (vi) certain actions or events permitted under the Merger
Agreement. See "The Merger Agreement--Material Adverse Effect."
REGULATORY REQUIREMENTS
The consummation of the Merger is subject to certain regulatory requirements,
including the expiration or early termination of the applicable waiting period
under the HSR Act. On April 14, 1997, Ascend and Cascade completed the filing
of notification and report forms relating to the Merger under the HSR Act,
together with requests for early termination of the applicable 30-day waiting
period. See "The Merger--Regulatory Requirements."
TERMINATION; TERMINATION FEES AND EXPENSES
The Merger Agreement is subject to termination by mutual written consent of
Ascend and Cascade, at the option of either Ascend or Cascade if the Merger is
not consummated by August 14, 1997, or at any time prior to the Effective Time
of the Merger upon the occurrence of certain events. The August 14, 1997 date
may be extended up to 90 days by either party if the required governmental
approvals have not been obtained and are reasonably expected to be obtained in
such period. Under certain circumstances, either Ascend or Cascade may be
required to pay the other party a termination fee or post-termination fee of
$85 million if the Merger Agreement is terminated and an alternative business
combination involving the paying party has been completed or is pending at the
time of termination. See "The Merger Agreement--Termination; Termination Fees
and Expenses."
STOCK OPTION AGREEMENTS
As an inducement to Ascend to enter into the Merger Agreement, Cascade
entered into a Stock Option Agreement with Ascend dated as of March 30, 1997
(the "Cascade Stock Option Agreement") pursuant to which Cascade granted Ascend
the right, under certain circumstances, to purchase a number of shares of
newly-issued Cascade Common Stock equal to 19.9% of Cascade's issued and
outstanding shares of common stock as of March 30, 1997 (subject to adjustment
upon certain changes in Cascade's capitalization). Subject to certain
conditions, the Cascade Stock Option Agreement becomes exercisable upon the
occurrence of any event that causes a termination fee or a post-termination fee
to become payable by Cascade under the Merger Agreement.
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When exercisable, the option granted under the Cascade Stock Option Agreement
may be exercised by delivery of the exercise price of $36.40 per share, in
cash, and/or, at Ascend's election, by delivery of 0.70 of a share of Ascend
Common Stock for each option share. In general, the maximum net proceeds that
may be retained by Ascend from termination or post-termination fees payable
under the Merger Agreement and the exercise of such stock option and the sale
of the underlying stock is $170 million. In no event is more than $85 million
payable by Cascade under the Merger Agreement and the Cascade Stock Option
Agreement.
As an inducement to Cascade to enter into the Merger Agreement, Ascend
entered into a Stock Option Agreement with Cascade dated as of March 30, 1997
(the "Ascend Stock Option Agreement") pursuant to which Ascend granted Cascade
the right, under certain circumstances, to purchase a number of shares of
newly-issued Ascend Common Stock equal to 19.9% of Ascend's issued and
outstanding shares of common stock as of March 30, 1997 (subject to adjustment
upon certain changes in Ascend's capitalization). Subject to certain
conditions, the Ascend Stock Option Agreement becomes exercisable upon the
occurrence of any event that causes a termination fee or a post-termination fee
to become payable by Ascend under the Merger Agreement. When exercisable, the
option granted under the Ascend Stock Option Agreement may be exercised by
delivery of the exercise price of $52.00 per share, in cash, and/or, at
Cascade's election, by delivery of 1.833 shares of Cascade Common Stock for
each option share. In general, the maximum net proceeds that may be retained by
Cascade from termination or post-termination fees payable under the Merger
Agreement and the exercise of such stock option and the sale of the underlying
stock is $170 million. In no event is more than $85 million payable by Ascend
under the Merger Agreement and the Ascend Stock Option Agreement. See "The
Merger Agreement--Termination; Termination Fees and Expenses" and "Stock Option
Agreements--General."
Each Stock Option Agreement gives the option holder the right, under certain
circumstances, to require the option grantor to repurchase all or any portion
of the option or the shares acquired thereunder. See "Stock Option Agreements--
Repurchase Rights and Obligations."
RESTRICTIONS ON RESALE OF ASCEND COMMON STOCK
The shares of Ascend Common Stock issuable to stockholders of Cascade upon
consummation of the Merger will have been registered under the Securities Act
at the Effective Time. Such shares will be freely transferable without
restriction by those Cascade stockholders who are not deemed to be "affiliates"
of Ascend or Cascade, as that term is defined in the rules under the Securities
Act.
Shares of Ascend Common Stock received pursuant to the Merger by those
stockholders of Cascade who are deemed to be affiliates of Cascade or Ascend
may be resold without registration under the Securities Act only as permitted
by Rule 145 under the Securities Act or as otherwise permitted under the
Securities Act. Each affiliate of Cascade has agreed not to sell, pledge,
transfer or otherwise dispose of any shares of Ascend Common Stock received
pursuant to the Merger, except in compliance with Rule 145 under the Securities
Act, or in a transaction that is otherwise exempt from the registration
requirements of the Securities Act and in which an opinion of counsel,
satisfactory to Ascend, has been provided to Ascend to the effect that no such
registration is required in connection with the proposed transaction, or in an
offering that is registered under the Securities Act. In addition, each
affiliate of Ascend and Cascade has agreed not to sell, transfer, pledge,
distribute or otherwise dispose of, or reduce such person's interest in or risk
relating to (i) any shares of Ascend Common Stock or Cascade Common Stock and
(ii) any shares of Ascend Common Stock issued to such person in the Merger or
otherwise beneficially owned by such person, except in each case for amounts of
Cascade Common Stock and Ascend Common Stock not more than the de minimis
amount permitted by the rules and releases of the Commission relating to
pooling of interests accounting treatment, during the period beginning 30 days
prior to the Closing Date (as defined in the Merger Agreement) and ending on
the day after Ascend has published financial results covering at least 30 days
of post-Merger combined operations of Ascend and Cascade. See "The Merger--
Federal Securities Law Compliance" and "--Accounting Treatment."
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SURRENDER OF CASCADE STOCK CERTIFICATES
If the Merger is consummated, The First National Bank of Boston (the
"Exchange Agent") will mail a letter of transmittal with instructions to all
holders of record of Cascade Common Stock immediately prior to the Merger for
use in surrendering their share certificates in exchange for certificates
representing shares of Ascend Common Stock. A STOCKHOLDER OF CASCADE SHOULD NOT
SURRENDER ANY SHARE CERTIFICATES UNTIL SUCH STOCKHOLDER RECEIVES THE LETTER OF
TRANSMITTAL. See "The Merger Agreement--Conversion of Securities."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to qualify as a tax-free reorganization so that no
gain or loss would be recognized by Ascend or Cascade and no gain or loss would
be recognized by Cascade stockholders for federal income tax purposes except
with respect to cash received in lieu of fractional shares. Cascade
stockholders are urged to consult their own tax advisors as to the specific
federal, state, local and foreign tax consequences of the Merger to the
individual stockholder. It is a condition to the consummation of the Merger
that Ascend and Cascade shall each have received an opinion from their
respective counsel to the effect that for federal income tax purposes the
Merger will be treated as a tax-free reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
For a further discussion of federal income tax consequences of the Merger, see
"The Merger--Certain Federal Income Tax Consequences." See also "The Merger
Agreement--Conditions to Closing."
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for accounting
and financial reporting purposes. It is a condition to the Merger that Ascend
shall have received a letter from Ernst & Young LLP, Ascend's independent
auditors, and Cascade shall have received a letter from Coopers & Lybrand
L.L.P., Cascade's independent accountants, as to their concurrence with the
respective company's management regarding the appropriateness of pooling of
interests accounting for the Merger under Accounting Principles Board Opinion
No. 16 and applicable Commission regulations and releases if the Merger is
consummated in accordance with the Merger Agreement. See "The Merger--
Accounting Treatment" and "The Merger Agreement--Conditions to Closing."
COMPARISON OF STOCKHOLDER RIGHTS
See "Comparison of Rights of Cascade Stockholders and Ascend Stockholders"
for a summary of the material differences between the rights of holders of
Ascend Common Stock and Cascade Common Stock.
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SELECTED HISTORICAL AND UNAUDITED PRO FORMA
COMBINED FINANCIAL DATA
Ascend's historical balance sheet data as of December 31, 1996 and 1995 and
historical statement of income data for each of the three years in the period
ended December 31, 1996 are derived from Ascend's audited consolidated
financial statements included elsewhere in this Joint Proxy
Statement/Prospectus. Ascend's historical balance sheet data as of December 31,
1994, 1993 and 1992 and historical statement of income data for each of the two
years in the period ended December 31, 1993 are derived from Ascend's audited
consolidated financial statements not included herein. Ascend's consolidated
financial statement information is qualified by and should be read in
conjunction with such financial statements and the notes thereto included
elsewhere in this Joint Proxy Statement/Prospectus. Cascade's historical
balance sheet data as of December 31, 1996 and 1995 and historical statement of
income data for each of the three years in the period ended December 31, 1996
are derived from Cascade's audited consolidated financial statements included
elsewhere in this Joint Proxy Statement/Prospectus. Cascade's historical
balance sheet data as of December 31, 1994, 1993 and 1992 and historical
statement of operations data for each of the two years in the period ended
December 31, 1993 are derived from Cascade's audited consolidated financial
statements not included herein. Cascade's consolidated financial statement
information is qualified by and should be read in conjunction with such
financial statements and notes thereto included elsewhere in this Joint Proxy
Statement/Prospectus. The unaudited pro forma combined financial data is
qualified in its entirety by reference to, and should be read in conjunction
with, the unaudited pro forma condensed combining financial statements and
notes thereto included elsewhere in this Joint Proxy Statement/Prospectus. The
unaudited pro forma combined statement of income data combines Ascend's
historical consolidated results of operations data for each of the three years
in the period ended December 31, 1996 with Cascade's historical consolidated
results of operations data for each of the three years in the period ended
December 31, 1996, giving effect to the Merger as if it had occurred at the
beginning of each period presented. The unaudited pro forma combined balance
sheet data combines Ascend's historical consolidated balance sheet data as of
December 31, 1996 with Cascade's historical consolidated balance sheet data as
of December 31, 1996, giving effect to the Merger as if it had occurred as of
December 31, 1996. The unaudited pro forma combined financial information is
not necessarily indicative of the consolidated operating results or financial
position that would have occurred had the Merger been consummated at the
beginning of the periods presented, nor is it necessarily indicative of future
operating results or financial position. See "Unaudited Pro Forma Condensed
Combining Financial Statements."
14
<PAGE>
ASCEND SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT OF
OPERATIONS DATA:
Net sales................. $549,297 $152,604 $39,655 $16,215 $ 7,236
Gross profit.............. 357,071 99,308 26,268 10,628 3,797
Operating income (loss)... 174,536 39,300 5,151 (462) (4,202)
Net income (loss)......... 113,111 27,535 6,550 (365) (4,064)
Net income (loss) per
share.................... $ 0.89 $ 0.25 $ 0.07 $ 0.00 $ (0.34)
Number of shares used in
per share calculation.... 127,809 111,362 94,583 83,117 12,051
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET DATA:
Working capital..................... $467,883 $262,750 $46,107 $10,578 $ 8,037
Total assets........................ 651,866 370,014 60,857 15,362 11,041
Total stockholders' equity.......... 547,450 324,987 50,675 12,122 9,100
</TABLE>
CASCADE SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT OF
OPERATIONS DATA:
Revenue................... $340,976 $134,834 $50,060 $ 6,960 $ 816
Gross profit.............. 221,457 86,271 30,947 3,544 292
Operating income (loss)... 110,282 38,078 10,317 (2,720) (3,224)
Net income (loss)......... 70,779 25,410 9,266 (2,613) (3,145)
Net income (loss) per
share.................... $ 0.72 $ 0.28 $ 0.11 $ (0.12) $ (0.14)
Number of shares used in
per share calculation.... 97,767 91,220 81,074 22,001 21,953
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET DATA:
Working capital.................... $184,564 $ 69,187 $46,308 $10,266 $5,703
Total assets....................... 270,261 111,859 65,763 16,070 6,709
Redeemable convertible preferred
stock............................. -- -- -- 18,269 10,408
Total stockholders' equity
(deficit)......................... 219,783 86,306 52,479 (6,841) (4,235)
</TABLE>
15
<PAGE>
ASCEND AND CASCADE
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996(2) 1995 1994
-------- -------- --------
<S> <C> <C> <C>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
DATA:
Net sales......................................... $890,273 $287,438 $ 89,715
Gross profit...................................... 578,528 185,579 57,215
Net income........................................ 176,558 52,945 15,816
Net income per share ............................. $ 0.89 $ 0.30 $ 0.10
Shares used in per share computations ............ 198,626 175,216 151,335
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET DATA(2):
Working capital................................................... $608,164
Total assets...................................................... 927,105
Total stockholders' equity........................................ 724,095
</TABLE>
- --------
(1) See "Unaudited Pro Forma Condensed Combining Financial Statements."
(2) Includes the pro forma effect of Cascade's purchase of Sahara which was
completed on January 28, 1997. See "Unaudited Pro Forma Condensed Combining
Financial Statements."
16
<PAGE>
COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA
The following table sets forth (1) historical net income per share and
historical book value per share data of Ascend; (2) historical net income per
share and historical book value per share data of Cascade; (3) unaudited pro
forma combined net income per share and unaudited pro forma book value per
share data of Ascend after giving effect to the Merger on a pooling of
interests basis; and (4) unaudited equivalent pro forma combined net income per
share and unaudited equivalent pro forma combined book value per share data of
Cascade based on the Exchange Ratio of 0.70 of a share of Ascend Common Stock
for each share of Cascade Common Stock. See "The Merger Agreement--Conversion
of Securities." The information in the table should be read in conjunction with
the audited consolidated financial statements of Ascend and Cascade and the
notes thereto included elsewhere in this Joint Proxy Statement/Prospectus. The
unaudited pro forma combined financial data are not necessarily indicative of
the net income per share or book value per share that would have been achieved
had the Merger been consummated as of the beginning of the periods presented
and should not be construed as representative of such amounts for any future
dates or periods.
<TABLE>
<CAPTION>
CASCADE
HISTORICAL(1) EQUIVALENT
-------------- PRO FORMA PRO FORMA
ASCEND CASCADE COMBINED(1)(2) COMBINED(1)(2)(3)
------ ------- -------------- -----------------
<S> <C> <C> <C> <C>
Net income per share:
For the year ended December
31:
1996(4).................... $0.89 $0.72 $0.89 $0.62
1995....................... 0.25 0.28 0.30 0.21
1994....................... 0.07 0.11 0.10 0.07
Book value per share at:
December 31, 1996(4)......... 4.58 2.44 3.92 2.74
</TABLE>
- --------
(1) Historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at the end of
each period. Ascend pro forma book value per share is computed by dividing
pro forma stockholders' equity, including the effect of pro forma
adjustments, by the pro forma number of shares of Ascend Common Stock which
would have been outstanding had the Merger been consummated as of December
31, 1996.
(2) Ascend and Cascade anticipate that the combined company will incur Merger-
related expenses totaling approximately $42.2 million. Such expenses
include investment advisory fees, legal and accounting expenses and other
transaction costs. These costs are expected to be charged to the operations
of Ascend in the quarter in which the Merger is consummated. The effects of
these costs have not been reflected in the historical or pro forma net
income per share data but are reflected in the pro forma book value per
share data as of December 31, 1996.
(3) The Cascade equivalent pro forma combined per share amounts are calculated
by multiplying the Ascend pro forma combined per share amounts by the
Exchange Ratio of 0.70 of a share of Ascend Common Stock for each share of
Cascade Common Stock.
(4) Includes the pro forma effect of Cascade's purchase of Sahara which was
completed on January 28, 1997. See "Unaudited Pro Forma Condensed Combining
Financial Statements."
17
<PAGE>
MARKET PRICE INFORMATION
Ascend Common Stock is quoted on The Nasdaq National Market under the symbol
"ASND."
The table below sets forth, for the calendar quarters indicated, the reported
high and low closing sale prices of Ascend Common Stock as reported on The
Nasdaq National Market. Ascend Common Stock began trading on The Nasdaq
National Market on May 13, 1994. The prices of Ascend Common Stock reflect all
stock splits effected prior to the date hereof.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1994
Second Quarter (commencing May 13)........................... $ 2.03 $ 1.41
Third Quarter................................................ 3.47 1.61
Fourth Quarter............................................... 5.56 2.72
1995
First Quarter................................................ 8.22 4.94
Second Quarter............................................... 13.00 7.84
Third Quarter................................................ 21.56 12.25
Fourth Quarter............................................... 40.63 16.50
1996
First Quarter................................................ 57.00 32.25
Second Quarter............................................... 70.63 51.75
Third Quarter ............................................... 67.81 41.75
Fourth Quarter............................................... 73.88 60.13
1997
First Quarter................................................ 80.25 40.75
Second Quarter (through April 21, 1997)...................... 48.81 38.25
</TABLE>
Cascade Common Stock is quoted on The Nasdaq National Market under the symbol
"CSCC."
The table below sets forth, for the calendar quarters indicated, the reported
high and low closing sale prices of Cascade Common Stock as reported on The
Nasdaq National Market. Cascade Common Stock began trading on The Nasdaq
National Market on July 29, 1994. The prices of Cascade Common Stock reflect
all stock splits effected prior to the date hereof.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
1994
Third Quarter (commencing July 29)............................ $ 8.63 $3.50
Fourth Quarter................................................ 10.69 7.50
1995
First Quarter................................................. 12.54 9.54
Second Quarter................................................ 15.42 10.13
Third Quarter................................................. 17.42 13.00
Fourth Quarter................................................ 30.83 13.75
1996
First Quarter................................................. 46.38 20.42
Second Quarter................................................ 68.50 39.75
Third Quarter ................................................ 83.38 46.25
Fourth Quarter................................................ 91.25 54.88
1997
First Quarter................................................. 64.25 24.38
Second Quarter (through April 21, 1997)....................... 32.13 25.88
</TABLE>
18
<PAGE>
The following table sets forth the closing prices per share of Ascend Common
Stock and Cascade Common Stock on The Nasdaq National Market on March 27, 1997,
the last full trading date prior to the public announcement of the signing of
Merger Agreement, and on April 21, 1997, the last practicable trading date for
which information is available before the printing of this Joint Proxy
Statement/Prospectus; and the equivalent per share prices for Cascade Common
Stock based on the Ascend Common Stock prices multiplied by the Exchange Ratio
of 0.70:
<TABLE>
<CAPTION>
ASCEND CASCADE
COMMON COMMON CASCADE
STOCK STOCK EQUIVALENT
------ ------- ----------
<S> <C> <C> <C>
March 27, 1997.................................. $52.00 $28.38 $36.40
April 21, 1997.................................. 38.25 25.88 26.78
</TABLE>
As of April 23, 1997, there were approximately 1,185 stockholders of record
of Ascend Common Stock, and approximately 1,020 stockholders of record of
Cascade Common Stock.
Ascend and Cascade believe that Cascade Common Stock presently trades on the
basis of the value of the Ascend Common Stock expected to be issued in exchange
for such Cascade Common Stock in the Merger, discounted for the uncertainties
associated with such transaction.
Cascade stockholders are advised to obtain current market quotations for
Ascend Common Stock and Cascade Common Stock. No assurance can be given as to
the market prices of Ascend Common Stock and Cascade Common Stock at any time
before the Effective Time or as to the market price of Ascend Common Stock at
any time thereafter. Because the Exchange Ratio is fixed, the Exchange Ratio
will not be adjusted to compensate Cascade stockholders for decreases in the
market price of Ascend Common Stock which could occur before the Merger becomes
effective. In the event the market price of Ascend Common Stock decreases or
increases prior to the Effective Time, the value at the Effective Time of the
Ascend Common Stock to be received in the Merger in exchange for Cascade Common
Stock would correspondingly decrease or increase.
Following the Merger, all Cascade Common Stock will be owned by Ascend and,
as a result, Cascade Common Stock will no longer be listed on The Nasdaq
National Market.
Neither Ascend nor Cascade has paid any cash dividends on their respective
capital stock since their respective inceptions. Following the Merger, Ascend
intends to retain any future earnings for use in its business and does not
anticipate paying cash dividends in the foreseeable future.
19
<PAGE>
RISK FACTORS
The following risk factors should be considered by holders of Cascade Common
Stock in evaluating whether to approve and adopt the Merger Agreement and
thereby acquire shares of Ascend Common Stock and by holders of Ascend Common
Stock in evaluating whether to approve the issuance of shares of Ascend Common
Stock pursuant to the Merger Agreement. These factors should be considered in
conjunction with the other information included and incorporated by reference
in this Joint Proxy Statement/Prospectus. This Joint Proxy
Statement/Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934. Actual results could differ materially from those projected in
these forward-looking statements as a result of a variety of factors,
including those set forth below and elsewhere in this Joint Proxy
Statement/Prospectus.
RISKS RELATING TO THE MERGER
INTEGRATION OF OPERATIONS AND TECHNOLOGIES. Achieving the anticipated
benefits of the Merger will depend in part upon whether the integration of the
two companies' businesses is accomplished in an efficient and effective
manner, and there can be no assurance as to the extent that this will occur,
if at all. The combination of the two companies will require, among other
things, integration of the companies' respective products, technologies,
management information systems, distribution channels and key personnel and
the coordination of their sales, marketing and research and development
efforts. There can be no assurance that such integration will be accomplished
smoothly or successfully, if at all. If significant difficulties are
encountered in the integration of the existing products or technologies or the
development of new products and technologies, resources could be diverted from
new product development, and delays in new product introductions could occur.
Successful integration of the two companies' sales and marketing organizations
will require the sales and marketing personnel of each company to learn about
the often technically-complex products, services and technologies of the other
company. As compared to Ascend, Cascade's product lines have traditionally
experienced longer, more complex sales cycles. There can be no assurance that
the combined company will be able to take full advantage of the combined sales
forces' efforts. The difficulties of integrating Ascend and Cascade may be
increased by the necessity of coordinating organizations with distinct
cultures and widely dispersed operations. Ascend and a majority of its
employees are located in California, while Cascade and a majority of its
employees are located in Massachusetts. The integration of operations and
technologies following the Merger will require the dedication of management
and other personnel which may distract their attention from the day-to-day
business of the combined company, the development or acquisition of new
technologies, and the pursuit of other business acquisition opportunities.
Failure to successfully accomplish the integration and development of the two
companies' operations and technologies would likely have a material adverse
effect on the combined company's business, financial condition and results of
operations. In addition, as commonly occurs with mergers of technology
companies, during the pre-merger and integration phases, aggressive
competitors may undertake initiatives to attract customers through various
incentives which could have a material adverse effect on the business, results
of operations and financial conditions of Ascend, Cascade and/or the combined
company.
FAILURE TO ACHIEVE BENEFICIAL SYNERGIES. The managements of Ascend and
Cascade have entered into the Merger Agreement with the expectation that the
Merger will result in beneficial synergies. See "The Merger--Reasons for the
Merger; Recommendations of the Boards of Directors." Achieving these
anticipated synergies will depend on a number of factors including, without
limitation, the successful integration of Ascend's and Cascade's operations
and general and industry-specific economic factors. Even if Ascend and Cascade
are able to integrate their operations and economic conditions remain stable,
there can be no assurance that the anticipated synergies will be achieved. The
failure to achieve such synergies could have a material adverse effect on the
business, results of operations and financial condition of the combined
company.
CUSTOMERS. There can be no assurance that customers of Ascend and Cascade,
including, in particular, telecommunications carrier customers of Cascade, ISP
customers of Ascend, resellers and other end users of Ascend and Cascade
products, will continue their current and historical buying patterns without
regard to the
20
<PAGE>
Merger and other recent industry developments. Certain customers may defer
purchasing decisions as they evaluate the proposed Merger, other merger and
product announcements in the data networking sector, changes and regulatory
developments in the telecommunications industry, the combined company's future
product strategy and current and anticipated product offerings of competitors.
Customers may ultimately decide to purchase competitors' products in lieu of
the combined company's products. Historically, a substantial portion of
Cascade's customers have been public service providers such as RBOCs, LECs,
and CAPs, while a substantial portion of Ascend's customers have been private
ISPs. These different types of customers may evaluate the combined company
differently. Cascade and, to a lesser extent, Ascend have each historically
depended upon a limited number of customers for a significant portion of its
business. Consequently, decisions by a relatively small number of customers to
defer their purchasing decisions or to purchase products elsewhere could have
a material adverse effect on the business, results of operations and financial
condition of the combined company. In addition, by increasing the breadth of
Ascend's and Cascade's respective businesses, the Merger may make it more
difficult for the combined company to enter into new, or to maintain existing,
relationships, including customer relationships, with strategic partners, some
of whom may view the combined company as a more direct competitor than either
Ascend or Cascade as an independent company.
DEPENDENCE ON RETENTION AND INTEGRATION OF KEY EMPLOYEES. The success of the
combined company is dependent on the retention and integration of the key
management, sales, marketing, engineering and other technical employees of
Ascend and Cascade. Competition for qualified personnel in the networking
industry is very intense, and competitors often use aggressive tactics to
recruit key employees during the period leading up to a merger and during the
integration phase following a merger. Stock options, which generally become
exercisable only over a period of several years of employment, serve as an
important incentive for retaining key employees. In accordance with their
original terms, certain stock options held by several key Cascade optionees
will be fully exercisable or the vesting thereof will accelerate by one year
upon the consummation of the Merger, thus potentially reducing the retention
incentive provided by such options. While it is anticipated that the combined
company will implement retention arrangements for its key employees, there can
be no assurance that key employees will remain with the combined company. The
loss of services of any of the key employees of the combined company could
materially and adversely affect the combined company's business, financial
condition and results of operation.
RISKS ASSOCIATED WITH FIXED EXCHANGE RATIO. As a result of the Merger, each
outstanding share of Cascade Common Stock will be converted into the right to
receive 0.70 of a share of Ascend Common Stock. Because the Exchange Ratio is
fixed, it will not increase or decrease due to fluctuations in the market
price of either Ascend Common Stock or Cascade Common Stock. The specific
dollar value of the consideration to be received by Cascade stockholders in
the Merger will depend on the market price of Ascend Common Stock at the
Effective Time. In the event that the market price of Ascend Common Stock
decreases or increases prior to the Effective Time, the market value at the
Effective Time of the Ascend Common Stock to be received by Cascade
stockholders in the Merger would correspondingly decrease or increase. The
market prices of Ascend Common Stock and Cascade Common Stock as of a recent
date are set forth herein under "Market Price Information." Ascend and Cascade
stockholders are advised to obtain recent market quotations for Ascend Common
Stock and Cascade Common Stock. Ascend Common Stock and Cascade Common Stock
historically have been subject to substantial price volatility. No assurance
can be given as to the market prices of Ascend Common Stock or Cascade Common
Stock at any time before the Effective Time or as to the market price of
Ascend Common Stock at any time thereafter. See "Market Price Information."
SUBSTANTIAL EXPENSES RESULTING FROM THE MERGER. Ascend and Cascade estimate
they will incur direct transaction costs relating primarily to regulatory
filing costs, and the fees of financial advisors, attorneys, accountants,
financial printers and proxy solicitors of approximately $42.2 million
associated with the Merger, which will be charged to operations upon
consummation of the Merger. Ascend and Cascade expect the combined company to
incur an additional significant charge to operations, which is not currently
reasonably estimable, in the quarter in which the Merger is consummated, to
reflect costs associated with integrating the two companies. There can be no
assurance that the combined company will not incur additional material charges
in subsequent quarters to reflect additional costs associated with the Merger.
21
<PAGE>
RISKS RELATING TO ASCEND, CASCADE AND THE COMBINED COMPANY
GENERAL RISKS. The future operating results of Ascend, Cascade and the
combined company may be affected by various trends and factors which must be
successfully managed in order to achieve favorable operating results. In
addition, there are trends and factors beyond the control of Ascend, Cascade
or the combined company which affect their current and combined operations.
Such trends and factors include, but are not limited to, adverse changes in
conditions in the specific markets for Ascend's and Cascade's products,
conditions in the broader market for computer, telecommunications and data
communications products and services, and conditions in the domestic or global
economy generally; governmental regulation or intervention affecting
communications or data networking; fluctuations in foreign exchange rates; and
other factors, including those listed below. Ascend and Cascade participate in
a highly volatile and rapidly growing industry which is characterized by
vigorous competition for market share and rapid technological development
carried out amidst uncertainty over adoption of industry standards, the
evolution of public and private data networks, customer requirements and
demand and protection of intellectual property rights. This could result in
aggressive pricing practices and growing competition from both start-up
companies and well-capitalized data communications companies. The ability of
Ascend, Cascade and the combined company to compete in this environment
depends upon a number of competitive and market factors and is subject to the
risks set forth in this Joint Proxy Statement/Prospectus and other factors
beyond the control of the management teams of the respective companies.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. Ascend and Cascade have
experienced rapid quarterly growth in net sales principally due to the
emergence of markets for WAN switching and remote access products, increased
market acceptance of their products and the expansion of their product lines
and distribution channels. Due to the rapidly changing nature of the markets
for Ascend's and Cascade's products, as well as the likelihood of increased
competition, there can be no assurance that Ascend's and/or Cascade's rates of
growth in net sales will continue or that Ascend, Cascade and/or the combined
company will be able to sustain profitability in the future. In particular,
Cascade's net sales for the first quarter of 1997 decreased from the level of
net sales in the last quarter of 1996. Ascend's, Cascade's and the combined
company's quarterly operating results may be affected by a wide variety of
factors, including competition, the mix of products sold, the mix of
distribution channels employed, success in developing, introducing and
shipping new products, price reductions for products, changes in the levels of
inventory held by third party resellers, the timing of orders from and
shipments to customers, seasonality and general economic conditions. A
significant portion of Cascade's revenues and, to a lesser extent, Ascend's
revenues, in prior periods has been derived from relatively large sales to a
limited number of customers, and therefore the failure of the combined company
to secure expected large sales may have a material adverse impact on the
results of operations of the combined company. Ascend and Cascade each expects
that its gross margins and the gross margins of the combined company could be
adversely affected in future periods by price adjustments as a result of
increased competition. Ascend also expects that its gross margins and the
gross margins of the combined company could be adversely affected in future
periods by increased sales of its Pipeline products as a percentage of net
sales. These products have lower gross margins than Ascend's and Cascade's
other products. In addition, Ascend's, Cascade's and the combined company's
use of third parties to distribute their products to certain end-user
customers may adversely affect their gross margins. Quarterly sales and
operating results of Ascend, Cascade and the combined company will generally
depend on the volume and timing of and ability to fulfill orders received
within the quarter, which are difficult to forecast. In the two quarters ended
March 31, 1997, a substantial portion of Cascade's revenue resulted from
orders and shipments during the latter part of the quarter. Significant
portions of Ascend's and Cascade's expense levels are relatively fixed in
advance based in large part on their respective forecasts of future sales. If
sales are below expectations in any given quarter, the adverse impact of the
shortfall on the operating results of Ascend, Cascade or the combined company
may be magnified to the extent the respective company is unable to adjust
spending to compensate for the shortfall. Ascend, Cascade or the combined
company may also increase spending in response to competition or to pursue new
market opportunities. Accordingly, there can be no assurance that any of them
will be able to sustain profitability in the future, particularly on a
quarter-to-quarter basis.
DEPENDENCE ON THE INTERNET MARKET; INTERNET PRODUCT AND CUSTOMER
CONCENTRATION. The recent growth in Ascend's and Cascade's net sales, to a
certain extent, has been attributable to the use of their respective products
in connection with the Internet and Intranets. Sales of Ascend's MAX products,
which are used as POP
22
<PAGE>
call concentration devices by ISPs, accounted for approximately 82%, 63% and
26% of Ascend's net sales in 1996, 1995 and 1994, respectively. Similarly,
sales of Ascend's Pipeline products, which are used for Internet and Intranet
access by service subscribers, were approximately 12%, 20% and 10% of net
sales in 1996, 1995 and 1994, respectively. Revenue from Cascade's Frame Relay
and ATM switching products (principally, the B-STDX 9000 and CBX 500), which
are used by ISPs and public service providers as wide area data network
switching devices, have represented substantially all of Cascade's revenue
since January 1, 1996. The market for Internet and Intranet access and
switching products is new and evolving, and it is difficult to predict its
size or future growth rate. Sales of the MAX and Pipeline products by Ascend
and the combined company and of the B-STDX 9000 and CBX 500 products by
Cascade and the combined company will likely depend in large part upon the
continued growth in demand for Internet and Intranet access and networks,
sustained adoption by end-user customers of the Internet for commerce and
communication and continued acceptance of Ascend's and Cascade's products.
There can be no assurance that this industry and infrastructure will continue
to develop, that this adoption will occur or that acceptance of Ascend's or
Cascade's products will continue. Ascend and Cascade believe that competition
in these markets will increase significantly in the future. Any adverse
development regarding the Internet access industry, the data network equipment
market, adoption of the Internet or acceptance of Ascend's or Cascade's
products could adversely affect Ascend's, Cascade's and/or the combined
company's business, results of operations and financial condition. In North
America, Ascend sells a substantial percentage of its products, particularly
its MAX products, to ISPs. Sales to ISPs accounted for approximately 20% and
21% of Ascend's net sales in 1996 and 1995, respectively. Sales to one of
these ISPs, UUNET, accounted for approximately 7% and 11% of net sales in 1996
and 1995, respectively. Cascade sales are concentrated among ISPs and public
service providers. The level of sales, if any, to any particular ISP or public
service provider may vary considerably from period to period. Accordingly,
there can be no assurance that sales by Ascend, Cascade and the combined
company to these entities, individually or as a group, will equal or exceed
historical levels of Ascend and Cascade in any future period. Any development
that would result in a substantial decrease or delay in sales to one or more
of these entities, including actions by competitors, technological changes or
regulation affecting the growth of network infrastructure, could have a
material adverse effect on Ascend's, Cascade's and/or the combined company's
business, results of operations and financial condition.
DEVELOPING MARKETS; MARKET ACCEPTANCE OF PRODUCTS. Market acceptance of the
combined company's products for applications other than Internet and Intranet
access and switching is important to the success of the combined company.
Specifically, Ascend's products are targeted at access to corporate backbone
networks and local area networks ("LANs") by remote offices, telecommuters and
mobile users, and videoconferencing and multimedia access facilities, while
Cascade's products are targeted at switching within the public carrier and
corporate backbone networks. Ascend's, Cascade's and the combined company's
success in generating significant sales in these emerging markets will depend
in part on their ability to educate users about the benefits of their
respective technologies and to develop effective distribution channels to
address these markets. These markets are diverse and rapidly evolving, and it
is difficult to predict their potential size or future growth rate. Moreover,
Ascend's, Cascade's and the combined company's limited resources relative to
certain of their competitors may restrict their ability to remain current with
respect to developments in these markets and to effectively pursue marketing
activities in multiple markets simultaneously. Accordingly, there can be no
assurance that Ascend's, Cascade's and/or the combined company's products will
be widely accepted in these new markets or that Ascend, Cascade and/or the
combined company will be able to identify additional markets. The inability of
Ascend, Cascade or the combined company to continue to penetrate the various
markets for their respective products or to successfully expand the markets
for their respective products would have a material adverse effect on the
respective company's business, results of operations and financial condition.
INTEGRATION OF RECENT ACQUISITIONS. Ascend and Cascade have each completed
several acquisitions of businesses, products and technologies since the
beginning of 1995. These include the acquisition by Ascend of Morning Star
Technologies, Inc. ("Morning Star"), NetStar, Inc. ("NetStar"), Subspace
Communications, Incorporated ("Subspace") and StonyBrook Services, Inc.
("Stony Brook"), which were completed in 1996, InterCon Systems Corporation
("InterCon"), which was completed in February 1997, and Whitetree, Inc.
("Whitetree"), which was completed in April 1997. Cascade acquired Arris
Networks, Inc. ("Arris") in 1996
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and Sahara in January 1997. Ascend, Cascade and/or the combined company may
acquire additional businesses, products or technologies in the future,
although there are no agreements with respect to such transactions as of the
date of this Joint Proxy Statement/Prospectus. Achieving the anticipated
benefits of past and future acquisition transactions will depend in part upon
whether the integration of the acquired companies' businesses with Ascend's,
Cascade's and/or the combined company's business is accomplished in an
efficient and effective manner, and there can be no assurance that this will
occur. The combination of Ascend, Cascade and/or the combined company with
such acquired companies will require, among other things, integration of the
companies' respective products, technologies, management information systems,
distribution channels and key personnel and coordination of their research and
development, sales and marketing and financial reporting efforts. There can be
no assurance that such integration will be accomplished smoothly or
successfully. If significant difficulties are encountered in the integration
of the existing product lines and technology, resources could be diverted from
new product development, and delays in new product introductions could occur.
The integration of product lines could also cause confusion or dissatisfaction
among existing customers of Ascend, Cascade, the combined company and the
acquired companies. The difficulties of such integration may be increased by
the necessity of coordinating geographically separated organizations with
distinct cultures. The integration of certain operations following an
acquisition will require the dedication of management and other personnel
which may distract their attention from the day-to-day business of Ascend,
Cascade and/or the combined company. Failure to accomplish successfully the
integration of the operations of Ascend, Cascade and/or the combined company
with the operations of the acquired companies could have a material adverse
effect on Ascend's, Cascade's and/or the combined company's business,
financial condition or results of operations.
NEW PRODUCT DEVELOPMENT AND TIMELY INTRODUCTION OF NEW AND ENHANCED
PRODUCTS. The markets for Ascend's and Cascade's products are, and the markets
for the combined company's products will be, characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions
and short product life cycles. Inherent in the product development process are
a number of risks. The development of new, technologically advanced products
is a complex and uncertain process requiring high levels of innovation, as
well as the accurate anticipation of technological and market trends. The
introduction of new or enhanced products also may require Ascend, Cascade
and/or the combined company to manage the transition from older products in
order to minimize disruption in customer ordering patterns, to avoid excessive
levels of older product inventories and to ensure that adequate supplies of
new products can be delivered to meet customer demand. There can be no
assurance that Ascend, Cascade and/or the combined company will successfully
develop, introduce or manage the transition of new products. Products may
contain undetected or unresolved software or hardware errors when they are
first introduced or as new versions are released. There can be no assurance
that, despite extensive testing, software or hardware errors will not be found
in new products or upgrades after commencement of commercial shipments of new
or enhanced products. The inability of such products to gain market acceptance
or problems associated with new product transitions could adversely affect
Ascend's, Cascade's and/or the combined company's results of operations,
particularly on a quarterly basis.
COMPETITION. In the WAN and Internet access segments of the data networking
market, the primary competitors of Ascend and Cascade are, and of the combined
company will be, Cisco Systems, Inc. ("Cisco"), U.S. Robotics Corporation
("U.S. Robotics"), Shiva Corporation ("Shiva") and Northern Telecom, Inc.
("Nortel"). 3Com Corporation ("3Com") recently entered into an agreement to
acquire U.S. Robotics. Cisco and 3Com have substantially greater financial,
marketing and technical resources than Ascend, Cascade and the combined
company. In the WAN and Internet backbone switching segments of the data
networking market, the primary competitors of Ascend, Cascade and the combined
company are Cisco, Newbridge Networks, Bay Networks, Fore Systems and General
Datacom, some of which have substantially greater financial, marketing and
technical resources than Ascend, Cascade and the combined company. In the
remote LAN and Internet subscriber access segments of the data networking
market, competition is widespread, although few companies have positioned
their products specifically as digital bandwidth on demand network access
systems. The primary competitors in these segments of the data networking
market are Gandalf, Cisco, Shiva and 3Com. In the videoconferencing and
multimedia access segments of the market, competitors include Teleos
Communications (a subsidiary of Madge Networks, Inc. ("Madge")), Adtran and
Promptus Communications (a subsidiary of GTI).
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Competitive factors in the access markets include core technology, breadth
of product features, scalability of products, product quality and
functionality, pricing, marketing and distribution resources, international
certifications and technical service and customer support. Competitive factors
in the market for switching products include breadth of network services
supported, conformance to industry standards, price per port, performance,
product features, network management capabilities, reliability and customer
support. In addition, customers of wide area networking products are
increasingly demanding integrated, end-to-end product portfolios from a single
vendor.
Ascend, Cascade and the combined company expect additional competition from
existing competitors and from a number of companies that may enter Ascend's,
Cascade's and the combined company's existing and future markets. Some of
Ascend's, Cascade's and the combined company's current and potential
competitors have substantially greater financial, marketing and technical
resources than they do. Many of Ascend's, Cascade's and the combined company's
current and potential competitors also have established relationships with
Ascend's, Cascade's and/or the combined company's current and potential
customers. Increased competition could result in price reductions, reduced
profit margins and loss of market share, each of which would adversely affect
Ascend's, Cascade's and/or the combined company's operating results. There can
be no assurance that Ascend, Cascade or the combined company will be able to
continue to compete successfully against current and future competitors as
markets evolve and competition increases.
MANAGEMENT OF GROWTH. Ascend and Cascade are currently experiencing rapid
growth and expansion, which has placed, and will continue to place, a
significant strain on their respective administrative, operational and
financial resources and increased demands on their respective systems and
controls. This growth has resulted in a continuing increase in the level of
responsibility for existing and new management personnel of both companies.
Continued growth of Ascend, Cascade and/or the combined company would require
each of them to recruit and hire a substantial number of new engineering,
technical support, sales, marketing and managerial personnel. Competition for
such highly-qualified personnel is intense. There can be no assurance that
Ascend, Cascade and the combined company will be successful at hiring or
retaining these personnel. The ability of Ascend, Cascade and the combined
company to manage their growth successfully will also require each of them to
continue to expand and improve their respective operational, management and
financial systems and controls and to expand their respective manufacturing
capacities. If management is unable to manage growth effectively, the
business, results of operations and financial condition of Ascend, Cascade
and/or the combined company could be materially and adversely affected.
RELIANCE ON THIRD PARTY TELECOMMUNICATIONS CARRIERS, VALUE-ADDED RESELLERS
AND DISTRIBUTORS. Ascend's sales are, and the combined company's sales will
be, to a significant degree, made through telecommunications carriers, value-
added resellers ("VARs") and distributors. Accordingly, Ascend, Cascade and
the combined company will be dependent upon the continued viability and
financial stability of these companies. While Ascend has contractual
relationships with many telecommunications carriers, VARs and distributors,
these agreements do not require the telecommunications carriers, VARs or
distributors to purchase Ascend's products and can be terminated by the
telecommunications carrier, VARs or distributor at any time. There can be no
assurance that any of the telecommunications carriers, VARs and distributors
will continue to market Ascend's or the combined company's products. The
telecommunication carrier customers, to the extent they are resellers, VARs
and distributors, generally offer products of several different companies,
including products that are competitive with Ascend's and Cascade's products.
Accordingly, there is a risk that these telecommunications carriers to the
extent they are resellers, VARs and distributors may give higher priority to
products of other suppliers, thus reducing their efforts to sell Ascend's
and/or the combined company's products. Any special distribution arrangements
and product pricing arrangements that Ascend, Cascade or the combined company
may implement in one or more distribution channels for strategic purposes
could adversely affect gross profit margins for each of their products.
DEPENDENCE ON KEY PERSONNEL. Ascend's, Cascade's and the combined company's
success depends to a significant degree upon the continuing contributions of
their respective key management, sales, marketing and product development
personnel. Ascend and Cascade do not have employment contracts with their key
personnel and do not maintain any key person life insurance policies. The loss
of key management, sales, marketing or
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technical personnel could adversely affect Ascend, Cascade and/or the combined
company. The future success of Ascend, Cascade and the combined company will
depend in large part upon their ability to attract and retain highly-skilled
engineering, managerial, sales and marketing personnel. Competition for such
highly-qualified personnel is intense, and there can be no assurance that
Ascend, Cascade or the combined company will be successful in attracting and
retaining such personnel. Failure to attract and retain key personnel could
have a material adverse effect on the business, results of operations and
financial condition of Ascend, Cascade and/or the combined company.
TARIFF AND REGULATORY MATTERS. Rates for telecommunications services are
governed by tariffs of licensed carriers that are subject to regulatory
approval. Future changes in these tariffs could have a material adverse effect
on Ascend's, Cascade's and/or the combined company's business. For example,
should tariffs for public switched digital services increase in the future
relative to tariffs for private leased services, the cost-effectiveness of
Ascend's, Cascade's and the combined company's products would be reduced, and
their businesses and results of operations could be adversely affected. In
addition, Ascend's, Cascade's and the combined company's products must meet
standards and receive certification for connection to the public
telecommunications network prior to their sale. In the United States,
Ascend's, Cascade's and the combined company's products must comply with Part
15(a) (industrial equipment), Part 15(b) (residential equipment) and Part 68
(analog lines) of the Federal Communications Commission's regulations.
Ascend's, Cascade's and the combined company's products also must be certified
by domestic telecommunications carriers. In countries outside the United
States, Ascend's, Cascade's and the combined company's products are subject to
a wide variety of governmental review and certification requirements. In
addition, customers outside the United States typically require that Ascend's,
Cascade's and the combined company's products receive certification from their
country's primary telecommunications carriers. Any future inability to obtain
on a timely basis or retain domestic certification or foreign regulatory
approvals could have a material adverse effect on the business, financial
condition and results of operations of Ascend, Cascade and/or the combined
company.
DEPENDENCE ON CONTRACT MANUFACTURERS AND SINGLE-SOURCE SUPPLIERS. Ascend's
and Cascade's production operations consist, and the combined company's
production operations will consist, primarily of materials planning and
procurement, quality control and final assembly, burn-in and testing of
certain products. Ascend and Cascade rely on independent contractors to
manufacture certain of their products or components and subassemblies used in
their products to their specifications, and the combined company will do the
same. Ascend and Cascade are, and the combined company will be, dependent upon
single or limited source suppliers for a number of components and parts used
in their respective products, including certain key microprocessors and
integrated circuits. There can be no assurance that these independent
contractors and suppliers will be able to meet Ascend's, Cascade's and/or the
combined company's future requirements for manufactured products, components
and subassemblies. Ascend and Cascade generally purchase single or limited
source components pursuant to purchase orders and have no guaranteed supply
arrangements with these suppliers. In addition, the availability of many of
these components to Ascend, Cascade and the combined company will be dependent
in part on their ability to provide their respective suppliers with accurate
forecasts of their future requirements. Ascend and Cascade believe that there
are alternative suppliers or alternative components for all of the components
contained in their products and the products of the combined company. However,
any extended interruption in the supply of any of the key components currently
obtained from a single or limited source or the time necessary to transition a
replacement supplier's product or a replacement component into Ascend's,
Cascade's and/or the combined company's products could disrupt their
operations and have a material adverse effect on the operating results of such
company in any given period. Ascend and Cascade purchase certain components
from suppliers outside the United States; however, all such purchases are
denominated in U.S. dollars and Ascend and Cascade believe that all such
components or alternate components are available from suppliers within the
United States. Ascend, Cascade and the combined company may also be subject to
increases in component costs, which could also have a material adverse effect
on the respective company's operating results.
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The success and ability to compete of
Ascend, Cascade and the combined company will depend in part upon each of
their proprietary technologies and continued development
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and acquisition of additional proprietary technologies. Ascend and Cascade
rely, and the combined company will rely, on a combination of patent,
copyright and trade secret laws and non-disclosure agreements to protect their
respective proprietary technologies. Ascend currently holds several United
States patents and a foreign patent and has patent applications pending.
Cascade has a number of patent applications that are currently pending for
certain of its existing products and currently relies on a combination of
contractual rights, trade secrets and copyrights to protect its proprietary
rights. There can be no assurance that patents will be issued with respect to
pending or future patent applications of Ascend, Cascade and/or the combined
company or that Ascend's, Cascade's or the combined company's patents will be
upheld as valid or will prevent the development of competitive products. In
addition, Ascend and Cascade have generally entered into confidentiality or
license agreements with their employees, VARs, distributors, customers and
potential customers and have limited access to the distribution of their
software, documentation and other proprietary information. There can be no
assurance that the steps taken by Ascend, Cascade and the combined company to
protect their proprietary rights will be adequate to prevent misappropriation
of their technologies or that competitors will not independently develop
technologies that are substantially equivalent or superior to their
technology. In addition, the laws of some countries do not protect proprietary
rights to the same extent as do the laws of the United States. Ascend, Cascade
and the combined company are also subject to the risk of adverse claims and
litigation alleging infringement of the intellectual property rights of
others. From time to time, Ascend and Cascade have received claims of
infringement of other parties' proprietary rights. Although Ascend and Cascade
believe that all such claims received to date are immaterial, there can be no
assurance that third parties will not assert infringement claims in the future
with respect to current or future products of Ascend, Cascade and/or the
combined company or that any such claims will not require Ascend, Cascade
and/or the combined company to enter into license arrangements or result in
protracted and costly litigation, regardless of the merits of such claims. No
assurance can be given that any necessary licenses will be available or that,
if available, such licenses can be obtained on commercially reasonable terms.
INTERNATIONAL SALES. Ascend's international sales accounted for
approximately 48%, 29% and 20% of net sales in 1996, 1995 and 1994,
respectively. Cascade's international sales accounted for approximately 19%,
16% and 20% of net sales in 1996, 1995 and 1994, respectively. International
sales are expected to continue to account for a significant portion of
Ascend's, Cascade's and the combined company's net sales in future periods.
International sales are subject to certain inherent risks, including
unexpected changes in regulatory requirements and tariffs, difficulties in
staffing and managing foreign operations, longer payment cycles, problems in
collecting accounts receivable and potentially adverse tax consequences.
Ascend and Cascade both depend on third party resellers for a substantial
portion of their international sales. Certain of these third party resellers
also act as resellers for competitors of Ascend and Cascade and could devote
greater effort and resources to marketing competitive products. The loss of
certain of these third party resellers could have a material adverse effect on
the business and results of operations of Ascend, Cascade and/or the combined
company. Although Ascend's and Cascade's sales are, and the combined company's
sales will likely be, denominated in U.S. dollars, fluctuations in currency
exchange rates could cause Ascend's products to become relatively more
expensive to customers in a particular country, leading to a reduction in
sales or profitability in that country. Furthermore, future international
activity may result in foreign currency denominated sales, and, in such event,
gains and losses on the conversion to U.S. dollars of accounts receivable and
accounts payable arising from international operations may contribute to
fluctuations in results of operations of Ascend, Cascade and/or the combined
company. In addition, sales in Europe and certain other parts of the world
typically are adversely affected in the third quarter of each calendar year as
many customers and end-users reduce their business activities during the
summer months. These seasonal factors may have an effect on the business,
results of operations and financial condition of Ascend, Cascade and/or the
combined company.
POTENTIAL ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS. The Ascend
Board has the authority to issue up to 2,000,000 shares of Preferred Stock and
to fix the rights, preferences, privileges and restrictions, including voting
rights, of these shares without any further vote or action by the
stockholders. The rights of the holders of the Ascend Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of the
Preferred Stock, while
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providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock of
Ascend or the combined company, thereby delaying, deferring or preventing a
change in control of Ascend or the combined company. Furthermore, such
Preferred Stock may have other rights, including economic rights, senior to
the Ascend Common Stock, and as a result, the issuance of such stock could
have a material adverse effect on the market value of the Ascend Common Stock.
Ascend has no present plans to issue shares of Preferred Stock. Ascend or the
combined company may in the future adopt other measures that may have the
effect of delaying, deferring or preventing a change of control of Ascend.
Certain of such measures may be adopted without any further vote or action by
Ascend's or the combined company's stockholders. Ascend is also afforded the
protections of Section 203 of the DGCL, which could delay or prevent a change
in control of Ascend or the combined company, impede a merger, consolidation
or other business combination involving Ascend or the combined company or
discourage a potential acquiror from making a tender offer or otherwise
attempting to obtain control of Ascend or the combined company.
VOLATILITY OF STOCK PRICE. Ascend's and Cascade's Common Stock have
experienced significant price volatility, and such volatility may occur in the
future, particularly as a result of quarter-to-quarter variations in the
actual or anticipated financial results of Ascend, Cascade and/or the combined
company or of other companies in the networking industry, announcements by
Ascend, Cascade and/or the combined company or their competitors regarding new
product introductions or other developments affecting Ascend, Cascade and/or
the combined company, or changes in financial estimates by public market
analysts. In addition, the market has experienced extreme price and volume
fluctuations that have affected the market price of many technology companies'
stocks and that have been unrelated or disproportionate to the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of Ascend's, Cascade's and the combined company's
Common Stock. In the past, following periods of volatility in the market price
of a company's securities, securities class action litigation has often been
instituted against such a company. Such litigation could result in substantial
costs and a diversion of management's attention and resources, which would
have a material adverse effect on the operating results and financial
condition of Ascend, Cascade or the combined company, as applicable.
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THE MEETINGS
GENERAL
This Joint Proxy Statement/Prospectus is being furnished to holders of
Ascend Common Stock in connection with the solicitation of proxies by the
Ascend Board for use at the Ascend Special Meeting to be held on May 28, 1997
at Ascend's principal executive offices, located at One Ascend Plaza, 1701
Harbor Bay Parkway, Alameda, California, commencing at 12:00 noon, local time,
and at any adjournments or postponements thereof.
This Joint Proxy Statement/Prospectus is also being furnished to holders of
Cascade Common Stock in connection with the solicitation of proxies by the
Cascade Board for use at the Cascade Special Meeting to be held on May 28,
1997 at The Omni Parker House located at 60 School Street, Boston,
Massachusetts, commencing at 3:00 p.m., local time, and at any adjournments or
postponements thereof.
This Joint Proxy Statement/Prospectus and the accompanying forms of proxies
are first being mailed to stockholders of Ascend and Cascade, on or about
April 28, 1997.
MATTERS TO BE CONSIDERED AT THE MEETINGS
Ascend Special Meeting. At the Ascend Special Meeting, holders of Ascend
Common Stock will consider and vote upon (i) a proposal to approve the
issuance of Ascend Common Stock in the Merger and (ii) such other matters as
may properly be brought before the Ascend Special Meeting, including any
motion to adjourn the Ascend Special Meeting to a later date to permit further
solicitation of proxies if necessary to establish a quorum or to obtain
additional votes, or any adjournments or postponements thereof.
Cascade Special Meeting. At the Cascade Special Meeting, holders of Cascade
Common Stock will consider and vote upon (i) a proposal to approve and adopt
the Merger Agreement and (ii) such other matters as may properly be brought
before the Cascade Special Meeting, including any motion to adjourn the
Cascade Special Meeting to a later date to permit further solicitation of
proxies if necessary to establish a quorum or to obtain additional votes, or
any adjournments or postponements thereof.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
Ascend. The Ascend Board, by the unanimous vote of all directors present and
voting (with one director absent and one director abstaining in order to avoid
the appearance of a conflict of interest), has approved the Merger Agreement
and the issuance of shares of Ascend Common Stock in connection with the
Merger and believes that the terms of the Merger Agreement are fair to, and
that the Merger is in the best interests of, Ascend and its stockholders. The
Ascend Board therefore recommends that the stockholders of Ascend vote FOR
approval of the issuance of Ascend Common Stock in the Merger. See "The
Merger--Interests of Certain Persons in the Merger."
Cascade. The Cascade Board has unanimously approved the Merger Agreement and
the Merger and believes that the terms of the Merger Agreement are fair to,
and that the Merger is in the best interests of, Cascade and its stockholders.
The Cascade Board therefore recommends that the holders of Cascade Common
Stock vote FOR approval and adoption of the Merger Agreement.
See "The Merger--Reasons for the Merger; Recommendations of the Boards of
Directors."
VOTING AT THE MEETINGS; RECORD DATES
Ascend. Holders of record of Ascend Common Stock on the Ascend Record Date
will be entitled to notice of and to vote at the Ascend Special Meeting. As of
April 18, 1997, there were 120,794,242 shares of Ascend Common Stock
outstanding and entitled to vote in person or by proxy, which shares were held
by approximately 1,185 holders of record. Each holder of record of shares of
Ascend Common Stock on the Ascend Record Date is
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entitled to cast one vote per share, in person or by a properly executed
proxy, on each proposal submitted for the vote of the Ascend stockholders at
the Ascend Special Meeting. The presence, in person or by a properly executed
proxy, of a majority of the outstanding shares of Ascend Common Stock entitled
to vote at the Ascend Special Meeting is necessary to constitute a quorum at
the Ascend Special Meeting.
The approval of the issuance of Ascend Common Stock in the Merger will
require the affirmative vote of a majority of the shares of Ascend Common
Stock present and voted either in person or by proxy at the Ascend Special
Meeting provided a quorum is present.
Directors and executive officers of Ascend have executed and delivered the
Ascend Voting Agreements obligating them, among other things, to vote their
shares of Ascend Common Stock in favor of (i) approval of the issuance of
Ascend Common Stock pursuant to the Merger Agreement and (ii) any proposal
which would, or could reasonably be expected to, facilitate the Merger.
Pursuant to the Ascend Voting Agreements, all of the outstanding shares of
Ascend Common Stock beneficially owned by the directors and such executive
officers of Ascend and their respective affiliates on the Ascend Record Date
(representing approximately 1.4% of the total number of shares of Ascend
Common Stock outstanding at such date) will be voted for approval of the
issuance of Ascend Common Stock pursuant to the Merger Agreement. See "The
Merger--Interests of Certain Persons in the Merger" and "--Voting Agreements."
Cascade. Holders of record of shares of Cascade Common Stock on the Cascade
Record Date will be entitled to notice of and to vote at the Cascade Special
Meeting. On the Cascade Record Date there were approximately 94,491,669 shares
of Cascade Common Stock outstanding and entitled to vote, which shares were
held by approximately 1,020 holders of record. Each holder of record of shares
of Cascade Common Stock on the Cascade Record Date is entitled to cast one
vote per share, in person or by a properly executed proxy, on each proposal
submitted for the vote of the Cascade stockholders at the Cascade Special
Meeting. The presence, in person or by a properly executed proxy, of a
majority of the outstanding shares of Cascade Common Stock entitled to vote at
the Cascade Special Meeting is necessary to constitute a quorum at the Cascade
Special Meeting provided a quorum is present.
The approval and adoption of the Merger Agreement by Cascade stockholders
will require the affirmative vote of a majority of the outstanding shares of
Cascade Common Stock entitled to vote at the Cascade Special Meeting.
Directors and executive officers of Cascade have executed and delivered the
Cascade Voting Agreements obligating them, among other things, to vote their
shares of Cascade Common Stock in favor of (i) approval and adoption of the
Merger Agreement and (ii) any proposal which would, or could reasonably be
expected to, facilitate the Merger. Pursuant to the Cascade Voting Agreements,
all of the outstanding shares of Cascade Common Stock beneficially owned by
the directors and such executive officers of Cascade and their respective
affiliates on the Cascade Record Date (representing approximately 1.8% of the
total number of shares of Cascade Common Stock outstanding as of such date)
will be voted for approval and adoption of the Merger Agreement. See "The
Merger--Interests of Certain Persons in the Merger" and "--Voting Agreements."
Effects of Abstentions and "Broker Non-Votes." At the Cascade Special
Meeting, in determining whether the proposal to approve and adopt the Merger
Agreement has received the requisite number of affirmative votes, abstentions
and broker non-votes will have the same effect as a vote against such
proposal. At the Ascend Special Meeting, abstentions and broker non-votes will
have no effect either for or against the vote with respect to the issuance of
Ascend Common Stock in the Merger. At both the Ascend Special Meeting and the
Cascade Special Meeting, abstentions and broker non-votes will be counted for
purposes of determining the presence of a quorum. A "broker non-vote" occurs
when a nominee holding shares for a beneficial owner does not vote on a
proposal because, for such proposal, the nominee does not have discretionary
voting power and has not received instructions from such beneficial owner.
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ADJOURNMENT OF THE ASCEND SPECIAL MEETING OR THE CASCADE SPECIAL MEETING
In the event that there are not sufficient votes to approve the issuance of
Ascend Common Stock in the Merger at the time of the Ascend Special Meeting,
such proposal could not be approved unless the Ascend Special Meeting were
adjourned to permit further solicitation of proxies from Ascend stockholders.
Proxies that are being solicited by the Ascend Board grant the discretionary
authority to vote for any such adjournment. If it is necessary to adjourn the
Ascend Special Meeting, and such adjournment is for a period of less than 30
days, no notice of the time and place of the adjourned meeting is required to
be given to Ascend stockholders other than the announcement of such time and
place at the Ascend Special Meeting. A majority of the voting power
represented and voting at the Ascend Special Meeting is required to approve
such adjournment whether or not a quorum is present at the Ascend Special
Meeting.
In the event that there are not sufficient votes to approve and adopt the
Merger Agreement at the time of the Cascade Special Meeting, such proposal
could not be approved unless the Cascade Special Meeting were adjourned in
order to permit further solicitation of proxies from Cascade stockholders.
Proxies that are being solicited by the Cascade Board grant the discretionary
authority to vote for any such adjournment. If it is necessary to adjourn the
Cascade Special Meeting, and such adjournment is for a period of less than 30
days, no notice of the time and place of the adjourned meeting is required to
be given to Cascade stockholders other than an announcement of such time and
place at the Cascade Special Meeting. A majority of the voting power
represented and voting at the Cascade Special Meeting is required to approve
any such adjournment whether or not a quorum is present at the Cascade Special
Meeting.
An adjournment of either the Ascend Special Meeting or the Cascade Special
Meeting, or both, may be necessary because the limited time between the
mailing of the Joint Proxy Statement/Prospectus and the special meetings may
result in the lack of a quorum at either or both special meetings. In
addition, the approval of a majority of all outstanding shares of Cascade
Common Stock is required to approve and adopt the Merger Agreement, and not
merely a majority of the shares present and voting in person or by proxy. To
obtain the requisite vote, it may be necessary to adjourn the Cascade Special
Meeting to solicit additional proxies.
PROXIES
This Joint Proxy Statement/Prospectus is being furnished to Ascend
stockholders and Cascade stockholders in connection with the solicitation of
proxies by and on behalf of the Ascend Board and the Cascade Board for use at
the Ascend Special Meeting and the Cascade Special Meeting, respectively.
All shares of Ascend Common Stock and Cascade Common Stock which are
entitled to vote and are represented at the Ascend Special Meeting and the
Cascade Special Meeting, respectively, by properly executed proxies received
prior to or at the relevant special meeting and before the occurrence of the
vote, and not revoked, will be voted at such special meeting in accordance
with the instructions indicated on such proxies. If no instructions are
indicated, such proxies will be voted:
(i) in the case of the Ascend Special Meeting, FOR approval of the
issuance of Ascend Common Stock in the Merger; and
(ii) in the case of the Cascade Special Meeting, FOR approval and
adoption of the Merger Agreement.
If any other matters are properly presented for consideration at either of
the special meetings, including, among other things, consideration of a motion
to adjourn a special meeting (including, without limitation, for purposes of
soliciting additional proxies) to another time and/or place, the persons named
in the enclosed form of proxy and acting thereunder will have discretion to
vote on such matters in accordance with their best judgment.
The persons named as proxies in the respective proxies are officers of
Ascend or Cascade. Any proxy given pursuant to this Joint Proxy
Statement/Prospectus may be revoked by the person giving it at any time before
it is
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voted. Proxies may be revoked by (i) filing with the Secretary of Ascend or
Cascade, as the case may be, at or before the taking of the vote at the Ascend
Special Meeting or the Cascade Special Meeting, respectively, a written notice
of revocation bearing a later date than the proxy, (ii) duly executing a later
dated proxy relating to the same shares and delivering it to the Secretary of
Ascend or Cascade, as the case may be, before the taking of the vote at the
relevant special meeting or (iii) attending the Ascend Special Meeting or the
Cascade Special Meeting, respectively, and voting in person (although
attendance at a special meeting will not in and of itself constitute a
revocation of a proxy). Any written notice of revocation or subsequent proxy
should be sent, in the case of Ascend stockholders, to Ascend Communications,
Inc., One Ascend Plaza, 1701 Harbor Bay Parkway, Alameda, California 94502,
Attention: Secretary, and in the case of Cascade stockholders, to Cascade
Communications Corp., 5 Carlisle Road, Westford, Massachusetts 01886,
Attention: Secretary, or hand delivered to the Secretary of Ascend or Cascade,
as the case may be, at or before the taking of the vote at the relevant
special meeting.
All expenses relating to this Joint Proxy Statement/Prospectus, including
the cost of preparing and mailing this Joint Proxy Statement/Prospectus, will
be borne by Ascend and Cascade. In addition to solicitation by use of the
mails, proxies may be solicited by directors, officers and employees of Ascend
and Cascade, respectively, in person or by telephone, telegram or other means
of communication. Such directors, officers and employees will not be
additionally compensated, but may be reimbursed for reasonable out-of-pocket
expenses in connection with such solicitation. Ascend has retained Skinner &
Co., Inc., a proxy solicitation firm, for assistance in connection with the
solicitation of proxies for the Ascend Special Meeting at a cost of
approximately $1,500 plus reasonable out-of-pocket expense estimated to be
approximately $5,000. Cascade has retained Corporate Investor Communications,
a proxy solicitation firm, for assistance in connection with the solicitation
of proxies for the Cascade Special Meeting at a cost of approximately $6,500
plus reasonable out-of-pocket expenses. Arrangements also will be made with
custodians, nominees and fiduciaries for forwarding of proxy solicitation
materials to beneficial owners of shares held of record by such custodians,
nominees and fiduciaries, and Ascend and Cascade, respectively, will reimburse
such custodians, nominees and fiduciaries for reasonable expenses incurred in
connection therewith.
CASCADE STOCKHOLDERS AND ASCEND STOCKHOLDERS SHOULD NOT SEND ANY STOCK
CERTIFICATES WITH THEIR PROXY CARDS.
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THE MERGER
The following discussion of the parties' reasons for the Merger contains
forward-looking statements which involve risks and uncertainties. Readers are
cautioned not to place undue reliance on these forward-looking statements. The
actual results of Ascend, Cascade and the combined company could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Joint Proxy Statement/Prospectus.
BACKGROUND OF THE MERGER
Business combinations have been a significant part of the business
strategies of both Ascend and Cascade. Both Ascend and Cascade have actively
pursued potential business combinations, corporate acquisition opportunities,
strategic alliances and other strategic transactions involving other
participants in the networking industry and related industries, with the aim
of obtaining and developing access to complementary products and technologies.
Over the past two years, Ascend has completed business combinations with and
corporate acquisitions of six companies, while Cascade has completed business
combinations with and corporate acquisitions of two companies.
Over the past several years, Ascend and Cascade have engaged in exploratory
communications with each other as well as a number of other industry
participants concerning the possibility of co-marketing or other strategic
arrangements. Although more extensive discussions were not pursued between
Ascend and Cascade prior to March 1997, these communications helped to provide
Ascend and Cascade with a basic familiarity with broad industry trends as well
as each other's business and management and a preliminary understanding of the
potential merits of a combination.
During January and February 1997, Ascend maintained an ongoing dialogue with
DMG regarding a broad range of potential combinations between Ascend and
certain other strategic partners, including, but not limited to, Cascade. Over
the same period, members of senior management of Cascade held discussions with
representatives of Morgan Stanley, Cascade's financial advisors, regarding
Cascade's strategic alternatives.
On February 26, 1997, Daniel E. Smith, President and Chief Executive Officer
of Cascade, Paul E. Blondin, Vice President of Finance and Administration and
Chief Financial Officer of Cascade, and certain other members of senior
management of Cascade met with Morgan Stanley to discuss consolidation trends
in the data networking industry and strategic alternatives available to
Cascade, including possible strategic business combinations and other
strategic arrangements.
On February 28, 1997, Mr. Smith requested that Morgan Stanley help Cascade
evaluate its strategic alternatives and prepare preliminary analyses of
potential combinations of Cascade and a select group of identified strategic
partners, including Ascend.
On March 6, 1997, Mory Ejabat, President and Chief Executive Officer of
Ascend, Robert K. Dahl, Vice President, Finance and Chief Financial Officer of
Ascend, and Bernard Schneider, Vice President, Strategic Business Development
of Ascend, met with Ascend's financial advisors, DMG, to evaluate Ascend's
strategic alternatives and to discuss potential strategic partners and
consolidation trends in the data networking industry. Subsequent to this
meeting, Ascend requested that DMG prepare analyses of potential strategic
partners for further evaluation, including a potential combination with
Cascade, which were delivered to Ascend on March 8, 1997.
On March 6, 1997, Mr. Smith spoke with representatives of Morgan Stanley to
discuss the continuing consolidation trends in the data networking industry
and to review Morgan Stanley's preliminary analyses of potential combinations
of Cascade with certain strategic partners. After this meeting, Mr. Smith
authorized Morgan Stanley to contact a select group of identified strategic
partners on a "no names" basis to determine their interest in a possible
business combination or other strategic alliance. Mr. Smith also requested
that Morgan Stanley continue to refine their analysis relating to these
identified potential strategic partners.
On March 7, 1997, Mr. Smith contacted Mr. Ejabat to arrange a meeting to
discuss the feasibility of a strategic business combination or other strategic
arrangement.
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On March 9, 1997, Mr. Smith met with representatives of Morgan Stanley to
review further their analyses of a potential strategic combination with Ascend
in advance of Mr. Smith's initial meeting with Mr. Ejabat.
On March 9, 1997, Messrs. Ejabat, Smith and Dahl met in San Francisco to
discuss the possibility of such a transaction, the potential business impact
of a strategic business combination and the strategic outlook for the data
networking industry.
On March 10, 1997, Cascade engaged Morgan Stanley to act as its financial
advisor in connection with a possible strategic business combination with
certain potential strategic partners.
On March 14, 1997, Messrs. Ejabat, Dahl and Schneider met with
representatives of DMG to review DMG's analysis of a potential combination
with Cascade and the possible timing and structure of such a transaction.
On March 17, 1997, the Cascade Board held a special teleconference meeting
and discussed with members of Cascade's senior management and representatives
of Morgan Stanley and Testa, Hurwitz & Thibeault, LLP, Cascade's legal counsel
("TH&T"), certain strategic alternatives for Cascade, potential strategic
partners of Cascade (including Ascend) and consolidation trends in the data
networking industry. Morgan Stanley updated the Cascade Board regarding its
discussions with potential strategic business partners.
On March 18, 1997, the Ascend Board held a regularly scheduled meeting
attended by members of Ascend's senior management and representatives of DMG
and Gray Cary Ware & Freidenrich, Ascend's legal counsel ("GCW&F"). Ascend's
senior management reported on the status of discussions between Ascend and
Cascade, and DMG delivered a preliminary financial and business analysis of
Cascade and the potential combination. The presentation covered a number of
matters relating to Cascade's business and the possible Ascend-Cascade
combination, including Cascade's financial performance, its stock trading
history, the stockholder bases of Ascend and Cascade and the extent of cross-
ownership, rationales for a combination between Ascend and Cascade, the two
companies' strengths and weaknesses in the networking sector, an analysis of
possible exchange ratios, a review of certain comparative financial models,
the potential impact of a combination on earnings and the market price of
Ascend Common Stock, challenges in implementing a combination and other
matters. At this meeting, the Ascend Board discussed the risks and benefits of
the proposed combination with Cascade, the Ascend Board's perception that
Cascade might not meet analysts' expectations for the first quarter of 1997,
and possible timing, structure and terms of a combination, including a range
of acceptable exchange ratios. The Ascend Board then authorized and instructed
Ascend's management to pursue further discussions and due diligence.
On March 19, 1997, DMG and Morgan Stanley had a preliminary discussion
concerning the financial basis of a strategic business combination of Ascend
and Cascade.
On March 19, 1997, the Cascade Board held a special teleconference meeting
in which members of Cascade's senior management and representatives of Morgan
Stanley and TH&T participated. Members of senior management reported on the
status of discussions with Ascend and the feasibility of a business
combination between Cascade and Ascend. The Cascade Board also discussed
possible timing, structure and terms of such a transaction including the range
of possibly acceptable exchange ratios. The Cascade Board received a
preliminary analysis by Morgan Stanley of Ascend and the potential combination
with Ascend and of various possible exchange ratios. Morgan Stanley's
preliminary analysis also covered a number of matters relating to Ascend's
business and the possible Cascade-Ascend combination, including Ascend's
financial performance, its stock trading history, the stockholder bases of
Ascend and Cascade and the extent of cross-ownership, rationales for a
combination between Ascend and Cascade, the two companies' strengths and
weaknesses in the networking sector, an analysis of possible exchange ratios,
a review of certain comparative financial models, challenges in implementing a
combination and other matters. The Cascade Board authorized and instructed
management to continue to explore its strategic alternatives including a
possible business combination with Ascend.
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On March 20, 1997, Ascend engaged DMG to act as its financial advisor in
connection with a potential strategic business combination with Cascade.
On March 20, 1997, Messrs. Ejabat and Smith discussed by telephone the
general terms of a proposed transaction, including the structure of a possible
combination and a possible acceptable range of exchange ratios.
On March 20, 1997, the Cascade Board held a special teleconference meeting
in which members of Cascade's senior management and representatives of Morgan
Stanley and TH&T participated. Morgan Stanley reported on its preliminary
discussions with DMG regarding certain terms of a possible business
combination with Ascend, including a possibly acceptable range of exchange
ratios.
On March 21, 1997, the Cascade Board held a special teleconference meeting
in which members of Cascade's senior management and representatives of Morgan
Stanley and TH&T participated. Members of senior management reported on the
status of discussions with potential strategic partners other than Ascend, the
relative merits of the strategic alternatives under discussion, the status of
negotiations with Ascend and the recent discussions that had taken place
between the two companies' management teams, financial advisors and legal
advisors. Senior management of Cascade addressed questions and comments of the
Cascade Board with respect to a possible combination with Ascend. There were
also further discussions concerning the strategic factors that supported a
possible combination with, and the product line, technology and market
position of, Ascend. At the conclusion of discussions, the Cascade Board
authorized and instructed management to continue the discussions with Ascend
regarding a possible business combination.
On March 21, 1997, the Ascend Board held a special teleconference meeting in
which members of Ascend's senior management and representatives of GCW&F
participated. Members of senior management reported on the status of
negotiations and the recent discussions that had taken place between the
respective company's management teams, financial advisors and legal advisors.
The Ascend Board authorized management to continue discussions and due
diligence.
On March 22, 1997, Ascend and Cascade entered into a confidentiality
agreement to facilitate the parties' discussion of a potential strategic
combination. The parties and their financial, legal and accounting advisors
thereafter exchanged information requests and made available to each other a
variety of public and nonpublic information and documents concerning Ascend
and Cascade.
Between March 22 and 30, 1997, the parties conducted an intensive series of
due diligence meetings in which each party and its financial, legal and
accounting advisors reviewed documents and held due diligence discussions with
the other party and its advisors. As part of this process, Messrs. Ejabat and
Dahl and other members of senior management of Ascend met with Messrs. Smith
and Blondin and other members of senior management of Cascade in New York, New
York, Boston, Massachusetts and Alameda, California. Representatives of the
parties' financial advisors participated in some of these meetings and also
held additional meetings to review and obtain information concerning the
companies.
On March 23, 1997, Messrs. Ejabat, Dahl, Smith and Blondin met in New York
City to discuss various operational issues associated with the possible
combination of the businesses. In the evening of March 23, 1997, Gururaj
Deshpande, the Chairman of the Board and Executive Vice President of Business
Development of Cascade, and Mr. Smith and other members of Cascade's senior
management met with Cascade's legal and financial advisors to discuss the
relative merits of possible combinations with certain potential strategic
partners other than Ascend.
Between March 23 and 26, 1997, GCW&F reviewed legal documents of Cascade in
Massachusetts and California and Ascend's independent auditors reviewed
workpapers and other documentation relating to Cascade's financial statements
in Boston. Between March 23 and 27, 1997, TH&T reviewed legal documents of
Ascend in California and on March 27, 1997, Cascade's independent accountants
reviewed workpapers and other documentation relating to Ascend's financial
statements in California.
On March 23, 1997, GCW&F circulated a draft of the Merger Agreement and
other transaction documents (including drafts of the Cascade Stock Option
Agreement and Ascend Stock Option Agreement (collectively, the "Stock Option
Agreements")) to TH&T.
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In the evening of March 24, 1997, the Cascade Board held a meeting, with one
director participating by telephone, at which members of Cascade's senior
management and representatives of Morgan Stanley and TH&T discussed with the
Cascade Board, and responded to numerous questions from Cascade Board members
about, (i) the status of discussions with Ascend and the benefits and
potential risks of the merger proposal, (ii) the proposed principal terms of
the Merger Agreement and related documents, including the proposed form of
Stock Option Agreements, termination rights relating to the Merger Agreement
and the proposed amount of the termination fees and (iii) the principal terms
(including proposed range of exchange ratios) proposed by Ascend and the
possible strategic benefits that might result from a combination with Ascend
in relation to other possible strategic alternatives and the preliminary
indications from other potential strategic partners contacted by or on behalf
of Cascade. TH&T discussed the Cascade Board's fiduciary duties in considering
a strategic business combination and strategic alternatives and held further
discussions with the Cascade Board on the principal terms of a proposed
business combination with Ascend. Morgan Stanley then reviewed, among other
things, the strategic rationale for, and certain financial analyses relating
to, the proposed merger. The presentation covered a number of matters relating
to both Cascade's and Ascend's businesses and the potential business
combination of Ascend and Cascade, including Ascend's and Cascade's financial
performance, the two companies' strengths and weaknesses in the networking
sector, an analysis of various possible exchange ratios, a review of certain
comparative financial models, challenges that may be faced in implementing a
combination and other matters. After careful consideration, the Cascade Board
determined that, because of, among other things, the terms proposed by Ascend
(including the course of discussions concerning the level of exchange ratios)
and the perceived strategic advantages to such a combination (in comparison to
potential combinations with other possible strategic partners then being, or
previously, considered by Cascade) senior management should pursue a
combination between Cascade and Ascend, and the Cascade Board authorized and
instructed its senior management to continue negotiations and due diligence
review of Ascend.
On March 25, 1997, Mr. Ejabat met with certain members of the Cascade Board
regarding the business of Ascend and the perceived benefits of the proposed
business combination and addressed questions and comments of the directors.
From March 25, 1997 through March 30, 1997, Ascend and Cascade, together
with their respective legal and financial advisors, continued their due
diligence investigations of the companies and negotiations of the terms and
conditions of the definitive agreements relating to the transaction, including
the terms of the proposed Stock Option Agreements, the termination rights
relating to the Merger Agreement, the conditions upon which any termination
fees would be payable and the amount of such fees, and the representations,
warranties and covenants to be made by the parties. Throughout that period,
representatives of Ascend stated that a condition of any transaction would be
the execution of the Stock Option Agreements and agreement to acceptable
termination fees.
On March 26, 1997, the Cascade Board held a special teleconference meeting
in which members of Cascade's senior management and representatives of Morgan
Stanley and TH&T discussed with the Cascade Board, and responded to numerous
questions from Cascade Board members about, (i) the status of negotiations
with Ascend and their ongoing financial, legal and accounting due diligence
evaluation of the business condition and prospects of Ascend and other matters
relating to the proposed combination and (ii) the principal terms of the
Merger Agreement and related documents, including the proposed amount of the
termination fee and the proposed terms of the Stock Option Agreements, and the
parties' respective positions on these terms. Among other things, the Cascade
Board directed Cascade's legal and financial advisors to continue to
negotiate, in particular, the terms of the Stock Option Agreements and the
proposed amount of the termination fees.
On March 27, 1997, the Ascend Board held a special meeting at which members
of Ascend's senior management and representatives of DMG, GCW&F and Ernst &
Young, LLP, Ascend's independent auditors, discussed with the Ascend Board (i)
the status of discussions with Cascade and the potential benefits and risks of
the proposed business combination, (ii) the proposed principal terms of the
Merger Agreement and related documents, (iii) the transaction protection
mechanisms proposed by Ascend, including the principal terms of the
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proposed form of Stock Option Agreements and termination rights relating to
the Merger Agreement including the proposed amount of the termination fees,
the scope and terms of the proposed non-solicitation provisions, the
importance of the transaction protections to Ascend and the status of the
parties' discussions with respect to these provisions and (iv) the principal
terms (including proposed range of exchange ratios) and the possible strategic
benefits that might result from a combination with Cascade. GCW&F discussed
the Ascend Board's fiduciary duties in considering a strategic business
combination, and held further discussions with the Ascend Board on the
principal terms of a proposed business combination with Cascade. DMG then
reviewed, among other things, the strategic rationale for, and certain
financial analyses relating to, the proposed business combination. The
presentations covered a number of matters relating to both Ascend's and
Cascade's businesses and the potential business combination of Ascend and
Cascade, including Ascend's and Cascade's financial performance, the two
companies' competitive market positions, an analysis of various possible
exchange ratios, a review of certain comparative financial models, potential
challenges that may be faced in implementing a combination and other matters.
After careful consideration, the Ascend Board determined that based on the
proposed terms of the transaction and the perceived strategic advantages of
such a combination that senior management should pursue a combination between
Ascend and Cascade, and the Ascend Board authorized and instructed its senior
management to continue negotiations and due diligence review of Cascade.
On March 28, 1997, the Cascade Board held a special teleconference meeting
in which senior management and legal and financial advisors discussed with the
Cascade Board, and responded to numerous questions from Cascade Board members
about, (i) the status of negotiations with Ascend and the results of the
legal, financial and accounting due diligence evaluation of Ascend and (ii)
the principal terms of the Merger Agreement and related documents, including
the proposed exchange ratio, the Stock Option Agreements and other terms of
the proposed Merger. In addition, there was a discussion regarding Cascade's
preliminary results of operations for the first quarter of fiscal 1997 and the
potential market reaction to the proposed combination. At this time, the
Cascade Board agreed that management should continue with negotiations
concerning the proposed combination.
On March 29, 1997, the Ascend Board held a special teleconference meeting to
consider and vote upon the proposed business combination with Cascade.
Representatives of DMG, GCW&F and Ernst & Young LLP, Ascend's independent
auditors, were also in attendance. At this meeting, the Ascend Board reviewed
the results of Ascend's due diligence and the parties' negotiations since
March 27, 1997. Further, Ascend's senior management and GCW&F reported on the
agreement reached with respect to the Exchange Ratio, the transaction
protection mechanisms and other business terms of the Merger. In addition, the
Ascend Board discussed information Cascade had provided concerning Cascade's
preliminary results of operations for the first quarter of fiscal 1997 and the
potential market reaction to the proposed combination. DMG delivered to the
Ascend Board its oral opinion (subsequently confirmed in writing as of March
30, 1997) to the effect that, as of such date, the Exchange Ratio was fair
from a financial point of view to Ascend. A copy of such opinion is attached
to this Joint Proxy Statement/Prospectus as Annex D, and stockholders of
Ascend are urged to carefully review the opinion. See "The Merger--Opinion of
Financial Advisor to Ascend." After further discussions, the Ascend Board
voted to approve the Merger Agreement and related transaction documents (with
one director absent and one director abstaining in order to avoid the
appearance of a conflict of interest).
On March 29, 1997, the Cascade Board held a special teleconference meeting
to consider and vote upon the proposed business combination with Ascend. At
this meeting, senior management reported on the agreement reached with respect
to the Exchange Ratio, Stock Option Agreements and other business terms of the
Merger. TH&T reported on the status of the negotiations and further reviewed
the proposed terms of the Merger Agreement and related documents. In addition,
Cascade's financial advisors updated the Cascade Board on its financial due
diligence on Ascend and delivered its oral opinion (subsequently confirmed in
writing as of March 30, 1997) to the effect, that as of such date, the
Exchange Ratio was fair from a financial point of view to Cascade's
stockholders. A copy of such opinion is attached to this Joint Proxy
Statement/Prospectus as Annex E, and stockholders of Cascade are urged to
carefully review the opinion. See "The Merger--Opinion of Financial Advisor to
Cascade." After discussions, the Cascade Board approved the Merger Agreement
and related transaction documents.
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On March 29 and 30, 1997, GCW&F and TH&T continued the final negotiation and
drafting of transaction documents overnight. In the afternoon of March 30,
1997, the Merger Agreement and the Stock Option Agreements were signed and
delivered, and a press release was issued by the parties announcing the
Merger.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
Certain statements made in the following paragraphs regarding the potential
benefits that could result from the Merger are forward-looking statements
based on current expectations and entail various risks and uncertainties that
could cause actual results to differ materially from those expressed in such
forward-looking statements. Such risks and uncertainties are set forth under
"Risk Factors" and elsewhere in this Joint Proxy Statement/Prospectus.
Joint Reasons for the Merger
In reaching their decision to approve the Merger Agreement and the Merger,
the Ascend Board and the Cascade Board consulted with their respective
management teams and advisors and independently considered the proposed Merger
Agreement and the transactions contemplated thereunder. Based upon their
respective independent reviews of the proposed transaction and the business
and operations of the other party, the Ascend Board and the Cascade Board each
approved the Merger Agreement and the transactions contemplated thereby. The
Ascend Board and the Cascade Board believe that the Merger will result in a
combined company that will be a leading provider of end-to-end wide area
networking solutions for public telecommunications carriers, ISPs, network
service providers and enterprises worldwide, with a more complete portfolio of
integrated, best-of-breed wide area networking products, supported by a global
sales, distribution and support organization.
The Ascend Board and the Cascade Board have both identified several
potential benefits of the Merger which they believe will contribute to the
success of the combined company. These potential benefits include the
following:
(i) Best-of-Breed, End-to-End Wide Area Networking Solutions. Ascend is a
leading provider of access concentration/remote networking products while
Cascade is a leading provider of Frame Relay and ATM switching products.
The combination of Ascend and Cascade is expected to create a company able
to provide superior end-to-end wide area networking solutions from the edge
to the core of the network with a more complete portfolio of integrated,
complementary best-of-breed products.
(ii) Shared Strategic Vision. The management teams of Ascend and Cascade
share a common strategic vision of creating a combined company that is the
provider of choice for purchasers of wide area networking products. Both
companies believe that emerging network infrastructures will require best-
of-breed technology in four key areas: remote products, IP switching
products, backbone switching products and access switching and
concentration products. The combination of the products, technologies and
sales channels of both companies, in addition to the leadership each
company has in different market segments, will position the combined
company to serve a broad base of customers with industry-leading technology
in each of these four key technological areas.
(iii) Complementary Distribution Channels. Ascend and Cascade possess
complementary distribution channels that are expected to accelerate
deployment of the combined company's products into each other's customer
accounts. The combined company is expected to be able to utilize Ascend's
well-established sales organization and expertise in addressing
international markets to more rapidly deploy Cascade's products abroad.
Moreover, Ascend and Cascade each have a strong presence in two different
and complementary markets: Ascend has a strong presence in the ISP market
while Cascade has a significant share in the telecommunications carrier
markets that include RBOCs, LECs and CAPs. The combined company will have
broader distribution channels with particular strength in the
telecommunications carrier and ISP segments, able to address a broader
customer base with its more complete and integrated portfolio of end-to-end
networking products.
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(iv) Improved Ability to Compete. Ascend and Cascade believe that the
growth of network deployment, coupled with the lack of industry standards
for product interface specifications, is driving demand among the largest
network users for single-vendor solutions. Ascend and Cascade further
believe that other major networking vendors are attempting to meet these
needs by developing and acquiring new products and technologies to enable
them to offer integrated product sets designed to provide true end-to-end
solutions. Ascend and Cascade believe that the combined company, with the
combined breadth of product offerings, industry experience, sales and
marketing capability and financial and other resources of Ascend and
Cascade, will be able to compete more effectively in the rapidly evolving
and highly competitive market for networking solutions and respond more
effectively to technological change and evolving customer needs.
There can be no assurance, however, that these results or any of the
efficiencies or opportunities described in the following sections on Ascend's
Reasons for the Merger and Cascade's Reasons for the Merger will be achieved
through the consummation of the Merger. See "Risk Factors--Risks Relating to
the Merger."
Ascend's Reasons for the Merger
In addition to the anticipated joint reasons described above, the Ascend
Board believes that the Merger will be beneficial to Ascend and Ascend's
stockholders for the following additional reasons:
. The combined company will have a more complete portfolio of integrated
best-of-breed wide area networking products, greater resources,
increased management depth and greater sales and marketing capability
than Ascend on a stand-alone basis. The combined company is expected to
be able to compete more effectively with competitors having greater
resources and broader product offerings than Ascend on a stand-alone
basis.
. Ascend will have the opportunity to expand its market presence through
Cascade's customer base of telecommunications carriers, including the
RBOCs, CAPs, LECs, IXCs, PTTs and ISPs.
. Combining Ascend's and Cascade's products and technologies will enable
the combined company to offer to the existing customer bases of Ascend
and Cascade a more complete end-to-end networking solution. The Ascend
Board believes that the broader portfolio of products offered by the
combined company will better position the combined company to maintain
Ascend's status as a key vendor, particularly to the ISPs.
. The integration of Cascade's software products and technology,
particularly in the areas of quality of service and IP traffic
management across high-speed backbone networks, into Ascend's products
will allow Ascend's service provider customers to deliver advanced data
services to the corporate customer.
. Cascade's technical management, research and development, and
applications teams have significant expertise in the development of
Frame Relay and ATM backbone switching products. The Ascend Board
believes that Cascade's expertise will enhance Ascend's ability to
deliver products more quickly and effectively in an industry that
requires rapid innovation and change.
. In the face of an increasingly competitive and consolidating industry,
Ascend must continue to invest in industry-leading technology. The
Ascend Board believes that the combined company will be in a stronger
competitive position than Ascend alone to effectively meet the
industry's technology challenges and evolving customer demands.
. The management teams of the combined company will have greater depth of
knowledge of the data networking industry and more business experience
than that of either company standing alone.
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In reaching its decision to approve the Merger Agreement and the issuance of
shares of Ascend Common Stock in connection with the Merger and to recommend
that Ascend's stockholders vote to approve the issuance of Ascend Common Stock
in the Merger, the Ascend Board also considered, among other things, the
following factors:
(i) the effect on stockholder value of a combination with Cascade, in
light of the financial condition and prospects of Ascend and Cascade and
the current economic and industry environment, including, but not limited
to, (A) other possible strategic alternatives for Ascend and (B) the
possibility of synergies from combining Ascend's and Cascade's product
lines, research and development programs and sales and marketing
organizations;
(ii) the results of the due diligence investigations by Ascend's
management and legal, financial and accounting advisors concerning the
business, technology, products, operations, financial condition and
prospects of Cascade and the opinion of DMG that the Exchange Ratio, as of
the date of such opinion, was fair to Ascend from a financial point of
view;
(iii) its knowledge of the business operations, properties, assets,
financial condition and operating results of Cascade;
(iv) Ascend's future prospects and whether such prospects could be
significantly enhanced by the Merger and the anticipated operating results
of Cascade;
(v) the terms and conditions of the Merger Agreement, which were the
product of extensive arm's-length negotiations (see "The Merger
Agreement");
(vi) the compatibility of the respective business philosophies and
corporate cultures of Cascade and Ascend;
(vii) the management resources available to address the management needs
of the combined company and such management's experience at managing
operations at different locations and integrating acquisitions; and
(viii) the impact of the Merger on Ascend's and Cascade's customers,
suppliers and employees.
The Ascend Board also identified and considered a number of potentially
negative factors in its deliberations concerning the Merger, including, but
not limited to:
(i) the possible adverse impact that Cascade's near-term operating
results could have on Ascend;
(ii) the difficulty of managing separate operations at different
geographic locations;
(iii) the risk that despite the efforts of the combined company, key
technical, marketing and management personnel might not choose to remain
employed by the combined company;
(iv) the risk that the operations of the two companies would not be
successfully integrated; and
(v) the other risks associated with Ascend's, Cascade's and the combined
company's businesses and with the Merger described under "Risk Factors," as
well as certain risks identified in other recent business combinations in
the networking industry.
The Ascend Board believed that certain of these risks were unlikely to
occur, while others could be avoided or mitigated by the combined company, and
that, overall, these risks were outweighed by the potential benefits of the
Merger.
The foregoing discussion of the information and factors considered by the
Ascend Board is not intended to be exhaustive but is believed to include all
material factors considered by the Ascend Board. In view of the variety of
factors considered in connection with its evaluation of the Merger, the Ascend
Board did not find it practicable to and did not quantify or otherwise assign
relative weight to the specific factors considered in reaching its
determination. In addition, individual members of the Ascend Board may have
given different weight to different factors.
Recommendation of Ascend's Board of Directors
The Ascend Board, by vote of all directors present and voting (except for
one absent director and one director abstaining in order to avoid the
appearance of a conflict of interest) has unanimously approved the
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Merger Agreement and the issuance of shares of Ascend Common Stock pursuant
thereto, has determined that the terms of the Merger Agreement are fair to,
and that the Merger is in the best interests of, Ascend and its stockholders.
The Ascend Board therefore recommends that Ascend Stockholders vote FOR
approval of the issuance of shares of Ascend Common Stock in the Merger.
Cascade's Reasons for the Merger
In addition to the anticipated joint benefits described above, the Cascade
Board believes that the following are additional reasons the Merger will be
beneficial to Cascade and the stockholders of Cascade:
. The Merger will result in the creation of a combined company with
significantly greater resources, a more integrated and cohesive multi-
technology product offering and greater sales and marketing capability
than those of Cascade alone, and will enable the combined company to
compete more effectively with competitors having greater resources and
broader product offerings than Cascade alone.
. Cascade currently derives a significant portion of its revenue from its
Frame Relay switching products. Demand for Frame Relay switching
products is characterized by large orders from a limited number of
customers. Cascade believes that its continued future success is
dependent, in part, on its ability to acquire new products and diversify
its product offerings. The combined company is expected to provide a
more complete portfolio of integrated WAN products.
. The Merger will provide Cascade with the potential to expand the market
presence of Cascade's products globally through a larger combined sales
force and geographically more extensive sales and distribution channels.
. The combined company will have an improved competitive position when
compared to that of either company standing alone in the networking
market, which Cascade believes will be characterized by increasingly
larger companies seeking to meet customer needs by providing an
extensive integrated set of products and services.
. The management team of the combined company will have greater depth of
knowledge of the data networking industry and more business experience
than that of either company standing alone.
. The Merger will result in an ability to expand the research and
development capabilities of Cascade by combining its research and
development efforts and personnel with those of Ascend to improve and
increase product development.
. The Cascade stockholders will have the opportunity to participate in the
potential growth of the combined company after the Merger.
In the course of its deliberations on March 17, 19, 20, 21, 24, 26, 28 and
29, 1997, the Cascade Board met with and questioned senior management of
Cascade and representatives of Morgan Stanley and TH&T and reviewed the
anticipated benefits summarized above and a number of additional factors
relevant to the proposed Merger. In particular, the Cascade Board considered,
among other things, the following factors:
(i) the effect on stockholder value of a combination with Ascend, in
light of the financial condition and prospects of Cascade and Ascend and
the current economic and industry environment, and other possible strategic
alternatives for Cascade, including potential business combinations with
network industry participants other than Ascend;
(ii) the possibility of synergies from combining Cascade's and Ascend's
product lines, research and development programs and sales and marketing
organizations;
(iii) the results of the due diligence investigations by Cascade's
management and its legal, financial and accounting advisors concerning the
business, technology, products, operations, financial condition and
prospects of Ascend and the opinion of Morgan Stanley that the Exchange
Ratio, as of the date of such opinion, was fair to the stockholders of
Cascade from a financial point of view;
(iv) its knowledge of the business, operations, properties, assets,
financial condition and operating results of Ascend;
(v) the terms and conditions of the Merger Agreement which were the
product of extensive arm's length negotiations (see "The Merger
Agreement");
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(vi) Cascade's future prospects and whether such prospects could be
significantly enhanced by the Merger;
(vii) the compatibility of the respective business philosophies and
corporate cultures of Cascade and Ascend, which the Cascade Board believed
was important for the successful integration of the companies; and
(viii) the impact of the Merger on Cascade's customers, suppliers and
employees.
The Cascade Board also identified and considered a number of potentially
negative factors in its deliberations concerning the Merger, including, but
not limited to:
(i) the risk that the potential benefits sought in the Merger might not
be fully realized, if at all;
(ii) the possibility that the Merger would not be consummated and the
effect of the public announcement of the Merger on (a) Cascade's sales and
operating results and (b) Cascade's ability to attract and retain key
management, marketing and technical personnel;
(iii) the risk that despite the efforts of the combined company, key
technical, marketing and management personnel might not choose to remain
employed by the combined company;
(iv) the difficulty of managing separate operations at different
geographic locations; and
(v) the other risks associated with Cascade's, Ascend's and the combined
company's business and the Merger described under "Risk Factors" herein.
The Cascade Board believed that certain of these risks were unlikely to
occur, while others could be avoided or mitigated by the combined company, and
that, overall, these risks were outweighed by the potential benefits of the
Merger.
The foregoing discussions of the information and factors considered by the
Cascade Board is not intended to be exhaustive but is believed to include all
material factors considered by the Cascade Board. In view of the variety of
factors considered in connection with its evaluation of the Merger, the
Cascade Board did not find it practicable to and did not quantify or otherwise
assign relative weight to the specific factors considered in reaching its
determination. In addition, individual members of the Cascade Board may have
given different weight to different factors.
Recommendation of Cascade's Board of Directors
The Cascade Board has unanimously approved the Merger Agreement and the
Merger, and believes that the terms of the Merger Agreement are fair to, and
that the Merger is in the best interests of, Cascade and its stockholders. The
Cascade Board therefore recommends that stockholders of Cascade vote FOR the
approval and adoption of the Merger Agreement.
OPINION OF FINANCIAL ADVISOR TO ASCEND
Ascend retained DMG to act as its financial advisor in connection with the
Merger. DMG was selected by the Ascend Board to act as Ascend's financial
advisor based on DMG's qualifications, expertise and reputation, as well as
DMG's investment banking relationship and familiarity with Ascend.
At the meeting of the Ascend Board on March 29, 1997, DMG rendered its oral
opinion, subsequently confirmed in writing as of March 30, 1997 (the "DMG
Opinion"), that, as of such date, based upon and subject to the various
considerations set forth in the DMG Opinion, the Exchange Ratio pursuant to
the Merger Agreement was fair from a financial point of view to Ascend.
THE FULL TEXT OF THE DMG OPINION, WHICH SETS FORTH, AMONG OTHER THINGS,
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON
THE SCOPE OF THE REVIEW UNDERTAKEN BY DMG IN RENDERING THE DMG OPINION, IS
ATTACHED AS ANNEX D TO THIS JOINT PROXY STATEMENT/PROSPECTUS. ASCEND
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STOCKHOLDERS ARE URGED TO READ THE DMG OPINION CAREFULLY AND IN ITS ENTIRETY.
DMG DID NOT RECOMMEND TO ASCEND THAT ANY SPECIFIC EXCHANGE RATIO CONSTITUTED
THE APPROPRIATE EXCHANGE RATIO FOR THE MERGER. THE DMG OPINION ADDRESSES ONLY
THE FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL POINT OF VIEW TO ASCEND AS
OF THE DATE OF THE DMG OPINION, AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE ASCEND SPECIAL
MEETING. THE SUMMARY OF THE DMG OPINION SET FORTH IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF THE DMG OPINION.
In rendering the DMG Opinion, DMG, among other things: (i) analyzed certain
publicly available financial statements and other information of Ascend and
Cascade, respectively; (ii) analyzed certain internal financial statements and
other financial and operating data concerning Cascade prepared by the
management of Cascade; (iii) discussed the past and current operations and
financial condition and the prospects of Cascade with senior executives of
Ascend and Cascade, respectively; (iv) analyzed certain internal financial
statements and other financial and operating data concerning Ascend prepared
by the management of Ascend; (v) analyzed certain financial projections
relating to Ascend prepared by the management of Ascend; (vi) discussed the
past and current operations and financial condition and the prospects of
Ascend with senior executives of Ascend; (vii) analyzed the pro forma impact
of the Merger on the earnings per share and consolidated capitalization of
Ascend; (viii) reviewed the reported prices and trading activity for the
Cascade Common Stock and the Ascend Common Stock, respectively; (ix) compared
the financial performance of Cascade and the prices and trading activity of
the Cascade Common Stock with that of certain other publicly-traded companies
which DMG deemed to be relevant and their securities; (x) compared the
financial performance of Ascend and the prices and trading activity of the
Ascend Common Stock with that of certain other publicly-traded companies which
DMG deemed to be relevant and their securities; (xi) reviewed the financial
terms, to the extent publicly available, of certain merger and acquisition
transactions which DMG deemed to be relevant; (xii) reviewed and discussed
with the senior management of Ascend the strategic rationale for the Merger
and their assessment of the synergies and other benefits expected to be
derived from the Merger; (xiii) participated in discussions and negotiations
among representatives of Ascend and Cascade and their respective financial and
legal advisors; (xiv) reviewed the Merger Agreement and related agreements;
and (xv) performed such other analyses and considered such other factors as
DMG deemed appropriate.
In rendering the DMG Opinion, DMG assumed and relied upon, without
independent verification, the accuracy and completeness of the information
reviewed by it for the purposes of the DMG Opinion. With respect to the
financial projections, DMG assumed they were reasonably prepared on bases
reflecting the best then currently available estimates and judgments of the
future financial performance of Ascend and Cascade. With respect to the
information furnished by Ascend and Cascade, and with respect to the
information discussed with the managements of Ascend and Cascade regarding
their views of future operations, DMG assumed that such information was
reasonably prepared and reflected the best then currently available estimates
and judgments of Ascend's and Cascade's management as to the competitive,
operating and regulatory environments and related financial performance of
Ascend and Cascade, as the case may be, for the relevant periods. For purposes
of the DMG Opinion, DMG also relied upon, without independent verification,
the assessment by Ascend's management of the cost savings and other synergies
as well as the strategic and other benefits expected to be derived from the
Merger. DMG also relied upon, without independent verification, the assessment
by Ascend's management of Cascade's products, technology and competitive
position and risks associated with Cascade's future products and technology.
DMG did not make any independent valuation or appraisal of the assets,
liabilities or technology of Ascend or Cascade, respectively, nor was DMG
furnished with any such appraisals. DMG also assumed that the Merger will be
accounted for as a "pooling-of-interests" business combination in accordance
with U.S. Generally Accepted Accounting Principles and will be consummated in
accordance with the terms set forth in the Merger Agreement. The DMG Opinion
is necessarily based on economic, market and other conditions in effect on,
and the information made available to DMG as of, the date of the DMG Opinion.
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The following is a summary of the analysis performed by DMG in preparation
of the DMG Opinion and reviewed with the Ascend Board at a meeting held on
March 27, 1997.
Historical Exchange Ratio Analysis: DMG reviewed the historical trading
prices for Ascend Common Stock and Cascade Common Stock, separately, and in
comparison to each other. DMG also reviewed the ratios of the daily closing
stock prices of Cascade Common Stock to Ascend Common Stock for each day over
various periods, starting as far back as December 29, 1995, and ending March
25, 1997, and computed the premiums represented by the Exchange Ratio over the
average of these ratios. The average of the ratios of the daily closing stock
prices of Cascade Common Stock to Ascend Common Stock for the various periods
ending on March 25, 1997, were 0.923 for the period since December 29, 1995;
0.967 for the previous year; 0.991 for the previous 180 days; 0.737 for the
previous 90 days; 0.683 for the previous 75 days; 0.617 for the previous 60
days; 0.539 for the previous 45 days; 0.506 for the previous 30 days; 0.504
for the previous 10 days; 0.509 for March 25, 1997; and 0.847 on January 23,
1997 (the date preceding Cascade's announcement of its fourth quarter
financial results). DMG observed that the Exchange Ratio represented a
premium/(discount) of (24.2%), (27.6%), (29.4%), (5.0%), 2.6%, 13.5%, 29.8%,
38.3%, 38.8%, 37.6% and (17.3%), respectively, over the aforementioned ratios
of the prices of Cascade Common Stock and Ascend Common Stock.
Selected Precedent Transactions: DMG reviewed the publicly available
financial terms of 69 precedent transactions in the networking sector (the
"Networking Transactions"), including two recent notable transactions: the
acquisition by Cisco of Stratacom, Inc. ("Stratacom") and the pending
acquisition by 3Com of U.S. Robotics ("Robotics"). DMG observed multiples of
aggregate value to latest twelve months revenue of 5.4 times, 11.1 times and
3.0 times for the Networking Transactions, Stratacom and Robotics,
respectively; share price to latest twelve months earnings per share of 45.0
times, 69.4 times and 26.0 times for the Networking Transactions, Stratacom
and Robotics, respectively; and share price to next twelve months earnings per
share of 28.3 times, 58.1 times and 17.9 times for the Networking
Transactions, Stratacom and Robotics, respectively. DMG also observed the
multiples implied by the Merger of 10.6 times latest twelve months revenue,
7.2 times estimated 1997 revenue, 5.0 times estimated 1998 revenue, 50.5 times
latest twelve months earnings per share, 36.8 times 1997 earnings per share
estimates and 27.7 times 1998 earnings per share estimates for Cascade.
Premium Analysis: DMG reviewed 11 stock-for-stock acquisition transactions
involving companies in the data networking sector, none of which were deemed
directly comparable to the Merger. Such analysis showed transaction exchange
ratios resulting in average premiums of approximately 27.0%, 28.7%, 41.7%,
43.9%, 36.3% and 28.9% over the average of the ratios of the closing stock
prices of the companies involved in such mergers over the one year, 90 day, 60
day, 30 day, 10 day and one day periods ending the day preceding the public
announcement of these transactions, respectively. DMG also reviewed 39 stock-
for-stock transactions in sectors within technology outside data networking.
Such analysis showed transaction exchange ratios resulting in average premiums
of approximately 19.7%, 33.6%, 36.3%, 39.6%, 37.6% and 33.0% over the average
of the ratios of the closing stock prices of the companies involved in such
mergers over the one year, 90 day, 60 day, 30 day, 10 day and one day periods
ending the day preceding the public announcement of these transactions,
respectively. DMG observed that the Exchange Ratio represented average
premiums/(discounts) of approximately (27.6%), (5.0%), 13.5%, 38.3%, 38.8% and
37.6% over the average of the ratios of the daily closing stock prices of
Cascade Common Stock to Ascend Common Stock for the respective comparable
periods ending on March 25, 1997.
Contribution Analysis: DMG analyzed the pro forma contribution by each of
Ascend and Cascade to the revenue and net income of the combined company if
the Merger were to be consummated. Such analysis was based on the base case
for Ascend and both the base case and sensitivity case for Cascade. DMG
observed that using the base case for Cascade in 1996, estimated 1997 and
estimated 1998, Cascade would contribute approximately 38.4%, 35.4% and 32.7%
of the revenues, respectively, and 35.1%, 34.6% and 31.8% of the net income,
respectively, of the combined company. DMG observed that using the sensitivity
case for Cascade in 1996, estimated 1997 and estimated 1998, Cascade would
contribute approximately 38.4%, 30.6% and 31.7% of the revenues, respectively,
and 35.1%, 28.7% and 34.1% of the net income, respectively, of the combined
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company. These figures compared to the pro forma fully diluted ownership of
the Cascade stockholders in the combined company of 34.9%.
Pro Forma Analysis of the Merger: DMG analyzed certain pro forma effects of
the Merger on the earnings and capitalization of Ascend. Such analysis was
based on base case estimates as well as a sensitivity case for each of Ascend
and Cascade. Based on such analysis, DMG observed that, based on the Exchange
Ratio and assuming that the Merger was treated as a pooling-of-interests
business combination for accounting purposes, before taking into account any
one-time restructuring charges, the Merger would result (i) using the base
case estimates for both companies, in earnings per share accretion/(dilution)
for Ascend stockholders of 8.6% and (4.1%) for second-half 1997 and calendar
1998, respectively, with respect to the Ascend base case, and earnings per
share accretion/(dilution) of (1.2%) and 3.7% for second-half 1997 and
calendar 1998, respectively, with respect to the Ascend sensitivity case; (ii)
using the base case estimates for Ascend and the sensitivity case for Cascade,
in earnings per share accretion/(dilution) for Ascend stockholders of (3.8%)
and (0.7%) for second-half 1997 and calendar 1998, respectively, with respect
to the Ascend base case, and earnings per share accretion/(dilution) of
(12.5%) and 7.4% for second-half 1997 and calendar 1998, respectively, with
respect to the Ascend sensitivity case; and (iii) using the sensitivity case
estimates for Ascend and the base case for Cascade, in earnings per share
accretion/(dilution) for Ascend stockholders of 4.7% and (1.6%) for second-
half 1997 and calendar 1998, respectively, with respect to the Ascend
sensitivity case.
In connection with the review of the Merger by the Board of Directors of
Ascend, DMG performed a variety of financial and comparative analyses for
purposes of the DMG Opinion. While the foregoing summary describes all
material analyses and factors reviewed by DMG with the Board of Directors of
Ascend, it does not purport to be a complete description of the presentations
by DMG to the Board of Directors of Ascend or the analyses performed by DMG in
arriving at the DMG Opinion. The preparation of a fairness opinion is a
complex process and is not necessarily susceptible to partial analysis or
summary description. DMG believes that its analyses must be considered as a
whole and that selecting portions of its analyses and of the factors
considered by it, without considering all analyses and factors, could create a
misleading view of the processes underlying the DMG Opinion. In addition, DMG
may have given various analyses more or less weight than other analyses, and
may have deemed various assumptions more or less probable than other
assumptions, so that the range of valuation resulting from any particular
analysis described above should not be taken to be DMG's view of the actual
value of Ascend or Cascade. In performing its analyses, DMG made numerous
assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond the control of
Ascend or Cascade. The analyses performed by DMG are not necessarily
indicative of actual values or actual future results, which may be
significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the value of businesses or assets do not
purport to be appraisals or to necessarily reflect the prices at which
businesses or assets may actually be sold. The analyses performed were
prepared solely as part of DMG's analysis of the fairness of the Exchange
Ratio, from a financial point of view, to Ascend and were provided to the
Ascend Board in connection with the delivery of the DMG Opinion.
The Ascend Board retained DMG to act as Ascend's financial advisor in
connection with the Merger. DMG was selected by the Ascend Board based on
DMG's qualifications, expertise and reputation, as well as DMG's investment
banking relationship and familiarity with Ascend. In the past, DMG has
provided financial advisory services for Ascend and Cascade. DMG is an
internationally recognized investment banking and advisory firm. DMG, as part
of its investment banking business, is continuously engaged in the valuation
of businesses and securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for
corporate and other purposes. In the ordinary course of its business, DMG may
actively trade the securities and loans of Ascend and Cascade for its own
account and for the accounts of its customers and, accordingly, may at any
time hold a long or short position in such securities and loans.
Ascend has agreed to pay DMG a fee for its financial advisory services in
connection with the Merger, including, among other things, rendering the DMG
Opinion and making the presentation referred to above. Pursuant to a letter
agreement between Ascend and DMG dated March 20, 1997, Ascend has agreed to
pay DMG
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a customary fee based on the aggregate value of the transaction if the Merger
is consummated. In addition, Ascend has agreed to reimburse DMG for its out-
of-pocket expenses (including fees and expenses of its legal counsel, to be
retained with prior approval of Ascend) incurred in connection with its
engagement, and to indemnify DMG and certain related persons against certain
liabilities and expenses arising out of or in conjunction with its rendering
of services under its engagement, including certain liabilities under the
federal securities laws.
OPINION OF FINANCIAL ADVISOR TO CASCADE
Pursuant to a letter agreement dated as of March 10, 1997 (the "Engagement
Letter"), Morgan Stanley provided a financial fairness opinion in connection
with the Merger. Morgan Stanley was selected by the Cascade Board to act as
Cascade's financial advisor based on Morgan Stanley's qualifications,
expertise and reputation and its knowledge of the business and affairs of
Cascade. At the meeting of the Cascade Board on March 29, 1997, Morgan Stanley
rendered its oral opinion, subsequently confirmed in writing, that as of
March 30, 1997, based upon and subject to the various considerations set forth
in the opinion, the Exchange Ratio pursuant to the Merger Agreement was fair
from a financial point of view to the holders of shares of Cascade Common
Stock.
THE FULL TEXT OF THE WRITTEN OPINION OF MORGAN STANLEY DATED MARCH 30, 1997,
WHICH SETS FORTH, AMONG OTHER THINGS, ASSUMPTIONS MADE, PROCEDURES FOLLOWED,
MATTERS CONSIDERED AND LIMITATIONS ON THE SCOPE OF THE REVIEW UNDERTAKEN BY
MORGAN STANLEY IN RENDERING ITS OPINION, IS ATTACHED AS ANNEX E TO THIS JOINT
PROXY STATEMENT/PROSPECTUS. CASCADE STOCKHOLDERS ARE URGED TO, AND SHOULD,
READ THE OPINION CAREFULLY AND IN ITS ENTIRETY. MORGAN STANLEY'S OPINION IS
DIRECTED TO THE CASCADE BOARD AND ADDRESSES ONLY THE FAIRNESS OF THE EXCHANGE
RATIO PURSUANT TO THE MERGER AGREEMENT FROM A FINANCIAL POINT OF VIEW AS OF
THE DATE OF THE OPINION, AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
HOLDER OF CASCADE COMMON STOCK AS TO HOW TO VOTE AT THE CASCADE SPECIAL
MEETING. THE SUMMARY OF THE OPINION OF MORGAN STANLEY SET FORTH IN THIS JOINT
PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
FULL TEXT OF SUCH OPINION.
In connection with rendering its opinion, Morgan Stanley, among other
things: (i) reviewed certain publicly available financial statements and other
information of Ascend and Cascade, respectively; (ii) reviewed certain
internal financial statements and other financial and operating data
concerning Cascade and Ascend prepared by the managements of Cascade and
Ascend, respectively; (iii) discussed the past and current operations and
financial condition and the prospects of Ascend, including discussions
relating to certain strategic, financial and operational benefits anticipated
from the Merger, with senior executives of Ascend; (iv) discussed the past and
current operations and financial condition and the prospects of Cascade,
including discussions relating to certain strategic, financial and operational
benefits anticipated from the Merger, with senior executives of Cascade;
(v) reviewed the pro forma impact of the Merger on the earnings per share and
consolidated capitalization of Ascend and Cascade, respectively; (vi) reviewed
the reported prices and trading activity for the Ascend Common Stock and the
Cascade Common Stock; (vii) compared the financial performance of Ascend and
Cascade and the prices and trading activity of the Ascend Common Stock and the
Cascade Common Stock with that of certain other publicly-traded companies and
their securities; (viii) reviewed the financial terms, to the extent publicly
available, of certain comparable acquisition transactions; (ix) reviewed and
discussed with the senior managements of Ascend and Cascade the strategic
rationale for the Merger and certain alternatives to the Merger; (x)
participated in discussions and negotiations among representatives of Ascend
and Cascade and their financial and legal advisors; (xi) reviewed the Merger
Agreement and certain related agreements; and (xii) considered such other
factors as Morgan Stanley deemed appropriate.
Morgan Stanley assumed and relied upon, without independent verification,
the accuracy and completeness of the information reviewed by it for the
purposes of its opinion. With respect to the internal financial statements and
other financial and operating data and discussions relating to the strategic,
financial and operational benefits anticipated from the Merger provided by
Cascade and Ascend, Morgan Stanley assumed that they were reasonably prepared
on bases reflecting the best then currently available estimates and judgments
of the prospects of Ascend and Cascade, respectively. Morgan Stanley relied
upon the assessment by the managements of Ascend
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and Cascade of their ability to retain key employees of both Ascend and
Cascade. Morgan Stanley also relied upon, without independent verification,
the assessment by the managements of Ascend and Cascade of the strategic and
other benefits expected to result from the Merger. Morgan Stanley also relied
upon, without independent verification, the assessment by the managements of
Ascend and Cascade of Ascend's and Cascade's technologies and products, the
timing and risks associated with the integration of Cascade with Ascend, and
the validity of, and risks associated with, Ascend's and Cascade's existing
and future products and technologies. Morgan Stanley did not make any
independent valuation or appraisal of the assets, liabilities or technology of
Ascend or Cascade, respectively, nor were they furnished with any such
appraisals. Morgan Stanley assumed that the Merger would be accounted for as a
"pooling-of-interests" business combination in accordance with U.S. Generally
Accepted Accounting Principles, would be treated as a tax-free reorganization
and/or exchange pursuant to the Code and would be consummated in accordance
with the terms set forth in the Merger Agreement. Morgan Stanley's opinion is
necessarily based on economic, market and other conditions as in effect on,
and the information made available to it as of, the date of the opinion.
The following is a brief summary of the analysis performed by Morgan Stanley
in preparation of its opinion letter dated March 30, 1997.
Certain analyses performed by Morgan Stanley utilized earnings per share
estimates for Cascade and Ascend based on estimates published by securities
research analysts in the investment community. In the case of Cascade, such
estimates were adjusted to reflect the anticipated shortfall in financial
results for the first quarter relative to investment community expectations
about such results.
Comparative Stock Price Performance
As part of its analysis, Morgan Stanley reviewed the recent stock price
performance of Cascade and Ascend and compared such performance with that of a
group of four high-growth data communications companies (the "High Growth Data
Communications Companies") and a group of five data communications companies
(the "Data Communications Companies"). Morgan Stanley observed that over the
period from January 1, 1996 to March 26, 1997, the market price of Cascade
Common Stock depreciated approximately 2%, compared with an approximate
appreciation of 34% for Ascend, and an approximate depreciation of 69% and 5%
for an index of the High Growth Data Communications Companies and an index of
the Data Communications Companies, respectively.
Peer Group Comparison
Morgan Stanley compared certain financial information of Cascade with that
of the High Growth Data Communications Companies (together with three other
high growth data communications companies) and the Data Communications
Companies (together with six other data communications companies). Such
financial information included, among other things, market valuation, stock
price as a multiple of earnings per share, and the ratio of calendar year 1997
price earnings multiple to projected growth rate. Such analysis showed that as
of March 26, 1997, based on earnings per share and growth rate projections of
securities research analysts, Cascade Common Stock traded at a multiple of
25.5 times forecasted earnings per share for the calendar year 1997
(representing a multiple of 0.5 times its forecasted growth rate), compared to
35.1 times (representing 0.8 times forecasted growth rate) for Ascend and
median multiples of 38.6 times (representing a median multiple of 0.8 times
forecasted growth rate) for the High Growth Data Communications Companies and
22.6 times (representing a median multiple of 0.8 times forecasted growth
rate) for the Data Communications Companies based on securities research
analyst forecasts. Such analysis also showed earnings per share growth rate
projections of 50.0% for Cascade, 43.8% for Ascend and medians of 45.0% and
28.9% for the High Growth Data Communications Companies and the Data
Communications Companies, respectively. No company used in the peer group
comparison is identical to Cascade.
Analysis of Selected Precedent Transactions
As part of its analysis, Morgan Stanley reviewed five technology
transactions (collectively the "Large Data Communications Technology
Transactions"). Morgan Stanley compared certain statistics for the Large Data
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Communications Technology Transactions to the relevant financial statistics
for Cascade based on the value of Cascade assuming the closing price for
Ascend Common Stock as of March 26, 1997 and the Exchange Ratio. The analysis
showed multiples of earnings ranging from a low of 12.9 times to a high of
57.6 times one year forward earnings and multiples of latest twelve months
revenues ranging from a low of 1.4 times to a high of 14.6 times. These
compared to multiples of 35.3 times one year forward earnings and 11.1 times
latest twelve months revenues for Cascade based on the Exchange Ratio and the
closing stock price of the Ascend Common Stock as of March 26, 1997. No
transaction used in the analysis of selected precedent transactions is
identical to the Merger.
Discounted Equity Value
Morgan Stanley performed an analysis of the present value per share of
Cascade Common Stock's future trading price based on a range of earnings per
share estimates for Cascade for calendar years 1999 and 2000, illustrative
multiples of earnings per share ranging from 26.4 times (Cascade's then
current multiple of estimated calendar year 1997 earnings per share) to
32.5 times and an illustrative discount rate of 18.0% based on Morgan Stanley
estimates of the theoretical return required by shareholders to hold shares of
Cascade Common Stock. Based on this analysis, Morgan Stanley estimated a
present value of the potential future trading price per share ranging from
$39.75 to $58.09 for Cascade Common Stock based on multiples ranging from 26.4
times to 32.5 times and an illustrative discount rate of 18.0%. Additionally,
Morgan Stanley compared the present value per share of Cascade Common Stock to
the pro forma present value per share assuming consummation of the Merger.
This analysis showed per share values ranging from $38.63 to $60.88 for
Cascade Common Stock assuming consummation of the Merger based on multiples
ranging from 26.4 times to 35.1 times (Ascend's then current multiple of
estimated calendar year 1997 earnings per share) and an illustrative discount
rate of 18.0%. This analysis suggested that, based on the aforementioned
earnings per share estimates, multiples of earnings and discount rates, the
range of present values of the potential future trading price per equivalent
share of Cascade Common Stock for the combined company could be higher than
for Cascade as a stand-alone entity.
Relative Contribution Analysis
Morgan Stanley analyzed the pro forma contribution of each of Cascade and
Ascend to the combined company assuming consummation of the Merger. This
analysis showed, among other things, that in terms of revenue, operating
income and net income, Cascade would contribute 38.3%, 37.1% and 36.5%,
respectively, in the calendar year 1996 and 35.3%, 34.8% and 34.4%,
respectively, in the forecasted calendar year 1997. These figures, adjusted to
reflect each company's respective capital structure, were compared to the pro
forma ownership of the combined company by Cascade stockholders of 35.4% on a
fully converted basis based on the Exchange Ratio.
Exchange Ratio Analysis
Morgan Stanley compared the exchange ratios implied by average historical
exchange ratios, the discounted equity value analysis and the relative
contribution analysis to the Exchange Ratio. Morgan Stanley reviewed the
ratios of the closing prices of Cascade Common Stock to Ascend Common Stock
over various periods during the twelve month period ending March 26, 1997 and
computed the premiums represented by the Exchange Ratio over the averages of
these daily ratios over various periods. The averages of these daily ratios of
the closing prices of Cascade Common Stock and Ascend Common Stock were 0.514
as of the close of market on March 26, 1997, 0.506 for the previous 10 trading
days, 0.503 for the previous 30 trading days, 0.608 for the previous 60
trading days, 0.719 for the previous 90 trading days, 0.819 for the previous
120 trading days and 0.966 for the latest twelve month period ending March 26,
1997. The Exchange Ratio represented premiums/(discounts) of 36%, 38%, 39%,
15%, (3)%, (15)% and (28)%, respectively, over the aforementioned average
ratios of the Cascade and Ascend stock prices. Additionally, Morgan Stanley
computed the exchange ratios implied by each company's respective discounted
equity value per share assuming a discount rate of 18.0% based on Morgan
Stanley estimates of the theoretical return required by stockholders to hold
shares of Cascade Common Stock
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and Ascend Common Stock and the then current multiples of estimated calendar
year 1997 earnings per share of 26.4 times and 35.1 times for Cascade and
Ascend, respectively. The ratio of the discounted equity values per share was
0.550 for calendar years 1999 and 2000. The Exchange Ratio represented a
premium of 27% over the aforementioned ratios of the discounted equity values
per share. Morgan Stanley also reviewed the exchange ratios implied by the
relative contribution of revenues, operating income and net income by each
company to the combined company. The exchange ratios implied by contribution
of calendar 1997 revenue, calendar 1997 operating income and calendar years
1997 and 1998 earnings were 0.670, 0.657, 0.663 and 0.691, respectively. The
Exchange Ratio represented premiums of 5%, 6%, 6% and 1%, respectively, over
the aforementioned exchange ratios implied by revenue, operating income and
net income contribution by Cascade to the combined company.
Pro Forma Analysis of the Merger
Morgan Stanley analyzed the pro forma impact of the Merger on Cascade's
estimated earnings per share for the calendar years ending 1997 and 1998.
Morgan Stanley observed that, assuming that the Merger was treated as a
pooling-of-interests for accounting purposes and before taking into account
any one-time restructuring charges or any synergies resulting from the
combination, the Merger would result in earnings per share
accretion/(dilution) for Cascade stockholders of 1.7% and (2.8)% for the
calendar years ending 1997 and 1998, respectively, based on the Exchange
Ratio.
In connection with the review of the Merger by the Cascade Board, Morgan
Stanley performed a variety of financial and comparative analyses for purposes
of its opinion given in connection therewith. While the foregoing summary
describes the analyses and factors reviewed by Morgan Stanley in connection
with its opinion, it does not purport to be a complete description of all the
analyses performed by Morgan Stanley in arriving at its opinion. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to partial analysis or summary description. In arriving at its
opinion, Morgan Stanley considered the results of all of its analyses as a
whole and did not attribute any particular weight to any analysis or factor
considered by it. Furthermore, selecting any portion of its analyses, without
considering all analyses, would create an incomplete view of the process
underlying its opinion. In addition, Morgan Stanley may have given various
analyses and factors more or less weight than other analyses and factors, and
may have deemed various assumptions more or less probable than other
assumptions, so that the ranges of valuations resulting from any particular
analysis described above should not be taken to be Morgan Stanley's view of
the actual value of Ascend and Cascade. In performing its analyses, Morgan
Stanley made numerous assumptions with respect to industry performance,
general business and economic conditions of other matters, many of which are
beyond the control of Cascade or Ascend. Any estimates contained herein are
not necessarily indicative of future results or actual values, which may be
significantly more or less favorable than those suggested by such estimates.
The analyses performed were prepared solely as part of Morgan Stanley's
analysis of the fairness of the Exchange Ratio in the Merger to the holders of
shares of Cascade Common Stock and were conducted in connection with the
delivery of Morgan Stanley's opinion. The analyses do not purport to be
appraisals or to reflect the prices at which Cascade or Ascend might actually
be sold. The consideration to be received by the stockholders of Cascade
pursuant to the Merger was determined through arm's-length negotiations
between Cascade and Ascend and was approved by the Cascade Board. Morgan
Stanley did not recommend any specific exchange ratio to Cascade or that any
specific exchange ratio constituted the only appropriate exchange ratio for
the Merger.
The Cascade Board retained Morgan Stanley based upon Morgan Stanley's
qualifications, experience and expertise. Morgan Stanley is an internationally
recognized investment banking and advisory firm. Morgan Stanley, as part of
its investment banking business, is continuously engaged in the valuation of
businesses and securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for
corporate and other purposes. Morgan Stanley makes a market in Cascade Common
Stock and Ascend Common Stock. In the ordinary course of Morgan Stanley's
trading and brokerage activities, Morgan Stanley or its affiliates may at any
time hold long or short positions, may trade or otherwise effect transactions,
for its own account or for the account of customers, in the equity securities
of Cascade or Ascend.
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Pursuant to the Engagement Letter, Morgan Stanley provided advisory services
and a financial opinion in connection with the Merger and Cascade has agreed
to pay a customary fee based on the aggregate value of the transaction to
Morgan Stanley if the Merger is consummated. In addition, Cascade has also
agreed to indemnify Morgan Stanley and its affiliates, their respective
directors, officers, agents and employees and each person, if any, controlling
Morgan Stanley or any of its affiliates against certain liabilities and
expenses, including certain liabilities under the federal securities laws,
related to Morgan Stanley's engagement. In the past, Morgan Stanley and its
affiliates have provided financial advisory and financing services for Cascade
and Ascend and have received fees for the rendering of these services.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As of the Cascade Record Date, directors and executive officers of Cascade
and their affiliates beneficially owned an aggregate of 4,282,786 shares of
Cascade Common Stock (including 2,600,639 shares of Cascade Common Stock
subject to Cascade Options). Based upon the last reported sales price of
Ascend Common Stock on April 21, 1997 of $38.25, the aggregate dollar value of
the shares of Ascend Common Stock to be received in the Merger by the
executive officers and directors of Cascade is approximately $45,039,486.
The directors and executive officers of Cascade and Ascend holding in the
aggregate approximately 1.8% and 1.4%, respectively, of the shares of Cascade
and Ascend outstanding as of the respective record dates, have entered into
Voting Agreements with Ascend and Cascade, respectively, pursuant to which
each has agreed to vote in favor of the Merger and related matters. See "The
Merger--Voting Agreements."
Roger Evans, a director of Ascend, owns 6,000 shares of Cascade Common
Stock. Mr. Evans is a general partner of Greylock Equity Limited Partnership
("Greylock"). Greylock is the beneficial owner of 955,209 shares of Cascade
Common Stock. Based upon the last reported sale price of Ascend Common Stock
on April 21, 1997, the aggregate dollar value of Ascend Common Stock to be
received by Greylock and Mr. Evans, individually, in the Merger is
approximately $25,736,370.
Paul J. Ferri, a director of Cascade, is a general partner of Matrix III
Management Company, which is the general partner of Matrix Partners III, L.P.
(collectively, "Matrix"). Matrix is the beneficial owner of 245,011 shares of
Ascend Common Stock. Based upon the last reported sale price of Ascend Common
Stock on April 21, 1997, the aggregate dollar value of Ascend Common Stock
held by Matrix is approximately $9,371,670.
Pursuant to the Merger Agreement, the non-employee directors of Cascade will
remain as directors of the Surviving Corporation after the Effective Time, and
will be entitled to serve in such capacity for up to one hundred fifty (150)
days after the Effective Time.
Pursuant to the Merger Agreement, upon the consummation of the Merger,
Daniel E. Smith, Gururaj Deshpande and Paul J. Ferri, directors of Cascade,
will be elected to the Ascend Board. Upon his election to the Ascend Board,
Mr. Ferri automatically will be granted a non-qualified stock option to
purchase 192,000 shares of Ascend Common Stock, which will vest and become
exercisable in equal annual installments over a four-year period beginning on
the date of grant. In addition, Mr. Smith will become an executive vice
president of Ascend and general manager of its Core Switching Systems unit,
and Mr. Deshpande will become an executive vice president of Ascend
responsible for strategic planning. Certain other executive officers of
Cascade will become executive officers and key management employees of Ascend.
The vesting of shares pursuant to options issued to non-employee directors
under the Cascade 1994 Non-Employee Director Stock Option Plan is subject,
pursuant to the terms of such plan and the option agreements issued pursuant
thereto, to full acceleration as a result of the Merger. In addition, the
vesting of shares pursuant to options issued to members of Cascade's
management team and certain other key employees, under Cascade's Amended and
Restated 1991 Stock Plan, is subject to a one year acceleration as a result of
the Merger. Furthermore, vesting of shares pursuant to options issued to
certain employees, under the Arris Networks, Inc. 1995 Stock Option Plan, is
subject to partial acceleration as a result of the Merger.
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Pursuant to the Merger Agreement, Ascend is required to provide
indemnification to the directors and officers of Cascade against certain
liabilities. In addition, Ascend has agreed to maintain, or cause the
Surviving Corporation to maintain, in effect the policies of directors' and
officers' liability insurance ("D&O Insurance") maintained by Cascade and its
subsidiaries as of March 30, 1997, or policies with at least the same coverage
and amounts and terms no less advantageous to the insured parties, for six
years following the Effective Time. In no event will Ascend or the Surviving
Corporation be required to expend an amount greater than 150% of the aggregate
annual premiums paid by Cascade and its subsidiaries for D&O Insurance
premiums in the last fiscal year. See "The Merger Agreement--Certain Covenants
and Agreements."
As a result of the foregoing transactions and agreement, the directors and
executive officers of Ascend and Cascade may have personal interests in the
Merger which are not identical to the interests of other Ascend and Cascade
stockholders.
VOTING AGREEMENTS
In connection with the execution of the Merger Agreement, each of the
directors and executive officers of Cascade, who, as of the Cascade Record
Date, together beneficially owned approximately 1.8% of the outstanding shares
of Cascade Common Stock, entered into Voting Agreements pursuant to which such
persons agreed, among other things, to vote their shares of Cascade Common
Stock in favor of (i) approval and adoption of the Merger Agreement and (ii)
any proposal which would, or could reasonably be expected to, facilitate the
Merger. Concurrently with the execution of each Cascade Voting Agreement, each
such stockholder delivered to Ascend an irrevocable proxy pursuant to which
such stockholder has appointed the Ascend Board as such stockholder's proxy to
vote all shares of Cascade Common Stock owned by such stockholder in a manner
consistent with the Cascade Voting Agreement.
Directors and executive officers of Ascend have executed and delivered the
Ascend Voting Agreements obligating them, among other things, to vote their
shares of Ascend Common Stock in favor of issuance of shares of Ascend Common
Stock pursuant to the Merger Agreement and any proposal or action which would,
or could reasonably be expected to, facilitate the Merger. Pursuant to the
Ascend Voting Agreements, all of the outstanding shares of Ascend Common Stock
beneficially owned by the directors and executive officers of Ascend and their
respective affiliates on the Ascend Record Date (representing approximately
1.4% of the total number of shares of Ascend Common Stock outstanding at such
date) will be voted for approval of the issuance of shares of Ascend Common
Stock pursuant to the Merger Agreement. Concurrently with the execution of
each Ascend Voting Agreement, each such stockholder delivered to Cascade an
irrevocable proxy pursuant to which such stockholder has appointed the Cascade
Board as such stockholder's proxy to vote all shares of Ascend Common Stock
owned by such stockholder in a manner consistent with the Ascend Voting
Agreement.
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for accounting
and financial reporting purposes. It is a condition to the consummation of the
Merger that Ascend shall have received a letter from Ernst & Young LLP,
Ascend's independent auditors, and Cascade shall have received a letter from
Coopers & Lybrand L.L.P., Cascade's independent accountants, as to their
concurrence with the conclusion of the respective company's management
regarding the appropriateness of pooling of interests accounting for the
Merger under Accounting Principles Board Opinion No. 16 and applicable
Commission releases and regulations, if the Merger is consummated in
accordance with the Merger Agreement. Under pooling of interests accounting,
the recorded assets and liabilities of Ascend and Cascade will be carried
forward to the combined company at their recorded amounts, results of
operations of the combined company will include results of operations of
Ascend and Cascade for the entire fiscal year in which the combination occurs
and the reported results of operations of the separate companies for prior
periods will be combined and restated as results of operations of the combined
company. Consummation of the Merger is conditioned upon the written
confirmation of such letters at the Effective Time. See "The Merger
Agreement--Conditions to Closing" and "Unaudited Pro Forma Condensed Combining
Financial Statements."
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To help ensure that the parties meet the prerequisites for pooling of
interests accounting treatment, each director and executive officer of Cascade
and Ascend has executed and delivered a written agreement to the effect that
such person will not sell, transfer or otherwise reduce his or her interest or
risk in his or her shares of Cascade Common Stock or Ascend Common Stock
during the period commencing on the date thirty (30) days prior to the closing
date of the Merger and ending on the day after Ascend publishes financial
statements which reflect 30 days of combined post-Merger operations of Ascend
and Cascade, subject to certain de minimis exceptions.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion addresses certain federal income tax considerations
of the Merger that are applicable to holders of Cascade Common Stock. Cascade
stockholders should be aware that the following discussion does not deal with
all federal tax consequences that may result from the Merger, including the
survival or availability of any tax attributes or elections of Cascade as a
result of the Merger, and does not deal with all federal income tax
considerations that may be relevant to particular Cascade stockholders in
light of their particular circumstances, such as stockholders who are dealers
in securities, who are foreign persons or who acquired their Cascade Common
Stock through stock option or stock purchase programs or in other compensatory
transactions. In addition, the following discussion generally does not address
the tax consequences of other transactions effectuated prior to, at the time
of or after the Merger (whether or not such transactions are in connection
with the Merger) including, without limitation, the exercise of options or
similar rights to purchase stock, or the exchange, assumption or substitution
of options or similar rights to purchase Cascade Common Stock for rights to
purchase Ascend Common Stock. Furthermore, no foreign, state or local tax
considerations are addressed herein. This discussion is based on legal
authorities in existence as of the date hereof. No assurances can be given
that future legislation, regulations, administrative pronouncements or court
decisions will not significantly change the law and materially affect the
conclusions expressed herein. Any such change, even though made after
consummation of the Merger, could be applied retroactively. ACCORDINGLY, ALL
CASCADE STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE MERGER TO
THEM.
The Merger is intended to qualify as a reorganization within the meaning of
Section 368(a) of the Code. Subject to the limitations and qualifications
described herein, and assuming the Merger so qualifies, then the following tax
consequences should generally result:
(a) No gain or loss should be recognized by holders of Cascade Common
Stock upon their receipt in the Merger of Ascend Common Stock in exchange
therefor (except to the extent of cash received in lieu of fractional
shares);
(b) The aggregate tax basis of the Ascend Common Stock received in the
Merger (including any fractional share of Ascend Common Stock deemed to be
received and subsequently redeemed by Ascend) should be the same as the
aggregate tax basis of Cascade Common Stock surrendered in exchange
therefor;
(c) The holding period of the Ascend Common Stock received in the Merger
should include the period for which the Cascade Common Stock surrendered in
exchange therefor was held, provided that the Cascade Common Stock is held
as a capital asset at the Effective Time;
(d) Cash payments received by Cascade stockholders in lieu of receipt of
fractional shares of Ascend Common Stock should be treated as received in
redemption of such fractional shares, subject to the provisions of Code
Section 302, as if such fractional share had been issued in the Merger and
then redeemed by Ascend for cash; and
(e) Neither Ascend, Cascade nor Sub should recognize gain or loss as a
result of the Merger.
The parties are not requesting a ruling from the Internal Revenue Service
("IRS") regarding the consequences of the Merger. It is a condition to the
respective obligations of the parties to consummate the
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Merger that Cascade receive an opinion of TH&T and Ascend receive an opinion
of GCW&F to the effect that the Merger will constitute a "reorganization"
within the meaning of Section 368(a) of the Code. Such opinions
(the "Tax Opinions") neither bind the IRS nor preclude the IRS from adopting a
contrary position. In addition, this discussion and the Tax Opinions will be
subject to certain assumptions and qualifications and will be based on the
truth and accuracy of certain representations and warranties made by Ascend,
Sub, Cascade and perhaps certain stockholders of Cascade. In particular,
Ascend, Sub and Cascade will represent that they have no knowledge of any plan
or intention on the part of Cascade's stockholders to engage in a sale,
exchange, transfer, distribution, pledge, disposition or any other transaction
which results in a reduction in the risk of ownership or direct or indirect
disposition of shares of Ascend Common Stock to be issued in the Merger, which
shares would have an aggregate fair market value in excess of 50% of the
aggregate fair market value, immediately prior to the Merger, of all
outstanding shares of Cascade Common Stock; and the Tax Opinions will assume
that there is in fact no such plan or intention. If that assumption were
incorrect, the Tax Opinions might be adversely affected and could not be
relied upon.
Irrespective of the reorganization status of the Merger, a recipient of
shares of Ascend Common Stock would recognize income or gain to the extent
such shares were considered to be received in exchange for services or
property other than solely Cascade Common Stock. Gain would also be recognized
to the extent a Cascade stockholder was treated as receiving (directly or
indirectly) consideration other than Ascend Common Stock in exchange for his
or her Cascade Common Stock.
A successful IRS challenge to the reorganization status of the Merger would
result in a Cascade stockholder recognizing gain or loss with respect to each
share of Cascade Common Stock equal to the difference between the
stockholder's basis in such share and the fair market value, as of the
Effective Time, of the Ascend Common Stock received in exchange therefor. A
stockholder's aggregate basis in the Ascend Common Stock so received would
equal its fair market value, and his or her holding period for such stock
would begin the day after the Merger.
Cascade stockholders will be required to attach a statement to their tax
returns for the year of the Merger that contains the information listed in
Treasury Regulation Section 1.368-3(b). Such statement must include the
stockholder's tax basis in the stockholder's Cascade Common Stock and a
description of the Ascend Common Stock received.
REGULATORY REQUIREMENTS
Under the HSR Act and the rules promulgated thereunder by the FTC, the
Merger may not be consummated and the options granted under the Stock Option
Agreements may not be exercised until notifications have been given and
certain information has been furnished to the FTC and the Antitrust Division
and the specified waiting period requirements have been satisfied or early
termination thereunder granted. Ascend and Cascade completed the filing of
notification and report forms under the HSR Act relating to the Merger with
the FTC and the Antitrust Division on April 14, 1997, together with requests
for early termination of the applicable 30-day waiting period. On April 18,
1997, Ascend and Cascade completed the filing of notifications and report
forms under the HSR Act with respect to the Stock Option Agreements with the
FTC and the Antitrust Division, together with requests for early termination
of the applicable 30-day waiting period. At any time before or after the
Effective Time, the Antitrust Division or the FTC could take such action under
the antitrust laws as it deems necessary or desirable in the public interest,
including seeking to enjoin the consummation of the Merger or the exercise of
the options under the Stock Option or seeking divestiture of substantial
businesses of Ascend or Cascade as a condition to consenting to such
transactions. At any time before or after the Effective Time, and
notwithstanding that the HSR Act waiting period has expired, any state could
take such action under the antitrust laws as it deems necessary or desirable
in the public interest. Such action could include seeking to enjoin the
consummation of the Merger or the exercise of the options under the Stock
Option Agreements or seeking divestiture of substantial businesses of Ascend
or Cascade. Private parties also may seek to take legal action under the
antitrust laws under certain circumstances.
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Based on information available to them, Ascend and Cascade believe that the
Merger can be effected in compliance with federal and state antitrust laws.
However, there can be no assurance that a challenge to the consummation of the
Merger or to the exercise of the options granted under the Stock Option
Agreements on antitrust grounds will not be made or that, if such a challenge
were made, Ascend and Cascade would prevail or would not be required to accept
certain conditions, including certain divestitures, in order to consummate the
Merger. In this regard, it is a condition to the obligation of the parties to
consummate the Merger that no temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal or regulatory restraint or prohibition preventing
the consummation of the Merger or limiting or restricting Ascend's or
Cascade's conduct or operation of the business of Ascend or Cascade after the
Merger shall have been issued and be in effect, nor shall any proceeding
brought by a domestic administrative agency or commission or other domestic
governmental entity, seeking any of the foregoing be pending; nor shall there
be any action taken, or any statute, rule, regulation or order enacted,
entered, enforced or deemed applicable to the Merger which makes the
consummation of the Merger illegal or prevents or prohibits the Merger.
Pursuant to the Merger Agreement, Ascend and Cascade have agreed to use all
reasonable efforts to consummate and make effective the transactions
contemplated by the Merger Agreement, including cooperating fully with each
other to resolve any competitive issues relating to or arising under the HSR
Act, including all litigation resulting from such issues; provided, however,
that neither Ascend nor Cascade is required to agree to divest itself or hold
separate any subsidiary, division or business unit which is material to the
business of such party and its subsidiaries, taken as a whole, or the
divestiture or holding separate of which would be reasonably likely to have a
material adverse effect on (A) the business, properties, assets, liabilities,
financial condition or results of operations of such party and its
subsidiaries taken as a whole or (B) the benefits intended to be derived as a
result of the Merger.
FEDERAL SECURITIES LAW CONSEQUENCES
All shares of Ascend Common Stock received by Cascade stockholders in the
Merger will be freely transferable, except for shares of Ascend Common Stock
received by persons who are deemed to be "affiliates" (as such term is defined
for purposes of Rule 145 under the Securities Act) of Cascade at the time the
transaction is submitted for a vote to Cascade stockholders. Persons who may
be deemed to be affiliates of Cascade generally include individuals or
entities that control, are controlled by, or are under common control with,
Cascade and may include certain officers and directors of Cascade as well as
principal stockholders of Cascade. Rule 145(d) under the Securities Act
requires that, for specified periods, resales of Ascend Common Stock acquired
pursuant to the Merger by affiliates of Cascade be made in compliance with the
volume limitations, manner of sale provisions and current information
requirements of Rule 144 under the Securities Act. The volume limitations
should not pose any material limitations on any Cascade stockholder who owns
less than one percent of Ascend's outstanding Common Stock after the Merger
(approximately 1,886,215 shares of Ascend Common Stock as of April 18, 1997
after giving effect to the shares estimated to be issued in the Merger)
unless, pursuant to Rule 144, such stockholder's shares are required to be
aggregated with those of another stockholder. Pursuant to the Merger
Agreement, the directors, and executive officers, of Cascade have executed and
delivered to Ascend an agreement to the effect that such person will not offer
to sell or otherwise dispose of any of the shares of Ascend Common Stock
issued to such person in or pursuant to the Merger in violation of the
Securities Act or the rules and regulations promulgated by the Commission
thereunder.
NASDAQ NATIONAL MARKET QUOTATION
It is a condition to the Merger that the shares of Ascend Common Stock to be
issued pursuant to the Merger Agreement and required to be reserved for
issuance in connection with the Merger be approved for quotation on The Nasdaq
National Market. Ascend has begun preparation of a notification for listing of
such shares of Ascend Common Stock on The Nasdaq National Market.
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THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, a copy of which is attached as Annex A to this Joint Proxy
Statement/Prospectus and incorporated herein by reference. This summary is
qualified in its entirety by reference to the Merger Agreement. Stockholders
of Cascade and Ascend are urged to read the Merger Agreement in its entirety
for a more complete description of the Merger. Capitalized terms not otherwise
defined herein shall have the meaning ascribed to them in the Merger
Agreement. In the case of any conflict between the Merger Agreement and the
summary set forth herein, the Merger Agreement will control.
THE MERGER
The Merger Agreement provides that, following the approval and adoption of
the Merger Agreement by the stockholders of Cascade, the approval of the
issuance of Ascend Common Stock pursuant to the Merger Agreement by the
stockholders of Ascend, and the satisfaction or waiver of the other conditions
to the Merger, Sub will be merged with and into Cascade, with Cascade
continuing as the Surviving Corporation and becoming a wholly-owned subsidiary
of Ascend.
If all conditions to the Merger are satisfied or waived, the Merger will
become effective at the time of filing of a Certificate of Merger with the
Secretary of State of the State of Delaware and the Recorder of the County in
which the registered office of Cascade is located (the "Effective Time").
CONVERSION OF SECURITIES
Upon consummation of the Merger pursuant to the Merger Agreement, each
issued and outstanding share of Cascade Common Stock will be converted into
the right to receive 0.70 of a share of Ascend Common Stock. Based upon the
capitalizations of Cascade and Ascend as of March 19, 1997 and March 24, 1997,
respectively, the stockholders of Cascade immediately prior to the
consummation of the Merger will own approximately 35% of the outstanding
shares of Ascend Common Stock immediately following consummation of the
Merger. If any holder of shares of Cascade Common Stock would be entitled to
receive a number of shares of Ascend Common Stock that includes a fraction,
then, in lieu of a fractional share, such holder will be entitled to receive
cash in an amount equal to such fractional part of a share of Ascend Common
Stock multiplied by the average of the last reported sale prices of Ascend
Common Stock on The Nasdaq National Market on the ten trading days immediately
preceding the Effective Time.
Each share of Sub common stock, par value $.001 per share, issued and
outstanding immediately prior to the Effective Time will be converted into one
share of common stock, par value $.001 per share, of the Surviving
Corporation.
As soon as reasonably practicable after the Effective Time, the Exchange
Agent will mail letters of transmittal and other transmittal forms, together
with exchange instructions, to each holder of record of Cascade Common Stock
for use in effecting the surrender and exchange of certificates evidencing
shares of Cascade Common Stock for certificates evidencing the shares of
Ascend Common Stock (and cash in lieu of any fractional shares) to which such
holder has become entitled. After receipt of such letters of transmittal and
other transmittal forms, each holder of certificates formerly representing
Cascade Common Stock will be able to surrender such certificates to the
Exchange Agent, and each such holder will receive in exchange therefor one or
more certificates evidencing the number of whole shares of Ascend Common Stock
(and cash in lieu of any fractional shares) to which such holder is entitled.
Such transmittal forms will be accompanied by instructions specifying other
details of the exchange. CASCADE STOCKHOLDERS SHOULD NOT SEND IN THEIR
CERTIFICATES UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL AND OTHER TRANSMITTAL
FORMS.
After the Effective Time, and until surrendered and exchanged, each
certificate evidencing Cascade Common Stock will be deemed, for all purposes,
to evidence only the right to receive the number of whole shares of Ascend
Common Stock which the holder of such certificate is entitled to receive and
the right to receive the applicable cash payment (if any) in lieu of any
fractional share of Ascend Common Stock that such holder is
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entitled to receive. The holder of such unexchanged certificate will not be
entitled to receive any dividends or other distributions payable by Ascend
until the certificate has been exchanged. Subject to applicable laws, such
dividends and distributions, together with any cash payment in lieu of a
fractional share of Ascend Common Stock, will be paid without interest.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains representations and warranties by Ascend, Sub
and Cascade relating to a number of matters, including: (i) the due
organization, valid existence and good standing of Ascend, Cascade and their
respective subsidiaries; (ii) subsidiaries and joint ventures of Ascend and
Cascade; (iii) the capital structure of Ascend and Cascade; (iv) the
authorization, execution, delivery and enforceability of the Merger Agreement
and the Stock Option Agreements and related matters; (v) the absence of
conflicts under each party's charter and by-laws, required governmental
consents or approvals and violations of any instruments or laws; (vi) the
filing of documents and financial statements by Ascend and Cascade with the
Commission and the accuracy of information contained therein; (vii) the
absence of undisclosed liabilities which in the aggregate would be material;
(viii) the absence of certain material adverse changes or events; (ix) taxes,
tax returns and tax deficiencies; (x) the possession of leasehold interests in
real properties necessary for the conduct of business; (xi) intellectual
property rights; (xii) agreements, contracts and commitments; (xiii) material
litigation; (xiv) environmental matters including hazardous materials,
hazardous materials activities and environmental permits; (xv) employee
benefit plans; (xvi) compliance with laws; (xvii) the ability to account for
the Merger as a pooling of interests; (xviii) interested party transactions;
(xix) the accuracy of information supplied for the Registration Statement and
Joint Proxy Statement/Prospectus; (xx) payments and benefits to directors,
officers, current employees, former employees or to the trustee under any
"rabbi trust" resulting from the Merger; (xxi) opinions of financial advisors;
and (xxii) accounts receivable, reserves, inventories and related matters. In
addition, the Merger Agreement contains a representation and warranty by
Cascade that Section 203 of the DGCL is not applicable to the transactions
contemplated by the Merger Agreement, and a representation and warranty by
Ascend and Sub concerning the interim operations of Sub.
CERTAIN COVENANTS AND AGREEMENTS
Conduct of Business. Pursuant to the Merger Agreement, Ascend and Cascade
have each agreed that, during the period from the date of the Merger Agreement
until the Effective Time, except with the advance written consent of the other
party or as contemplated by the Merger Agreement, each of Ascend and Cascade
and its respective subsidiaries will: (i) carry on their respective businesses
in the ordinary course in substantially the same manner as previously
conducted including keeping available the services of their present officers
and key employees; (ii) pay their respective debts and taxes when due subject
to good faith disputes over such debts or taxes, and pay or perform other
obligations when due; (iii) preserve intact their respective present business
organizations and relationships; (iv) not accelerate, amend or change the
period of exercisability of options granted under any employee stock plan,
except as required pursuant to the plan or any related agreement; (v) not
transfer or license or otherwise extend, amend or modify any rights to their
respective intellectual property, other than in the ordinary course of
business consistent with past practices or on a non-exclusive basis not
materially different from past practices; (vi) not declare or pay any
dividends on or make other distributions in respect of any of their respective
capital stock, not effect certain other changes in their respective
capitalization, and not purchase or otherwise acquire, directly or indirectly,
any shares of its capital stock except from former employees, directors and
consultants in accordance with agreements providing for the repurchase of
shares in connection with the termination of service or from escrow
arrangements entered into in connection with prior acquisitions; (vii) not
issue, deliver or sell, or authorize or propose the issuance, delivery or sale
of, any shares of their respective capital stock or securities convertible
into shares of their respective capital stock, or any subscriptions, rights,
warrants, or options to acquire, or other agreements obligating any of them to
issue any such shares or other convertible securities, subject to certain
exceptions; (viii) not to acquire or agree to acquire, by merging or
consolidating with, by purchasing a substantial interest in or substantial
portion of the assets of, or by any other means, any business entity, or
otherwise acquire or agree to acquire any material amount of
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assets; (ix) subject to certain exceptions, not sell, lease, license or
otherwise dispose of material properties or assets except in the ordinary
course of business; (x) not increase the compensation payable to their
respective officers or employees (except for increases consistent with past
practices), grant additional severance or termination pay or enter into
employment agreements with directors or officers, grant severance or
termination pay to or enter into any employment or severance arrangement with
any employee (except in accordance with past practices or in settlement of
disputes), enter into any collective bargaining agreement or establish, adopt,
enter into or amend in any material respect any plan for the benefit of their
respective directors, officers or employees, subject to certain exceptions;
(xi) not materially revalue any of their respective assets, including writing
down the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business; (xii) not incur, with certain
exceptions, indebtedness for money borrowed (or guarantees thereof) other than
indebtedness incurred under existing lines of credit, or consistent with prior
practice, in excess of certain aggregate amounts; (xiii) not amend their
respective charter documents or bylaws; (xiv) not incur, with certain
exceptions, material capital expenditures in excess of certain aggregate
amounts; (xv) not enter into or amend any agreements pursuant to which any
third party is granted exclusive marketing or manufacturing rights with
respect to any product, process or technology; (xvi) not amend or terminate
any material contract, agreement or license except in the ordinary course of
business; (xvii) not waive or release any material right or claim, except in
the ordinary course of business; (xviii) not initiate any litigation or
arbitration proceeding; and (xix) not take any action that would make any of
its representations and warranties in the Merger Agreement untrue or incorrect
in any material respect or prevent it from performing any of its obligations
under the Merger Agreement.
The Merger Agreement also provides for certain additional agreements among
the parties to the Merger, including but not limited to the following:
No Solicitation. Ascend and Cascade have each agreed that it will not,
directly or indirectly, through any officer, director, employee,
representative, agent or affiliate (i) solicit, initiate or encourage any
inquiries or proposals that constitute, or could reasonably be expected to
lead to, a proposal or offer for a merger, consolidation, sale or purchase of
substantial assets or stock tender or exchange offer or similar transaction or
series of transactions, or other business combination or change in control or
similar transaction, other than the transactions contemplated by the Merger
Agreement (any of the foregoing inquiries or proposals being referred to as a
"Competing Offer"), (ii) engage in negotiations or discussions concerning, or
provide any non-public information to any person or entity relating to, any
Competing Offer, or (iii) agree to, approve or recommend any Competing Offer.
Notwithstanding the foregoing restriction, the Merger Agreement permits each
party and its respective Board of Directors to furnish non-public information
or enter into discussions or negotiations in connection with an unsolicited
bona fide written Competing Offer (including a new and unsolicited Competing
Offer received after the execution of the Merger Agreement from a person or
entity whose initial contact with such party may have been solicited by such
party prior to the execution of the Merger Agreement) or to recommend such an
unsolicited bona fide written Competing Offer to stockholders, if and only to
the extent that (1) such Competing Offer would, if consummated, result in a
transaction that would, in the reasonable good faith judgment of the Board of
Directors of such party, after consultation with its financial advisors,
result in a transaction more favorable to such party's stockholders from a
financial point of view than the Merger (any such more favorable Competing
Offer being referred to as a "Superior Proposal") and, in the reasonable good
faith judgment of the Board of Directors of such party, after consultation
with its financial advisors, the person or entity making such Superior
Proposal appears to have the financial means, or the ability to obtain the
necessary financing, to conclude such transaction, and (2) the failure to take
such action would, in the reasonable good faith judgment of the Board of
Directors of such party after consultation with outside corporate counsel to
such party, be contrary to the fiduciary duties of such party's Directors to
such party's stockholders under Delaware law or in violation of Rules 14d-9 or
14e-2 of the Commission. Prior to furnishing such non-public information, or
entering into such discussions or negotiations, such Board of Directors must
receive an executed confidentiality agreement with confidentiality provisions
not materially less favorable than those contained in the Mutual Nondisclosure
and Confidentiality Agreement dated March 22, 1997 between Ascend and Cascade.
Each party is required to notify the other (orally and in writing) within 24
hours after receipt of any Competing Offer or any subsequent modification of
the financial terms of a Competing Offer, or any request for non-public
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information or access to its properties, books or records in connection with a
Competing Offer. In addition, each party is required to notify the other party
at least 48 hours prior to each meeting of the Board of Directors held to
consider taking definitive action with respect to a Competing Offer or
withdrawing or modifying its recommendation of the Merger in a manner adverse
to the other party.
Third-Party Consents. Each party has agreed to use its reasonable efforts to
obtain all necessary consents, waivers and approvals under its respective
material agreements, contracts, licenses or leases as may be required in
connection with the Merger.
No Appraisal Rights. Provided that Ascend and Cascade continue quotation of
their respective Common Stock on The Nasdaq National Market until the
Effective Time, appraisal rights will not be available to stockholders of
Cascade under the DGCL.
Notice of Certain Events. Each party has agreed to give prompt notice to the
other of the occurrence of any event which is likely to cause any
representation or warranty in the Merger Agreement to be untrue in any
material respect at or prior to the Effective Time and to give prompt notice
of any failure to comply with or satisfy in any material respect any covenant,
condition or agreement to be complied with under the Merger Agreement.
Tax Free Reorganization. Each party has agreed to use its best efforts to
cause the Merger to be treated as a reorganization within the meaning of
Section 368(a) of the Code.
Pooling. Each party has agreed to use its best efforts to cause the business
combination to be effected by the Merger to be accounted for as a pooling of
interests. In this regard, each party has agreed to use its best efforts to
cause its affiliates to (i) refrain from taking any action that would
adversely affect the ability of Ascend to account for the Merger as a pooling
of interests, (ii) sign and deliver a customary "pooling letter," and
(iii) enter into certain director, officer and stockholder agreements,
pursuant to which the parties' directors and officers have agreed not to sell,
exchange, transfer, pledge, distribute, make any gift or otherwise dispose of
or grant any option, establish any "short" or put-equivalent position or enter
into any similar transaction until after Ascend publicly announces financial
results covering at least thirty (30) days of combined post-Merger operations
of Ascend and Cascade, subject to a limited exception if the transfer meets a
de minimis test. In addition, it is a condition to the parties' obligation to
consummate the Merger that each shall have received a letter from its
respective independent auditors or accountants as to their concurrence with
the conclusion of the respective company's management regarding the
appropriateness of pooling of interests accounting for the Merger under
Accounting Principles Board Opinion No. 16 and the applicable Commission
regulations and releases if the Merger is consummated in accordance with the
Merger Agreement.
Assumption of Cascade Options. Upon consummation of the Merger, each then-
outstanding Cascade Option will be assumed by Ascend and will be deemed to
constitute an option to acquire, on the same terms and conditions as were
applicable under such Cascade Option, the same number of shares of Ascend
Common Stock (rounded down to the nearest whole share) as the holder of such
Cascade Option would have been entitled to receive pursuant to the Merger had
such holder exercised such Cascade Option in full immediately prior to the
consummation of the Merger, at a price per share (rounded up to the nearest
whole cent) equal to the per share exercise price of such Cascade Option as in
effect immediately prior to the Effective Time divided by the Exchange Ratio.
Following the Effective Time, Ascend will issue to each holder of a Cascade
Option a document evidencing the assumption of such Cascade Option by Ascend.
Ascend has agreed to file a registration statement on Form S-8 for the
Ascend Common Stock issuable with respect to Cascade Options assumed by Ascend
within five (5) business days after the Effective Time.
Indemnification and Insurance. The Merger Agreement provides that Cascade
shall and, from and after the Effective Time, Ascend and the Surviving
Corporation shall, indemnify, defend and hold harmless each person who was an
officer or director of Cascade or any of its subsidiaries as of the date of
the Merger Agreement or
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had been such an officer or director at any time prior to the date thereof (or
who becomes a director or officer of Cascade or any of its subsidiaries prior
to the Effective Time) and certain other persons (each an "Indemnified Party")
against all losses, claims, demands, damages, costs, expenses, liabilities or
judgments or amounts that are paid in settlement (with the approval of the
indemnifying party, such approval not to be unreasonably withheld) of or in
connection with any claim, action, demand, suit, proceeding or investigation
(whether arising before or after the Effective Time) based in whole or in part
on, or arising in whole or in part out of, the fact that such person is or was
a director or officer of Cascade or any subsidiary or affiliate of Cascade,
whether pertaining to any matter existing or occurring at or prior to the
Effective Time and whether asserted, filed, commenced or claimed prior to, at
or after the Effective Time ("Indemnified Liabilities"), including, without
limitation, all losses, claims, damages, costs, expenses, liabilities,
judgments or settlement amounts based in whole or in part on, or arising in
whole or in part out of, or pertaining to the Merger Agreement or the
transactions contemplated thereby, in each case to the full extent that a
corporation is permitted under the DGCL to indemnify its own directors and
officers, as the case may be. In addition, Cascade, Ascend and the Surviving
Corporation, as the case may be, will pay expenses in advance of final
disposition to each Indemnified Party to the full extent permitted by law upon
receipt of certain undertakings provided that none of Ascend, Cascade or the
Surviving Corporation shall be liable for any settlement of any claim effected
without its written consent, which consent shall not be unreasonably withheld.
After the Effective Time, Ascend and the Surviving Corporation will fulfill,
assume and honor in all respects the indemnification obligations of Cascade
pursuant to Cascade's charter, Bylaws and indemnification agreements for a
period of at least six years.
In addition, Ascend has agreed to maintain, or to cause the Surviving
Corporation to maintain, in effect the D&O Insurance maintained by Cascade and
its Subsidiaries as of March 30, 1997, or policies with at least the same
coverage and amounts and terms no less advantageous to the insured parties,
for at most six years following the Effective Time. In addition, this
insurance will provide coverage for claims based upon or arising out of facts
or circumstances occurring on or before the Effective Time, and in no event
will Ascend or the Surviving Corporation be required to expend an amount
greater than 150% of the aggregate annual premiums paid by Cascade and its
Subsidiaries for D&O Insurance premiums in the last fiscal year.
The Merger Agreement also provides that if Ascend or the Surviving
Corporation or any of their respective successors or assigns (i) consolidates
with or merges into any other person and is not the continuing or surviving
corporation or entity in such consolidation or merger or (ii) transfers all or
substantially all its properties and assets to any person, then, and in each
case, proper provision shall be made so that the successors and assigns of
Ascend or the Surviving Corporation, as the case may be, honors, the
indemnification obligations described above.
Confidentiality and Non-Disclosure. In connection with the Merger, each of
Ascend and Cascade has provided to the other certain confidential information
concerning their respective businesses. The parties have agreed that unless
and until the Merger is consummated, all such information shall be held in
strict confidence and used solely for the purpose of evaluating the Merger and
the transactions contemplated by the Merger Agreement and the planning for the
implementation of the Merger. If the Merger is consummated, only Ascend shall
have the right to disclose Ascend's and Cascade's confidential information.
If, however, the Merger is not consummated, each party shall be obligated to
return the other party's confidential information and destroy any analyses,
studies or other documents that they have prepared using the other party's
confidential information. Ascend and Cascade have agreed that in the event of
a breach of the confidentiality provisions, the non-breaching party shall be
entitled to equitable relief.
Further Action. Each of the parties has agreed to use its reasonable efforts
to take all actions necessary, proper or advisable to consummate the Merger
and all transactions contemplated thereunder, including without limitation the
making of all necessary government filings.
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MATERIAL ADVERSE EFFECT
The terms "Ascend Material Adverse Effect" and "Cascade Material Adverse
Effect" are defined in the Merger Agreement to mean a material adverse effect
on the business, operations, properties, financial condition, assets
(including intangible assets) or results of operations of Ascend or Cascade
and their subsidiaries, taken as a whole, as the case may be. For purposes of
the Merger Agreement, the following are not deemed to constitute a material
adverse effect, either alone or in combination: (i) a change in the market
price or trading volume of either Ascend Common Stock or Cascade Common Stock,
(ii) a failure by either party to meet the revenue or earnings predictions of
equity analysts as reflected in the First Call consensus estimate or any other
revenue or earnings predictions or expectations for any period ending (or for
which earnings are released) on or after March 30, 1997 and prior to the
closing date of the Merger; (iii) conditions affecting the computer networking
industry, or the U.S. economy, as a whole; (iv) any effect arising primarily
out of or resulting primarily from actions contemplated by the parties in
connection with the Merger Agreement or which is primarily attributable to the
announcement of the Merger Agreement and the transactions contemplated thereby
(to the extent so attributable); (v) certain matters identified by the parties
in disclosure schedules to the Merger Agreement; and (vi) certain actions or
events permitted under the Merger Agreement.
CONDITIONS TO CLOSING
The consummation of the Merger is subject to the satisfaction of certain
conditions, including the following: (i) the Merger Agreement shall have been
approved and adopted by the requisite vote of holders of Cascade Common Stock
and the issuance of Ascend Common Stock in the Merger shall have been approved
by the requisite vote of holders of Ascend Common Stock pursuant to the DGCL;
(ii) the waiting period required by the HSR Act, and any other material
waiting periods under applicable foreign laws shall have expired or been
terminated and no action by the Antitrust Division, the FTC or any foreign
governmental entity challenging or seeking to enjoin the consummation of the
Merger shall be pending or have been instituted; (iii) all governmental
approvals and filings required for the Merger, the absence of which would be
reasonably likely to have a material adverse effect on either party or on the
parties' ability to complete the Merger, shall have been obtained or made;
(iv) the Registration Statement shall have become effective under the
Securities Act and shall not be the subject of any stop order or proceedings
seeking a stop order, and all required state securities laws authorizations
shall have been received; (v) there shall be no order, injunction or other
legal or regulatory restraint or prohibition in effect preventing or
prohibiting the consummation of the Merger or restricting the conduct of
either Ascend's or Cascade's business after the consummation of the Merger;
(vi) each of Ascend and Cascade shall have received opinions from their
respective counsel that the Merger will be treated as a tax-free
reorganization for federal income tax purposes; (vii) Ascend shall have
received a letter from Ernst & Young LLP and Cascade shall have received a
letter from Coopers & Lybrand L.L.P., as to their concurrence with the
respective company's management regarding the appropriateness of pooling of
interests accounting for the Merger under Accounting Principles Board Opinion
No. 16 and applicable Commission regulations and releases if the Merger is
consummated in accordance with the Merger Agreement; (viii) the shares of
Ascend Common Stock to be issued in the Merger shall have been authorized for
quotation on The Nasdaq National Market; (ix) Ascend, Sub and Cascade shall
have performed, in all material respects, all obligations they are required to
perform at or prior to the closing date of the Merger; (x) the parties'
representations and warranties shall be accurate in all material respects when
made and as of the closing date of the Merger; (xi) certain ancillary
agreements shall have been executed and delivered by the directors and
executive officers of Ascend and Cascade; and (xii) no material adverse effect
shall have occurred with respect to Ascend or Cascade, and no event shall have
occurred and no fact or circumstance shall exist which could reasonably be
expected to result in a material adverse effect on Ascend or Cascade.
Any of the conditions in the Merger Agreement may be waived by the party
benefited thereby, except those conditions imposed by law.
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TERMINATION; TERMINATION FEES AND EXPENSES
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval by the stockholders of Ascend or Cascade
of the matters presented in connection with the Merger:
(a) by the mutual written consent of Ascend and Cascade;
(b) by either Ascend or Cascade, if the Merger shall not have been
consummated by August 14, 1997 (provided that the right to terminate the
Merger Agreement under this clause shall not be available to any party
whose failure to fulfill any obligation under the Merger Agreement has been
the cause of or resulted in the failure of the Merger to occur on or before
such date, and provided further that the Merger Agreement may be extended
up to 90 days by either party by written notice to the other party if the
Merger would have been consummated but for the absence of one or more
required governmental approvals and the failure to obtain such approval(s)
would have a Cascade Material Adverse Effect, an Ascend Material Adverse
Effect or a material adverse effect on the ability of the parties to
consummate the Merger and such approval(s) can reasonably be expected to be
obtained within such 90-day period); or
(c) by either Ascend or Cascade, if a court of competent jurisdiction or
other Governmental Entity (as defined in the Merger Agreement) shall have
issued a nonappealable final order, decree or ruling, or taken any other
action, having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger, subject to certain limitations; or
(d) by either Ascend or Cascade, if, at the Cascade Special Meeting or
Ascend Special Meeting (including any adjournment or postponement thereof),
the requisite vote of the stockholders of Cascade in favor of the Merger
Agreement and the Merger or the requisite vote of the stockholders of
Ascend in favor of the issuance of Ascend Common Stock in the Merger shall
not have been obtained, subject to certain limitations; or
(e) by either Ascend or Cascade, if there has been a breach of any
representation, warranty, covenant or agreement on the part of the other
party set forth in the Merger Agreement, which breach (i) causes the
conditions set forth in Sections 7.2(a) or (b) (in the case of termination
by Ascend) or Sections 7.3(a) or (b) (in the case of termination by
Cascade) of the Merger Agreement (relating to the accuracy of
representations and warranties of the other party and performance by the
other party of its obligations) not to be satisfied and (ii) is either
incapable of being cured or shall not have been cured within 10 business
days following receipt by the breaching party of written notice of such
breach from the other party; or
(f) by Ascend, if (i) the Cascade Board shall have withdrawn or modified
its recommendation of the Merger Agreement or the Merger in a manner
adverse to Ascend; (ii) an Alternative Transaction (as defined below)
involving Cascade shall have taken place or the Cascade Board shall have
recommended such an Alternative Transaction (or a proposal or offer
therefor) to the stockholders of Cascade, or shall have publicly announced
its intention to recommend such an Alternative Transaction (or proposal or
offer therefor) or to engage in such a transaction; or (iii) a tender offer
or exchange offer for 20% or more of the outstanding shares of Cascade
Common Stock shall have been commenced or a registration statement with
respect thereto shall have been filed (other than by Ascend or an affiliate
of Ascend) and the Cascade Board shall have recommended that the
stockholders of Cascade tender their shares in such tender or exchange
offer or publicly announced its intention to take no position with respect
to such tender offer; or
(g) by Cascade if (i) the Ascend Board shall have withdrawn or modified
its recommendation of the Merger Agreement or the Merger in a manner
adverse to Cascade; (ii) an Alternative Transaction involving Ascend shall
have taken place or the Ascend Board shall have recommended such an
Alternative Transaction or a proposal or offer therefor to the stockholders
of Ascend or shall have resolved or publicly announced its intention to
recommend such an Alternative Transaction or a proposal or offer therefor
or to engage in such a transaction; or (iii) a tender offer or exchange
offer for 20% or more of the outstanding
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shares of Ascend Common Stock shall have been commenced or a registration
statement with respect thereto shall have been filed (other than by Cascade
or any affiliate thereof), and the Ascend Board shall have recommended that
the stockholders of Ascend tender their shares in such tender or exchange
offer or publicly announced its intention to take no position with respect
to such tender offer.
In the event of any termination of the Merger Agreement by either Ascend or
Cascade as provided above, there will be no liability or obligation on the
part of Cascade, Ascend, Sub or their respective officers, directors,
stockholders or affiliates, except to the extent that such termination results
from the willful breach by a party of any of its representations, warranties,
covenants or agreements set forth in the Merger Agreement, provided that the
provisions described below relating to the payment of fees and expenses shall
survive any such termination.
Except as described below, whether or not the Merger is consummated, all
fees, costs and expenses incurred in connection with the Merger Agreement and
the transactions contemplated thereby shall be paid by the party incurring
such expenses, except that all fees and expenses, other than attorneys' and
accounting fees and expenses, incurred in connection with the printing and
filing of this Joint Proxy Statement/Prospectus and any filings under the HSR
Act shall be shared equally by Ascend and Cascade.
If the Merger Agreement is terminated (i) by Ascend as a consequence of the
actions described in paragraph (f) above, (ii) by Cascade as a consequence of
the actions described in paragraph (d) above or (iii) by Ascend as a result of
a wilfull or intentional breach by Cascade within the scope of paragraph (e)
above, and, in each such case, at the time of such failure or breach an
Alternative Transaction involving Cascade shall have been announced or
proposed which shall not have been absolutely and unconditionally withdrawn
and abandoned, Cascade shall pay to Ascend a termination fee of $85 million in
cash (the "Cascade Termination Fee").
If the Merger Agreement is terminated by Ascend pursuant to paragraph (d)
above as a result of the failure to receive the requisite vote for approval
and adoption of the Merger Agreement by the stockholders of Cascade at the
Cascade Special Meeting, and written notice of such termination is given by
Ascend to Cascade within twenty (20) days after such Cascade Special Meeting,
and at the time of the event giving rise to the right of Ascend to terminate
under such paragraph (d), an Alternative Transaction involving Cascade shall
have been announced or proposed which shall not have been absolutely and
unconditionally withdrawn and abandoned, and Cascade within 180 days after
such termination enters into a definitive written merger or other business
combination agreement with the offeror in such Alternative Transaction (or any
affiliate thereof) or recommends that the stockholders of Cascade tender their
shares of Cascade capital stock in response to a tender or exchange offer
providing for an Alternative Transaction by such offeror (or any affiliate
thereof), then Cascade shall pay to Ascend a post-termination fee of $85
million upon entering into such agreement or making such recommendation (the
"Cascade Post-Termination Fee").
If the Merger Agreement is terminated (i) by Cascade as a consequence of the
actions described in paragraph (g) above, (ii) by Ascend pursuant to paragraph
(d) above or (iii) by Cascade as a result of a wilfull or intentional breach
by Ascend or Sub within the scope of paragraph (e) above, and, in each such
case, at the time of such failure or breach an Alternative Transaction
involving Ascend shall have been announced or proposed which shall not have
been absolutely and unconditionally withdrawn and abandoned, Ascend shall pay
to Cascade a termination fee of $85 million in cash (the "Ascend Termination
Fee").
If the Merger Agreement is terminated by Cascade pursuant to paragraph (d)
above as a result of the failure to receive the requisite vote for approval of
the issuance of shares of Ascend Common Stock pursuant to the Merger Agreement
by the stockholders of Ascend at the Ascend Special Meeting, and written
notice of such termination is given by Cascade to Ascend within twenty (20)
days after such Ascend Special Meeting, and at the time of the event giving
rise to the right of Ascend to terminate under such paragraph (d), an
Alternative Transaction involving Ascend shall have been announced or proposed
which shall not have been absolutely and unconditionally withdrawn and
abandoned, and Ascend within 180 days after such termination enters into a
definitive written merger or other business combination agreement with the
offeror in such Alternative
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Transaction (or any affiliate thereof) or recommends that the stockholders of
Ascend tender their shares of Ascend capital stock in response to a tender or
exchange offer providing for an Alternative Transaction by such offeror (or
any affiliate thereof), then Ascend shall pay to Cascade a post-termination
fee in the amount of $85 million upon entering into such agreement or making
such recommendation (the "Ascend Post-Termination Fee").
An "Alternative Transaction" involving a party means (i) a transaction or
series of transactions pursuant to which any person or group (as such term is
defined under the Exchange Act) other than Ascend, Cascade, or Sub, or any
affiliate thereof, (a "Third Party"), acquires (or would acquire upon
completion of such transaction or series of transactions) more than 20% of the
equity securities or voting power of such party or any of its material
subsidiaries, pursuant to a tender offer or exchange offer or otherwise, (ii)
a merger, consolidation, share exchange or other business combination
involving such party or any of its material subsidiaries pursuant to which any
Third Party acquires ownership (or would acquire ownership upon consummation
of such merger, consolidation, share exchange or other business combination)
of more than 20% of the outstanding equity securities or voting power of such
party or any of its material subsidiaries or the entity surviving such merger
or business combination or resulting from such consolidation, (iii) any other
transaction or series of transactions pursuant to which any Third Party
acquires or would acquire (upon completion of such transaction or series of
transactions) control of assets of such party or any of its material
subsidiaries (including, for this purpose, outstanding equity securities of
subsidiaries of such party) having a fair market value equal to more than 20%
of the fair market value of all the consolidated assets of such party
immediately prior to such transaction or series of transactions, or (iv) any
transaction or series of transactions pursuant to which any Third Party
acquires or would acquire (upon completion of such transaction or series of
transactions) control of the Board of Directors of such party or by which
nominees of any Third Party are (or would be) elected or appointed to a
majority of the seats on the Board of Directors of such party.
In no event shall either party be required to pay any of the termination or
post-termination fees as provided for above, if, immediately prior to the
termination of the Merger Agreement, the party to receive such expenses or
fees was in material breach of any of its material obligations under the
Merger Agreement. Furthermore, in no event will either party be required to
pay both a termination fee and a post-termination fee.
AMENDMENT AND WAIVER
The Merger Agreement may be amended at any time by action taken or
authorized by the respective Boards of Directors of Ascend and Cascade, but no
amendment shall be made after stockholder approval which by law requires
further approval by such stockholders, without such further approval. Ascend
and Cascade, by action taken or authorized by their respective Boards of
Directors, may extend the time for performance of the obligations or other
acts of the other parties to the Merger Agreement, may waive inaccuracies in
the representations or warranties contained in the Merger Agreement and may
waive compliance with any agreements or conditions contained in the Merger
Agreement.
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STOCK OPTION AGREEMENTS
The following is a brief summary of certain provisions of the Stock Option
Agreements, copies of which are attached as Annex B and Annex C to this Joint
Proxy Statement/Prospectus and incorporated herein by this reference. This
summary is qualified in its entirety by reference to the Stock Option
Agreements. Stockholders of Ascend and Cascade are urged to read the Stock
Option Agreements in their entirety for a more complete description of the
rights and obligations of the parties thereunder.
GENERAL
Pursuant to reciprocal stock option agreements dated March 30, 1997, Ascend
and Cascade have each granted the other an option to acquire, under certain
circumstances, a number of shares equivalent to 19.9% of its issued and
outstanding common stock as of March 30, 1997. With the exception of certain
terms relating to the applicable exercise price, the terms of the two Stock
Option Agreements are substantially parallel.
The exercise price per share under both Stock Option Agreements is payable
either in cash (a "Cash Exercise") or in shares of the exercising party's
common stock (a "Stock Exercise"). Under the Cascade Stock Option Agreement,
the exercise price per share for a Cash Exercise is equal to $36.40, and the
exercise price per share for a Stock Exercise is equal to the Exchange Ratio
(0.70 of a share of Ascend Common Stock for each share of Cascade Common Stock
purchased by Ascend under the Cascade Stock Option Agreement). Under the
Ascend Stock Option Agreement, the exercise price per share for a Cash
Exercise is equal to $52.00, and the exercise price per share for a Stock
Exercise is equal to 1.833 shares of Cascade Common Stock for each share of
Ascend Common Stock purchased by Cascade under the Ascend Stock Option
Agreement.
The number of shares issuable under the Stock Option Agreements, and the
exercise prices, are subject to adjustment in the event of certain changes in
the parties' capitalization.
Subject to certain limitations, each option is exercisable, in whole or in
part, at any time or from time to time after the occurrence of an event which
causes a termination fee or post-termination fee to become payable to the
option holder by the option grantor under the Merger Agreement (a "Trigger
Event"). With certain exceptions, the options terminate upon the earliest of
the following: (i) the Effective Time of the Merger; (ii) the date on which
the Merger Agreement is terminated pursuant to Article VIII thereof other than
under circumstances which also constitute a Trigger Event under the Stock
Option Agreement, and (iii) (A) in the event the option becomes exercisable
pursuant to clause (i) of Section 2(a) of the Stock Option Agreements, the
date two hundred seventy (270) days after the date on which the Merger
Agreement is terminated pursuant to Article VIII thereof under circumstances
which also constitute a Trigger Event under clause (i) of Section 2(a) of the
Stock Option Agreement, or (B) in the event the option becomes exercisable
pursuant to clause (ii) of Section 2(a) of the Stock Option Agreements, the
later of (I) the date two hundred seventy (270) days after the date on which
the Merger Agreement is terminated pursuant to Article VIII thereof under
circumstances which also constitute a Trigger Event under clause (ii) of
Section 2(a) of the Stock Option Agreements and (II) the date one hundred
eighty (180) days after the date on which the option becomes exercisable
pursuant to clause (ii) of Section 2(a) of the Stock Option Agreements.
Notwithstanding the foregoing, and subject to certain conditions, with respect
to clause (iii), above, if an option cannot be exercised by reason of any
applicable judicial or governmental judgment, decree, order, law or
regulation, the option shall remain exercisable and shall not terminate until
the earlier of (x) the date on which such impediment becomes final and not
subject to appeal and (y) the end of the tenth (10th) business day after such
impediment has been removed. In addition, neither option can be exercised by a
party which is in material breach of its material representations, warranties,
covenants or agreements in the applicable Stock Option Agreement or the Merger
Agreement.
Under both Stock Option Agreements, the option grantor's obligation to issue
shares is subject to a number of conditions, including expiration of all
applicable waiting periods under the HSR Act, the absence of any injunction or
order prohibiting or otherwise restraining such issuance, receipt of any
required governmental consents, approvals, orders, authorizations and permits.
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REPURCHASE RIGHTS AND OBLIGATIONS
At any time when the applicable option is exercisable, the option holder has
the right to "put" the option back to the option grantor. Under these "put"
provisions, the option holder has the right to require the option grantor to
repurchase the option, either in whole or in part, at a price equal to the
amount by which the fair market value (the per share average last reported
sales prices on The Nasdaq National Market for the preceding ten trading days)
of a single share of the option grantor's common stock exceeds the per share
exercise price multiplied by the number of shares then purchasable pursuant to
such option.
In addition, at any time during which an option is exercisable, the option
holder has the right to "put" any or all shares purchased under the Stock
Option Agreement back to the option grantor. Under these stock "put"
provisions, the option holder has the right to require the option grantor to
repurchase any or all shares purchased by the option holder under the option,
at a price per share equal to the product of the greater of the exercise price
and the fair market value of a single share of the option grantor's common
stock and the number of shares of common stock to be repurchased. Further, if
the exercise price of the applicable option was paid by delivery of the option
holder's common stock, then, in the option grantor's discretion, or if
specified by the option holder, all or part of the share repurchase price may
be paid by delivery of the shares of the option holder's common stock tendered
in payment of the exercise price.
In the event that the payment of the repurchase price would subject the
repurchase to a vote of the option grantor's stockholders pursuant to
applicable laws, regulations or requirements of a national securities exchange
or national market system or the grantor's Certificate of Incorporation, the
option holder may, at its election, reduce the repurchase price or the number
of shares covered by the repurchase request to any amount which would permit
such repurchase without the necessity for a stockholder vote.
At any time following the first occurrence of a Trigger Event and prior to
the expiration of the option, the Stock Option Agreements give the option
grantor certain "first refusal" rights with respect to the shares of the
option grantor's common stock acquired by the option holder under the
applicable Stock Option Agreement. Under these "first refusal" rights if the
option holder proposes to sell any of the option grantor shares issued to the
option holder under the Stock Option Agreement, then the option grantor has
the right to repurchase all, but not less than all, of the shares proposed to
be transferred, at a per-share price equal to that price which the option
holder would have received from the third party purchaser whose offer gave
rise to the right of first refusal.
In addition, at any time following the first occurrence of a Trigger Event,
and prior to the expiration of the option, the Stock Option Agreements give
the option holder certain "first refusal" rights with respect to shares of the
option holder's common stock acquired by the option grantor pursuant to a
Stock Exercise of the Option. Under these "first refusal" rights if the option
grantor proposes to sell any of the option holder's common stock acquired by
the option grantor pursuant to a Stock Exercise of the option, then the option
holder has the right to repurchase all, but not less than all, of the shares
then proposed to be transferred, at a per share price equal to that price
which the option grantor would have received from the third party purchaser
whose offer gave rise to the right of first refusal.
LIMITATIONS ON CERTAIN AMOUNTS PAYABLE
The aggregate amount payable by either party under both the Merger Agreement
and the Stock Option Agreements is capped, as are the aggregate net proceeds
receivable by either party from sales of shares received upon exercise of such
options. The amount payable by Cascade to Ascend or by Ascend to Cascade under
the termination fees and the post-termination fees provisions of the Merger
Agreement and the "put" provisions of the applicable Stock Option Agreement
may not exceed $85 million in the aggregate. In addition, if the exercising
party would receive net proceeds of more than $85 million (over and above the
aggregate exercise price) from third-party sales or dispositions of the shares
acquired under the Stock Option Agreements, all net proceeds in excess of such
amount will be remitted to the other party. As a result of these provisions, a
party's "profits" from the option cannot exceed $170 million.
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TRANSFER RESTRICTIONS AND REGISTRATION
Under the Stock Option Agreements, each party's right to sell, assign,
pledge or otherwise dispose of or transfer shares of the other party is
subject to certain restrictions and certain first refusal rights in favor of
the other party, as described above.
In addition, after the termination of the Merger Agreement, and subject to
certain conditions and limitations, the Stock Option Agreements give each
party certain rights to have the shares acquired from the other party
registered under the Securities Act for sale in an underwritten public
offering. In lieu of registration, the Stock Option Agreements give the
registrant the option to agree to purchase, for cash, all or part of the
securities covered by the registration request, at a price equal to the
average last sale price of such securities for the preceding ten trading days.
The Stock Option Agreements allow each party to demand a total of two
registrations, and allow the registrant to defer the requested registrations
for certain periods under the following circumstances: (i) for up to 60 days
when the registrant is in possession of material non-public information which
it reasonably believes would be detrimental to be disclosed at such time and
which, in the opinion of counsel to the registrant, would be required to be
disclosed in the registration statement, and (ii) for up to 90 days when
required audited financial statements are not yet available or the registrant
reasonably determines that registration would interfere with a material
financing, acquisition or other transaction.
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INFORMATION CONCERNING ASCEND
The following Information Concerning Ascend section provides information on
the business of Ascend on a stand-alone basis and does not describe the
business of Ascend if the Merger is consummated. The following Business
Section contains forward-looking statements which involve risks and
uncertainties. Ascend's actual results could differ materially from those
anticipated in these forward-looking statements as a result of a variety of
factors, including those factors set forth under "Risk Factors" and elsewhere
in this Joint Proxy Statement/Prospectus.
BUSINESS
Ascend develops, manufactures, markets, sells and supports a broad range of
high-speed integrated remote networking products that enable its customers to
build: (i) Internet access systems consisting of POP termination equipment for
ISPs and remote site Internet access equipment for Internet subscribers; (ii)
high speed IP switches for application in telecommunications carriers and ISP
backbone networks; (iii) extensions and enhancements to corporate backbone
networks that facilitate access to these networks by remote offices,
telecommuters and mobile computer users; and (iv) videoconferencing and
multimedia access facilities. These products support existing digital and
analog networks.
Ascend has four product families, each of which is focused on a major
application segment: MAX products for WAN access to corporate backbone
networks, Internet access in POPs and multimedia access facilities; GRF
products for high performance IP switching in carrier and ISP backbone
networks; Pipeline and NetWarp products for telecommuting, remote office
access and Internet access by individual sites or users; and Multiband
products for videoconferencing and multimedia networks. Ascend's products
offer integrated security and network management functionality. These products
support a wide variety of application interfaces, switched digital services,
digital modem services and digital and analog access line types. This wide
range of connectivity and interoperability options significantly increases the
number of telecommunication carrier, ISP POP, corporate and individual sites
that can benefit from Ascend's products. Ascend's products are distributed and
serviced globally and Ascend maintains marketing and sales relationships with
ISPs, including UUNET, PSI, BBN, MCI, Demon Internet (UK) and IIJ (Japan),
with major telecommunications carriers, including AT&T, Sprint, MCI, GTE,
Pacific Bell, Southwestern Bell, British Telecom, France Telecom, Deutsche
Telekom and NTT in Japan, with video equipment providers, including
Compression Labs, PictureTel and VTEL, and with VARs and distributors
throughout the world.
In April 1997, Ascend acquired Whitetree, a privately held developer and
supplier of high-speed LAN switching products based on Ethernet and ATM
technology. As a result of this acquisition, Whitetree became a wholly-owned
subsidiary of Ascend. Ascend issued approximately 1,315,000 shares of Ascend
Common Stock in exchange for all the outstanding shares of Whitetree. In
addition, Ascend assumed all outstanding Whitetree stock options to purchase
approximately 99,000 shares of Ascend Common Stock. The combination will be
accounted for as a pooling of interests.
APPLICATIONS
As a consequence of the availability of a broad range of network services, a
new class of internetworking applications has emerged. Four such applications
include WAN and Internet access; WAN and Internet backbone switching; remote
LAN and Internet subscriber access; and videoconferencing and multimedia
access.
WAN and Internet Access. The WAN and Internet access markets are driven by
the growth of switched digital services offered by telecommunications carriers
and by the growth of dial-up internetworking offered through Internet service
providers, public information network providers, private network service
providers and large corporate telecommunications centers. WAN and Internet
access requires managed, high capacity, high density termination of digital
and analog switched connections and flexible communications to the appropriate
backbone network or the Internet through LAN or WAN circuit or frame relay
connections.
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WAN and Internet Backbone Switching. The WAN and Internet backbone switching
markets are driven by the high growth of the Internet due to increases in the
number of individual Internet subscribers and the number of corporations using
the Internet as a virtual private network. This growing traffic on the
Internet has put increased demands on the backbone equipment at the core of
WAN and Internet networks. Today's backbone switches must handle millions of
packets of data per second and simultaneously communicate with the
approximately 46,000, and growing, peer devices that form the foundation of
today's Internet.
Remote LAN and Internet Subscriber Access. The remote office and
telecommuting/SOHO market is driven primarily by the need for organizations to
increase the productivity of network users by extending their corporate
backbone network beyond its dedicated leased digital circuit boundaries to
remote offices, telecommuters, mobile computer users, vendors and customers.
The Internet access market is driven by the need for organizations and
individuals to have switched digital connections to Internet services such as
inter-company electronic mail, file transfers and the World Wide Web. Remote
LAN and Internet subscriber access requires managed, cost-effective
connections that can be established and terminated as needed, at sufficient
bandwidth.
Videoconferencing and Multimedia Access. Today's videoconferencing market is
driven by corporate demands for better and more efficient communications,
thereby enhancing video room system access and worker productivity. With the
emergence of the desktop video market, the demand for high performance
switched connectivity allowing intra-company as well as inter-company video
access equipment has grown. The multimedia market is driven by an array of
emerging multimedia access applications which include multimedia banking,
telemedicine and distance learning.
Coincident with the demand for connectivity driven by these applications has
been the need for integrated security. In addition, connectivity equipment
must contain sophisticated bandwidth management technology to address the
significant connectivity challenges posed by the large variety of network
services, communications protocols and application-specific requirements.
Furthermore, connectivity equipment must have the reliability and scalability
demanded by large telecommunications carriers and ISPs which provide these
services on a worldwide basis.
THE ASCEND SOLUTION
Ascend provides the major components of a remote networking solution: access
equipment for the remote site, access equipment for the edge of the network,
and high speed backbone switching equipment for the core of the network.
Ascend's access and backbone systems establish high-speed transparent
connections whose bandwidth, duration and destination can be adjusted to suit
user application needs.
Ascend's remote LAN and Internet subscriber access products and WAN and
Internet access products integrate digital modem technology in addition to
switched digital technology, allowing dynamic selection of analog or digital
dial-up services and a seamless transition and integration of digital and
analog services within a telecommunications carrier, corporation or an ISP's
network. Ascend's products also provide integrated network management and
security functionality.
Ascend's product families incorporate scaleable, modular software and
hardware architectures that facilitate rapid, flexible customer deployments.
This scalability and modularity also has allowed Ascend to rapidly develop new
products and additional features. Hardware platforms range from lower cost
systems using general purpose microprocessors to high-performance scaleable
systems with state-of-the-art RISC processors. All products have integrated
hardware and software platforms that can be configured into a wide variety of
systems to suit customers' specific needs for capacity, functionality and cost
effectiveness.
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ASCEND STRATEGY
Ascend's objective is to maintain a leadership position in the market for
remote networking systems using the following strategies:
Focus on Targeted Applications Markets. Ascend's first product family, the
Multiband family, was introduced in February 1991. By focusing on
videoconferencing and working closely with telecommunications carriers such as
AT&T, MCI and Sprint, Ascend became a market leader in bandwidth on demand
videoconferencing access. Building on this success and on the existing
Multiband technology, Ascend introduced the MAX product family in late 1992.
The MAX family of products supports WAN, Internet and multimedia access
applications, and has been widely deployed by ISPs. In 1996, 1995 and 1994,
the MAX product family accounted for approximately 82%, 63% and 26% of
Ascend's net sales, respectively. In late 1996, Ascend introduced the MAX TNT,
a carrier class, high-speed/high-capacity WAN access switch that is the newest
member of the MAX product family. In late 1993, to address the expanding
remote LAN and Internet access market, Ascend leveraged the technology
incorporated in its MAX and Multiband product families and introduced a new
product family of remote site access equipment, the Pipeline family of
products. In 1996, 1995 and 1994, the Pipeline product family accounted for
approximately 12%, 20% and 10% of Ascend's net sales, respectively. In late
1996, Ascend introduced the GRF product family of high performance IP
switches. The GRF is the first product family to be introduced by Ascend's
High Performance Networking Division (formerly NetStar, Inc.), based in
Minneapolis, Minnesota. Also in late 1996, to continue to enhance its
offerings to the remote LAN and Internet access market, Ascend introduced the
NetWarp product family of high performance ISDN terminal adapters. Ascend will
continue to monitor future trends and evolving applications, and intends to
enhance and expand its range of product offerings to suit the particular
network access requirements of significant new applications markets.
Provide "Any to Any" Connectivity. Ascend believes that its products must
support and enable interoperability among common network services and
interfaces. Ascend currently supports major network services including analog
modem, ISDN BRI, ISDN PRI, dedicated digital services up to and including
SONET(OC12--622 KB/second), Frame Relay, emerging xDSL networks and other
derivatives. In addition, Ascend currently supports major equipment interfaces
such as serial cabling interfaces (V.35), 10/100 MB Ethernet, FDDI, as well as
very high speed interfaces such as HIPPI and HISSI. Ascend intends to support
additional application cabling interfaces, digital access lines and analog and
digital services when such offerings become necessary to satisfy the needs of
end-user customers in the targeted applications markets.
Leverage Strategic Distribution and Marketing Relationships. Since its
inception in 1989, Ascend has developed close relationships with important
VARs, distributors, ISPs, telecommunications carriers and applications
equipment manufacturers around the world to support marketing and sales
activities in each of its targeted applications markets. Ascend leverages the
capabilities, resources, expertise and market presence of these strategic
partners to bring Ascend's products to market rapidly and to respond to
developments in these markets. Ascend intends to develop similar strategic
relationships with additional partners in the future with the aim of obtaining
comparable benefits.
Focus on Global Markets and Applications. Organizations around the world
utilize the applications targeted by Ascend's products, often across national
borders. To achieve continued success, Ascend's products must support analog
and digital services available in the major industrial countries throughout
the world and enable interoperability of these services. Ascend intends to
continue to invest in product development aimed at these global markets.
Ascend currently markets and sells its products outside of North America in
Europe, Asia, the Pacific Basin and Latin and South America. Ascend intends to
support telecommunications services in additional countries as those services
become available.
Exploit Flexible Product Architecture For Rapid Time to Market. All of
Ascend's products leverage integrated core software components. This core
software is designed to be extensible to accommodate new applications, cabling
interfaces, digital access lines and carrier digital services. The software
currently operates
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on three different families of microprocessors, from relatively low-cost
processors, such as the Intel 80C18 and Motorola's 68xxx, to state-of-the-art
RISC-based processors such as the Intel i960, and is designed to be ported to
other microprocessors in the future. In addition, Ascend has designed its
hardware architecture in a modular fashion so that it can use elements of this
architecture in future products. This flexibility, portability and modularity
are intended to facilitate a relatively short product design and development
cycle and to enable Ascend to address new applications markets and support new
network services offered by telecommunications carriers.
CURRENT PRODUCTS
Ascend has developed four product families based on an integrated software-
based architecture intended to permit its products to: (i) connect to the
major types of analog and digital access lines worldwide; (ii) connect to
widely available dedicated line services, switched digital services, and
digital modem services; (iii) connect to the major types of telecommunications
services worldwide; (iv) provide support for different types of applications
and application interfaces; and (v) accommodate network growth and application
expansion in a scaleable fashion.
Ascend provides integrated firewall and encryption security software for its
products. In addition, Ascend's products also support local and remote
management of the access equipment, the access line interface and the
application interface. Ascend products can be managed from a central location
using either Ascend's proprietary remote management protocols or standards-
based Simple Network Management Protocol ("SNMP").
MAX
Ascend introduced its first MAX products in late 1992. Sales of MAX products
accounted for approximately 82%, 63% and 26% of Ascend's net sales in 1996,
1995 and 1994, respectively. Products in the MAX product family range from the
low-end MAX 200+ to the recently introduced MAX TNT, a carrier class, high-
speed/high-capacity WAN access switch. The entire MAX family of integrated
access servers provide bandwidth on demand for WAN, Internet and multimedia
access over common sets of digital access lines. Each MAX product supports a
modular card and backplane system that allows users to configure each unit
according to application and bandwidth requirements. MAX products can be
configured with HDLC and digital modem cards to act as a central site remote
LAN access server, allowing up to 672 simultaneous remote users to dial into
the corporate backbone network or ISP network. MAX 2000 and 4000 series units
can be configured with Multiband cards, providing up to 36 high-speed inverse
multiplexing ports for central site videoconferencing, dedicated circuit
backup and disaster recovery, dedicated circuit overflow and load balancing,
high speed bulk file transfer, high quality audio transmission and other
applications. MAX product family features include:
. Wide capacity range from MAX 200+ (8 sessions) to MAX TNT (672
sessions).
. High density digital modem support (72 per MAX 4004; 672 per multi-shelf
MAX TNT).
. Frame relay connectivity via a high speed serial connection (1 X 8Mbps
per MAX 4004; 4 X 53Mbps per MAX TNT), connection to a local frame relay
switch or integrated T1 CSU/DSU (4 X 24 DS0s per MAX 4000; 128 X 24 DS0s
per MAX TNT) access to a remote switch.
. Dynamic Bandwidth Allocation (MP, MPP, BACP) and Inverse Multiplexing
(AIM, BONDING) support facilitates the needs of modern remote access and
videoconferencing environments.
. The TNT can accommodate a full DS3, and has 10/100Mbps Ethernet, HSSI,
FDDI, V.35, POTS, E1/T1/PRI, Digital Modem, Unchannelized T1 redundant
AC or DC power supply and hot-swappable modules.
. Translation of traditional T1/PRI signaling to out-of-band ISDN
signaling for support of voice services offered through a PBX.
. Support of network access from multiple diverse network carriers and
unique hardware provides load-based, circuit-level automatic backup and
overflow accommodation for fault-tolerance.
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. Heterogeneous network access, providing T1, ISDN PRI and ISDN BRI
concurrently in the same device to optimize bandwidth utilization and
cost. Low-bandwidth, low-cost ISDN BRI access lines may be used as
backup for a T1 access line. ISDN BRI may also provide ISDN to the
desktop for desktop videoconferencing.
Ascend has obtained certification for MAX products in approximately 35
countries and has applied for certification in several other countries. Low
and mid-level MAX units generally range in list price from $2,400 to $30,000,
with units fully configured with digital modems ranging up to approximately
$60,000. MAX TNT units generally range in list price from $60,000 for a basic
configuration to $300,000 for a multi-shelf configuration.
GRF
Ascend introduced its first GRF products in September 1996. The GRF family
of high-performance IP switches enables telecommunications carriers and ISPs
to offer cost-effective competitive network access and backbone services. The
GRF's unique architecture combines its Layer-3 switch with intelligent IP
forwarding media cards to deliver scaleable performance up to 10 million
packets per second. The GRF products are equipped to handle the high-bandwidth
requirements of demanding network environments, such as the Internet.
The GRF easily integrates into existing networks using industry-standard LAN
and WAN interfaces. Network designers can place the GRF into their backbone
network to consolidate equipment, increase port density, increase packet
handling and router handling capacity and reduce the cost of ownership.
The GRF family includes the GRF 400 and GRF 1600. Introduced in September
1996, the GRF 400 offers 4 Gb/s bandwidth to support up to four media cards
and forward up to 2.8 million packets per second. Ascend announced its newest
IP switching product, the GRF 1600, in February 1997. The GRF 1600 has 16 Gb/s
bandwidth to support up to 16 media cards and deliver scaleable performance of
up to 10 million packets per second.
GRF IP switch features include:
. Support for industry-standard media types such as HSSI, 10/100 Base-T,
ATM OC3c, IP/SONET OC-3cf, ATM OC-12c, FDDI, CDDI and HPPI.
. Quick Branch Routing Technology ("QBRT") for hardware-assisted full
route table lookup of up to 150,000 routes in less than 2.5
microseconds.
. Full suite of routing protocols including multicast, BGP3/4 and IS-IS.
. High-availability features including redundant load-balancing power
supplies, redundant load-balancing fans (GRF 1600), hot swappable media
cards and remote access and reboot.
The GRF 400 is now available with a base unit price of approximately
$15,650. The GRF 1600 base unit is scheduled to be available in North America
in the second quarter of 1997 at a starting price of approximately $32,000.
Media cards for the GRF 400 and GRF 1600 are currently available at prices
ranging from $13,500 to $25,000. A typical system configuration is $96,000.
Pipeline and NetWarp
Ascend introduced its first Pipeline products in late 1993. Sales of
Pipeline products accounted for approximately 12%, 20% and 10% of Ascend's net
sales in 1996, 1995 and 1994, respectively. The Pipeline product family
provides access equipment for remote office, telecommuting, SOHO and Internet
access. Pipeline products incorporate standards-based LAN routing and bridging
protocols transmitted over switched or dedicated digital services, and include
inverse multiplexing functionality to allow users to obtain higher data rates
than are available from individual digital access lines and switched digital
circuits.
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Pipeline products support the major types of digital access lines and
provide interoperability between different access line types. Certain of the
Pipeline features enabling remote LAN access include:
. Security protocols such as Challenge Handshake Authentication Protocol
("CHAP"), Password Authentication Protocol ("PAP") and UNIX Syslog.
Security protocols are crucial to ensure the integrity of the backbone
network.
. Support of additional security capabilities including call-back and
filtering on a per-caller basis.
. Packet-level inverse multiplexing for greater performance than can be
obtained over single channel connections.
. Support for key encapsulation protocols including Point-to-Point
Protocol ("PPP") and Multilink PPP ("MP") and Ascend's and other
companies' proprietary encapsulation protocols.
. Support for data compression over WANs for improved performance.
. Support of protocol spoofing to minimize connect-time costs over the WAN
and to maximize remote site performance.
. Call Detail Recording ("CDR") for billing and monitoring purposes.
. Filter-based call establishment and termination to ensure that
connections are active only for the duration required for the
application.
. Telnet and SNAP network management capabilities.
Members of the Pipeline product family include the low-end Pipeline 25-PX
and Pipeline 25-FX, the mid-range Pipeline 50 and Pipeline 75, and the
Pipeline 130, which may be used for high-end remote LAN access or as a small
central site WAN access device. The low-end products in the Pipeline product
family are targeted at the telecommuting and Internet access market and are
designed for the less technically sophisticated user. Ascend distributes these
products through channels targeted at such users. These products have yielded
lower gross margins than Ascend's other products. Ascend has obtained
certification for Pipeline products in approximately 30 countries and has
applied for certification in several other countries. Pipeline 25-PX units
generally range in list price from $595 to $695. Pipeline 50 units generally
range in list price from $895 to $1,695 and Pipeline 130 units generally range
in list price from $1,895 to $1,995.
In late 1996, to enhance its offerings in the remote LAN and Internet access
market, Ascend introduced the NetWarp product family of high performance ISDN
terminal adapters ("TAs"). NetWarp products address the burgeoning market of
home users who want high-speed ISDN access to the Internet. NetWarp products
are designed to address the three primary end-user requirements for ISDN dial-
up: performance, low cost and easy installation. The NetWarp ISDN terminal
adapters support all three Windows environments: Windows 3.x, Windows/NT and
Windows 95. To facilitate installation and ease of set-up, NetWarp products
are plug and play capable and include automatic switch protocol detection to
eliminate error-prone manual configuration required in existing TA-type
products. NetWarp units generally range in list price from $169 to $349.
Multiband
Ascend introduced its first Multiband products in February 1991 and
introduced a cost-reduced product, the Multiband Plus, in May 1992. In 1995,
Ascend introduced the Multiband VSX, a less expensive, reduced functionality
version of its Multiband Plus product. Sales of Multiband products accounted
for approximately 5%, 15% and 58% of Ascend's net sales in 1996, 1995 and
1994, respectively. The Multiband family is focused primarily on
videoconferencing and multimedia applications. This family of bandwidth on
demand controllers provides global bandwidth on demand at speeds from 56
kbit/s to 4 Mbit/s using switched digital services.
The Multiband Plus product supports four simultaneous high-speed digital
connections, connecting to applications using serial ports. The product
incorporates inverse multiplexing, dynamic bandwidth allocation,
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global connectivity and comprehensive management capabilities to allow users
to create bandwidth on demand network solutions primarily for
videoconferencing and multimedia applications. Multiband Remote Port Modules
("RPM") facilitate bandwidth distribution within a facility by extending
serial data ports from Multiband products over unshielded twisted pair wiring
to applications throughout a facility for distances up to 3,400 feet.
Certain of the key Multiband features enabling videoconferencing access
include:
. Inverse multiplexing.
. Support for all major inverse multiplexing standards, including BONDING.
. Remote management capability on all models.
. Integrated SNMP management with direct Ethernet access.
. Support for all major videoconferencing dialing protocols, such as RS-
366, extended Switched Digital Services Applications Forum ("SDSAF"),
V.25 bis and X.21 for international compatibility.
. Support for dual paired ports to interoperate with the installed base of
videoconferencing systems that do not support inverse multiplexing.
. Compatibility with the major brands of videoconferencing equipment.
Ascend has obtained country certifications for Multiband Plus products in
approximately 24 countries and has applied for certification in several other
countries. Multiband VSX units generally range in list price from $1,200 to
$7,500. Multiband Plus units generally range in list price from $7,000 to
$12,000.
TECHNOLOGY
Ascend has developed a core software architecture that is modular and
portable. This software is used throughout all products and runs on three
different hardware microprocessors: Intel 80C188, Intel RISC i960 and Motorola
68xxx. The key capabilities of Ascend's technology are:
WAN Protocol Software. Ascend products connect to and manage wide area
communications for a variety of digital and analog access lines and switched
and leased digital services worldwide. Each digital or analog access line and
digital service has specific connect and disconnect protocols. Ascend's
products support 36 WAN protocols and five wide area digital access
interfaces. These protocols include 20 different ISDN call signaling protocols
worldwide.
Bandwidth Management Software. Ascend's products manage WAN bandwidth over a
variety of digital services, digital access lines and user applications.
Ascend's products support several bandwidth on demand technologies which allow
dynamic changes in bandwidth during a communications session, including Ascend
Inverse Multiplexing ("AIM"), and industry standard inverse multiplexing, such
as BONDING, as well as software data compression.
Remote LAN Access Software. Ascend's products incorporate standards used in
remote LAN access including PPP and MP. Ascend has also developed proprietary
extensions to the standard protocols by optimizing them for remote LAN access.
These include MPP, Ascend's Multipoint Point-to-Point Protocol.
Standards-Based Security. Ascend's products support many standard and
extended methods for providing security and access control for WAN access,
including CHAP, PAP, Extended TACACS, Radius and UNIX Syslog.
Application Specific Software. Ascend's products support a wide variety of
application equipment, such as videoconferencing equipment, routers, T1
multiplexers and PBXs, and a wide variety of application cabling, such as
serial ports and unshielded twisted pair wiring. Ascend's Multiband product
family implements the
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videoconferencing protocol RS-366 and is compatible with videoconferencing
equipment manufactured by Compression Labs, PictureTel, VTEL, British Telecom,
GPT Panasonic and others. In addition, Ascend's products support network
management, remote diagnostics and a wide variety of advanced security
protocols.
MARKETING AND SALES
Ascend's marketing and sales objective is to ensure that subscribers to
network services and users of applications equipment requiring such services
are aware of the capabilities and benefits of Ascend's products. To accomplish
this objective Ascend has developed and maintains marketing and sales
relationships with VARs, distributors, ISPs, major telecommunications carriers
and applications equipment manufacturers who, in turn, market and sell
Ascend's products to end-user customers. Ascend's sales force also sells
products directly to certain end-user customers.
The primary role of Ascend's sales force is to: (i) provide support to the
VARs, distributors, ISPs, telecommunications carriers and applications
equipment manufacturers; (ii) assist ISPs and end-user customers in addressing
complex network and Internet access problems; (iii) differentiate the features
and capabilities of Ascend's products from competitive offerings; and (iv)
continually monitor and understand ISPs' and end-user customers' evolving
needs for network services.
Ascend also has several marketing programs to support the sale and
distribution of its products. The objective of these programs is to inform
VARs, distributors, ISPs, telecommunications carriers, applications equipment
manufacturers and end-user customers about the capabilities and benefits
available with the use of Ascend's remote networking equipment. The programs
include participation in industry trade shows and technical conferences,
design and presentation of technology seminars, publication of customer
newsletters and technical and educational articles for the trade press and
other industry journals and frequent communications with the installed base of
end-user customers regarding evolving applications for Ascend's products.
Internet Service Providers
Ascend's MAX and Pipeline products are sold through its direct, VAR and
distributor channels to ISPs. Ascend has relationships with many major ISPs
worldwide, including UUNET, PSI, BBN, MCI, Demon Internet (UK) and IIJ
(Japan). UUNET, which first commenced volume purchases of Ascend's products in
1995, accounted for approximately 7% and 11% of net sales in 1996 and 1995,
respectively.
Value-Added Resellers and Distributors
In North America, Ascend employs a two-tier reseller channel strategy. As
part of this strategy, Ascend maintains contractual relationships with and
sells its products to VARs and end-users around the world through three large
distributors: Merisel, Ingram and Tech Data. In addition, Ascend has entered
into non-exclusive agreements with approximately 87 premier VARs to sell and
service Ascend's products. The terms of the agreements generally are for
periods not in excess of 12 months, subject to annual renewals and earlier
termination by either party with prior notice. VARs and distributors are
entitled to periodically return unsold inventory to Ascend. Returns are
subject to a maximum limit and may be subject to a minimum restocking
requirement. To date such inventory returns have not been material.
Telecommunications Carriers
Ascend's products are sold and serviced by major telecommunications carriers
around the world, including AT&T, Sprint, MCI, GTE, Pacific Bell, Southwestern
Bell, U.S. West, Ameritech, British Telecom, France Telecom, Deutsche Telekom
and NTT in Japan. Sales to telecommunications carriers are made on open
account and are subject to Ascend's standard terms and conditions of sale.
Certain of the telecommunications carriers are entitled to periodically
exchange unsold inventory for other products offered by Ascend, subject to a
maximum exchange limit and subject to a minimum restocking requirement for
returned inventory. To date, such inventory exchanges have not been material.
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Applications Equipment Manufacturers
Ascend's products are also sold and serviced by several applications
equipment manufacturers, including Lucent Technologies, Inc. ("Lucent"),
Northern Telecom, Inc., Alcatel and NEC. Under its agreement with Lucent,
Ascend provides its Multiband, MAX and Pipeline products for resale by Lucent
under the Lucent label. Lucent may, at any time, cancel orders for product
delivery which it has placed with Ascend, subject to the payment of specified
minimum amounts. In addition, Ascend has entered into agreements with
applications equipment manufacturers and integrators of videoconferencing
equipment, including Compression Labs, PictureTel, VTEL and Panasonic, which
authorize these companies to resell Ascend's products using Ascend's
identification label. These videoconferencing applications equipment
manufacturers are not obligated to purchase minimum volumes of product, and
they may cancel orders placed with Ascend at any time prior to scheduled
payment.
North American Sales and Marketing Organization
As of December 31, 1996, Ascend's North America sales and marketing
organization included 265 individuals, including managers, sales
representatives, and technical and administrative support personnel. Ascend
has 44 sales offices located in the following metropolitan areas: Atlanta,
Boston, Chicago, Cincinnati, Cleveland, Columbus, Durham, Dallas, Denver,
Hartford, Houston, Indianapolis, Kansas City, Los Angeles, Minneapolis, New
York, Orlando, Phoenix, Portland, Providence, Salt Lake City, San Francisco,
Seattle, St. Louis, Tampa, Toronto, Vancouver and Washington D.C. Ascend
intends to continue to recruit highly trained individuals for its North
America sales organization.
International Sales
Ascend's international sales have been principally export sales and
currently are made through approximately 200 telecommunications carriers,
ISPs, VARs and distributors servicing approximately 50 countries, including
Japan, Germany, the United Kingdom, France, Sweden, Belgium, Italy, Spain,
Hong Kong, Australia, Singapore, Korea, Taiwan and China. The carriers, VARs
and distributors generally provide system installation, technical assistance
and support to end-user customers within their area of responsibility.
Generally, international telecommunications carriers, VARs and distributors
have non-exclusive rights to sell and market Ascend's products within their
respective countries.
As of December 31, 1996, Ascend's international sales organization included
101 individuals, including managers, sales representatives and technical and
administrative support personnel. Ascend has sales offices in the United
Kingdom, Germany, France, Belgium, Japan, Hong Kong, Singapore and Australia.
International sales accounted for approximately 48%, 29% and 20% of net
sales in 1996, 1995 and 1994, respectively. International sales are made in
United States dollars and are subject to government controls and other risks
associated with international business activities. See "Risk Factors--
International Sales." To date, Ascend has not experienced any material
difficulties or interruptions with respect to its international business
activities.
TECHNICAL ASSISTANCE AND SUPPORT
A high level of continuing technical assistance and support is important to
Ascend's objective of developing long-term relationships with customers. The
majority of these technical assistance and support activities are related to
installations and network configuration issues and are primarily provided by
third parties distributing Ascend's products. Ascend supports its sales
personnel and customers by providing telephone support and remote access to
customer installations through Ascend's Technical Assistance Centers in
Alameda, California and Sophia Antipolis, France. Remote access is
accomplished either through a digital dial-up network connection directly to a
customer's installation or through a modem connection to the control port of
the customer's system. The connection allows Ascend's technical support
personnel to remotely analyze and correct software, installation and
configuration problems. Ascend also offers on-site installation and technical
assistance for fixed fees, which to date have not been significant.
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Ascend's products have standard warranties of up to 12 months. Ascend has a
variety of comprehensive and flexible hardware and software maintenance and
support programs available for products no longer under warranty, with
services ranging from time and materials remote service support to 24-hour on-
site support, depending on the end-user customer preference. Ascend also
offers various training courses for its third party resellers and end-user
customers. To date, revenues attributable to customer service, support and
training services have not been significant.
RESEARCH AND DEVELOPMENT
Ascend believes that its future success depends in part on its ability to
continue to enhance its existing products and to develop new products that
maintain technological competitiveness. Ascend also believes its product
development activities should be directed at solving the practical needs of
its customers. Ascend monitors changing customer needs and works closely with
users of network access products, including ISPs, telecommunications carriers,
applications equipment manufacturers, VARs and distributors, end-user
customers and market research organizations to monitor changes in the
marketplace. Ascend intends to remain dedicated to industry standards and to
continue to support emerging WAN protocol standards and carrier services.
Ascend's software and hardware architecture is modular in design,
facilitating a relatively short product design and development cycle and
reducing the time to market for new products and features. Ascend has utilized
this architectural design to develop and introduce numerous product models and
enhancements since the introduction of its first products in 1991. Ascend
intends to continue to utilize this architectural design to develop and
introduce additional products and enhancements in the future.
Ascend and its major customers test new products prior to their general
commercial availability. Ascend conducts both internal testing and beta
testing with selected customers. To date, Ascend has not experienced any
material product returns or software or hardware defects.
Ascend has expanded its research and development expertise by acquiring key
technologies and core competencies through mergers with and acquisitions of
public and private companies in the networking industry. In 1997, Ascend
acquired InterCon, a leading developer of client software products for both
the corporate and ISP markets, and Whitetree, a developer and manufacturer of
high-speed switching products. In December 1996, Ascend acquired StonyBrook, a
developer of network management software. In August 1996, Ascend acquired
NetStar, a developer and manufacturer of high performance, high speed IP
network switches. In August 1996, Ascend acquired Subspace, a developer of PC-
based data and telecommunications products for the home and small office
environments. In March 1996, Ascend acquired Morning Star, a developer of
network routing software and advanced network security products.
Ascend is currently undertaking development efforts for each of its product
families. MAX development efforts include improving network access and network
management capabilities as well as improving price/performance. Pipeline
development efforts include digital and analog integration, support of
additional WAN protocols and cost reduction engineering. Multiband development
efforts include integration of emerging multimedia access applications such as
multimedia banking, telemedicine and distance learning as well as improving
price/performance.
Schedules for high technology products are inherently difficult to predict,
and there can be no assurance that Ascend will achieve its scheduled first
customer shipment dates. Also, there can be no assurance that Ascend's product
development efforts will result in commercially successful products, or that
Ascend's products will not be rendered obsolete by changing technology or new
product announcements by other companies.
Ascend's research and development expenditures were $40.3 million, $12.4
million and $6.1 million in 1996, 1995 and 1994, respectively. Research and
development expenditures are expensed as incurred. At December 31, 1996, 210
full-time employees were engaged in research and development. During 1996,
Ascend added development facilities in Columbus, Ohio; Fremont, California;
Minneapolis, Minnesota; and Bohemia, New York.
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COMPETITION
The market for remote networking systems is highly competitive and subject
to rapid technological change. Ascend expects competition to persist and
increase in the future. Ascend's current competitors can be divided into four
groups: manufacturers of WAN and Internet access equipment, manufacturers of
high speed switching equipment for backbone networks, manufacturers of remote
LAN and Internet subscriber access equipment and manufacturers of bandwidth on
demand products addressing the needs of the videoconferencing and multimedia
market.
In the WAN and Internet access market, Ascend's primary competitors are
Cisco, U.S. Robotics and Shiva. Cisco and 3Com have substantially greater
financial, marketing and technical resources than Ascend. 3Com recently
entered into an agreement to acquire U.S. Robotics. In the WAN and Internet
backbone switching market, Ascend's primary competitor is Cisco. In the remote
LAN access and Internet subscriber access market, competition is widespread,
although few companies have positioned their products specifically as digital
bandwidth on demand network access systems. Ascend's primary competitors in
this market are Gandalf, Cisco, Shiva and 3Com. In the videoconferencing and
multimedia access market, competitors include Teleos Communications (a
subsidiary of Madge), Adtran and Promptus Communications (a subsidiary of
GTI).
Competitive factors in the remote networking market include core technology,
breadth of product features, scalability of products, product quality and
functionality, pricing, marketing and distribution resources, international
certifications and technical service and support. Ascend believes it presently
competes favorably with respect to each of these factors and is positioned to
respond to anticipated competitive actions.
Competitive factors in the high speed switching market include support for
standards-based protocols, the need for multiple interfaces, the ability to
handle the size and dynamic nature of the Internet addressing infrastructure,
and throughput measured in packets per second. Ascend believes it presently
competes favorably with respect to each of these factors and is positioned to
respond to anticipated competitive actions.
Ascend expects additional competition from existing competitors and from a
number of other companies that may enter Ascend's existing and future markets.
The additional competition could adversely affect Ascend's business, results
of operations and financial condition. Some of Ascend's current and potential
competitors have substantially greater financial, marketing and technical
resources than Ascend.
MANUFACTURING AND QUALITY
Ascend has received the International Standard Organization ("ISO") 9001
certification for quality. Ascend's manufacturing operations consist primarily
of materials planning and procurement, final assembly, burn-in, final system
testing and quality control. Ascend designs all of the hardware sub-assemblies
for its products and uses the services of contract manufacturers to build
these sub-assemblies and certain of its products to Ascend's specifications.
Ascend presently uses a variety of independent third party contract assembly
companies to perform printed circuit board assembly and in-circuit testing.
Ascend installs its proprietary software into the electronically erasable
programmable read only memory ("EEPROM") of its systems in order to configure
products to meet customer needs and to maintain quality control and system
security. The manufacturing process enables Ascend to configure the hardware
and software in combinations to meet a wide variety of individual customer
requirements. Ascend uses automated testing equipment and burn-in procedures,
as well as comprehensive inspection, testing and statistical process control
testing by technicians, to assure the quality and reliability of its products.
To date, Ascend has not experienced significant product defects or customer
returns of products.
Although Ascend generally uses standard parts and components for its
products, certain components, including certain key microprocessors and
integrated circuits, are presently available only from a single source or from
limited sources. Ascend has no supply commitments from its vendors and
generally purchases components on a purchase order basis as opposed to
entering into long term procurement agreements with vendors. Ascend has
generally been able to obtain adequate supplies of components in a timely
manner from
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current vendors or, when necessary to meet production needs, from alternate
vendors. Ascend believes that, in most cases, alternate vendors can be
identified if current vendors are unable to fulfill needs. However, delays or
failure to identify alternate vendors, if required, or a reduction or
interruption in supply or a significant increase in the price of components
could adversely affect Ascend's revenues and financial results and could
adversely impact customer relations.
Ascend increased its manufacturing capacity in 1996, 1995 and 1994 by adding
additional facilities and personnel and will continue to increase its
manufacturing capacity as needed. Ascend's financial results could be
adversely affected if it encounters delays or for any other reason does not
expand manufacturing capacity as required.
PROPRIETARY RIGHTS
Ascend's success and ability to compete is dependent in part upon its
proprietary technology, although Ascend believes that its success is more
dependent upon its technical expertise than its proprietary rights. Ascend
relies on a combination of patent, copyright and trade secret laws and non-
disclosure agreements to protect its proprietary technology. Ascend generally
enters into confidentiality or license agreements with its employees,
distributors, customers and potential customers and limits access to its
software, documentation and other proprietary information. There can be no
assurance that the steps taken by Ascend in this regard will be adequate to
prevent misappropriation of its technology or that Ascend's competitors will
not independently develop technologies that are substantially equivalent or
superior to Ascend's technology. In addition, the laws of some foreign
countries do not protect Ascend's proprietary rights to the same extent as do
the laws of the United States. Ascend is also subject to the risk of adverse
claims and litigation alleging infringement of the intellectual property
rights of others. From time to time Ascend has received claims of infringement
of other parties' proprietary rights. There can be no assurance that third
parties will not assert infringement claims in the future with respect to
Ascend's current or future products or that any such claims will not require
Ascend to enter into license arrangements or result in protracted and costly
litigation, regardless of the merits of such claims. No assurance can be given
that any necessary licenses will be available or that, if available, such
licenses can be obtained on commercially reasonable terms.
EMPLOYEES
As of December 31, 1996, Ascend employed 721 persons, including 366 in sales
and marketing, 83 in manufacturing, 210 in engineering and 62 in finance and
administration. Of these, 88 were employed outside of North America. None of
Ascend's employees is represented by a labor union. Ascend has experienced no
work stoppages and believes its relationship with its employees is good.
Ascend's success depends to a significant degree upon the continuing
contributions of its key management, sales, marketing and product development
personnel. Ascend does not have employment contracts with its key personnel
and does not maintain any key person life insurance policies. The loss of key
management or technical personnel could adversely affect Ascend.
Ascend is currently experiencing rapid growth and expansion, which has
placed, and will continue to place, a significant strain on its
administrative, operational and financial resources and increased demands on
its systems and controls. This growth has resulted in a continuing increase in
the level of responsibility for both existing and new management personnel.
Ascend anticipates that its continued growth will require it to recruit and
hire a substantial number of new engineering, sales, marketing and managerial
personnel. There can be no assurance that Ascend will be successful at hiring
or retaining these personnel. Ascend's ability to manage its growth
successfully will also require Ascend to continue to expand and improve its
operational, management and financial systems and controls and to expand its
manufacturing capacity. If Ascend's management is unable to manage growth
effectively, Ascend's business, results of operations and financial condition
may be materially and adversely affected.
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PROPERTIES
Ascend's principal administrative, engineering, manufacturing, marketing and
sales facilities total approximately 250,000 square feet and are located in
four buildings in Alameda, California. Ascend occupies its current facilities
under leases which expire at various dates through December 2001. In addition,
Ascend leases sales offices and development centers in the metropolitan areas
of Atlanta, Boston, Chicago, Cincinnati, Cleveland, Columbus, Durham, Dallas,
Denver, Hartford, Houston, Indianapolis, Kansas City, Los Angeles,
Minneapolis, New York, Orlando, Phoenix, Portland, Providence, Salt Lake City,
San Francisco, Seattle, St. Louis, Tampa, Toronto, Vancouver and Washington
D.C. Ascend expects that it will require additional facilities over the next
few years, and Ascend believes that additional space will be available.
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial information of Ascend is
qualified by and should be read in conjunction with Ascend's consolidated
financial statements and notes thereto included elsewhere in this Joint Proxy
Statement/Prospectus. The consolidated statement of operations data for the
years ended December 31, 1996, 1995 and 1994 and the balance sheet data as of
December 31, 1996 and 1995 set forth below are derived from the consolidated
financial statements included elsewhere in this Joint Proxy
Statement/Prospectus. The consolidated statement of operations data for the
years ended December 31, 1993 and 1992 and the consolidated balance sheet data
as of December 31, 1994, 1993 and 1992 are derived from audited consolidated
financial statements which are not included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net sales........................ $549,297 $152,604 $39,655 $16,215 $ 7,236
Cost of sales.................... 192,226 53,296 13,387 5,587 3,439
-------- -------- ------- ------- -------
Gross profit................... 357,071 99,308 26,268 10,628 3,797
Operating expenses:
Research and development....... 40,291 12,400 6,139 3,092 2,480
Sales and marketing............ 111,599 35,447 11,409 5,790 4,305
General and administrative..... 16,745 9,129 3,569 2,208 1,214
Purchased research and
development................... -- 3,032 -- -- --
Costs of merger................ 13,900 -- -- -- --
-------- -------- ------- ------- -------
Total operating expenses..... 182,535 60,008 21,117 11,090 7,999
-------- -------- ------- ------- -------
Operating income (loss).......... 174,536 39,300 5,151 (462) (4,202)
Interest, net.................... 11,879 5,122 969 97 138
-------- -------- ------- ------- -------
Income (loss) before income
taxes........................... 186,415 44,422 6,120 (365) (4,064)
Provision (benefit) for income
taxes........................... 73,304 16,887 (430) -- --
-------- -------- ------- ------- -------
Net income (loss)................ $113,111 $ 27,535 $ 6,550 $ (365) $(4,064)
======== ======== ======= ======= =======
Net income (loss) per share...... $ 0.89 $ 0.25 $ 0.07 $ 0.00 $ (0.34)
======== ======== ======= ======= =======
Number of shares used in per
share calculation............... 127,809 111,362 94,583 83,117 12,051
======== ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital...................... $467,883 $262,750 $46,107 $10,578 $ 8,037
Total assets......................... 651,866 370,014 60,857 15,362 11,041
Total stockholders' equity........... 547,450 324,987 50,675 12,122 9,100
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Ascend develops, manufactures, markets, sells and supports a broad range of
high-speed integrated remote networking products that enable its customers to
build: (i) Internet access systems consisting of POP termination equipment for
ISPs and remote site Internet access equipment for Internet subscribers; (ii)
high speed IP switches for application in telecommunications carriers and ISP
backbone networks; (iii) extensions and enhancements to corporate backbone
networks that facilitate access to these networks by remote offices,
telecommuters and mobile computer users; and (iv) videoconferencing and
multimedia access facilities. These products support existing digital and
analog networks. Net sales have increased due to the market acceptance of MAX
and Pipeline products and continuing acceptance of the Multiband product
family, and due to the expansion of Ascend's domestic and international
distribution network.
Ascend acquired four companies in the year ended December 31, 1996. In
December 1996, Ascend acquired StonyBrook, a developer of network management
software. In August 1996, Ascend acquired NetStar, a developer and
manufacturer of high performance, high speed IP network switches, and
Subspace, a manufacturer of PC-based data and telecommunications products for
the home and small office environments. In March 1996, Ascend acquired Morning
Star, a manufacturer of network routing software and advanced network security
products. In addition, in 1997 Ascend acquired InterCon, a leading developer
of client software products for both the corporate and ISP markets and
Whitetree, a developer and manufacturer of high speed switching products.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
net sales represented by certain line items from Ascend's consolidated
statements of income:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales..................................................... 100% 100% 100%
Cost of sales................................................. 35 35 34
--- --- ---
Gross profit................................................ 65 65 66
Operating expenses:
Research and development.................................... 7 8 15
Sales and marketing......................................... 20 23 29
General and administrative.................................. 3 6 9
Purchased research and development.......................... - 2 -
Costs of merger............................................. 3 - -
--- --- ---
Total operating expenses.................................. 33 39 53
--- --- ---
Operating income.............................................. 32 26 13
Interest, net................................................. 2 3 2
--- --- ---
Income before income taxes.................................... 34 29 15
Provision (benefit) for income taxes.......................... 13 11 (1)
--- --- ---
Net income.................................................... 21% 18% 16%
=== === ===
</TABLE>
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Net Sales. Net sales for 1996 increased 260% to $549.3 million as compared
to $152.6 million in 1995, which increased 285% from $39.7 million in 1994.
International sales (sales outside of North America) increased to $261.4
million in 1996 as compared to $43.9 million in 1995 and to $7.9 million in
1994 and accounted for 48%, 29% and 20% of net sales in 1996, 1995 and 1994,
respectively.
80
<PAGE>
The growth in net sales during 1996 and 1995 was attributable primarily to
an increase in unit shipments as a result of market acceptance of Ascend's MAX
and Pipeline product families and the expansion of the domestic and
international distribution network. The increase in unit shipments of the MAX
family of products was primarily attributable to the growth in business from
ISPs and increased demand for corporate WAN access applications. The MAX
product family accounted for approximately 82% of net sales in 1996 as
compared to approximately 63% in 1995 and approximately 26% in 1994. The
Pipeline product family accounted for approximately 12% of net sales in 1996
as compared to approximately 20% of net sales in 1995, but increased in
absolute dollars for the same time period. The Pipeline product family
accounted for approximately 10% of net sales in 1994. The increase in net
sales of the Pipeline family of products from 1994 to 1996 was principally due
to growth in Ascend's VAR and distributor channels and increased demand for
remote and Internet access products by end-user customers. Net sales of
Ascend's Multiband products accounted for approximately 5% of net sales in
1996 compared to approximately 15% of net sales in 1995 and approximately 58%
of net sales in 1994. The decreases in Multiband net sales as a percentage of
total net sales were due to the rapid increase in sales of Ascend's MAX and
Pipeline products.
In North America, Ascend relies on third party distribution channels,
including VARs and distributors, major telecommunications carriers and
applications equipment manufacturers for a substantial portion of its net
sales. Sales to these third party distribution channels accounted for
approximately 31%, 48% and 64% of Ascend's net sales in 1996, 1995 and 1994,
respectively. AT&T, a telecommunications carrier, accounted for approximately
3%, 5% and 15% of net sales in 1996, 1995 and 1994, respectively. Also, UUNET,
an ISP that first commenced volume purchases of Ascend's products in 1995,
accounted for approximately 7% and 11% of net sales in 1996 and 1995,
respectively. International sales (sales outside of North America) are made
through telecommunications carriers, ISPs, VARs and distributors, and
accounted for 48%, 29% and 20% of net sales in 1996, 1995 and 1994,
respectively. There can be no assurance that sales to these entities or any of
Ascend's other customers will remain at or exceed historical levels in any
future period.
Gross Margin. Gross margin was 65% for 1996 and 1995 compared to 66% for
1994. The decrease in gross margin between 1994 and 1995 was primarily due to
increased unit shipments of the Pipeline family of products which has a lower
gross margin than the Multiband and MAX products. In the past, gross margins
have been affected by the mix of products sold and the mix of distribution
channels used by Ascend. In the future, Ascend's gross margins may be affected
by several factors, including the mix of products sold, the price of products
sold, the introduction of new products with lower gross margins, the
distribution channels used, price competition, increases in material costs and
changes in other components of cost of sales.
Research and Development. Research and development expenses increased to
$40.3 million in 1996 compared to $12.4 million in 1995 and $6.1 million in
1994. These increases were primarily due to the addition of engineering
personnel, payments for consulting services in connection with developing and
enhancing Ascend's existing and new products and payments for consulting
services related to filing applications and product testing required to obtain
governmental approvals to resell Ascend's products outside of North America.
In 1996, research and development expenses increased in part through the
addition of engineering personnel as a result of Ascend's mergers and
acquisitions. Research and development expenses as a percentage of net sales
decreased to 7% in 1996 from 8% in 1995 and 15% in 1994, primarily due to
increased net sales. Ascend expects that spending for research and development
will increase in absolute dollars in 1997 but may continue to vary as a
percentage of net sales.
Sales and Marketing. Sales and marketing expenses were $111.6 million, $35.4
million and $11.4 million for 1996, 1995 and 1994, respectively. These
increases in expenses were primarily due to the addition of sales, marketing
and technical support personnel, increased commissions, expenditures for
demonstration and loaner equipment used by customers and expenses associated
with opening additional sales offices in North America, Europe and Asia and
the Pacific Basin. The growth in sales, marketing and technical support
personnel was primarily due to the need to manage the activities of an
increased number of VARs, distributors, end-user customers and to the
introduction of several new products. Sales and marketing expenses as a
percentage of net sales, however, decreased to 20% in 1996 from 23% in 1995
and 29% in 1994, primarily due to increased net
81
<PAGE>
sales. Ascend expects that sales and marketing expenses will increase in
absolute dollars in 1997 but may continue to vary as a percentage of net
sales.
General and Administrative. General and administrative expenses increased to
$16.7 million in 1996 as compared to $9.1 million in 1995 and $3.6 million in
1994. These increases were primarily due to the addition of finance and
administrative personnel, bonus compensation paid to Ascend's employees,
increased costs for insurance and contract personnel associated with
information systems service and support, and increased costs associated with
being a public company. General and administrative expenses as a percent of
net sales decreased to 3% in 1996 from 6% in 1995 and 9% in 1994, primarily
due to increased net sales. Ascend expects that spending for general and
administrative activities will increase in absolute dollars in 1997 but may
continue to vary as a percentage of net sales.
Purchased Research and Development. Purchased research and development costs
were $3.0 million for 1995. These costs were for the purchase of technology
and related assets associated with the DaynaLINK product family from Dayna
Communications, Inc. on September 1, 1995. The acquisition provides technology
and expertise that Ascend is using to enhance and expand the functionality of
its MAX family of products.
Costs of Merger. For the year ended December 31, 1996, Ascend charged to
operations one-time merger costs of approximately $13.9 million. These costs
principally related to the acquisition of NetStar during 1996 and consist
primarily of investment banking and professional fees and other direct costs
associated with the merger. Of the $13.9 million in one-time merger costs,
approximately $7.5 million are not deductible for income tax purposes and
approximately $11.5 million have been paid as of December 31, 1996.
Interest Income. Interest income increased to $11.9 million in 1996 compared
to $5.1 million in 1995 and $969,000 in 1994. The increase in interest income
during 1996 and 1995 is due primarily to the investment of proceeds from
Ascend's public offerings of its common stock which were completed in August
1995 and May 1994, proceeds from the exercise of stock options and issuance of
common stock in connection with Ascend's employee and outside director stock
plans and cash from operations.
Provision for Income Taxes. The provision for income taxes for 1996 was
$73.3 million, an effective tax rate of 39.3%, compared to an effective tax
rate of 38% and 0% for 1995 and 1994, respectively. Ascend's effective tax
rate for 1996 was impacted by approximately $7.5 million of non-deductible
one-time merger costs associated with the NetStar, Morning Star, Subspace and
StonyBrook acquisitions. Ascend's effective tax rate of 38% for the year ended
December 31, 1995 approximates the net effective statutory federal and state
rates adjusted for tax exempt interest income and the tax benefits associated
with Ascend's Foreign Sales Corporation. The provision for income taxes for
1994 reflects the utilization of Ascend's net operating loss carryforwards,
which were substantially utilized as of December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, Ascend's principal sources of liquidity included
$408.9 million of cash and cash equivalents, short-term investments and
investments and an unsecured $15.0 million revolving line of credit which
expires in November 1997. There were no borrowings under the line of credit in
1996. The increase in cash and cash equivalents of $66.9 million for 1996 was
principally due to $103.6 million of proceeds from, and tax benefits related
to, the exercise of stock options and issuance of common stock in connection
with Ascend's employee and outside director stock plans and by $54.5 million
of funds provided by operations, offset by $89.1 million of funds used in
investment activities and $2.1 million of repayment of notes payable. The net
cash provided by operating activities for 1996 was primarily due to net income
and increases in accounts payable, accrued liabilities and accrued
compensation and related liabilities offset by increases in accounts
receivable, inventories and other assets.
Net cash used in investing activities of $89.1 million for 1996 related
primarily to expenditures for furniture, fixtures and equipment of $38.7
million and net purchases of investments of $52.6 million. Financing
activities
82
<PAGE>
provided $101.5 million for 1996, primarily due to $103.6 million of proceeds
from, and tax benefits related to, the exercise of stock options and issuance
of common stock in connection with Ascend's employee and outside director
stock plans less $2.1 million used to repay notes payable.
At December 31, 1996, Ascend had $467.9 million in working capital. Ascend
currently has no significant capital commitments other than commitments under
facilities and operating leases. Ascend believes that its available sources of
funds and anticipated cash flow from operations will be adequate to finance
current operations, anticipated investments and capital expenditures for at
least the next 12 months.
MANAGEMENT
Ascend's current directors and executive officers and their ages are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Mory Ejabat........................... 47 President, Chief Executive Officer
and Director
Robert K. Dahl........................ 56 Vice President, Finance, Chief
Financial
Officer, Secretary and Director
Curtis N. Sanford..................... 38 Senior Vice President,
International Sales and General
Manager of International
Operations
Michael Hendren....................... 50 Senior Vice President, North
America Sales
Anthony Stagno........................ 56 Vice President, Manufacturing
Michael J. Johnson.................... 44 Controller and Chief Accounting
Officer
Jeanette Symons....................... 34 Executive Vice President, Advanced
Products and Technology Group and
Chief Technical Officer
Bernard Schneider..................... 40 Vice President, Strategic Business
Development
William H. Kind....................... 42 Vice President, Engineering
Maureen Lawrence...................... 48 Vice President, Marketing
Betsy S. Atkins(1).................... 43 Director
Roger L. Evans(2)..................... 51 Director
C. Richard Kramlich(1)................ 61 Director
James P. Lally(2)..................... 51 Director
Martin Schoffstall.................... 37 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Mr. Ejabat joined Ascend in January 1990 as Vice President, Operations, and
he served in this capacity until December 1992. From December 1992 until March
1994, he served as Executive Vice President. From March 1994 until June 1995,
he served as President, Chief Operating Officer and a director of Ascend.
Since June 1995, he has served as President, Chief Executive Officer and a
director of Ascend. From January 1979 to
June 1989, Mr. Ejabat was employed by Micom Systems, Inc., a data
communications equipment manufacturer, where he served in various management
capacities, including Vice President for Wide Area Communications Products and
Vice President of Development and Operations.
Mr. Dahl joined Ascend in January 1994 as Vice President, Finance and Chief
Financial Officer. He has served as a director of Ascend since July 1995. From
May 1991 to December 1993, Mr. Dahl was a private investor and a principal in
Dahl-De Vivo Management Co., a private investment firm. From January 1991 to
May 1991, he was employed as Executive Vice President and Chief Financial
Officer for Digital Microwave Corporation. From January 1988 to December 1990,
Mr. Dahl was Senior Vice President, Chief Financial Officer and a member of
the Board of Directors of American President Cos., Ltd., a diversified
transportation company.
83
<PAGE>
From July 1986 to December 1987, he was employed by Ungermann-Bass, Inc., a
networking equipment supplier, as Executive Vice President and Chief Financial
Officer and also served as a member of its Board of Directors. From June 1979
to July 1986, he was employed as Vice President and Chief Financial Officer of
ROLM Corporation, a manufacturer of customer premises communications
equipment.
Mr. Sanford joined Ascend in January 1990 as Vice President, International.
From January 1993 until May 1994 he served as Vice President, Worldwide
Marketing and International Sales. From May 1994 to December 1995 he served as
Vice President, International Sales. Since December 1995, he has served as
Senior Vice President, International Sales and General Manager of
International Operations. From June 1980 to December 1989, Mr. Sanford was
employed by BBN Communications Corporation, a data communications equipment
manufacturer, and was Director, Far East Operations at the end of his
employment there.
Mr. Hendren joined Ascend in May 1994 as Vice President, North American
Sales. Since December 1995, he has served as Senior Vice President, North
America Sales. From January 1990 to April 1994, Mr. Hendren was employed by
ACC Corp., a communications equipment manufacturer, and was Vice President of
Sales at the end of his employment there.
Mr. Stagno joined Ascend in January 1992 as Director, Quality Assurance, and
since July 1994 has served as Vice President, Manufacturing. From November
1989 to December 1991, Mr. Stagno was employed by MiniMed Technologies, an
electronic medical instruments manufacturer, and was Director, Quality
Assurance at the end of his employment there.
Mr. Johnson joined Ascend in May 1994 as Controller and Chief Accounting
Officer. From December 1992 to May 1994, Mr. Johnson was Vice President of
Finance and Chief Financial Officer for Skylawn Corporation. From October 1990
to November 1992, he was employed as Controller and Chief Accounting Officer
for Itel Rail Corporation, a rail car leasing, maintenance, and transportation
company. From July 1987 to September 1990, Mr. Johnson was Vice President and
Chief Financial Officer of the Oakland Tribune, Inc., a newspaper publisher.
From May 1981 to June 1987, he was employed as Controller of Baron Data
Systems, Inc., a computer software and equipment manufacturer.
Ms. Symons is a co-founder of Ascend and served as Director of Engineering
from Ascend's inception until March 1994. From March 1994 to June 1995, Ms.
Symons served as Assistant Vice President, Engineering. From June 1995 to
January 1997 she served as Vice President, Engineering and Chief Technical
Officer. Since January 1997, she has served as Executive Vice President,
Advanced Products and Technology Group and Chief Technical Officer. From
October 1983 to December 1988, she was employed as an engineer by Hayes
Microcomputer Products, Inc., a data communications equipment manufacturer.
Mr. Schneider joined Ascend in June 1995 as Vice President, Marketing and
served in this capacity until July 1996. Since July 1996, Mr. Schneider has
served as Vice President, Strategic Business Development. From July 1990 to
June 1995, Mr. Schneider was Director of Data Product Management of Sprint
Corp., a telecommunications equipment provider. From October 1983 to July
1990, Mr. Schneider was Director, Telecommunications for United Stationers, an
office products company.
Mr. Kind joined Ascend in October 1996 as Vice President, Engineering. From
October 1995 to October 1996, Mr. Kind was Senior Director of Engineering at
Cisco. From October 1985 to June 1995, Mr. Kind served in various senior
engineering management positions in the Networking Division of Hewlett Packard
in Roseville, California.
Maureen Lawrence joined Ascend in early April 1997 as Vice President,
Marketing following Ascend's acquisition of Whitetree. From January 1994 until
March 1997, Ms. Lawrence served as the President and Chief Executive Officer
of Whitetree. Before joining Whitetree, she was Vice President and General
Manager of the Adaptive Division of N.E.T., an early developer of ATM
technology. Prior to N.E.T., Ms. Lawrence spent a year at the venture capital
firm Institutional Venture Partners, where she was responsible for analyzing
potential communications investments. In addition, Ms. Lawrence has served as
Vice President of Marketing and Service for Vitalink Communications, a
provider of wide-area internetworking products, and Vice President of
Marketing for Chipcom Corporation.
84
<PAGE>
Ms. Atkins has served as a director of Ascend since August 1989. Ms. Atkins
was President and Chief Executive Officer of Nellson Candies, Inc. from 1990
to 1993. From August 1989 to January 1990, she was Vice President of Marketing
and Sales for Ascend. From 1987 to 1988, she was Vice President of Marketing
for Unisys Corporation, a computer manufacturer.
Mr. Evans has served as a director of Ascend since April 1989. Mr. Evans has
been a special limited partner of Greylock Capital Limited Partnership, a
venture capital partnership, and a member of the management of Greylock
Management Corporation, the service organization to the Greylock venture
capital partnerships, since 1989, and has been a general partner of Greylock
Limited Partnership since 1991, of Greylock Equity Limited Partnership since
1994, and Greylock IX Limited Partnership since early 1997. From October 1988
until joining Greylock, Mr. Evans was a consultant. From 1985 until October
1988, he served as President and Chief Executive Officer of Micom Systems,
Inc., a manufacturer of data communications equipment. Mr. Evans also serves
on the Board of Directors of HNC Software, Inc.
Mr. Kramlich has served as a director of Ascend since February 1990. Mr.
Kramlich has been a general partner of New Enterprise Associates, a venture
capital firm, since June 1978. Mr. Kramlich also serves on the Board of
Directors of Chalone, Inc., Macromedia, Inc., Neopath, Inc., Silicon Graphics,
Inc., SyQuest Technology, Inc., Lumisys, Inc. and Graphix Zone, Inc.
Mr. Lally has served as a director of Ascend since April 1989. Mr. Lally has
been a general partner at Kleiner Perkins Caufield & Byers, a venture capital
firm, since September 1981. Mr. Lally also serves on the Board of Directors of
Visioneer, Inc.
Mr. Schoffstall has served as a director of Ascend since June 1996. Mr.
Schoffstall is a founder of Epicenter, Inc., an Internet gaming company, and
has served as its President and Chairman of the Board of Directors since its
inception in April 1996. Mr. Schoffstall is a co-founder of PSINet Inc.
("PSINet"), an Internet access and service provider, and served as PSINet's
Senior Vice President from February 1995 to April 1996 and as director and
Chief Technical Officer of PSINet from its inception in 1988 to April 1996.
Mr. Schoffstall also served as Vice President and Treasurer of PSINet from
1988 to February 1995. Prior to forming PSINet, Mr. Schoffstall was co-founder
and, from 1987 to 1989, served as Vice President for Technology and Marketing,
of NYSERNet (New York State Education and Research Network). Mr. Schoffstall
co-authored the national standard network management software, SNMP.
85
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 31, 1997,
with respect to the beneficial ownership of Ascend Common Stock by (i) each
director of Ascend, (ii) the individuals who served as the Chief Executive
Officer of Ascend in 1996, and the four other highest compensated executive
officers of Ascend whose salary and bonus for the year ended December 31, 1996
exceeded $100,000, (iii) all directors and executive officers of Ascend as a
group, and (iv) each person known by Ascend to own more than 5% of Ascend
Common Stock.
<TABLE>
<CAPTION>
SHARES OWNED(1)
------------------------
NUMBER PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNERS OF SHARES OF CLASS
- ------------------------------------- --------- ----------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Mory Ejabat.......................................... 1,320,622(2) 1.08%
Roger L. Evans....................................... 1,050,279(3) *
c/o Greylock Capital Limited Partnership
One Federal Street
Boston, MA 02110
Robert K. Dahl....................................... 805,599(4) *
C. Richard Kramlich.................................. 238,618(5) *
c/o New Enterprise Associates
235 Montgomery Street, Suite 1025
San Francisco, CA 94104
Betsy S. Atkins...................................... 167,515(6) *
James P. Lally....................................... 213,808(7) *
c/o Kleiner Perkins Caufield & Byers
2750 Sand Hill Road
Menlo Park, CA 94025
Curtis N. Sanford.................................... 616,502(8) *
Jeanette Symons...................................... 1,073,765(9) *
Michael Hendren...................................... 458,132(10) *
Martin Schoffstall................................... 1,600 *
Directors and executive officers as a group (15
persons)............................................. 6,748,993(11) 5.36
5% STOCKHOLDERS
FMR Corp............................................. 8,035,720(12) 6.65
82 Devonshire Street
Boston, MA 02109
</TABLE>
- --------
* Less than 1%
(1) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all
shares of Ascend Common Stock shown as beneficially owned by them,
subject to community property laws, where applicable. Unless otherwise
indicated, the individuals in the table may be contacted c/o Ascend
Communications, Inc., One Ascend Plaza, 1701 Harbor Bay Parkway, Alameda,
CA 94502.
(2) Mr. Ejabat is the President, Chief Executive Officer and a director of
Ascend. Includes 1,273,844 shares which are subject to options
exercisable within 60 days of March 31, 1997 and 4,000 shares held as
trustee of a trust for the benefit of his children.
(3) Mr. Evans is a director of Ascend. Includes (i) 870,279 shares held as
trustee of the Roger Evans and Jacqueline Evans Family Trust, dated
March 8, 1989; and (ii) 180,000 shares which are subject to options
exercisable within 60 days of March 31, 1997.
(4) Mr. Dahl is Vice President, Finance, Chief Financial Officer, Secretary
and a director of Ascend. Includes 599,786 shares which are subject to
options exercisable within 60 days of March 31, 1997.
(5) Mr. Kramlich is a director of Ascend. Includes 132,000 shares which are
subject to options exercisable within 60 days of March 31, 1997.
(6) Ms. Atkins is a director of Ascend. Includes 72,000 shares which are
subject to options exercisable within 60 days of March 31, 1997 and
37,182 shares held by her husband.
(7) Mr. Lally is a director of Ascend. Includes 180,000 shares which are
subject to options exercisable within 60 days of March 31, 1997.
(8) Mr. Sanford is Senior Vice President, International Sales and General
Manager of International Operations of Ascend. Includes 456,688 shares
which are subject to options exercisable within 60 days of March 31,
1997. Also includes 2,000 shares owned by Mr. Sanford's child.
(9) Ms. Symons is Executive Vice President, Advanced Products and Technology
Group and Chief Technical Officer of Ascend. Includes 895,093 shares
which are subject to options exercisable within 60 days of March 31,
1997.
(10) Mr. Hendren is Senior Vice President, North America Sales of Ascend.
Includes 458,124 shares which are subject to options exercisable within
60 days of March 31, 1997.
(11) Includes 5,050,072 shares which are subject to options exercisable within
60 days of March 31, 1997.
(12) Based solely on a Schedule 13G filed with the Commission on February 10,
1997.
86
<PAGE>
EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table sets forth information concerning the compensation of
the Chief Executive Officer of Ascend in 1996 and the four other most highly
compensated executive officers of Ascend as of December 31, 1996, whose total
salary and bonus for 1996 exceeded $100,000, for services in all capacities to
Ascend during 1996:
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION OTHER AWARDS
NAME AND PRINCIPAL ---------------------- NON-CASH OPTIONS
POSITION YEAR SALARY BONUS COMPENSATION(2) (SHARES)
------------------ ---- -------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Mory Ejabat............... 1996 $327,928 $487,500 $ 3,983 400,000
President and Chief
Executive Officer 1995 233,103 230,000 4,740 1,023,840
1994 163,015 81,505 5,159 186,664
Curtis N. Sanford ........ 1996 541,051 -- 4,860 150,000
Senior Vice President,
International Sales and 1995 333,465 -- 4,860 251,680
General Manager of
International Operations 1994 135,500 67,675 4,824 160,000
Michael Hendren .......... 1996 325,227 -- -- 150,000
Senior Vice President,
North America Sales 1995 331,029 -- -- 170,000
1994 128,026 -- -- 680,000
Robert K. Dahl ........... 1996 290,960 435,000 14,272 350,000
Vice President, Finance, 1995 201,803 200,000 19,290 401,680
Chief Financial Officer
and Secretary 1994 135,000 70,000 26,130 866,664
Jeanette Symons .......... 1996 200,000 300,000 3,240 300,000
Executive Vice President,
Advanced 1995 141,500 141,500 3,240 501,760
Products and Technology
Group and 1994 105,000 21,000 -- 106,664
Chief Technical Officer
</TABLE>
- --------
(1) Total amount of personal benefits paid to each executive officer during
the year was less than the lesser of (i) $50,000 or (ii) 10% of the
officer's total reported salary and bonus.
(2) Represents interest waived by Ascend which had accrued on full-recourse
notes from the executive officer during the fiscal year. See "Information
Concerning Ascend--Certain Relationships and Related Transactions."
87
<PAGE>
The following table provides the specified information concerning grants of
options to purchase Ascend Common Stock made during 1996 to the persons named
in the Summary Compensation Table:
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
% OF TOTAL POTENTIAL REALIZABLE VALUE
OPTIONS AT ASSUMED ANNUAL RATES
GRANTED TO OF STOCK PRICE APPRECIATION
OPTIONS EMPLOYEES EXERCISE FOR OPTION TERM(3)
GRANTED IN FISCAL PRICE PER EXPIRATION ----------------------------
NAME (SHARES)(1) YEAR SHARE(2) DATE 5% 10%
---- ----------- ---------- --------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Mory Ejabat............. 400,000 5.1% $61.875 12/16/06 $ 15,565,142 $ 39,445,126
Curtis N. Sanford....... 150,000 1.9 61.875 12/16/06 5,836,928 14,791,922
Michael Hendren......... 50,000 0.6 65.938 5/29/06 2,073,387 5,254,370
100,000 1.3 61.875 12/16/06 3,891,286 9,861,281
Robert K. Dahl.......... 350,000 4.4 61.875 12/16/06 13,619,499 34,514,485
Jeanette Symons......... 300,000 3.9 61.875 12/16/06 11,673,857 29,583,844
</TABLE>
- --------
(1) All options granted in 1996 were granted under Ascend's 1989 Stock Option
Plan. Options generally vest, in the case of new employees, as to 1/4th of
the subject shares on the first anniversary of the employee's hire date,
and an additional 1/48th of the subject shares upon completion of each
succeeding full month of continuous employment with Ascend thereafter.
Subsequent options granted to an employee typically vest as to 1/48th of
the subject shares upon completion of each full month of continuous
employment following the date of grant. The Ascend Board retains
discretion to modify the terms, including the price, of outstanding
options.
(2) All options were granted with an exercise price equal to the fair market
value per share of the Ascend Common Stock on the date of grant, as
determined by the Ascend.
(3) Potential gains are net of the exercise price but before taxes associated
with the exercise. Amounts represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. The assumed 5% and 10% rates of stock price appreciation are
provided in accordance with the rules of the Commission and do not
represent Ascend's estimate or projection of the future market price of
Ascend Common Stock. Actual gains, if any, on stock option exercises are
dependent on the future financial performance of Ascend, overall market
conditions and the option holders' continued employment through the
vesting period.
The following table provides the specified information concerning exercises
of options to purchase Ascend Common Stock in 1996, and unexercised options
held as of December 31, 1996, by the persons named in the Summary Compensation
Table:
AGGREGATE OPTION EXERCISES IN 1996
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT 12/31/96(1) AT 12/31/96(2)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mory Ejabat............. 231,774 $13,807,206 1,328,182 0 $44,237,070 $0
Curtis N. Sanford....... -- -- 456,687 0 14,905,750 0
Michael Hendren......... 250,584 13,668,269 525,416 0 21,706,547 0
Robert K. Dahl.......... 41,520 2,689,254 682,160 0 11,995,385 0
Jeanette Symons......... -- -- 895,093 0 31,998,440 0
</TABLE>
- --------
(1) Options granted under Ascend's 1989 Stock Option Plan are generally
immediately exercisable subject to a repurchase right in favor of Ascend
which lapses as the option vests.
(2) Valuation based on the difference between the option exercise price and
the fair market value of Ascend's Common Stock on December 31, 1996 (which
was $62.125 per share, based on the closing sales price of Ascend Common
Stock as quoted on The Nasdaq National Market).
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Employment Contracts and Termination and Change of Control Arrangements
In June 1995, Ascend entered into an employment agreement with Robert Ryan,
former Chief Executive Officer of Ascend, pursuant to which Mr. Ryan would
remain an employee of Ascend until June 1997; Ascend would continue to pay Mr.
Ryan at his then-current salary until June 1996 and thereafter would pay Mr.
Ryan $84,000 per year; Mr. Ryan would participate in Ascend's 1995 bonus
program for its executive officers; Mr. Ryan would continue to participate in
Ascend's benefit plans and Mr. Ryan would receive an option to purchase
400,000 shares of Ascend Common Stock. This option was granted to Mr. Ryan on
June 6, 1995.
Certain options granted under Ascend's 1989 Stock Option Plan or under
Ascend's 1994 Directors Plan contain provisions pursuant to which the unvested
portions of outstanding options become immediately exercisable and fully
vested upon a merger of Ascend in which Ascend's stockholders do not retain,
directly or indirectly, at least a majority of the beneficial interest in the
voting stock of Ascend or its successor, if the successor corporation fails to
assume the outstanding options or substitute options for the successor
corporation's stock to replace the outstanding options. The outstanding
options will terminate to the extent they are not exercised as of consummation
of such merger, or assumed or substituted for by the successor corporation.
Director Compensation
For each meeting of the Ascend Board which they attend, directors are
reimbursed for reasonable travel expenses incurred. Pursuant to Ascend's 1994
Outside Directors Stock Option Plan, all directors who are not employees of
Ascend are automatically granted non-qualified stock options to purchase
Ascend Common Stock upon their initial appointment to the Ascend Board and
thereafter on an annual basis. The grant on initial appointment is for an
option to purchase 192,000 shares and the annual grant is for an option to
purchase 48,000 shares. Such options generally become vested and exercisable
in equal annual installments over a four-year period beginning on the date of
grant.
Certain Relationships and Related Transactions
During 1994, Ascend accepted full-recourse notes, bearing interest at 5.4%
per annum, from certain executive officers and key employees in payment of the
exercise price for options granted in January 1994. Ascend waived an aggregate
of approximately $43,000, $33,000 and $30,000 of interest which had accrued on
these notes during 1994, 1995 and 1996, respectively. The Company received
notes with principal amounts of $105,000, $487,500, $90,000 and $60,000 from
Mr. Ejabat, Mr. Dahl, Mr. Sanford and Ms. Symons, respectively.
For a description of the compensation of officers of Ascend, see
"Information Concerning Ascend--Executive Compensation and Other Matters."
To date, Ascend has made no loans to officers, directors, principal
stockholders or other affiliates other than as described above or other than
advances of reimbursable expenses. All such transactions, including loans, are
subject to approval by a majority of Ascend's independent and disinterested
directors.
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INFORMATION CONCERNING CASCADE
The following Information Concerning Cascade section provides information on
the business of Cascade on a stand-alone basis and does not describe the
business of Cascade if the Merger is consummated. The following Business
section also contains forward-looking statements which involve risks and
uncertainties, including forward-looking statements regarding new product
development, expansion of operations, international expansion and growth in
the market for WAN data communications services. Cascade's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of a variety of factors, including those factors set
forth under "Risk Factors" and elsewhere in this Joint Proxy
Statement/Prospectus.
BUSINESS
Cascade develops, manufactures, markets and supports a family of high
performance, multi-service wide area network switches that enable public
service providers and private network managers to provide cost-effective,
high-speed data, video and voice communications services to end users. Wide
area networks built on Cascade's switches are designed to support one or more
of the major broadband packet communications protocols and services, including
Frame Relay, IP, SMDS and ATM. Users or other networking devices access
Cascade's products over a variety of media, including twisted pair, coaxial
and fiber optic leased line facilities, analog modem and ISDN dial facilities
and wireless facilities.
RECENT DEVELOPMENTS
On January 28, 1997, Cascade completed its acquisition of Sahara, a
privately held developer of scalable, high-speed broadband access products
located in Wallingford, Connecticut, by means of a merger of a wholly-owned
subsidiary of Cascade with and into Sahara. As a result of the acquisition,
Sahara became a wholly-owned subsidiary of Cascade. Cascade issued
approximately 3.4 million shares of Cascade Common Stock in exchange for all
the outstanding shares of Sahara. In addition, Cascade assumed all outstanding
Sahara stock options to purchase approximately 400,000 shares of Cascade
Common Stock. The combination is being accounted for as a purchase.
Sahara is in the process of designing, manufacturing and marketing
integrated broadband access products for communications services based on ATM
technology. Cascade expects to integrate Sahara's products into Cascade's
carrier-class network management, Quality of Service and IP capabilities
across Cascade's product lines, enabling Cascade's service provider customers
to extend their high-speed network infrastructure to the customer premise.
These products are intended to serve multiple markets focusing on LECs, IXCs,
CAPs, and PTTs and large information intensive end users.
WIDE AREA NETWORK INDUSTRY
Corporations have traditionally built their WANs by purchasing time division
multiplexers ("TDM") from equipment vendors and interconnecting them with long
distance lines leased from network service providers. While TDM products can
accommodate many forms of information, including voice, video and data, they
were designed and optimized for fixed path, fixed bandwidth applications,
especially voice.
The rapid growth in the number of personal computers, workstations and end-
user applications has led to the extensive deployment of LANs in corporate
environments. As these LAN-based users need to communicate with users at other
sites, corporations installed bridges and multiprotocol routers to
interconnect them across wide area networks.
Most wide area router-based networks were installed on the TDM networks
already put in place. However, these TDM networks are not well suited for the
dynamic, high bandwidth communications of LAN-based data coming from PCs and
workstations. Although vendors of TDM products have provided upgrade modules
to support the newer data and video traffic, these older architectures have
been unable to scale to accommodate the
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tremendous growth in the data traffic as well as support the dynamic nature of
this communication. As such, a new generation of wide area network
technologies has been developed to address these needs, including Frame Relay,
SMDS and ATM.
Frame Relay, the most widely deployed of the three current broadband packet
technologies, was designed to provide cost-effective dynamic WAN connectivity
for data applications. Frame Relay is used by public network service providers
for provisioning of WAN data services as well as large end users for private
network applications. Although originally specified to operate at speeds from
56 and 64 Kbps (thousands of bits per second) to T1 and E1 speeds (1.5 Mbps,
millions of bits per second and 2.048 Mbps, respectively), due to its
popularity, Frame Relay has been extended to support lower speed applications,
such as 9.6 Kbps and 19.2 Kbps to very high speed backbone applications at DS3
(45 Mbps) and E3 (European equivalent at 34 Mbps). Also, while popularized for
router-based networks, Frame Relay has also become a cost-effective solution
for hierarchical IBM-based System Network Architecture ("SNA") data networks
as well as packet-based voice and video applications.
SMDS was designed by Bellcore as the basis of a very high speed public data
service offering to be provisioned by the RBOCs. SMDS only became accepted
once lower speed support at 56/64 Kbps and T1/E1 speeds were provided. While
still popular among many end users due to its simplicity, SMDS has not become
as popular as Frame Relay.
ATM was designed with the very broad goal of supporting all forms of
communications, including voice, video and data, in both the LAN and the WAN.
Within the wide area network, ATM has been developed to provide two levels of
service offerings: 1) as a high bandwidth backbone technology for other packet
data services, such as Frame Relay, SMDS and IP based router networks, and 2)
as the basis of a new high speed information service, simultaneously
supporting all forms of communications, including voice, video and data
applications.
THE INTERNET
The Internet has become very popular with businesses as well as home users
for access to a wide variety of information located on computing resources
around the world. While many refer to the Internet as if it were a single
network, it is actually a network of networks. Originally designed out of IP
based routers for providing access by governments and universities to the
world's research information, the Internet has become highly popularized by
Web-based applications and extends to business and home users for accessing a
very broad range and types of information.
New Internet service providers have emerged to provide access to these
computing and information storage resources available over the Internet. They
provide dedicated access via leased lines for business users as well as analog
modem and ISDN dial-in access, both for business as well as home use. These
Internet access networks are predominately based on three types of networking
equipment: a) IP routers; b) remote access servers; and c) Frame Relay and ATM
switches.
THE CASCADE SOLUTION
Cascade pioneered the concept of utilizing a single, powerful switching
platform to simultaneously support the major broadband packet communications
services, including Frame Relay, SMDS and ATM. Cascade's multi-service,
standards-based products enable public service providers and private network
managers to select the transmission services with the cost and performance
attributes that best fit the end user's requirements, without requiring them
to build multiple separate specialized networks. In addition to addressing the
requirements for provisioning services for internal communications needs,
Cascade's Frame Relay and ATM product offerings are widely deployed in
numerous Internet access provider networks, including many of the world's
largest ISPs.
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With the acquisition of Arris in May 1996, Cascade now offers a wide range
of options to access its broadband network switches, including twisted pair,
coaxial and fiber optic leased line facilities; analog modem and ISDN dial
facilities; and wireless facilities. Cascade, together with Arris, also offers
comprehensive and cost-effective deployment for all major broadband packet
technologies, including Frame Relay, ATM, SMDS and IP, for both Intranet as
well as Internet applications.
PRODUCTS
With the introduction of the AX 800 and AX 1600 High Capacity Access
Switches in September 1996, Cascade now offers four product families of wide
area network switches which address a broad range of service provisioning
options. These include the STDX 6000, the B-STDX 8000 and 9000, the CBX 500
and the AX 800 and 1600. All Cascade switches are modular in design, and can
be configured with many types of network interface modules to support a wide
variety of end user access devices and network connections. Cascade's product
architecture emphasizes software-based solutions in order to permit the
implementation of new services and standards in a cost-effective manner.
Cascade's products have been designed for use as WAN switches primarily for
public service networks for internal as well as Internet access applications
and for use in large private networks.
STDX 6000. The STDX 6000 is designed to aggregate low speed data traffic
from remote sites onto larger networks and to serve as a backbone for small
networks. A popular platform for medium and even large service providers in
the early deployment of Frame Relay, STDX 6000 networks have yielded to the
distributed packet processing capabilities and complete redundancy offered by
the B-STDX 8000 and 9000 platforms now widely deployed in large Frame Relay,
SMDS and ATM networks worldwide. The STDX 6000 is still attractive in regions
of the world outside the United States where cost, especially at low speeds,
is of highest concern and where traffic and redundancy requirements are
significantly lower than in the U.S. and in other deregulated economies.
B-STDX 8000 and B-STDX 9000. The B-STDX 8000 and 9000 multi-service WAN
switches offer a level of speed and capacity representing a hundred-fold
increase in total system throughput over the STDX 6000 and up to ten times the
port density for the B-STDX 9000 and five times the port density for the B-
STDX 8000. The B-STDX 8000 and 9000 can function as multi-service access
switches for carriers to aggregate multiple end-user services onto an ATM
backbone. They can also serve as the backbone of a stand-alone multi-service
network for private network users and public service providers seeking an
inexpensive distributed network solution.
Cascade's customers generally deploy the B-STDX 9000 for the backbone of
medium to large-size public service providers and end users, and the B-STDX
8000 is being deployed as a platform for these same service providers and end
users to expand their coverage to less dense geographical regions. Both the B-
STDX 8000 and 9000 are used in public service provider and end user networks
for the provisioning of services for internal communications (intranet
applications) as well as in public service provider networks designed for
Internet applications. The B-STDX 8000 and 9000 are designed for high levels
of redundancy required in mission critical applications. These switches
utilize a symmetrical Reduce Introduction Set Computing ("RISC")
multiprocessing architecture, employing a Control Processor ("CP") interacting
with up to fourteen network interface modules in the B-STDX 9000 and six
interface modules in the B-STDX 8000. Separate RISC micro processors are used
on the CP and on each network interface module providing for scaleable
performance.
CBX 500. The CBX 500 (formerly the Cascade 500 ATM Switch) is a high
capacity ATM switch which was first commercially deployed in the first quarter
of 1996. The CBX 500 features a quad plane architecture and significant
scalability features. Unlike competitive architectures that share ATM
switching resources among different user applications, the quad plane
architecture dedicates switching resources to each of the ATM Forum's four
user classes of service. Dedicating resources in this manner assures that no
user traffic of one class of service will interfere with other communications
taking place simultaneously assigned to a different service class. The initial
release of the CBX 500 supported 2.5 Gbps and 5 Gbps (billions of bits per
second) of switching capacity and DS3/E3 (defined earlier) and OC3c/STM1 (155
Mbps) interfaces for user and network trunk
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connections. In December 1996 Cascade announced support for OC12c/STM4 (622
Mbps) and T1/E1 support in order to broaden the range of access speeds and
network trunking capacities available for the CBX 500. Like the B-STDX 8000
and 9000, the CBX 500 offers complete redundancy options.
AX 800 and AX 1600 High Capacity Access Switches. The AX product family
resulted from the acquisition of Arris and was introduced in the third quarter
of 1996. While earlier generations of remote access servers were developed for
commercial telecommuting applications, the AX product family was designed
exclusively for the carrier access market segment. Specifically, the AX High
Capacity Access Switches are designed for performance, scalability and
availability requirements of public service providers with similar features to
those found in Cascade's B-STDX and CBX product families, such as hardware
redundant server modules and power supplies. The AX family of switches
integrate leased line and dial-in traffic from modem and ISDN-based users and
support a wide array of multiservice capabilities, such as IP routing. A
multiprocessor architecture scales as the system expands to deliver high
performance, high availability, and multiple quality of service levels.
The AX High Capacity Access Switch family includes two models: the AX 1600
and the AX 800. The AX 1600 provides scalable capacity for hundreds of users,
making it appealing to Internet and network service providers. The AX 800, for
applications that require mid-range capacity, has the same features and
performance of the AX 1600. The models share common hardware and software
architecture, so users benefit from investment protection as their networks
evolve. Both the AX 800 and the AX 1600 support 10 and 100 Mbps Ethernet
connections for high speed connection to co-located devices, such as a POP
router or web servers, as well as high speed leased line Frame Relay
connections to the B-STDX product family. The AX product family is manageable
by the same network management platform, CascadeView/UX, which manages
Cascade's B-STDX and CBX product families. In addition, the AX family features
a web-based monitoring and management tool.
Network Management. Extremely important to the design, operation and
maintenance of a public service provider network is the network management
platform. Cascade provides CascadeView/DOS and CascadeView/UX software for the
management and control of all of its WAN products. These products offer easy
integration with existing network management systems due to their use of the
industry standard SNMP. CascadeView is built on Hewlett-Packard OpenView
running on an IBM compatible personal computer (DOS version) or a diagnosis
and fault management RISC-based workstation (UNIX version). CascadeView's
network management capabilities include a graphical user interface, rate
monitoring, congestion management, usage statistics generation, configuration
management, remote diagnosis and fault management.
In addition to the integrated network management application, in 1996
Cascade began shipping Provisioning Server, Bulk Stats Server, Accounting
Server and modules for CascadeView, which are a series of management servers
that allow network service providers to continue to scale the management of
their networks just as they scale the connectivity to these networks. Each
server module provides an enhanced functional version of the software that is
part of the integrated CascadeView application.
MARKETS AND CUSTOMERS
Cascade markets its products and services directly to public service
providers, including IXCs, LECs, RBOCs and CAPs in the U.S., PTTs and OLOs
internationally, and ISPs and VANs worldwide. Cascade's products and services
are also sold to private network managers on a worldwide basis either directly
or via partners of Cascade, including OEMs, system integrators and
international distributors. At December 31, 1996, Cascade's direct sales
organization maintained eighteen offices throughout the United States and ten
offices internationally. Direct and indirect sales to international customers
accounted for 19%, 16%, and 20% of Cascade's total sales for the years ended
December 31, 1996, 1995 and 1994, respectively. See note J of the notes to the
consolidated financial statements. During the year ended December 31, 1996,
sales to no one single customer exceeded 10% of revenue. In 1995, sales to
Bell Atlantic and U.S. West, Inc. accounted for 12% and 17% of revenue,
respectively. In 1994, sales to BellSouth Corporation and U.S. West, Inc.
accounted for approximately 12% and 11% of revenue, respectively.
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COMPETITION
The market for WAN communications products is intensely competitive and is
subject to rapid technological change. Although to date Cascade has
experienced significant success against competitive product offerings, Cascade
expects competition to increase significantly in the future. To date, Cascade
has faced significant competition in the Frame Relay market from StrataCom,
Newbridge Networks, and Nortel. However, in early 1996, Cisco acquired
StrataCom, and as such, represents even greater competition to Cascade. With
Cascade's entrance in the ATM WAN backbone market in 1996, Cascade has begun
to compete with additional industry participants, including Bay Networks, Fore
Systems and General Datacom. With the introduction of the AX product family in
1996, Cascade now also competes in the remote access concentrator portion of
the wide area network marketplace. Competitors in this segment of the market
include Cisco, U.S. Robotics, Shiva and Nortel. 3Com has recently entered into
an agreement to acquire U.S. Robotics.
The principal competitive factors in the market for switching products are
breadth of network services supported, conformance to industry standards,
price per port, performance, product features, network management
capabilities, reliability and customer support. Cascade believes it presently
competes favorably in all of these areas. However, many of Cascade's current
and potential competitors have substantially greater financial, marketing and
technical resources than Cascade. As such, significant success by any one of
them in Cascade's markets could have an adverse effect upon Cascade's
business.
BACKLOG
Because of the generally lengthy and unpredictable sales cycle involved in
selling to public service providers, the generally short time period between
order and shipment and occasional customer changes in delivery schedules or
cancellation of orders (which can be made without significant penalty),
Cascade does not believe that its backlog as of any particular date is
necessarily indicative of actual revenue for any future period.
RESEARCH AND PRODUCT DEVELOPMENT
The market for Cascade's products is characterized by rapidly changing
technology, evolving industry standards and frequent new product
introductions. Cascade's management believes that Cascade's future success
depends in large part upon its ability to continue to enhance existing
products and develop new products that maintain technological competitiveness.
Cascade intends to make substantial investments in product and technology
development and continues to participate in the development of industry
standards. Extensive product development input is obtained through the
comments and suggestions of customers and prospective customers and through
Cascade's participation in industry organizations and standards-development
bodies, such as the ATM Forum, the Frame Relay Forum and the SMDS Interest
Group. In 1996, Cascade announced several new products, including remote
access and ATM as well as enhancements to the B-STDX and STDX product
families.
Cascade is focusing development efforts on expanding the protocol
capabilities of its products, expanding its network management capabilities,
providing additional interface capabilities, supporting additional industry
standards and adding higher capacity platforms to the product family. During
the years ended December 31, 1996, 1995 and 1994, research and development
expenditures were approximately $53.4 million, $20.7 million and $7.4 million,
respectively.
CUSTOMER SUPPORT AND SERVICE
Cascade installs, maintains and supports products sold directly in the
United States with Cascade's service and support personnel. Cascade's
resellers generally provide installation, maintenance and support to their
customers. Cascade also has agreements with several third party vendors to
provide worldwide service and support for all of Cascade's products. Cascade's
Technical Assistance Center ("TAC") will continue to be the first point of
contact for all customer problem resolution. If TAC determines that a customer
has a hardware problem, a third party representative will be dispatched to the
customer site. The vendors also carry Cascade products locally at selected
supply centers. All software problems will continue to be resolved by TAC.
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Cascade generally warrants its software products for 90 days upon shipment.
During this 90 day warranty period, Cascade will investigate all reported
problems and will endeavor to provide a solution. Cascade generally warrants
its hardware products for 12 months. During such warranty period, Cascade
endeavors to take action to repair or replace failed components within 24
hours of notification. Cascade has experienced no significant customer returns
and has accrued for expected warranty costs.
MANUFACTURING
Cascade's manufacturing activities are conducted in its Boxborough,
Massachusetts facility. These activities consist primarily of material
planning and procurement, testing, burn-in, final assembly and quality
assurance. Cascade uses several third-party contract manufacturers to perform
printed circuit board assembly, in-circuit testing and product repair. In
January 1995, Cascade received ISO 9001 certification. Cascade significantly
increased manufacturing capacity in 1996 through expansion of its outsourcing
relationships and the expansion of its own facilities.
Cascade generally uses components available from multiple suppliers. Certain
components are, however, available only from single or limited sources.
Cascade has no supply commitments from its vendors and generally procures
products on a purchase order basis as opposed to entering into long term
procurement agreements. The inability of Cascade or its third-party contract
manufacturers to obtain certain components could cause a delay in the shipment
of certain products. This could have a material, adverse affect on Cascade's
operating results. Cascade believes that its inventory levels of these
components are adequate for current forecasted demand.
PROPRIETARY RIGHTS
Cascade has a number of patent applications that are currently pending for
certain of its existing products and currently relies on a combination of
contractual rights, trade secrets and copyrights to protect its proprietary
rights. Although Cascade intends to apply for additional patents in the
future, there can be no assurance that Cascade's intellectual property
protection will be sufficient to prevent competitors from developing similar
technology. Moreover, in the absence of patent protection, Cascade's business
may be adversely affected by competitors that independently develop
functionally equivalent technology.
Cascade currently licenses certain hardware and software technology from
third parties and plans to continue to do so in the future. While it may be
necessary in the future to seek or renew licenses with third parties, Cascade
believes based upon past experience and standard industry practice that such
licenses could be obtained on commercially reasonable terms.
EMPLOYEES
As of December 31, 1996, Cascade employed a total of 833 persons. None of
Cascade's employees are represented by a collective bargaining agreement and
Cascade's believes that its relations with employees are good.
FACILITIES
Cascade's corporate headquarters are located in an 80,000 square foot
facility in Westford, Massachusetts. This facility accommodates corporate
administration, marketing, sales and customer support. Cascade occupies this
space under a five and one-half year lease which expires in March 1999 with an
option to extend the term of the lease for an additional three years at a rate
equivalent to 95% of the then current market rate for similar space in the
area.
Cascade's development activities are located in a 97,500 square foot
facility in Westford, Massachusetts. Cascade occupies this space under a two
and one-half year sub-lease which expires in November 1997. Cascade's
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manufacturing activities are located in a 103,000 square foot facility in
Boxborough, Massachusetts. The lease expires in March 1999 and Cascade has a
option to renew the lease for an additional three years.
Cascade has entered into a lease for a 279,000 square foot facility in
Westford, Massachusetts to expand its development activities. The lease
expires in March 2009 with an option to extend the lease for up to three
successive five year periods at the current market rate for similar space in
the area.
Cascade also leases on a short-term basis various sales office space,
including space in the metropolitan areas of: Atlanta, Chicago, Dallas,
Minneapolis, New York, Philadelphia, San Francisco and Washington D.C. as well
as international sales offices in Brazil, Canada, China, Germany, France,
Great Britain, Japan, Singapore and Spain. Cascade expects that it will
continue to acquire additional office space in 1997 to meet expected growth in
its domestic and international customer base.
LEGAL PROCEEDINGS
On April 16, 1997, a civil action was filed against Sahara, its three
founders and ten employees of Sahara by General DataComm Industries, Inc. in
the Superior Court for the State of Connecticut. The complaint alleges several
causes of action, including breach of contract, tortious interference with
contractual relations, misappropriation of trade secrets, unfair competition,
and violation of the Connecticut Unfair Trade Practices Act. The plaintiff
seeks relief of unspecified monetary damages, costs and injunctive relief.
Based on Cascade's preliminary investigation, Cascade believes the allegations
of the lawsuit are without merit and plans to vigorously defend this lawsuit;
however, the ultimate outcome of this matter cannot yet be determined. No
provision for any liability that may result from the action has been
recognized in the consolidated financial statements of Cascade included
elsewhere in this Joint Proxy Statement/Prospectus.
On April 18, 1997, Cascade received a claim and request for royalties
alleging patent infringement on four separate patents. Cascade is currently
investigating the claims of such infringement, and thus the ultimate outcome
of this matter cannot yet be determined. No provision for any liability that
may result from the claim has been recognized in the consolidated financial
statements of Cascade included elsewhere in this Joint Proxy
Statement/Prospectus.
In addition to the foregoing matters, in the ordinary course of business,
various other lawsuits and claims are filed or made against Cascade. While the
outcome of these other matters is not currently determinable, Cascade's
management believes that the ultimate outcome will not have a material adverse
effect on Cascade's results of operations or its financial position.
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SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial information presented below is derived
from the consolidated financial statements of Cascade for the years ended
December 31, 1996, 1995, 1994, 1993 and 1992. The information set forth below
should be read in conjunction with "Information Concerning Cascade--
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of Cascade and related
footnotes included elsewhere in this Joint Proxy Statement/Prospectus.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue........................... $340,976 $134,834 $50,060 $ 6,960 $ 816
Income (loss) from operations..... 110,282 38,078 10,317 (2,720) (3,224)
Net income (loss)................. $ 70,779 $ 25,410 $ 9,266 $(2,613) $(3,145)
EARNINGS PER SHARE:
Net income (loss) per common
share............................ $ 0.72 $ 0.28 $ 0.11 $ (0.12) $ (0.14)
Net income (loss) per common
share--supplementary basis (1)... $ 0.72 $ 0.28 $ 0.11 $ (0.04) $ (0.06)
CONSOLIDATED BALANCE SHEET DATA:
Working capital................... $184,564 $ 69,187 $46,308 $10,266 $ 5,703
Total assets...................... 270,261 111,859 65,763 16,070 6,709
Long term obligations, excluding
current portion.................. -- -- -- 256 113
Redeemable convertible preferred
stock............................ -- -- -- 18,269 10,408
Total stockholders' equity
(deficit)........................ $219,783 $ 86,306 $52,479 $(6,841) $(4,235)
</TABLE>
- --------
(1) Net income (loss) on a supplementary basis assumes the conversion of all
previously outstanding preferred stock at the time of original issuance.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BUSINESS ENVIRONMENT AND RISK FACTORS
The following discussion should be read in conjunction with the consolidated
financial statements of Cascade and related notes included elsewhere herein as
well as the section above under the heading "Risk Factors." Cascade's future
operating results may be affected by various trends and factors which are
beyond Cascade's control. These include, among other factors, changes in
general economic conditions, rapid or unexpected changes in technologies,
activities of competitors, timing of product shipments and uncertain business
conditions that affect the data networking industry. Accordingly, past results
and trends should not be used by investors to anticipate future results or
trends.
With the exception of historical information, the matters discussed below
under the headings "Results of Operations" and "Liquidity and Capital
Resources" may include forward-looking statements that involve risks and
uncertainties. Cascade wishes to caution readers that a number of important
factors, including those identified in the section above entitled "Risk
Factors," as well as factors discussed elsewhere in this Joint Proxy
Statement/Prospectus and in Cascade's other reports filed with the Commission,
could affect Cascade's actual results and cause actual results to differ
materially from those in the forward-looking statements.
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RESULTS OF OPERATIONS
In 1996, Cascade continued to increase profitability with net income of
$70.8 million on revenue of $341.0 million. This compares with a net income
and revenue of $25.4 million and $134.8 million, respectively, in 1995.
Cascade reported net income of $9.3 million on revenue of $50.1 million in
1994. The following table sets forth for the periods indicated the percentage
of revenue represented by certain items reflected in Cascade's consolidated
statements of income:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenue.............................................. 100.0% 100.0% 100.0%
Cost of revenue...................................... 35.1 36.0 38.2
------- ------- -------
Gross profit......................................... 64.9 64.0 61.8
------- ------- -------
Operating expenses:
Research and development........................... 15.7 15.3 14.7
Sales and marketing................................ 13.1 15.3 21.1
General and administrative......................... 3.8 5.1 5.4
------- ------- -------
Total operating expenses............................. 32.6 35.7 41.2
======= ======= =======
Income from operations............................... 32.3 28.3 20.6
Interest income...................................... 1.6 2.4 1.6
------- ------- -------
Income before income taxes........................... 33.9 30.7 22.2
Provision for income taxes........................... 13.1 11.8 3.7
------- ------- -------
Net income........................................... 20.8% 18.9% 18.5%
======= ======= =======
</TABLE>
REVENUE
Cascade's revenue increased 153% to $341.0 million in 1996, as compared with
1995 revenue of $134.8 million. Revenue in 1994 was $50.1 million. Cascade
believes that the increase in revenue is primarily attributable to the growth
in the broadband packet equipment market, market acceptance of Cascade's
products and new product introductions by Cascade. Revenue from Cascade's
Frame Relay products represented a substantial portion of revenue over each
period presented. Additionally, in 1996 Cascade introduced the CBX 500, an ATM
product, which accounted for approximately 11% of revenue. To date, most of
Cascade's customers have been public carriers and internet service providers
which have been migrating to higher speed network access products such as
Frame Relay and ATM.
Direct and indirect international sales accounted for approximately 19%, 16%
and 20% of revenue for 1996, 1995 and 1994, respectively. The dollar increase
in international sales is primarily attributable to continued sales growth in
the Americas, Pacific Rim and European markets as well as the expansion of
Cascade's international presence. In 1996, Cascade established sales offices
in Brazil, China, France, Singapore and Spain and increased its sales and
marketing personnel in existing sales offices. Cascade intends to increase its
presence internationally and expects that international sales will continue to
be a significant portion of Cascade's business, but may fluctuate as a
percentage of revenue. To date, Cascade's international sales have been
denominated in U.S. currency; however, if this were to change, Cascade would
be subject to exchange rate fluctuations.
GROSS PROFIT
Gross profit increased to 64.9% of revenue or $221.5 million in 1996
compared to 64.0% of revenue in 1995 and 61.8% of revenue in 1994. The
continued improvement in gross profit as a percentage of revenue was due to
manufacturing efficiencies from high volume production of the Frame Relay
products, somewhat offset by the initial manufacturing costs associated with
new products. In future periods, gross profit will vary depending upon a
number of factors, including the channels of distribution, the mix of products
as well as manufacturing and component costs. As Cascade introduces new
products, it is possible that such products may have a lower gross profit than
other established products in high volume production. Accordingly, gross
profit as a percentage of revenue may vary.
98
<PAGE>
RESEARCH AND DEVELOPMENT
In 1996, research and development expenses were $53.4 million or 15.7% of
revenue, compared to $20.7 million and $7.4 million or 15.3% and 14.7% of
revenue for 1995 and 1994, respectively. The expense increase was due
principally to the addition of personnel, depreciation of capital expenditures
and prototype development, design and testing. Expenses were incurred for the
following research and development projects including: the expansion into the
remote access market, completion of Cascade's CBX 500 ATM product and
enhancements to Cascade's Frame Relay products. Cascade considers product
development expenditures to be critical to future revenue and expects to
increase spending in absolute dollars while such expenditures as a percentage
of revenue may vary. There can be no assurance that Cascade's research and
development efforts will result in commercially successful new technology and
products in the future, and those efforts may be affected by other factors as
noted below.
SALES AND MARKETING
Cascade's sales and marketing expenses increased to $44.7 million in 1996
from $20.6 million in 1995 and $10.5 million in 1994. These expenses decreased
as a percentage of revenue to 13.1% in 1996 from 15.3% in 1995 and 21.1% in
1994. The increase in dollars spent was due to the addition of personnel,
commissions associated with revenue growth, expansion of domestic and
international sales offices and product promotional expenses. Cascade expects
to increase spending in 1997 as part of its effort to increase international
revenue and expand the markets for its products. These expenses may vary as a
percentage of revenue.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased to $13.1 million in 1996 from
$7.0 million in 1995 and $2.7 million in 1994. These expenses decreased as a
percentage of revenue to 3.8% in 1996 from 5.1% in 1995 and 5.4% in 1994. The
increase in dollars spent reflects increased administrative, legal and
information technology costs incurred to support Cascade's expanded
operations. Cascade expects that administrative expenses will increase in
absolute dollars, but may vary as a percentage of revenue in the future.
INTEREST INCOME
Interest income increased to $5.3 million or 1.6% of revenue in 1996 from
$3.2 million or 2.4% of revenue for 1995 and $781,000 or 1.6% of revenue in
1994. The increase in 1996 and 1995 was attributable to interest income earned
on cash generated from operations and notes receivable.
PROVISION FOR INCOME TAXES
Cascade's effective tax rate was 38.8%, 38.5% and 16.5% in 1996, 1995 and
1994, respectively. The differences between the statutory federal income tax
rate and Cascade's effective tax rate are principally due to state income
taxes, available research and experimentation credits and the benefit of
Cascade's foreign sales corporation. The 1996 provision reflects certain
merger costs that are nondeductible for tax purposes. In the absence of such
expenses, the effective tax rate for 1996 would have been 38.5%. The 1994
provision reflected Cascade's utilization of all available net operating loss
carryforwards and tax credits.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, Cascade had cash, cash equivalents and marketable
securities of $112.3 million, an increase of $51.7 million from the prior
year. Cascade has continued to fund its operations primarily through cash
flows generated from operations and the proceeds from the sale of Cascade
Common Stock through its employee stock purchase and option plans.
Cash generated from operations was $62.0 million in 1996. This was primarily
generated from net income, the tax benefits related to disqualifying
dispositions of shares upon exercise of stock options and increased
99
<PAGE>
current liabilities, offset by increased accounts receivable and inventory
balances. Accounts receivable increased by $62.0 million primarily due to the
increase in revenue and the timing of orders. Inventory balances increased by
$11.7 million to meet the demand for Cascade's existing products and the
desired lead times as well as anticipated demand for new product
introductions, including the CBX 500 and remote access products. Cascade
believes that inventory balances are likely to increase in future periods to
support customer demands and new product introductions. The increase of $24.9
million in current liabilities was due primarily to increases in accounts
payable, deferred revenue, warranty costs and the general increase in business
activity.
Investment activities in 1996 included capital expenditures of $32.3
million. Capital investments include improvements to Cascade's facilities, the
purchase of engineering development equipment and the information technology
necessary to support the rapid growth of Cascade's business. Net purchases of
marketable securities were $8.8 million. The purchases of marketable
securities were placed in U.S. Government obligations and highly rated
commercial paper. In 1996, Cascade received proceeds of $11.2 million from the
sale of its Common Stock through its employee stock purchase and option plans.
The remaining proceeds received by Cascade relate primarily to proceeds
received by Arris for the sale of its preferred stock prior to Cascade's
acquisition of Arris.
Cascade believes that its existing cash, cash equivalents and marketable
securities, along with anticipated funds from operations, will satisfy
Cascade's working capital and capital expenditure needs at least through 1997.
ACQUISITIONS
In May 1996, Cascade expanded its product plans to include the remote access
market with the acquisition of Arris, a developer of high performance remote
access technology for carrier class networks, for approximately 3.2 million
shares of its Common Stock. Cascade also assumed all outstanding Arris options
to purchase approximately 242,000 shares of Cascade's Common Stock. The
combination was accounted for as a pooling of interests. The operating
expenses of Arris from December 31, 1995 to the acquisition date are
immaterial to Cascade's operations. The accompanying financial statements for
periods prior to December 31, 1995 do not include the amounts for this
acquisition as they were deemed to be immaterial.
On January 28, 1997, Cascade completed its acquisition of Sahara, a
privately held developer of scalable, high-speed broadband access products
located in Wallingford, Connecticut, by means of a merger of a wholly-owned
subsidiary of Cascade with and into Sahara. As a result of the merger, Sahara
became a wholly-owned subsidiary of Cascade. Cascade issued approximately 3.4
million shares of Cascade Common Stock in exchange for all the outstanding
shares of Sahara. In addition, Cascade assumed all outstanding Sahara stock
options to purchase approximately 400,000 shares of Cascade Common Stock.
The acquisition is being accounted for under the purchase method of
accounting. Accordingly, the purchase price of $219 million was allocated to
the net assets acquired based upon their estimated fair market values. The
estimated fair value of the tangible assets acquired was $4 million. In
addition, approximately $215 million of the purchase price was allocated to
in-process research and development that has not reached technological
feasibility and that has no alternative future use. No completed technology
was purchased as Sahara has brought no products to market and no development
project has reached technological feasibility. The estimated costs to complete
the technology are approximately $4 million.
100
<PAGE>
MANAGEMENT
The following table sets forth the directors and the executive officers of
Cascade, their ages, and the positions currently held by each such person with
Cascade. Information with respect to the number of shares of Cascade Common
Stock beneficially owned by each director, directly or indirectly, as of March
31, 1997, appears under the heading "Information Concerning Cascade--Security
Ownership of Certain Beneficial Owners and Management."
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Victoria A. Brown (1)............ 49 Director
Richard M. Burnes, Jr. (2)....... 56 Director
Gururaj Deshpande................ 46 Executive Vice President of Business
Development and Chairman of the Board
of Directors
Paul J. Ferri (1)................ 58 Director
Bruns H. Grayson (2)............. 49 Director
Daniel E. Smith.................. 47 President, Chief Executive Officer and
Director
Steven C. Walske................. 45 Director
Hassan M. Ahmed.................. 39 Vice President of Engineering
Paul E. Blondin.................. 46 Vice President of Finance and
Administration, Chief Financial
Officer, Treasurer and Secretary
Michael A. Champa................ 45 Vice President of Worldwide Sales and
Customer Service
James A. Dolce, Jr. ............. 34 Vice President and General Manager of
Remote Access
John E. Dowling.................. 43 Vice President of Operations
Robert N. Machlin................ 39 Vice President of Marketing
Jonathan M. Reeves............... 37 Vice President and General Manager of
Broadband Access
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Victoria A. Brown has been a director of Cascade since November 1991 and
served as Chairperson of the Board of Directors from November 1991 to January
1997. Ms. Brown has also served as President of Communicore, a consulting
company, since 1991. From 1988 to 1990, Ms. Brown was President of Timeplex,
Inc., a data communications equipment manufacturer and a subsidiary of Unisys
Corp.
Richard M. Burnes, Jr. has been a director of Cascade since June 1991. Since
1970, he has been a General Partner of The Charles River Partnerships, a group
of venture capital funds based in Waltham, Massachusetts. Mr. Burnes is also a
director of CellCall, Inc., LANart Corporation, Concord Communications,
Passport Corporation and Prominet Corporation.
Gururaj Deshpande is a founder of Cascade and has served as a director of
Cascade since inception and as Chairman of the Board of Directors and
Executive Vice President of Business Development of Cascade since January
1997. From April 1992 to January 1997, Mr. Deshpande served as Executive Vice
President of Marketing and Customer Service of Cascade and from October 1990
to April 1992, served as President of Cascade. From December 1988 to May 1990,
Mr. Deshpande served as Vice President of Engineering for Coral Network
Corporation, a designer and manufacturer of high performance LAN
internetworking products.
Paul J. Ferri has been a director of Cascade since June 1991. He has served
as a General Partner of Matrix Partners, a venture capital firm, since
February 1982. Mr. Ferri also serves on the Board of Directors of Stratus
Computer Inc., Applix Inc., BancTec, Inc., TechForce Corp. and VideoServer,
Inc.
101
<PAGE>
Bruns H. Grayson has been a director of Cascade since October 1993. Since
September 1987, Mr. Grayson has served as the Managing General Partner of
Calvert Capital L.P., a partnership that manages the investment activities of
the ABS Ventures partnerships. Mr. Grayson is also a director of Anadigics,
Inc.
Daniel E. Smith has served as President, Chief Executive Officer and
Director of Cascade since April 1992. From August 1987 until April 1992, Mr.
Smith served as Vice President of Sales for Proteon, Inc., a producer of LAN
and LAN internetworking products. Prior to that time, Mr. Smith spent seven
years at Rolm Corporation, a manufacturer of telecommunications systems, in
several positions, most recently General Manager, Named Accounts Program
Division, that corporation's sales division for certain major accounts.
Steven C. Walske has been a director of Cascade since March 1996. Since
August 1994, Mr. Walske has served as Chairman of the Board of Directors of
Parametric Technology Corporation, a developer of software products for the
automation of the mechanical design process, and as Chief Executive Officer of
Parametric Technology Corporation since December 1986. Mr. Walske served as
President of Parametric Technology Corporation from December 1986 to August
1994. Mr. Walske also serves on the Board of Directors of Synopsys, Inc.,
VideoServer, Inc. and Object Design, Inc.
Dr. Hassan M. Ahmed has served as Vice President of Engineering of Cascade
since December 1995. From July 1995 to December 1995, Dr. Ahmed served as Vice
President and Chief Technology Officer of Cascade. Prior to that time, Dr.
Ahmed was President of AirAccess, an emerging high-speed, wireless LAN company
from June 1993 to June 1995 and he worked as an independent consultant to
technology companies such as Motorola, Inc., Telco Systems, Inc., and Windata,
Inc. from September 1987 to June 1993. In addition, he was an associate
professor at Boston University's Electrical Engineering and Computer Science
and Systems Engineering Departments from September 1987 to September 1992.
Paul E. Blondin has served as Vice President of Finance and Administration,
Chief Financial Officer and Treasurer of Cascade since March 1993 and assumed
the office of Secretary in May 1994. Prior to that time, Mr. Blondin served at
Proteon, Inc. as Controller from February 1987 to February 1993, as General
Manager of European Subsidiaries from September 1992 until February 1993 and
as Vice President from January 1990 to February 1993.
Michael A. Champa has served as Vice President of Worldwide Sales of Cascade
since May 1995, and has served as Vice President of Customer Service since
January 1997. From April 1993 to May 1995, Mr. Champa served as Vice President
of Sales of Cascade. Prior to that time, Mr. Champa served as Vice President
of International Sales at Microcom Inc., a manufacturer of modems,
communications software and internetworking equipment, from March 1991 to
April 1993 and at Racal-Interlan, Inc., a manufacturer of data communications
and internetworking products, as National Sales Director, from February 1990
to February 1991 and as Director of International Sales from February 1987 to
February 1990.
James A. Dolce, Jr. has served as Vice President and General Manager of
Remote Access of Cascade since February 1997. From May 1996 to February 1997,
Mr. Dolce served as Vice President of Remote Access Marketing of Cascade.
Prior to that time, Mr. Dolce was a founder and Vice President of Sales and
Marketing of Arris, a developer of carrier-class remote access products, from
its inception to May 1996. From April 1989 to June 1995, Mr. Dolce was also a
founder and Vice President of Sales and Marketing of Promptus Communications,
a manufacturer of high speed digital network access products.
John E. Dowling has served as Vice President of Operations of Cascade since
May 1994. Prior to that time, Mr. Dowling served as Vice President of
Operations at Coral Network Corporation from July 1991 to May 1994 and as Vice
President of Operations at Epoch Systems, Inc., formerly a manufacturer of
mass storage devices, from March 1987 to July 1991.
Robert N. Machlin has served as Vice President of Marketing of Cascade since
October 1994. Prior to that time, Mr. Machlin served as an independent
consultant to manufacturers of networking equipment from December 1993 to
September 1994. Mr. Machlin served as Vice President of Marketing at Coral
Network
102
<PAGE>
Corporation from October 1992 to November 1993 and as Vice President of
Marketing at Amnet, Inc., a manufacturer of wide area network switches, from
November 1988 to October 1992.
Jonathan M. Reeves has served as Vice President and General Manager of
Broadband Access of Cascade since January 1997. Prior to that time, Mr. Reeves
served as Chief Executive Officer of Sahara Networks, Inc., a developer of
scaleable, high-speed broadband access products from June 1995 to January
1997. Mr. Reeves served at General DataComm, Inc., a supplier of networking
and ATM switching equipment, as Associate Vice President for the ATM Business
Unit from January 1995 to May 1995, as Executive Director ATM from January
1994 to January 1995, as Director System Architecture from August 1991 to
January 1994 and as Product Manager from October 1989 to August 1991.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 31, 1997,
with respect to beneficial ownership of Cascade's Common Stock by: (i) each
person who, to the knowledge of Cascade, beneficially owned more than 5% of
the shares of Common Stock outstanding as of such date; (ii) each director or
nominee for director; (iii) each executive officer identified in the Summary
Compensation Table set forth below under the heading "Compensation and Other
Information Concerning Cascade's Directors and Officers," and (iv) all
directors, nominees and executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND PERCENTAGE OF CASCADE
NATURE OF COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) OUTSTANDING(2)
------------------------------------ ------------ ---------------------
<S> <C> <C>
5% STOCKHOLDERS
Putnam Investments, Inc. ............ 7,844,574(3) 8.32%
One Post Office Square
Boston, MA 02109
American Century Mutual Funds, Inc... 7,033,000(4) 7.46%
4500 Main Street, P.O. Box 418210
Kansas City, MO 64141-9210
DIRECTORS AND EXECUTIVE OFFICERS
Victoria A. Brown.................... 252,000(5) *
Richard M. Burnes, Jr. .............. 185,278(6) *
Paul J. Ferri........................ 149,877(7) *
Bruns H. Grayson..................... 289,290(8) *
Steven C. Walske..................... 44,068(9) *
Daniel E. Smith...................... 1,661,034(10) 1.73%
Gururaj Deshpande.................... 826,174(11) *
Paul B. Blondin...................... 154,204(12) *
Michael A. Champa.................... 146,574(13) *
Robert N. Machlin.................... 62,845(14) *
All directors and executive officers
as a group (14 persons)............. 4,388,438(15) 4.53%
</TABLE>
- --------
* Less than 1% of the total number of outstanding shares of Cascade Common
Stock.
(1) Except as otherwise noted, each person or entity named in the table has
sole voting and investment power with respect to the shares.
(2) The number of shares of Cascade Common Stock deemed outstanding on March
31, 1997 includes (i) 94,323,162 shares of Cascade Common Stock
outstanding on such date and (ii) all options that are currently
exercisable or will become exercisable within 60 days of March 31, 1997
by the person or group in question.
(3) Represents shares held by Putnam Investments, Inc., which is the parent
corporation to Putnam Investment Management, Inc. and The Putnam Advisory
Company, Inc., two investment managers which are deemed to beneficially
own an aggregate of 7,844,574 shares of Cascade's Common Stock.
Information stated above was provided to Cascade as of December 31, 1996.
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<PAGE>
(4) Represents shares held by American Century Mutual Funds, Inc. ("ACMF").
American Century Investment Management, Inc. ("ACIM"), a registered
investment advisor, is the investment manager of ACMF and ACIM is a
wholly-owned subsidiary of American Century Companies, Inc. ("ACC").
Mr. James E. Stowers, Jr. controls ACC by virtue of his beneficial
ownership of a majority of the voting stock of ACC. Mr. Stowers, ACC and
ACIM disclaim beneficial ownership of such shares. Information stated
above was provided to Cascade as of January 15, 1997.
(5) Consists of 252,000 shares of Cascade Common Stock issuable pursuant to
stock options that are currently exercisable or will become exercisable
within 60 days of March 31, 1997.
(6) Includes 84,000 shares of Cascade Common Stock issuable pursuant to stock
options that are currently exercisable or will become exercisable within
60 days of March 31, 1997.
(7) Includes 60,046 shares of Cascade Common Stock held by Matrix Partners
IV, L.P. and 5,006 shares of Cascade Common Stock held by Matrix IV
Entrepreneurs Fund, L.P. Mr. Ferri is the general partner of Matrix IV
Management Company, L.P. which is the general partner of Matrix Partners
IV, L.P. and Matrix IV Entrepreneurs Fund, L.P., and as such may be
deemed to beneficially own all shares of Cascade Common Stock held by
such entities. Mr. Ferri disclaims beneficial ownership of the shares
held by Matrix Partners IV, L.P. and Matrix IV Entrepreneurs Fund, L.P.
except to the extent of any pecuniary interest therein. Also includes
84,000 shares of Cascade Common Stock issuable pursuant to stock options
that are currently exercisable or will become exercisable within 60 days
of March 31, 1997.
(8) Includes 27,000 shares of Cascade Common Stock held by the Grayson Family
Foundation which Mr. Grayson may be deemed the beneficial owner since he
exercises voting and investment control over the shares as the President
of the Foundation. Mr. Grayson disclaims any pecuniary interest in the
shares held by the Grayson Family Foundation. Also includes 84,000 shares
of Cascade Common Stock issuable pursuant to stock options that are
currently exercisable or will become exercisable within 60 days of
March 31, 1997.
(9) Includes 42,000 shares of Cascade Common Stock issuable pursuant to stock
options that are currently exercisable or will become exercisable within
60 days of March 31, 1997.
(10) Includes 1,559,934 shares of Cascade Common Stock issuable pursuant to
stock options that are currently exercisable or will become exercisable
within 60 days of March 31, 1997.
(11) Includes 32,268 shares of Cascade Common Stock issuable pursuant to stock
options that are currently exercisable or will become exercisable within
60 days of March 31, 1997.
(12) Includes 75,704 shares of Cascade Common Stock issuable pursuant to stock
options that are currently exercisable or will become exercisable within
60 days of March 31, 1997.
(13) Includes 144,174 shares of Cascade Common Stock issuable pursuant to
stock options that are currently exercisable or will become exercisable
within 60 days of March 31, 1997.
(14) Includes 61,351 shares of Cascade Common Stock issuable pursuant to stock
options that are currently exercisable or will become exercisable within
60 days of March 31, 1997.
(15) Includes an aggregate of 2,594,549 shares of Cascade Common Stock
issuable pursuant to stock options that are currently exercisable or will
become exercisable within 60 days of March 31, 1997.
104
<PAGE>
COMPENSATION AND OTHER INFORMATION CONCERNING CASCADE DIRECTORS AND OFFICERS
EXECUTIVE COMPENSATION SUMMARY
The following table sets forth summary information concerning the annual and
long-term compensation paid or earned for services rendered to Cascade during
the fiscal years ended December 31, 1996, 1995 and 1994 to Cascade's Chief
Executive Officer and each of the four most highly compensated executive
officers of Cascade in fiscal year 1996 (the "Cascade Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION(1) COMPENSATION(3)
----------------------- ---------------
FISCAL YEAR
ENDING BONUS AWARDS ALL OTHER
NAME AND PRINCIPAL POSITION DECEMBER 31, SALARY ($)(2) OPTIONS (#) COMPENSATION
- --------------------------- ------------ ----------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Daniel E. Smith.......... 1996 $ 214,615 $ 140,148 -- --
President and Chief
Executive Officer 1995 193,596 82,258 330,778 --
1994 122,038 60,000 -- --
Gururaj Deshpande........ 1996 189,231 103,588 -- --
Executive Vice President
of 1995 149,269 63,275 180,874 --
Business Development 1994 111,885 15,000 -- --
Paul E. Blondin.......... 1996 149,423 79,214 -- --
Vice President of 1995 119,846 44,293 108,526 --
Finance and
Administration and
Chief Financial Officer 1994 111,885 18,500 -- --
Michael A. Champa........ 1996 149,327 213,896(4) -- --
Vice President of
Worldwide Sales 1995 114,505 164,476(4) 180,874 --
and Customer Service 1994 100,000 295,905(4) -- --
Robert N. Machlin........ 1996 144,519 79,214 -- --
Vice President of
Marketing 1995 120,000 37,965 156,756 --
1994 27,692 -- 300,002 --
</TABLE>
- --------
(1) Excludes perquisites and other personal benefits, if any, the aggregate
annual amount of which for each officer was less than the lesser of
$50,000 or 10% of the total annual salary and bonus reported.
(2) Bonuses are reported in the year earned, even if actually paid in a
subsequent year.
(3) Cascade did not grant any restricted stock awards or stock appreciation
rights or make any long term incentive plan payouts during the fiscal
years ended December 31, 1996, 1995 and 1994.
(4) Consists of amounts paid pursuant to commissions.
OPTION GRANTS IN THE LAST FISCAL YEAR
Cascade did not grant any stock options or stock appreciation rights to the
Named Executive Officers during the fiscal year ended December 31, 1996.
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<PAGE>
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information with respect to options to
purchase Cascade Common Stock granted to the Cascade Named Executive Officers
under the Cascade Amended and Restated 1991 Stock Plan, including: (i) the
number of shares of Cascade Common Stock purchased upon exercise of options in
the fiscal year ending December 31, 1996; (ii) the net value realized upon
such exercise; (iii) the number of unexercised options outstanding at December
31, 1996; and (iv) the value of such unexercised options at December 31, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
DECEMBER 31, 1996 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
SHARES DECEMBER 31, AT DECEMBER 31,
ACQUIRED VALUE 1996 (#) 1996 ($) (2)
ON EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) (1) UNEXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------------- -----------------------
<S> <C> <C> <C> <C>
Daniel E. Smith......... 702,428 $35,197,578 1,368,597/555,959 $73,732,692/$23,873,480
Gururaj Deshpande....... 0 0 36,174/144,700 1,068,640/ 4,274,680
Paul E. Blondin......... 126,000 7,038,300 21,704/248,822 641,172/ 11,489,717
Michael A. Champa....... 0 0 144,174/306,700 7,018,541/ 13,199,530
Robert N. Machlin....... 60,000 3,535,487 31,352/305,406 926,190/ 12,232,238
</TABLE>
- --------
(1) Amounts disclosed in this column do not reflect amounts actually received
by the Cascade Named Executive Officers, but are calculated based on the
difference between the fair market value of Cascade Common Stock on the
date of exercise and the exercise price of the options. Cascade Named
Executive Officers will receive cash only if and when they sell the
Cascade Common Stock issued upon exercise of the options and the amount of
cash received by such individuals is dependent on the price of Cascade
Common Stock at the time of such sale.
(2) Value is based on the difference between the option exercise price and the
fair market value at December 31, 1996, the last day during fiscal year
1996 for which market prices are available ($55.125 per share as quoted on
the Nasdaq National Market), multiplied by the number of shares underlying
the option.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1996, Ms. Brown and Mr. Ferri
served on the Compensation Committee. No member of the Compensation Committee
was at any time during the past fiscal year or at any other time (i) an
officer or employee of Cascade or any of its subsidiaries, or (ii) was
formerly an officer of Cascade or any of its subsidiaries.
In May 1996, Cascade completed its acquisition of Arris, a privately-held
developer of high performance remote access technology for carrier class
networks, by means of a merger (the "Acquisition") of a wholly-owned
subsidiary of Cascade with and into Arris. As a result of the Acquisition,
Arris became a wholly-owned subsidiary of Cascade. Cascade issued
approximately 3.2 million shares of Cascade Common Stock in exchange for all
outstanding shares of Arris, of which 60,886 shares were issued to Matrix IV
Entrepreneurs Fund, LP and 1,156,852 shares were issued to Matrix Partner IV,
LP. Paul J. Ferri, a director of Cascade, is a general partner of the general
partner of each of these entities. Cascade also assumed all outstanding Arris
options to purchase approximately 242,000 shares of Cascade Common Stock.
No executive officer of Cascade served as a member of the Compensation
Committee (or other Board committee performing equivalent functions or, in the
absence of any such committee, the entire Board of Directors) of another
entity, where an executive officer of such other entity served as a director
of Cascade. In addition, no executive officer of Cascade served on the Board
of Directors of another entity, one of whose executive officers served as a
member of the Compensation Committee of Cascade.
106
<PAGE>
COMPENSATION OF DIRECTORS
As compensation for serving on the Cascade Board, Cascade pays each non-
employee director $5,000 annually and an additional $500 for each meeting that
they attend of the Cascade Board and Board committees on which they serve.
Non-employee directors may receive expense reimbursements for attending
Cascade Board and committee meetings. Directors who are officers or employees
of Cascade do not receive any additional compensation for their services as
directors. Non-Employee directors are also entitled to participate in the
Cascade's Non-Employee Director Stock Option Plan (the "Cascade Director
Plan"). Under the Cascade Director Plan, each non-employee director as of July
28, 1994 automatically received an option for 90,000 shares of Cascade Common
Stock on such date, and each non-employee director first elected to the
Cascade Board after July 28, 1994 automatically receives an option for 90,000
shares on the date of his or her election (each, an "Initial Grant"). Every
non-employee director who continues to be a non-employee director immediately
following each annual meeting of stockholders occurring after his or her
Initial Grant automatically receives an option to purchase 12,000 shares of
Cascade Common Stock on each such annual meeting date (each, a "Subsequent
Grant"). Initial Grants become exercisable in three equal annual installments
from the date of grant and Subsequent Grants become exercisable on the earlier
of one year from the date of grant or the date of the next annual meeting of
stockholders. The exercise price per share of all options granted under the
Cascade Director Plan is equal to the fair market value of Cascade Common
Stock on the date of grant, and such options expire on the date which is ten
years from the date of the option grant. Options to purchase 90,000 shares of
Cascade Common Stock at an exercise price of $43.625 per share and 60,000
shares of Cascade Common Stock at an exercise price of $51.375 per share were
granted in 1996.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 1996, Cascade completed the Acquisition of Arris, a privately-held
developer of high performance remote access technology for carrier class
networks. As a result of the Acquisition, Arris became a wholly-owned
subsidiary of Cascade. Cascade issued approximately 3.2 million shares of
Cascade Common Stock in exchange for all outstanding shares of Arris, of which
60,886 shares were issued to Matrix IV Entrepreneurs Fund, LP and 1,156,852
shares were issued to Matrix Partner IV, LP. Paul J. Ferri, a director of
Cascade, is a general partner of the general partner of each of these
entities. Cascade also assumed all outstanding Arris options to purchase
approximately 242,000 shares of Cascade Common Stock.
Cascade has adopted a policy that all transactions between Cascade and its
officers, directors, principal stockholders and their affiliates be on terms
no less favorable to Cascade than could be obtained from unrelated third
parties and must be approved by a majority of the outside independent and
disinterested directors. No such transactions are currently being considered.
107
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
The unaudited pro forma condensed combining statements of income combine
Ascend's and Cascade's historical consolidated statements of income for each
of the three years in the period ended December 31, 1996 giving effect to the
Merger on a pooling of interests basis as if it had occurred at the beginning
of each period presented and to the purchase of Sahara for the year ended
December 31, 1996, which is being accounted for as a purchase transaction, at
the beginning of the period presented. The unaudited pro forma condensed
combining balance sheet combines Ascend's historical consolidated balance
sheet as of December 31, 1996 with Cascade's and Sahara's historical
consolidated balance sheets as of December 31, 1996, giving effect to the
Merger and the Sahara purchase transaction as if they had occurred on December
31, 1996. The historical financial information of Ascend and Cascade has been
derived from the audited consolidated financial statements for each of the
three years in the period ended December 31, 1996 and of Sahara for the year
ended December 31, 1996 which are all included elsewhere herein and should be
read in conjunction with such financial statements and the notes thereto. The
pro forma information is not necessarily indicative of the combined
consolidated operating results or financial position that would have occurred
had the Merger and the purchase transaction been consummated at the beginning
of the periods presented, nor is it necessarily indicative of future combined
operating results or financial position.
108
<PAGE>
ASCEND, CASCADE AND SAHARA
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------
ASCEND CASCADE SAHARA ADJUSTMENTS COMBINED
-------- -------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $213,970 $ 98,399 $ 3,696 $ -- $316,065
Short-term
investments.......... 159,181 13,920 -- -- 173,101
Accounts receivable,
net.................. 103,145 81,949 -- -- 185,094
Inventories........... 49,241 19,303 -- -- 68,544
Deferred income
taxes................ 33,489 8,300 -- -- 41,789
Other current assets.. 13,273 13,171 137 -- 26,581
-------- -------- ------- -------- --------
Total current
assets............. 572,299 235,042 3,833 -- 811,174
Investments............. 35,771 -- -- -- 35,771
Furniture, fixtures and
equipment, net......... 40,034 33,012 1,140 -- 74,186
Other assets............ 3,762 2,207 5 -- 5,974
-------- -------- ------- -------- --------
Total assets.......... $651,866 $270,261 $ 4,978 $ -- $927,105
======== ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...... $ 43,268 $ 17,555 $ 539 -- $ 61,362
Accrued liabilities... 39,003 27,481 1,327 42,200 (a) 114,061
4,050 (a)
Accrued compensation
and related
liabilities.......... 22,145 5,442 -- -- 27,587
-------- -------- ------- -------- --------
Total current
liabilities........ 104,416 50,478 1,866 46,250 203,010
Redeemable convertible
preferred stock........ -- -- 11,007 (11,007)(c) --
Commitments and
contingencies
Stockholders' equity
(deficit):
Common stock.......... 119 90 179 (203)(b) 185
Additional paid-in
capital.............. 412,227 121,809 1,183 203 (b) 747,177
(1,362)(c)
213,117 (d)
Retained earnings..... 135,652 97,884 (8,222) (42,200)(a) (22,719)
(214,055)(e)
8,222 (c)
Unearned
compensation......... -- -- (1,035) 1,035 (c) --
Notes receivable from
stockholders......... (548) -- -- -- (548)
-------- -------- ------- -------- --------
Total stockholders'
equity (deficit)... 547,450 219,783 (7,895) (35,243) 724,095
-------- -------- ------- -------- --------
Total liabilities
and stockholders'
equity............. $651,866 $270,261 $ 4,978 $ -- $927,105
======== ======== ======= ======== ========
</TABLE>
- --------
See accompanying notes to Unaudited Pro Forma Condensed Combining Financial
Statements.
109
<PAGE>
ASCEND, CASCADE AND SAHARA
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------
ASCEND CASCADE SAHARA COMBINED
-------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
Net sales............................ $549,297 $ 340,976 $ -- $890,273
Cost of sales........................ 192,226 119,519 -- 311,745
-------- --------- ------- --------
Gross profit....................... 357,071 221,457 -- 578,528
Operating expenses:
Research and development........... 40,291 53,378 4,908 98,577
Sales and marketing................ 111,599 44,687 1,101 157,387
General and administrative......... 16,745 13,110 1,415 31,270
Costs of Merger.................... 13,900 -- -- 13,900
-------- --------- ------- --------
Total operating expenses......... 182,535 111,175 7,424 301,134
-------- --------- ------- --------
Operating income (loss).............. 174,536 110,282 (7,424) 277,394
Interest income (expense), net....... 11,879 5,307 92 17,278
-------- --------- ------- --------
Income (loss) before income taxes.... 186,415 115,589 (7,332) 294,672
Provision for income taxes........... 73,304 44,810 -- 118,114
-------- --------- ------- --------
Net income (loss).................... $113,111 $ 70,779 $(7,332) $176,558
======== ========= ======= ========
Net income (loss) per share.......... $ 0.89 $ 0.72 $ (0.57) $ 0.89
======== ========= ======= ========
Number of shares used in per share
calculation......................... 127,809 97,767 12,752 198,626
======== ========= ======= ========
</TABLE>
- --------
See accompanying notes to Unaudited Pro Forma Condensed Combining Financial
Statements.
110
<PAGE>
ASCEND AND CASCADE
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------
ASCEND CASCADE COMBINED
--------- --------- ----------
<S> <C> <C> <C>
Net sales........................................ $ 152,604 $ 134,834 $ 287,438
Cost of sales.................................... 53,296 48,563 101,859
--------- --------- ---------
Gross profit................................... 99,308 86,271 185,579
Operating expenses:
Research and development....................... 12,400 20,651 33,051
Sales and marketing............................ 35,447 20,587 56,034
General and administrative..................... 9,129 6,955 16,084
Purchased research and development............. 3,032 -- 3,032
--------- --------- ---------
Total operating expenses..................... 60,008 48,193 108,201
--------- --------- ---------
Operating income................................. 39,300 38,078 77,378
Interest income, net............................. 5,122 3,238 8,360
--------- --------- ---------
Income before income taxes....................... 44,422 41,316 85,738
Provision for income taxes....................... 16,887 15,906 32,793
--------- --------- ---------
Net income....................................... $ 27,535 $ 25,410 $ 52,945
========= ========= =========
Net income per share............................. $ 0.25 $ 0.28 $ 0.30
========= ========= =========
Number of shares used in per share calculation... 111,362 91,220 175,216
========= ========= =========
</TABLE>
- --------
See accompanying notes to Unaudited Pro Forma Condensed Combining Financial
Statements.
111
<PAGE>
ASCEND AND CASCADE
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
-------------------------------
ASCEND CASCADE COMBINED
--------- --------- ----------
<S> <C> <C> <C>
Net sales..................................... $ 39,655 $ 50,060 $ 89,715
Cost of sales................................. 13,387 19,113 32,500
--------- --------- ----------
Gross profit................................ 26,268 30,947 57,215
Operating expenses:
Research and development.................... 6,139 7,384 13,523
Sales and marketing......................... 11,409 10,547 21,956
General and administrative.................. 3,569 2,699 6,268
--------- --------- ----------
Total operating expenses.................. 21,117 20,630 41,747
--------- --------- ----------
Operating income.............................. 5,151 10,317 15,468
Interest income, net.......................... 969 781 1,750
--------- --------- ----------
Income before income taxes.................... 6,120 11,098 17,218
Provision (benefit) for income taxes.......... (430) 1,832 1,402
--------- --------- ----------
Net income.................................... $ 6,550 $ 9,266 $ 15,816
========= ========= ==========
Net income per share.......................... $ 0.07 $ 0.11 $ 0.10
========= ========= ==========
Number of shares used in per share
calculation.................................. 94,583 81,074 151,335
========= ========= ==========
</TABLE>
- --------
See accompanying notes to Unaudited Pro Forma Condensed Combining Financial
Statements.
112
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
The adjustments to the unaudited pro forma condensed combining balance sheet
give effect to the assumed issuance of approximately 66 million shares of
Ascend Common Stock as if the Merger had been consummated as of December 31,
1996 and an anticipated charge for Merger-related expenses totaling
approximately $42.2 million. Such Merger-related expenses include investment
advisory fees, regulatory filing costs, legal and accounting expenses and
other transaction costs. The unaudited pro forma condensed combining financial
statements do not include adjustments to conform the accounting policies of
Cascade to those followed by Ascend nor do they include merger related
adjustments for redundant capacity and assets. The nature and extent of such
adjustments will be based upon further study and analysis. The unaudited pro
forma condensed combining statements of income do not reflect these non-
recurring charges, which Ascend anticipates will be recorded during the
quarter in which the merger is consummated.
In addition, the adjustments to the unaudited pro forma condensed combining
balance sheet give effect to the acquisition of Sahara, which was completed by
Cascade on January 28, 1997. Cascade issued approximately 3.4 million shares
of Cascade Common Stock in exchange for all the outstanding shares of Sahara.
In addition, Cascade assumed all outstanding Sahara stock options to purchase
approximately 400,000 shares of Cascade Common Stock. The acquisition will be
accounted for under the purchase method of accounting. Accordingly, the
purchase price of approximately $219 million was allocated to the net assets
acquired based upon their estimated fair market values. The estimated fair
value of the tangible net assets acquired was approximately $5 million. In
addition, approximately $214 million of the purchase price was allocated to
in-process research and development that has not reached technological
feasibility and that has no alternative future use. Purchased research and
development was valued using a risk adjusted cash flow model under which
future cash flows were discounted, taking into account risks related to
existing and future markets and assessments of the life expectancy of the
underlying technology. Expected future cash flows associated with purchased
research and development are discounted considering risks and uncertainties
related to the viability of and to the potential changes in future target
markets and to the completion of the products expected to ultimately be
marketed by Cascade. The in-process technology relates to the products that
management intends to further develop to the point of technological
feasibility. No completed technology was purchased as Sahara has brought no
products to market and no development project has reached technological
feasibility. Pro forma adjustments to the pro forma combined statements of
income do not give effect to an anticipated charge for purchased research and
development, which is non-deductible for tax purposes and which will be
charged to operations in the first quarter of 1997.
The pro forma combined per share amounts in the unaudited pro forma
condensed combining statements of income are based upon the historical
weighted average number of shares of common stock and dilutive common stock
equivalents of Ascend outstanding during each period presented. In addition,
the shares of Ascend Common Stock to be issued in connection with the Merger,
based on the equivalent weighted average shares and the dilutive common share
equivalents of Cascade outstanding during each period presented, are treated
as outstanding during each such period and the shares issued by Cascade to
purchase Sahara, adjusted to the equivalent shares of Ascend, are treated as
outstanding for the year ended December 31, 1996.
Certain financial statement balances of Cascade and Sahara have been
reclassified to conform with the Ascend financial statement presentation.
The adjustments to the unaudited pro forma condensed combining balance sheet
and statements of income are as follows:
(a) To record accrual for anticipated Merger-related expenses and purchase
transaction costs.
(b) To record par value for shares to be issued in connection with the Merger
and purchase of Sahara.
(c) To eliminate Sahara's preferred stock, stockholder's deficit, additional
paid-in capital and unearned compensation.
(d) To record additional paid-in capital related to the fair value of issuance
of common stock and options for the purchase of Sahara.
(e) To record the impact to retained earnings of the charge for purchased
research and development relating to the purchase of Sahara.
113
<PAGE>
COMPARISON OF RIGHTS OF CASCADE STOCKHOLDERS
AND ASCEND STOCKHOLDERS
Cascade is a Delaware corporation and the rights of its stockholders are
governed by the DGCL, the Amended and Restated Certificate of Incorporation of
Cascade (the "Cascade Certificate of Incorporation") and the Bylaws of Cascade
(the "Cascade Bylaws"). Ascend is a Delaware corporation and the rights of its
stockholders are governed by the DGCL, the Restated Certificate of
Incorporation of Ascend, as amended (the "Ascend Certificate of
Incorporation"), and the Bylaws of Ascend (the "Ascend Bylaws"). If the Merger
is consummated, holders of Cascade Common Stock will become holders of Ascend
Common Stock, and the rights of the Cascade stockholders will be governed by
the DGCL, the Ascend Certificate of Incorporation and the Ascend Bylaws. The
rights of Ascend stockholders under the DGCL, the Ascend Certificate of
Incorporation and the Ascend Bylaws differ in certain respects from the rights
of Cascade stockholders under the DGCL, the Cascade Certificate of
Incorporation and the Cascade Bylaws. Certain of these differences are
summarized below. This summary is qualified in its entirety by reference to
the full text of such documents which are incorporated by reference in this
Joint Proxy Statement/Prospectus.
SPECIAL MEETINGS OF STOCKHOLDERS
Under the DGCL, special meetings of the stockholders of a Delaware
corporation may be called by the board of directors or by the persons
authorized in the corporation's certificate of incorporation or bylaws. The
Cascade Bylaws provide that special meetings of the stockholders may be called
by the Chairman of the Cascade Board, a majority of the Cascade Board or the
President of Cascade. Notwithstanding any other provision of law, the Cascade
Certificate of Incorporation or the Cascade Bylaws, the affirmative vote of at
least seventy-five percent (75%) of all stockholders is required to amend,
repeal, or to adopt any provision inconsistent with the prior sentence.
The Ascend Bylaws provide that special meetings of the stockholders, unless
otherwise prescribed by statute or by the Ascend Certificate of Incorporation,
may be called by either a resolution adopted by a majority of the Ascend Board
or by the holders of not less than 10% of all shares entitled to cast votes at
the special meeting. This provision may be amended or repealed by a majority
of authorized directors or by the affirmative vote of at least sixty-six and
two-thirds percent (66 2/3%) of voting power of all the outstanding shares of
capital stock entitled to vote generally and any vote of holders of any class
or series of stock of Ascend required by law or the Ascend Certificate of
Incorporation.
NUMBER AND ELECTION OF DIRECTORS
Under the DGCL, the number of directors shall be fixed or determined in the
manner the bylaws provide, unless the corporation's certificate of
incorporation fixes the number of directors, in which case the number of
directors may only be changed by amending the certificate of incorporation.
The DGCL permits the certificate of incorporation or bylaws to divide the
directors into one, two or three classes, with the term of office of one class
of directors to expire each year and the terms of office of no two classes to
expire during the same year.
The Cascade Bylaws provide that the number of directors of Cascade shall be
fixed from time to time by resolution of the Cascade Board but in no event
shall be less than three (3). In addition, the Cascade Certificate of
Incorporation divides the Cascade Board into three classes, with no class
containing more than one director more than any other class. Currently, the
Cascade Board consists of six (6) members.
The Ascend Bylaws provide that the authorized number of Ascend directors is
seven (7) and may be changed from time to time exclusively by the Ascend Board
pursuant to a resolution adopted by a majority of the total number of
authorized directors. Ascend has agreed to increase the number of its
directors to ten (10) upon consummation of the Merger.
114
<PAGE>
REMOVAL OF DIRECTORS
The DGCL provides in general that any director or the entire board of
directors may be removed, with or without cause, by the holders of a majority
of shares entitled to vote at an election of directors, except that, with
respect to corporations with classified boards (as is applicable to Cascade)
or cumulative voting, a director may be removed, only for cause, by the
holders of the majority of the shares entitled to vote at an election of
directors. The Cascade Certificate of Incorporation and the Cascade Bylaws
contain sections restating this provision of the DGCL.
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS
The DGCL allows a corporation's certificate of incorporation to eliminate or
limit a director's personal liability to the corporation or its stockholders
for monetary damages for the director's breach of his fiduciary duty as a
director. However, the corporation may not eliminate or limit a director's
liability (a) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (b) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (c) for
an unlawful payment of dividends or an unlawful stock purchase or redemption
or (d) for any transaction from which the director derived any improper
personal benefit. No provision may retroactively eliminate or limit a
director's liability.
Both the Ascend Certificate of Incorporation and the Cascade Certificate of
Incorporation limit a director's personal liability to Ascend or Cascade,
respectively, or their respective stockholders for monetary damages to the
full extent permitted by the DGCL, and provide that any repeal or modification
of the applicable DGCL provision will be prospective only, and will not
adversely affect any limitation on the personal liability existing at the time
of such repeal or modification applicable to any such Ascend or Cascade
director.
DESCRIPTION OF ASCEND CAPITAL STOCK
The authorized capital stock of Ascend consists of 400,000,000 shares of
Common Stock, $.001 par value per share, and 2,000,000 shares of Preferred
Stock, $.001 par value per share.
COMMON STOCK
As of April 18, 1997, there were approximately 120,794,242 shares of Ascend
Common Stock outstanding held of record by approximately 1,185 stockholders.
The holders of Ascend Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders.
Accordingly, holders of a majority of the shares of Ascend Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Subject to preferences that may be applicable to any
outstanding Preferred Stock, holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Ascend Board out of funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of Ascend, holders of Ascend Common Stock are entitled to share
ratably in the assets remaining after payment of liabilities and the
liquidation preference of any outstanding Preferred Stock. Holders of Ascend
Common Stock have no preemptive, conversion or redemption rights. All of the
outstanding shares of Ascend Common Stock are, and the shares to be issued in
connection with the Merger when issued will be, fully paid and non-assessable.
The transfer agent for Ascend Common Stock is The First National Bank of
Boston.
CERTAIN CHARTER PROVISIONS
The Ascend Certificate of Incorporation and Bylaws contain certain
provisions that could have the effect of delaying, deferring or preventing a
change in control of Ascend. See "Comparison of Rights of Cascade Stockholders
and Ascend Stockholders."
115
<PAGE>
PREFERRED STOCK
As of the date of this Joint Proxy Statement/Prospectus, there were no
shares of Ascend Preferred Stock outstanding. The Ascend Board has the
authority, without further action by the stockholders, to issue such Preferred
Stock in one or more series and to fix the designations, powers, preferences,
privileges and relative participating, optional or special rights and the
qualifications, limitations or restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption and liquidation
preferences, any or all of which may be greater than the rights of the Ascend
Common Stock. The Ascend Board, without stockholder approval, can issue
Preferred Stock with voting, conversion or other rights that could adversely
affect the voting power and other rights of the holders of Ascend Common
Stock. Preferred Stock could thus be issued quickly with terms calculated to
delay or prevent a change in control of Ascend or make removal of management
more difficult. Additionally, the issuance of Preferred Stock may have the
effect of decreasing the market price of the Ascend Common Stock. At present,
Ascend has no plans to issue any of the Preferred Stock.
LEGAL MATTERS
The validity of the shares of Ascend Common Stock to be issued in connection
with the Merger will be passed upon for Ascend by Gray Cary Ware &
Freidenrich, A Professional Corporation, Palo Alto, California. As of the date
hereof, attorneys at Gray Cary Ware & Freidenrich participating in this matter
beneficially own approximately 3,800 shares of Ascend Common Stock.
EXPERTS
The consolidated financial statements of Ascend as of December 31, 1995 and
1996 and for each of the three years in the period ended December 31, 1996 and
the financial statements of Sahara Networks, Inc., a development stage
enterprise, as of December 31, 1996 and 1995 and for the year ended December
31, 1996 and the period from May 25, 1995 (inception) to December 31, 1995,
appearing in this Joint Proxy Statement/ Prospectus have been audited by Ernst
& Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Cascade as of December 31, 1995 and
1996, and for each of the three years in the period ended December 31, 1996
included in this Joint Proxy Statement/Prospectus have been incorporated by
reference and included herein in reliance on the report of Coopers & Lybrand
L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
116
<PAGE>
INDEX TO ASCEND COMMUNICATIONS, INC., CASCADE COMMUNICATIONS CORP. AND
SAHARA NETWORKS, INC. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ASCEND COMMUNICATIONS, INC.
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets at December 31, 1996 and 1995................ F-3
Consolidated Statements of Income for the Years Ended December 31, 1996,
1995 and 1994........................................................... F-4
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1996, 1995 and 1994........................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
CASCADE COMMUNICATIONS CORP.
Report of Independent Accountants........................................ F-20
Consolidated Balance Sheets as of December 31, 1996 and 1995............. F-21
Consolidated Statements of Income for the Years Ended December 31, 1996,
1995 and 1994........................................................... F-22
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1996, 1995 and 1994........................................ F-23
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994..................................................... F-24
Notes to Consolidated Financial Statements............................... F-25
SAHARA NETWORKS, INC. (a Development Stage Enterprise)
Report of Independent Auditors........................................... F-34
Balance Sheets at December 31, 1996 and 1995............................. F-35
Statements of Operations for the year ended December 31, 1996 and for the
period from May 25, 1995 (inception) to December 31, 1995 and 1996...... F-36
Statements of Stockholders' Deficit for the year ended December 31, 1996
and for the period from May 25, 1995 (inception) to December 31, 1995
and 1996................................................................ F-37
Statements of Cash Flows for the year ended December 31, 1996 and for the
period from May 25, 1995 (inception) to December 31, 1995 and 1996...... F-38
Notes to Financial Statements............................................ F-39
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Ascend Communications, Inc.
We have audited the accompanying consolidated balance sheets of Ascend
Communications, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Ascend Communications, Inc. at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Walnut Creek, California
January 24, 1997,
except Note 10 as to which the date is
April 1, 1997
F-2
<PAGE>
ASCEND COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $213,970 $147,050
Short-term investments..................................... 159,181 90,843
Accounts receivable, less allowance for uncollectible
accounts of $2,000 and $900 at December 31, 1996 and 1995,
respectively.............................................. 103,145 31,238
Inventories................................................ 49,241 26,868
Deferred income taxes...................................... 33,489 9,370
Other current assets....................................... 13,273 2,408
-------- --------
Total current assets................................... 572,299 307,777
Investments.................................................. 35,771 51,515
Furniture, fixtures and equipment, net....................... 40,034 10,108
Other assets................................................. 3,762 614
-------- --------
Total assets........................................... $651,866 $370,014
======== ========
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES
AND
STOCKHOLDERS'
EQUITY
</TABLE>
<TABLE>
<S> <C> <C>
Current liabilities:
Accounts payable.......................................... $ 43,268 $ 13,571
Accrued liabilities....................................... 39,003 20,861
Accrued compensation and related liabilities.............. 22,145 6,419
Notes payable............................................. -- 4,176
-------- --------
Total current liabilities............................. 104,416 45,027
Commitments
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares-2,000
No shares issued or outstanding......................... -- --
Common stock, $.001 par value:
Authorized shares-400,000
119,417 shares issued (113,211--1995)................... 119 113
Additional paid-in capital................................ 412,227 302,110
Retained earnings......................................... 135,652 23,312
Notes receivable from stockholders........................ (548) (548)
-------- --------
Total stockholders' equity............................ 547,450 324,987
-------- --------
Total liabilities and stockholders' equity............ $651,866 $370,014
======== ========
</TABLE>
See accompanying notes
F-3
<PAGE>
ASCEND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Net sales........................................... $549,297 $152,604 $39,655
Cost of sales....................................... 192,226 53,296 13,387
-------- -------- -------
Gross profit...................................... 357,071 99,308 26,268
Operating expenses:
Research and development.......................... 40,291 12,400 6,139
Sales and marketing............................... 111,599 35,447 11,409
General and administrative........................ 16,745 9,129 3,569
Purchased research and development................ -- 3,032 --
Costs of merger................................... 13,900 -- --
-------- -------- -------
Total operating expenses........................ 182,535 60,008 21,117
-------- -------- -------
Operating income.................................... 174,536 39,300 5,151
Interest income, net................................ 11,879 5,122 969
-------- -------- -------
Income before income taxes.......................... 186,415 44,422 6,120
Provision (benefit) for income taxes................ 73,304 16,887 (430)
-------- -------- -------
Net income.......................................... $113,111 $ 27,535 $ 6,550
======== ======== =======
Net income per share................................ $ 0.89 $ 0.25 $ 0.07
======== ======== =======
Number of shares used in per share calculation...... 127,809 111,362 94,583
======== ======== =======
</TABLE>
See accompanying notes
F-4
<PAGE>
ASCEND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS RECEIVABLE
----------------- -------------- PAID-IN (ACCUMULATED FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) STOCKHOLDERS TOTAL
------- -------- ------- ------ ---------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993................... 61,256 $ 18,228 11,471 $ 11 $ 4,656 $(10,773) $ -- $ 12,122
Issuance of common
stock, net of issuance
costs.................. -- -- 717 1 6,606 -- -- 6,607
Conversion of preferred
stock into common
stock, NetStar......... (61,256) (18,228) 61,226 62 18,166 -- -- --
Issuance of common stock
in initial public
offering, net of
issuance costs......... -- -- 17,456 18 25,157 -- -- 25,175
Conversion of warrants
into common stock,
NetStar................ -- -- 503 -- -- -- -- --
Issuances of common
stock under stock
option plans........... -- -- 6,117 6 1,009 -- (794) 221
Net income.............. -- -- -- -- -- 6,550 -- 6,550
------- -------- ------- ---- -------- -------- ----- --------
Balance at December 31,
1994................... -- -- 97,490 98 55,594 (4,223) (794) 50,675
Tax benefit related to
exercise of stock
options................ -- -- -- -- 7,803 -- -- 7,803
Payments from
stockholders........... -- -- -- -- -- -- 246 246
Issuance of warrants to
purchase shares of
common stock, NetStar.. -- -- -- -- 134 -- -- 134
Issuance of common stock
under employee stock
option and stock
purchase plans......... -- -- 1,724 1 2,134 -- -- 2,135
Issuance of common stock
in initial public
offering, net of
issuance costs,
NetStar................ -- -- 1,347 1 24,715 -- -- 24,716
Issuance of common stock
in public offering, net
of issuance costs...... -- -- 12,650 13 211,730 -- -- 211,743
Net income.............. -- -- -- -- -- 27,535 -- 27,535
------- -------- ------- ---- -------- -------- ----- --------
Balance at December 31,
1995................... -- -- 113,211 113 302,110 23,312 (548) 324,987
Tax benefit related to
exercise of stock
options................ -- -- -- -- 64,551 -- -- 64,551
Effect of poolings...... -- -- 1,350 2 6,504 (771) -- 5,735
Exercise of warrants,
NetStar................ -- -- 399 -- 7,904 -- -- 7,904
Issuance of common stock
under employee stock
option and stock
purchase plans......... -- -- 4,457 4 31,158 -- -- 31,162
Net income.............. -- -- -- -- -- 113,111 -- 113,111
------- -------- ------- ---- -------- -------- ----- --------
Balance at December 31,
1996................... -- $ -- 119,417 $119 $412,227 $135,652 $(548) $547,450
======= ======== ======= ==== ======== ======== ===== ========
</TABLE>
See accompanying notes
F-5
<PAGE>
ASCEND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Operating activities:
Net income.................................... $ 113,111 $ 27,535 $ 6,550
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation................................ 8,801 3,083 1,002
Deferred income taxes....................... (22,654) (6,389) (2,981)
Allowance for uncollectible accounts........ 1,100 200 650
Changes in operating assets and liabilities:
Accounts receivable....................... (73,007) (23,560) (4,931)
Inventories............................... (22,373) (20,467) (4,543)
Other current assets...................... (10,865) (1,332) (753)
Other assets.............................. (3,148) (173) (102)
Accounts payable and accrued liabilities.. 47,839 25,473 6,285
Accrued compensation and related
liabilities.............................. 15,726 5,196 631
--------- --------- --------
Net cash provided by operating
activities............................. 54,530 9,566 1,808
--------- --------- --------
Investing activities:
Purchases of investments.................... (245,431) (161,119) (71,208)
Maturities and sales of investments......... 192,837 47,709 46,995
Purchases of furniture, fixtures and
equipment.................................. (38,703) (10,286) (2,260)
Effect of business combinations............. 2,202 -- --
--------- --------- --------
Net cash used in investing activities... (89,095) (123,696) (26,473)
--------- --------- --------
Financing activities:
Proceeds from issuance of common stock,
net........................................ 39,066 238,728 32,003
Proceeds from notes receivable from
stockholders............................... -- 246 --
Proceeds from (repayment of) notes payable.. (2,132) 3,730 --
Tax benefit related to exercise of stock
options.................................... 64,551 7,803 --
--------- --------- --------
Net cash provided by financing
activities............................. 101,485 250,507 32,003
--------- --------- --------
Net increase in cash and cash equivalents..... 66,920 136,377 7,338
Cash and cash equivalents, beginning of year.. 147,050 10,673 3,335
--------- --------- --------
Cash and cash equivalents, end of year........ $ 213,970 $ 147,050 $ 10,673
========= ========= ========
Supplemental disclosure of cash flow
information:
Income tax payments......................... $ 34,095 $ 8,152 $ 1,381
========= ========= ========
Supplemental schedule of noncash investing and
financing activities information:
Notes receivable related to exercise of
stock options.............................. $ -- $ -- $ 794
========= ========= ========
Exercise of warrants in exchange for
retirement of notes payable................ $ 2,068 $ -- $ --
========= ========= ========
</TABLE>
See accompanying notes
F-6
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
The Company--Ascend Communications, Inc. ("Ascend" or the "Company")
develops, manufactures, markets, sells and supports a broad range of high-
speed integrated remote networking products that enable its customers to
build: (i) Internet access systems consisting of point-of-presence ("POP")
termination equipment for Internet service providers ("ISPs") and remote site
Internet access equipment for Internet subscribers; (ii) high speed IP
switches for application in telecommunications carriers and ISP backbone
networks; (iii) extensions and enhancements to corporate backbone networks
that facilitate access to these networks by remote offices, telecommuters and
mobile computer users; and (iv) videoconferencing and multimedia access
facilities. These products support existing digital and analog networks.
Basis of Presentation--The consolidated financial statements include the
accounts of Ascend and its subsidiaries. All significant intercompany
transactions and balances have been eliminated.
As more fully described in Note 8, in August 1996, the Company merged with
NetStar, Inc. ("NetStar"). The merger has been accounted for as a pooling of
interests, and the historical consolidated financial statements of the Company
for all periods prior to the merger have been restated to include the
financial position, results of operations and cash flows of NetStar.
Cash and Cash Equivalents--Cash and cash equivalents consist of demand
deposits and commercial paper in highly liquid short-term instruments with
original maturities of three months or less from the date of purchase and are
stated at cost, which approximates market. Substantially all of the Company's
cash and cash equivalents are maintained by four major financial institutions.
Short-Term Investments and Investments--The Company adopted SFAS 115 in
January 1994. Accordingly, management determines the appropriate
classification of debt securities at the time of purchase and re-evaluates
such designation as of each balance sheet date. On November 15, 1995, the FASB
staff issued a Special Report, A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities. In
accordance with provisions in that Special Report, the Company chose to
reclassify securities from held-to-maturity to available-for-sale. At the date
of transfer, the fair value of all of the Company's investments approximated
their cost. Available-for-sale securities are carried at amounts which
approximate fair value, with unrealized gains and losses, net of tax, recorded
in stockholders' equity until disposition. Realized gains and losses and
declines in value judged to be other than temporary on available-for-sale debt
and equity securities are included in interest and other income. At December
31, 1996 and 1995, the Company's investments consisted primarily of
obligations of the U.S. government ($23,401,000--1996 and $13,000,000--1995),
states and political subdivisions ($156,948,000--1996 and $114,698,000--1995),
U.S. corporate securities ($9,500,000--1996 and $14,660,000--1995) and foreign
debt securities ($5,103,000--1996 and None--1995). Unrealized gains and losses
for 1996, 1995 and 1994 were not material.
Accounts Receivable--The Company sells and distributes a substantial
percentage of its products to Internet service providers, value-added
resellers and distributors, and local and long-distance telecommunications
carriers, throughout North America, Europe, and Asia and the Pacific Basin.
Accounts receivable are principally from these customers. The Company conducts
ongoing credit evaluations of its customers and maintains an allowance for
doubtful accounts.
Inventories--Inventories are stated at the lower of cost (determined by the
first-in, first-out method) or market. The Company provides for obsolete
inventories in the period when obsolescence is determined to have occurred.
F-7
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
Depreciation--Furniture, fixtures and equipment are recorded at cost.
Depreciation is provided using the straight-line method over estimated useful
lives of three to four years.
Major Customers and Revenues by Geographic Area--No customer accounted for
more than 10% of net sales in 1996. One customer accounted for 11% of net
sales in 1995. A second customer accounted for 15% of net sales in 1994. Net
sales were derived from customers based in the following geographic areas (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
North America..................................... $287,849 $108,662 $31,781
Europe............................................ 104,582 19,818 5,957
Asia and Pacific Basin............................ 152,371 24,124 1,917
Latin and South America........................... 4,495 -- --
-------- -------- -------
$549,297 $152,604 $39,655
======== ======== =======
</TABLE>
Revenue Recognition--The Company recognizes revenue from product sales upon
shipment provided that no significant customer and post-contract support
obligations remain and collection of the related receivable is deemed
probable. The Company defers recognition of revenue on initial shipments of
certain new products until such products have been tested in the marketplace.
The Company accounts for all costs relating to customer and post-contract
support obligations, which are not significant in amount, at the time of
shipment by accruing such costs. In addition, the Company provides for
potential product returns and estimated warranty costs in the period of the
sale.
The Company's revenue recognition policy is in compliance with the American
Institute of Certified Public Accountants' Statement of Position 91-1,
Software Revenue Recognition.
Key Suppliers--The Company is dependent on single or limited source
suppliers for certain components used in its products. The Company has
generally been able to obtain adequate supplies of these components. In
addition, the Company believes that there are alternative suppliers for the
components used in its products. However, an extended interruption in the
supply of the components currently obtained from single or limited source
suppliers could adversely effect the Company's business and results of
operations.
Research and Development--Costs to develop the Company's products are
expensed as incurred in accordance with Statement of Financial Accounting
Standards No. 2, Accounting for Research and Development Costs, which
establishes accounting and reporting standards for research and development.
Software Development Costs--The Company accounts for software development
costs in accordance with Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed. The Company's products include a software component. The Company has
expensed substantially all software development costs to date as such
development costs have been incurred prior to the Company's products attaining
technological feasibility.
Stock-Based Compensation--In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"). In accordance with the
provisions of SFAS 123, the Company applies APB Opinion No. 25 and related
Interpretations in accounting for its stock option and purchase plans and,
accordingly, has not recognized compensation cost in connection with such
plans. Note 5 to the consolidated financial statements contains a
F-8
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
summary of the pro forma effects to reported net income and net income per
share for 1996 and 1995 as if the Company had elected to recognize
compensation cost based on the fair value of the options granted at grant date
as prescribed by SFAS 123.
Net Income Per Share--Net income per share is computed using the weighted
average number of shares of common stock outstanding. Common equivalent shares
from stock options and warrants (using the treasury stock method) have been
included in the computation when dilutive. Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins, common and common equivalent
shares issued by the Company at prices below the initial public offering price
during the twelve-month period prior to the initial public offering have been
included in the calculation as if they were outstanding for all periods prior
to the initial public offering (using the treasury stock method). The
difference between primary and fully diluted earnings per share is not
material for all periods presented.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Reclassifications--Certain 1994 and 1995 balances have been reclassified to
conform to the 1996 presentation.
2. BALANCE SHEET DETAILS (IN THOUSANDS)
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------- --------
<S> <C> <C>
Finished goods............................................. $ 6,854 $ 10,687
Products in process........................................ 6,992 8,001
Raw materials and supplies................................. 35,395 8,180
------- --------
$49,241 $ 26,868
======= ========
</TABLE>
Furniture, Fixtures and Equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- -------
<S> <C> <C>
Computer equipment........................................ $ 26,967 $ 7,836
Laboratory equipment...................................... 10,060 3,119
Furniture and fixtures.................................... 16,573 3,942
-------- -------
53,600 14,897
Less accumulated depreciation........................... (13,566) (4,789)
-------- -------
$ 40,034 $10,108
======== =======
</TABLE>
F-9
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BALANCE SHEET DETAILS (IN THOUSANDS) (CONTINUED)
Accrued Liabilities consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
------- -------
<S> <C> <C>
Income taxes payable........................................ $ 6,298 $ 8,419
Other accrued liabilities................................... 19,849 5,570
Customer deposits........................................... 12,856 6,872
------- -------
$39,003 $20,861
======= =======
</TABLE>
3. NOTES PAYABLE
In June 1995, NetStar issued $4,200,000 of convertible notes payable
("Bridge Notes") in a private placement. In connection with this financing,
NetStar also issued warrants to the holders of the Bridge Notes to purchase
297,343 shares of common stock. During 1996, $2,068,000 of principal
outstanding under the Bridge Notes was exchanged for 130,713 shares of the
Company's common stock. The remaining $2,132,000 was repaid during 1996.
4. INCOME TAXES
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, under which the
liability method is used to calculate deferred income taxes. Under this
method, deferred tax assets and liabilities are determined based on the
differences between financial reporting and income tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. The realization of
deferred tax assets is based on historical tax positions and expectations
about future taxable income.
The following is a geographical breakdown of consolidated income before
income taxes (including intercompany revenue and expenses) by income tax
jurisdiction (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
-------- ------- ------
<S> <C> <C> <C>
United States........................................ $183,766 $43,977 $6,120
Foreign.............................................. 2,649 445 --
-------- ------- ------
Total.............................................. $186,415 $44,422 $6,120
======== ======= ======
</TABLE>
F-10
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
Significant components of the provision (benefit) for income taxes
attributable to operations are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Current:
Federal........................................ $ 80,395 $17,782 $ 1,582
State.......................................... 14,623 5,316 969
Foreign........................................ 940 178 --
-------- ------- -------
Total current................................ 95,958 23,276 2,551
Deferred:
Federal........................................ (19,597) (5,572) (2,649)
State.......................................... (3,057) (817) (332)
-------- ------- -------
Total deferred (benefit)..................... (22,654) (6,389) (2,981)
-------- ------- -------
Total provision (benefit).................... $ 73,304 $16,887 $ (430)
======== ======= =======
</TABLE>
A reconciliation of income taxes at the statutory federal income tax rate to
net income taxes included in the accompanying statements of income is as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Federal statutory rate....................... $65,245 $15,548 $ 2,081
State rate, net of federal benefit........... 11,690 2,617 428
Tax-exempt interest.......................... (3,168) (1,097) --
Foreign Sales Corporation benefit............ (4,842) (466) --
Non-deductible merger expenses............... 2,625 -- --
Utilization of net operating loss
carryforwards and credits................... -- -- (3,824)
Other........................................ 1,754 285 885
------- ------- -------
Total tax provision....................... $73,304 $16,887 $ (430)
======= ======= =======
Effective tax rate........................... 39.3 % 38.0 % 0.0 %
======= ======= =======
</TABLE>
F-11
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
------- ------
<S> <C> <C>
Deferred tax assets:
Reserve for uncollectible accounts........................ $ 2,305 $1,623
Reserve for warranties and inventories.................... 8,080 1,462
Purchased research and development........................ 673 1,176
State taxes............................................... 716 421
Customer deposits......................................... 12,238 --
Net operating loss carryovers and tax credits of acquired
companies................................................ 7,507 3,496
Other..................................................... 1,970 1,192
------- ------
Total net deferred tax assets........................... $33,489 $9,370
======= ======
</TABLE>
5. STOCKHOLDERS' EQUITY
Public Offering--In August 1995, the Company completed a public offering of
its common stock consisting of 12,650,000 shares at $17.625 per share, with
proceeds, net of issuance costs, of approximately $211,743,000 (issuance costs
were approximately $11,213,000). On September 25, 1995, and May 29, 1996, the
Company's stockholders approved amendments to the Company's Certificate of
Incorporation that increased the authorized common stock from 50,000,000 to
200,000,000 and 200,000,000 to 400,000,000 shares, respectively.
Stock Splits--In May, October and December of 1995, the Company's Board of
Directors approved two-for-one stock splits, payable in the form of a stock
dividend to all stockholders of record. All shares and per share data in the
accompanying consolidated financial statements have been retroactively
adjusted to reflect these stock splits.
Preferred Stock--The Company's Board of Directors has the authority to issue
these shares in one or more series and to fix the rights, preferences,
privileges and restrictions of ownership. At December 31, 1996, there were no
outstanding shares of preferred stock.
Notes Receivable--Notes receivable from stockholders resulted from the
purchase of common stock from the Company pursuant to the exercise of stock
options. Such notes are due on demand, bear interest at 5.4% and are secured
by certain common shares.
Warrants--As of December 31, 1996, warrants to purchase 66,531 shares of
common stock with exercise prices ranging from $3.53 to $29.66 were
outstanding. The warrants expire at various dates ranging from 1997 to 2000.
1994 Employee Stock Purchase Plan--In March 1994, the Board of Directors
approved an Employee Stock Purchase Plan under which eligible employees may
purchase common stock at a price equal to 85% of the lower of the fair market
value of the common stock at the beginning or end of each offering period.
Participation in the offering is limited to 10% of an employee's compensation
(not to exceed amounts allowed by the Internal Revenue Code), may be
terminated at any time by the employee and automatically ends on termination
of employment with the Company. A total of 2,800,000 shares of common stock
have been reserved for issuance
F-12
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
under this plan and the first offering commenced on the effective date of the
Company's initial public offering of shares of its common stock and continued
through January 31, 1995. Subsequent six-month offering periods commenced on
each February 1 and August 1 thereafter. During 1996 and 1995, 86,870 and
252,120 shares of common stock were issued under this plan, respectively.
1989 Stock Option Plan--The Company has a Stock Option Plan under which a
total of 45,000,000 shares of common stock have been reserved for issuance to
employees, officers, directors and consultants of the Company. Options granted
to date are immediately exercisable and unvested shares are subject to
repurchase by the Company. Options and unvested shares typically vest ratably
over four years from the date of grant. In the event option holders cease to
be employed by the Company, all unvested options are forfeited and all vested
options may be exercised within a 30-day period after termination; the Company
also has the right to repurchase any unvested (but issued) shares if the
holder is no longer employed by the Company. As of December 31, 1996, options
to purchase approximately 476,091 shares had been exercised but were not
vested.
Stock options are granted at not less than the fair market value of common
stock on the date of grant. All options expire no later than ten years from
the date of grant, except options granted to 10% stockholders, which have a
maximum term of five years. The exercise price of stock options granted to a
stockholder possessing 10% or more of the total combined voting power of all
classes of stock may not be less than 110% of the fair market value of common
stock on the date of grant. As of December 31, 1996, no options had been
granted to 10% stockholders.
The Company has adopted SFAS 123 which was issued in October 1995. In
accordance with the provisions of SFAS 123, the Company applies APB Opinion 25
and related Interpretations in accounting for its stock option plans and,
accordingly, does not recognize compensation cost. If the Company had elected
to recognize compensation cost based on the fair value of the options granted
at grant date as prescribed by SFAS 123, net income and net income per share
would have been reduced to the pro forma amounts indicated in the table below
(in thousands except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
------------ -----------
<S> <C> <C>
Net income--as reported............................ $ 113,111 $ 27,535
Net income--pro forma.............................. $ 68,266 $ 19,247
Net income per share--as reported.................. $ 0.89 $ 0.25
Net income per share--pro forma.................... $ 0.54 $ 0.18
</TABLE>
The effect on net income and earnings per share is not expected to be
indicative of the effects on net income and earnings per share in future
years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1996 1995
------ ------
<S> <C> <C>
Expected volatility............................................ 0.610 0.610
Risk-free interest rate........................................ 6.20% 6.05%
Expected life of options in years.............................. 3.0 3.0
Expected dividend yield........................................ 0.00% 0.00%
</TABLE>
F-13
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
these subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not provide a
reliable single measure of the fair value of its employee stock options.
The following table summarizes activity under the Company's 1989 Stock
Option Plan from December 31, 1993 through December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- --------
<S> <C> <C>
Balance at December 31, 1993.......................... 7,238,839 $ 0.15
Granted............................................. 5,530,234 1.70
Exercised........................................... (6,116,928) 0.18
Forfeited........................................... (845,548) 0.39
----------
Balance at December 31, 1994.......................... 5,806,597 1.03
Granted............................................. 11,196,310 15.76
Exercised........................................... (1,451,494) 1.01
Forfeited........................................... (586,266) 6.39
----------
Balance at December 31, 1995.......................... 14,965,147 12.04
Granted............................................. 7,716,873 54.44
Exercised........................................... (4,294,248) 6.53
Forfeited........................................... (233,084) 29.45
----------
Balance at December 31, 1996.......................... 18,154,688 $30.70
==========
Outstanding options exercisable and vested at December
31, 1996............................................. 2,966,733 $12.57
==========
Options available for grant at December 31, 1996...... 14,267,495
==========
</TABLE>
The weighted average fair value of options granted during 1996 and 1995 is
$24.05 and $6.78 per share, respectively.
F-14
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE NUMBER AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES OUTSTANDING LIFE PRICE AND VESTED PRICE
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.01-$ 5.06........... 1,717,617 4.89 $ 1.34 760,180 $ 0.98
5.81.................. 1,521,193 7.77 5.81 591,625 5.81
7.28- 11.13........... 2,278,192 7.94 10.07 615,462 10.26
14.13- 21.75........... 2,319,250 8.06 17.30 476,752 17.01
25.13- 35.25........... 2,220,794 8.85 32.92 462,607 32.94
35.38- 43.50........... 2,326,956 9.30 41.26 32,604 37.35
43.75- 58.25........... 2,191,955 9.37 51.43 1,455 60.55
59.00- 63.38........... 2,316,500 9.80 61.82 671 59.39
64.75- 73.88........... 1,262,231 9.61 68.13 25,377 66.07
---------- ---------
18,154,688 2,966,733
========== =========
</TABLE>
1994 Outside Directors Stock Option Plan--In March 1994, the Board of
Directors approved an Outside Directors Stock Option Plan under which
directors of the Company who are not officers or employees of the Company may
receive nonstatutory options to purchase shares of common stock of the
Company. A total of 2,000,000 shares of common stock have been reserved for
issuance under this plan, and options to purchase 384,000, 640,000 and 320,000
shares of common stock were granted during 1996, 1995 and 1994, respectively,
at weighted average exercise prices of $61.50, $10.25 and $1.63 per share,
respectively. During 1996, options to purchase 76,000 shares of common stock
were exercised at a weighted average exercise price of $7.98 per share. During
1995, options to purchase 20,000 shares of common stock were exercised at a
weighted average exercise price of $1.63 per share.
1996 Restricted Stock Plan--In October 1996, the Board of Directors approved
a Restricted Stock Plan under which employees and consultants of the Company
who are not officers or directors of the Company may receive shares of common
stock of the Company. A total of 200,000 shares of common stock have been
reserved for issuance under this plan, and 25,000 shares of common stock were
granted during 1996 at a purchase price of $1.00 per share.
Reserved for Future Issuance--As of December 31, 1996, the Company has
reserved the following shares of its common stock for future issuance:
<TABLE>
<S> <C>
1989 Stock Option Plan............................................ 32,422,183
1994 Outside Directors Stock Option Plan.......................... 1,904,000
1994 Employee Stock Purchase Plan................................. 2,461,010
1996 Restricted Stock Plan........................................ 200,000
----------
Total shares reserved......................................... 36,987,193
==========
</TABLE>
F-15
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. RETIREMENT PLAN
In July 1993, the Company established a profit sharing plan, which has been
qualified under Section 401(k) of the Internal Revenue Code, covering
substantially all employees who meet certain minimum eligibility requirements.
The Company does not contribute to the plan. Eligible employees can contribute
amounts to the plan via payroll withholdings, subject to certain limitations.
7. COMMITMENTS
Leases--The Company leases office and warehouse space under noncancelable
operating leases. Rent expense on these operating leases was $4,051,000,
$1,164,000 and $636,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
In March 1996, the Company entered into an agreement to lease 13 acres of
land located in Alameda, California. Certain buildings currently being used
for the Company's headquarters have been constructed on the land. The lessor
has funded approximately $24.9 million for the land and construction of the
buildings. The lease has an initial term of three years and an option to renew
for two years, subject to the lessor's consent. The rent obligation for the
lease commenced in December 1996. At any time during the term of the lease,
the Company may purchase the land and buildings. If the Company does not
exercise its purchase option at the end of the lease, the Company has
guaranteed a residual value of approximately $22.4 million.
Future minimum payments under noncancelable operating leases with initial
terms of one year or more consist of the following at December 31, 1996 (in
thousands):
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1997............................................................... $ 4,053
1998............................................................... 3,480
1999............................................................... 2,705
2000............................................................... 2,403
2001 and beyond.................................................... 2,330
-------
Total minimum lease payments....................................... $14,971
=======
</TABLE>
Line of Credit--The Company entered into a $15,000,000 bank line of credit
agreement in November 1995, which expires in November 1997. Interest is
computed at the bank's prime rate or 1.0% over LIBOR, at the option of the
Company. There is a commitment fee of 0.2% on the unused portion of the line
of credit. The line of credit requires the Company to maintain certain
financial ratios, minimum net worth and profitability on a quarterly and year-
to-date basis. There were no borrowings under the line of credit agreement
during 1996.
8. BUSINESS COMBINATIONS
In August 1996, the Company acquired NetStar, a developer and manufacturer
of high performance, high speed IP network routers, in a transaction that was
accounted for as a pooling of interests. The Company issued approximately
3,869,000 shares of its common stock to NetStar shareholders in exchange for
all outstanding NetStar shares. Outstanding options and warrants to purchase
NetStar common stock were exchanged for options and warrants to purchase
approximately 535,000 and 203,000 shares, respectively, of the Company's
common stock. The Company's historical consolidated financial statements for
prior periods have been restated to reflect the financial position and results
of operations of NetStar.
F-16
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. BUSINESS COMBINATIONS (CONTINUED)
NetStar had a fiscal year that ended on September 30. NetStar's statements
of operations for the years ended September 30, 1995 and 1994 have been
combined with the Company's statements of income for the years ended December
31, 1995 and 1994, respectively. In order to conform NetStar's year end to
Ascend's year end, the consolidated statement of income for the year ended
December 31, 1996 excludes the results of operations for the three months
ended December 31, 1995 for NetStar. Accordingly, an adjustment has been made
to retained earnings for the year ended December 31, 1996 for the exclusion of
NetStar's net loss (including the tax benefit to the Company) of approximately
$660,000 for the three months ended December 31, 1995.
Separate results of operations for the periods prior to the merger with
NetStar are as follows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED JUNE 30, -------------------------
1996 1995 1994
-------------- ------------ -----------
<S> <C> <C> <C>
Net Sales:
Ascend......................... $214,423 $149,590 $ 39,343
NetStar........................ 2,754 3,014 312
-------- ------------ -----------
Total........................ $217,177 $152,604 $ 39,655
======== ============ ===========
Net Income:
Ascend......................... $ 50,742 $ 30,573 $ 8,699
NetStar........................ (5,833) (4,898) (3,785)
-------- ------------ -----------
Total........................ 44,909 25,675 4,914
Adjustment to reflect elimination
of income tax valuation
allowance....................... 2,215 1,860 1,636
-------- ------------ -----------
Net income, as restated.......... $ 47,124 $ 27,535 $ 6,550
======== ============ ===========
</TABLE>
In December 1996, the Company acquired StonyBrook Services, Inc.
("StonyBrook"), a developer of network management software, in a transaction
that was accounted for as a pooling of interests. The Company issued
approximately 480,000 shares of its common stock to StonyBrook shareholders in
exchange for all outstanding StonyBrook shares.
In August 1996, the Company acquired Subspace Communications, Inc.
("Subspace"), a manufacturer of PC-based data and telecommunications products
for the home and small office environments, in a transaction that was
accounted for as a pooling of interests. The Company issued approximately
90,000 shares of its common stock to Subspace shareholders for all outstanding
Subspace shares.
In March 1996, the Company acquired Morning Star Technologies, Inc.
("Morning Star"), a manufacturer of network routing software and advanced
network security products, in a transaction that was accounted for as a
pooling of interests. The Company issued approximately 440,000 shares of its
common stock to Morning Star shareholders in exchange for all outstanding
Morning Star shares.
The results of operations of StonyBrook, Subspace and Morning Star, which
have not been material in relation to those of the Company, are included in
the consolidated results of operations for periods subsequent to the
acquisition. The Company's historical consolidated financial statements prior
to the combinations have not been restated to reflect the financial results of
these acquisitions as these results were not material to the Company.
F-17
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. QUARTERLY INFORMATION (UNAUDITED)
The following table presents unaudited quarterly operating results for each
of the Company's eight quarters in the two-year period ended December 31,
1996:
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------
SEPT.
MARCH 31, JUNE 30, 30, DEC. 31,
--------- -------- -------- --------
<S> <C> <C> <C> <C>
1996
Net sales............................... $92,028 $125,149 $154,629 $177,491
Gross profit............................ 59,462 80,440 100,665 116,504
Operating income........................ 28,408 41,989 41,325 62,814
Net income.............................. 19,386 27,738 24,894 41,093
Net income per share.................... 0.15 0.22 0.20 0.32
1995
Net sales............................... $20,716 $ 29,591 $ 40,909 $ 61,388
Gross profit............................ 13,507 19,082 26,546 40,173
Operating income........................ 4,121 7,376 8,301 19,502
Net income.............................. 2,832 4,810 6,436 13,457
Net income per share.................... 0.03 0.05 0.06 0.11
</TABLE>
10. SUBSEQUENT EVENTS
In April 1997, the Company acquired Whitetree, Inc. ("Whitetree"), a
privately held provider of high speed switching products, in a transaction
accounted for as a pooling of interests. The Company issued a total of
approximately 1,315,000 shares of its common stock in exchange for all
outstanding Whitetree shares. In addition, Ascend assumed all outstanding
Whitetree stock options to purchase approximately 99,000 shares of Ascend
stock.
Whitetree has a fiscal year that ends on September 30. Whitetree's
statements of operations for the years ended September 30, 1996, 1995 and 1994
will be combined with the Company's statements of income for the years ended
December 31, 1996, 1995 and 1994, respectively. In order to conform
Whitetree's year end to the Company's year end, the consolidated statement of
income for the year ended December 31, 1996 will exclude the results of
operations for the three months ended December 31, 1996 for Whitetree.
F-18
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
10. SUBSEQUENT EVENTS (CONTINUED)
The following unaudited pro forma summary includes the historical operations
of the Company and the historical operations of Whitetree for all periods
presented. The unaudited pro forma summary does not purport to be indicative
of what would have occurred had the acquisition been made at the beginning of
the periods presented or the results which may occur in the future.
Unaudited pro forma summary results of operations (in thousands except per
share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Net sales......................................... $560,977 $152,896 $39,655
Net income........................................ 108,204 23,175 5,130
Net income per share.............................. $ 0.84 $ 0.21 $ 0.05
Shares used in per share computations............. 128,760 112,132 95,134
</TABLE>
In February 1997, the Company acquired substantially all of the outstanding
stock of InterCon Systems Corporation. The purchase price consisted of a cash
payment of $12,000,000, the assumption of approximately $9,000,000 of
liabilities and transaction costs of approximately $600,000. The acquisition
will be accounted for under the purchase method of accounting. Accordingly,
the total purchase price of $21,600,000 was allocated to the net assets
acquired based upon their estimated fair values. The estimated fair value of
tangible net assets acquired was $600,000. In addition, $18,000,000 of the
purchase price was allocated to purchased research and development that has
not reached technological feasibility and that has no alternative future use
and $3,000,000 was allocated to purchased software.
On March 30, 1997, the Company entered into an Agreement and Plan of
Reorganization ("Agreement") with Cascade Communications Corp. ("Cascade")
pursuant to which Cascade will become a wholly-owned subsidiary of the Company
and each share of Cascade common stock which is issued and outstanding at the
"effective time" will be converted into the right to receive 0.70 of a share
of the Company's common stock. The Agreement specifies, as a condition of the
merger, that the transaction be accounted for as a pooling of interest.
The following unaudited pro forma summary includes the historical operations
of the Company and the historical operations of Cascade for all periods
presented. The unaudited pro forma summary does not purport to be indicative
of what would have occurred had the acquisition been made at the beginning of
the periods presented or the results which may occur in the future.
Unaudited pro forma summary results of operations (in thousands except per
share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net Sales........................................ $890,273 $287,438 $ 89,715
Net income....................................... 176,558 52,945 15,816
Net income per share............................. $ 0.89 $ 0.30 $ 0.10
Shares used in per share computations............ 198,626 175,216 151,335
</TABLE>
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Cascade Communications Corp.:
We have audited the accompanying consolidated balance sheets of Cascade
Communications Corp. as of December 31, 1996 and 1995 and the related
consolidated statements of income, cash flows and stockholders' equity
(deficit) for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cascade
Communications Corp. as of December 31, 1996 and 1995 and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
January 22, 1997,
except for Note M as to which
the date is March 30, 1997
F-20
<PAGE>
CASCADE COMMUNICATIONS CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 98,399 $ 55,474
Marketable securities...................................... 13,920 5,120
Accounts receivable, net of allowance for doubtful accounts
of $632 in 1996 and $302 in 1995.......................... 81,949 19,910
Notes receivable........................................... 1,750 1,548
Inventories................................................ 19,303 7,645
Deferred income taxes...................................... 8,300 4,262
Prepaid expenses........................................... 11,421 781
-------- --------
Total current assets......................................... 235,042 94,740
Property and equipment, net.................................. 33,012 13,980
Other assets................................................. 2,207 3,139
-------- --------
Total assets................................................. $270,261 $111,859
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 17,555 $ 6,771
Deferred revenue........................................... 9,038 1,585
Accrued expenses........................................... 23,885 12,197
Accrued income taxes....................................... -- 5,000
-------- --------
Total current liabilities.................................... 50,478 25,553
Commitments and contingencies (Notes F and K)
Stockholders' equity:
Preferred stock, $.01 par value; authorized 2,000,000
shares; no shares issued or outstanding.................... -- --
Common stock, $.001 par value; authorized 225,000,000
shares; 90,154,507 and 83,781,082 shares issued and
outstanding in 1996 and 1995, respectively................. 90 84
Additional paid-in capital.................................. 121,809 58,397
Retained earnings........................................... 97,884 27,825
-------- --------
Total stockholders' equity................................... 219,783 86,306
-------- --------
Total liabilities and stockholders' equity................... $270,261 $111,859
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-21
<PAGE>
CASCADE COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Revenue............................................. $340,976 $134,834 $50,060
Cost of revenue..................................... 119,519 48,563 19,113
-------- -------- -------
Gross profit...................................... 221,457 86,271 30,947
Operating expenses:
Research and development.......................... 53,378 20,651 7,384
Sales and marketing............................... 44,687 20,587 10,547
General and administrative........................ 13,110 6,955 2,699
-------- -------- -------
Total operating expenses.......................... 111,175 48,193 20,630
-------- -------- -------
Income from operations.............................. 110,282 38,078 10,317
Interest income .................................... 5,307 3,238 781
-------- -------- -------
Income before income taxes.......................... 115,589 41,316 11,098
Provision for income taxes.......................... 44,810 15,906 1,832
-------- -------- -------
Net income.......................................... $ 70,779 $ 25,410 $ 9,266
======== ======== =======
Net income per common share......................... $ 0.72 $ 0.28 $ 0.11
======== ======== =======
Weighted average number of common and common
equivalent shares outstanding...................... 97,767 91,220 81,074
======== ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-22
<PAGE>
CASCADE COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $70,779 $25,410 $ 9,266
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 13,662 5,503 1,651
Deferred income taxes............................ (4,875) (3,051) (1,447)
Issuance of Common Stock in exchange for
consulting services............................. -- -- 40
Tax benefits related to stock options exercised.. 40,272 6,143 700
Changes in operating assets and liabilities:
Accounts receivable............................... (62,039) (11,683) (5,901)
Notes receivable.................................. 1,556 (3,967) (238)
Inventories....................................... (11,658) 292 (3,177)
Prepaid expenses.................................. (10,640) (441) (264)
Accounts payable.................................. 10,784 2,027 1,367
Accrued income taxes.............................. (5,000) 2,986 2,014
Accrued expenses and deferred revenue............. 19,141 7,256 5,787
------- ------- -------
Net cash provided by operating activities........... 61,982 30,475 9,798
------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment............... (32,334) (13,529) (6,282)
Purchases of marketable securities................ (27,200) (36,029) (19,598)
Proceeds from maturities of marketable
securities....................................... 18,400 45,630 4,876
Cash acquired from Arris pooling.................. 4,538 -- --
Decrease (increase) in other assets............... 11 (206) (71)
------- ------- -------
Net cash used in investing activities............... (36,585) (4,134) (21,075)
------- ------- -------
Cash flows from financing activities:
Issuance of Common Stock, net..................... 17,528 2,274 31,046
Payments of notes payable, net.................... -- -- (526)
------- ------- -------
Net cash provided by financing activities........... 17,528 2,274 30,520
------- ------- -------
Net increase in cash and cash equivalents........... 42,925 28,615 19,243
Cash and cash equivalents, beginning of year........ 55,474 26,859 7,616
------- ------- -------
Cash and cash equivalents, end of year.............. $98,399 $55,474 $26,859
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid................................. $20,175 $ 9,828 $ 564
Interest paid..................................... -- -- $ 62
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-23
<PAGE>
CASCADE COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------------- ADDITIONAL RETAINED STOCKHOLDERS'
NUMBER OF $.001 PAID-IN EARNINGS EQUITY
SHARES PAR VALUE CAPITAL (DEFICIT) (DEFICIT)
---------- --------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1993................... 8,828,850 $ 9 $ 2 $ (6,851) $ (6,840)
Issuance of Common
Stock, net............. 13,830,000 14 31,056 -- 31,070
Exercise of stock
options and warrants... 739,350 1 14 -- 15
Conversion of redeemable
preferred stock........ 58,089,540 58 18,210 -- 18,268
Tax benefits relating to
stock options
exercised.............. -- -- 700 -- 700
Net income.............. -- -- -- 9,266 9,266
---------- --- -------- -------- --------
Balance, December 31,
1994................... 81,487,740 82 49,982 2,415 52,479
Exercise of stock
options and warrants... 2,293,342 2 2,272 -- 2,274
Tax benefits relating to
stock options
exercised.............. -- -- 6,143 -- 6,143
Net income.............. -- -- -- 25,410 25,410
---------- --- -------- -------- --------
Balance, December 31,
1995................... 83,781,082 84 58,397 27,825 86,306
Pooling of interests
with Arris............. 2,542,639 2 5,616 (720) 4,898
---------- --- -------- -------- --------
Balance, as restated.... 86,323,721 86 64,013 27,105 91,204
---------- --- -------- -------- --------
Issuance of Common
Stock, net............. 633,927 1 6,309 -- 6,310
Exercise of stock
options................ 3,196,859 3 11,215 -- 11,218
Tax benefits relating to
stock options
exercised.............. -- -- 40,272 -- 40,272
Net income.............. -- -- -- 70,779 70,779
---------- --- -------- -------- --------
Balance, December 31,
1996................... 90,154,507 $90 $121,809 $ 97,884 $219,783
========== === ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-24
<PAGE>
CASCADE COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. NATURE OF BUSINESS
Cascade Communications Corp. (the "Company") was incorporated in Delaware on
October 16, 1990. The Company designs, develops, manufactures, markets and
supports a family of high performance multi-service wide area network
switches.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Certain prior year amounts have been reclassified to be consistent with
current year presentation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany transactions have been
eliminated in consolidation. Transaction and translation gains and losses are
immaterial for all years presented.
ACQUISITION
On May 3, 1996, the Company acquired Arris Networks, Inc. ("Arris"), a
developer of high performance remote access technology for carrier class
networks, for approximately 3.2 million shares of its Common Stock. The
Company also assumed all outstanding Arris options to purchase approximately
242,000 shares of the Company's Common Stock. The combination was accounted
for as a pooling of interests. The operating expenses of Arris from December
31, 1995 to the acquisition date are immaterial to the combined operations.
The accompanying financial statements for periods prior to December 31, 1995
do not include the amounts for this acquisition as they were deemed to be
immaterial.
CASH, CASH EQUIVALENTS AND INVESTMENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Investments
include high grade commercial paper and short-term U.S. Government securities.
Investments are classified as available-for-sale to support current operations
or to take advantage of other investment opportunities. These securities are
stated at cost plus accrued interest which approximates fair market value and
mature within one year. The following table summarizes cash equivalents and
investments held at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Commercial paper......................................... $ 91,863 $35,537
U.S. Government securities............................... 8,926 20,261
-------- -------
$100,789 $55,798
======== =======
</TABLE>
REVENUE RECOGNITION
Revenue from product sales is generally recognized at the time of shipment
or, for certain initial shipments of new products, upon customer acceptance,
when collectibility is reasonably assured. The Company records reserves for
anticipated product returns and warranty costs at the time of product
shipment. Revenue from service agreements, consisting primarily of one-year
equipment maintenance contracts, is recognized ratably over the term of the
agreements. Revenue from customer funded contracts is generally recognized on
the percentage of completion method of accounting.
F-25
<PAGE>
CASCADE COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, are principally cash investments and accounts
receivable. The Company places its investments in highly rated commercial
paper and high credit quality financial institutions. Concentration of credit
risk with respect to accounts receivable is limited due to the large number of
customers comprising the Company's customer base and their dispersion across
different geographic regions. To reduce risk, the Company routinely assesses
the financial strength of its customers and, as a consequence, believes that
its trade accounts receivable credit risk exposure is limited. The Company
generally does not require collateral and historically has not experienced
significant losses on trade receivables.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined
under the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Company provides for
depreciation by using the straight-line method over the estimated useful lives
of the assets as follows:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
-------------------- ---------------------
<S> <C>
Computer equipment............................ 2-3 years
Office equipment.............................. 5 years
Furniture and fixtures........................ 5 years
Leasehold improvements........................ Shorter of lease term or
estimated useful life.
</TABLE>
Maintenance and repairs are charged to expense as incurred. Upon retirement
or sale, the cost of the asset disposed of and the related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
credited or charged to income.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
Capitalization of computer software costs begins upon the establishment of
technological feasibility. The Company has not capitalized any such costs as
eligible amounts were immaterial for all years presented.
INCOME TAXES
Deferred tax liabilities and assets are recognized based on temporary
differences between the financial statement and tax bases of assets and
liabilities using current statutory rates. A valuation allowance is recorded
against net deferred tax assets if, based on the weighted available evidence,
it is more likely than not that some or all of the deferred tax assets will
not be realized.
USE OF ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-26
<PAGE>
CASCADE COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MANUFACTURING RISKS
The Company purchases certain components from suppliers who the Company
believes are currently the only suppliers of such components that meets the
Company's requirements. A failure by any such supplier to meet the Company's
requirements for an extended period of time could adversely affect the
Company's operating results until the Company established sufficient
manufacturing supplies from alternative sources.
NET INCOME PER COMMON SHARE
Net income per common share is computed based upon the weighted average
number of common shares and common equivalent shares (using the treasury stock
method) outstanding. Fully diluted net income per common share is not
presented as the dilutive effect is immaterial.
C. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
------- ------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................... $14,827 $5,095
Work-in-process............................................. 552 890
Finished goods.............................................. 3,924 1,660
------- ------
$19,303 $7,645
======= ======
</TABLE>
D. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Computer equipment........................................ $45,242 $17,969
Furniture and fixtures.................................... 1,818 1,093
Office equipment.......................................... 1,015 662
Leasehold improvements.................................... 4,134 1,480
------- -------
52,209 21,204
Less accumulated depreciation and amortization............ 19,197 7,224
------- -------
$33,012 $13,980
======= =======
</TABLE>
E. ACCRUED EXPENSES
Accrued expenses consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued compensation....................................... $ 5,442 $ 2,276
Warranty costs............................................. 3,384 2,372
Other...................................................... 15,059 7,549
------- -------
$23,885 $12,197
======= =======
</TABLE>
F-27
<PAGE>
CASCADE COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. COMMITMENTS
The Company rents its facilities and various sales offices under operating
leases, some of which contain escalation clauses, through March 2009. The
agreements generally require the payment of utilities, real estate taxes,
insurance and repairs. In most cases management expects, in the normal course
of business, leases that expire will be renewed or replaced by other leases.
The approximate future minimum lease commitments under these leases at
December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997......................................................... $ 3,962,000
1998......................................................... 3,526,000
1999......................................................... 2,523,000
2000......................................................... 2,066,000
2001......................................................... 2,066,000
Thereafter................................................... 14,804,000
-----------
$28,947,000
===========
</TABLE>
Rental expense charged to operations was approximately $2,398,000,
$1,187,000 and $338,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. At December 31, 1996, the Company had a letter of credit
outstanding of $4,000,000 used as a deposit for commitments to construct
certain leasehold improvements. The fair value of this letter of credit is
estimated to be the same as the contract value based upon the nature of the
arrangement with the issuing bank.
G. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
On August 4, 1994, the Company completed its Initial Public Offering ("IPO")
and sold an aggregate of 13,800,000 shares of Common Stock at $2.50 per share,
resulting in net proceeds, after deducting underwriting discounts and
expenses, of $31,030,000. In addition, upon the closing of the IPO all issued
and outstanding shares of Series 1, 2, 3 and 4 Redeemable Convertible
Preferred Stock were automatically converted into 58,089,540 shares of Common
Stock in accordance with the underlying agreements.
COMMON STOCK
At the stockholder meetings of the Company in 1995 and 1996, the
stockholders approved amendments to the Company's Articles of Organization to
increase its authorized number of shares of Common Stock to 50,000,000 and
225,000,000 shares, respectively. The Company effected the following stock
splits in the form of stock dividends: two-for-one in June 1995, three-for-two
in February 1996 and two-for-one in May 1996. All share and per share data
have been restated in these consolidated financial statements for all periods
to reflect the stock splits. Prior to the merger, Arris issued redeemable
convertible preferred stock for $6,310,000 that was converted into 633,927
shares of Cascade Common Stock.
PREFERRED STOCK
The Company is authorized to issue up to an aggregate of 2,000,000 shares of
Preferred Stock, $.01 par value per share. Each such series of Preferred Stock
shall have such rights, preferences, privileges and restrictions, including
voting rights, dividend rights, conversion rights, redemption privileges and
liquidation preferences as determined by the Board of Directors.
F-28
<PAGE>
CASCADE COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. EMPLOYEE BENEFIT PLANS
RETIREMENT SAVINGS PLAN
During 1992, the Company adopted a Retirement Savings Plan for its
employees, which has been qualified under Section 401(k) of the Internal
Revenue Code. Eligible employees are permitted to contribute to the 401(k)
Plan through payroll deductions within statutory limitations and subject to
any limitations included in the 401(k) Plan. To date, the Company has made no
contributions to the Plan.
STOCK-BASED COMPENSATION PLANS
The Company has several stock-based compensation plans which are described
below. The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations in
accounting for its stock-based compensation plans. Accordingly, no
compensation expense has been recognized for its stock-based compensation
plans for any options as none have been granted below fair value of the common
stock. Had compensation cost for the stock-based compensation plans been
determined based upon the fair value at the grant date for awards consistent
with the method of Statement of Financial Accounting Standards No. 123 ("SFAS
123") "Accounting for Stock-Based Compensation", the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Net income
As reported.............................................. $70,779 $25,410
Pro forma................................................ 49,870 22,198
Earnings per share
As reported.............................................. $ 0.72 $ 0.28
Pro forma................................................ 0.52 0.25
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model. In computing these pro forma
amounts, the Company has assumed a risk-free interest rate equal to
approximately 6.46% and 5.44%, expected volatility 64% and 66%, zero dividend
yields and expected lives of six years for 1996 and 1995 respectively. The
average fair value of the options granted during 1996 and 1995 is estimated as
$34.36 and $12.39, respectively on the date of the grant.
1991 STOCK OPTION PLAN
The 1991 Stock Option Plan (the "Plan") provides for the issuance of
incentive stock options and nonqualified stock options to purchase the
Company's Common Stock. The Company may issue up to a maximum of 24,000,000
shares of its Common Stock pursuant to the exercise of options which may be
granted under the Plan. All options granted under the plan will have an
exercise price equal to the fair market value of the Common Stock on the date
of grant. Options issued generally vest ratably over five years. The term of
each option will be for a period of ten years from the date of grant.
DIRECTOR STOCK OPTION PLAN
The 1994 Non-Employee Director Stock Option Plan (the "Director Option
Plan") provides for the grant of options to purchase a maximum of 720,000
shares of Common Stock of the Company to non-employee directors of the
Company. Under the Director Option Plan, each director who is not also an
employee of the Company received an option to purchase 90,000 shares of Common
Stock, vesting in three equal annual installments commencing on the first
anniversary of the date of grant.
F-29
<PAGE>
CASCADE COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. EMPLOYEE BENEFIT PLANS (CONTINUED)
In addition, on the date of each annual meeting of stockholders, each
director will receive an option to purchase 12,000 shares of Common Stock. All
options granted under the plan will have an exercise price equal to the fair
market value of the Common Stock on the date of grant. The term of each option
will be for a period of ten years from the date of grant.
ARRIS STOCK PLAN
In conjunction with the Arris merger, the Company assumed 242,000
outstanding options on May 3, 1996. These assumed options were granted at
prices equal to the fair market value at the date of grant, become exercisable
in installments (generally ratably over five years), and expire ten years from
the date of grant. The Company does not intend to issue any additional options
under the Arris stock option plan.
The following table summarizes stock option activity for the above mentioned
stock option plans:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE NUMBER
OPTIONS EXERCISE PRICE EXERCISABLE
---------- ----------------- -----------
<S> <C> <C> <C>
Outstanding at December 31,
1993............................ 7,550,976 $ 0.03 1,439,029
---------- ------
Granted........................ 3,595,260 3.90
Exercised...................... (561,360) 0.03
Canceled....................... (62,880) 0.47
---------- ------
Outstanding at December 31,
1994............................ 10,521,996 1.35 2,643,924
---------- ------
Granted........................ 5,165,274 18.31
Exercised...................... (2,050,350) 0.66
Canceled....................... (370,866) 3.55
---------- ------
Outstanding at December 31,
1995............................ 13,266,054 7.99 3,501,660
---------- ------
Granted........................ 2,903,885 53.27
Exercised...................... (3,083,721) 2.84
Canceled....................... (319,360) 22.61
---------- ------
Outstanding at December 31,
1996............................ 12,766,858 $19.17 969,604
---------- ------
Options available for future
grants.......................... 5,908,883
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUALLIFE PRICE EXERCISABLE PRICE
------------------------ ----------- --------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.01-$ 0.03... 2,974,228 5.85 $ 0.02 245,300 $ 0.02
0.13- 9.29... 2,628,643 7.45 3.39 329,982 3.27
10.69- 25.58... 3,364,799 8.59 17.51 280,478 12.27
27.00- 58.50... 2,631,029 9.14 37.10 113,844 29.72
$60.63-$79.13... 1,168,159 9.71 $67.84 -- $ --
---------- -------
12,766,858 969,604
---------- -------
</TABLE>
1994 EMPLOYEE STOCK PURCHASE PLAN
The 1994 Employee Stock Purchase Plan (the "Plan") provides for the issuance
of a maximum of 1,440,000 shares of Common Stock pursuant to the exercise of
nontransferable options granted to participating
F-30
<PAGE>
CASCADE COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. EMPLOYEE BENEFIT PLANS (CONTINUED)
employees. Each eligible employee may authorize payroll deductions up to 10%
of their compensation (as defined) not to exceed a maximum of $25,000 per
year. The purchase price under the Plan is 85% of the fair market value per
share on the first or last day of the offering period (as defined), whichever
is lower. During 1996 and 1995, 113,240 and 132,532 shares were issued under
this Plan and 1,194,316 shares are reserved for future issuance.
I. INCOME TAXES
The provisions for income taxes for the years ended December 31, 1996, 1995
and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal....................................... $41,580 $16,741 $ 2,280
State......................................... 8,105 2,216 999
------- ------- -------
49,685 18,957 3,279
Deferred benefit:
Federal....................................... (4,388) (2,694) (1,266)
State......................................... (487) (357) (181)
------- ------- -------
(4,875) (3,051) (1,447)
------- ------- -------
Provision for income taxes...................... $44,810 $15,906 $ 1,832
======= ======= =======
</TABLE>
The following is a summary of the significant components of the Company's
deferred tax assets as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Inventory reserves..................................... $ 5,151 $2,765
Warranty reserves...................................... 1,303 949
Net operating loss carryforwards....................... 765 --
Compensation and vacation accruals..................... 781 402
Accounts receivable reserve............................ 243 121
Other.................................................. 822 25
Depreciation........................................... 1,073 236
------- ------
Total deferred tax assets.............................. 10,138 4,498
Valuation allowance.................................... (765) --
------- ------
Net deferred tax assets.............................. $ 9,373 $4,498
======= ======
</TABLE>
The Company assumed a net operating loss carryforward of $1,986,000, as a
result of the merger with Arris which expires in 2010. The amount of the
deferred tax asset was offset by a full valuation allowance due the
limitations imposed by the Internal Revenue Code affecting the realization of
the deferred tax asset. Management believes that it is more likely than not
that the deferred tax asset will not be realized.
F-31
<PAGE>
CASCADE COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
I. INCOME TAXES (CONTINUED)
A reconciliation between the statutory federal income tax rate and the
Company's effective tax rate for the years ended December 31, 1996, 1995 and
1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- -----
<S> <C> <C> <C>
Statutory federal income tax rate..................... 35.0% 35.0% 35.0%
State taxes, net of federal tax benefit............... 4.2 4.5 5.9
Utilization of net operating loss and credit
carryforwards........................................ -- -- (21.9)
Foreign sales corporation benefit..................... (0.4) (0.6) (0.3)
Research and development tax credits.................. (0.6) (0.7) (2.6)
Other................................................. 0.6 0.3 0.4
---- ---- -----
Effective tax rate.................................. 38.8% 38.5% 16.5%
==== ==== =====
</TABLE>
J. SIGNIFICANT CUSTOMERS AND EXPORT SALES
The Company is active in one business segment: designing, developing,
manufacturing, marketing and supporting a family of high performance multi-
service wide area network switches. In 1995, sales to the Company's two
largest customers represented approximately 17% and 12% of revenue. In 1994,
sales to the Company's two largest customers represented approximately 12% and
11% of total revenue. Export sales for the years ended December 31, 1996, 1995
and 1994 can be grouped in the following geographic areas.
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Europe/Africa...................................... $27,401 $11,713 $6,297
North and South America (other than U.S.).......... 11,057 1,426 620
Pacific Rim/Asia................................... 18,541 8,375 2,896
------- ------- ------
Total............................................ $56,999 $21,514 $9,813
======= ======= ======
</TABLE>
K. LEGAL MATTERS
In the ordinary course of business, various lawsuits and claims are filed
against the Company. While the outcome of these matters is not currently
determinable, management believes that the ultimate resolution of these
matters will not have a material adverse effect on the Company's results of
operations or its financial position.
F-32
<PAGE>
CASCADE COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
L. QUARTERLY RESULTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
DEC. 31, SEPT. 28, JUNE 29, MARCH 30,
QUARTERS ENDED 1996 1996 1996 1996
-------------- ----------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue...................... $ 110,300 $ 94,207 $ 80,432 $ 56,037
Gross profit................. 71,678 61,242 52,282 36,255
Income from operations....... 36,470 31,526 25,914 16,372
Net income................... $ 23,395 $ 20,263 $ 16,686 $ 10,435
----------- ---------- ---------- ----------
Net income per common share.. $ 0.24 $ 0.21 $ 0.17 $ 0.11
=========== ========== ========== ==========
<CAPTION>
DEC. 31, SEPT. 30, JULY 1, APRIL 1,
QUARTERS ENDED 1995 1995 1995 1995
-------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue...................... $ 46,204 $ 36,015 $ 29,109 $ 23,506
Gross profit................. 29,799 23,049 18,506 14,917
Income from operations....... 13,899 10,072 7,866 6,241
Net income................... $ 9,132 $ 6,787 $ 5,267 $ 4,224
----------- ---------- ---------- ----------
Net income per common share.. $ 0.10 $ 0.07 $ 0.06 $ 0.05
=========== ========== ========== ==========
</TABLE>
M. SUBSEQUENT EVENTS
On January 28, 1997, Cascade completed its acquisition of Sahara, a privately
held developer of scalable, high-speed broadband access products located in
Wallingford, Connecticut, by means of a merger of a wholly-owned subsidiary of
Cascade with and into Sahara. As a result of the Merger, Sahara became a
wholly-owned subsidiary of Cascade. Cascade issued approximately 3.4 million
shares of Cascade Common Stock in exchange for all the outstanding shares of
Sahara. In addition, Cascade assumed all outstanding Sahara stock options to
purchase approximately 400,000 shares of Cascade Common Stock.
The acquisition will be accounted for under the purchase method of
accounting. Accordingly, the purchase price of $219 million was allocated to
the net assets acquired based upon their estimated fair market values. The
estimated fair value of the tangible net assets acquired was $4 million. In
addition, $215 million of the purchase price was allocated to in-process
research and development that has not reached technological feasibility and
that has no alternative future use. No completed technology was purchased as
Sahara has brought no products to market and no development project has reached
technological feasibility. The estimated costs to complete the technology are
approximately $4 million.
On March 30, 1997, Cascade entered into an Agreement and Plan of
Reorganization ("Agreement") with Ascend Communications, Inc. ("Ascend")
pursuant to which Cascade will become a wholly-owned subsidiary of Ascend and
each share of Cascade Common Stock which is issued and outstanding at the
"effective time" will be converted into the right to receive 0.70 of a share of
a share of Ascend's Common Stock. The Agreement specifies, as a condition of
the Merger, that the transaction be accounted for as a pooling of interest.
F-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Sahara Networks, Inc.
We have audited the accompanying balance sheets of Sahara Networks, Inc., a
development stage enterprise, as of December 31, 1996 and 1995, and the
related statements of operations, stockholders' deficit, and cash flows for
the year ended December 31, 1996, the period from May 25, 1995 (inception) to
December 31, 1995, and the period from May 25, 1995 (inception) to December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sahara Networks, Inc. at
December 31, 1996 and 1995, and the results of its operations and its cash
flows for the year ended December 31, 1996, the period from May 25, 1995
(inception) to December 31, 1995, and the period from May 25, 1995 (inception)
to December 31, 1996 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Hartford, Connecticut
March 11, 1997
F-34
<PAGE>
SAHARA NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1996 1995
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 3,696,428 $2,621,879
Prepaid expenses.................................... 132,532 --
Other assets........................................ 4,044 5,521
----------- ----------
Total current assets.................................. 3,833,004 2,627,400
Property and equipment:
Furniture and fixtures.............................. 90,524 22,445
Office equipment.................................... 420,347 100,455
Technical equipment................................. 851,661 165,040
Leasehold improvements.............................. 54,435 3,056
----------- ----------
1,416,967 290,996
Less accumulated depreciation......................... (277,546) (27,340)
----------- ----------
1,139,421 263,656
Other assets:
Organization costs, net of accumulated amortization
of $2,145 and $693................................. 5,113 6,565
----------- ----------
Total assets.......................................... $ 4,977,538 $2,897,621
=========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Note payable........................................ $ 102,757 $ --
Accounts payable.................................... 538,580 74,267
Accrued liabilities................................. 64,107 12,000
Capital lease obligations........................... 142,514 12,929
----------- ----------
Total current liabilities............................. 847,958 99,196
Note payable.......................................... 150,288 --
Capital lease obligations............................. 867,605 27,851
Series A redeemable preferred stock--$.99 par value;
3,636,000 shares authorized, issued and outstanding
in 1996; 3,650,000 shares authorized and 3,636,000
issued and outstanding, net of stock subscription
receivable in 1995................................... 3,544,057 3,534,157
Series B redeemable participating convertible
preferred stock--$.01 par value; 1,312,500 shares
authorized; 1,311,842 shares issued and outstanding.. 3,484,261 --
Series C redeemable convertible preferred stock--$.01
par value; 1,052,632 shares authorized, issued and
outstanding.......................................... 3,978,213 --
Stockholders' deficit:
Common stock--$.01 par value; 20,000,000 shares
authorized; shares issued and outstanding
12,991,500 in 1996 and 12,674,250 in 1995.......... 179,356 126,158
Additional paid-in capital.......................... 1,183,400 --
Unearned compensation............................... (1,035,221) --
Stock subscriptions receivable...................... -- (100)
Deficit accumulated during development stage........ (8,222,379) (889,641)
----------- ----------
Total stockholders' deficit........................... (7,894,844) (763,583)
----------- ----------
Total liabilities and stockholders' deficit........... $ 4,977,538 $2,897,621
=========== ==========
</TABLE>
See accompanying notes.
F-35
<PAGE>
SAHARA NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
FROM MAY 25, FROM MAY 25,
YEAR ENDED 1995 (INCEPTION) 1995 (INCEPTION)
DECEMBER TO DECEMBER 31, TO DECEMBER 31,
31, 1996 1995 1996
----------- --------------- ---------------
<S> <C> <C> <C>
Product development expenses... $(4,907,754) $(464,184) $(5,371,938)
Sales and marketing expenses... (1,101,124) (111,168) (1,212,292)
General and administrative
expenses...................... (1,415,168) (269,222) (1,684,390)
----------- --------- -----------
Loss from operations........... (7,424,046) (844,574) (8,268,620)
Other income (expense):
Interest income.............. 155,347 30,029 185,376
Interest expense............. (62,851) (4,683) (67,534)
----------- --------- -----------
Net loss....................... $(7,331,550) $(819,228) $(8,150,778)
----------- --------- -----------
Net loss per common share...... $ (.57) $ (.09)
=========== =========
Average outstanding common
shares........................ 12,751,763 9,074,893
=========== =========
</TABLE>
See accompanying notes.
F-36
<PAGE>
SAHARA NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' DEFICIT
DECEMBER 31, 1996
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL STOCK DURING
-------------------- PAID-IN UNEARNED SUBSCRIPTION DEVELOPMENT
SHARES PAR VALUE CAPITAL COMPENSATION RECEIVABLE STAGE TOTALS
---------- --------- ---------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to officers upon
organization........... 1,847,000 $ 18,470 -- -- -- -- $ 18,470
Issuance of common and
preferred stock in
exchange for $1,751,500
and extinguishment of
$250,000 bridge loan,
net of expenses........ 2,150,000 21,157 -- -- -- -- 21,157
Net proceeds from
issuance of common
stock.................. 1,400,000 13,768 -- -- -- -- 13,768
Net proceeds from
issuance of common
stock.................. 226,000 2,250 -- -- -- -- 2,250
Subscription of 10,000
shares of common
stock.................. 10,000 100 -- -- (100) -- --
Net loss................ -- -- -- -- -- (819,228) (819,228)
Effect of three-for-two
stock splits........... 7,041,250 70,413 -- -- -- (70,413) --
---------- -------- ---------- ----------- ----- ----------- -----------
Balances at December 31,
1995................... 12,674,250 126,158 -- -- (100) (889,641) (763,583)
Issuance of common
shares pursuant to
restricted stock
agreements............. 172,500 51,750 -- -- -- -- 51,750
Issuance of common
shares pursuant to the
exercise of stock
options................ 26,000 260 -- -- -- -- 260
Unearned compensation
relating to incentive
stock option grants.... -- -- 1,183,400 (1,183,400) -- -- --
Amortization of unearned
compensation........... -- -- -- 148,179 -- -- 148,179
Payment for stock
subscription........... -- -- -- -- 100 -- 100
Net loss................ -- -- -- -- -- (7,331,550) (7,331,550)
Effect of three-for-two
stock splits........... 118,750 1,188 -- -- -- (1,188) --
---------- -------- ---------- ----------- ----- ----------- -----------
Balances at December 31,
1996................... 12,991,500 $179,356 $1,183,400 $(1,035,221) $ -- $(8,222,379) $(7,894,844)
========== ======== ========== =========== ===== =========== ===========
</TABLE>
See accompanying notes.
F-37
<PAGE>
SAHARA NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
FROM MAY 25, FROM MAY 25,
YEAR ENDED 1995 (INCEPTION) 1995 (INCEPTION)
DECEMBER TO DECEMBER 31, TO DECEMBER 31,
31, 1996 1995 1996
----------- --------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss....................... $(7,331,550) $ (819,228) $(8,150,778)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation................. 250,206 27,340 277,546
Amortization................. 1,452 693 2,145
Amortization of unearned
compensation................ 148,179 -- 148,179
Changes in assets and
liabilities:
Organization costs......... -- (7,258) (7,258)
Accounts payable........... 464,313 74,267 538,580
Accrued liabilities........ 52,107 12,000 64,107
Prepaid expenses........... (132,532) -- (132,532)
Other assets............... 1,477 (5,521) (4,044)
----------- ---------- -----------
Net cash used in operating
activities.................... (6,546,348) (717,707) (7,264,055)
INVESTING ACTIVITIES
Purchase of property and
equipment, net................ (32,675) (247,577) (280,252)
----------- ---------- -----------
Net cash used in investing
activities.................... (32,675) (247,577) (280,252)
FINANCING ACTIVITIES
Proceeds from the issuance of
note payable.................. 325,000 -- 325,000
Repayments of note payable..... (71,955) -- (71,955)
Net proceeds from the issuance
of common stock............... 52,010 53,145 105,155
Payment for stock
subscriptions................. 10,000 -- 10,000
Net proceeds from the issuance
of redeemable preferred
stock......................... 7,462,474 3,286,657 10,749,131
Proceeds from the issuance of
debt converted into capital
stock......................... -- 250,000 250,000
Repayment of capital lease
obligations................... (123,957) (2,639) (126,596)
----------- ---------- -----------
Net cash provided by financing
activities.................... 7,653,572 3,587,163 11,240,735
----------- ---------- -----------
Increase in cash and cash
equivalents................... 1,074,549 2,621,879 3,696,428
Cash at beginning of the
period........................ 2,621,879 -- --
----------- ---------- -----------
Cash at end of the period...... $ 3,696,428 $2,621,879 $ 3,696,428
=========== ========== ===========
SUPPLEMENTAL INFORMATION
Interest paid.................. $ 62,851 $ 4,683 $ 67,534
=========== ========== ===========
</TABLE>
See accompanying notes.
F-38
<PAGE>
SAHARA NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company is a development stage enterprise incorporated in Delaware on
May 25, 1995. The Company is in the process of designing, manufacturing and
marketing integrated broadband access products for communications services
based on Asynchronous Transfer Mode (ATM) technology. These products are
intended to serve multiple markets focusing on Local Exchange Carriers,
Interexchange Carriers, Competitive Access Providers, foreign Post and
Telecommunications Authorities and large information intensive end users.
The financial statements are prepared in conformity with generally accepted
accounting principles applicable to a development stage company.
It is management's opinion that the current financial performance is a
result of the start-up of operations and is not permanent. If there are delays
in bringing the Company's products to market, there could be a substantial
effect on the Company. Until operations provide adequate cash flow, the
Company intends to meet it cash requirements through raising additional
capital. Subsequent to December 31, 1996 the Company was acquired by Cascade
Communications Corp. (see Note 9).
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over estimated useful lives of three to five years.
Depreciation expense for 1996 and 1995 was $250,206 and $27,340, respectively,
including all leased machinery and equipment.
ORGANIZATION COSTS
The Company has capitalized the costs of its organization and is amortizing
such costs over five years using the straight-line method.
CASH AND CASH EQUIVALENTS
The Company maintains checking and money market accounts which are fully
liquid in nature. The Company does not hold any instruments which would not
become liquid within 90 days or less from the date of acquisition.
NET LOSS PER COMMON SHARE
Net loss per common share is based on the weighted average number of shares
of Common Stock outstanding during the year. Common stock equivalents are not
included in the computation as their effect would be antidilutive. All common
and per common share amounts have been restated to reflect the stock splits
described in Note 2.
INCOME TAXES
Income taxes have been provided using the liability method in accordance
with Statement of Financial Accounting Standard ("SFAS") No. 109, Accounting
for Income Taxes.
RESEARCH AND DEVELOPMENT COSTS
The Company has incurred research and development costs which are expensed
as incurred in accordance with SFAS No. 2, Accounting for Research and
Development Costs.
F-39
<PAGE>
SAHARA NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. CAPITAL STOCK
The Company is authorized to issue 20,000,000 shares of common stock, par
value of $.01 per share and 3,636,000 and 3,650,000 shares of preferred stock
at December 31, 1996 and 1995, respectively, par value $.99 per share
designated as Series A Redeemable Preferred Stock ("Series A Preferred"),
1,312,500 shares of preferred stock, par value $.01 per share designated as
Series B Redeemable Participating Convertible Preferred Stock ("Series B
Preferred") and 1,052,632 shares of preferred stock, par value $.01 per share
designated as Series C Redeemable Convertible Preferred Stock ("Series C
Preferred"). The shares of common stock are entitled to one vote per share.
The Company cannot declare or pay dividends on the common stock without the
consent of a majority of the Series A Preferred shareholders.
In April and October 1996, the Company's Board of Directors declared three-
for-two splits of its Common Stock effective immediately prior to the
effectiveness of the Company's Amended and Restated Certificate of
Incorporation related to the authorization and issuance of Series B Preferred
and Series C Preferred, respectively. Accordingly, the financial statements
and all common and per common share data have been retroactively adjusted to
reflect the increase in authorized common shares and the stock splits. The par
value of the additional shares of common stock issued in connection with the
stock splits was credited to Common Stock and charged to Deficit Accumulated
During Development Stage.
Holders of the Series A Preferred are entitled to dividends when and if
declared by the Board of Directors. The Series A Preferred is non-voting and
is redeemable at par value plus any declared and unpaid dividends, at a rate
of one-third of the outstanding shares on each of August 25, 2001, 2002 and
2003 or in full on a change in control or initial public offering of the
Company's equity securities ("IPO"). The Series A Preferred has a liquidation
preference equal to par value plus any declared and unpaid dividends.
Holders of Series B Preferred are entitled to dividends when and if declared
by the Board of Directors and may participate in voting to the extent of one
vote per share of Series B Preferred as if converted. The Series B Preferred
is redeemable at par value plus any declared and unpaid dividends, at a rate
of one-third of the outstanding shares on each of April 30, 2002, 2003 and
2004 or in full on a change in control or IPO of the Company's equity
securities. Series B Preferred has a liquidation preference equal to par
value, pooled with Series A, including any declared and unpaid dividends in
the event of a merger, sale or liquidation.
Holders of Series C Preferred are entitled to dividends when and if declared
by the Board of Directors and may participate in voting to the extent of one
vote per share of Series C Preferred as if converted. The Series C Preferred
is redeemable at par value plus any declared and unpaid dividends at a rate of
one-third of the outstanding shares on each of October 8, 2002, 2003 and 2004
or in full on a change in control or IPO of the Company's equity securities.
Series C Preferred has a liquidation preference equal to par value, pooled
with Series A and B, including any declared and unpaid dividends in the event
of a merger, sale or liquidation.
In April 1996, the Company's Board of Directors canceled previously issued
stock options granted at $.01 per share to its advisory board members. These
options were replaced by a grant of 172,500 restricted shares (258,750 shares
after reflecting the October stock split) of common stock at $.30 per share,
the fair market value at the date of the restricted stock grant.
F-40
<PAGE>
SAHARA NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In May 1995, the three founding officers ("Founders") of the Company
contributed a total of $18,470 for 1,847,000 shares (4,155,750 shares after
reflecting the stock splits) of common stock. Under the terms of the
shareholders agreement the Founders cannot sell their common stock before
August 1997. For the next eight years, or until an IPO, first the Company,
then the remaining Founders, have a right of first refusal to purchase any
shares being sold by any Founder. In the event a Founder leaves the Company,
the Company has an option to repurchase shares owned by the Founder for $.01
per share. At December 31, 1996 and 1995, the Company's option extends to
approximately 65% and 73%, respectively, of the shares owned by each Founder,
decreasing ratably to zero by August 1999.
In June and August 1995, the Company received $1,500 and $1,750,000,
respectively, from a venture capital firm in exchange for 2,000,000 shares of
Series A preferred stock, 2,150,000 shares (4,837,500 shares after reflecting
the stock splits) of common stock, and the extinguishment of a $250,000 bridge
loan provided to the Company by the venture capital firm.
In October 1995, the Company received $1,400,000 from a second venture
capital firm in exchange for 1,400,000 shares of Series A preferred stock and
1,400,000 shares (3,150,000 shares after reflecting the stock splits) of
common stock. The Company also received $226,000 from various investors,
including two officers, in exchange for 226,000 shares of Series A preferred
stock and 226,000 shares (508,500 shares after reflecting the stock splits) of
common stock.
In October 1995, the Company agreed to issue 10,000 shares of Series A
preferred stock and 10,000 shares (22,500 shares after reflecting the stock
splits) of common stock. Accordingly, the Company has recorded a stock
subscription receivable of $10,000. Payment for the stock subscription was
received by the Company in 1996.
3. STOCK OPTIONS
The Company's 1995 Stock Plan (the "Plan") provides for the granting of
Incentive Stock Options ("ISO"), Non-Qualified Options ("NQO") and other
awards to employees, directors, officers and consultants up to an aggregate of
3,825,750 and 1,353,000 shares (3,044,250 shares after reflecting the stock
splits) of common stock at December 31, 1996 and 1995, respectively. The
exercise price of the options shall be no less than 100% for ISOs and 50% for
NQO's respectively, of the fair market value on the date of grant as
determined by the Board of Directors. The exercisability of the options is
determined on an individual grant basis by the Board of Directors, however, no
options can be exercisable prior to six months from the date of grant.
Information regarding the Company's stock option plan is summarized below:
<TABLE>
<CAPTION>
1996 1995
-------------------- ----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------- --------- ------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year: 821,250 $.01 -- --
Granted............................. 1,240,750 $.01-$.40 821,250 $ .01
Exercised........................... (58,500) $.01 -- --
Canceled............................ (67,500) $.01 -- --
--------- --------- ------- -----
Outstanding at end of year............ 1,936,000 $.01-$.40 821,250 $ .01
========= ========= ======= =====
Options exercisable at end of year.... 92,250 $.01 -- --
========= ========= ======= =====
</TABLE>
F-41
<PAGE>
SAHARA NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Options as to 1,798,750 shares become exercisable as to 20% of the shares in
1997 and an additional 20% per year over the next four years. Options as to an
additional 45,000 shares become exercisable at 22,500 shares per year
beginning in 1997 in conjunction with a non-qualified stock option agreement
entered into by the Company. The weighted average exercise price of options
outstanding at December 31, 1996 and 1995 was $.10 and $.01, respectively, and
the weighted average remaining contractual life of these options is 9.5 years
at December 31, 1996.
In 1995, the Financial Accounting Standards Board issued Statement No. 123,
"Accounting for Stock Based Compensation" ("SFAS 123"). However, the
aforementioned new accounting standard did not have any effect on the
Company's results of operations. In addition the pro forma effects are not
material.
The Company accounts for options under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and will continue to do so.
All options issued in the year ended December 31, 1995 were at fair market
value on the date of grant as determined by the Board of Directors. In 1996,
options were issued at prices below fair market value as determined by the
Board of Directors. Accordingly, non-cash unearned compensation expense of
$1,188,400 for stock options granted below fair market value has been recorded
in the year ended December 31, 1996. Amortization of unearned compensation for
the year ended December 31, 1996 was $148,179.
4. INCOME TAXES
The Company's net deferred tax asset is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1996 1995
----------- ---------
<S> <C> <C>
Deferred tax asset
Net operating loss carryforwards................... $ 2,561,879 $ 370,600
Valuation allowance................................ (2,561,879) (370,600)
----------- ---------
Net deferred tax asset............................... $ -- $ --
=========== =========
</TABLE>
The valuation allowance increased by approximately $2,200,000 during the
year ended December 31, 1996, primarily to fully reserve the net operating
loss generated during the year.
At December 31, 1996 and 1995, the Company had available for federal income
tax purposes, a net operating loss carryforward of approximately $8,051,000
and $819,000, respectively, which begins to expire in 2010, that may be used
to offset future federal taxable income. The difference between the deficit
accumulated during the development stage for financial reporting purposes and
the net operating loss carryforward for tax purposes is primarily due to
certain general and administrative expenses which are not currently deductible
for tax purposes. The Company has provided a valuation allowance against the
full amount of the net operating loss tax benefit since the likelihood of
realization cannot be determined. The ability of the Company to realize a
future tax benefit from a portion of its net operating carryforwards is
severely limited due to changes in ownership of the Company.
The Company also has available for state income tax purposes, a net
operating loss tax benefit of approximately $905,000 which is also offset by a
valuation allowance.
5. NOTES PAYABLE
In March 1996, the Company entered into a financing arrangement with an
outside investor group from which the Company received $325,000 in exchange
for an unsecured loan with an interest rate of 14%. Principal
F-42
<PAGE>
SAHARA NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
and interest are to be paid in 36 equal monthly installments of $10,890 each,
commencing on April 1, 1996. The Company received an additional $350,000 in
exchange for a loan secured by equipment with an interest rate of 8%. In
connection with this financing arrangement, the Company issued to this
investor group warrants to purchase 72,000 shares of Common Stock at an
exercise price of $.67 per share. The warrants became exercisable upon
issuance and expire seven years from the issuance date.
In September, 1996, the Company entered into a $750,000 loan and security
agreement secured by equipment with an interest rate of prime plus one-half
percentage point. Borrowings under the loan agreement were $547,278 at
December 31, 1996. This amount was fully repaid in January 1997 as a result of
the purchase of the Company (see Note 9).
6. OPERATING LEASES
The Company leases office space for its Wallingford, Connecticut
headquarters. Rent expense totaled $112,142 and $14,070 at December 31, 1996
and 1995, respectively. Minimum future rental payments under noncancelable
leases at December 31, 1996 are as follows: 1997--$104,940 and 1998--$39,353.
7. CAPITAL LEASES
The Company leases office equipment and machinery used in the development of
products. The minimum future lease obligations under noncancelable leases at
December 31, 1996 using imputed interest rates ranging from 8% to 18.6%, are
as follows: 1997--$659,332, 1998--$152,059, 1999--$150,055, 2000--$48,673, and
zero thereafter.
8. DEFINED CONTRIBUTION PLAN
The Company offers a defined contribution plan in the form of a 401K plan.
All employees with at least three months of service and who are 21 years of
age are eligible to participate in the Plan. The Company is not obligated to
make contributions to the Plan. Employees may make contributions through
payroll deductions up to 14% of their salary. The Company did not make any
contributions for the periods ended December 31, 1996 and 1995.
9. SUBSEQUENT EVENT
On January 2, 1997, the Company signed an agreement with Cascade
Communications Corp. ("Cascade"), whereby Cascade will purchase the Company in
exchange for 3.8 million shares of Cascade's common stock. The transaction was
subsequently approved by the shareholders of the Company.
F-43
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
ASCEND COMMUNICATIONS, INC.,
A DELAWARE CORPORATION,
CATSKILL MERGER CORPORATION,
A DELAWARE CORPORATION AND WHOLLY-OWNED
SUBSIDIARY OF ASCEND,
AND
CASCADE COMMUNICATIONS CORP.,
A DELAWARE CORPORATION
DATED AS OF MARCH 30, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Recitals................................................................ A-1
ARTICLE I THE MERGER............................................... A-1
Section 1.1 Merger................................................... A-1
Section 1.2 Closing; Effective Time.................................. A-1
Section 1.3 Effects of the Merger.................................... A-1
Section 1.4 Directors and Officers................................... A-2
ARTICLE II CONVERSION OF SECURITIES A-2
Section 2.1 Conversion of Capital Stock.............................. A-2
(a)Capital Stock of Sub.................................. A-2
(b)Cancellation of Ascend-Owned Stock.................... A-2
(c)Exchange Ratio for Cascade Common Stock............... A-2
(d)Cascade Stock Options and Employee Stock Purchase
Plan................................................ A-3
Section 2.2 Exchange of Certificates................................. A-3
(a)Exchange Agent........................................ A-3
(b)Exchange Procedures................................... A-3
(c)Distributions with Respect to Unexchanged Shares...... A-4
(d)No Further Ownership Rights in Cascade Common Stock... A-4
(e)No Fractional Shares.................................. A-4
(f)Termination of Exchange Fund.......................... A-4
(g)No Liability.......................................... A-4
ARTICLE III REPRESENTATIONS AND WARRANTIES OF CASCADE................ A-5
Section 3.1 Organization............................................. A-5
Section 3.2 Cascade Subsidiaries and Joint Ventures.................. A-5
Section 3.3 Cascade Capital Structure................................ A-6
Section 3.4 Authority; No Conflict; Required Filings and Consents.... A-6
Section 3.5 SEC Filings; Financial Statements........................ A-7
Section 3.6 Absence of Undisclosed Liabilities....................... A-8
Section 3.7 Absence of Certain Changes or Events..................... A-8
Section 3.8 Taxes.................................................... A-8
Section 3.9 Properties............................................... A-9
Section 3.10 Intellectual Property.................................... A-9
Section 3.11 Agreements, Contracts and Commitments.................... A-10
Section 3.12 Litigation............................................... A-10
Section 3.13 Environmental Matters.................................... A-10
Section 3.14 Employee Benefit Plans................................... A-10
Section 3.15 Compliance with Laws..................................... A-11
Section 3.16 Pooling of Interests..................................... A-11
Section 3.17 Interested Party Transactions............................ A-11
Section 3.18 Registration Statement; Joint Proxy
Statement/Prospectus.................................... A-12
Section 3.19 Payments Resulting from Mergers.......................... A-12
Section 3.20 Opinion of Financial Advisor............................. A-12
Section 3.21 Accounts Receivable; Inventory........................... A-12
Section 3.22 Section 203 of the DGCL Not Applicable................... A-13
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF ASCEND AND SUB......... A-13
Section 4.1 Organization............................................. A-13
Section 4.2 Ascend Subsidiaries and Joint Ventures................... A-13
Section 4.3 Ascend Capital Structure................................. A-14
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Section 4.4 Authority; No Conflict; Required Filings and Consents.... A-14
Section 4.5 SEC Filings; Financial Statements........................ A-15
Section 4.6 Absence of Undisclosed Liabilities....................... A-16
Section 4.7 Absence of Certain Changes or Events..................... A-16
Section 4.8 Taxes.................................................... A-16
Section 4.9 Properties............................................... A-16
Section 4.10 Intellectual Property.................................... A-17
Section 4.11 Agreements, Contracts and Commitments.................... A-17
Section 4.12 Litigation............................................... A-17
Section 4.13 Environmental Matters.................................... A-17
Section 4.14 Employee Benefit Plans................................... A-18
Section 4.15 Compliance with Laws..................................... A-19
Section 4.16 Pooling of Interests..................................... A-19
Section 4.17 Interested Party Transactions............................ A-19
Section 4.18 Registration Statement; Joint Proxy
Statement/Prospectus.................................... A-19
Section 4.19 Payments Resulting from Mergers.......................... A-19
Section 4.20 Opinion of Financial Advisor............................. A-19
Section 4.21 Accounts Receivable; Inventory........................... A-19
Section 4.22 Interim Operations of Sub................................ A-20
ARTICLE V CONDUCT OF BUSINESS...................................... A-20
Section 5.1 Covenants of Cascade..................................... A-20
Section 5.2 Covenants of Ascend...................................... A-22
Section 5.3 Cooperation.............................................. A-23
ARTICLE VI ADDITIONAL AGREEMENTS.................................... A-24
Section 6.1 No Solicitation.......................................... A-24
Section 6.2 Joint Proxy Statement/Prospectus; Registration
Statement............................................... A-24
Section 6.3 Consents................................................. A-25
Section 6.4 Current Nasdaq Quotation................................. A-25
Section 6.5 Access to Information.................................... A-25
Section 6.6 Special Stockholders Meetings............................ A-25
(a)Cascade Stockholders Meeting.......................... A-25
(b)Ascend Stockholders Meeting........................... A-25
Section 6.7 Legal Conditions to Merger............................... A-25
Section 6.8 Public Disclosure........................................ A-26
Section 6.9 Tax-Free Reorganization.................................. A-26
Section 6.10 Pooling Accounting....................................... A-26
Section 6.11 Director, Officer and Stockholder Agreements............. A-26
Section 6.12 Nasdaq Quotation......................................... A-27
Section 6.13 Stock Plans and Options.................................. A-27
Section 6.14 Brokers or Finders....................................... A-27
Section 6.15 Indemnification.......................................... A-28
Section 6.16 Stock Option and Voting Agreements....................... A-29
Section 6.17 Additional Agreements; Reasonable Efforts................ A-29
Section 6.18 Board Composition........................................ A-30
ARTICLE VII CONDITIONS TO MERGER..................................... A-30
Section 7.1 Conditions to Each Party's Obligation to Effect the
Merger.................................................. A-30
(a)Stockholder Approvals................................. A-30
(b)HSR Act............................................... A-30
(c)Certain Approvals..................................... A-30
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
(d)Registration
Statement; State
Securities Laws.... A-30
(e)No Injunctions or
Restraints;
Illegality......... A-30
(f)Pooling.............. A-30
(g)Nasdaq............... A-31
(h)Tax Opinions......... A-31
Section 7.2 Additional Conditions to
Obligations of Ascend
and Sub................ A-31
(a)Representations and
Warranties......... A-31
(b)Performance of
Obligations........ A-31
(c)Certain Agreements... A-31
(d)Absence of Cascade
Material Adverse
Effect............. A-31
Section 7.3 Additional Conditions to
Obligations of
Cascade................ A-31
(a)Representations and
Warranties......... A-31
(b)Performance of
Obligations........ A-31
(c)Certain Agreements... A-32
(d)Absence of Ascend
Material Adverse
Effect............. A-32
ARTICLE VIII TERMINATION AND
AMENDMENT.............. A-32
Section 8.1 Termination............. A-32
Section 8.2 Effect of Termination... A-33
Section 8.3 Fees and Expenses....... A-33
Section 8.4 Amendment............... A-35
Section 8.5 Extension; Waiver....... A-35
ARTICLE IX MISCELLANEOUS........... A-35
Section 9.1 Nonsurvival of
Representations,
Warranties and
Agreements............. A-35
Section 9.2 Notices................. A-36
Section 9.3 Interpretation.......... A-36
Section 9.4 Counterparts............ A-37
Section 9.5 Entire Agreement; No
Third Party
Beneficiaries.......... A-37
Section 9.6 Governing Law........... A-37
Section 9.7 Assignment.............. A-37
</TABLE>
EXHIBITS & ANNEXES
Exhibit AForm of Cascade Stock Option Agreement
Exhibit BForm of Ascend Stock Option Agreement
Exhibit CForm of Cascade Director and Officer Voting Agreement
Exhibit DForm of Ascend Director and Officer Voting Agreement
Exhibit EForm of Cascade Director, Officer and Stockholder Agreement
Exhibit FForm of Ascend Director, Officer and Stockholder Agreement
Exhibit GForm of Amended and Restated Certificate of Incorporation of Cascade
iii
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TABLE OF DEFINED TERMS
<TABLE>
<CAPTION>
SECTION
--------
<S> <C>
Affiliate.............................................................. 6.11
Agreement.............................................................. Forepart
Alternative Transaction................................................ 8.3(e)
Approval............................................................... 6.7
Ascend................................................................. Forepart
Ascend Balance Sheet................................................... 4.5(b)
Ascend Common Stock.................................................... 2.1(b)
Ascend Disclosure Schedule............................................. IV
Ascend Employee Plans.................................................. 4.14(a)
Ascend Financial Statements............................................ 4.5(b)
Ascend Intellectual Property Rights.................................... 4.10(a)
Ascend Material Adverse Effect......................................... IV
Ascend Material Contracts.............................................. 4.11
Ascend Option Plans.................................................... 4.3(a)
Ascend Post-Termination Fee............................................ 8.3(c)
Ascend Preferred Stock................................................. 4.3(a)
Ascend Purchase Plan................................................... 4.3(a)
Ascend SEC Reports..................................................... 4.5(a)
Ascend Stock Option Agreement.......................................... 3.4(a)
Ascend Stockholders Meeting............................................ 3.18
Ascend Termination Fee................................................. 8.3(c)
Cascade................................................................ Forepart
Cascade Balance Sheet.................................................. 3.5(b)
Cascade Certificate.................................................... 2.2(b)
Cascade Certificates................................................... 2.2(b)
Cascade Common Stock................................................... 2.1
Cascade Disclosure Schedule............................................ III
Cascade Employee Plans................................................. 3.14(a)
Cascade Financial Statements........................................... 3.5(b)
Cascade Intellectual Property Rights................................... 3.10(a)
Cascade Material Adverse Effect........................................ III
Cascade Material Contracts............................................. 3.11
Cascade Option......................................................... 6.13(a)
Cascade Post-Termination Fee........................................... 8.3(b)
Cascade Preferred Stock................................................ 3.3(a)
Cascade SEC Reports.................................................... 3.5(a)
Cascade Stockholders Meeting........................................... 3.18
Cascade Stock Option Agreement......................................... 3.4(a)
Cascade Stock Plans.................................................... 2.1(d)
Cascade Termination Fee................................................ 8.3(b)
Closing................................................................ 1.2
Closing Date........................................................... 1.2
Code................................................................... Recitals
Competing Offer........................................................ 6.1(a)
Competing Offeror...................................................... 6.1(b)
Confidentiality Agreement.............................................. 6.1(a)
Constituent Corporations............................................... 1.3(a)
DGCL................................................................... 1.1
Effective Time......................................................... 1.2
Environmental Permits.................................................. 3.13(c)
</TABLE>
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<TABLE>
<CAPTION>
SECTION
--------
<S> <C>
ERISA.................................................................. 3.14(a)
Evaluation Material.................................................... 6.5
Exchange Act........................................................... 3.4(c)
Exchange Agent......................................................... 2.2(a)
Exchange Fund.......................................................... 2.2(a)
Exchange Ratio......................................................... 2.1(c)
Government Entity...................................................... 3.4(c)
Hazardous Materials.................................................... 3.13(a)
Hazardous Materials Activities......................................... 3.13(b)
HSR Act................................................................ 2.2(b)
Indemnified Parties.................................................... 6.15(a)
Indemnified Liabilities................................................ 6.15(a)
IRS.................................................................... 3.14(b)
Joint Proxy Statement.................................................. 3.18
Joint Venture.......................................................... 3.2(b)
Merger................................................................. 1.1
Registration Statement................................................. 3.18
Reporting Tail Coverage................................................ 6.15(d)
Returns................................................................ 3.8(b)
Rule 145............................................................... 6.11
SEC.................................................................... 3.4(c)
Securities Act......................................................... 3.4(c)
Stock Option Agreements................................................ 3.4(a)
Sub.................................................................... Forepart
Subsidiary............................................................. 3.2(b)
Superior Proposal...................................................... 6.1(a)
Surviving Corporation.................................................. 1.3(a)
Tax.................................................................... 3.8(a)
Taxes.................................................................. 3.8(a)
Third Party............................................................ 8.3(e)
Voting Agreements...................................................... 6.16
</TABLE>
v
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AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement"), dated as of March
30, 1997, by and among Ascend Communications, Inc., a Delaware corporation
("Ascend"), Catskill Merger Corporation, a Delaware corporation and a wholly
owned subsidiary of Ascend ("Sub"), and Cascade Communications Corp., a
Delaware corporation ("Cascade").
Recitals
WHEREAS, the Boards of Directors of each of Ascend, Sub and Cascade deem it
advisable and in the best interests of each corporation and its respective
stockholders that Ascend and Cascade enter into a strategic business
combination in order to advance the long-term business interests of Ascend and
Cascade, and have therefore approved this Agreement, the Merger (as defined
below) and the other transactions contemplated by this Agreement;
WHEREAS, the combination of Ascend and Cascade shall be effected by the
terms of this Agreement through a transaction in which Sub will merge with and
into Cascade, Cascade will become a wholly-owned subsidiary of Ascend and the
stockholders of Cascade will become stockholders of Ascend;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a pooling of interests.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth below, the
parties agree as follows:
ARTICLE I
The Merger
Section 1.1 Merger. Subject to the provisions of this Agreement and in
accordance with the Delaware General Corporation Law (the "DGCL"), Sub shall
be merged with and into Cascade (the "Merger"). As a result of the Merger, the
outstanding shares of capital stock of Sub and Cascade shall be converted or
canceled in the manner provided in Article II of this Agreement; the separate
corporate existence of Sub shall cease; and Cascade shall be the surviving
corporation in the Merger.
Section 1.2 Closing; Effective Time. The closing of the Merger (the
"Closing") will take place at 9:00 a.m., local time, on a date to be specified
by Ascend and Cascade, which shall be no later than the second business day
after satisfaction or waiver of the conditions set forth in Article VII (the
"Closing Date"), at the offices of Gray Cary Ware & Freidenrich, A
Professional Corporation, unless another date or place is agreed to in writing
by Ascend and Cascade. Subject to the foregoing, and to the provisions of
Section 8.1(b) of this Agreement, the parties currently intend, and will use
their best commercially reasonable efforts, to cause the Closing to occur on
or before July 31, 1997. At or concurrently with the Closing, the parties
hereto shall cause the Merger to be consummated by filing a Certificate of
Merger with the Secretary of State of the State of Delaware and with the
Recorder of the County in which the registered office of Cascade is located,
in accordance with the relevant provisions of the DGCL (the time of such
filing being the "Effective Time").
Section 1.3 Effects of the Merger.
(a) At the Effective Time, (i) the separate existence of Sub shall cease and
Sub shall be merged with and into Cascade (Sub and Cascade are sometimes
referred to below as the "Constituent Corporations," and Cascade after the
Effective Time is sometimes referred to below as the "Surviving Corporation"),
(ii) the
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Certificate of Incorporation of Cascade shall be amended and restated
substantially in the form set forth in Exhibit G hereto and, as so amended and
restated, shall be the Certificate of Incorporation of the Surviving
Corporation, and (iii) subject to Section 6.15(b), the Bylaws of Cascade as in
effect immediately prior to the Effective Time shall be the Bylaws of the
Surviving Corporation.
(b) From and after the Effective Time, the effects of the Merger shall be as
provided in this Agreement and in the applicable provisions of the DGCL.
Without limiting the generality of the foregoing, and subject thereto, from
and after the Effective Time, the Surviving Corporation shall possess all the
rights, privileges, powers and franchises of a public as well as of a private
nature, and be subject to all the restrictions, disabilities and duties of
each of the Constituent Corporations; and all and singular, the rights,
privileges, powers and franchises of each of the Constituent Corporations, and
all property, real, personal and mixed, and all debts due to either of the
Constituent Corporations on whatever account, as well as for stock
subscriptions and all other things in action or belonging to each of the
Constituent Corporations, shall be vested in the Surviving Corporation; and
all property, rights, privileges, powers and franchises, and all and every
other interest shall be thereafter as effectually the property of the
Surviving Corporation as they were of the several and respective Constituent
Corporations, and the title to any real estate vested by deed or otherwise
under the laws of the State of Delaware, in either of the Constituent
Corporations, shall not revert or be in any way impaired; but all rights of
creditors and all liens upon any property of either of the Constituent
Corporations shall be preserved unimpaired, and all debts, liabilities and
duties of the Constituent Corporations shall thereafter attach to the
Surviving Corporation, and may be enforced against it to the same extent as if
such debts and liabilities had been incurred or contracted by it.
Section 1.4 Directors and Officers. The directors of Cascade immediately
prior to the Effective Time shall continue as directors of the Surviving
Corporation (together with such additional directors as shall be elected by
Ascend as of or after the Effective Time) and shall hold office until their
resignation or until their respective successors have been appointed in
accordance with the Certificate of Incorporation and Bylaws of the Surviving
Corporation. The officers of Sub immediately prior to the Effective Time shall
be the initial officers of the Surviving Corporation, in each case until their
respective successors are duly elected or appointed.
ARTICLE II
Conversion of Securities
Section 2.1 Conversion of Capital Stock. As of the Effective Time, by virtue
of the Merger and without any action on the part of the holder of any shares
of common stock, $.001 par value, of Cascade ("Cascade Common Stock") or
capital stock of Sub:
(a) Capital Stock of Sub. Each issued and outstanding share of the capital
stock of Sub shall be converted into and become one fully paid and
nonassessable share of common stock, $.001 par value, of the Surviving
Corporation.
(b) Cancellation of Ascend-Owned Stock. Any shares of Cascade Common Stock
owned by Ascend, Sub or any other wholly owned Subsidiary (as defined in
Section 3.2(b)) of Ascend shall be canceled and retired and shall cease to
exist, and no stock of Ascend or other consideration shall be delivered in
exchange therefor. All shares of common stock, $.001 par value, of Ascend
("Ascend Common Stock") owned by Cascade shall remain unaffected by the
Merger.
(c) Exchange Ratio for Cascade Common Stock. Subject to Section 2.2, each
issued and outstanding share of Cascade Common Stock (other than shares to be
canceled in accordance with Section 2.1(b)) shall be converted into the right
to receive seven tenths (0.7) (the "Exchange Ratio") of a fully paid and
nonassessable share of Ascend Common Stock (which amount will be adjusted for
any stock split or stock dividend with respect to the Ascend Common Stock or
Cascade Common Stock effected between the date of this Agreement and the
Effective Time). All such shares of Cascade Common Stock, when so converted,
shall no longer be outstanding
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and shall automatically be canceled and retired and shall cease to exist, and
each holder of a certificate representing any such shares shall cease to have
any rights with respect thereto, except the right to receive the shares of
Ascend Common Stock and any cash in lieu of fractional shares of Ascend Common
Stock to be issued or paid in consideration therefor upon the surrender of
such certificate in accordance with Section 2.2, without interest.
(d) Cascade Stock Options and Employee Stock Purchase Plan. At the Effective
Time, all then outstanding options to purchase Cascade Common Stock issued
under the Cascade Amended and Restated 1991 Stock Plan, as amended, the
Cascade 1994 Employee Stock Purchase Plan, the Cascade 1994 Non-Employee
Director Stock Option Plan, the Arris Stock Plan and the Sahara 1995 Stock
Option Plan (collectively, the "Cascade Stock Plans"), not exercised as of the
Effective Time will be assumed by Ascend in accordance with Section 6.13.
Ascend acknowledges and agrees that the consummation of the Merger
automatically will result in the acceleration of vesting (either in whole or
in part) of certain options granted under the Cascade Amended and Restated
1991 Stock Plan, the Cascade 1994 Non-Employee Director Stock Option Plan, and
the Arris Stock Plan, each as heretofore amended and as proposed to be amended
in the Proxy Statement of Cascade for the 1997 Annual Meeting of Cascade
stockholders, in accordance with and to the extent set forth in such plans.
Section 2.2 Exchange of Certificates. The procedures for exchanging
outstanding shares of Cascade Common Stock for Ascend Common Stock pursuant to
the Merger are as follows:
(a) Exchange Agent. As of the Effective Time, Ascend shall deposit with a
bank or trust company designated by Ascend and reasonably acceptable to
Cascade (the "Exchange Agent"), for the benefit of the holders of shares of
Cascade Common Stock, for exchange in accordance with this Section 2.2,
through the Exchange Agent, certificates representing the shares of Ascend
Common Stock (such shares of Ascend Common Stock, together with any dividends
or distributions with respect thereto, being hereinafter referred to as the
"Exchange Fund") issuable pursuant to Section 2.1 in exchange for outstanding
shares of Cascade Common Stock.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Cascade Common Stock or the right to receive
shares of Cascade Common Stock in connection with the acquisition by Cascade
of Sahara Networks, Inc. (each a "Cascade Certificate" and, collectively, the
"Cascade Certificates") whose shares were converted pursuant to Section 2.1
into the right to receive shares of Ascend Common Stock (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Cascade Certificates shall pass, only upon delivery of
the Cascade Certificates to the Exchange Agent and shall be in such form and
have such other provisions as Ascend and Cascade may reasonably specify) and
(ii) instructions for use in effecting the surrender of the Cascade
Certificates in exchange for certificates representing shares of Ascend Common
Stock. Upon surrender of a Cascade Certificate for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by Ascend,
together with such letter of transmittal, duly executed (and, in the case of
any Cascade stockholder whose shares of Cascade Common Stock have been
converted into the right to receive Ascend Common Stock with a value (as
determined in accordance with the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act") and applicable rules thereunder) of more
than fifteen million dollars ($15,000,000), upon (i) expiration or early
termination of the waiting period under the HSR Act or (ii) if requested in
writing by Ascend, receipt by Ascend of a legal opinion from counsel to such
holder, in form and substance satisfactory to Ascend, that the acquisition of
such Ascend Common Stock by such holder is exempt from the requirements of the
HSR Act), the holder of such Cascade Certificate shall be entitled to receive
in exchange therefor a certificate representing that number of whole shares of
Ascend Common Stock which such holder has the right to receive pursuant to the
provisions of this Article II, and the Cascade Certificate so surrendered
shall immediately be canceled. In the event of a transfer of ownership of
Cascade Common Stock which is not registered in the transfer records of
Cascade, a certificate representing the proper number of shares of Ascend
Common Stock may be issued to a transferee if the Cascade Certificate
representing such Cascade Common Stock is presented to the Exchange Agent,
accompanied by all documents required to evidence and
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effect such transfer and by evidence that any applicable stock transfer taxes
have been paid. Until surrendered as contemplated by this Section 2.2, each
Cascade Certificate shall be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender the certificate
representing shares of Ascend Common Stock and cash in lieu of any fractional
shares of Ascend Common Stock as contemplated by this Section 2.2.
(c) Distributions with Respect to Unexchanged Shares. No dividends or other
distributions declared or made after the Effective Time with respect to Ascend
Common Stock with a record date after the Effective Time shall be paid to the
holder of any unsurrendered Cascade Certificate with respect to the shares of
Ascend Common Stock represented thereby, and no cash payment in lieu of
fractional shares shall be paid to any such holder pursuant to Section 2.2(e)
below, until the holder of record of such Cascade Certificate shall surrender
such Cascade Certificate. Subject to the effect of applicable laws, following
surrender of any such Cascade Certificate, there shall be paid to the record
holder of the certificates representing whole shares of Ascend Common Stock
issued in exchange therefor, without interest, (i) at the time of such
surrender, the amount of any cash payable in lieu of a fractional share of
Ascend Common Stock to which such holder is entitled pursuant to Section
2.2(e) below and the amount of dividends or other distributions with a record
date after the Effective Time previously paid with respect to such whole
shares of Ascend Common Stock, and (ii) at the appropriate payment date, the
amount of dividends or other distributions with a record date after the
Effective Time but prior to surrender and a payment date subsequent to
surrender payable with respect to such whole shares of Ascend Common Stock.
(d) No Further Ownership Rights in Cascade Common Stock. All shares of
Ascend Common Stock issued upon the surrender for exchange of shares of
Cascade Common Stock in accordance with the terms hereof, including any cash
paid pursuant to Sections 2.2(c) and 2.2(e), shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of Cascade
Common Stock, and there shall be no further registration of transfers on the
stock transfer books of the Surviving Corporation of the shares of Cascade
Common Stock which were outstanding immediately prior to the Effective Time.
If, after the Effective Time, Cascade Certificates are presented to the
Surviving Corporation for any reason, they shall be canceled and exchanged as
provided in this Section 2.2.
(e) No Fractional Shares. No certificate or scrip representing fractional
shares of Ascend Common Stock shall be issued upon the surrender for exchange
of Cascade Certificates, and such fractional share interests will not entitle
the owner thereof to vote or to any rights of a stockholder of Ascend.
Notwithstanding any other provision of this Agreement, each holder of shares
of Cascade Common Stock exchanged pursuant to the Merger who would otherwise
have been entitled to receive a fraction of a share of Ascend Common Stock
(after taking into account all Cascade Certificates delivered by such holder)
shall receive, in lieu thereof, cash (without interest) in an amount equal to
such fractional part of a share of Ascend Common Stock multiplied by the
average of the last reported sale prices of Ascend Common Stock on The Nasdaq
National Market on the ten (10) trading days immediately preceding the
Effective Time.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the stockholders of Cascade for one year after the
Effective Time shall be delivered to Ascend, upon demand, and any stockholders
of Cascade who have not previously complied with this Section 2.2 shall
thereafter look only to Ascend for payment of their claim for Ascend Common
Stock, cash in lieu of fractional shares of Ascend Common Stock, and dividends
or distributions with respect to Ascend Common Stock.
(g) No Liability. Neither Ascend nor Cascade, nor any of their respective
directors, officers, employees or agents, shall be liable to any holder of
shares of Cascade Common Stock or Ascend Common Stock, as the case may be, for
such shares (or dividends or distributions with respect thereto) delivered to
a public official pursuant to any applicable abandoned property, escheat or
similar law.
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ARTICLE III
Representations and Warranties of Cascade
Cascade represents and warrants to Ascend and Sub that the statements
contained in this Article III are true and correct, except as set forth in the
disclosure schedule delivered by Cascade to Ascend on or before the date of
this Agreement ("Cascade Disclosure Schedule"). The Cascade Disclosure
Schedule shall be arranged in sections corresponding to the numbered and
lettered sections contained in this Article III, and the disclosure in any
section of the Cascade Disclosure Schedule shall qualify only the
corresponding section in this Article III. The Term "Cascade Material Adverse
Effect" shall mean a material adverse effect on the business, operations,
properties, financial condition, assets (including intangible assets), or
results of operations of Cascade and its Subsidiaries, taken as a whole, it
being understood that none of the following shall be deemed by itself or by
themselves, either alone or in combination, to constitute a Cascade Material
Adverse Effect: (a) a change in the market price or trading volume of Cascade
Common Stock, (b) a failure by Cascade to meet the revenue or earnings
predictions of equity analysts as reflected in the First Call consensus
estimate, or any other revenue or earnings predictions or expectations, for
any period ending (or for which earnings are released) on or after the date of
this Agreement and prior to the Closing Date, (c) conditions affecting the
computer networking industry as a whole or the U.S. economy as a whole, (d)
any effect arising primarily out of or resulting primarily from actions
contemplated by the parties in connection with, or which is primarily
attributable to, the announcement of this Agreement and the transactions
contemplated hereby, to the extent so attributable, (e) any matter identified
in Section 3.7 of the Cascade Disclosure Schedule, or (f) any action or event
permitted in Section 5.1 hereof.
Section 3.1 Organization. Each of Cascade and its Subsidiaries (i) is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, (ii) has all requisite
corporate power to own, lease and operate its property and to carry on its
business as now being conducted and as proposed to be conducted, and (iii) is
duly qualified to do business and is in good standing as a foreign corporation
in each jurisdiction in which the nature of its activities requires it to be
so qualified, except where the failure to have such power or the failure to be
so qualified could not reasonably be expected to have a Cascade Material
Adverse Effect.
Section 3.2 Cascade Subsidiaries and Joint Ventures.
(a) Section 3.2 of the Cascade Disclosure Schedule sets forth a list of all
Subsidiaries and Joint Ventures (as defined in Section 3.2(b)) of Cascade,
including the name of each Subsidiary and Joint Venture and the jurisdiction
in which such Subsidiary or Joint Venture is organized. Except as set forth in
Section 3.2 of the Cascade Disclosure Schedule, there are no outstanding
subscriptions, options, calls, contracts, voting trusts, proxies or other
commitments, understandings, restrictions, arrangements, rights or warrants
with respect to any such Subsidiary's capital stock, including any right
obligating any such Subsidiary to issue, deliver, or sell additional shares of
its capital stock, and no obligations, contingent or otherwise, of Cascade or
any of its Subsidiaries to repurchase, redeem, or otherwise acquire any shares
of the capital stock of any Cascade Subsidiary or make any investment (in the
form of a loan, capital contribution or otherwise) in any such Subsidiary or
any other entity other than guarantees of bank obligations of such
Subsidiaries entered into in the ordinary course of business. All of the
outstanding shares of capital stock of each Subsidiary of Cascade are duly
authorized, validly issued, fully paid and nonassessable, and all such shares
are owned by Cascade or another Cascade Subsidiary free and clear of all
security interests, liens, claims, pledges, agreements, limitations on
Cascade's voting rights, charges or other encumbrances of any nature. Section
3.2 of the Cascade Disclosure Schedule sets forth the nature and extent of the
ownership and voting interests held by Cascade in each such Joint Venture.
Except as set forth in Section 3.2 of the Cascade Disclosure Schedule, neither
Cascade nor any of its Subsidiaries directly or indirectly owns any equity or
similar interest in, or any interest convertible into or exchangeable or
exercisable for any such equity or similar interest in, any corporation,
limited liability company, partnership, joint venture or other business
association or entity, excluding securities of any publicly traded company
held for investment and comprising less than five percent (5%) of the
outstanding stock or voting power of such company.
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(b) As used in this Agreement, "Subsidiary" means, with respect to any
party, any corporation, limited liability company, partnership, joint venture,
or other business association or entity, at least a majority of the voting
securities or economic interests of which is directly or indirectly owned or
controlled by such party or by any one or more of its Subsidiaries. As used in
this Agreement, "Joint Venture" means, with respect to any party, any
corporation, limited liability company, partnership, joint venture or other
entity in which (i) such party, directly or indirectly, owns or controls more
than five percent (5%) and less than a majority of any class of the
outstanding voting securities or economic interests, or (ii) such party or a
Subsidiary of such party is a general partner.
Section 3.3 Cascade Capital Structure.
(a) The authorized capital stock of Cascade consists of 225,000,000 shares
of Cascade Common Stock and 2,000,000 shares of Preferred Stock, $.001 par
value per share ("Cascade Preferred Stock"). As of March 19, 1997: (i)
94,301,202 shares of Cascade Common Stock were issued and outstanding, all of
which are validly issued, fully paid and nonassessable; (ii) no shares of
Cascade Preferred Stock are issued or outstanding; (iii) no shares of Cascade
Common Stock or Cascade Preferred Stock were held in the treasury of Cascade
or by Subsidiaries of Cascade; (iv) 26,792,766 shares of Cascade Common Stock
were reserved for issuance under Cascade Stock Plans (including (A) 24,000,000
shares reserved for issuance under the Cascade Amended and Restated 1991 Stock
Plan, as amended, 13,308,147 of which were subject to outstanding options and
3,839,828 of which were reserved for future option grants, (B) 720,000 shares
of Cascade Common Stock reserved for issuance under the Cascade 1994 Non-
Employee Director Stock Option Plan, 558,000 of which were subject to
outstanding options and 162,000 of which were reserved for option grants, (C)
1,440,000 shares of Cascade Common Stock reserved for issuance under the
Cascade 1994 Employee Stock Purchase Plan, 1,120,451 of which are reserved for
future issuance under the Cascade 1994 Employee Stock Purchase Plan, (D)
242,000 shares of Cascade Common Stock reserved for issuance under the Arris
Stock Plan assumed by Cascade, 123,377 of which were subject to outstanding
options and 16,242 of which were reserved for option grants, and (E) 390,766
shares of Cascade Common Stock reserved for issuance under the Sahara 1995
Stock Plan assumed by Cascade, 361,329 of which were subject to outstanding
options and 2,785 of which were reserved for option grants), and (v) 5,798,760
shares of Cascade Common Stock have been reserved for issuance pursuant to
incentive and non-qualified stock option agreements granted to certain
officers of Cascade under Cascade Stock Plans. All shares of Cascade Common
Stock subject to issuance as specified above, upon issuance on the terms and
conditions specified in the instruments pursuant to which they are issuable,
shall be duly authorized, validly issued, fully paid and nonassessable. Except
as provided in Section 3.3 of the Cascade Disclosure Schedule, there are no
obligations, contingent or otherwise, of Cascade or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any shares of Cascade Common Stock.
(b) Except as set forth in this Section 3.3 or as reserved for grants of
options or rights or issuances of stock after March 19, 1997 under the Cascade
Stock Plans, there are no equity securities of any class of Cascade or any of
its Subsidiaries, or any security exchangeable into or exercisable for such
equity securities, issued, reserved for issuance or outstanding. Except
pursuant to the Cascade Stock Plans or any related agreement in effect as of
the date of this Agreement as set forth in this Section 3.3 or in Section 3.3
of the Cascade Disclosure Schedule, there are no options, warrants, equity
securities, calls, rights, commitments or agreements of any character to which
Cascade or any of its Subsidiaries is a party or by which it is bound
obligating Cascade or any of its Subsidiaries to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of capital stock of
Cascade or any of its Subsidiaries or obligating Cascade or any of its
Subsidiaries to grant, extend, accelerate the vesting of or enter into any
such option, warrant, equity security, call, right, commitment or agreement,
and, to the best knowledge of Cascade, as of the date of the Agreement and
except such ancillary agreements as are required by this Agreement, there are
no voting trusts, proxies or other agreements or understandings with respect
to the shares of capital stock of Cascade.
Section 3.4 Authority; No Conflict; Required Filings and Consents.
(a) Cascade has all requisite corporate power and authority to enter into
this Agreement and the Stock Option Agreements by and between Ascend and
Cascade of even date herewith, the forms of which are annexed
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hereto as Exhibits A and B (the "Cascade Stock Option Agreement" and the
"Ascend Stock Option Agreement," respectively, and the "Stock Option
Agreements," collectively) and to consummate the transactions contemplated
hereby and thereby. The execution and delivery of this Agreement and the Stock
Option Agreements and the consummation of the transactions contemplated hereby
and thereby have been duly authorized by all necessary corporate and
stockholder action on the part of Cascade, subject only (in the case of this
Agreement and the Merger contemplated hereby) to the adoption of the Merger
Agreement and the approval of the Merger by Cascade's stockholders under the
DGCL. This Agreement and the Stock Option Agreements have been duly executed
and delivered by Cascade and constitute the valid and binding obligations of
Cascade, enforceable in accordance with the respective terms thereof, except
as such enforceability may be limited by (i) bankruptcy laws and other similar
laws affecting creditors' rights generally and (ii) general principles of
equity, regardless of whether asserted in a proceeding in equity or at law.
(b) The execution and delivery of this Agreement and the Stock Option
Agreements by Cascade do not, and the consummation of the transactions
contemplated by this Agreement and the Stock Option Agreements will not, (i)
conflict with, or result in any violation or breach, of any provision of the
Certificate of Incorporation or Bylaws of Cascade or any of its Subsidiaries
(in each case as heretofore amended), (ii) result in any violation or breach
of, or constitute (with or without notice or lapse of time, or both) a default
(or give rise to a right of termination, cancellation or acceleration of any
obligation or loss of any material benefit) under, any of the terms,
conditions or provisions of any material note, bond, mortgage, indenture,
lease, contract or other material agreement, instrument or obligation to which
Cascade or any of its Subsidiaries is a party or by which any of them or any
of their properties or assets may be bound, or (iii) subject to the consents,
approvals, orders, authorizations, filings and registrations specified in
Section 3.4(c), conflict with or violate any judgment, order, decree, statute,
law, ordinance, rule or regulation or any material permit, concession,
franchise or license applicable to Cascade or any of its Subsidiaries or any
of their properties or assets, except in the case of clause (ii) for any such
violations, breaches, defaults, terminations, cancellations or accelerations
which in the aggregate could not reasonably be expected to have a Cascade
Material Adverse Effect.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency, commission or
other governmental authority or instrumentality ("Governmental Entity") is
required by or with respect to Cascade or any of its Subsidiaries in
connection with the execution and delivery of this Agreement or the Stock
Option Agreements or the consummation of the transactions contemplated hereby
or thereby, except for (i) the filing of pre-merger notification reports under
the HSR Act and the expiration or early termination of the waiting period
thereunder; (ii) the filing of the Registration Statement (as defined in
Section 3.18) and the registration statements contemplated by the Stock Option
Agreement with the Securities and Exchange Commission (the "SEC") in
accordance with the Securities Act of 1933, as amended (the "Securities Act"),
and the entry of an order by the SEC permitting such registration statements
to become effective; (iii) the filing of the Certificate of Merger with the
Secretary of State of the State of Delaware in accordance with the DGCL; (iv)
the filing of the Joint Proxy Statement (as defined in Section 3.18) and
related proxy materials with the SEC in accordance with the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); (v) such consents,
approvals, orders, authorizations, filings, registrations and declarations as
may be required under applicable federal and state securities laws and the
laws of any foreign country; and (vi) such other consents, approvals, orders,
authorizations, filings, approvals and registrations which, in the aggregate,
if not obtained or made, could not reasonably be expected to have a Cascade
Material Adverse Effect.
Section 3.5 SEC Filings; Financial Statements.
(a) Cascade has filed and made available to Ascend or its legal counsel all
forms, reports and documents required to be filed by Cascade with the SEC
(collectively, the "Cascade SEC Reports") since January 1, 1995. The Cascade
SEC Reports (i) at the time filed, complied in all material respects with the
applicable requirements of the Securities Act and the Exchange Act, as the
case may be, and (ii) did not at the time they were filed (or if amended or
superseded by a subsequent filing, then on the date of such filing) contain
any untrue statement of a material fact or omit to state a material fact
required to be stated in such Cascade SEC Reports or necessary in order to
make the statements in such Cascade SEC Reports, in the light of the
circumstances under which they
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were made, not misleading. None of Cascade's Subsidiaries is required to file
any forms, reports or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes) contained in the Cascade SEC Reports, including any Cascade
SEC Reports filed after the date of this Agreement until the Closing (the
"Cascade Financial Statements"), complied or will comply as to form in all
material respects with the applicable published rules and regulations of the
SEC with respect thereto, was or will be prepared in accordance with U.S.
generally accepted accounting principles applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes to
such financial statements or, in the case of unaudited statements, as
permitted by Form 10-Q or 8-K promulgated by the SEC), and fairly presented or
will fairly present the consolidated financial position of Cascade and its
Subsidiaries as at the respective dates and the consolidated results of its
operations and cash flows for the periods indicated, except that the unaudited
interim financial statements were or are subject to normal and recurring year-
end adjustments which were not or are not expected to be material in amount.
The audited consolidated balance sheet of Cascade as of December 31, 1996 is
referred to herein as the "Cascade Balance Sheet."
Section 3.6 Absence of Undisclosed Liabilities. Except as disclosed in
Section 3.6 of the Cascade Disclosure Schedule or as otherwise disclosed in
the Cascade SEC Reports, Cascade and its Subsidiaries do not have any
liabilities, either accrued or contingent (whether or not required to be
reflected in financial statements in accordance with U.S. generally accepted
accounting principles), and whether due or to become due, which individually
or in the aggregate could reasonably be expected to have a Cascade Material
Adverse Effect, other than (i) liabilities reflected in the Cascade Balance
Sheet, (ii) liabilities specifically described in this Agreement or in the
Cascade Disclosure Schedule, (iii) normal or recurring liabilities incurred
since December 31, 1996 in the ordinary course of business consistent with
past practices, and (iv) liabilities permitted by Section 5.1 hereof.
Section 3.7 Absence of Certain Changes or Events. Since the date of the
Cascade Balance Sheet, Cascade and its Subsidiaries have conducted their
businesses only in the ordinary course in a manner consistent with past
practice (except as disclosed in the Cascade SEC Reports), and since such date
there has not been: (a) any Cascade Material Adverse Effect or any facts or
circumstances that could reasonably be expected to result in a Cascade
Material Adverse Effect; (b) any damage, destruction or loss (whether or not
covered by insurance) with respect to Cascade or any of its Subsidiaries
having a Cascade Material Adverse Effect; (c) any material change by Cascade
or any of its Subsidiaries in its accounting methods, principles or practices
to which Ascend has not previously consented in writing; (d) any revaluation
by Cascade or any of its Subsidiaries of any of its assets having a Cascade
Material Adverse Effect, including writing down the value of capitalized
software or inventory or writing off notes or accounts receivable other than
in the ordinary course of business consistent with past practice, unless
Ascend has previously consented in writing; or (e) except as disclosed in the
Cascade Disclosure Schedule, any other action or event that would have
required the consent of Ascend pursuant to Section 5.1 of this Agreement had
such action or event occurred after the date of this Agreement and that could
reasonably be expected to result in a Cascade Material Adverse Effect.
Section 3.8 Taxes.
(a) For purposes of this Agreement, a "Tax" or, collectively, "Taxes" means
any and all material federal, state, local and foreign taxes, assessments and
other governmental charges, duties, impositions and liabilities, including
taxes based upon or measured by gross receipts, income, profits, sales, use
and occupation, and value added, ad valorem, transfer, franchise, withholding,
payroll, recapture, employment, excise and property taxes, together with all
interest, penalties and additions imposed with respect to such amounts and any
obligations under any agreements or arrangements with any other person with
respect to such amounts and including any liability for taxes of a predecessor
entity.
(b) Each of Cascade and its Subsidiaries have accurately prepared and timely
filed (or will so file) all material federal, state, local and foreign
returns, estimates, information statements and reports ("Returns") required to
be filed at or before the Effective Time relating to any and all Taxes
concerning or attributable to
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Cascade or any of its Subsidiaries or to their operations, and such Returns
are true and correct in all material respects and have been completed in all
material respects in accordance with applicable law.
(c) Each of Cascade and its Subsidiaries as of the Effective Time: (i) will
have paid all Taxes it is required to pay prior to the Effective Time and (ii)
will have withheld with respect to its employees all federal and state income
taxes, FICA, FUTA and other Taxes required to be withheld, except in each case
for Taxes contested in good faith by appropriate proceedings for which
adequate reserves have been taken and except where the failure (if any) to pay
or withhold such Taxes could not reasonably be expected to have a Cascade
Material Adverse Effect.
(d) There is no Tax deficiency outstanding, proposed or assessed against
Cascade or any of its Subsidiaries that is not reflected as a liability on the
Cascade Balance Sheet nor has Cascade or any of its Subsidiaries executed any
waiver of any statute of limitations on or extending the period for the
assessment or collection of any Tax.
(e) Neither Cascade nor any of its Subsidiaries has any material liability
for unpaid federal, state, local or foreign Taxes that has not been accrued
for or reserved on the Cascade Balance Sheet, whether asserted or unasserted,
contingent or otherwise.
Section 3.9 Properties. Cascade and its Subsidiaries own or have valid
leasehold interests in all real property necessary for the conduct of their
businesses as presently conducted. All material leases to which Cascade or any
of its Subsidiaries is a party are in good standing, valid and effective in
accordance with their respective terms, and neither Cascade nor its
Subsidiaries is in default under any of such leases, except where the lack of
such good standing, validity and effectiveness or the existence of such
default could not reasonably be expected to have a Cascade Material Adverse
Effect.
Section 3.10 Intellectual Property.
(a) Except as disclosed in Section 3.10 of the Cascade Disclosure Schedule,
Cascade and its Subsidiaries own, or are licensed or otherwise possess,
legally enforceable rights to use, all patents, trademarks, trade names,
service marks, copyrights and mask works, any applications for and
registrations of such patents, trademarks, trade names, service marks,
copyrights and mask works, and all processes, formulae, methods, schematics,
technology, know how, computer software programs or applications and tangible
or intangible proprietary information or material that are necessary to
conduct the business of Cascade and its Subsidiaries as currently conducted or
planned to be conducted by Cascade and its Subsidiaries, the absence of which
would be reasonably likely to have a Cascade Material Adverse Effect (the
"Cascade Intellectual Property Rights").
(b) Except as disclosed in Section 3.10 of the Cascade Disclosure Schedule,
neither Cascade nor any of its Subsidiaries is, or will be as a result of the
execution and delivery of this Agreement or the performance of its obligations
under this Agreement, in breach of any material license, sublicense or other
agreement relating to the Cascade Intellectual Property Rights or any material
license, sublicense or other agreement pursuant to which Cascade or any of its
Subsidiaries is authorized to use any third party patents, trademarks or
copyrights, including software, which are incorporated in or form a part of
any product of Cascade or any of its Subsidiaries that is material to the
business of Cascade and its Subsidiaries taken as a whole.
(c) Except as disclosed in Schedule 3.10 of the Cascade Disclosure Schedule,
(i) all patents, registered trademarks, service marks and copyrights which are
held by Cascade or any of its Subsidiaries, and which are material to the
business of Cascade and its Subsidiaries, taken as a whole, are valid and
subsisting; (ii) Cascade has not been sued in any suit, action or proceeding
which involves a claim of infringement of any patents, trademarks, service
marks, copyrights or violation of any trade secret or other proprietary right
of any third party; and (iii) the manufacturing, marketing, licensing or sale
of Cascade's products does not infringe any patent, trademark, service mark,
copyright, trade secret or other proprietary right of any third party, which
infringement, either individually or in the aggregate, could reasonably be
expected to have a Cascade Material Adverse Effect.
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Section 3.11 Agreements, Contracts and Commitments. Neither Cascade nor any
of its Subsidiaries has breached, or received in writing any claim or threat
that it has breached, any of the terms or conditions of any material
agreement, contract or commitment to which it is a party or by which any of
its assets and properties are bound ("Cascade Material Contracts") in such a
manner as would permit any other party to cancel or terminate the same or
would permit any other party to collect material damages from Cascade or any
of its Subsidiaries under any Cascade Material Contract. Each Cascade Material
Contract that has not expired or been terminated is in full force and effect
and is not subject to any material default thereunder of which Cascade is
aware by any party obligated to Cascade or any of its Subsidiaries pursuant to
such Cascade Material Contract.
Section 3.12 Litigation. There is no action, suit or proceeding, claim,
arbitration or, to the knowledge of Cascade, investigation against Cascade or
any of its Subsidiaries pending or, to the knowledge of Cascade, threatened,
or as to which Cascade or any of its Subsidiaries has received any written
notice of assertion, which, if decided adversely to Cascade or such
Subsidiary, could reasonably be expected to have a Cascade Material Adverse
Effect or a material adverse effect on the ability of Cascade to consummate
the transactions contemplated by this Agreement.
Section 3.13 Environmental Matters.
(a) As of the date hereof, except as set forth in the Cascade Disclosure
Schedule, Cascade has no reason to believe (i) that any underground storage
tanks are present under any property that Cascade or any of its Subsidiaries
has at any time owned, operated, occupied or leased or (ii) that any amount of
any substance that has been designated by any Governmental Entity or by
applicable federal, state or local law to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment, including PCBs, asbestos,
petroleum, urea-formaldehyde and all substances listed as hazardous substances
pursuant to the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended, or defined as a hazardous waste pursuant to
the United States Resource Conservation and Recovery Act of 1976, as amended,
and the regulations promulgated pursuant to said laws (a "Hazardous
Material"), is present, as a result of actions of Cascade or any of its
Subsidiaries or actions of any third party or otherwise, in, on or under any
property, including the land and the improvements, ground water and surface
water, that Cascade or any of its Subsidiaries has at any time owned,
operated, occupied or leased, where the presence of such underground storage
tanks or Hazardous Material would be reasonably likely to have a Cascade
Material Adverse Effect.
(b) At no time has Cascade or any of its Subsidiaries transported, stored,
used, manufactured, disposed of, released or exposed its employees or others
to Hazardous Materials in violation of any law in effect on or before the
Closing Date, nor has Cascade or any of its Subsidiaries disposed of,
transported, sold, or manufactured any product containing a Hazardous Material
(collectively, "Hazardous Materials Activities") in violation of any rule,
regulation, treaty or statute promulgated by any Governmental Entity to
prohibit, regulate or control Hazardous Materials or any Hazardous Material
Activity, which violation has had or is reasonably likely to have a Cascade
Material Adverse Effect.
(c) Cascade and its Subsidiaries currently hold all environmental approvals,
permits, licenses, clearances and consents (the "Environmental Permits")
necessary for the conduct of the Hazardous Material Activities and other
businesses of Cascade and its Subsidiaries as such activities and businesses
are currently being conducted.
(d) No action, proceeding, revocation proceeding, amendment procedure, writ,
injunction or claim is pending or, to the knowledge of Cascade, threatened
concerning any Environmental Permit or any Hazardous Materials Activity of
Cascade or any of its Subsidiaries. Cascade is not aware of any fact or
circumstance which could (i) involve Cascade or any of its Subsidiaries in any
environmental litigation which, if decided adversely to Cascade and its
Subsidiaries, could have a Cascade Material Adverse Effect, or (ii) impose
upon Cascade or any of its Subsidiaries any environmental liability which
would have a Cascade Material Adverse Effect.
Section 3.14 Employee Benefit Plans.
(a) Cascade has made available to Ascend all employee benefit plans (as
defined in Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA")) and all bonus, stock option, stock
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purchase, incentive, deferred compensation, supplemental retirement, severance
and other similar employee benefit plans, and all unexpired severance
agreements, written or otherwise, for the benefit of, or relating to, any
current or former employee of Cascade or any of its Subsidiaries or any trade
or business (whether or not incorporated) which is a member or which is under
common control with Cascade within the meaning of Section 414 of the Code
(together, the "Cascade Employee Plans"). Cascade does not maintain and has
never maintained or contributed to any employee benefit plan subject to Title
IV of ERISA (including a multiemployer plan as defined in Section 3(37) of
ERISA).
(b) With respect to each Cascade Employee Plan, Cascade has made available
to Ascend, a true and correct copy of (i) the most recent annual report (Form
5500) filed with the Internal Revenue Service ("IRS") with respect to a
Cascade Employee Plan subject to such filing requirement, (ii) such Cascade
Employee Plan, (iii) each trust agreement and group annuity contract, if any,
relating to such Cascade Employee Plan, and (iv) the most recent determination
letter issued with respect to any plan which is intended to be qualified under
Section 401(a) of the Internal Revenue Code.
(c) With respect to the Cascade Employee Plans, individually and in the
aggregate, no event has occurred, and to the knowledge of Cascade there exists
no condition or set of circumstances, in connection with which Cascade or any
of its Subsidiaries could be subject to any material liability under ERISA,
the Code or any other applicable law.
(d) With respect to the Cascade Employee Plans, individually and in the
aggregate, there are no material funded benefit obligations for which
contributions have not been made or properly accrued and there are no material
unfunded benefit obligations which have not been accounted for by reserves, or
otherwise properly footnoted in accordance with U.S. generally accepted
accounting principles, on the Cascade Financial Statements.
(e) Except as set forth in Schedule 3.14 of the Cascade Disclosure Schedule
or as disclosed in the Cascade SEC Reports filed prior to the date of this
Agreement, and except as provided for in this Agreement, neither Cascade nor
any of its Subsidiaries is a party to any oral or written (i) union or
collective bargaining agreement, (ii) agreement with any officer or other key
employee of Cascade or any of its Subsidiaries, the benefits of which are
contingent, or the terms of which are materially altered, upon the occurrence
of a transaction involving Cascade of the nature contemplated by this
Agreement, (iii) agreement with any officer of Cascade or any of its
Subsidiaries providing any term of employment or compensation guarantee
extending for a period longer than one year from the date hereof or for the
payment of compensation in excess of two hundred thousand dollars ($200,000)
per annum, or (iv) agreement or plan, including any stock option plan, stock
appreciation rights plan, restricted stock plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of the benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the Stock Option Agreements or the value of
any of the benefits of which will be calculated on the basis of any of the
transactions contemplated by this Agreement or the Stock Option Agreements.
Section 3.15 Compliance with Laws. Cascade and its Subsidiaries have
complied with, are not in violation of, and have not received any notices of
violations with respect to, any federal, state, local or foreign statute, law
or regulation with respect to the conduct of their business, or ownership or
operation of their business, except for failures to comply or violations which
could not reasonably be expected to have a Cascade Material Adverse Effect.
Section 3.16 Pooling of Interests. Neither Cascade nor any of its
Subsidiaries, nor, to Cascade's knowledge, any of its other Affiliates (as
defined in Section 6.11) has, through the date of this Agreement, taken or
agreed to take any action which could impair the ability of Ascend to account
for the business combination to be effected by the Merger as a pooling of
interests.
Section 3.17 Interested Party Transactions. Except as set forth in the
Cascade SEC Reports or by virtue of the Merger, since the date of Cascade's
last proxy statement to its stockholders, no event has occurred that
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would be required to be reported by Cascade as a Certain Relationship or
Related Transaction pursuant to Item 404 of Regulation S-K promulgated by the
SEC.
Section 3.18 Registration Statement; Joint Proxy Statement/Prospectus. The
information supplied by Cascade for inclusion in the registration statement of
Ascend on Form S-4 pursuant to which shares of Ascend Common Stock issued in
the Merger will be registered with the SEC (the "Registration Statement")
shall not contain, at the time the Registration Statement is declared
effective by the SEC, any untrue statement of a material fact or omit to state
any material fact required to be stated in the Registration Statement or
necessary in order to make the statements in the Registration Statement, in
light of the circumstances under which they were made, not misleading. The
information supplied by Cascade for inclusion in the joint proxy
statement/prospectus (the "Joint Proxy Statement") to be sent to the
stockholders of Cascade in connection with the special meeting of Cascade's
stockholders to consider this Agreement and the Merger (the "Cascade
Stockholders Meeting") and to the stockholders of Ascend in connection with
the special meeting of Ascend stockholders to consider the issuance of Ascend
Common Stock in connection with the Merger (the "Ascend Stockholders Meeting")
shall not, on the date the Joint Proxy Statement is first mailed to
stockholders of Ascend and Cascade, at the time of the Cascade Stockholders
Meeting, at the time of the Ascend Stockholders Meeting or at the Effective
Time, contain any statement which, at such time and in light of the
circumstances under which it was made, is false or misleading with respect to
any material fact, or omit to state any material fact necessary in order to
make the statements made in the Joint Proxy Statement not false or misleading
or omit to state any material fact necessary to correct any statement in any
earlier communication with respect to the solicitation of proxies for the
Ascend Stockholders Meeting or the Cascade Stockholders Meeting which has
become false or misleading. If at any time prior to the Effective Time any
event relating to Cascade or any of its Affiliates should be discovered by
Cascade which should be set forth in an amendment to the Registration
Statement or a supplement to the Joint Proxy Statement, Cascade shall promptly
inform Ascend.
Section 3.19 Payments Resulting from Mergers. The consummation or
announcement of any transaction contemplated by this Agreement or the Stock
Option Agreements will not (either alone or upon the occurrence of any
additional or further acts or events) result in any (i) payment (whether of
severance pay or otherwise) becoming due from Cascade or any of its
Subsidiaries to any officer, employee, former employee or director thereof or
to the trustee under any "rabbi trust" or similar arrangement pursuant to any
management, employment, deferred compensation, severance (including any
payment, right or benefit resulting from a change in control), bonus or other
contract for personal services with any officer, director or employee or any
plan agreement or understanding similar to any of the foregoing, or (ii)
benefit under any Cascade benefit plan being established or becoming
accelerated, vested or payable.
Section 3.20 Opinion of Financial Advisor. The financial advisor to Cascade,
Morgan Stanley & Co. Incorporated, has delivered to Cascade an opinion dated
as of or immediately prior to the date of this Agreement to the effect that
the Exchange Ratio is fair from a financial point of view to the holders of
Cascade Common Stock.
Section 3.21 Accounts Receivable; Inventory. Subject to any reserves set
forth in the Cascade Balance Sheet, the accounts receivable shown in the
Cascade Balance Sheet arose in the ordinary course of business; were not, as
of the date of the Cascade Balance Sheet, subject to any material discount,
contingency, claim of offset or recoupment or counter claim; and represented,
as of the date of the Cascade Balance Sheet, bona fide claims against debtors
for sales, leases, licenses and other charges. All accounts receivable of
Cascade arising after the date of the Cascade Balance Sheet through the date
of this Agreement arose in the ordinary course of business and, as of the date
of this Agreement, are not subject to any material discount, contingency,
claim of offset or recoupment or counterclaim, except for normal reserves
consistent with past practice. The amount carried for doubtful accounts and
allowances disclosed in the Cascade Balance Sheet is believed by Cascade as of
the date of this Agreement to be sufficient to provide for any losses which
may be sustained on realization of the accounts receivable shown in the
Cascade Balance Sheet. As of the date of the Cascade Balance Sheet, the
inventories shown on the Cascade Balance Sheet consisted in all material
respects of items of a quantity and quality usable or saleable in the ordinary
course of business. All of such inventories were acquired in the ordinary
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course of business and, as of the date of this Agreement, have been
replenished in all material respects in the ordinary course of business
consistent with past practices. All such inventories are valued on the Cascade
Balance Sheet in accordance with generally accepted accounting principles
applied on a basis consistent with Cascade's past practices, and, as of the
date of this Agreement, provision has been made or reserves have been
established on the Cascade Balance Sheet, in each case in an amount believed
by Cascade as of the date of the Cascade Balance Sheet to be adequate, for all
slow-moving, obsolete or unusable inventories.
Section 3.22 Section 203 of the DGCL Not Applicable. The Board of Directors
of Cascade has taken all actions so that the restrictions contained in Section
203 of the DGCL applicable to a "business combination" (as defined in Section
203) will not apply to the execution, delivery or performance of this
Agreement or the Stock Option Agreements or the consummation of the Merger or
the other transactions contemplated hereby and thereby.
ARTICLE IV
Representations and Warranties of Ascend and Sub
Ascend and Sub represent and warrant to Cascade that the statements
contained in this Article IV are true and correct, except as set forth in the
disclosure schedule delivered by Ascend to Cascade on or before the date of
this Agreement ("Ascend Disclosure Schedule"). The Ascend Disclosure Schedule
shall be arranged in sections corresponding to the numbered and lettered
sections contained in this Article IV and the disclosure in any section shall
qualify only the corresponding section in this Article IV. The term "Ascend
Material Adverse Effect" shall mean a material adverse effect on the business,
operations, properties, financial condition, assets (including intangible
assets) or results of operations of Ascend and its Subsidiaries, taken as a
whole, it being understood that none of the following shall be deemed by
itself or by themselves, either alone or in combination, to constitute an
Ascend Material Adverse Effect: (a) a change in the market price or trading
volume of Ascend Common Stock, (b) a failure by Ascend to meet the earnings
predictions of equity analysts as reflected in the First Call consensus
estimate, or any other revenue or earnings predictions or expectations, for
any period ending (or for which earnings are released) on or after the date of
this Agreement and prior to the Closing Date, (c) conditions affecting the
computer networking industry as a whole or the U.S. economy as a whole, (d)
any effect arising primarily out of or resulting primarily from actions
contemplated by the parties in connection with, or which is primarily
attributable to, the announcement of this Agreement and the transactions
contemplated thereby, to the extent so attributable, (e) any matter identified
in Section 4.7 of the Ascend Disclosure Schedule, or (f) any action or event
permitted in Section 5.2 hereof.
Section 4.1 Organization. Each of Ascend and its Subsidiaries (i) is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, (ii) has all requisite
corporate power to own, lease and operate its property and to carry on its
business as now being conducted and as proposed to be conducted, and (iii) is
duly qualified to do business and is in good standing as a foreign corporation
in each jurisdiction in which the nature of its activities requires it to be
so qualified, except where the failure to have such power or the failure to be
so qualified could not reasonably be expected to have an Ascend Material
Adverse Effect.
Section 4.2 Ascend Subsidiaries and Joint Ventures. Section 4.2 of the
Ascend Disclosure Schedule sets forth a list of all Subsidiaries and Joint
Ventures (as defined in Section 3.2(b)) of Ascend, including the name of each
Subsidiary and Joint Venture and the jurisdiction in which such Subsidiary or
Joint Venture is organized. Except as set forth in Section 4.2 of the Ascend
Disclosure Schedule, there are no outstanding subscriptions, options, calls,
contracts, voting trusts, proxies or other commitments, understandings,
restrictions, arrangements, rights or warrants with respect to any such
Subsidiary's capital stock, including any right obligating any such Subsidiary
to issue, deliver, or sell additional shares of its capital stock, and no
obligations, contingent or otherwise, of Ascend or any of its Subsidiaries to
repurchase, redeem, or otherwise acquire any shares of the capital stock of
any Ascend Subsidiary or make any investment (in the form of a loan, capital
contribution or otherwise) in any such Subsidiary or any other entity other
than guarantees of bank obligations of such
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Subsidiaries entered into in the ordinary course of business. All of the
outstanding shares of capital stock of each Subsidiary of Ascend are duly
authorized, validly issued, fully paid and nonassessable, and all such shares
are owned by Ascend or another Ascend Subsidiary free and clear of all
security interests, liens, claims, pledges, agreements, limitations on
Ascend's voting rights, charges or other encumbrances of any nature. Section
4.2 of the Ascend Disclosure Schedule sets forth the nature and extent of the
ownership and voting interests held by Ascend in each such Joint Venture.
Except as set forth in Section 4.2 of the Ascend Disclosure Schedule, neither
Ascend nor any of its Subsidiaries directly or indirectly owns any equity or
similar interest in, or any interest convertible into or exchangeable or
exercisable for any such equity or similar interest in, any corporation,
limited liability company, partnership, joint venture or other business
association or entity, excluding securities of any publicly traded company
held for investment and comprising less than five percent (5%) of the
outstanding stock or voting power of such company.
Section 4.3 Ascend Capital Structure.
(a) The authorized capital stock of Ascend consists of 400,000,000 shares of
Ascend Common Stock and 2,000,000 shares of Preferred Stock, $.001 par value
per share ("Ascend Preferred Stock"). As of March 24, 1997: (i) 120,732,369
shares of Ascend Common Stock were issued and outstanding, all of which are
validly issued, fully paid and nonassessable; (ii) no shares of Ascend
Preferred Stock are issued or outstanding; (iii) no shares of Ascend Common
Stock or Ascend Preferred Stock were held in the treasury of Ascend or by
Subsidiaries of Ascend; and (iv) 20,318,653 shares of Ascend Common Stock were
reserved for issuance pursuant to stock options granted and outstanding under
Ascend's stock option plans (the "Ascend Option Plans") and rights outstanding
under Ascend's employee stock purchase plan (the "Ascend Purchase Plan"). All
shares of Ascend Common Stock subject to issuance as specified above, upon
issuance on the terms and conditions specified in the instruments pursuant to
which they are issuable, shall be duly authorized, validly issued, fully paid
and nonassessable. There are no obligations, contingent or otherwise, of
Ascend or any of its Subsidiaries to repurchase, redeem or otherwise acquire
any shares of Ascend Common Stock.
(b) Except as set forth in this Section 4.3 or as reserved for future grants
of options under the Ascend Option Plans or the Ascend Purchase Plan, there
are no equity securities of any class of Ascend or any of its Subsidiaries, or
any security exchangeable into or exercisable for such equity securities,
issued, reserved for issuance or outstanding. Except pursuant to the Ascend
Option Plans, the Ascend Purchase Plan or any related agreement in effect as
of the date of this Agreement as set forth in this Section 4.3 or in Section
4.3(b) of the Ascend Disclosure Schedule, there are no options, warrants,
equity securities, calls, rights, commitments or agreements of any character
to which Ascend or any of its Subsidiaries is a party or by which it is bound
obligating Ascend or any of its Subsidiaries to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of capital stock of
Ascend or any of its Subsidiaries or obligating Ascend or any of its
Subsidiaries to grant, extend, accelerate the vesting of or enter into any
such option, warrant, equity security, call, right, commitment or agreement,
and, to the best knowledge of Ascend, as of the date of this Agreement and
such ancillary agreements as are required by this Agreement, there are no
voting trusts, proxies or other agreements or understandings with respect to
the shares of capital stock of Ascend.
Section 4.4 Authority; No Conflict; Required Filings and Consents.
(a) Ascend has all requisite corporate power and authority to enter into
this Agreement and the Stock Option Agreements and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the Stock Option Agreements and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate and stockholder action on the part of Ascend, subject only
(in the case of this Agreement and the issuance of Ascend Common Stock
contemplated hereby) to the approval of the issuance of Ascend Common Stock in
the Merger by Ascend's stockholders under the DGCL. This Agreement and the
Stock Option Agreements have been duly executed and delivered by Ascend and
constitute the valid and binding obligations of Ascend, enforceable in
accordance with the respective terms thereof, except as such enforceability
may be limited by (i) bankruptcy laws and other similar laws affecting
creditors' rights generally and (ii) general principles of equity, regardless
of whether asserted in a proceeding in equity or at law.
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(b) The execution and delivery of this Agreement and the Stock Option
Agreements by Ascend do not, and the consummation of the transactions
contemplated by this Agreement and the Stock Option Agreements will not, (i)
conflict with, or result in any violation or breach of, any provision of the
Certificate of Incorporation or Bylaws of Ascend or any of its Subsidiaries
(in each case as heretofore amended), (ii) result in any violation or breach
of, or constitute (with or without notice or lapse of time, or both) a default
(or give rise to a right of termination, cancellation or acceleration of any
obligation or loss of any material benefit) under, any of the terms,
conditions or provisions of any material note, bond, mortgage, indenture,
lease, contract or other material agreement, instrument or obligation to which
Ascend or any of its Subsidiaries is a party or by which any of them or any of
their properties or assets may be bound, or (iii) subject to the consents,
approvals, orders, authorizations, filings and registrations specified in
Section 4.4(c), conflict with or violate any judgment, order, decree, statute,
law, ordinance, rule or regulation or any material permit, concession,
franchise or license applicable to Ascend or any of its Subsidiaries or any of
their properties or assets, except in the case of clause (ii) for any such
violations, breaches, defaults, terminations, cancellations or accelerations
which in the aggregate could not reasonably be expected to have an Ascend
Material Adverse Effect.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to Ascend or any of its Subsidiaries in connection with the execution
and delivery of this Agreement or the Stock Option Agreements or the
consummation of the transactions contemplated hereby or thereby, except for
(i) the filing of pre-merger notification reports under the HSR Act and the
expiration or early termination of the waiting period thereunder; (ii) the
filing of the Registration Statement and the registration statements
contemplated by the Stock Option Agreement with the SEC in accordance with the
Securities Act and the entry of an order by the SEC permitting such
registration statements to become effective; (iii) the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware in
accordance with the DGCL; (iv) the filing of the Joint Proxy Statement and
related proxy materials with the SEC in accordance with the Exchange Act; (v)
such consents, approvals, orders, authorizations, filings, registrations and
declarations as may be required under applicable federal and state securities
laws and the laws of any foreign country; and (vi) such other consents,
approvals, orders, authorizations, filings, registrations which, in the
aggregate, if not obtained or made, could not reasonably be expected to have
an Ascend Material Adverse Effect.
Section 4.5 SEC Filings; Financial Statements.
(a) Ascend has filed and made available to Cascade or its legal counsel all
forms, reports and documents required to be filed by Ascend with the SEC
(collectively, the "Ascend SEC Reports") since January 1, 1995. The Ascend SEC
Reports (i) at the time filed, complied in all material respects with the
applicable requirements of the Securities Act and the Exchange Act, as the
case may be, and (ii) did not at the time they were filed (or if amended or
superseded by a subsequent filing, then on the date of such filing) contain
any untrue statement of a material fact or omit to state a material fact
required to be stated in such Ascend SEC Reports or necessary in order to make
the statements in such Ascend SEC Reports, in the light of the circumstances
under which they were made, not misleading. None of Ascend's Subsidiaries is
required to file any forms, reports or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes) contained in the Ascend SEC Reports, including any Ascend
SEC Reports filed after the date of this Agreement until the Closing (the
"Ascend Financial Statements"), complied or will comply as to form in all
material respects with the applicable published rules and regulations of the
SEC with respect thereto, was or will be prepared in accordance with U.S.
generally accepted accounting principles applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes to
such financial statements or, in the case of unaudited statements, as
permitted by Form 10-Q or 8-K promulgated by the SEC), and fairly presented or
will fairly present the consolidated financial position of Ascend and its
Subsidiaries as at the respective dates and the consolidated results of its
operations and cash flows for the periods indicated, except that the unaudited
interim financial statements were or are subject to normal and recurring year-
end adjustments which were not or are not expected to be material in amount.
The audited consolidated balance sheet of Ascend as of December 31, 1996 is
referred to herein as the "Ascend Balance Sheet."
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Section 4.6 Absence of Undisclosed Liabilities. Except as disclosed in
Section 4.6 of the Ascend Disclosure Schedule or as otherwise disclosed in the
Ascend SEC Reports, Ascend and its Subsidiaries do not have any liabilities,
either accrued or contingent (whether or not required to be reflected in
financial statements in accordance with U.S. generally accepted accounting
principles), and whether due or to become due, which individually or in the
aggregate could reasonably be expected to have an Ascend Material Adverse
Effect, other than (i) liabilities reflected in the Ascend Balance Sheet, (ii)
liabilities specifically described in this Agreement or in the Ascend
Disclosure Schedule, (iii) normal or recurring liabilities incurred since
December 31, 1996 in the ordinary course of business consistent with past
practices, and (iv) any liabilities permitted by Section 5.2 hereof.
Section 4.7 Absence of Certain Changes or Events. Since the date of the
Ascend Balance Sheet, Ascend and its Subsidiaries have conducted their
businesses only in the ordinary course in a manner consistent with past
practice (except as disclosed in the Ascend SEC Reports), and since such date
there has not been: (a) any Ascend Material Adverse Effect or any facts or
circumstances that could reasonably be expected to result in an Ascend
Material Adverse Effect; (b) any damage, destruction or loss (whether or not
covered by insurance) with respect to Ascend or any of its Subsidiaries having
an Ascend Material Adverse Effect; (c) any material change by Ascend or any of
its Subsidiaries in its accounting methods, principles or practices to which
Cascade has not previously consented in writing; (d) any revaluation by Ascend
or any of its Subsidiaries of any of its assets having an Ascend Material
Adverse Effect, including writing down the value of capitalized software or
inventory or writing off notes or accounts receivable other than in the
ordinary course of business consistent with past practice, unless Cascade has
previously consented in writing; or (e) except as disclosed in the Ascend
Disclosure Schedule, any other action or event that would have required the
consent of Cascade pursuant to Section 5.2 of this Agreement had such action
or event occurred after the date of this Agreement and that could reasonably
be expected to result in an Ascend Material Adverse Effect.
Section 4.8 Taxes.
(a) Ascend and its Subsidiaries have accurately prepared and timely filed
(or will so file) all Returns required to be filed at or before the Effective
Time relating to any and all Taxes concerning or attributable to Ascend or any
of its Subsidiaries or to their operations, and such Returns are true and
correct in all material respects and have been completed in all material
respects in accordance with applicable law.
(b) Each of Ascend and its Subsidiaries as of the Effective Time: (i) will
have paid all Taxes it is required to pay prior to the Effective Time and (ii)
will have withheld with respect to its employees all federal and state income
taxes, FICA, FUTA and other Taxes required to be withheld, except in each case
for Taxes contested in good faith by appropriate proceedings for which
adequate reserves have been taken and except where the failure (if any) to pay
or withhold such Taxes could not reasonably be expected to have an Ascend
Material Adverse Effect.
(c) There is no Tax deficiency outstanding, proposed or assessed against
Ascend or any of its Subsidiaries that is not reflected as a liability on the
Ascend Balance Sheet nor has Ascend or any of its Subsidiaries executed any
waiver of any statute of limitations on or extending the period for the
assessment or collection of any Tax.
(d) Neither Ascend nor any of its Subsidiaries has any material liability
for unpaid federal, state, local or foreign Taxes that has not been accrued
for or reserved on the Ascend Balance Sheet, whether asserted or unasserted,
contingent or otherwise.
Section 4.9 Properties. Ascend and its Subsidiaries own or have valid
leasehold interests in all real property necessary for the conduct of their
businesses as presently conducted. All material leases to which Ascend or any
of its Subsidiaries is a party are in good standing, valid and effective in
accordance with their respective terms, and neither Ascend nor its
Subsidiaries is in default under any of such leases, except where the lack of
such good standing, validity and effectiveness or the existence of such
default could not reasonably be expected to have an Ascend Material Adverse
Effect.
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Section 4.10 Intellectual Property.
(a) Except as disclosed in Section 4.10 of the Ascend Disclosure Schedule,
Ascend and its Subsidiaries own, or are licensed or otherwise possess, legally
enforceable rights to use, all patents, trademarks, trade names, service
marks, copyrights and mask works, any applications for and registrations of
such patents, trademarks, trade names, service marks, copyrights and mask
works, and all processes, formulae, methods, schematics, technology, know how,
computer software programs or applications, and tangible or intangible
proprietary information or material that are necessary to conduct the business
of Ascend and its Subsidiaries as currently conducted or planned to be
conducted by Ascend and its Subsidiaries, the absence of which would be
reasonably likely to have an Ascend Material Adverse Effect (the "Ascend
Intellectual Property Rights").
(b) Except as disclosed in Section 4.10 of the Ascend Disclosure Schedule,
neither Ascend nor any of its Subsidiaries is, or will be as a result of the
execution and delivery of this Agreement or the performance of its obligations
under this Agreement, in breach of any material license, sublicense or other
agreement relating to the Ascend Intellectual Property Rights or any material
license, sublicense or other agreement pursuant to which Ascend or any of its
Subsidiaries is authorized to use any third party patents, trademarks or
copyrights, including software, which are incorporated in or form a part of
any product of Ascend or any of its Subsidiaries that is material to the
business of Ascend and its Subsidiaries taken as a whole.
(c) Except as disclosed in Section 4.10 of the Ascend Disclosure Schedule,
(i) all patents, registered trademarks, service marks and copyrights which are
held by Ascend or any of its Subsidiaries and which are material to the
business of Ascend and its Subsidiaries, taken as a whole, are valid and
subsisting; (ii) Ascend has not been sued in any suit, action or proceeding
which involves a claim of infringement of any patents, trademarks, service
marks, copyrights or violation of any trade secret or other proprietary right
of any third party; and (iii) the manufacturing, marketing, licensing or sale
of Ascend's products does not infringe any patent, trademark, service mark,
copyright, trade secret or other proprietary right of any third party, which
infringement could, either individually or in the aggregate, be reasonably
likely to have an Ascend Material Adverse Effect.
Section 4.11 Agreements, Contracts and Commitments. Neither Ascend nor any
of its Subsidiaries has breached, or received in writing any claim or threat
that it has breached, any of the terms or conditions of any material
agreement, contract or commitment to which it is a party or by which any of
its assets and properties are bound ("Ascend Material Contracts") in such a
manner as would permit any other party to cancel or terminate the same or
would permit any other party to collect material damages from Ascend or any of
its Subsidiaries under any Ascend Material Contract. Each Ascend Material
Contract that has not expired or been terminated is in full force and effect
and is not subject to any material default thereunder of which Ascend is aware
by any party obligated to Ascend or any of its Subsidiaries pursuant to such
Ascend Material Contract.
Section 4.12 Litigation. There is no action, suit or proceeding, claim,
arbitration or, to the knowledge of Ascend, investigation against Ascend or
any of its Subsidiaries pending or, to the knowledge of Ascend, threatened, or
as to which Ascend or any of its Subsidiaries has received any written notice
of assertion, which, if decided adversely to Ascend or such Subsidiary, could
reasonably be expected to have an Ascend Material Adverse Effect or a material
adverse effect on the ability of Ascend to consummate the transactions
contemplated by this Agreement.
Section 4.13 Environmental Matters.
(a) As of the date hereof, except as set forth in the Ascend Disclosure
Schedule, Ascend has no reason to believe (i) that any underground storage
tanks are present under any property that Ascend or any of its Subsidiaries
has at any time owned, operated, occupied or leased or (ii) that any Hazardous
Material is present, as a result of actions of Ascend or any of its
Subsidiaries or actions of any third party or otherwise, in, on or under any
property, including the land and the improvements, ground water and surface
water, that Ascend or any of its Subsidiaries has at any time owned, operated,
occupied or leased, where the presence of such underground storage tanks or
Hazardous Material would be reasonably likely to have an Ascend Material
Adverse Effect.
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(b) At no time has Ascend or any of its Subsidiaries engaged in any
Hazardous Materials Activities in violation of any rule, regulation, treaty or
statute promulgated by any Governmental Entity to prohibit, regulate or
control Hazardous Materials or any Hazardous Material Activity, which
violation has had or is reasonably likely to have an Ascend Material Adverse
Effect.
(c) Ascend and its Subsidiaries currently hold all Environmental Permits
necessary for the conduct of the Hazardous Material Activities and other
businesses of Ascend and its Subsidiaries as such activities and businesses
are currently being conducted.
(d) No action, proceeding, revocation proceeding, amendment procedure, writ,
injunction or claim is pending or, to the knowledge of Ascend, threatened
concerning any Environmental Permit or any Hazardous Materials Activity of
Ascend or any of its Subsidiaries. Ascend is not aware of any fact or
circumstance which could (i) involve Ascend or any of its Subsidiaries in any
environmental litigation which, if decided adversely to Ascend and its
Subsidiaries, could have an Ascend Material Adverse Effect, or (ii) impose
upon Ascend or any of its Subsidiaries any environmental liability which would
have an Ascend Material Adverse Effect.
Section 4.14 Employee Benefit Plans.
(a) Ascend has made available to Cascade all employee benefit plans (as
defined in Section 3(3) of ERISA) and all bonus, stock option, stock purchase,
incentive, deferred compensation, supplemental retirement, severance and other
similar employee benefit plans, and all unexpired severance agreements,
written or otherwise, for the benefit of, or relating to, any current or
former employee of Ascend or any of its Subsidiaries or any trade or business
(whether or not incorporated) which is a member or which is under common
control with Ascend within the meaning of Section 414 of the Code (together,
the "Ascend Employee Plans"). Ascend does not maintain and has never
maintained or contributed to an employee benefit plan subject to Title IV of
ERISA (including a multiemployer plan as defined in Section 3(37) of ERISA).
(b) With respect to each Ascend Employee Plan, Ascend has made available to
Cascade, a true and correct copy of (i) the most recent annual report (Form
5500) filed with the IRS with respect to an Ascend Employee Plan subject to
such filing requirement, (ii) such Ascend Employee Plan, (iii) each trust
agreement and group annuity contract, if any, relating to such Ascend Employee
Plan, and (iv) the most recent determination letter issued with respect to any
plan which is intended to be qualified under section 401(a) of the Internal
Revenue Code.
(c) With respect to the Ascend Employee Plans, individually and in the
aggregate, no event has occurred, and to the knowledge of Ascend there exists
no condition or set of circumstances, in connection with which Ascend or any
of its Subsidiaries could be subject to any material liability under ERISA,
the Code or any other applicable law.
(d) With respect to the Ascend Employee Plans, individually and in the
aggregate, there are no material funded benefit obligations for which
contributions have not been made or properly accrued and there are no material
unfunded benefit obligations which have not been accounted for by reserves, or
otherwise properly footnoted in accordance with U.S. generally accepted
accounting principles, on the Ascend Financial Statements.
(e) Except as set forth in Schedule 4.14 of the Ascend Disclosure Schedule
or as disclosed in the Ascend SEC Reports filed prior to the date of this
Agreement, and except as provided for in this Agreement, neither Ascend nor
any of its Subsidiaries is a party to any oral or written (i) union or
collective bargaining agreement, (ii) agreement with any officer or other key
employee of Ascend or any of its Subsidiaries, the benefits of which are
contingent, or the terms of which are materially altered, upon the occurrence
of a transaction involving Ascend of the nature contemplated by this
Agreement, (iii) agreement with any officer of Ascend or any of its
Subsidiaries providing any term of employment or compensation guarantee
extending for a period longer than one year from the date hereof or for the
payment of compensation in excess of two hundred thousand dollars ($200,000)
per annum, or (iv) agreement or plan, including any stock option plan, stock
appreciation rights plan, restricted stock plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of the
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benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Agreement or the Stock Option Agreements or
the value of any of the benefits of which will be calculated on the basis of
any of the transactions contemplated by this Agreement or the Stock Option
Agreements.
Section 4.15 Compliance with Laws. Ascend and its Subsidiaries have complied
with, are not in violation of, and have not received any notices of violations
with respect to, any federal, state, local or foreign statute, law or
regulation with respect to the conduct of their business, or ownership or
operation of their business, except for failures to comply or violations which
could not reasonably be expected to have an Ascend Material Adverse Effect.
Section 4.16 Pooling of Interests. Neither Ascend nor any of its
Subsidiaries, nor, to Ascend's knowledge, any of its other Affiliates (as
defined in Section 6.11) has, through the date of this Agreement, taken or
agreed to take any action which could impair the ability of Ascend to account
for the business combination to be effected by the Merger as a pooling of
interests.
Section 4.17 Interested Party Transactions. Except as set forth in the
Ascend SEC Reports or by virtue of the Merger, since the date of Ascend's last
proxy statement to its stockholders, no event has occurred that would be
required to be reported by Ascend as a Certain Relationship or Related
Transaction pursuant to Item 404 of Regulation S-K promulgated by the SEC.
Section 4.18 Registration Statement; Joint Proxy Statement/Prospectus. The
information supplied by Ascend for inclusion in the Registration Statement
shall not contain, at the time the Registration Statement is declared
effective by the SEC, any untrue statement of a material fact or omit to state
any material fact required to be stated in the Registration Statement or
necessary in order to make the statements in the Registration Statement, in
light of the circumstances under which they were made, not misleading. The
information supplied by Ascend for inclusion in the Joint Proxy Statement to
be sent to the stockholders of Ascend in connection with the Ascend
Stockholders Meeting and to the stockholders of Cascade in connection with the
Cascade Stockholders Meeting shall not, on the date the Joint Proxy Statement
is first mailed to stockholders of Cascade and Ascend, at the time of the
Ascend Stockholders Meeting, at the time of the Cascade Stockholders Meeting
or at the Effective Time, contain any statement which, at such time and in
light of the circumstances under which it was made, is false or misleading
with respect to any material fact, or omit to state any material fact
necessary in order to make the statements made in the Joint Proxy Statement
not false or misleading or omit to state any material fact necessary to
correct any statement in any earlier communication with respect to the
solicitation of proxies for the Cascade Stockholders Meeting or the Ascend
Stockholders Meeting which has become false or misleading. If at any time
prior to the Effective Time any event relating to Ascend or any of its
Affiliates should be discovered by Ascend which should be set forth in an
amendment to the Registration Statement or a supplement to the Joint Proxy
Statement, Ascend shall promptly inform Cascade.
Section 4.19 Payments Resulting from Mergers. The consummation or
announcement of any transaction contemplated by this Agreement or the Stock
Option Agreements will not (either alone or upon the occurrence of any
additional or further acts or events) result in any (i) payment (whether of
severance pay or otherwise) becoming due from Ascend or any of its
Subsidiaries to any officer, employee, former employee or director thereof or
to the trustee under any "rabbi trust" or similar arrangement pursuant to any
management, employment, deferred compensation, severance (including any
payment, right or benefit resulting from a change in control), bonus or other
contract for personal services with any officer, director or employee or any
plan, agreement or understanding similar to any of the foregoing, or (ii)
benefit under any Ascend benefit plan being established or becoming
accelerated, vested or payable.
Section 4.20 Opinion of Financial Advisor. The financial advisor to Ascend,
Deutsche Morgan Grenfell Inc., has delivered to Ascend an opinion dated as of
or immediately prior to the date of this Agreement to the effect that the
Exchange Ratio is fair to Ascend from a financial point of view.
Section 4.21 Accounts Receivable; Inventory. Subject to any reserves set
forth in the Ascend Balance Sheet, the accounts receivable shown in the Ascend
Balance Sheet arose in the ordinary course of business; were
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not, as of the date of the Ascend Balance Sheet, subject to any material
discount, contingency, claim of offset or recoupment or counterclaim; and
represented, as of the date of the Ascend Balance Sheet, bona fide claims
against debtors for sales, leases, licenses and other charges. All accounts
receivable of Ascend arising after the date of the Ascend Balance Sheet
through the date of this Agreement arose in the ordinary course of business
and, as of the date of this Agreement, are not subject to any material
discount, contingency, claim of offset or recoupment or counterclaim, except
for normal reserves consistent with past practice. The amount carried for
doubtful accounts and allowances disclosed in the Ascend Balance Sheet is
believed by Ascend as of the date of this Agreement to be sufficient to
provide for any losses which may be sustained on realization of the accounts
receivable shown in the Ascend Balance Sheet. As of the date of the Ascend
Balance Sheet, the inventories shown on the Ascend Balance Sheet consisted in
all material respects of items of a quantity and quality usable or saleable in
the ordinary course of business. All of such inventories were acquired in the
ordinary course of business and, as of the date of this Agreement, have been
replenished in all material respects in the ordinary course of business
consistent with past practices . All such inventories are valued on the
Cascade Balance Sheet in accordance with generally accepted accounting
principles applied on a basis consistent with Ascend's past practices, and
provision has been made or reserves have been established on the Ascend
Balance Sheet, in each case in an amount believed by Ascend as of the date of
the Ascend Balance Sheet to be adequate, for all slow-moving, obsolete or
unusable inventories.
Section 4.22 Interim Operations of Sub. Sub was formed solely for the
purpose of engaging in the transactions contemplated by this Agreement, has
engaged in no other business activities, and has conducted its operations only
as contemplated by this Agreement.
ARTICLE V
Conduct of Business
Section 5.1 Covenants of Cascade. During the period from the date of this
Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, and except as otherwise set forth in Section
5.1 of the Cascade Disclosure Schedule, Cascade agrees as to itself and its
Subsidiaries (except to the extent that Ascend shall otherwise consent in
writing), to carry on its business in the usual, regular and ordinary course
in substantially the same manner as previously conducted, to pay its debts and
taxes when due subject to good faith disputes over such debts or taxes, to pay
or perform its other obligations when due, and, to the extent consistent with
such business, to use reasonable efforts consistent with past practices and
policies to (i) preserve intact its present business organization, (ii) keep
available the services of its present officers and key employees, and (iii)
preserve its relationships with customers, suppliers, distributors, licensors,
licensees and others having business dealings with it, except where the
failure to do so could not reasonably be expected to have a Cascade Material
Adverse Effect. Cascade shall notify Ascend promptly after becoming aware of
any event or occurrence not in the ordinary course of business of Cascade that
would result in a breach of any covenant or agreement of Cascade set forth in
this Agreement or cause any representation or warranty of Cascade set forth in
this Agreement to be untrue if made as of the date of, and giving effect to,
such event or occurrence, which if uncured, could reasonably be expected to
cause any condition set forth in Section 7.2(a) or 7.2(b) not to be satisfied.
Except as expressly contemplated by this Agreement, the Cascade Stock Option
Agreement or the Ascend Stock Option Agreement or as set forth in Section 5.1
of the Cascade Disclosure Schedule, Cascade shall not (and shall not permit
any of its Subsidiaries to), without the prior written consent of Ascend,
which shall not be unreasonably withheld:
(a) accelerate, amend or change the period of exerciseability of options
or restricted stock granted under any of the Cascade Stock Plans or
authorize cash payments in exchange for any options granted under any of
such plans except as required by the terms of such plans or any related
agreements in effect as of the date of this Agreement;
(b) transfer or license to any person or entity or otherwise extend,
amend or modify any rights to the Cascade Intellectual Property Rights
other than in the ordinary course of business consistent with past
practices or on a non-exclusive basis not materially different from past
practices;
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(c) declare or pay any dividends on or make any other distributions (whether
in cash, stock or property) in respect of any of its capital stock, or split,
combine or reclassify any of its capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock, or purchase or otherwise acquire, directly or
indirectly, any shares of its capital stock except from former employees,
directors and consultants in accordance with agreements providing for the
repurchase of shares in connection with any termination of service by such
party or from escrow arrangements entered into in connection with acquisitions
prior to the date of this Agreement;
(d) issue, deliver or sell, or authorize or propose the issuance, delivery
or sale of, any shares of its capital stock or securities convertible into
shares of its capital stock, or subscriptions, rights, warrants or options to
acquire, or other agreements or commitments of any character obligating it to
issue any such shares or other convertible securities, other than (i) the
issuance of Cascade Common Stock or the grant of options or rights to acquire
Cascade Common Stock pursuant to the Cascade Stock Plans in the ordinary
course of business substantially consistent as to amount, exercise price,
vesting and other terms with past practice, and (ii) the issuance of shares of
Cascade Common Stock as and to the extent required under the Cascade Stock
Plans;
(e) acquire or agree to acquire, by merging or consolidating with, by
purchasing a substantial equity interest in or substantial portion of the
assets of, or by any other means, any business or any corporation, partnership
or other business organization or division, or otherwise acquire or agree to
acquire any material amount of assets;
(f) sell, lease, license or otherwise dispose of any of its properties or
assets which are material, individually or in the aggregate, to the business
of Cascade and its Subsidiaries, taken as a whole, except for sales, leases or
licenses of products, services and software in the ordinary course of
business;
(g) take any action to: (i) increase or agree to increase the compensation
payable or to become payable to its officers or employees, except for
increases in salary or wages of officers or employees in accordance with past
practices, (ii) grant any additional severance or termination pay to, or enter
into any employment or severance agreements with, directors or officers, (iii)
grant any severance or termination pay to, or enter into any employment or
severance agreement with, any employee, except in accordance with past
practices or in settlement of disputes with present or former employees, not
material in amount, either individually or in the aggregate, (iv) enter into
any collective bargaining agreement, or (v) establish, adopt, enter into or
amend in any material respect any bonus, profit sharing, thrift, compensation,
stock option, restricted stock, pension, retirement, deferred compensation,
employment, termination, severance or other plan, trust, fund, policy or
arrangement for the benefit of any directors, officers or employees;
(h) revalue any of its assets, including writing down the value of inventory
or writing off notes or accounts receivable, other than in the ordinary course
of business or pursuant to arm's length transactions on commercially
reasonable terms or where such action will not have a Cascade Material Adverse
Effect;
(i) incur or maintain any indebtedness for borrowed money or guarantee any
such indebtedness or issue or sell any debt securities or warrants or rights
to acquire any debt securities or guarantee any debt securities of others in
excess of a maximum aggregate amount outstanding at any time of fifty million
dollars ($50,000,000) inclusive of indebtedness outstanding as of the date of
this Agreement;
(j) amend or propose to amend its Certificate of Incorporation or Bylaws;
(k) incur or commit to incur capital expenditures in excess of thirty
million dollars ($30,000,000) in the aggregate;
(l) enter into or amend any OEM agreement or any agreements pursuant to
which any third party is granted exclusive marketing, manufacturing or other
rights with respect to any Cascade product, process or technology;
(m) amend or terminate any material contract, agreement or license to which
it is a party except in the ordinary course of business;
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(n) waive or release any material right or claim, except in the ordinary
course of business;
(o) initiate any litigation or arbitration proceeding; or
(p) take, or agree in writing or otherwise to take, any of the actions
described in the foregoing clauses (a) through (o), or any action which (i)
would make any of Cascade's representations or warranties in this Agreement,
if made on and as of the date of such action or agreement, untrue or incorrect
in any material respect, or (ii) could prevent it from performing, or cause it
not to perform, its obligations under this Agreement.
Section 5.2 Covenants of Ascend. During the period from the date of this
Agreement and continuing until the earlier of the termination of the Agreement
or the Effective Time, and except as otherwise set forth in Section 5.2 of the
Ascend Disclosure Schedule, Ascend agrees as to itself and its Subsidiaries
(except to the extent that Cascade shall otherwise consent in writing), to
carry on its business in the usual, regular and ordinary course in
substantially the same manner as previously conducted, to pay its debts and
taxes when due subject to good faith disputes over such debts or taxes, to pay
or perform its other obligations when due, and, to the extent consistent with
such business, to use all reasonable efforts consistent with past practices
and policies to (i) preserve intact its present business organization, (ii)
keep available the services of its present officers and key employees, and
(iii) preserve its relationships with customers, suppliers, distributors,
licensors, licensees and others having business dealings with it, except where
the failure to do so could not reasonably be expected to have an Ascend
Material Adverse Effect. Ascend shall notify Cascade promptly after becoming
aware of any event or occurrence that would result in a breach of any covenant
or agreement of Ascend set forth in this Agreement or cause any representation
or warranty of Ascend set forth in this Agreement to be untrue if made as of
the date of, and giving effect to, such event or occurrence, which in any
case, if uncured, could reasonably be expected to cause any condition set
forth in Section 7.3(a) or 7.3(b) not to be satisfied. Except as expressly
contemplated by this Agreement or the Stock Option Agreements or as set forth
in Section 5.2 of the Ascend Disclosure Schedule, Ascend shall not (and shall
not permit any of its Subsidiaries to), without the prior written consent of
Cascade, which shall not be unreasonably withheld:
(a) accelerate, amend or change the period of exerciseability of options or
restricted stock granted under any Ascend Option Plan or authorize cash
payments in exchange for any options granted under any of such plans except as
required by the terms of such plans or any related agreements in effect as of
the date of this Agreement;
(b) transfer or license to any person or entity or otherwise extend, amend
or modify any rights to the Ascend Intellectual Property Rights other than in
the ordinary course of business consistent with past practices or on a non-
exclusive basis not materially different from past practices;
(c) declare or pay any dividends on or make any other distributions (whether
in cash, stock or property) in respect of any of its capital stock, or split,
combine or reclassify any of its capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock, or purchase or otherwise acquire, directly or
indirectly, any shares of its capital stock except from former employees,
directors and consultants in accordance with agreements providing for the
repurchase of shares in connection with any termination of service by such
party or from escrow arrangements entered into in connection with acquisitions
prior to the date of this Agreement;
(d) issue, deliver or sell or authorize or propose the issuance, delivery or
sale of, any shares of its capital stock or securities convertible into shares
of its capital stock, or subscriptions, rights, warrants or options to
acquire, or other agreements or commitments of any character obligating it to
issue any such shares or other convertible securities, other than (i) the
grant of options to acquire Ascend Common Stock (A) pursuant to Ascend Option
Plans in the ordinary course of business substantially consistent as to
amount, exercise price, vesting and other terms with past practices, or (B)
otherwise consistent with Ascend's obligations under Section 6.10, (ii) the
issuance of shares of Ascend Common Stock to the extent required under Ascend
Option Plans, or (iii) in connection with the acquisition permitted under
clause (e) of this Section 5.2;
(e) acquire or agree to acquire, by merging or consolidating with, or by
purchasing a substantial equity interest in or substantial portion of the
assets of, or by any other means, any business or any corporation,
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partnership or other business organization or division, or otherwise acquire
or agree to acquire any material amount of assets, other than the transactions
contemplated by the Agreement and Plan of Merger by and among Ascend, Ascend
Acquisition Corporation II, and Whitetree, Inc., dated as of February 14,
1997;
(f) sell, lease, license or otherwise dispose of any of its properties or
assets which are material, individually or in the aggregate, to the business
of Ascend and its Subsidiaries, taken as a whole, except for sales, leases or
licenses of products, services or software in the ordinary course of business;
(g) take any action to: (i) increase or agree to increase the compensation
payable or to become payable to its officers or employees, except for
increases in salary or wages of officers or employees in accordance with past
practices, (ii) grant any additional severance or termination pay to, or enter
into any employment or severance agreements with, directors or officers, (iii)
grant any severance or termination pay to, or enter into any employment or
severance agreement, with any employee, except in accordance with past
practices or in settlement of disputes with present or former employees, not
material in amount, either individually or in the aggregate, (iv) enter into
any collective bargaining agreement, or (v) establish, adopt, enter into or
amend in any material respect any bonus, profit sharing, thrift, compensation,
stock option, restricted stock, pension, retirement, deferred compensation,
employment, termination, severance or other plan, trust, fund, policy or
arrangement for the benefit of any directors, officers or employees;
(h) revalue any of its assets, including writing down the value of inventory
or writing off notes or accounts receivable, other than in the ordinary course
of business or pursuant to arm's length transactions on commercially
reasonable terms or where such action would not have an Ascend Material
Adverse Effect;
(i) incur or maintain any indebtedness for borrowed money or guarantee any
such indebtedness or issue or sell any debt securities or warrants or rights
to acquire any debt securities or guarantee any debt securities of others in
excess of a maximum aggregate amount outstanding at any time of one hundred
million dollars ($100,000,000) inclusive of indebtedness outstanding as of the
date of this Agreement;
(j) amend or propose to amend its Certificate of Incorporation or Bylaws;
(k) incur or commit to incur capital expenditures in excess of sixty million
dollars ($60,000,000) in the aggregate;
(l) enter into or amend any OEM agreement or any agreements pursuant to
which any third party is granted exclusive marketing, manufacturing or other
rights with respect to any Ascend product, process or technology;
(m) amend or terminate any material contract, agreement or license to which
it is a party except in the ordinary course of business;
(n) waive or release any material right or claim, except in the ordinary
course of business;
(o) initiate any litigation or arbitration proceeding; or
(p) take, or agree in writing or otherwise to take, any of the actions
described in the foregoing clauses (a) through (o) or any action which (i)
would make any of Ascend's representations or warranties in this Agreement, if
made on and as of the date of such action or agreement, untrue or incorrect in
any material respect, or (ii) could prevent it from performing, or cause it
not to perform, its obligations under this Agreement.
Section 5.3 Cooperation. Subject to compliance with applicable law, from the
date hereof until the Effective Time, each of Ascend and Cascade shall confer
on a regular and frequent basis with one or more representatives of the other
party to report operational matters of materiality and the general status of
ongoing operations and shall promptly provide the other party or its counsel
with copies of all filings made by such party with any Governmental Entity in
connection with this Agreement, the Stock Option Agreements, the Merger and
the other transactions contemplated hereby and thereby.
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ARTICLE VI
Additional Agreements
Section 6.1 No Solicitation.
(a) Cascade and Ascend each agrees that, from and after the date of this
Agreement until the earlier of the Effective Time or the termination of this
Agreement in accordance with Section 8.1, it shall not, directly or
indirectly, through any officer, director, employee, representative, agent, or
affiliate, (i) solicit, initiate, or encourage any inquiries or proposals that
constitute, or could reasonably be expected to lead to, a proposal or offer
for a merger, consolidation, sale or purchase of substantial assets or stock,
tender or exchange offer, or other business combination or change in control
or similar transaction involving such party, other than the transactions
contemplated or permitted by this Agreement (any of the foregoing inquiries or
proposals being referred to in this Agreement as a "Competing Offer"), (ii)
engage in negotiations or discussions concerning, or provide any non-public
information to any person or entity relating to, any Competing Offer, or (iii)
agree to, approve or recommend any Competing Offer; provided, however, that
nothing contained in this Agreement shall prevent Cascade or Ascend or their
respective Boards of Directors, directly or through representatives or agents
on behalf of the Board, from (A) furnishing non-public information to, or
entering into discussion or negotiations with, any person or entity in
connection with an unsolicited bona fide written Competing Offer by such
person or entity (including a new and unsolicited Competing Offer received by
such party after the execution of this Agreement from a person or entity whose
initial contact with such party may have been solicited by such party prior to
the execution of this Agreement) or recommending such an unsolicited bona fide
written Competing Offer to the stockholders of such party, if and only to the
extent that (1) such Competing Offer would, if consummated, result in a
transaction that would, in the reasonable good faith judgment of the Board of
Directors of such party, after consultation with its financial advisors,
result in a transaction more favorable to such party's stockholders from a
financial point of view than the Merger (any such more favorable Competing
Offer being referred to in this Agreement as a "Superior Proposal") and, in
the reasonable good faith judgment of the Board of Directors of such party,
after consultation with its financial advisors, the person or entity making
such Superior Proposal appears to have the financial means, or the ability to
obtain the necessary financing, to conclude such transaction, (2) the failure
to take such action would, in the reasonable good faith judgment of the Board
of Directors of such party after consultation with outside corporate counsel
to such party, be contrary to the fiduciary duties of such party's Directors
to such party's stockholders under Delaware law, and (3) prior to furnishing
such non-public information to, or entering into discussions or negotiations
with, such person or entity, such Board of Directors receives from such person
or entity an executed confidentiality agreement with confidentiality
provisions not materially less favorable to such party than those contained in
the Mutual Nondisclosure and Confidentiality Agreement dated March 22, 1997
between Ascend and Cascade (the "Confidentiality Agreement"); or (B) complying
with Rule 14d-9 and Rule 14e-2 promulgated under the Exchange Act with regard
to a Competing Offer.
(b) Cascade and Ascend shall each notify the other party no later than 24
hours after receipt by Cascade or Ascend (or their respective advisors),
respectively, of any Competing Offer or any request for nonpublic information
in connection with a Competing Offer or for access to the properties, books or
records of such party by any person or entity that informs such party that it
is considering making, or has made, a Competing Offer (the "Competing
Offeror"). Such notice to the other party shall be made orally and in writing
and shall indicate in reasonable detail the identity of the Competing Offeror
and the terms and conditions of such proposal, inquiry or contact. If the
financial terms of such Competing Offer are modified, then each party
receiving such Competing Offer shall notify the other party of the terms and
conditions of such modification within 24 hours of the receipt of such
modification. Each party shall notify the other at least 48 hours prior to
each meeting of the Board of Directors at which such party will consider
taking definitive action with respect to such Competing Offer or will consider
taking definitive action with respect to withdrawing or modifying, in a manner
adverse to the other party hereto, its recommendation for approval of the
Merger.
Section 6.2 Joint Proxy Statement/Prospectus; Registration Statement.
(a) As promptly as practicable after the execution of this Agreement, Ascend
and Cascade shall prepare and file with the SEC the Joint Proxy Statement, and
Ascend shall prepare and file with the SEC the Registration
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Statement, in which the Joint Proxy Statement will be included. Ascend and
Cascade shall use all reasonable efforts to cause the Registration Statement
to become effective as soon after such filing as reasonably practicable. The
Joint Proxy Statement shall include the recommendation of the Board of
Directors of Cascade in favor of approval and adoption of this Agreement and
the Merger, subject to Section 6.1, and the recommendation of the Board of
Directors of Ascend in favor of approval of the issuance by Ascend of Ascend
Common Stock in the Merger.
(b) Each of Ascend and Cascade shall make all necessary filings with respect
to the Merger under the Securities Act and the Exchange Act and applicable
state securities laws and the rules and regulations thereunder, and shall use
its best efforts to obtain all permits and other authorizations required under
applicable state securities laws for the issuance of the shares of Ascend
Common Stock pursuant to the Merger.
Section 6.3 Consents. Each of Ascend and Cascade shall use reasonable
efforts to obtain all necessary consents, waivers and approvals under its
respective material agreements, contracts, licenses or leases required for the
consummation of the Merger and the other transactions contemplated by this
Agreement.
Section 6.4 Current Nasdaq Quotation. Ascend shall continue the quotation of
Ascend Common Stock, and Cascade shall continue the quotation of Cascade
Common Stock, on The Nasdaq National Market during the term of this Agreement
to the extent necessary so that appraisal rights will not be available to
stockholders of Cascade under Section 262 of the DGCL.
Section 6.5 Access to Information. Upon reasonable notice and subject to
applicable law and other legal obligations, Cascade and Ascend shall each (and
shall cause each of its Subsidiaries to) afford to the officers, employees,
accountants, financial advisors, counsel and other representatives of the
other, access, during normal business hours during the period prior to the
Effective Time, to all its properties, books, contracts, commitments and
records and, during such period, each of Cascade and Ascend shall (and shall
cause each of its Subsidiaries to) furnish promptly to the other (i) a copy of
each report, schedule, registration statement and other document filed or
received by it during such period pursuant to the requirements of federal
securities laws and (ii) all other information concerning its business,
properties and personnel as such other party may reasonably request. Unless
otherwise required by law, the parties will hold all such information which is
non-public in confidence and shall treat such information as "Evaluation
Material" in accordance with the Confidentiality Agreement. No information or
knowledge obtained in any investigation pursuant to this Section 6.5 shall
affect or be deemed to modify any representation or warranty contained in this
Agreement or the conditions to the obligations of the parties to consummate
the Merger.
Section 6.6 Special Stockholders Meetings.
(a) Cascade Stockholders Meeting. Cascade shall call and hold the Cascade
Stockholders Meeting as promptly as practicable after the date hereof for the
purpose of voting upon the adoption of this Agreement and the approval of the
Merger. Subject to Section 6.1, Cascade, through its Board of Directors, shall
recommend that Cascade stockholders vote in favor of the adoption of this
Agreement and the approval of the Merger and shall otherwise use its best
efforts to solicit from its stockholders proxies in favor of such matters and
to obtain the requisite approval of Cascade stockholders.
(b) Ascend Stockholders Meeting. Ascend shall call and hold the Ascend
Stockholders Meeting as promptly as practicable after the date hereof for the
purpose of voting upon the approval of the issuance by Ascend of Ascend Common
Stock in the Merger. Subject to Section 6.1, Ascend, through its Board of
Directors, shall recommend that Ascend stockholders vote in favor of approval
of the issuance by Ascend of Ascend Common Stock in the Merger and shall
otherwise use its best efforts to solicit from its stockholders proxies in
favor of such matters and to obtain the requisite approval of Ascend
stockholders.
Section 6.7 Legal Conditions to Merger. Each of Ascend and Cascade shall
take reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on such party with respect to the Merger
(which actions shall include, without limitation, furnishing all information
required under the HSR
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Act and in connection with approvals of or filings with any other Governmental
Entity) and shall promptly cooperate with and furnish information to each
other in connection with any such requirements imposed upon either of them or
any of their Subsidiaries in connection with the Merger. Each of Ascend and
Cascade shall, and shall cause its Subsidiaries to (i) take reasonable actions
necessary to obtain (and shall cooperate with each other in obtaining) any
consent, authorization, order or approval of, or any exemption by, any
Governmental Entity or other third party, required to be obtained or made by
Cascade, Ascend or any of their Subsidiaries for any of the conditions set
forth in Article VII to be satisfied (any of the foregoing, an "Approval") or
the taking of any action required in furtherance thereof or otherwise
contemplated thereby or by this Agreement, (ii) diligently oppose or pursue
any rehearing, appeal or other challenge which may be available to it of any
refusal to issue any Approval or of any order or ruling of any Governmental
Entity which may adversely affect the ability of the parties hereto to
consummate the Merger or to take any action contemplated by any Approval or by
this Agreement until such time as such refusal to issue any Approval or any
order or ruling has become final and non-appealable, and (iii) diligently
oppose any objections to, appeals from or petitions to reconsider or reopen
any Approval or the taking of any action contemplated thereby or by this
Agreement. Notwithstanding the foregoing, neither Ascend nor Cascade shall be
required to agree, as a condition to any Approval, to divest itself or hold
separate any Subsidiary, division or business unit which is material to the
business of such party and its Subsidiaries, taken as a whole, or the
divestiture or holding separate of which would be reasonably likely to have a
material adverse effect on (A) the business, properties, assets, liabilities,
financial condition or results of operations of such party and its
Subsidiaries taken as a whole or (B) the benefits intended to be derived as a
result of the Merger.
Section 6.8 Public Disclosure. Ascend and Cascade shall consult with each
other before issuing any press release or otherwise making any public
statement with respect to the Merger or this Agreement and shall not issue any
such press release or make any such public statement prior to such
consultation, except as may be required by law or by the rules of the NASD.
Section 6.9 Tax-Free Reorganization. Ascend and Cascade shall each use its
best efforts to cause the Merger to be treated as a reorganization within the
meaning of Section 368(a) of the Code, and to obtain the opinion of its
respective counsel contemplated by Section 7.1(h). Each party shall make, and
shall use all reasonable efforts to cause those of its respective stockholders
that counsel to the parties shall reasonably request to make, such
representations and certificates as counsel to the parties shall reasonably
request to enable them to render such opinions.
Section 6.10 Pooling Accounting. Ascend and Cascade shall each use its best
efforts to cause the business combination to be effected by the Merger to be
accounted for as a pooling of interests. Each of Ascend and Cascade shall use
its best efforts (i) to cause its respective Affiliates (as defined in Section
6.11) not to take any action that would adversely affect the ability of Ascend
to account for the business combination to be effected by the Merger as a
pooling of interests and (ii) to cause its respective Affiliates to sign and
deliver to Ascend a customary "pooling letter" in form and substance agreed
upon by Cascade and Ascend to the extent that receipt of such letter is
required to assure the availability of pooling of interests accounting
treatment.
Section 6.11 Director, Officer and Stockholder Agreements. As promptly as
reasonably practicable and in no event later than ten (10) days after the date
of this Agreement, Cascade shall deliver to Ascend an executed Cascade
Director, Officer and Stockholder Agreement in the form annexed hereto as
Exhibit E from each of its directors and executive officers who may, in the
reasonable judgment of Cascade and Ascend, be deemed to be an "affiliate" of
Cascade within the meaning of Rule 145 promulgated under the Securities Act
("Rule 145"), and Ascend shall use its best efforts to deliver to Cascade an
executed Ascend Director, Officer and Stockholder Agreement in the form
annexed hereto as Exhibit F from each of its directors and executive officers
who may, in the reasonable judgment of Ascend and Cascade, be deemed to be an
"affiliate" of Ascend within the meaning of Rule 145 (each such person so
judged to be an "affiliate" of Ascend or Cascade, as the case may be, is
referred to herein as an "Affiliate"). Between the date of this Agreement and
the Effective Time, Ascend and Cascade shall, if requested, promptly provide
each other such information and documents as Cascade or Ascend shall
reasonably request for purposes of reviewing a list of such affiliates. Ascend
shall be entitled to place
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appropriate legends on the certificates evidencing any Ascend Common Stock to
be received by such Affiliates of Cascade pursuant to this Agreement and to
issue appropriate stop transfer instructions to the transfer agent for the
Ascend Common Stock, consistent with the terms of the Cascade Director,
Officer and Stockholder Agreement or the Ascend Director, Officer and
Stockholder Agreement, as the case may be.
Section 6.12 Nasdaq Quotation. Ascend shall use its best efforts to cause
the shares of Ascend Common Stock to be issued in the Merger to be approved
for quotation on The Nasdaq National Market, subject to official notice of
issuance, prior to the Closing Date.
Section 6.13 Stock Plans and Options.
(a) Cascade shall provide to each holder of an outstanding option to
purchase Cascade Common Stock (a "Cascade Option") under the Cascade Stock
Plans the notice (if any) required pursuant to such plans.
(b) From and after the Effective Time, each outstanding Cascade Option shall
be assumed by Ascend and shall be deemed to constitute an option to acquire,
on the same terms and conditions as were applicable under such Cascade Option,
the same number of shares of Ascend Common Stock as the holder of such Cascade
Option would have been entitled to receive in the Merger pursuant to this
Agreement had such holder exercised such option in full immediately prior to
the Effective Time (rounded down to the nearest whole number), at a price per
share (rounded up to the nearest whole cent) equal to the quotient of (i) the
exercise price per share of Cascade Common Stock pursuant to such Cascade
Option divided by (ii) the Exchange Ratio.
(c) As soon as practicable after the Effective Time, Ascend shall deliver to
the participants in the Cascade Stock Plan an appropriate notice setting forth
such participants' rights pursuant thereto and the grants pursuant to the
Cascade Stock Plans shall continue in effect on the same terms and conditions
(subject to the adjustments required by this Section 6.13 after giving effect
to the Merger). Ascend shall comply with the terms of the Cascade Stock Plans
and ensure, to the extent required by, and subject to the provisions of, such
plan, that Cascade Options which qualified as incentive stock options pursuant
to Section 422 of the Code prior to the Effective Time will continue to so
qualify after the Effective Time.
(d) Ascend shall take all corporate action necessary to reserve and make
available for issuance a sufficient number of shares of Ascend Common Stock
for delivery upon the exercise of the Cascade Options assumed in accordance
with this Section 6.13. As soon as practicable after the Effective Time, and
not more than five (5) business days thereafter, Ascend shall file a
registration statement on Form S-8 (or any successor or other appropriate
form) with respect to the shares of Ascend Common Stock subject to the Cascade
Options assumed pursuant to this Section 6.13 and shall use its best efforts
to maintain the effectiveness of such registration statement or registration
statements (and maintain the current status of the prospectus or prospectuses
contained therein) for as long as the Cascade Options remain outstanding. With
respect to those individuals, if any, who subsequent to the Merger will be
subject to the reporting requirements under Section 16(a) of the Exchange Act,
where applicable, Ascend shall administer Cascade Options assumed pursuant to
this Section 6.13 in a manner that complies with Rule 16b-3 promulgated under
the Exchange Act.
Section 6.14 Brokers or Finders. Each of Ascend and Cascade represents, as
to itself, its Subsidiaries and its Affiliates, that no agent, broker,
investment banker, financial advisor or other firm or person is or will be
entitled to any broker's or finder's fee or any other commission or similar
fee in connection with any of the transactions contemplated by this Agreement
except Morgan Stanley & Co. Incorporated, whose fees and expenses will be paid
by the Surviving Corporation to the extent that such fees and expenses become
payable at or after the Effective Time (and otherwise by Cascade) in
accordance with Cascade's agreement with such firm (a copy of which has been
delivered by Cascade to Ascend prior to the date of this Agreement), and
Deutsche Morgan Grenfell Inc., whose fees and expenses will be paid by Ascend
in accordance with Ascend's agreement with such firm (a copy of which has been
delivered by Ascend to Cascade prior to the date of this Agreement), and each
of Ascend and Cascade agrees to indemnify and hold the other harmless from and
against any and all claims, liabilities or obligations with respect to any
other fees, commissions or expenses asserted by any person
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on the basis of any act or statement alleged to have been made by such party
or any of its directors, officers, employees or affiliates.
Section 6.15 Indemnification.
(a) Cascade shall and, from and after the Effective Time, Ascend and the
Surviving Corporation shall, indemnify, defend and hold harmless each person
who is now, or has been at any time prior to the date of this Agreement or who
becomes prior to the Effective Time, an officer or director of Cascade or any
of its Subsidiaries or their affiliates and each person who served at the
request of Cascade as a director, officer, trustee, partner, fiduciary,
employee or agent of Cascade or of another corporation, partnership or other
entity, or trust, pension or other employee benefit plan or enterprise
(collectively, the "Indemnified Parties") against all losses, claims, demands,
damages, costs, expenses, liabilities or judgments, or amounts that are paid
in settlement (provided, in the case of amounts paid in settlement, that such
amounts shall have been approved by the indemnifying party, which shall not
unreasonably withhold such approval), of or in connection with any claim,
action, demand, suit, proceeding or investigation (whether arising before, at
or after the Effective Time) which is based in whole or in part on, or arising
in whole or in part out of the fact that such person is or was a director or
officer of Cascade or any of its Subsidiaries or their affiliates or served in
such other capacity, or which such Indemnified Party reasonably believes may
lead to the assertion or imposition of liability against such Indemnified
Party, whether pertaining to any matter existing or occurring at or prior to
or after the Effective Time and whether asserted, filed, commenced, or claimed
prior to, or at or after, the Effective Time ("Indemnified Liabilities")
including, without limitation, all losses, claims, damages, costs, expenses,
liabilities, judgments or settlement amounts based in whole or in part on, or
arising in whole or in part out of, or pertaining to this Agreement or the
transactions contemplated hereby, in each case to the full extent a
corporation is permitted under the DGCL to indemnify its own directors and
officers, as the case may be. Cascade, Ascend and the Surviving Corporation,
as the case may be, shall pay expenses in advance of the final disposition of
any such claim, demand, action, suit, proceeding or investigation to each
Indemnified Party to the full extent permitted by law upon receipt of any
undertaking contemplated by Section 145(e) of the DGCL. Without limiting the
foregoing, in the event any such claim, demand, action, suit, proceeding or
investigation is brought or asserted (whether arising before or after the
Effective Time), (i) the Indemnified Parties may retain counsel reasonably
satisfactory to them and Cascade (or them and Ascend and the Surviving
Corporation after the Effective Time), (ii) Cascade (or after the Effective
Time, Ascend and the Surviving Corporation) shall pay all reasonable fees and
expenses of such counsel for the Indemnified Parties promptly as statements
therefor are received, and (iii) Cascade (or after the Effective Time, Ascend
and the Surviving Corporation) shall use all reasonable efforts to assist in
the vigorous defense of any such matter, provided that none of Cascade, Ascend
or the Surviving Corporation shall be liable for any settlement of any claim
effected without its written consent, which consent, however, shall not be
unreasonably withheld. Any Indemnified Party wishing to claim indemnification
under this Section 6.15, upon learning of any such claim, action, suit,
proceeding or investigation, shall within sixty (60) days of becoming aware of
such claim, notify Cascade, Ascend or the Surviving Corporation (but the
failure so to notify an Indemnifying Party shall not relieve it from any
liability which it may have under this Section 6.15 except to the extent such
failure materially prejudices such party), and shall deliver to Cascade (or
after the Effective Time, Ascend and the Surviving Corporation) the
undertaking contemplated by Section 145(e) of the DGCL. The Indemnified
Parties as a group may retain only one law firm to represent them with respect
to each such matter unless any Indemnified Party reasonably concludes that
there may be reasonable defenses available to such Indemnified Party which are
different from or additional to those available to any other Indemnified Party
and counsel for the group of Indemnified Parties declines to assert any such
defense on behalf of such Indemnified Party, or if the interests of such
Indemnified Party otherwise reasonably may be deemed by such Indemnified Party
to conflict with the interests of the other Indemnified Parties in the group.
(b) From and after the Effective Time, the Surviving Corporation and Ascend
shall fulfill, assume and honor in all respects the obligations of Cascade
pursuant to Cascade's Certificate of Incorporation, Bylaws and any
indemnification agreement between Cascade and any of Cascade's directors and
officers existing and in force as of the Effective Time. Ascend and Cascade
agree that the indemnification obligations set forth in Cascade's Certificate
of Incorporation and Bylaws, in each case as of the date of this Agreement,
shall survive the Merger
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(and, as of or prior to the Effective Time, Ascend shall cause the Bylaws of
Sub to reflect such provisions) and shall not be amended, repealed or
otherwise modified for a period of six years after the Effective Time in any
manner that would adversely affect the rights thereunder of the Indemnified
Parties.
(c) In the event Ascend or the Surviving Corporation or any of their
respective successors or assigns (i) consolidates with or merges into any
other person and shall not be the continuing or surviving corporation or
entity in such consolidation or merger or (ii) transfers all or substantially
all its properties and assets to any person, then, and in each case, proper
provision shall be made so that the successors and assigns of Ascend or the
Surviving Corporation, as the case may be, honor the indemnification
obligations set forth in this Section 6.15.
(d) Ascend and the Surviving Corporation shall, until the sixth anniversary
of the Effective Time or such earlier date as may be mutually agreed upon by
Ascend, the Surviving Corporation and the applicable Indemnified Party, cause
to be maintained in effect, to the extent available, the policies of
directors' and officers' liability insurance maintained by Cascade and its
Subsidiaries as of the date hereof (or policies of at least the same coverage
and amounts containing terms that are no less advantageous to the insured
parties) with respect to claims arising from facts or events that occurred on
or prior to the Effective Time, including without limitation all claims based
upon, arising out of, directly or indirectly resulting from, in consequence
of, or in any way involving the Merger and any and all related events. In lieu
of the purchase of such insurance by Ascend or the Surviving Corporation,
Cascade may purchase a six-year extended reporting period endorsement
("reporting tail coverage") under its existing directors' and liability
insurance coverage, provided that such reporting tail coverage shall extend
the director and officer liability coverage in force as of the date hereof for
a period of at least six (6) years from the Effective Time for any claims
based upon, arising out of, directly or indirectly resulting from, in
consequence of, or in any way involving wrongful acts or omissions occurring
on or prior to the Effective Time, including without limitation all claims
based upon, arising out of, directly or indirectly resulting from, in
consequence of, or in any way involving the Merger and any and all related
transactions or related events. In no event shall Ascend or the Surviving
Corporation be obligated to expend in order to maintain or procure insurance
coverage pursuant to this paragraph (c) any amount per year in excess of one
hundred fifty percent (150%) of the aggregate premiums paid by Cascade and its
Subsidiaries in the fiscal year ended for directors' and officers' liability
insurance.
(e) The obligations of Cascade, the Surviving Corporation and Ascend under
this Section 6.15 shall not be terminated or modified in such a manner as to
adversely affect any of the Indemnified Parties without the consent of such
Indemnified Party (it being expressly agreed that each such Indemnified Party
shall be a third party beneficiary of this Section 6.15).
Section 6.16 Stock Option and Voting Agreements. Concurrently with the
execution and delivery of this Agreement, Cascade and Ascend shall execute and
deliver the Stock Option Agreements in the forms annexed hereto as Exhibits A
and B and concurrently therewith or as soon as practicable thereafter (and in
no event later than April 9, 1997) shall cause each of their respective
directors and executive officers to execute and deliver voting agreements and
irrevocable proxies in the applicable forms annexed hereto as Exhibits C and D
(the "Voting Agreements"), agreeing, among other things, to vote in favor of
the Merger and against any competing proposals. Cascade and Ascend shall each
take all corporate action necessary to reserve for issuance a sufficient
number of shares of its common stock for delivery upon an exercise in full of
the option granted to Ascend in the Cascade Stock Option Agreement and to
Cascade in the Ascend Stock Option Agreement.
Section 6.17 Additional Agreements; Reasonable Efforts. Subject to the terms
and conditions of this Agreement, each of the parties agrees to use all
reasonable efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement, subject to the appropriate votes of the
stockholders of Cascade and Ascend described in Section 6.6, including
cooperating fully with the other party, including by provision of information
and making all necessary filings under the HSR Act. If at any time after the
Effective Time any further action is necessary or desirable to carry out the
purposes of this
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Agreement or to vest the Surviving Corporation with full title to all
properties, assets, rights, approvals, immunities and franchises of either of
the Constituent Corporations, the proper officers and directors of each party
to this Agreement shall take all such necessary action.
Section 6.18 Board Composition. Ascend and the Ascend Board of Directors of
Ascend shall take all action required (a) to increase the size of the Ascend
Board to ten (10) as of the Effective Time and to cause the election promptly
after the Effective Time by the Ascend Board of Gururaj Deshpande, Paul J.
Ferri, and Daniel E. Smith to the Ascend Board, and (b) to cause Paul J. Ferri
to be appointed to the Compensation Committee of the Ascend Board. Ascend and
the Ascend Board shall, at the request of any member of the Board of Directors
of Cascade immediately prior to the Effective Time, continue uninterrupted the
service of such person as a member of the Board of Directors of the Surviving
Corporation following the Effective Time for up to one hundred fifty (150)
days.
ARTICLE VII
Conditions to Merger
Section 7.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction prior to the Closing Date of the
following conditions:
(a) Stockholder Approvals. This Agreement and the Merger shall have been
adopted and approved by the requisite vote of holders of Cascade Common Stock
pursuant to the DGCL and the Certificate of Incorporation of Cascade, and the
issuance of Ascend Common Stock in the Merger shall have been approved by the
requisite vote of the holders of Ascend Common Stock pursuant to the
regulations of The Nasdaq National Market.
(b) HSR Act. The waiting period applicable to the consummation of the Merger
under the HSR Act and any other material waiting periods under applicable
foreign laws (if any) shall have expired or been terminated, and no action by
the Department of Justice or Federal Trade Commission or any foreign
Governmental Entity challenging or seeking to enjoin the consummation of the
Merger shall have been instituted and be pending.
(c) Certain Approvals. All authorizations, consents, orders or approvals of,
or declarations or filings with, any Governmental Entity required to
consummate the Merger, the absence or nonoccurrence of which would be
reasonably likely to have an Ascend Material Adverse Effect, a Cascade
Material Adverse Effect or a material adverse effect on the ability of the
parties to consummate the Merger, shall have been obtained and be in effect.
(d) Registration Statement; State Securities Laws. The Registration
Statement shall have become effective under the Securities Act and shall not
be the subject of any stop order or proceedings seeking a stop order, and
Ascend shall have received all permits and other authorizations required under
applicable state securities laws for the issuance of shares of Ascend Common
Stock pursuant to the Merger.
(e) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court
of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing or prohibiting the consummation of the Merger or
limiting or restricting Ascend's conduct or operation of the business of
Ascend or Cascade after the Merger shall have been issued and be in effect,
nor shall any proceeding brought by a domestic administrative agency or
commission or other domestic Governmental Entity, seeking any of the foregoing
be pending; nor shall any action have been taken or any statute, rule,
regulation or order have been enacted, entered or enforced or be deemed
applicable to the Merger which makes the consummation of the Merger illegal or
prevents or prohibits the Merger.
(f) Pooling. Each of Ascend and Cascade shall have received a letter from
its respective independent accountants, dated the date of the Joint Proxy
Statement and confirmed in writing at the Effective Time, regarding such
independent accountants' concurrence with Ascend's management as to the
appropriateness of
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pooling of interests accounting for the Merger under Accounting Principles
Board Opinion No. 16 and applicable SEC regulations and releases, if the
Merger is consummated in accordance with this Agreement.
(g) Nasdaq. The shares of Ascend Common Stock to be issued in the Merger
shall have been approved for quotation on The Nasdaq National Market.
(h) Tax Opinions. Ascend shall have received a written opinion from its
counsel Gray Cary Ware & Freidenrich, A Professional Corporation, and Cascade
shall have received a written opinion from its counsel, Testa, Hurwitz &
Thibeault, LLP, in form and substance reasonably satisfactory to both parties,
to the effect that the Merger will be treated for federal income tax purposes
as a tax-free reorganization within the meaning of Section 368(a) of the Code.
In rendering such opinion, counsel may rely upon reasonable representations
and certificates of Ascend, Sub, Cascade and their respective directors,
officers and stockholders.
Section 7.2 Additional Conditions to Obligations of Ascend and Sub. The
obligations of Ascend and Sub to effect the Merger are subject to the
satisfaction or waiver of each of the following conditions, any of which may
be waived in writing exclusively by Ascend and Sub:
(a) Representations and Warranties. The representations and warranties of
Cascade set forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and (except to the extent such
representations and warranties expressly speak as of an earlier date) as of
the Closing Date as though made on and as of the Closing Date, except (i) for
changes contemplated by this Agreement or (ii) where the failure to be true
and correct could not reasonably be expected to have a Cascade Material
Adverse Effect or a material adverse effect upon the parties' ability to
consummate the Merger in accordance with this Agreement, and Ascend shall have
received a certificate signed on behalf of Cascade by the chief executive
officer or chief financial officer of Cascade to such effect.
(b) Performance of Obligations. Cascade shall have performed in all material
respects all obligations required to be performed by it under this Agreement
at or prior to the Closing Date, and Ascend shall have received a certificate
signed on behalf of Cascade by the chief executive officer or chief financial
officer of Cascade to such effect.
(c) Certain Agreements. A Cascade Director, Officer and Stockholder
Agreement in the form annexed hereto as Exhibit E shall have been executed and
delivered to Ascend by or on behalf of each director and officer of Cascade,
and each such Cascade Director, Officer and Stockholder Agreement shall be in
full force and effect.
(d) Absence of Cascade Material Adverse Effect. No Cascade Material Adverse
Effect shall have occurred, and no fact or circumstance shall exist which
could reasonably be expected to result in a Cascade Material Adverse Effect.
Section 7.3 Additional Conditions to Obligations of Cascade. The obligation
of Cascade to effect the Merger is subject to the satisfaction of each of the
following conditions, any of which may be waived, in writing, exclusively by
Cascade:
(a) Representations and Warranties. The representations and warranties of
Ascend and Sub set forth in this Agreement shall be true and correct in all
material respects as of the date of this Agreement and (except to the extent
such representations speak as of an earlier date) as of the Closing Date as
though made on and as of the Closing Date, except (i) for changes contemplated
by this Agreement or (ii) where the failure to be true and correct could not
reasonably be expected to have an Ascend Material Adverse Effect or a material
adverse effect upon the parties' ability to consummate the Merger in
accordance with the Merger Agreement, and Cascade shall have received a
certificate signed on behalf of Ascend by the chief executive officer or chief
financial officer of Ascend to such effect.
(b) Performance of Obligations. Ascend and Sub shall have performed in all
material respects all obligations required to be performed by them under this
Agreement at or prior to the Closing Date, and Cascade
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shall have received a certificate signed on behalf of Ascend by the chief
executive officer or chief financial officer of Ascend to such effect.
(c) Certain Agreements. An Ascend Director, Officer and Stockholder
Agreement in the form annexed hereto as Exhibit F shall have been executed and
delivered to Cascade by or on behalf of each director and officer of Ascend,
and each such Ascend Director, Officer and Stockholder Agreement shall be in
full force and effect.
(d) Absence of Ascend Material Adverse Effect. No Ascend Material Adverse
Effect shall have occurred, and no fact or circumstance shall exist which
could reasonably be expected to result in an Ascend Material Adverse Effect.
ARTICLE VIII
Termination and Amendment
Section 8.1 Termination. This Agreement may be terminated at any time prior
to the Effective Time (with respect to Sections 8.1(b) through 8.1(h), by
written notice by the terminating party to the other party), whether before or
after approval of the matters presented in connection with the Merger by the
stockholders of Ascend or Cascade:
(a) by mutual written consent of Ascend and Cascade; or
(b) by either Ascend or Cascade if the Merger shall not have been
consummated by August 14, 1997 (provided, however, that the right to terminate
this Agreement under this Section 8.1(b) shall not be available to any party
whose failure to fulfill any obligation under this Agreement has been the
cause of or resulted in the failure of the Merger to occur on or before such
date, and provided further, that such date may be extended for up to ninety
(90) days by either party by written notice to the other party if the Merger
would have been consummated but for the absence of one or more required
Approvals of Governmental Entities where the failure to obtain such Approvals
would have a Cascade Material Adverse Effect or an Ascend Material Adverse
Effect or a material adverse effect on the ability of the parties to
consummate the Merger, and such Approval can reasonably be expected to be
obtained within such ninety (90) day period); or
(c) by either Ascend or Cascade if a court of competent jurisdiction or
other Governmental Entity shall have issued a final order, decree or ruling,
or taken any other action, having the effect of permanently restraining,
enjoining or otherwise prohibiting the Merger, and all appeals with respect to
such order, decree, ruling or action have been exhausted or the time for
appeal of such order, decree, ruling or action shall have expired (provided,
however, that the right to terminate this Agreement under this Section 8.1(c)
shall not be available to any party which has not complied with its
obligations under Section 6.7); or
(d) by either Ascend or Cascade if, at the Cascade Stockholders Meeting or
the Ascend Stockholders Meeting (including any adjournment or postponement
thereof), the requisite vote of Cascade stockholders in favor of this
Agreement and approval of the Merger or the requisite vote of Ascend
stockholders in favor of approval of the issuance of Ascend Common Stock in
the Merger shall not have been obtained (provided, however, that the right to
terminate this Agreement under this Section 8.1(d) shall not be available to
any party which has not complied with its obligations under Sections 6.2 and
6.6, and no termination shall be effective by any party which has not complied
with its obligations under Section 8.3(b) or (c), if applicable, as the case
may be, of this Agreement); or
(e) by Ascend if (i) the Board of Directors of Cascade shall have withdrawn
or modified its recommendation of this Agreement or the Merger in a manner
adverse to Ascend; (ii) an Alternative Transaction (as defined in Section
8.3(e)) involving Cascade shall have taken place or the Board of Directors of
Cascade shall have recommended such an Alternative Transaction (or a proposal
or offer therefor) to the stockholders of Cascade or shall have publicly
announced its intention to recommend such an Alternative Transaction (or a
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proposal or offer therefor) or to engage in an Alternative Transaction; or
(iii) a tender offer or exchange offer for twenty percent (20%) or more of the
outstanding shares of Cascade Common Stock shall have been commenced or a
registration statement with respect thereto shall have been filed (other than
by Ascend or an affiliate thereof) and the Board of Directors of Cascade shall
have (A) recommended that the stockholders of Cascade tender their shares in
such tender or exchange offer or (B) publicly announced its intention to take
no position with respect to such tender offer; or
(f) by Ascend if a breach of any representation, warranty, covenant or
agreement on the part of Cascade set forth in this Agreement shall have
occurred which if uncured would cause any condition set forth in Sections
7.2(a) or 7.2(b) not to be satisfied, and such breach is incapable of being
cured or, if capable of being cured, shall not have been cured within ten (10)
business days following receipt by Cascade of written notice of such breach
from Ascend; or
(g) by Cascade if (i) the Board of Directors of Ascend shall have withdrawn
or modified its recommendation in favor of approval of the issuance of Ascend
Common Stock in the Merger in a manner adverse to Cascade; (ii) an Alternative
Transaction (as defined in Section 8.3(e)) involving Ascend shall have taken
place or the Board of Directors of Ascend shall have recommended such an
Alternative Transaction (or a proposal or offer therefor) to the stockholders
of Ascend or shall have publicly announced its intention to recommend such an
Alternative Transaction (or a proposal or offer therefor) or to engage in an
Alternative Transaction; or (iii) a tender offer or exchange offer for twenty
percent (20%) or more of the outstanding shares of Ascend Common Stock shall
have been commenced or a registration statement with respect thereto shall
have been filed (other than by Cascade or an affiliate thereof), and the Board
of Directors of Ascend shall have (A) recommended that the stockholders of
Ascend tender their shares in such tender or exchange offer or (B) publicly
announced its intention to take no position with respect to such tender offer;
or
(h) by Cascade, if a breach of any representation, warranty, covenant or
agreement on the part of Ascend set forth in this Agreement shall have
occurred which if uncured would cause any conditions set forth Section 7.3(a)
or 7.3(b) not to be satisfied, and such breach is incapable of being cured or,
if capable of being cured, shall not have been cured within ten (10) business
days following receipt by Ascend of written notice of such breach from
Cascade.
Section 8.2 Effect of Termination. In the event of any termination of this
Agreement pursuant to Section 8.1, there shall be no liability or obligation
on the part of Ascend, Cascade, Sub, or any of their respective officers,
directors, stockholders or Affiliates, except as set forth in Section 8.3. The
foregoing limitations shall not apply, and the remedies provided by Section
8.3 shall not be exclusive, to the extent that such termination results from
the willful breach by a party of any of its material representations,
warranties, covenants or agreements in this Agreement. The provisions of
Section 8.3 of this Agreement and the Confidentiality Agreement shall remain
in full force and effect and survive any termination of this Agreement.
Section 8.3 Fees and Expenses.
(a) Except as set forth in this Section 8.3, all fees and expenses incurred
in connection with this Agreement and the transactions contemplated hereby
shall be paid by the party incurring such expenses, whether or not the Merger
is consummated; provided, however, that Ascend and Cascade shall share equally
all fees and expenses, other than attorneys' and accounting fees and expenses,
incurred in relation to the printing and filing of the Joint Proxy Statement
(including any related preliminary materials) and the Registration Statement
(including financial statements and exhibits) and any amendments or
supplements thereto and the fee(s) required to be paid in connection with the
filing(s) required under the HSR Act and applicable foreign laws (if any) in
connection with the transactions contemplated by this Agreement.
(b) If this Agreement is terminated (i) by Ascend pursuant to Section
8.1(e), or (ii) by Cascade pursuant to Section 8.1(d) as a result of the
failure to receive the requisite vote for adoption of this Agreement and
approval of the Merger by the stockholders of Cascade at the Cascade
Stockholders Meeting, or (iii) by Ascend as a result of a willful or
intentional breach by Cascade within the scope of Section 8.1(f), and, at the
time of the event
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giving rise to the right of Ascend to terminate under such Section 8.1(e) or
8.1(f) or the right of Cascade to terminate under such Section 8.1(d), an
Alternative Transaction involving Cascade shall have been announced or
proposed which shall not have been absolutely and unconditionally withdrawn
and abandoned, Cascade shall pay to Ascend, prior to and as a condition
precedent to the effectiveness of such termination, a termination fee of
eighty five million dollars ($85,000,000) in cash (the "Cascade Termination
Fee"). If this Agreement is terminated by Ascend pursuant to Section 8.1(d) as
a result of the failure to receive the requisite vote for adoption of this
Agreement and approval of the Merger by the stockholders of Cascade at the
Cascade Stockholders Meeting, and written notice of such termination is given
by Ascend to Cascade within twenty (20) days after such Cascade Stockholders
Meeting, and at the time of the event giving rise to the right of Ascend to
terminate under such Section 8.1(d), an Alternative Transaction involving
Cascade shall have been announced or proposed which shall not have been
absolutely and unconditionally withdrawn and abandoned, and Cascade within one
hundred eighty (180) days after such termination enters into a definitive
written merger or other business combination agreement with the offeror in
such Alternative Transaction (or any affiliate thereof) or recommends that the
stockholders of Cascade tender their shares of Cascade capital stock in
response to a tender or exchange offer providing for an Alternative
Transaction by such offeror (or any affiliate thereof), then Cascade shall pay
to Ascend a termination fee in the amount of eighty five million dollars
($85,000,000) (the "Cascade Post-Termination Fee") upon entering into such
agreement or making such recommendation.
(c) If this Agreement is terminated (i) by Cascade pursuant to Section
8.1(g), or (ii) by Ascend pursuant to Section 8.1(d) as a result of the
failure to receive the requisite vote by the stockholders of Ascend at the
Ascend Stockholders Meeting to approve the issuance of Ascend Common Stock in
the Merger, or (iii) by Cascade as a result of a willful or intentional breach
by Ascend within the scope of Section 8.1(h), and, at the time of the event
giving rise to the right of Cascade to terminate under such Section 8.1(g) or
8.1(h) or the right of Ascend to terminate under such Section 8.1(d), an
Alternative Transaction involving Ascend shall have been announced or proposed
which shall not have been absolutely and unconditionally withdrawn and
abandoned, Ascend shall pay to Cascade, prior to and as a condition precedent
to the effectiveness of such termination, a termination fee of eighty five
million dollars ($85,000,000) in cash (the "Ascend Termination Fee"). If this
Agreement is terminated by Cascade pursuant to Section 8.1(d) as a result of
the failure to receive the requisite vote for the issuance of shares of Ascend
Common Stock pursuant to the Merger Agreement by the stockholders of Ascend at
the Ascend Stockholders Meeting, and written notice of such termination is
given by Cascade to Ascend within twenty (20) days after such Ascend
Stockholders Meeting, and at the time of the event giving rise to the right of
Cascade to terminate under such Section 8.1(d), an Alternative Transaction
involving Ascend shall have been announced or proposed which shall not have
been absolutely and unconditionally withdrawn and abandoned, and Ascend within
one hundred eighty (180) days after such termination enters into a definitive
written merger or other business combination agreement with the offeror in
such Alternative Transaction (or any affiliate thereof) or recommends that the
stockholders of Ascend tender their shares of Ascend capital stock in response
to a tender or exchange offer providing for an Alternative Transaction by such
offeror (or any affiliate thereof), then Ascend shall pay to Cascade a
termination fee in the amount of eighty five million dollars ($85,000,000)
(the "Ascend Post-Termination Fee") upon entering into such agreement or
making such recommendation.
(d) The Cascade Termination Fee, the Cascade Post-Termination Fee, the
Ascend Termination Fee, and the Ascend Post-Termination Fee shall be paid in
cash in immediately available funds. In no event shall Cascade be required to
pay both the Cascade Termination Fee and the Cascade Post-Termination Fee, and
in no event shall Ascend be required to pay both the Ascend Termination Fee
and the Ascend Post-Termination Fee.
(e) As used in this Agreement, an "Alternative Transaction" involving a
specified party to this Agreement means (i) a transaction or series of
transactions pursuant to which any person or group (as such term is defined
under the Exchange Act), other than Ascend, Cascade or Sub, or any affiliate
thereof (a "Third Party"), acquires (or would acquire upon completion of such
transaction or series of transactions) more than twenty percent (20%) of the
equity securities or voting power of such party or any of its material
subsidiaries, pursuant to a tender offer or exchange offer or otherwise, (ii)
a merger, consolidation, share exchange or other business combination
involving such party or any of its material Subsidiaries pursuant to which any
Third Party acquires ownership
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(or would acquire ownership upon consummation of such merger, consolidation,
share exchange or other business combination) of more than twenty percent
(20%) of the outstanding equity securities or voting power of such party or
any of its material Subsidiaries or of the entity surviving such merger or
business combination or resulting from such consolidation, (iii) any other
transaction or series of transactions pursuant to which any Third Party
acquires (or would acquire upon completion of such transaction or series of
transactions) control of assets of such party or any of its material
Subsidiaries (including, for this purpose, outstanding equity securities of
Subsidiaries of such party) having a fair market value equal to more than
twenty percent (20%) of the fair market value of all the consolidated assets
of such party immediately prior to such transaction or series of transactions,
or (iv) any transaction or series of transactions pursuant to which any Third
Party acquires (or would acquire upon completion of such transaction or series
of transactions) control of the Board of Directors of such party or by which
nominees of any Third Party are (or would be) elected or appointed to a
majority of the seats on the Board of Directors of such party.
(f) In no event shall Cascade be required to pay to Ascend any Cascade
Termination Fee or Cascade Post-Termination Fee, and in no event shall Ascend
be required to pay to Cascade any Ascend Termination Fee or Ascend Post-
Termination Fee, if, immediately prior to the applicable termination of this
Agreement, the party that would otherwise be entitled to receive such
termination fee pursuant to Section 8.3 was in material breach of any of its
material obligations under this Agreement.
(g) If one party fails to promptly pay to the other any fee or expense due
hereunder, the defaulting party shall pay the costs and expenses (including
reasonable documented legal fees and expenses) in connection with any action,
including the filing of any lawsuit or other legal action, taken to collect
payment, together with interest on the amount of any unpaid fee at the
publicly announced prime rate of Citibank, N.A. from the date such fee was
required to be paid.
Section 8.4 Amendment. This Agreement may be amended by the parties hereto,
by action taken or authorized by their respective Boards of Directors, at any
time before or after approval of the matters presented in connection with the
Merger by the stockholders of Cascade or of Ascend, but, after any such
approval, no amendment shall be made which by law requires further approval by
such stockholders without such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
Section 8.5 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto, and (iii) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall
be valid only if set forth in a written instrument signed on behalf of such
party.
ARTICLE IX
Miscellaneous
Section 9.1 Nonsurvival of Representations, Warranties and Agreements. None
of the representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Closing and
the Effective Time, except for the agreements contained in Sections 1.3
(Effects of the Merger), 1.4 (Directors and Officers), 2.1 (Conversion of
Capital Stock), 2.2 (Exchange of Certificates), 6.13 (Stock Plans and
Options), 6.14 (Brokers and Finders), 6.15 (Indemnification), 6.18 (Board
Composition), 8.2 (Effect of Termination), 8.3 (Fees and Expenses), this
Article IX, the agreements of Affiliates delivered pursuant to Section 6.11,
and any other agreement contemplated by this Agreement which, by its terms,
does not terminate until a later date. The Confidentiality Agreement shall
survive the execution and delivery of this Agreement.
A-35
<PAGE>
Section 9.2 Notices. All notices and other communications hereunder shall be
in writing and shall be deemed given if delivered personally, telecopied
(which is confirmed) or mailed by registered or certified mail (return receipt
requested) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
(a) if to Ascend or Sub, to
Ascend Communications, Inc. One Ascend Plaza 1701 Harbor Bay Parkway
Alameda, CA 94502 Attention: Robert K. Dahl, Chief Financial Officer
Facsimile No.: (510) 747-2616
with a copy to:
Gray Cary Ware & Freidenrich A Professional Corporation 400 Hamilton
Avenue Palo Alto, California 94301 Facsimile No.: (415) 327-3699
Attention: Gregory M. Gallo, Esq. Rod J. Howard, Esq.
(b) if to Cascade, to
Cascade Communications Corp. 5 Carlisle Road Westford, MA 01886
Attention: President and Corporate Counsel Facsimile No.: (508) 682-
1221
with a copy to:
Testa, Hurwitz & Thibeault, LLPHigh Street Tower125 High StreetBoston,
Massachusetts 02110Attention: John A. Meltaus, Esq. Facsimile No.:
(617) 248-7100
Section 9.3 Interpretation. When a reference is made in this Agreement to an
Article or a Section, such reference shall be to an Article or a Section of
this Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement. Whenever
the words "include," "includes" or "including" are used in this Agreement they
shall be deemed to be followed by the words "without limitation." The phrase
"made available" in this Agreement shall mean that the information referred to
has been made available by the party to whom such information is to be made
available. The phrases "the date of this Agreement," "the date hereof," and
terms of similar import, unless the context otherwise requires, shall be
deemed to refer to March 30, 1997. In determining whether a Cascade Material
Adverse Effect or an Ascend Material Adverse Effect exists, materiality shall
be determined on the basis of the applicable party and all of its
Subsidiaries, taken together as a whole, and not on the basis of the party or
any single Subsidiary alone; and in determining whether the breach or failure
of any representation and warranty "individually or in the aggregate" to be
true, and in determining whether the breach of any covenant or agreement,
either "individually or in the aggregate," would have, or could reasonably be
expected to have, or would be reasonably likely to have a Cascade Material
Adverse Effect or an Ascend Material Adverse Effect, all breaches and failures
of such representation, warranty, covenant
A-36
<PAGE>
or agreement by such party in the applicable section of this Agreement shall
be aggregated and considered. Reference to a party's "knowledge" means actual
knowledge of such party and its Subsidiaries after reasonable inquiry of such
party's and its Subsidiaries' directors and officers who could reasonably be
expected to have knowledge of such matters.
Section 9.4 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
Section 9.5 Entire Agreement; No Third Party Beneficiaries. This Agreement
(including the documents and the instruments referred to herein) (a)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, and (b) except as provided in Sections 6.13 and 6.15 is
not intended to confer upon any person other than the parties hereto any
rights or remedies hereunder.
Section 9.6 Governing Law. This Agreement shall be governed and construed,
and any controversy arising out of or otherwise relating to the Agreement
shall be determined, in accordance with the internal laws of the State of
Delaware without regard to conflicts of law rules thereof. Each party hereto
consents and submits to the exclusive jurisdiction of the courts of the State
of Delaware and the courts of the United States located in such state for the
adjudication of any action, suit, proceeding, claim or dispute arising out of
or otherwise relating to this Agreement.
Section 9.7 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties, and any attempted assignment thereof without
such consent shall be null and void. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
[Remainder of Page Intentionally Left Blank]
A-37
<PAGE>
IN WITNESS WHEREOF, Ascend, Sub and Cascade have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
Cascade Communications Corp. Ascend Communications, Inc.
By: /s/ Daniel E. Smith By: /s/ Robert K. Dahl
_______________________________ ____________________________________
Name: Daniel E. Smith Name: Robert K. Dahl
Title: President and Chief Title: Vice President, Finance and
Executive Officer Chief Financial Officer
Catskill Merger Corporation
By: /s/ Robert K. Dahl
____________________________________
Name: Robert K. Dahl
Title: Vice President
A-38
<PAGE>
ANNEX B
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CASCADE STOCK OPTION AGREEMENT
BY AND BETWEEN
CASCADE COMMUNICATIONS CORP.,
A DELAWARE CORPORATION,
AND
ASCEND COMMUNICATIONS, INC.,
A DELAWARE CORPORATION,
DATED AS OF MARCH 30, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM SECTION
- ---- --------
<S> <C>
Agreement............................................................. Preamble
Ascend................................................................ Preamble
Ascend Common Stock................................................... 2(e)
Ascend Offer Notice................................................... 8(c)
Cash Exercise......................................................... 2(e)
Cash Exercise Price................................................... 2(e)
Cascade............................................................... Preamble
Cascade Charter....................................................... 2(b)
Cascade Common Stock.................................................. Recitals
Cascade Offer Notice.................................................. 8(d)
Cascade Option........................................................ 1
Closing............................................................... 2(b)
Exercise Notice....................................................... 2(b)
Exercise Price........................................................ 2(e)
Expiration Date....................................................... 8(a)
Fair Market Value..................................................... 7(b)(iii)
Holder................................................................ 9(a)
Holder's Designation Notice........................................... 9(b)
HSR Act............................................................... 3
Manager............................................................... 9(b)
Material Contract..................................................... 5(e)
Merger................................................................ Recitals
Merger Agreement...................................................... Recitals
Net Proceeds.......................................................... 2(f)
Option Number......................................................... 2(d)
Option Repurchase Price............................................... 7(b)(i)
Permitted Offering.................................................... 9(a)
Purchase Period....................................................... 7(a)
Registrable Securities................................................ 9(a)
Registrant............................................................ 9(a)
Registrant's Designation Notice....................................... 9(b)
Registration Notice................................................... 9(a)
Repurchase Notice..................................................... 7(a)
Restricted Shares..................................................... 8(a)
Share Repurchase Price................................................ 7(b)(ii)
Stock Exercise........................................................ 2(e)
Stock Exercise Price.................................................. 2(e)
Sub................................................................... Recitals
Trigger Event......................................................... 2(a)
Violation............................................................. 5(e)
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <C> <S> <C>
Section 1. Grant of Option............................................. B-1
Section 2. Exercise and Termination of the Cascade Option.............. B-1
(a) Exercise.................................................... B-1
(b) Exercise Procedure.......................................... B-1
(c) Termination of the Cascade Option........................... B-2
(d) Option Number............................................... B-2
(e) Exercise Price.............................................. B-2
(f) Certain Limitations......................................... B-2
Section 3. Conditions to Closing....................................... B-3
Section 4. Closing..................................................... B-3
Section 5. Representations and Warranties of Cascade................... B-3
(a) Organization and Standing................................... B-3
(b) Authority................................................... B-3
(c) Reservation of Shares....................................... B-4
(d) No Liens.................................................... B-4
(e) No Conflicts................................................ B-4
(f) Consents and Approvals...................................... B-4
(g) Investment Purposes......................................... B-4
Section 6. Representations and Warranties of Ascend.................... B-4
(a) Organization and Standing................................... B-4
(b) Authority................................................... B-4
(c) Reservation of Shares....................................... B-5
(d) No Liens.................................................... B-5
(e) No Conflicts................................................ B-5
(f) Consents and Approvals...................................... B-5
(g) Investment Purpose.......................................... B-5
Section 7. Certain Repurchases......................................... B-5
(a) Ascend "Put"................................................ B-5
(b) Certain Definitions......................................... B-6
(c) Redelivery of Shares of Ascend Common Stock................. B-6
(d) Payment and Redelivery of Cascade Options or Shares......... B-6
(e) Repurchase Price Reduced at Ascend's Option................. B-6
Section 8. Restrictions on Transfer.................................... B-6
(a) Restrictions on Transfer.................................... B-6
(b) Permitted Sales............................................. B-7
(c) Cascade's Right of First Refusal............................ B-7
(d) Ascend's Right of First Refusal............................. B-7
(e) Additional Restrictions..................................... B-8
Section 9. Registration Rights......................................... B-8
(a) Procedure................................................... B-8
(b) Manager's Certificate....................................... B-8
(c) First Refusal Right......................................... B-9
(d) Closing..................................................... B-9
(e) Certain Limitations......................................... B-9
(f) State Securities Laws....................................... B-9
(g) Obligations of Registrant................................... B-9
(h) Indemnification............................................. B-9
(i) Inclusion of Additional Shares of Registrant................ B-10
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <C> <S> <C>
Section 10. Adjustment Upon Changes in Capitalization.................. B-10
Section 11. Restrictive Legends........................................ B-10
Binding Effect; No Assignment; No Third-Party
Section 12. Beneficiaries............................................. B-11
Section 13. Specific Performance....................................... B-11
Section 14. Validity................................................... B-11
Section 15. Notices.................................................... B-12
Section 16. Governing Law.............................................. B-12
Section 17. Interpretation............................................. B-12
Section 18. Counterparts; Effect....................................... B-13
Section 19. Expenses................................................... B-13
Section 20. Amendments; Waiver......................................... B-13
Section 21. Extension of Time Periods.................................. B-13
Section 22. Further Assurances......................................... B-13
</TABLE>
iii
<PAGE>
CASCADE STOCK OPTION AGREEMENT
THIS CASCADE STOCK OPTION AGREEMENT (the "Agreement") is made and entered
into as of March 30, 1997 by and between Cascade Communications Corp., a
Delaware corporation ("Cascade"), and Ascend Communications, Inc., a Delaware
corporation ("Ascend").
Recitals
Concurrently with the execution and delivery of this Agreement, Cascade,
Ascend, and Catskill Merger Corporation, a Delaware corporation and a wholly-
owned subsidiary of Ascend ("Sub"), are entering into an Agreement and Plan of
Reorganization, dated as of March 30, 1997 (the "Merger Agreement"), which
provides for the merger of Sub with and into Cascade in accordance with the
terms of the Merger Agreement and the laws of the State of Delaware (the
"Merger"). As a condition and inducement to Ascend's willingness to enter into
the Merger Agreement, Ascend has requested that Cascade agree, and Cascade has
agreed, to grant to Ascend an option to acquire certain shares of Cascade's
authorized but unissued common stock, par value $.001 per share (together with
any associated rights, "Cascade Common Stock"), on the terms and subject to
the conditions set forth herein.
NOW, THEREFORE, to induce Ascend to enter into the Merger Agreement and in
consideration of the representations, warranties, covenants and agreements
contained herein and in the Merger Agreement, the parties hereto, intending to
be legally bound, hereby agree as follows. Capitalized terms used herein but
not defined herein shall have the meanings ascribed to them in the Merger
Agreement.
Agreement
Section 1. Grant of Option. Cascade hereby grants to Ascend an irrevocable
option (the "Cascade Option") to purchase a number of shares of Cascade Common
Stock equal to the Option Number (as defined in Section 2(d)), on the terms
and subject to the conditions set forth below.
Section 2. Exercise and Termination of the Cascade Option.
(a) Exercise. The Cascade Option may be exercised by Ascend, in whole or in
part, at any time or from time to time prior to the termination of Ascend's
right to exercise the Cascade Option by the terms of this Agreement and upon
and after the occurrence of the earliest event which causes (i) the Cascade
Termination Fee or (ii) the Cascade Post-Termination Fee (in each case as
defined in the Merger Agreement) to become payable (a "Trigger Event").
Notwithstanding the foregoing, the Cascade Option may not be exercised if
Ascend is in breach in any material respect of any of its material
representations, warranties, covenants or agreements contained in this
Agreement or the Merger Agreement.
(b) Exercise Procedure. In the event that Ascend wishes to exercise the
Cascade Option, Ascend shall deliver to Cascade written notice (an "Exercise
Notice") specifying the total number of shares of Cascade Common Stock that
Ascend wishes to purchase. To the extent permitted by law and the Certificate
of Incorporation, as amended, of Cascade (the "Cascade Charter"), and provided
that the conditions set forth in Section 3 to Cascade's obligation to issue
the shares of Cascade Common Stock to Ascend hereunder have been satisfied or
waived, Ascend shall, upon delivery of the Exercise Notice and tender of the
applicable aggregate Exercise Price, immediately be deemed to be the holder of
record of the shares of Cascade Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of Cascade shall then be closed
or that certificates representing such shares of Cascade Common Stock shall
not theretofore have been delivered to Ascend. Each closing of a purchase of
shares of Cascade Common Stock hereunder (a "Closing") shall occur at a place,
on a date, and at a time designated by Ascend in an Exercise Notice delivered
at least two (2) business days prior to the date of such Closing.
B-1
<PAGE>
(c) Termination of the Cascade Option. Ascend's right to exercise the
Cascade Option shall terminate upon the earliest to occur of:
(i) the Effective Time of the Merger;
(ii) the date on which the Merger Agreement is terminated pursuant to
Article VIII thereof other than under circumstances which also constitute a
Trigger Event under this Agreement; and
(iii) (A) in the event the Cascade Option becomes exercisable pursuant to
clause (i) of Section 2(a), the date two hundred seventy (270) days after
the date on which the Merger Agreement is terminated pursuant to Article
VIII thereof under circumstances which also constitute a Trigger Event
under clause (i) of Section 2(a), or
(B) in the event the Cascade Option becomes exercisable pursuant to
clause (ii) of Section 2(a), the later of (I) the date two hundred seventy
(270) days after the date on which the Merger Agreement is terminated
pursuant to Article VIII thereof under circumstances which also constitute
a Trigger Event under clause (ii) of Section 2(a) and (II) the date one
hundred eighty (180) days after the date on which the Cascade Option
becomes exercisable pursuant to clause (ii) of Section 2(a).
Notwithstanding the foregoing, with respect to clause (iii) in the immediately
preceding sentence, if the Cascade Option cannot be exercised by reason of any
applicable judicial or governmental judgment, decree, order, law or
regulation, the Cascade Option shall remain exercisable and shall not
terminate until the earlier of (x) the date on which such impediment shall
become final and not subject to appeal and (y) 5:00 p.m., Pacific Standard
Time, on the tenth (10th) business day after such impediment shall have been
removed; provided, however, that if such judgment, decree, or order shall have
been obtained at the request of Cascade or any of its Affiliates or a party
that has made or is proposing to make a Competing Offer (as such term is
defined in the Merger Agreement) for Cascade, and such judgment, decree or
order is vacated, set aside, withdrawn, reversed or otherwise nullified, the
time during which the Cascade Option shall remain exercisable shall be
extended for as long as such judgment, decree, or order shall be in effect.
The rights of Ascend set forth in Sections 7 and 9 shall not terminate upon
termination of Ascend's right to exercise the Cascade Option with respect to
shares acquired prior to such termination, but shall extend to the time
provided in such sections. Notwithstanding the termination of the Cascade
Option, Ascend shall be entitled to purchase the shares of Cascade Common
Stock with respect to which Ascend had exercised the Cascade Option prior to
such termination.
(d) Option Number. The aggregate number of shares of Cascade Common Stock
issuable upon exercise of this Cascade Option (the "Option Number") shall
initially be the number of shares, rounded down to the nearest whole share,
equal to nineteen and nine-tenths percent (19.9%) of the total number of
shares of Cascade Common Stock issued and outstanding as of the date of this
Agreement, and shall be adjusted hereafter to reflect changes in Cascade's
capitalization occurring after the date hereof in accordance with Section 10.
Notwithstanding any other provision of this Agreement, in no event shall the
Option Number exceed nineteen and nine-tenths percent (19.9%) of the total
number of shares of Cascade Common Stock issued and outstanding as of the date
of this Agreement, adjusted in accordance with Section 10.
(e) Exercise Price. The purchase price per share of Cascade Common Stock
pursuant to the Cascade Option (the "Exercise Price") shall be payable, at
Ascend's election, in cash (a "Cash Exercise") or in shares (a "Stock
Exercise") of Ascend common stock, $.001 par value per share ("Ascend Common
Stock"). The Exercise Price per share of Cascade Common Stock, (i) in the case
of a Cash Exercise, shall be a cash amount equal to $36.40 (the "Cash Exercise
Price"), and (ii) in the case of a Stock Exercise, shall be seven tenths (.7)
of a share of Ascend Common Stock (the "Stock Exercise Price").
(f) Certain Limitations. In the event Ascend would receive aggregate,
cumulative Net Proceeds (as defined below) of more than eighty-five million
dollars ($85,000,000) in connection with the sale (or other disposition) to
any third party of the shares of Cascade Common Stock acquired pursuant to the
Cascade Option (other than a sale of such shares pursuant to Section 7), all
Net Proceeds in excess of such amount shall be remitted to Cascade promptly
upon receipt. "Net Proceeds" shall mean the aggregate proceeds of such sale or
disposition in excess of the product of the Exercise Price multiplied by the
number of shares of Cascade Common
B-2
<PAGE>
Stock included in such sale or disposition. Notwithstanding anything in this
Agreement or in the Merger Agreement to the contrary, the maximum aggregate
amount payable by Cascade to Ascend and its affiliates pursuant to Section 7
of this Agreement and the provisions of Section 8.3(b) of the Merger Agreement
shall not exceed the sum of eighty-five million dollars ($85,000,000) plus, in
the case of payments pursuant to Sections 7(a)(ii) and 7(b)(ii) of this
Agreement, the aggregate Exercise Price for the shares of Cascade Common Stock
repurchased by Cascade from Ascend pursuant to Section 7 of this Agreement, it
being understood that the limitation contained in this sentence shall not
limit the amounts receivable by Ascend from persons other than Cascade,
including without limitation amounts receivable pursuant to a tender offer or
other purchase and sale transaction.
Section 3. Conditions to Closing. The obligation of Cascade to issue the
shares of Cascade Common Stock to Ascend hereunder is subject to the
conditions that (a) all waiting periods, if any, under the Hart Scott Rodino
Antitrust Improvements Act of 1975, as amended (the "HSR Act"), applicable to
the issuance of the shares of Cascade Common Stock by Cascade and the
acquisition of such shares by Ascend hereunder (and, in the case of a Stock
Exercise, the issuance of shares of Ascend Common Stock by Ascend and the
acquisition of such shares by Cascade) shall have expired or have been
terminated; (b) no preliminary or permanent injunction or other order by any
court of competent jurisdiction prohibiting or otherwise restraining such
issuance shall be in effect; and (c) all consents, approvals, orders,
authorizations and permits of any federal, state, local or foreign
governmental authority, if any, required in connection with the issuance of
the shares of Cascade Common Stock and the acquisition of such shares by
Ascend hereunder (and, in the case of a Stock Exercise, the issuance of shares
of Ascend Common Stock and the acquisition of such shares by Cascade) shall
have been obtained.
Section 4. Closing. At any Closing: (a) Cascade shall deliver to Ascend or
its designee a single certificate in definitive form representing the number
of shares of Cascade Common Stock designated by Ascend in its Exercise Notice,
such certificate to be registered in the name of Ascend and to bear the legend
set forth in Section 11; and (b) Ascend shall deliver to Cascade the aggregate
Exercise Price for the shares of Cascade Common Stock so designated and being
purchased by (i) wire transfer of immediately available funds to the account
or accounts specified in writing by Cascade (in the case of a Cash Exercise),
or (ii) subject to the satisfaction of applicable conditions, delivery of a
certificate or certificates representing the number of shares of Ascend Common
Stock being issued by Ascend in consideration thereof (in the case of a Stock
Exercise). Effective at or prior to the Closing, Cascade shall cause the
shares of Cascade Common Stock being delivered at the Closing to be approved
for quotation on The Nasdaq National Market, and Ascend shall cause the shares
of Ascend Common Stock being delivered at the Closing pursuant to a Stock
Exercise to be approved for quotation on The Nasdaq National Market.
Section 5. Representations and Warranties of Cascade. Cascade represents and
warrants to Ascend as follows:
(a) Organization and Standing. Cascade is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Delaware and has all corporate power and authority required to enter into
this Agreement and to carry out its obligations hereunder.
(b) Authority. The execution and delivery of this Agreement by Cascade
and the consummation by Cascade of the transactions contemplated hereby
have been duly authorized by all necessary corporate action on the part of
Cascade and no other corporate proceedings on the part of Cascade and no
action of Cascade shareholders are necessary to authorize this Agreement or
any of the transactions contemplated hereby; this Agreement has been duly
and validly executed and delivered by Cascade and, assuming the due
authorization, execution and delivery hereof by Ascend and the receipt of
all required governmental approvals, constitutes the valid and binding
obligation of Cascade, enforceable against Cascade in accordance with its
terms, except as may be limited by applicable bankruptcy, insolvency,
reorganization or other similar laws affecting the enforcement of
creditors' rights generally, and except that the availability of equitable
remedies, including specific performance, may be subject to the discretion
of any court before which any proceeding therefor may be brought.
B-3
<PAGE>
(c) Reservation of Shares. Cascade has taken all necessary corporate
action to authorize and reserve for issuance and to permit it to issue,
upon exercise of the Cascade Option, and at all times from the date hereof
through the expiration of the Cascade Option will have reserved, a number
of authorized and unissued shares of Cascade Common Stock not less than the
Option Number, such amount being subject to adjustment as provided in
Section 10, all of which, upon their issuance and delivery in accordance
with the terms of this Agreement, will be duly authorized, validly issued,
fully paid and nonassessable.
(d) No Liens. The shares of Cascade Common Stock issued to Ascend upon
the exercise of the Cascade Option will be, upon delivery thereof to
Ascend, free and clear of all claims, liens, charges, encumbrances and
security interests of any nature whatsoever.
(e) No Conflicts. The execution and delivery of this Agreement by Cascade
does not, and, subject to compliance with applicable law, the consummation
by Cascade of the transactions contemplated hereby will not, violate,
conflict with, or result in a breach of any provision of, or constitute a
default (with or without notice or lapse of time, or both) under, or result
in the termination of, or accelerate the performance required by, or result
in a right of termination, cancellation, or acceleration of any obligation
or the loss of a material benefit under, or the creation of a lien, pledge,
security interest or other encumbrance on assets (any such violation,
conflict, breach, default, termination, acceleration, right of termination,
cancellation or acceleration, loss, or creation, a "Violation") by Cascade
or any of its Subsidiaries of (i) any provision of the charter or the
Bylaws of Cascade or any of its Subsidiaries, each as amended to date, (ii)
any material provision of any material loan or credit agreement, note,
mortgage, indenture, lease, benefit plan or other agreement, obligation,
instrument, permit, concession, franchise or license (a "Material
Contract") of Cascade or any of its Subsidiaries or to which any of them is
a party or by which any of them or their properties or assets are bound, or
(iii) except as contemplated by Section 3.4(c) of the Merger Agreement or
Section 5(f) below, any judgment, order, decree, statute, law, ordinance,
rule or regulation applicable to Cascade or any of its subsidiaries or any
of their properties or assets.
(f) Consents and Approvals. The execution and delivery of this Agreement
by Cascade does not, and (except for the notifications required under the
HSR Act and applicable foreign laws, the expiration or early termination of
waiting periods under the HSR Act and applicable foreign laws, and the
receipt of approvals under applicable securities laws, and except as
contemplated by Section 9) the performance of this Agreement by Cascade and
the consummation of the transactions contemplated hereby will not, require
any consent, approval, order, authorization or permit of, filing with, or
notification to any governmental or regulatory authority, other than such
consents, approvals, orders, authorizations, permits, filings and
notifications which, in the aggregate, if not obtained or made, could not
reasonably be expected to have a Cascade Material Adverse Effect or an
Ascend Material Adverse Effect (as such terms are defined in the Merger
Agreement) or a material adverse effect on the ability of the parties to
consummate the transactions contemplated by this Agreement.
(g) Investment Purposes. Any shares of Ascend Common Stock acquired by
Cascade pursuant to this Agreement will be acquired for Cascade's own
account, for investment purposes only, and will not be acquired by Cascade
with a view to the public distribution thereof in violation of any
applicable provision of the Securities Act.
Section 6. Representations and Warranties of Ascend. Ascend represents and
warrants to Cascade as follows:
(a) Organization and Standing. Ascend is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Delaware and has all corporate power and authority required to enter into
this Agreement and to carry out its obligations hereunder.
(b) Authority. Except as set forth in Section 6(c), the execution and
delivery of this Agreement by Ascend and the consummation by Ascend of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Ascend, and no other corporate proceedings
on the part of Ascend and no action of its stockholders are necessary to
authorize this Agreement or any of the transactions contemplated hereby;
this Agreement has been duly and validly executed and delivered by
B-4
<PAGE>
Ascend and, assuming the due authorization, execution and delivery hereof
by Cascade and the receipt of all required governmental approvals,
constitutes the valid and binding obligation of Ascend, enforceable against
Ascend in accordance with its terms, except as may be limited by applicable
bankruptcy, insolvency, reorganization, or other similar laws affecting the
enforcement of creditors' rights generally, and except that the
availability of equitable remedies, including specific performance, may be
subject to the discretion of any court before which any proceeding may be
brought.
(c) Reservation of Shares. Prior to any delivery of shares of Ascend
Common Stock in consideration of the purchase of shares of Cascade Common
Stock pursuant hereto, Ascend will have taken all necessary corporate
action to authorize for issuance and to permit it to issue such shares of
Ascend Common Stock, all of which, upon their issuance and delivery in
accordance with the terms of this Agreement, will be duly authorized,
validly issued, fully paid and nonassessable.
(d) No Liens. The shares of Ascend Common Stock (if any) issued to
Cascade in consideration of the purchase of shares of Cascade Common Stock
pursuant hereto will be, upon delivery thereof to Cascade, free and clear
of all claims, liens, charges, encumbrances and security interests of any
nature whatsoever.
(e) No Conflicts. The execution and delivery of this Agreement by Ascend
does not, and the consummation by Ascend of the transactions contemplated
hereby will not, violate, conflict with, or result in a Violation by Ascend
or any of its Subsidiaries, of (i) any provision of the Certificate of
Incorporation or Bylaws of Ascend, (ii) any material provision of any
Material Contract of Ascend or any of its Subsidiaries or to which any of
them is a party or by which any of them or their properties or assets are
bound, or (iii) except as contemplated by Section 4.4(c) of the Merger
Agreement or Section 6(f) below, any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Ascend or any of its
subsidiaries or any of their properties or assets.
(f) Consents and Approvals. The execution and delivery of this Agreement
by Ascend does not, and (except for the notifications required under the
HSR Act and applicable foreign laws, the expiration or early termination of
any waiting periods under the HSR Act and applicable foreign laws, and the
receipt of approvals under applicable securities laws, and except as
contemplated by Section 9) the performance of this Agreement by Ascend and
the consummation of the transactions contemplated hereby will not, require
any consent, approval, order, authorization or permit of, filing with, or
notification to any governmental or regulatory authority, other than such
consents, approvals, orders, authorizations, permits, filings and
notifications which, in the aggregate, if not obtained or made, could not
reasonably be expected to have a Cascade Material Adverse Effect or an
Ascend Material Adverse Effect (as such terms are defined in the Merger
Agreement) or a material adverse effect on the ability of the parties to
consummate the transactions contemplated by this Agreement.
(g) Investment Purpose. Any shares of Cascade Common Stock acquired by
Ascend upon exercise of the Cascade Option will be acquired for Ascend's
own account, for investment purposes only and will not be, and the Cascade
Option is not being, acquired by Ascend with a view to the public
distribution thereof in violation of any applicable provision of the
Securities Act.
Section 7. Certain Repurchases.
(a) Ascend "Put". At any time during which the Cascade Option is exercisable
pursuant to Section 2 (the "Purchase Period"), upon written notice to Cascade
by Ascend (the "Repurchase Notice"):
(i) Cascade and its successors in interest shall repurchase from Ascend
all or any portion of the Cascade Option, as specified by Ascend, to the
extent not previously exercised, at the Option Repurchase Price set forth
in Section 7(b)(i), subject to and as limited by Section 2(f) above; and
(ii) Cascade and its successors in interest shall repurchase from Ascend
all or any portion of the shares of Cascade Common Stock purchased by
Ascend pursuant to the Cascade Option, as specified by Ascend, at the Share
Repurchase Price set forth in Section 7(b)(ii) subject to and as limited by
Section 2(f) above.
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(b) Certain Definitions. For purposes of this Section 7, the following
definitions shall apply:
(i) Option Repurchase Price. "Option Repurchase Price" shall mean (A) the
amount (if any) by which the Fair Market Value (as defined in Section
7(b)(iii)) of a single share of Cascade Common Stock as of the date of the
applicable Repurchase Notice exceeds the per share Exercise Price,
multiplied by (B) the number of shares of Cascade Common Stock purchasable
pursuant to the Cascade Option or the portion thereof covered by the
applicable Repurchase Notice.
(ii) Share Repurchase Price. "Share Repurchase Price" shall mean the
product of (A) the greater of (I) the Exercise Price paid by Ascend per
share of Cascade Common Stock acquired pursuant to the Cascade Option and
(II) the Fair Market Value (as defined in Section 7(b)(iii)) of a single
share of Cascade Common Stock as of the date of the applicable Repurchase
Notice, and (B) the number of shares of Cascade Common Stock to be
repurchased pursuant to this Section 7 as covered by the applicable
Repurchase Notice.
(iii) Fair Market Value. As used in this Agreement, "Fair Market Value"
shall mean, with respect to any security, the per share average of the last
reported sale prices on The Nasdaq National Market (or such other national
stock exchange or national market system as shall then be the primary
trading market for such security) for the ten (10) trading days immediately
preceding the applicable date.
(c) Redelivery of Shares of Ascend Common Stock. In Cascade's discretion or
if specified by Ascend in the Repurchase Notice, all or a portion of the Share
Repurchase Price shall be paid by Cascade in shares of Ascend Common Stock, by
redelivery to Ascend of the shares of Ascend Common Stock (and the
certificate(s) representing such shares) previously delivered by Ascend to
Cascade pursuant to a Stock Exercise. For purposes of this Section 7(c), each
share of Ascend Common Stock redelivered to Ascend shall be valued at and
exchanged for 1.428 shares of Cascade Common Stock. If fewer than all of the
shares of Cascade Common Stock purchased by Ascend pursuant to a Stock
Exercise are to be repurchased by Cascade pursuant to Section 7(a)(ii), Ascend
shall issue to Cascade new certificates representing those shares of Ascend
Common Stock which are not due to be redelivered to Ascend pursuant to this
Section 7(c) to the extent that excess shares of Ascend Common Stock are
included in the certificates redelivered to Ascend by Cascade. All shares of
Ascend Common Stock redelivered to Ascend hereunder shall be free and clear of
all claims, liens, charges, encumbrances and security interests of any nature
whatsoever.
(d) Payment and Redelivery of Cascade Options or Shares. In the event that
Ascend exercises its rights under Section 7(a), Cascade shall, within ten (10)
business days thereafter, pay the required amount to Ascend in immediately
available funds (or shares of Ascend Common Stock, if applicable) and Ascend
shall surrender to Cascade the Cascade Option or the certificate or
certificates evidencing the shares of Cascade Common Stock purchased by Ascend
pursuant hereto, and Ascend shall warrant that it has sole beneficial
ownership of the Cascade Option or such shares and that the Cascade Option or
such shares are then free and clear of all claims, liens, charges,
encumbrances and security interests of any nature whatsoever.
(e) Repurchase Price Reduced at Ascend's Option. In the event that payment
of the repurchase price specified in Section 7(a) would subject the repurchase
of the Cascade Option or the shares of Cascade Common Stock purchased by
Ascend pursuant to the Cascade Option to a vote of the stockholders of Cascade
pursuant to applicable law, regulations, or requirements of a national
securities exchange or national market system or the Cascade Charter, then
Ascend may, at its election, reduce the repurchase price or the number of
shares covered by the Ascend repurchase request to an amount which would
permit such repurchase without the necessity for such a vote.
Section 8. Restrictions on Transfer.
(a) Restrictions on Transfer. Prior to the fifth anniversary of the date
hereof (the "Expiration Date"), neither party shall, directly or indirectly,
by operation of law or otherwise, sell, assign, pledge, or otherwise dispose
of or transfer any shares of capital stock of the other party acquired by such
party pursuant to this Agreement, including any shares of Ascend Common Stock
issued pursuant to a Stock Exercise ("Restricted
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Shares"), or otherwise beneficially owned (within the meaning of Rule 13d-3
promulgated under the Exchange Act) by such other party, other than (i)
pursuant to Section 7 or (ii) in accordance with Sections 8(b) or 9.
(b) Permitted Sales. Following the termination of the Merger Agreement, a
party shall be permitted to sell any Restricted Shares beneficially owned by
it if such sale is made (i) pursuant to a tender or exchange offer or other
business combination transaction that has been approved or recommended, or
otherwise determined to be fair to and in the best interests of the holders of
common stock of the other party, by a majority of the members of the Board of
Directors of such other party, or (ii) subject to Section 8(c) or (d) as the
case may be, to a person who, immediately following such sale, would
beneficially own (within the meaning of Rule 13d-3 promulgated under the
Exchange Act), either alone or as part of a "group" (as used in Rule 13d-5
under the Exchange Act), not more than ten percent (10%) of such party's
outstanding voting securities, which person is a passive institutional
investor who would be eligible under Rule 13d-1(b)(1) under the Exchange Act
to report such holdings of Restricted Shares on Schedule 13G under the
Exchange Act.
(c) Cascade's Right of First Refusal. At any time after the first occurrence
of a Trigger Event and prior to the Expiration Date if Ascend shall desire to
sell, assign, transfer or otherwise dispose of all or any of the shares of
Cascade Common Stock or other securities acquired by it pursuant to the
Cascade Option, it shall give Cascade written notice of the proposed
transaction (an "Ascend Offer Notice"), identifying the proposed transferee,
accompanied by a copy of a binding offer to purchase such shares or other
securities signed by such transferee and setting forth the terms of the
proposed transaction. An Ascend Offer Notice shall be deemed an offer by
Ascend to Cascade, which may be accepted within five (5) business days of the
receipt of such Ascend Offer Notice, on the same terms and conditions and at
the same price at which Ascend is proposing to transfer such shares or other
securities to such transferee. The purchase of any such shares or other
securities by Cascade shall be settled within five (5) business days of the
date of the acceptance of the offer and the purchase price shall be paid to
Ascend in immediately available funds. In the event of the failure or refusal
of Cascade to purchase all the shares or other securities covered by a Ascend
Offer Notice, Ascend may sell all, but not less than all, of such shares or
other securities to the proposed transferee at no less than the price
specified and on terms no more favorable to the transferee than those set
forth in the Ascend Offer Notice as long as such sale is completed within
ninety (90) days of the receipt by Cascade of the applicable Ascend Offer
Notice; provided that the provisions of this sentence shall not limit the
rights Ascend may otherwise have in the event Cascade has accepted the offer
contained in the Ascend Offer Notice and wrongfully refuses to purchase the
shares or other securities subject thereto. The requirements of this Section
8(c) shall not apply to (i) any disposition as a result of which the proposed
transferee would own beneficially not more than three percent (3%) of the
outstanding voting power of Cascade, (ii) any disposition of Cascade Common
Stock or other securities by a person to whom Ascend has assigned its rights
under the Cascade Option with the consent of Cascade, (iii) any sale by means
of a public offering registered under the Securities Act, or (iv) any transfer
to a wholly-owned subsidiary of Ascend which agrees in writing to be bound by
the terms hereof.
(d) Ascend's Right of First Refusal. At any time after the first occurrence
of a Trigger Event and prior to the Expiration Date, if Cascade shall desire
to sell, assign, transfer or otherwise dispose of all or any of the shares of
Ascend Common Stock or other securities acquired by it pursuant to a Stock
Exercise of the Cascade Option by Ascend, it shall give Ascend written notice
of the proposed transaction (a "Cascade Offer Notice"), identifying the
proposed transferee, accompanied by a copy of a binding offer to purchase such
shares or other securities signed by such transferee and setting forth the
terms of the proposed transaction. A Cascade Offer Notice shall be deemed an
offer by Cascade to Ascend, which may be accepted within five (5) business
days of the receipt of such Cascade Offer Notice, on the same terms and
conditions and at the same price at which Cascade is proposing to transfer
such shares or other securities to such transferee. The purchase of any such
shares or other securities by Ascend shall be settled within five (5) business
days of the date of the acceptance of the offer and the purchase price shall
be paid to Cascade in immediately available funds. In the event of the failure
or refusal of Ascend to purchase all the shares or other securities covered by
a Cascade Offer Notice, Cascade may sell all, but not less than all, of such
shares or other securities to the proposed transferee at no less than the
price specified and on terms no more favorable to the transferee than those
set forth in the Cascade
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Offer Notice as long as such sale is completed within ninety (90) days of the
receipt by Ascend of the applicable Cascade Offer Notice; provided that the
provisions of this sentence shall not limit the rights Cascade may otherwise
have in the event Ascend has accepted the offer contained in the Cascade Offer
Notice and wrongfully refuses to purchase the shares or other securities
subject thereto. The requirements of this Section 8(d) shall not apply to (i)
any disposition as a result of which the proposed transferee would own
beneficially not more than three percent (3%) of the outstanding voting power
of Ascend, (ii) any sale by means of a public offering registered under the
Securities Act, or (iii) any transfer to a wholly-owned subsidiary of Cascade
which agrees in writing to be bound by the terms hereof.
(e) Additional Restrictions. Prior to any permitted sales of any Restricted
Shares under of Section 8(b)(ii), the holder thereof shall give written notice
to the issuer of such Restricted Shares of its intention to effect such
transfer. Each such notice shall describe the manner of the proposed transfer
and, if requested by the issuer of such Restricted Shares, shall be
accompanied by an opinion of counsel satisfactory to such issuer (it being
agreed that each of Gray Cary Ware & Freidenrich, a Professional Corporation,
and Testa, Hurwitz & Thibeault, LLP shall be satisfactory) to the effect that
such sale may be effected without registration under the Securities Act and
any applicable state securities laws. Each certificate for Restricted Shares
transferred as above provided shall bear the legend set forth in Section 11,
except that such certificate shall not bear such legend if (i) such transfer
is in accordance with the provisions of Rule 144 (or any other rule permitting
public sale without registration under the Securities Act) or (ii) the opinion
of counsel referred to above is to the further effect that the transferee and
any subsequent transferee would be entitled to transfer such securities in a
public sale without registration under the Securities Act and any applicable
state securities laws. The restrictions provided for in this Section 8(e)
shall not apply to securities which are not required to bear the legend
prescribed by Section 11 in accordance with the provisions of this Agreement.
The foregoing restrictions on transferability shall terminate as to any
particular shares when such shares shall have been effectively registered
under the Securities Act and any applicable state securities laws and sold or
otherwise disposed of in accordance with the registration statement covering
such shares.
Section 9. Registration Rights.
(a) Procedure. Following the termination of the Merger Agreement, either
party hereto that owns Restricted Shares (a "Holder") may by written notice
(the "Registration Notice") to the other party (the "Registrant") request the
Registrant to register under the Securities Act all or any part of the
Restricted Shares acquired by such Holder pursuant to this Agreement (the
"Registrable Securities") in order to permit the sale or other disposition of
such shares pursuant to a bona fide firm commitment underwritten public
offering, in which the Holder and the underwriters shall effect as wide a
distribution of such Registrable Securities as is reasonably practicable and
shall use their best efforts to prevent any person (including any "group" as
used in Rule 13d-5 under the Exchange Act)) and its affiliates from purchasing
through such offering Restricted Shares representing more than three percent
(3%) of the outstanding shares of common stock of the Registrant on a fully
diluted basis (a "Permitted Offering"). Any rights to require registration
hereunder shall terminate with respect to any shares that may be sold pursuant
to Rule 144(k) under the Securities Act.
(b) Manager's Certificate. The managing underwriter shall be an investment
banking firm of nationally recognized standing, and shall be selected by (i)
the Registrant within ten (10) business days after receipt of a Registration
Notice, subject to approval of the Holder (which approval shall not be
unreasonably withheld, delayed or conditioned), or (ii) if Registrant fails to
deliver notice (the "Registrant's Designation Notice") to Holder of such
selection within ten (10) business days after receipt of a Registration
Notice, then by Holder subject to the reasonable approval of Registrant (which
approval shall not be unreasonably withheld, delayed or conditioned) (the
"Manager"), and Holder shall deliver written notice (the "Holder's Designation
Notice") of such selection within ten (10) business days after expiration of
the ten (10) day period in which Registrant is entitled to give notice. The
Registrant's Designation Notice or the Holder's Designation Notice, as the
case may be, shall state that (i) the party delivering such notice and its
proposed Manager have a good faith intention to commence promptly a Permitted
Offering, and (ii) such proposed Manager in good faith believes that, based on
the then-prevailing market conditions, it will be able to sell the Registrable
Securities to the public in a Permitted
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Offering within one hundred twenty (120) days at a per share price equal to at
least eighty percent (80%) of the then Fair Market Value of such shares.
(c) First Refusal Right. The Registrant (and/or any person designated by the
Registrant) shall thereupon have the option exercisable by written notice
delivered to the Holder within five (5) business days after the receipt of the
Registration Notice, irrevocably to agree to purchase all or any part of the
Registrable Securities proposed to be so sold for cash at a price equal to the
product of (i) the number of Registrable Securities to be so purchased by the
Registrant and (ii) the then Fair Market Value of such shares.
(d) Closing. Any purchase of Registrable Securities by the Registrant (or
its designee) under Section 9(c) shall take place at a closing to be held at
the principal executive offices of the Registrant or at the offices of its
counsel at any reasonable date and time designated by the Registrant and/or
such designee in such notice within twenty (20) business days after delivery
of such notice, and any payment for the shares to be so purchased shall be
made by delivery at the time of such closing in immediately available funds.
(e) Certain Limitations. If the Registrant does not elect to exercise its
option pursuant to Section 9(c) with respect to all Registrable Securities, it
shall use its best efforts to effect, as promptly as practicable, the
registration under the Securities Act of the unpurchased Registrable
Securities proposed to be so sold; provided, however, that (i) neither party
shall be entitled to demand more than an aggregate of two (2) effective
registration statements hereunder, and (ii) the Registrant will not be
required to file any such registration statement during any period of time
(not to exceed sixty (60) days after such request in the case of clause (A)
below or ninety (90) days after such request in the case of clauses (B) and
(C) below) when (A) the Registrant is in possession of material non-public
information which it reasonably believes would be detrimental to be disclosed
at such time and, in the opinion of counsel to the Registrant, such
information would be required to be disclosed if a registration statement were
filed at that time; (B) the Registrant is required under the Securities Act to
include audited financial statements for any period in such registration
statement and such financial statements are not yet available for inclusion in
such registration statement; or (C) the Registrant determines, in its
reasonable judgment, that such registration would interfere with any
financing, acquisition or other transaction involving the Registrant or any of
its material subsidiaries and that such transaction is material to the
Registrant and its subsidiaries taken as a whole. If consummation of the sale
of any Registrable Securities pursuant to a registration hereunder does not
occur within one hundred twenty (120) days after the effectiveness of the
initial registration statement, the provisions of this Section 9 shall again
be applicable to any proposed registration.
(f) State Securities Laws. The Registrant shall use its reasonable best
efforts to cause any Registrable Securities registered pursuant to this
Section 9 to be qualified for sale under the securities laws of such states as
the Holder may reasonably request and shall continue such registration or
qualification in effect in such jurisdiction; provided, however, that the
Registrant shall not be required to qualify to do business in, or consent to
general service of process in, any jurisdiction by reason of this provision.
(g) Obligations of Registrant. The Registrant shall provide to the
underwriters such documentation (including certificates, opinions of counsel
and "comfort" letters from auditors) as is customary in connection with
underwritten public offerings as such underwriters may reasonably require. The
registration rights set forth in this Section 9 are subject to the condition
that the Holder shall provide the Registrant with such information with
respect to its Registrable Securities, the plans for the distribution thereof,
and such other information with respect to the Holder as, in the reasonable
judgment of counsel for the Registrant, is necessary to enable the Registrant
to include in such registration statement all material facts required to be
disclosed with respect to a registration thereunder.
(h) Indemnification. In connection with any registration effected under this
Section 9, the parties agree (i) to indemnify each other and the underwriters
in the customary manner, (ii) to enter into an underwriting agreement in form
and substance customary for transactions of such type with the Manager and the
other underwriters participating in such offering, and (iii) to take all
further actions which shall be reasonably
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necessary to effect such registration and sale (including, if the Manager
deems it necessary, participating in road-show presentations).
(i) Inclusion of Additional Shares of Registrant. The Registrant shall be
entitled to include (at its expense) additional shares of its common stock in
a registration effected pursuant to this Section 9 only if and to the extent
the Manager determines that such inclusion will not adversely affect the
prospects for success of such offering.
Section 10. Adjustment Upon Changes in Capitalization.
(a) Without limiting any restriction on Cascade contained in this Agreement
or in the Merger Agreement, in the event of any change in Cascade Common Stock
by reason of any stock dividend, stock split, merger (other than the Merger),
recapitalization, combination, exchange of shares or any similar transaction,
the type and number of shares or securities subject to the Cascade Option, and
the Exercise Price per share provided herein, shall be adjusted appropriately
and proper provision shall be made in the agreements governing such
transaction so that Ascend shall receive, upon exercise of the Cascade Option,
the number and class of securities or property that Ascend would have received
in respect of the shares of Cascade Common Stock issuable to Ascend if the
Cascade Option had been exercised immediately prior to such event or the
record date therefor, as applicable. In addition, without limiting any
restriction on Ascend or Cascade contained in this Agreement or the Merger
Agreement, in the event of any change in Ascend Common Stock or Cascade Common
Stock by reason of any stock dividend, stock split, merger (other than the
Merger), recapitalization, combination, exchange of shares or similar
transaction, equitable adjustment shall be made to the other provisions hereof
to carry out the original intent of this Agreement.
(b) In the event that Cascade shall enter into an agreement: (i) to
consolidate with or merge into any person, other than Ascend or one of its
subsidiaries, and shall not be the continuing or surviving corporation of such
consolidation or merger; (ii) to permit any person, other than Ascend or one
of its Subsidiaries, to merge into Cascade and Cascade shall be the continuing
or surviving corporation, but, in connection with such merger, the then-
outstanding shares of Cascade Common Stock shall be changed into or exchanged
for stock or other securities of Cascade or any other person or cash or any
other property; or (iii) to sell or otherwise transfer all or substantially
all of its assets to any person, other than Ascend or one of its Subsidiaries,
then, and in each such case, the agreement governing such transaction shall
make proper provision so that upon the consummation of such transaction and
upon the subsequent exercise of the Cascade Option, Ascend shall be entitled
to receive, for each share of Cascade Common Stock with respect to which the
Cascade Option has not theretofore been exercised, an amount of consideration
in the form of and equal to the per share amount of consideration that would
be received by the holder of one share of Cascade Common Stock (and, in the
event of an election or similar arrangement with respect to the type of
consideration to be received by the holders of Cascade Common Stock, subject
to the foregoing, proper provision shall be made so that the holder of the
Cascade Option would have the same election or similar rights as would the
holder of the number of shares of Cascade Common Stock for which the Cascade
Option is then exercisable).
Section 11. Restrictive Legends. Each certificate representing shares of
Cascade Common Stock issued to Ascend hereunder, and shares of Ascend Common
Stock, if any, delivered to Cascade pursuant to a Stock Exercise, shall
include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES OR
BLUE SKY LAWS, AND MAY BE REOFFERED OR SOLD ONLY IF SO REGISTERED OR IF AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. SUCH SECURITIES ARE ALSO
SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AS SET FORTH IN THE CASCADE
STOCK OPTION AGREEMENT DATED AS OF MARCH 30, 1997, A COPY OF WHICH MAY BE
OBTAINED FROM THE ISSUER UPON REQUEST.
It is understood and agreed that (i) the reference to the resale restrictions
of the Securities Act and state securities or Blue Sky laws in the foregoing
legend shall be removed by delivery of substitute certificate(s) without such
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reference if Ascend or Cascade, as the case may be, shall have delivered to
the other party a copy of a letter from the staff of the Securities and
Exchange Commission, or an opinion of counsel, in form and substance
reasonably satisfactory to the other party, to the effect that such legend is
not required for purposes of the Securities Act or such laws; (ii) the
reference to the provisions of this Agreement in the foregoing legend shall be
removed by delivery of substitute certificate(s) without such reference if the
shares have been sold or transferred in compliance with the provisions of this
Agreement and under circumstances that do not require the retention of such
reference; and (iii) the legend shall be removed in its entirety if the
conditions in the preceding clauses (i) and (ii) are both satisfied. In
addition, such certificates shall bear any other legend as may be required by
law. Certificates representing shares sold in a registered public offering
pursuant to Section 9 shall not be required to bear the legend set forth in
this Section 11.
Section 12. Binding Effect; No Assignment; No Third-Party
Beneficiaries. This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and permitted assigns.
Except as expressly provided for in this Agreement, neither this Agreement nor
the rights or obligations of either party hereto are assignable, except by
operation of law, or with the written consent of the other party, and any such
attempted assignment in violation of this Agreement shall be void and of no
force or effect. Nothing contained in this Agreement, express or implied, is
intended to confer upon any person other than the parties hereto and their
respective permitted assigns any rights or remedies of any nature whatsoever.
Any Restricted Shares sold by a party in compliance with the provisions of
Section 9 shall, upon consummation of such sale, be free of the restrictions
imposed and the benefits provided with respect to such shares by this
Agreement.
Section 13. Specific Performance. The parties hereto recognize and agree
that if for any reason any of the provisions of this Agreement are not
performed in accordance with their specific terms or are otherwise breached,
immediate and irreparable harm or injury would be caused for which money
damages would not be an adequate remedy. Accordingly, each party agrees that,
in addition to other remedies, whether at law or in equity, the other party
shall be entitled to an injunction to prevent or restrain any violation or
threatened violation of the provisions of this Agreement, and to enforce
specifically the terms and provisions hereof, in any court of the State of
Delaware or of the United States of America located in the State of Delaware.
In the event that any action should be brought in equity to enforce the
provisions of this Agreement, neither party will allege, and each party hereby
waives the defense, that there is an adequate remedy at law. Each party hereto
irrevocably and unconditionally consents and submits to the jurisdiction of
the courts of the State of Delaware and of the United States of America
located in the City of Wilmington in the State of Delaware for any actions,
suits or proceedings arising out of or relating to this Agreement and the
transactions contemplated hereby, and waives any objection to venue in any
such court therein.
Section 14. Validity.
(a) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of the other provisions of
this Agreement, which shall remain in full force and effect.
(b) In the event any court or other governmental or regulatory authority
holds any provisions of this Agreement to be null, void or unenforceable, the
parties hereto shall negotiate in good faith the execution and delivery of an
amendment to this Agreement in order, as nearly as possible, to effectuate, to
the extent permitted by law, the intent of the parties hereto with respect to
such provision and the economic effects thereof.
(c) If for any reason any such court or other governmental or regulatory
authority determines that Ascend is not permitted to acquire, or Cascade is
not permitted to repurchase pursuant to Section 7, the full number of shares
of Cascade Common Stock provided in this Agreement (as the same may be
adjusted), it is the express intention of Cascade to allow Ascend to acquire
or to require Cascade to repurchase such lesser number of shares as may be
permissible without any other amendment or modification hereof.
(d) Each party agrees that, should any court or other governmental or
regulatory authority hold any provision of this Agreement or part hereof to be
null, void or unenforceable, or order any party to take any action
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inconsistent herewith, or not take any action required herein, the other party
shall not be entitled to specific performance of such provision or part hereof
or to any other remedy, including but not limited to money damages, for breach
hereof or of any other provision of this Agreement or part hereof as the
result of such holding or order.
Section 15. Notices. All notices and other communications hereunder shall be
in writing and shall be deemed given if (a) delivered personally, or (b) if
sent by overnight courier service (receipt confirmed in writing), or (c) if
delivered by facsimile transmission (with receipt confirmed), or (d) five (5)
days after being mailed by registered or certified mail (return receipt
requested) to the parties in each case to the following addresses (or at such
other address for a party as shall be specified by like notice):
If to Cascade, to:
Cascade Communications Corp.
5 Carlisle Road
Westford, MA 01886
Facsimile No.: (508) 692-1221
Attention: President and Corporate Counsel
with a copy to:
Testa, Hurwitz & Thibeault, LLP
High Street Tower
125 High Street
Boston, MA 02110
Fax Number: (617) 248-7100
Attention: John A. Meltaus, Esq.
If to Ascend, to:
Ascend Communications, Inc.
One Ascend Plaza
1701 Harbor Bay Parkway
Alameda, CA 94502
Facsimile No.: (510) 769-6001
Attention: President
with a copy to:
Gray Cary Ware & Freidenrich
A Professional Corporation
400 Hamilton Avenue
Palo Alto, CA 94301
Fax Number: (415) 327-3699
Attention: Gregory M. Gallo, Esq. &
Rod J. Howard, Esq.
Section 16. Governing Law. This Agreement shall be governed by and
construed, and any controversy arising out of or otherwise relating to this
Agreement shall be determined, in accordance with the laws of the State of
Delaware applicable to agreements made and to be performed entirely within
such State and without regard to its choice of law principles. Each party
hereto consents and submits to the exclusive jurisdiction of the courts of the
State of Delaware and the courts of the United States located in such state
for the adjudication of any action, suit, proceeding, claim or dispute arising
out of or otherwise relating to this Agreement.
Section 17. Interpretation. The headings contained in this Agreement are for
reference purposes and shall not affect in any way the meaning or
interpretation of the Agreement. When reference is made in this Agreement to a
Section, such reference shall be to a Section of this Agreement, unless
otherwise indicated. Whenever the words "include," "includes," or "including"
are used in this Agreement, they shall be deemed
B-12
<PAGE>
to be followed by the words "without limitation." Whenever "or" is used in
this Agreement it shall be construed in the nonexclusive sense. The words
"herein," "hereby," "hereof," "hereto," "hereunder" and words of similar
import refer to this Agreement.
Section 18. Counterparts; Effect. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
Section 19. Expenses. Cascade shall pay all expenses, and any and all
federal, state and local taxes and other charges, that may be payable in
connection with the preparation, issuance and delivery of Cascade stock
certificates under Section 4 and any stock listing or stock quotation
application required to be filed by Cascade with respect to such shares, and
Ascend shall pay all expenses, and any and all federal, state and local taxes
and other charges, that may be payable in connection with the preparation,
issuance and delivery of Ascend stock certificates in connection with a Stock
Exercise and any stock listing or stock quotation application required to be
filed by Cascade with respect to such shares. A registration effected under
Section 9 shall be effected at the Registrant's expense, except for
underwriting discounts and commissions and the fees and the expenses of
counsel to the Holder. Subject to the foregoing, and except as otherwise
expressly provided herein or in the Merger Agreement, all other costs and
expenses incurred in connection with the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses.
Section 20. Amendments; Waiver. This Agreement may be amended by the parties
hereto and the terms and conditions hereof may be waived only by an instrument
in writing signed on behalf of each of the parties hereto, or, in the case of
a waiver, by an instrument signed on behalf of the party waiving compliance.
Section 21. Extension of Time Periods. The time periods for exercises of
certain rights hereunder shall be extended (but in no event by more than six
(6) months): (a) to the extent necessary to obtain all governmental approvals
for the exercise of such rights, and for the expiration of all statutory
waiting periods; and (b) to the extent necessary to avoid any liability or
disgorgement of profits under Section 16(b) of the Exchange Act by reason of
such exercise.
Section 22. Further Assurances. Each party agrees to execute and deliver all
such further documents and instruments and take all such further action as may
be necessary in order to consummate the transactions contemplated hereby.
[Remainder of Page Intentionally Left Blank]
B-13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first
above written.
Cascade Communications Corp.
By: /s/ Daniel E. Smith
-------------------------------
Name: Daniel E. Smith
Title: President and Chief
Executive Officer
Ascend Communications, Inc.
By: /s/ Robert K. Dahl
-------------------------------
Name: Robert K. Dahl
Title: Vice President, Finance and
Chief Financial Officer
B-14
<PAGE>
ANNEX C
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ASCEND STOCK OPTION AGREEMENT
BY AND BETWEEN
ASCEND COMMUNICATIONS, INC.,
A DELAWARE CORPORATION,
AND
CASCADE COMMUNICATIONS CORP.,
A DELAWARE CORPORATION,
DATED AS OF MARCH 30, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM SECTION
- ---- --------
<S> <C>
Agreement............................................................. Preamble
Ascend................................................................ Preamble
Ascend Common Stock................................................... Recitals
Ascend Offer Notice................................................... 8(d)
Ascend Option......................................................... 1
Cash Exercise......................................................... 2(e)
Cash Exercise Price................................................... 2(e)
Cascade............................................................... Preamble
Cascade Charter....................................................... 2(b)
Cascade Common Stock.................................................. 2(e)
Cascade Offer Notice.................................................. 8(c)
Closing............................................................... 2(b)
Exercise Notice....................................................... 2(b)
Exercise Price........................................................ 2(e)
Expiration Date....................................................... 8(a)
Fair Market Value..................................................... 7(b)(iii)
Holder................................................................ 9(a)
Holder's Designation Notice........................................... 9(b)
HSR Act............................................................... 3
Manager............................................................... 9(b)
Material Contract..................................................... 5(e)
Merger................................................................ Recitals
Merger Agreement...................................................... Recitals
Net Proceeds.......................................................... 2(f)
Option Number......................................................... 2(d)
Option Repurchase Price............................................... 7(b)(i)
Permitted Offering.................................................... 9(a)
Purchase Period....................................................... 7(a)
Registrable Securities................................................ 9(a)
Registrant............................................................ 9(a)
Registrant's Designation Notice....................................... 9(b)
Registration Notice................................................... 9(a)
Repurchase Notice..................................................... 7(a)
Restricted Shares..................................................... 8(a)
Share Repurchase Price................................................ 7(b)(ii)
Stock Exercise........................................................ 2(e)
Stock Exercise Price.................................................. 2(e)
Sub................................................................... Recitals
Trigger Event......................................................... 2(a)
Violation............................................................. 5(e)
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <C> <S> <C>
Section 1. Grant of Option............................................. C-1
Section 2. Exercise and Termination of the Ascend Option............... C-1
(a) Exercise.................................................... C-1
(b) Exercise Procedure.......................................... C-1
(c) Termination of the Ascend Option............................ C-2
(d) Option Number............................................... C-2
(e) Exercise Price.............................................. C-2
(f) Certain Limitations......................................... C-2
Section 3. Conditions to Closing....................................... C-3
Section 4. Closing..................................................... C-3
Section 5. Representations and Warranties of Ascend.................... C-3
(a) Organization and Standing................................... C-3
(b) Authority................................................... C-3
(c) Reservation of Shares....................................... C-3
(d) No Liens.................................................... C-4
(e) No Conflicts................................................ C-4
(f) Consents and Approvals...................................... C-4
(g) Investment Purposes......................................... C-4
Section 6. Representations and Warranties of Cascade................... C-4
(a) Organization and Standing................................... C-4
(b) Authority................................................... C-4
(c) Reservation of Shares....................................... C-5
(d) No Liens.................................................... C-5
(e) No Conflicts................................................ C-5
(f) Consents and Approvals...................................... C-5
(g) Investment Purpose.......................................... C-5
Section 7. Certain Repurchases......................................... C-5
(a) Cascade "Put"............................................... C-5
(b) Certain Definitions......................................... C-5
(c) Redelivery of Shares of Cascade Common Stock................ C-6
(d) Payment and Redelivery of Ascend Options or Shares.......... C-6
(e) Repurchase Price Reduced at Cascade's Option................ C-6
Section 8. Restrictions on Transfer.................................... C-6
(a) Restrictions on Transfer.................................... C-6
(b) Permitted Sales............................................. C-7
(c) Ascend's Right of First Refusal............................. C-7
(d) Cascade's Right of First Refusal............................ C-7
(e) Additional Restrictions..................................... C-8
Section 9. Registration Rights......................................... C-8
(a) Procedure................................................... C-8
(b) Manager's Certificate....................................... C-8
(c) First Refusal Right......................................... C-9
(d) Closing..................................................... C-9
(e) Certain Limitations......................................... C-9
(f) State Securities Laws....................................... C-9
(g) Obligations of Registrant................................... C-9
(h) Indemnification............................................. C-9
(i) Inclusion of Additional Shares of Registrant................ C-9
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <C> <S> <C>
Section 10. Adjustment Upon Changes in Capitalization.................. C-10
Section 11. Restrictive Legends........................................ C-10
Binding Effect; No Assignment; No Third-Party
Section 12. Beneficiaries............................................. C-11
Section 13. Specific Performance....................................... C-11
Section 14. Validity................................................... C-11
Section 15. Notices.................................................... C-12
Section 16. Governing Law.............................................. C-12
Section 17. Interpretation............................................. C-12
Section 18. Counterparts; Effect....................................... C-13
Section 19. Expenses................................................... C-13
Section 20. Amendments; Waiver......................................... C-13
Section 21. Extension of Time Periods.................................. C-13
Section 22. Further Assurances......................................... C-13
</TABLE>
iii
<PAGE>
ASCEND STOCK OPTION AGREEMENT
THIS ASCEND STOCK OPTION AGREEMENT (the "Agreement") is made and entered
into as of March 30, 1997 by and between Ascend Communications, Inc., a
Delaware corporation ("Ascend"), and Cascade Communications Corp., a Delaware
corporation ("Cascade").
Recitals
Concurrently with the execution and delivery of this Agreement, Ascend,
Cascade, and Cascade Merger Corporation, a Delaware corporation and a wholly-
owned subsidiary of Ascend ("Sub"), are entering into an Agreement and Plan of
Reorganization, dated as of March 30, 1997 (the "Merger Agreement"), which
provides for the merger of Sub with and into Cascade in accordance with the
terms of the Merger Agreement and the laws of the State of Delaware (the
"Merger"). As a condition and inducement to Cascade's willingness to enter
into the Merger Agreement, Cascade has requested that Ascend agree, and Ascend
has agreed, to grant to Cascade an option to acquire certain shares of
Ascend's authorized but unissued common stock, par value $.001 per share
(together with any associated rights, "Ascend Common Stock"), on the terms and
subject to the conditions set forth herein.
NOW, THEREFORE, to induce Cascade to enter into the Merger Agreement and in
consideration of the representations, warranties, covenants and agreements
contained herein and in the Merger Agreement, the parties hereto, intending to
be legally bound, hereby agree as follows. Capitalized terms used herein but
not defined herein shall have the meanings ascribed to them in the Merger
Agreement.
Agreement
Section 1. Grant of Option. Ascend hereby grants to Cascade an irrevocable
option (the "Ascend Option") to purchase a number of shares of Ascend Common
Stock equal to the Option Number (as defined in Section 2(d)), on the terms
and subject to the conditions set forth below.
Section 2. Exercise and Termination of the Ascend Option.
(a) Exercise. The Ascend Option may be exercised by Cascade, in whole or
in part, at any time or from time to time prior to the termination of
Cascade's right to exercise the Ascend Option by the terms of this
Agreement and upon and after the occurrence of the earliest event which
causes (i) the Ascend Termination Fee or (ii) the Ascend Post-Termination
Fee (in each case as defined in the Merger Agreement) to become payable (a
"Trigger Event"). Notwithstanding the foregoing, the Ascend Option may not
be exercised if Cascade is in breach in any material respect of any of its
material representations, warranties, covenants or agreements contained in
this Agreement or the Merger Agreement.
(b) Exercise Procedure. In the event that Cascade wishes to exercise the
Ascend Option, Cascade shall deliver to Ascend written notice (an "Exercise
Notice") specifying the total number of shares of Ascend Common Stock that
Cascade wishes to purchase. To the extent permitted by law and the
Certificate of Incorporation, as amended, of Ascend (the "Ascend Charter"),
and provided that the conditions set forth in Section 3 to Ascend's
obligation to issue the shares of Ascend Common Stock to Cascade hereunder
have been satisfied or waived, Cascade shall, upon delivery of the Exercise
Notice and tender of the applicable aggregate Exercise Price, immediately
be deemed to be the holder of record of the shares of Ascend Common Stock
issuable upon such exercise, notwithstanding that the stock transfer books
of Ascend shall then be closed or that certificates representing such
shares of Ascend Common Stock shall not theretofore have been delivered to
Cascade. Each closing of a purchase of shares of Ascend Common Stock
hereunder (a "Closing") shall occur at a place, on a date, and at a time
designated by Cascade in an Exercise Notice delivered at least two (2)
business days prior to the date of such Closing.
C-1
<PAGE>
(c) Termination of the Ascend Option. Cascade's right to exercise the
Ascend Option shall terminate upon the earliest to occur of:
(i) the Effective Time of the Merger;
(ii) the date on which the Merger Agreement is terminated pursuant to
Article VIII thereof other than under circumstances which also
constitute a Trigger Event under this Agreement; and
(iii) (A) in the clause (i) of Section 2(a), the date two hundred
seventy (270) days after the date on which the Merger Agreement is
terminated pursuant to Article VIII thereof under circumstances which
also constitute a Trigger Event under clause (i) of Section 2(a), or
(B) in the case of clause (ii) of Section 2(a), the later of (I) the
date two hundred seventy (270) days after the date on which the Merger
Agreement is terminated pursuant to Article VIII thereof under
circumstances which also constitute a Trigger Event under clause (ii)
of Section 2(a) and (II) the date one hundred eighty (180) days after
the date on which the Ascend Option becomes exercisable pursuant to
clause (ii) of Section 2(a).
Notwithstanding the foregoing, with respect to clause (iii) in the immediately
preceding sentence, if the Ascend Option cannot be exercised by reason of any
applicable judicial or governmental judgment, decree, order, law or
regulation, the Ascend Option shall remain exercisable and shall not terminate
until the earlier of (x) the date on which such impediment shall become final
and not subject to appeal and (y) 5:00 p.m., Pacific Standard Time, on the
tenth (10th) business day after such impediment shall have been removed;
provided, however, that if such judgment, decree, or order shall have been
obtained at the request of Ascend or any of its Affiliates or a party that has
made or is proposing to make a Competing Offer (as such term is defined in the
Merger Agreement) for Ascend, and such judgment, decree or order is vacated,
set aside, withdrawn, reversed or otherwise nullified, the time during which
the Ascend Option shall remain exercisable shall be extended for as long as
such judgment, decree, or order shall be in effect. The rights of Cascade set
forth in Sections 7 and 9 shall not terminate upon termination of Cascade's
right to exercise the Ascend Option with respect to shares acquired prior to
termination, but shall extend to the time provided in such sections.
Notwithstanding the termination of the Ascend Option, Cascade shall be
entitled to purchase the shares of Ascend Common Stock with respect to which
Cascade had exercised the Ascend Option prior to such termination.
(d) Option Number. The aggregate number of shares of Ascend Common Stock
issuable upon exercise of this Ascend Option (the "Option Number") shall
initially be the number of shares, rounded down to the nearest whole share,
equal to nineteen and nine-tenths percent (19.9%) of the total number of
shares of Ascend Common Stock issued and outstanding as of the date of this
Agreement, and shall be adjusted hereafter to reflect changes in Ascend's
capitalization occurring after the date hereof in accordance with Section
10. Notwithstanding any other provision of this Agreement, in no event
shall the Option Number exceed nineteen and nine-tenths percent (19.9%) of
the total number of shares of Ascend Common Stock issued and outstanding as
of the date of this Agreement, adjusted in accordance with Section 10.
(e) Exercise Price. The purchase price per share of Ascend Common Stock
pursuant to the Ascend Option (the "Exercise Price") shall be payable, at
Cascade's election, in cash (a "Cash Exercise") or in shares (a "Stock
Exercise") of Cascade common stock, $.001 par value per share ("Cascade
Common Stock"). The Exercise Price per share of Ascend Common Stock, (i) in
the case of a Cash Exercise, shall be a cash amount equal to $52.00 (the
"Cash Exercise Price"), and (ii) in the case of a Stock Exercise, shall be
1.833 shares of Cascade Common Stock (the "Stock Exercise Price").
(f) Certain Limitations. In the event Cascade would receive aggregate,
cumulative Net Proceeds (as defined below) of more than eighty-five million
dollars ($85,000,000) in connection with the sale (or other disposition) to
any third party of the shares of Ascend Common Stock acquired pursuant to
the Ascend Option (other than a sale of such shares to Ascend pursuant to
Section 7, all Net Proceeds in excess of such amount shall be remitted to
Ascend promptly upon receipt. "Net Proceeds" shall mean the aggregate
proceeds of such sale or disposition in excess of the product of the
Exercise Price multiplied by the number of shares of Ascend Common Stock
included in such sale or disposition. Notwithstanding anything in this
C-2
<PAGE>
Agreement or in the Merger Agreement to the contrary, the maximum aggregate
amount payable by Ascend to Cascade and its affiliates pursuant to Section
7 of this Agreement and the provisions of Section 8.3(c) of the Merger
Agreement shall not exceed the sum of eighty-five million dollars
($85,000,000) plus, in the case of payments pursuant to Sections 7(a)(ii)
and 7(b)(ii) of this Agreement, the aggregate Exercise Price for the shares
of Ascend Common Stock repurchased by Ascend from Cascade pursuant to
Section 7 of this Agreement, it being understood that the limitation
contained in this sentence shall not limit the amounts receivable by
Cascade from persons other than Ascend, including without limitation
amounts receivable pursuant to a tender offer or other purchase and sale
transaction.
Section 3. Conditions to Closing. The obligation of Ascend to issue the
shares of Ascend Common Stock to Cascade hereunder is subject to the
conditions that (a) all waiting periods, if any, under the Hart Scott Rodino
Antitrust Improvements Act of 1975, as amended (the "HSR Act"), applicable to
the issuance of the shares of Ascend Common Stock by Ascend and the
acquisition of such shares by Cascade hereunder (and, in the case of a Stock
Exercise, the issuance of shares of Cascade Common Stock by Cascade and the
acquisition of such shares by Ascend) shall have expired or have been
terminated; (b) no preliminary or permanent injunction or other order by any
court of competent jurisdiction prohibiting or otherwise restraining such
issuance shall be in effect; and (c) all consents, approvals, orders,
authorizations and permits of any federal, state, local or foreign
governmental authority, if any, required in connection with the issuance of
the shares of Ascend Common Stock and the acquisition of such shares by
Cascade hereunder (and, in the case of a Stock Exercise, the issuance of
shares of Cascade Common Stock and the acquisition of such shares by Ascend)
shall have been obtained.
Section 4. Closing. At any Closing: (a) Ascend shall deliver to Cascade or
its designee a single certificate in definitive form representing the number
of shares of Ascend Common Stock designated by Cascade in its Exercise Notice,
such certificate to be registered in the name of Cascade and to bear the
legend set forth in Section 11; and (b) Cascade shall deliver to Ascend the
aggregate Exercise Price for the shares of Ascend Common Stock so designated
and being purchased by (i) wire transfer of immediately available funds to the
account or accounts specified in writing by Ascend (in the case of a Cash
Exercise), or (ii) subject to the satisfaction of applicable conditions,
delivery of a certificate or certificates representing the number of shares of
Cascade Common Stock being issued by Cascade in consideration thereof (in the
case of a Stock Exercise). Effective at or prior to the Closing, Ascend shall
cause the shares of Ascend Common Stock being delivered at the Closing to be
approved for quotation on The Nasdaq National Market, and Cascade shall cause
the shares of Cascade Common Stock being delivered at the Closing pursuant to
a Stock Exercise to be approved for quotation on The Nasdaq National Market.
Section 5. Representations and Warranties of Ascend. Ascend represents and
warrants to Cascade as follows:
(a) Organization and Standing. Ascend is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Delaware and has all corporate power and authority required to enter into
this Agreement and to carry out its obligations hereunder.
(b) Authority. The execution and delivery of this Agreement by Ascend and
the consummation by Ascend of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of
Ascend and no other corporate proceedings on the part of Ascend and no
action of Ascend shareholders are necessary to authorize this Agreement or
any of the transactions contemplated hereby; this Agreement has been duly
and validly executed and delivered by Ascend and, assuming the due
authorization, execution and delivery hereof by Cascade and the receipt of
all required governmental approvals, constitutes the valid and binding
obligation of Ascend, enforceable against Ascend in accordance with its
terms, except as may be limited by applicable bankruptcy, insolvency,
reorganization or other similar laws affecting the enforcement of
creditors' rights generally, and except that the availability of equitable
remedies, including specific performance, may be subject to the discretion
of any court before which any proceeding therefor may be brought.
(c) Reservation of Shares. Ascend has taken all necessary corporate
action to authorize and reserve for issuance and to permit it to issue,
upon exercise of the Ascend Option, and at all times from the date
C-3
<PAGE>
hereof through the expiration of the Ascend Option will have reserved, a
number of authorized and unissued shares of Ascend Common Stock not less
than the Option Number, such amount being subject to adjustment as provided
in Section 10, all of which, upon their issuance and delivery in accordance
with the terms of this Agreement, will be duly authorized, validly issued,
fully paid and nonassessable.
(d) No Liens. The shares of Ascend Common Stock issued to Cascade upon
the exercise of the Ascend Option will be, upon delivery thereof to
Cascade, free and clear of all claims, liens, charges, encumbrances and
security interests of any nature whatsoever.
(e) No Conflicts. The execution and delivery of this Agreement by Ascend
does not, and, subject to compliance with applicable law, the consummation
by Ascend of the transactions contemplated hereby will not, violate,
conflict with, or result in a breach of any provision of, or constitute a
default (with or without notice or lapse of time, or both) under, or result
in the termination of, or accelerate the performance required by, or result
in a right of termination, cancellation, or acceleration of any obligation
or the loss of a material benefit under, or the creation of a lien, pledge,
security interest or other encumbrance on assets (any such violation,
conflict, breach, default, termination, acceleration, right of termination,
cancellation or acceleration, loss, or creation, a "Violation") by Ascend
or any of its Subsidiaries of (i) any provision of the charter or the
Bylaws of Ascend or any of its Subsidiaries, each as amended to date, (ii)
any material provision of any material loan or credit agreement, note,
mortgage, indenture, lease, benefit plan or other agreement, obligation,
instrument, permit, concession, franchise or license (a "Material
Contract") of Ascend or any of its Subsidiaries or to which any of them is
a party or by which any of them or their properties or assets are bound, or
(iii) except as contemplated by Section 4.4(c) of the Merger Agreement or
Section 5(f) below, any judgment, order, decree, statute, law, ordinance,
rule or regulation applicable to Ascend or any of its subsidiaries or any
of their properties or assets.
(f) Consents and Approvals. The execution and delivery of this Agreement
by Ascend does not, and (except for the notifications required under the
HSR Act and applicable foreign laws, the expiration or early termination of
any waiting periods under the HSR Act and applicable foreign laws, and the
receipt of approvals under applicable securities laws, and except as
contemplated by Section 9), the performance of this Agreement by Ascend and
the consummation of the transactions contemplated hereby will not, require
any consent, approval, order, authorization or permit of, filing with, or
notification to any governmental or regulatory authority, other than such
consents, approvals, orders, authorizations, permits, filings and
notifications which, in the aggregate, if not obtained or made, could not
reasonably be expected to have a Cascade Material Adverse Effect or an
Ascend Material Adverse Effect (as such terms are defined in the Merger
Agreement) or a material adverse effect on the ability of the parties to
consummate the transactions contemplated by this Agreement.
(g) Investment Purposes. Any shares of Cascade Common Stock acquired by
Ascend pursuant to this Agreement will be acquired for Ascend's own
account, for investment purposes only, and will not be acquired by Ascend
with a view to the public distribution thereof in violation of any
applicable provision of the Securities Act.
Section 6. Representations and Warranties of Cascade. Cascade represents and
warrants to Ascend as follows:
(a) Organization and Standing. Cascade is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Delaware and has all corporate power and authority required to enter into
this Agreement and to carry out its obligations hereunder.
(b) Authority. Except as set forth in Section 6(c), the execution and
delivery of this Agreement by Cascade and the consummation by Cascade of
the transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of Cascade, and no other corporate
proceedings on the part of Cascade and no action of its stockholders are
necessary to authorize this Agreement or any of the transactions
contemplated hereby; this Agreement has been duly and validly executed and
delivered by Cascade and, assuming the due authorization, execution and
delivery hereof by Ascend and the receipt of all required governmental
approvals, constitutes the valid and binding obligation of Cascade,
enforceable
C-4
<PAGE>
against Cascade in accordance with its terms, except as may be limited by
applicable bankruptcy, insolvency, reorganization, or other similar laws
affecting the enforcement of creditors' rights generally, and except that
the availability of equitable remedies, including specific performance, may
be subject to the discretion of any court before which any proceeding may
be brought.
(c) Reservation of Shares. Prior to any delivery of shares of Cascade
Common Stock in consideration of the purchase of shares of Ascend Common
Stock pursuant hereto, Cascade will have taken all necessary corporate
action to authorize for issuance and to permit it to issue such shares of
Cascade Common Stock, all of which, upon their issuance and delivery in
accordance with the terms of this Agreement, will be duly authorized,
validly issued, fully paid and nonassessable.
(d) No Liens. The shares of Cascade Common Stock (if any) issued to
Ascend in consideration of the purchase of shares of Ascend Common Stock
pursuant hereto will be, upon delivery thereof to Ascend, free and clear of
all claims, liens, charges, encumbrances and security interests of any
nature whatsoever.
(e) No Conflicts. The execution and delivery of this Agreement by Cascade
does not, and the consummation by Cascade of the transactions contemplated
hereby will not, violate, conflict with, or result in a Violation by
Cascade or any of its Subsidiaries of (i) any provision of the Certificate
of Incorporation or Bylaws of Cascade, (ii) any material provision of any
Material Contract of Cascade or any of its Subsidiaries or to which any of
them is a party or by which any of them or their properties or assets are
bound, or (iii) except as contemplated by Section 3.4(c) of the Merger
Agreement or Section 6(f) below, any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Cascade or any of its
subsidiaries or any of their properties or assets.
(f) Consents and Approvals. The execution and delivery of this Agreement
by Cascade does not, and (except for the notifications required under the
HSR Act and applicable foreign laws, the expiration or early termination of
waiting periods under the HSR Act and applicable foreign laws, and the
receipt of approvals under applicable securities laws, and except as
contemplated by Section 9), the performance of this Agreement by Ascend and
the consummation of the transactions contemplated hereby will not, require
any consent, approval, order, authorization or permit of, filing with, or
notification to any governmental or regulatory authority, other than such
consents, approvals, orders, authorizations, permits, filings and
notifications which, in the aggregate, if not obtained or made, could not
reasonably be expected to have a Cascade Material Adverse Effect or an
Ascend Material Adverse Effect (as such terms are defined in the Merger
Agreement) or a material adverse effect on the ability of the parties to
consummate the transactions contemplated by this Agreement.
(g) Investment Purpose. Any shares of Ascend Common Stock acquired by
Cascade upon exercise of the Ascend Option will be acquired for Cascade's
own account, for investment purposes only and will not be, and the Ascend
Option is not being, acquired by Cascade with a view to the public
distribution thereof in violation of any applicable provision of the
Securities Act.
Section 7. Certain Repurchases.
(a) Cascade "Put". At any time during which the Ascend Option is
exercisable pursuant to Section 2 (the "Purchase Period") upon written
notice to Ascend by Cascade (the "Repurchase Notice"):
(i) Ascend and its successors in interest shall repurchase from
Cascade all or any portion of the Ascend Option, as specified by
Cascade, to the extent not previously exercised, at the Option
Repurchase Price set forth in Section 7(b)(i), subject to and as
limited by Section 2(f) above; and
(ii) Ascend and its successors in interest shall repurchase from
Cascade all or any portion of the shares of Ascend Common Stock
purchased by Cascade pursuant to the Ascend Option, as specified by
Cascade, at the Share Repurchase Price set forth in Section 7(b)(ii)
subject to and as limited by Section 2(f) above.
(b) Certain Definitions. For purposes of this Section 7, the following
definitions shall apply:
(i) Option Repurchase Price. "Option Repurchase Price" shall mean (A)
the amount (if any) by which the Fair Market Value (as defined in
Section 7(b)(iii)) of a single share of Ascend Common
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Stock as of the date of the applicable Repurchase Notice exceeds the
per share Exercise Price, multiplied by (B) the number of shares of
Ascend Common Stock purchasable pursuant to the Ascend Option or the
portion thereof covered by the applicable Repurchase Notice.
(ii) Share Repurchase Price. "Share Repurchase Price" shall mean the
product of (A) the greater of (I) the Exercise Price paid by Cascade
per share of Ascend Common Stock acquired pursuant to the Ascend Option
and (II) the Fair Market Value (as defined in Section 7(b)(iii)) of a
single share of Ascend Common Stock as of the date of the applicable
Repurchase Notice, and (B) the number of shares of Ascend Common Stock
to be repurchased pursuant to this Section 7 as covered by the
applicable Repurchase Notice.
(iii) Fair Market Value. As used in this Agreement, "Fair Market
Value" shall mean, with respect to any security, the per share average
of the last reported sale prices on The Nasdaq National Market (or such
other national stock exchange or national market system as shall then
be the primary trading market for such security) for the ten (10)
trading days immediately preceding the applicable date.
(c) Redelivery of Shares of Cascade Common Stock. In Ascend's discretion
or if specified by Cascade in the Repurchase Notice, all or a portion of
the Share Repurchase Price shall be paid by Ascend in shares of Cascade
Common Stock, by redelivery to Cascade of the shares of Cascade Common
Stock (and the certificate(s) representing such shares) previously
delivered by Cascade to Ascend pursuant to a Stock Exercise. For purposes
of this Section 7(c), each share of Cascade Common Stock redelivered to
Cascade shall be valued at and exchanged for .546 shares of Cascade Common
Stock. If fewer than all of the shares of Ascend Common Stock purchased by
Cascade pursuant to a Stock Exercise are to be repurchased by Ascend
pursuant to Section 7(a)(ii), Cascade shall issue to Ascend new
certificates representing those shares of Cascade Common Stock which are
not due to be redelivered to Cascade pursuant to this Section 7(c) to the
extent that excess shares of Cascade Common Stock are included in the
certificates redelivered to Cascade by Ascend. All shares of Cascade Common
Stock redelivered to Cascade hereunder shall be free and clear of all
claims, liens, charges, encumbrances and security interests of any nature
whatsoever.
(d) Payment and Redelivery of Ascend Options or Shares. In the event that
Cascade exercises its rights under Section 7(a), Ascend shall, within ten
(10) business days thereafter, pay the required amount to Cascade in
immediately available funds (or shares of Cascade Common Stock, if
applicable) and Cascade shall surrender to Ascend the Ascend Option or the
certificate or certificates evidencing the shares of Ascend Common Stock
purchased by Cascade pursuant hereto, and Cascade shall warrant that it has
sole beneficial ownership of the Ascend Option or such shares and that the
Ascend Option or such shares are then free and clear of all claims, liens,
charges, encumbrances and security interests of any nature whatsoever.
(e) Repurchase Price Reduced at Cascade's Option. In the event that
payment of the repurchase price specified in Section 7(a) would subject the
repurchase of the Ascend Option or the shares of Ascend Common Stock
purchased by Cascade pursuant to the Ascend Option to a vote of the
stockholders of Ascend pursuant to applicable law, regulations, or
requirements of a national securities exchange or national market system or
the Ascend Charter, then Cascade may, at its election, reduce the
repurchase price or the number of shares covered by the Cascade repurchase
request to an amount which would permit such repurchase without the
necessity for such a vote.
Section 8. Restrictions on Transfer.
(a) Restrictions on Transfer. Prior to the fifth anniversary of the date
hereof (the "Expiration Date"), neither party shall, directly or
indirectly, by operation of law or otherwise, sell, assign, pledge, or
otherwise dispose of or transfer any shares of capital stock of the other
party acquired by such party pursuant to this Agreement, including any
shares of Cascade Common Stock issued pursuant to a Stock Exercise
("Restricted Shares") or otherwise beneficially owned (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) by such other party,
other than (i) pursuant to Section 7 or (ii) in accordance with Sections
8(b) or 9.
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(b) Permitted Sales. Following the termination of the Merger Agreement, a
party shall be permitted to sell any Restricted Shares beneficially owned
by it if such sale is made (i) pursuant to a tender or exchange offer or
other business combination transaction that has been approved or
recommended, or otherwise determined to be fair to and in the best
interests of the holders of common stock of the other party, by a majority
of the members of the Board of Directors of such other party, or (ii)
subject to Section 8(c) or (d) as the case may be, to a person who,
immediately following such sale, would beneficially own (within the meaning
of Rule 13d-3 promulgated under the Exchange Act), either alone or as part
of a "group" (as used in Rule 13d-5 under the Exchange Act), not more than
ten percent (10%) of such party's outstanding voting securities, which
person is a passive institutional investor who would be eligible under Rule
13d-1(b)(1) under the Exchange Act to report such holdings of Restricted
Shares on Schedule 13G under the Exchange Act.
(c) Ascend's Right of First Refusal. At any time after the first
occurrence of a Trigger Event and prior to the Expiration Date, if Cascade
shall desire to sell, assign, transfer or otherwise dispose of all or any
of the shares of Ascend Common Stock or other securities acquired by it
pursuant to the Ascend Option, it shall give Ascend written notice of the
proposed transaction (a "Cascade Offer Notice"), identifying the proposed
transferee, accompanied by a copy of a binding offer to purchase such
shares or other securities signed by such transferee and setting forth the
terms of the proposed transaction. A Cascade Offer Notice shall be deemed
an offer by Cascade to Ascend, which may be accepted within five (5)
business days of the receipt of such Cascade Offer Notice, on the same
terms and conditions and at the same price at which Cascade is proposing to
transfer such shares or other securities to such transferee. The purchase
of any such shares or other securities by Ascend shall be settled within
five (5) business days of the date of the acceptance of the offer and the
purchase price shall be paid to Cascade in immediately available funds. In
the event of the failure or refusal of Ascend to purchase all the shares or
other securities covered by a Cascade Offer Notice, Cascade may sell all,
but not less than all, of such shares or other securities to the proposed
transferee at no less than the price specified and on terms no more
favorable to the transferee than those set forth in the Cascade Offer
Notice as long as such sale is completed within ninety (90) days of the
receipt by Ascend of the applicable Cascade Offer Notice; provided that the
provisions of this sentence shall not limit the rights Cascade may
otherwise have in the event Ascend has accepted the offer contained in the
Cascade Offer Notice and wrongfully refuses to purchase the shares or other
securities subject thereto. The requirements of this Section 8(c) shall not
apply to (i) any disposition as a result of which the proposed transferee
would own beneficially not more than three percent (3%) of the outstanding
voting power of Ascend, (ii) any disposition of Ascend Common Stock or
other securities by a person to whom Cascade has assigned its rights under
the Ascend Option with the consent of Ascend, (iii) any sale by means of a
public offering registered under the Securities Act, or (iv) any transfer
to a wholly-owned subsidiary of Cascade which agrees in writing to be bound
by the terms hereof.
(d) Cascade's Right of First Refusal. At any time after the first
occurrence of a Trigger Event and prior to the Expiration Date, if Ascend
shall desire to sell, assign, transfer or otherwise dispose of all or any
of the shares of Cascade Common Stock or other securities acquired by it
pursuant to a Stock Exercise of the Ascend Option by Cascade, it shall give
Cascade written notice of the proposed transaction (a "Ascend Offer
Notice"), identifying the proposed transferee, accompanied by a copy of a
binding offer to purchase such shares or other securities signed by such
transferee and setting forth the terms of the proposed transaction. An
Ascend Offer Notice shall be deemed an offer by Ascend to Cascade, which
may be accepted within five (5) business days of the receipt of such Ascend
Offer Notice, on the same terms and conditions and at the same price at
which Ascend is proposing to transfer such shares or other securities to
such transferee. The purchase of any such shares or other securities by
Cascade shall be settled within five (5) business days of the date of the
acceptance of the offer and the purchase price shall be paid to Ascend in
immediately available funds. In the event of the failure or refusal of
Cascade to purchase all the shares or other securities covered by a Ascend
Offer Notice, Ascend may sell all, but not less than all, of such shares or
other securities to the proposed transferee at no less than the price
specified and on terms no more favorable to the transferee than those set
forth in the Ascend Offer Notice as long as such sale is completed within
ninety (90) days of the receipt by Cascade of the applicable Ascend Offer
Notice; provided that the
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provisions of this sentence shall not limit the rights Ascend may otherwise
have in the event Cascade has accepted the offer contained in the Ascend
Offer Notice and wrongfully refuses to purchase the shares or other
securities subject thereto. The requirements of this Section 8(d) shall not
apply to (i) any disposition as a result of which the proposed transferee
would own beneficially not more than three percent (3%) of the outstanding
voting power of Cascade, (ii) any sale by means of a public offering
registered under the Securities Act, or (iii) any transfer to a wholly-
owned subsidiary of Ascend which agrees in writing to be bound by the terms
hereof.
(e) Additional Restrictions. Prior to any permitted sales of any
Restricted Shares under Section 8(b)(ii), the holder thereof shall give
written notice to the issuer of such Restricted Shares of its intention to
effect such transfer. Each such notice shall describe the manner of the
proposed transfer and, if requested by the issuer of such Restricted
Shares, shall be accompanied by an opinion of counsel satisfactory to such
issuer (it being agreed that each of Gray Cary Ware & Freidenrich and
Testa, Hurwitz & Thibeault, LLP shall be satisfactory) to the effect that
such sale may be effected without registration under the Securities Act and
any applicable state securities laws. Each certificate for Restricted
Shares transferred as above provided shall bear the legend set forth in
Section 11, except that such certificate shall not bear such legend if (i)
such transfer is in accordance with the provisions of Rule 144 (or any
other rule permitting public sale without registration under the Securities
Act) or (ii) the opinion of counsel referred to above is to the further
effect that the transferee and any subsequent transferee would be entitled
to transfer such securities in a public sale without registration under the
Securities Act and any applicable state securities laws. The restrictions
provided for in this Section 8(e) shall not apply to securities which are
not required to bear the legend prescribed by Section 11 in accordance with
the provisions of this Agreement. The foregoing restrictions on
transferability shall terminate as to any particular shares when such
shares shall have been effectively registered under the Securities Act and
any applicable state securities laws and sold or otherwise disposed of in
accordance with the registration statement covering such shares.
Section 9. Registration Rights.
(a) Procedure. Following the termination of the Merger Agreement, either
party hereto that owns Restricted Shares (a "Holder") may by written notice
(the "Registration Notice") to the other party (the "Registrant") request
the Registrant to register under the Securities Act all or any part of the
Restricted Shares acquired by such Holder pursuant to this Agreement (the
"Registrable Securities") in order to permit the sale or other disposition
of such shares pursuant to a bona fide firm commitment underwritten public
offering, in which the Holder and the underwriters shall effect as wide a
distribution of such Registrable Securities as is reasonably practicable
and shall use their best efforts to prevent any person (including any
"group" as used in Rule 13d-5 under the Exchange Act)) and its affiliates
from purchasing through such offering Restricted Shares representing more
than three percent (3%) of the outstanding shares of common stock of the
Registrant on a fully diluted basis (a "Permitted Offering"). Any rights to
require registration hereunder shall terminate with respect to any shares
that may be sold pursuant to Rule 144(k) under the Securities Act.
(b) Manager's Certificate. The managing underwriter shall be an
investment banking firm of nationally recognized standing, and shall be
selected by (i) the Registrant within ten (10) business days after receipt
of a Registration Notice, subject to approval of the Holder (which approval
shall not be unreasonably withheld, delayed or conditioned), or (ii) if
Registrant fails to deliver notice (the "Registrant's Designation Notice")
to Holder of such selection within ten (10) business days after receipt of
a Registration Notice, then by Holder subject to the reasonable approval of
Registrant (which approval shall not be unreasonably withheld, delayed or
conditioned) (the "Manager"), and Holder shall deliver written notice (the
"Holder's Designation Notice") of such selection within ten (10) business
days after expiration of the ten (10) day period in which Registrant is
entitled to give notice. The Registrant's Designation Notice or the
Holder's Designation Notice, as the case may be, shall state that (i) the
party delivering such notice and its proposed Manager have a good faith
intention to commence promptly a Permitted Offering, and (ii) such proposed
Manager in good faith believes that, based on the then-prevailing market
conditions, it will be able to sell the Registrable Securities to the
public in a Permitted Offering within one hundred twenty (120) days at a
per share price equal to at least eighty percent (80%) of the then Fair
Market Value of such shares.
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(c) First Refusal Right. The Registrant (and/or any person designated by
the Registrant) shall thereupon have the option exercisable by written
notice delivered to the Holder within five (5) business days after the
receipt of the Registration Notice, irrevocably to agree to purchase all or
any part of the Registrable Securities proposed to be so sold for cash at a
price equal to the product of (i) the number of Registrable Securities to
be so purchased by the Registrant and (ii) the then Fair Market Value of
such shares.
(d) Closing. Any purchase of Registrable Securities by the Registrant (or
its designee) under Section 9(c) shall take place at a closing to be held
at the principal executive offices of the Registrant or at the offices of
its counsel at any reasonable date and time designated by the Registrant
and/or such designee in such notice within twenty (20) business days after
delivery of such notice, and any payment for the shares to be so purchased
shall be made by delivery at the time of such closing in immediately
available funds.
(e) Certain Limitations. If the Registrant does not elect to exercise its
option pursuant to Section 9(c) with respect to all Registrable Securities,
it shall use its best efforts to effect, as promptly as practicable, the
registration under the Securities Act of the unpurchased Registrable
Securities proposed to be so sold; provided, however, that (i) neither
party shall be entitled to demand more than an aggregate of two (2)
effective registration statements hereunder, and (ii) the Registrant will
not be required to file any such registration statement during any period
of time (not to exceed sixty (60) days after such request in the case of
clause (A) below or ninety (90) days after such request in the case of
clauses (B) and (C) below) when (A) the Registrant is in possession of
material non-public information which it reasonably believes would be
detrimental to be disclosed at such time and, in the opinion of counsel to
the Registrant, such information would be required to be disclosed if a
registration statement were filed at that time; (B) the Registrant is
required under the Securities Act to include audited financial statements
for any period in such registration statement and such financial statements
are not yet available for inclusion in such registration statement; or (C)
the Registrant determines, in its reasonable judgment, that such
registration would interfere with any financing, acquisition or other
transaction involving the Registrant or any of its material subsidiaries
and that such transaction is material to the Registrant and its
subsidiaries taken as a whole. If consummation of the sale of any
Registrable Securities pursuant to a registration hereunder does not occur
within one hundred twenty (120) days after the effectiveness of the initial
registration statement, the provisions of this Section 9 shall again be
applicable to any proposed registration.
(f) State Securities Laws. The Registrant shall use its reasonable best
efforts to cause any Registrable Securities registered pursuant to this
Section 9 to be qualified for sale under the securities laws of such states
as the Holder may reasonably request and shall continue such registration
or qualification in effect in such jurisdiction; provided, however, that
the Registrant shall not be required to qualify to do business in, or
consent to general service of process in, any jurisdiction by reason of
this provision.
(g) Obligations of Registrant. The Registrant shall provide to the
underwriters such documentation (including certificates, opinions of
counsel and "comfort" letters from auditors) as is customary in connection
with underwritten public offerings as such underwriters may reasonably
require. The registration rights set forth in this Section 9 are subject to
the condition that the Holder shall provide the Registrant with such
information with respect to its Registrable Securities, the plans for the
distribution thereof, and such other information with respect to the Holder
as, in the reasonable judgment of counsel for the Registrant, is necessary
to enable the Registrant to include in such registration statement all
material facts required to be disclosed with respect to a registration
thereunder.
(h) Indemnification. In connection with any registration effected under
this Section 9, the parties agree (i) to indemnify each other and the
underwriters in the customary manner, (ii) to enter into an underwriting
agreement in form and substance customary for transactions of such type
with the Manager and the other underwriters participating in such offering,
and (iii) to take all further actions which shall be reasonably necessary
to effect such registration and sale (including, if the Manager deems it
necessary, participating in road-show presentations).
(i) Inclusion of Additional Shares of Registrant. The Registrant shall be
entitled to include (at its expense) additional shares of its common stock
in a registration effected pursuant to this Section 10 only if
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and to the extent the Manager determines that such inclusion will not
adversely affect the prospects for success of such offering.
Section 10. Adjustment Upon Changes in Capitalization.
(a) Without limiting any restriction on Ascend contained in this
Agreement or in the Merger Agreement, in the event of any change in Ascend
Common Stock by reason of any stock dividend, stock split, merger (other
than the Merger), recapitalization, combination, exchange of shares or any
similar transaction, the type and number of shares or securities subject to
the Ascend Option, and the Exercise Price per share provided herein, shall
be adjusted appropriately and proper provision shall be made in the
agreements governing such transaction so that Cascade shall receive, upon
exercise of the Ascend Option, the number and class of securities or
property that Cascade would have received in respect of the shares of
Ascend Common Stock issuable to Cascade if the Ascend Option had been
exercised immediately prior to such event or the record date therefor, as
applicable. In addition, without limiting any restriction on Ascend or
Cascade contained in this Agreement or the Merger Agreement, in the event
of any change in Ascend Common Stock or Cascade Common Stock by reason of
any stock dividend, stock split, merger (other than the Merger)
recapitalization, combination, exchange of shares or any similar
transaction, equitable adjustment shall be made to the other provisions
hereof to carry out the original intent of this Agreement.
(b) In the event that Ascend shall enter into an agreement: (i) to
consolidate with or merge into any person, other than Cascade or one of its
subsidiaries, and shall not be the continuing or surviving corporation of
such consolidation or merger; (ii) to permit any person, other than Cascade
or one of its Subsidiaries, to merge into Ascend and Ascend shall be the
continuing or surviving corporation, but, in connection with such merger,
the then-outstanding shares of Ascend Common Stock shall be changed into or
exchanged for stock or other securities of Ascend or any other person or
cash or any other property; or (iii) to sell or otherwise transfer all or
substantially all of its assets to any person, other than Cascade or one of
its Subsidiaries, then, and in each such case, the agreement governing such
transaction shall make proper provision so that upon the consummation of
such transaction and upon the subsequent exercise of the Ascend Option,
Cascade shall be entitled to receive, for each share of Ascend Common Stock
with respect to which the Ascend Option has not theretofore been exercised,
an amount of consideration in the form of and equal to the per share amount
of consideration that would be received by the holder of one share of
Ascend Common Stock (and, in the event of an election or similar
arrangement with respect to the type of consideration to be received by the
holders of Ascend Common Stock, subject to the foregoing, proper provision
shall be made so that the holder of the Ascend Option would have the same
election or similar rights as would the holder of the number of shares of
Ascend Common Stock for which the Ascend Option is then exercisable).
Section 11. Restrictive Legends. Each certificate representing shares of
Ascend Common Stock issued to Cascade hereunder, and shares of Cascade Common
Stock, if any, delivered to Ascend pursuant to a Stock Exercise, shall include
a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES OR
BLUE SKY LAWS, AND MAY BE REOFFERED OR SOLD ONLY IF SO REGISTERED OR IF AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. SUCH SECURITIES ARE ALSO
SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AS SET FORTH IN THE ASCEND
STOCK OPTION AGREEMENT DATED AS OF MARCH 30, 1997, A COPY OF WHICH MAY BE
OBTAINED FROM THE ISSUER UPON REQUEST.
It is understood and agreed that (i) the reference to the resale
restrictions of the Securities Act and state securities or Blue Sky laws in
the foregoing legend shall be removed by delivery of substitute certificate(s)
without such reference if Cascade or Ascend, as the case may be, shall have
delivered to the other party a copy of a letter from the staff of the
Securities and Exchange Commission, or an opinion of counsel, in form and
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substance reasonably satisfactory to the other party, to the effect that such
legend is not required for purposes of the Securities Act or such laws; (ii)
the reference to the provisions of this Agreement in the foregoing legend
shall be removed by delivery of substitute certificate(s) without such
reference if the shares have been sold or transferred in compliance with the
provisions of this Agreement and under circumstances that do not require the
retention of such reference; and (iii) the legend shall be removed in its
entirety if the conditions in the preceding clauses (i) and (ii) are both
satisfied. In addition, such certificates shall bear any other legend as may
be required by law. Certificates representing shares sold in a registered
public offering pursuant to Section 9 shall not be required to bear the legend
set forth in this Section 11.
Section 12. Binding Effect; No Assignment; No Third-Party
Beneficiaries. This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and permitted assigns.
Except as expressly provided for in this Agreement, neither this Agreement nor
the rights or obligations of either party hereto are assignable, except by
operation of law, or with the written consent of the other party, and any such
attempted assignment in violation of this Agreement shall be void and of no
force or effect. Nothing contained in this Agreement, express or implied, is
intended to confer upon any person other than the parties hereto and their
respective permitted assigns any rights or remedies of any nature whatsoever.
Any Restricted Shares sold by a party in compliance with the provisions of
Section 9 shall, upon consummation of such sale, be free of the restrictions
imposed and the benefits provided with respect to such shares by this
Agreement.
Section 13. Specific Performance. The parties hereto recognize and agree
that if for any reason any of the provisions of this Agreement are not
performed in accordance with their specific terms or are otherwise breached,
immediate and irreparable harm or injury would be caused for which money
damages would not be an adequate remedy. Accordingly, each party agrees that,
in addition to other remedies, whether at law or in equity, the other party
shall be entitled to an injunction to prevent or restrain any violation or
threatened violation of the provisions of this Agreement, and to enforce
specifically the terms and provisions hereof, in any court of the State of
Delaware or of the United States of America located in the State of Delaware.
In the event that any action should be brought in equity to enforce the
provisions of this Agreement, neither party will allege, and each party hereby
waives the defense, that there is an adequate remedy at law. Each party hereto
irrevocably and unconditionally consents and submits to the jurisdiction of
the courts of the State of Delaware and of the United States of America
located in the City of Wilmington in the State of Delaware for any actions,
suits or proceedings arising out of or relating to this Agreement and the
transactions contemplated hereby, and waives any objection to venue in any
such court therein.
Section 14. Validity.
(a) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of the other provisions of
this Agreement, which shall remain in full force and effect.
(b) In the event any court or other governmental or regulatory authority
holds any provisions of this Agreement to be null, void or unenforceable,
the parties hereto shall negotiate in good faith the execution and delivery
of an amendment to this Agreement in order, as nearly as possible, to
effectuate, to the extent permitted by law, the intent of the parties
hereto with respect to such provision and the economic effects thereof.
(c) If for any reason any such court or other governmental or regulatory
authority determines that Cascade is not permitted to acquire, or Ascend is
not permitted to repurchase pursuant to Section 7, the full number of
shares of Ascend Common Stock provided in this Agreement (as the same may
be adjusted), it is the express intention of Ascend to allow Cascade to
acquire or to require Ascend to repurchase such lesser number of shares as
may be permissible without any other amendment or modification hereof.
(d) Each party agrees that, should any court or other governmental or
regulatory authority hold any provision of this Agreement or part hereof to
be null, void or unenforceable, or order any party to take any action
inconsistent herewith, or not take any action required herein, the other
party shall not be entitled to specific performance of such provision or
part hereof or to any other remedy, including but not limited to money
damages, for breach hereof or of any other provision of this Agreement or
part hereof as the result of such holding or order.
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Section 15. Notices. All notices and other communications hereunder shall be
in writing and shall be deemed given if (a) delivered personally, or (b) if
sent by overnight courier service (receipt confirmed in writing), or (c) if
delivered by facsimile transmission (with receipt confirmed), or (d) five (5)
days after being mailed by registered or certified mail (return receipt
requested) to the parties in each case to the following addresses (or at such
other address for a party as shall be specified by like notice):
If to Ascend, to:
Ascend Communications, Inc.
One Ascend Plaza
1701 Harbor Bay Parkway
Alameda, CA 94502
Facsimile No.: (510) 769-6001
Attention: President
with a copy to:
Gray Cary Ware & Freidenrich
A Professional Corporation
400 Hamilton Avenue
Palo Alto, CA 94301
Facsimile No.: (415) 327-3699
Attention: Gregory M. Gallo, Esq. &
Rod J. Howard, Esq.
If to Cascade, to:
Cascade Communications Corp.
5 Carlisle Road
Westford, MA 01886
Facsimile No.: (508) 692-1221
Attention: President and Corporate Counsel
with a copy to:
Testa, Hurwitz & Thibeault, LLP
High Street Tower
125 High Street
Boston, MA 02110
Fax Number: (617) 248-7100
Attention: John A. Meltaus, Esq.
Section 16. Governing Law. This Agreement shall be governed by and
construed, and any controversy arising out of or otherwise relating to this
Agreement shall be determined, in accordance with the laws of the State of
Delaware applicable to agreements made and to be performed entirely within
such State and without regard to its choice of law principles. Each party
hereto consents and submits to the exclusive jurisdiction of the courts of the
State of Delaware and the courts of the United States located in such state
for the adjudication of any action, suit, proceeding, claim or dispute arising
out of or otherwise relating to this Agreement.
Section 17. Interpretation. The headings contained in this Agreement are for
reference purposes and shall not affect in any way the meaning or
interpretation of the Agreement. When reference is made in this Agreement to a
Section, such reference shall be to a Section of this Agreement, unless
otherwise indicated. Whenever the words "include," "includes," or "including"
are used in this Agreement, they shall be deemed to be followed by the words
"without limitation." Whenever "or" is used in this Agreement it shall be
construed in the nonexclusive sense. The words "herein," "hereby," "hereof,"
"hereto," "hereunder" and words of similar import refer to this Agreement.
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Section 18. Counterparts; Effect. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
Section 19. Expenses. Ascend shall pay all expenses, and any and all
federal, state and local taxes and other charges, that may be payable in
connection with the preparation, issuance and delivery of Ascend stock
certificates under Section 4 and any stock listing or stock quotation
application required to be filed by Ascend with respect to such shares, and
Cascade shall pay all expenses, and any and all federal, state and local taxes
and other charges, that may be payable in connection with the preparation,
issuance and delivery of Cascade stock certificates in connection with a Stock
Exercise and any stock listing or stock quotation application required to be
filed by Ascend with respect to such shares. A registration effected under
Section 9 shall be effected at the Registrant's expense, except for
underwriting discounts and commissions and the fees and the expenses of
counsel to the Holder. Subject to the foregoing, and except as otherwise
expressly provided herein or in the Merger Agreement, all other costs and
expenses incurred in connection with the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses.
Section 20. Amendments; Waiver. This Agreement may be amended by the parties
hereto and the terms and conditions hereof may be waived only by an instrument
in writing signed on behalf of each of the parties hereto, or, in the case of
a waiver, by an instrument signed on behalf of the party waiving compliance.
Section 21. Extension of Time Periods. The time periods for exercises of
certain rights hereunder shall be extended (but in no event by more than six
(6) months): (a) to the extent necessary to obtain all governmental approvals
for the exercise of such rights, and for the expiration of all statutory
waiting periods; and (b) to the extent necessary to avoid any liability or
disgorgement of profits under Section 16(b) of the Exchange Act by reason of
such exercise.
Section 22. Further Assurances. Each party agrees to execute and deliver all
such further documents and instruments and take all such further action as may
be necessary in order to consummate the transactions contemplated hereby.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first
above written.
Ascend Communications, Inc.
By: /s/ Robert K. Dahl
-------------------------------
Name: Robert K. Dahl
Title: Vice President, Finance,
and Chief Financial Officer
Cascade Communications Corp.
By: /s/ Daniel E. Smith
-------------------------------
Name: Daniel E. Smith
Title: President and Chief
Executive Officer
C-13
<PAGE>
ANNEX D
March 30, 1997
Board of Directors
Ascend Communications, Inc.
One Ascend Plaza
1701 Harbor Bay Parkway
Alameda, CA 94502
Members of the Board:
We understand that Ascend Communications, Inc. ("Ascend"), Cascade
Communications Corp. ("Cascade"), and Catskill Merger Corporation ("Merger
Sub"), a wholly-owned subsidiary of Ascend, have entered into an Agreement and
Plan of Reorganization, dated as of the date hereof (the "Merger Agreement"),
which provides, among other things, for the merger (the "Merger") of Merger
Sub with and into Cascade. Pursuant to the Merger, Cascade will become a
wholly-owned subsidiary of Ascend and each issued and outstanding share of
common stock, par value $.001 per share, of Cascade (the "Cascade Common
Stock"), shall be converted into the right to receive 0.700 (the "Exchange
Ratio") of a share of common stock, par value $.001 per share, of Ascend (the
"Ascend Common Stock"). The terms and conditions of the Merger are more fully
set forth in the Merger Agreement.
You have asked for our opinion as to whether, as of the date hereof, the
Exchange Ratio pursuant to the Merger Agreement is fair from a financial point
of view to Ascend.
For purposes of the opinion set forth herein, we have:
i. analyzed certain publicly available financial statements and other
information of Ascend and Cascade, respectively;
ii. analyzed certain internal financial statements and other financial and
operating data concerning Cascade prepared by the management of
Cascade;
iii. discussed the past and current operations and financial condition and
the prospects of Cascade with senior executives of Ascend and Cascade,
respectively;
iv. analyzed certain internal financial statements and other financial and
operating data concerning Ascend prepared by the management of Ascend;
v. analyzed certain financial projections relating to Ascend prepared by
the management of Ascend;
vi. discussed the past and current operations and financial condition and
the prospects of Ascend with senior executives of Ascend;
vii. analyzed the pro forma impact of the Merger on the earnings per share
and consolidated capitalization of Ascend;
viii. reviewed the reported prices and trading activity for the Cascade
Common Stock and the Ascend Common Stock, respectively;
ix. compared the financial performance of Cascade and the prices and
trading activity of the Cascade Common Stock with that of certain other
publicly-traded companies which we deemed to be relevant and their
securities;
<PAGE>
Ascend Communications, Inc.
March 30, 1997
Page 2
x. compared the financial performance of Ascend and the prices and trading
activity of the Ascend Common Stock with that of certain other
publicly-traded companies which we deemed to be relevant and their
securities;
xi. reviewed the financial terms, to the extent publicly available, of
certain merger and acquisition transactions which we deemed to be
relevant;
xii. reviewed and discussed with the senior management of Ascend the
strategic rationale for the Merger and their assessment of the
synergies and other benefits expected to be derived from the Merger;
xiii. participated in discussions and negotiations among representatives of
Ascend and Cascade and their respective financial and legal advisors;
xiv. reviewed the Merger Agreement and related agreements; and
xv. performed such other analyses and considered such other factors as we
have deemed appropriate.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for the purposes
of this opinion. With respect to the financial projections, we have assumed
they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of
Ascend and Cascade. With respect to the information furnished by Ascend and
Cascade, and with respect to the information discussed with the managements of
Ascend and Cascade regarding their views of future operations, we have assumed
that such information has been reasonably prepared and reflects the best
currently available estimates and judgments of Ascend's and Cascade's
management as to the competitive, operating and regulatory environments and
related financial performance of Ascend and Cascade, as the case may be, for
the relevant periods. For purposes of this opinion, we have also relied upon,
without independent verification, the assessment by Ascend's management of the
cost savings and other synergies as well as the strategic and other benefits
expected to be derived from the Merger. We have also relied upon, without
independent verification, the assessment by Ascend's management of Cascade's
products, technology and competitive position and risks associated with
Cascade's future products and technology. We have not made any independent
valuation or appraisal of the assets, liabilities or technology of Ascend or
Cascade, respectively, nor have we been furnished with any such appraisals. We
have assumed that the Merger will be accounted for as a "pooling-of-interests"
business combination in accordance with U.S. Generally Accepted Accounting
Principles and will be consummated in accordance with the terms set forth in
the Merger Agreement. Our opinion is necessarily based on economic, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof.
We have acted as financial advisor to the Board of Directors of Ascend in
connection with this transaction and will receive a fee for our services. In
the past, Deutsche Morgan Grenfell and its affiliates have provided financial
advisory services for Ascend and Cascade.
It is understood that this letter is for the information of the Board of
Directors of Ascend only and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its
entirety in any filing made by Ascend or Cascade with the Securities and
Exchange Commission with respect to the transactions contemplated by the
Merger Agreement. In addition, we express no recommendation or opinion as to
how the shareholders of Ascend should vote at the stockholders' meeting held
in connection with the Merger.
<PAGE>
Ascend Communications, Inc.
March 30, 1997
Page 3
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the Exchange Ratio pursuant to the Merger Agreement is fair from a
financial point of view to Ascend.
Very truly yours,
DEUTSCHE MORGAN GRENFELL INC.
By: /s/ George F. Boutros
------------------------------------
George F. Boutros
Managing Director
By: /s/ Ethan M. Topper
------------------------------------
Ethan M. Topper
Managing Director
<PAGE>
ANNEX E
March 30, 1997
Board of Directors
Cascade Communications Corp.
5 Carlisle Road
Westford, MA 01886-3601
Members of the Board:
We understand that Ascend Communications, Inc. ("Ascend"), Cascade
Communications Corp. ("Cascade") and Catskill Merger Corporation ("Merger
Sub"), a wholly-owned subsidiary of Ascend, have entered into an Agreement and
Plan of Reorganization, dated as of March 30, 1997 (the "Merger Agreement"),
which provides, among other things, for the merger (the "Merger") of Merger
Sub with and into Cascade. Pursuant to the Merger, Cascade will become a
wholly-owned subsidiary of Ascend and each issued and outstanding share of
common stock, par value $0.001 per share, of Cascade (the "Cascade Common
Stock"), other than shares held in treasury or held by Ascend or any
subsidiary of Ascend or Cascade, shall be converted into the right to receive
0.700 (the "Exchange Ratio") of a share of common stock, par value $0.001 per
share, of Ascend (the "Ascend Common Stock"). The terms and conditions of the
Merger are more fully set forth in the Merger Agreement.
You have asked for our opinion as to whether the Exchange Ratio pursuant to
the Merger Agreement is fair from a financial point of view to the holders of
shares of Cascade Common Stock.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of Ascend and Cascade, respectively;
(ii) reviewed certain internal financial statements and other financial and
operating data concerning Cascade and Ascend prepared by the
managements of Cascade and Ascend, respectively;
(iii)discussed the past and current operations and financial condition and
the prospects of Ascend, including information relating to certain
strategic, financial and operational benefits anticipated from the
Merger, with senior executives of Ascend;
(iv)discussed the past and current operations and financial condition and
the prospects of Cascade, including information relating to certain
strategic, financial and operational benefits anticipated from the
Merger, with senior executives of Cascade;
(v)reviewed the pro forma impact of the Merger on the earnings per share
and consolidated capitalization of Ascend and Cascade, respectively;
(vi)reviewed the reported prices and trading activity for the Ascend Common
Stock and the Cascade Common Stock;
(vii)compared the financial performance of Ascend and Cascade and the
prices and trading activity of the Ascend Common Stock and the Cascade
Common Stock with that of certain other publicly-traded companies and
their securities;
(viii)reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
<PAGE>
Cascade Communications Corp.
March 30, 1997
Page 2
(ix)reviewed and discussed with the senior managements of Ascend and
Cascade the strategic rationale for the Merger and certain alternatives
to the Merger;
(x)participated in discussions and negotiations among representatives of
Ascend and Cascade and their financial and legal advisors;
(xi)reviewed the Merger Agreement and certain related agreements; and
(xii)considered such other factors as we have deemed appropriate.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for the purposes
of this opinion. With respect to the internal financial statements and other
financial and operating data and discussions relating to the strategic,
financial and operational benefits anticipated from the Merger provided by
Cascade and Ascend, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
prospects of Ascend and Cascade, respectively. We have relied upon the
assessment by the managements of Ascend and Cascade of their ability to retain
key employees of both Ascend and Cascade. We have also relied upon, without
independent verification, the assessment by the managements of Ascend and
Cascade of the strategic and other benefits expected to result from the
Merger. We have also relied upon, without independent verification, the
assessment by the managements of Ascend and Cascade of Ascend's and Cascade's
technologies and products, the timing and risks associated with the
integration of Cascade with Ascend, and the validity of, and risks associated
with, Ascend's and Cascade's existing and future products and technologies. We
have not made any independent valuation or appraisal of the assets,
liabilities or technology of Ascend or Cascade, respectively, nor have we been
furnished with any such appraisals. We have assumed that the Merger will be
accounted for as a "pooling-of-interests" business combination in accordance
with U.S. Generally Accepted Accounting Principles, will be treated as a tax-
free reorganization and/or exchange pursuant to the Internal Revenue Code of
1986, as amended, and will be consummated in accordance with the terms set
forth in the Merger Agreement. Our opinion is necessarily based on economic,
market and other conditions as in effect on, and the information made
available to us as of, the date hereof.
We have acted as financial advisor to the Board of Directors of Cascade in
connection with this transaction and will receive a fee for our services. In
the past, Morgan Stanley & Co. Incorporated and its affiliates have provided
financial advisory and financing services for Ascend and Cascade and have
received fees for the rendering of these services. In addition, in the
ordinary course of our business we may actively trade the securities of Ascend
and Cascade for our own account and for the accounts of our customers and,
accordingly, may at any time hold a long or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors of Cascade and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its
entirety in any filing made by Ascend or Cascade with the Securities and
Exchange Commission with respect to the transactions contemplated by the
Merger Agreement. In addition, this opinion does not in any manner address the
prices at which the Ascend Common Stock will actually trade at any time and we
express no recommendation or opinion as to how the holders of Cascade Common
Stock should vote at the shareholders' meeting held in connection with the
Merger.
<PAGE>
Cascade Communications Corp.
March 30, 1997
Page 3
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the Exchange Ratio pursuant to the Merger Agreement is fair from a
financial point of view to the holders of shares of Cascade Common Stock.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ Charles R. Cory
----------------------------------
Charles R. Cory
Managing Director
<PAGE>
[LOGO OF ASCEND]
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