<PAGE>
================================================================================
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Ascend Communications, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
ASCEND COMMUNICATIONS, INC.
ONE ASCEND PLAZA
1701 HARBOR BAY PARKWAY
ALAMEDA, CA 94502
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 21, 1998
----------------
To the Stockholders of Ascend Communications, Inc.:
The Annual Meeting of Stockholders of Ascend Communications, Inc., a
Delaware corporation (the "Corporation"), will be held on Thursday, May 21,
1998 (the "Annual Meeting") at 9:00 A.M., local time, at the Palace Hotel, 2
New Montgomery Street, San Francisco, California 94105, to consider and act
upon the following matters:
1. To elect eight (8) members of the Board of Directors to hold office
until the 1999 Annual Meeting of Stockholders and until their
respective successors are elected and qualified.
2. To approve the implementation of the Corporation's 1998 Stock
Incentive Plan.
3. To approve amendments to the Corporation's 1994 Outside Directors
Stock Option Plan (the "Directors Option Plan") to (i) decrease the
initial stock option grant from 192,000 shares to 75,000 shares for
outside directors first elected after the Annual Meeting; (ii) to
decrease the stock option grant for each subsequent year of service
on the Board of Directors from 48,000 shares to 25,000 shares for
all outside directors following the Annual Meeting; (iii) to limit
the number of shares granted for each initial stock option grant and
the stock option grant for each subsequent year of service on the
Board of Directors to the amount stated above effective after the
Annual Meeting; and (iv) to increase the number of shares of Common
Stock available for issuance under the Directors Option Plan from
2,000,000 shares to 2,400,000 shares.
4. To ratify the selection of Ernst & Young LLP as auditors for the
fiscal year ending December 31, 1998.
5. To transact such other business as may properly come before the
meeting or any adjournments thereof.
Stockholders entitled to notice of and to vote at the meeting shall be
determined as of March 23, 1998, the record date fixed by the Board of
Directors for such purpose.
By Order of the Board of Directors,
/s/ Michael F.G. Ashby
Michael F.G. Ashby
Secretary
Mail Date: April 8, 1998
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND SIGN
THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED STAMPED ENVELOPE
IN ORDER TO ASSURE REPRESENTATION OF YOUR SHARES AT THE MEETING. NO POSTAGE
NEED BE AFFIXED IF THE PROXY IS MAILED IN THE UNITED STATES.
<PAGE>
ASCEND COMMUNICATIONS, INC.
ONE ASCEND PLAZA
1701 HARBOR BAY PARKWAY
ALAMEDA, CA 94502
---------------------
PROXY STATEMENT
---------------------
APRIL 8, 1998
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Ascend Communications, Inc. (the
"Corporation") for use at the Annual Meeting of Stockholders to be held on
Thursday, May 21, 1998 (the "Annual Meeting") at 9:00 A.M., local time, at the
Palace Hotel, 2 New Montgomery Street, San Francisco, California 94105, and
any adjournments thereof.
Only stockholders of record as of March 23, 1998 (the "Record Date") will be
entitled to vote at the meeting and any adjournments thereof. As of that date,
192,724,700 shares of common stock, $.001 par value (the "Common Stock"), of
the Corporation were issued and outstanding. The holders of Common Stock are
entitled to one vote per share on any proposal presented at the Annual
Meeting. Stockholders may vote in person or by proxy. Execution of a proxy
will not in any way affect a stockholder's right to attend the Annual Meeting
and vote in person. Any proxy may be revoked by a stockholder at any time
before it is exercised by delivery of a written revocation or a later executed
proxy to the Secretary of the Corporation.
An Annual Report to Stockholders, containing financial statements for the
fiscal year ended December 31, 1997, is being mailed together with this Proxy
Statement to all stockholders entitled to vote. This Proxy Statement and the
form of proxy were first mailed to stockholders on or about April 8, 1998.
VOTING SECURITIES AND VOTES REQUIRED
The representation in person or by proxy of at least a majority of the
outstanding shares of Common Stock entitled to vote at the meeting is
necessary to constitute a quorum for the transaction of business. Votes
withheld from any nominee for election as director, abstentions and broker
"non-votes" are counted as present or represented for purposes of determining
the presence or absence of a quorum for the meeting. A "non-vote" occurs when
a nominee holding shares for a beneficial owner votes on one proposal, but
does not vote on another proposal because, in respect of such other proposal,
the nominee does not have discretionary voting power and has not received
instructions from the beneficial owner.
In the election of directors, the nominees receiving the highest number of
affirmative votes of the shares present or represented and entitled to vote at
the meeting shall be elected as directors. On all other matters being
submitted to stockholders, an affirmative vote of a majority of the shares
present or represented and voting on each such matter is required for
approval. An automated system administered by the Corporation's transfer agent
tabulates the votes. The vote on each matter submitted to stockholders is
tabulated separately. Abstentions are included in the number of shares present
or represented and voting on each matter. Broker "non-votes" are not
considered to have been voted for the particular matter and have the practical
effect of reducing the number of affirmative votes required to achieve a
majority for such matter by reducing the total number of shares from which the
majority is calculated.
The persons named as attorneys in the proxies are officers of the
Corporation. All properly executed proxies returned in time to be counted at
the meeting will be voted. Any stockholder giving a proxy has the right to
withhold authority to vote for any individual nominee to the Board of
Directors by writing that nominee's name in the space provided on the proxy.
In addition to the election of directors, the stockholders will consider and
vote upon proposals (i) to approve the implementation of the Corporation's
1998 Stock Incentive Plan, (ii) to
1
<PAGE>
amend the Corporation's 1994 Outside Directors Stock Option Plan; and (iii) to
ratify the selection of auditors, all as further described in this Proxy
Statement. All proxies will be voted in accordance with the instructions
contained therein, and if no choice is specified, the proxies will be voted in
favor of the matters set forth in the accompanying Notice of Meeting.
The Board of Directors of the Corporation knows of no other matters to be
presented at the meeting. If any other matter should be presented at the
meeting upon which a vote properly may be taken, shares represented by all
proxies received by the Board of Directors will be voted with respect thereto
in accordance with the judgment of the persons named as attorneys in the
proxies.
ADJUSTMENTS FOR STOCK SPLITS
All share and per share information in this Proxy Statement has been
adjusted as of each date given to reflect the following stock splits in the
form of stock dividends; (i) a two-for-one in May 1995; (ii) a two-for-one in
October 1995; and (iii) a two-for-one in January 1996.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of February 28, 1998,
with respect to beneficial ownership of the Corporation's Common Stock by: (i)
each person who, to the knowledge of the Corporation, 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 Directors and Officers," and (iv) all
directors, nominees and executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENTAGE OF COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP (1) STOCK OUTSTANDING (2)
------------------------------------ ------------- ---------------------
<S> <C> <C>
5% Stockholders
Capital Group Companies, Inc......... 12,789,580(3) 6.66%
333 South Hope Street
Los Angeles, California 90071
Directors and Executive Officers
Betsy S. Atkins...................... 130,339(4) *
Robert K. Dahl....................... 63,979 *
Roger L. Evans....................... 1,893,592(5) *
C. Richard Kramlich.................. 241,049(6) *
James P. Lally....................... 214,434(7) *
Martin L. Schoffstall................ 50,037(8) *
Mory Ejabat.......................... 1,523,843(9) *
Michael E. Hendren................... 365,746(10) *
Curtis N. Sanford.................... 689,732(11) *
Daniel E. Smith...................... 1,730,339(12) *
Jeanette A. Symons................... 1,230,757(13) *
Directors and executive officers as a
group
(17 persons)........................ 9,232,409(14) 4.64%
</TABLE>
- --------
*Less than 1% of the total number of outstanding shares of 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 Common Stock deemed outstanding on February 28,
1998 includes (i) 191,906,397 shares of Common Stock outstanding on such
date and (ii) all options that are currently exercisable or will become
exercisable within 60 days of February 28, 1998 by the person or group in
question.
2
<PAGE>
(3) Represents shares held by The Capital Group Companies, Inc., which is the
parent holding company of a group of investment management companies that
hold investment power and, in some cases, voting power over the shares
reported. The investment management companies, which include a "bank" and
several investment advisers registered under Section 203 of the
Investment Advisers Act of 1940, provide investment advisory and
management services for their respective clients which include registered
investment companies and institutional accounts. The Capital Group
Companies, Inc. does not have investment power or voting power over any
of the shares reported herein; however, The Capital Group Companies may
be deemed to beneficially own such shares. Information stated above is
based solely on a Schedule 13G filed with the Securities and Exchange
Commission on February 10, 1998.
(4) Includes 72,000 shares of Common Stock issuable pursuant to stock options
that are currently exercisable or will become exercisable within 60 days
of February 28, 1998.
(5) Includes 210,282 shares of Common Stock held by Greylock Limited
Partnership and 588,408 shares of Common Stock held by Greylock Equity
Limited Partnership. Mr. Evans is a general partner of Greylock Limited
Partnership and of Greylock Equity GP Limited Partnership, the general
partner of Greylock Equity Limited Partnership. As such, Mr. Evans may be
deemed to beneficially own such shares, but disclaims beneficial
ownership of the shares. Also includes 180,000 shares of Common Stock
issuable pursuant to stock options that are currently exercisable or will
become exercisable within 60 days of February 28, 1998.
(6) Includes 132,000 shares of Common Stock issuable pursuant to stock
options that are currently exercisable or will become exercisable within
60 days of February 28, 1998.
(7) Includes 180,000 shares of Common Stock issuable pursuant to stock
options that are currently exercisable or will become exercisable within
60 days of February 28, 1998.
(8) Includes 1,600 shares of Common Stock held in an irrevocable charitable
trust in which a family member of Mr. Schofstall is a trustee and Mr.
Schofstall is the beneficiary. Also includes 48,000 shares of Common
Stock issuable pursuant to stock options that are currently exercisable
or will become exercisable within 60 days of February 28, 1998.
(9) Consists of 1,523,843 shares of Common Stock issuable pursuant to stock
options that are currently exercisable or will become exercisable within
60 days of February 28, 1998.
(10) Includes 362,714 shares of Common Stock issuable pursuant to stock
options that are currently exercisable or will become exercisable within
60 days of February 28, 1998.
(11) Includes 2,000 shares of Common Stock held by a family member of Mr.
Sanford. Also includes 569,188 shares of Common Stock issuable pursuant
to stock options that are currently exercisable or will become
exercisable within 60 days of February 28, 1998.
(12) Includes 1,577,569 shares of Common Stock issuable pursuant to stock
options that are currently exercisable or will become exercisable within
60 days of February 28, 1998.
(13) Includes 1,120,093 shares of Common Stock issuable pursuant to stock
options that are currently exercisable or will become exercisable within
60 days of February 28, 1998.
(14) Includes an aggregate of 6,858,305 shares of Common Stock issuable
pursuant to stock options that are currently exercisable or will become
exercisable within 60 days of February 28, 1998.
3
<PAGE>
ELECTION OF DIRECTORS
Eight (8) directors, constituting the Corporation's full Board of Directors,
are to be elected at the Annual Meeting. If elected, the nominees will serve
as directors until the Corporation's Annual Meeting of Stockholders in 1999
and until their successors are elected and qualified.
Management's nominees for election to the Board of Directors and certain
information with respect to their age and background are set forth below.
Management knows of no reason why any nominee would be unable or unwilling to
serve. However, if any nominee(s) should for any reason be unable or unwilling
to serve, the proxies will be voted for such substitute nominees as management
may designate.
If a quorum is present and voting, the nominees for directors receiving the
highest number of affirmative votes will be elected as directors. Abstentions
and shares held by brokers that are present, but not voted because the brokers
were prohibited from exercising discretionary authority, i.e., "broker non-
votes," will be counted as present for purposes of determining whether a
quorum is present.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE
ELECTION OF THE NOMINEES LISTED BELOW.
<TABLE>
<CAPTION>
NAME POSITION WITH THE CORPORATION AGE DIRECTOR SINCE
---- ----------------------------- --- --------------
<C> <S> <C> <C>
Mory Ejabat...................... Director, President and 48 1994
Chief Executive Officer
Daniel E. Smith.................. Director, EVP and 48 1997
General Manager, Core
Systems
Robert K. Dahl................... Director 57 1995
Betsy S. Atkins.................. Director 42 1989
Roger L. Evans................... Director 52 1989
C. Richard Kramlich.............. Director 63 1990
James P. Lally................... Director 52 1989
Martin L. Schoffstall............ Director 38 1996
</TABLE>
There are no family relationships among any directors or executive officers of
the Corporation.
BOARD OF DIRECTORS' MEETINGS AND COMMITTEES
During 1997, the Board of Directors held eight (8) meetings. No incumbent
director serving on the Board of Directors in 1997 attended fewer than 75% of
such meetings of the Board of Directors and the Committees on which he or she
serves, except Messrs. Schoffstall and Smith.
The Corporation has an Audit Committee and a Compensation Committee.
The Audit Committee's function is to review with the Corporation's
independent auditors and management the annual financial statements and
independent auditors' opinion, review the scope and results of the examination
of the Corporation's financial statements by the independent auditors, approve
all professional services and related fees performed by the independent
auditors, recommend the retention of the independent auditors to the Board of
Directors, subject to ratification by the stockholders, and periodically
review the Corporation's accounting policies and internal accounting and
financial controls. The members of the Audit Committee are Messrs. Evans and
Lally. During 1997, the Audit Committee held one (1) meeting.
The Compensation Committee's function is to review and establish salary
levels for executive officers and certain other management employees and to
grant stock options. The members of the Compensation Committee are Ms. Atkins
and Mr. Kramlich. During 1997, the Compensation Committee held one (1)
meeting. For additional information concerning the Compensation Committee, see
"Compensation Committee Report on Executive Compensation."
4
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS PROFESSIONAL EXPERIENCE
Mory Ejabat has served as President, Chief Executive Officer and Director of
the Corporation since June 1995. Prior to that, Mr. Ejabat served as the
Corporation's President, Chief Operating Officer and Director from March 1994
to June 1995, as Executive Vice President from December 1992 to March 1994 and
as Vice President, Operations from January 1990 to December 1992. Mr. Ejabat
also served in various management capacities, including Vice President for
Wide Area Communications Products and Vice President of Development and
Operations for Micom Systems, Inc., a data communications equipment
manufacturer.
Daniel E. Smith has served as Executive Vice President and General Manager,
Core Systems and Director of the Corporation since June 1997. Prior to that
time, Mr. Smith served as President, Chief Executive Officer and Director of
Cascade Communications Corp. from April 1992 to June 1997. From August 1987
until April 1992, Mr. Smith served as Vice President of Sales for Proteon,
Inc., a producer of LAN and LAN interworking products.
Robert K. Dahl has served as a director of the Corporation since July 1995.
Prior to that time, Mr. Dahl served as Executive Vice President, Planning of
the Corporation from October 1997 to January 1998. Mr. Dahl served as Vice
President of Finance and Chief Financial Officer of the Corporation from
January 1994 to October 1997. Prior to joining the Corporation, Mr. Dahl was a
private investor and a principal in Dahl-De Vivo Management Co., a private
investment firm. Mr. Dahl also serves on the Board of Directors of the Bank of
Alameda, Timesink, Inc., Spear Technologies, Inc. and Northpoint
Communications, Inc.
Betsy S. Atkins has served as a director of the Corporation since August
1989. Ms. Atkins has been retired since 1993. Prior to that time, Ms. Atkins
was President and Chief Executive Officer of Nellson Candies, Inc. from 1990
to 1993. From August 1989 to January 1990, Ms. Atkins was Vice President of
Marketing and Sales for the Corporation. From 1987 to 1988, Ms. Atkins served
Vice President of Marketing for Unisys Corporation, a computer manufacturer.
Ms. Atkins also serves as Chairperson of the Board of Directors of Amplitude
Software Corp. and a member of the Board of Directors of Secure Computing
Corporation.
Roger L. Evans has served as a director of the Corporation since April 1989.
In 1989, Mr. Evans joined Greylock Management Corporation, the service
organization to the Greylock venture capital partnerships and became a Special
Limited Partner of Greylock Capital Limited Partnership. He has been a General
Partner of Greylock Limited Partnership since 1991, Greylock Equity Limited
Partnership since 1994 and Greylock IX Limited Partnership since 1997.
C. Richard Kramlich has served as a director of the Corporation 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., Silicon
Graphics, Inc., SyQuest Technology, Inc. and Lumisys, Inc.
James P. Lally has served as a director of the Corporation 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 NeoMagic Corp.
Martin L. Schoffstall has served as a director of the Corporation since June
1996. Mr. Schoffstall is a founder of Timesink, Inc., an internet
communications and advertising 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, as director and Chief Technical Officer of PSINet from its
inception in 1988 to April 1996 and as Vice President and Treasurer of PSINet
from 1988 to February 1995. Mr. Schoffstall also serves on the Board of
Directors of Go2net, Inc.
5
<PAGE>
Curtis N. Sanford has served as Senior Vice President, International Sales
and General Manager of International Operations since December 1995. Prior to
that time, Mr. Sanford served as the Corporation's Vice President of
International Sales from May 1994 to December 1995, as Vice President
Worldwide Marketing and International Sales from January 1993 to May 1994 and
Vice President, International from January 1990 to January 1993. From June
1980 to December 1989, Mr. Sanford served in various positions, including
Director, Far East Operations for BBN Communications Corporation, a data
communications equipment manufacturer.
Michael E. Hendren has served as Senior Vice President, North American Sales
and Service of the Corporation since December 1995. Prior to that time, Mr.
Hendren served as Vice President, North American Sales of the Corporation from
May 1994 to December 1995. From January 1990 to April 1994, Mr. Hendren served
in various management positions, including Vice President of Sales for ACC
Corp., a communications equipment manufacturer.
Jeanette A. Symons is co-founder of the Corporation and has served as
Executive Vice President of Advanced Products and Chief Technical Officer
since June 1995. Prior to that time, Ms. Symons served as Vice President of
Engineering for the Corporation from January 1994 to June 1995 and served in
various other management positions with the Corporation from 1989 to 1993. Ms.
Symons served as a software engineer from October 1983 to December 1988 for
Hayes Microcomputer, where she developed and managed its ISDN program.
6
<PAGE>
COMPENSATION AND OTHER INFORMATION
CONCERNING 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 the Corporation
during the fiscal years ended December 31, 1997, 1996 and 1995 to the
Corporation's Chief Executive Officer and each of the four most highly
compensated executive officers of the Corporation in fiscal year 1997 (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
COMPENSATION
--------------------------------------------------
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
NAMED AND PRINCIPAL ----------------------------- OTHER ANNUAL ------------
POSITION YEAR SALARY ($) BONUS ($) (2) COMPENSATION ($) (3) OPTIONS (#)
- ------------------- ---- ---------- ------------- -------------------- ------------
<S> <C> <C> <C> <C> <C>
Mory Ejabat............. 1997 426,464 238,000 2,768 300,000
President and Chief 1996 327,928 487,500 3,983 400,000
Executive Officer 1995 233,103 230,000 4,740 1,023,840
Michael E. Hendren...... 1997 357,216 -- -- 75,000
Senior Vice President, 1996 325,227 -- -- 150,000
North America Sales and 1995 331,029 -- -- 170,000
Service
Robert K. Dahl.......... 1997 340,960 163,200 11,753 --
Executive Vice 1996 290,960 435,000 14,272 350,000
President, Planning 1995 201,308 200,000 19,290 401,680
(Retired January 1998)
Curtis N. Sanford....... 1997 336,827 -- 4,860 112,500
Senior Vice President, 1996 541,051 -- 4,860 150,000
International 1995 333,465 -- 4,860 251,680
Sales and General
Manager of
International
Operations
Jeanette A. Symons...... 1997 250,000 120,000 3,240 225,000
Executive Vice 1996 200,000 300,000 3,240 300,000
President, Advanced 1995 141,500 141,500 3,240 501,760
Products and Chief
Technical Officer
</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
$50,000 or 10% of the total of annual salary and bonus reported.
(2) Bonuses are reported in the year earned, even if actually paid in a
subsequent year.
(3) Represents interest waived by the Corporation which had accrued on full-
recourse notes from the executive officer during the fiscal year.
7
<PAGE>
OPTION GRANTS IN 1997
The following table provides the specified information concerning grants of
options to purchase the Corporation's Common Stock made during 1997 to the
Corporation's Named Executive Officers. No stock appreciation rights were
granted in 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE OF ASSUMED ANNUAL
SECURITIES OPTIONS RATES OF STOCK
UNDERLYING GRANTED TO PRICE APPRECIATION
OPTIONS EMPLOYEES EXERCISE FOR OPTION TERM (3)
GRANTED IN FISCAL PRICE EXPIRATION ------------------------
NAME (#) (1) YEAR ($/SHARE) (2) DATE 5% ($) 10% ($)
- ---- ---------- ---------- ------------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Mory Ejabat............. 300,000 .70% 23.63 12/03/07 4,457,291 11,295,650
Michael E. Hendren...... 75,000 .18% 23.63 12/03/07 1,114,323 2,823,912
Robert K. Dahl.......... -- -- -- -- -- --
Curtis N. Sanford....... 112,500 .26% 23.63 12/03/07 1,671,484 4,235,869
Jeanette A. Symons...... 225,000 .53% 23.63 12/03/07 3,342,968 8,471,737
</TABLE>
- --------
(1) All options granted in 1997 were granted under the Corporation'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 the
Corporation 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
options granted to the Named Executive Officers above vest as to 1/36th of
the subject shares upon completion of each full month of continuous
employment following the date of grant.
(2) All options were granted with an exercise price equal to the fair market
value per share of the Common Stock on the date of grant.
(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 Securities and Exchange
Commission and do not represent the Corporation's estimate or projection
of the future Common Stock price. Actual gains, if any, on stock option
exercises are dependent on the future financial performance of the
Corporation, overall market conditions and the option holder's continued
employment through the vesting period.
8
<PAGE>
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information with respect to options to
purchase the Corporation's Common Stock granted to the Corporation's Named
Executive Officers under the Corporation's 1989 Stock Option Plan, including:
(i) the number of shares of Common Stock purchased upon exercise of options in
the fiscal year ending December 31, 1997; (ii) the net value realized upon
such exercise; (iii) the number of unexercised options outstanding at December
31, 1997; and (iv) the value of such unexercised options at December 31, 1997.
No stock appreciation rights were exercised or outstanding in 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY OPTIONS
OPTIONS AT FY-END (2) AT FY-END ($)(3)
------------------------- -------------------------
SHARES VALUE
ACQUIRED ON REALIZED
NAME EXERCISE (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mory Ejabat............. 54,339 3,121,611 1,573,843 0 10,986,207 0
Michael E. Hendren...... 145,625 5,655,934 454,791 0 4,671,659 0
Robert K. Dahl.......... 107,654 3,510,791 574,506 0 885,788 0
Curtis N. Sanford....... -- -- 569,188 0 4,277,555 0
Jeanette A. Symons...... -- -- 1,120,093 0 9,729,928 0
</TABLE>
- --------
(1) Amounts disclosed in this column do not reflect amounts actually received
by the Named Executive Officers, but are calculated based on the
difference between the fair market value of the Corporation's Common Stock
on the date of exercise and the exercise price of the options. Named
Executive Officers will receive cash only if and when they sell the Common
Stock issued upon exercise of the options and the amount of cash received
by such individuals is dependent on the price of the Corporation's Common
Stock at the time of such sale.
(2) Options granted under the Corporation's 1989 Stock Option Plan generally
are exercisable immediately subject to a repurchase right in favor of the
Corporation which lapses as the option vests as described in Footnote 1 to
the table entitled "Option Grants in Last Fiscal Year."
(3) Value is based on the difference between the option exercise price and the
fair market value at December 31, 1997, the last day during fiscal year
1997 for which market prices are available ($24.50 per share as quoted on
the Nasdaq National Market), multiplied by the number of shares underlying
the option.
EMPLOYMENT CONTRACTS AND TERMINATION AND CHANGE OF CONTROL ARRANGEMENTS
Certain options granted under the Corporation's 1989 Stock Option Plan
contain provisions pursuant to which the unvested portions of outstanding
options become immediately exercisable and fully vested upon a merger of the
Corporation in which the Corporation's stockholders do not retain, directly or
indirectly, at least a majority of the beneficial interest in the voting stock
of the Corporation 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 the
consummation of the merger, or assumed or substituted for by the successor
corporation.
In March 1998, the Board of Directors approved certain benefits for officers
and other key employees upon a change in control of the Corporation in which
the Corporation's stockholders do not retain, directly or indirectly, greater
than 55% of the beneficial interest in the voting stock of the Corporation or
its successor, or there is a change of a majority of the incumbent members of
the Board of Directors of the Corporation or its successor. Certain
outstanding options granted to officers and other key employees will receive
12 months advancement of vesting and, under certain circumstances, the
individual may receive severance payments for up to 18 months at the
individual's current annual salary plus adjustments for taxes.
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COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee (the "Committee") is comprised of two outside
directors of the Board of Directors and is responsible for establishing and
monitoring policies governing the compensation of executive officers and
certain other key employees. For executive officers, the Committee reviews the
performance and compensation levels, sets salary and bonus levels and
recommends to the Board of Directors option grants under the Corporation's
option plan. The Committee attempts to correlate executive officer
compensation with the Corporation's business objectives and performance, and
to enable the Corporation to attract, retain and reward executive officers and
other key employees who contribute to the long-term success of the
Corporation.
OVERVIEW AND POLICIES FOR 1997
In 1997, compensation for the Corporation's executive officers consisted
primarily of base salary, potential bonuses based upon the Corporation's
performance for the year and long-term equity incentives in the form of stock
options.
Base Salary
With the assistance of management, the Committee engaged consultants to
survey the compensation practices in the high technology industry (the "Peer
Group Companies") to ensure that the Corporation's compensation structure was
competitive. In preparing the Stock Performance Graph included in this Proxy
Statement, the Corporation selected the Nasdaq Telecommunications Stock Index
(the "Nasdaq Index") as its published industry index. The companies included
in the Peer Group Companies are not necessarily those included in the Nasdaq
Index, because companies in the Nasdaq Index may not compete with the
Corporation for executive talent, and companies which do compete for executive
officers may not be publicly traded. The Committee also reviewed the
Corporation's financial performance in 1996, certain milestones achieved by
the Corporation (including profitability, sales levels, the successful
acquisitions of various companies and new product introductions) and
individual executive officer responsibilities. As a result of the survey and
based upon the Corporation's strong performance in 1996, the Committee
approved increases to executive officers base salaries so that they were
approximately in the 75th percentile range for comparable positions at
similarly sized high technology corporations.
For 1997, each executive officer, including the Chief Executive Officer,
received his or her base salary as recommended by the Committee.
Performance Bonuses
It is the policy of the Committee that a portion of the annual cash
compensation of each executive officer be contingent upon the performance of
the Corporation. The Committee approves an executive bonus plan each year.
During 1997, the Corporation's bonus plan was based upon certain financial
objectives and individual non-financial objectives and had three targeted
bonus performance levels. Annual bonus compensation at the lowest, mid-range
and highest targeted bonus performance levels represented up to approximately
60%, 90% and 120%, respectively, of the base salary for each executive officer
who participated in the bonus plan.
In 1997, the Corporation paid bonuses to each executive officer in an amount
equal to approximately 50% of the respective executive officer's base salary.
Long-Term Equity Incentives
The Committee believes in granting stock options to the Corporation's
executive officers in an attempt to tie executive officer compensation
directly to the long-term success of the Corporation and increase in
stockholder value. In addition, the Committee believes annual unvested stock
option grants to executive officers are important to retain current executive
officers.
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In December 1997, each executive officer, except Messrs. Ashby, Dahl,
Misunas and Schneider were granted a stock option under the Corporation's 1989
Stock Option Plan. The size of each grant was based on the executive officer's
position with the Corporation, the executive officer's past performance and
the number of unvested options then held by the executive officers.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Ejabat has served as an executive officer of the Corporation since
January 1990 and has served as the Corporation's Chief Executive Officer since
June 1995. Mr. Ejabat's base salary for 1997 was established by the Committee
based upon (i) the Corporation's financial performance; (ii) Mr. Ejabat's
individual duties; and (iii) the salaries paid to executives with comparable
positions at similarly situated high technology companies. Based upon these
criteria, Mr. Ejabat earned his base salary and a 50% bonus under the
Corporation's bonus plan in recognition of the Corporation's achievement of
successful acquisitions, individual duties and contributions, the expansion of
the Corporation's senior management team and the Corporation's continued
development of new products. Mr. Ejabat also received in December 1997 a stock
option grant for 300,000 shares under the Corporation's 1989 Stock Option Plan
as part of his compensation for 1997.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
The Committee does not believe Section 162(m) of the Internal Revenue Code
of 1986, as amended (the "Code"), which disallows a tax deduction for certain
compensation in excess of $1 million, will have an effect on the Corporation
in the near future. The Committee believes that stock options granted under
the 1989 Stock Option Plan and, if approved by the stockholders, the 1998
Stock Incentive Plan meet the exception for qualified performance-based
compensation in accordance with Internal Revenue Code Regulations, so that
amounts otherwise deductible with respect to such options will not count
toward the $1 million deduction limit. The Committee's general policy is to
take into account the deductibility of compensation in determining the type
and amount of compensation payable to executive officers.
RESPECTFULLY SUBMITTED BY THE COMPENSATION
COMMITTEE:
Betsy S. Atkins
C. Richard Kramlich
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1997, the Compensation Committee was comprised of two outside
directors of the Board of Directors, Ms. Atkins and Mr. Kramlich. No member of
the Compensation Committee was at any time during the past fiscal year an
officer or employee of the Corporation or any of its subsidiaries.
No executive officer of the Corporation 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 the Corporation. In addition, no executive officer of
the Corporation served on the Board of Directors of another entity, one of
whose executive officers served as a member of the Compensation Committee of
the Corporation.
COMPENSATION OF DIRECTORS
For each meeting of the Board of Directors which they attend, directors are
reimbursed for reasonable travel expenses incurred. Pursuant to the
Corporation's 1994 Outside Directors Stock Option Plan (the "Directors Option
Plan"), all directors who are not employees of the Corporation are
automatically granted non-qualified stock options to purchase the
Corporation's Common Stock upon their initial appointment to the Board of
Directors (each, an "Initial Grant") and then thereafter on an annual basis
(each a "Subsequent Grant"). The Initial Grant is for an option to purchase
192,000 shares and the Subsequent 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. The
exercise price per share of all options granted under the Directors Option
Plan is equal to the fair market value of the Corporation's Common Stock on
the date of grant, and such options expire on the date which is ten years from
the date of option grant. Options to purchase 240,000 shares of Common Stock
at an exercise price of $56.625 per share were granted to the non-employee
directors in 1997.
If the proposed amendments to the Directors Option Plan are approved by the
stockholders of the Corporation at the Annual Meeting then the Initial Grant
to non-employee directors elected for the first time after the Annual Meeting
will be decreased from 192,000 shares to 75,000 shares and each Subsequent
Grant to all non-employee directors occurring after the Annual Meeting will be
decreased from 48,000 shares to 25,000 shares.
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STOCK PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the cumulative
total stockholder return on the Corporation's Common Stock during the period
from the Corporation's initial public offering through December 31, 1997, with
the cumulative total return on the Nasdaq Telecommunications Stock Index and
Standard and Poor's 500 Stock Index.
COMPARISON OF CUMULATIVE TOTAL RETURN
FROM MAY 13, 1994 THROUGH DECEMBER 31, 1997(1)
ASCEND COMMUNICATIONS, INC., STANDARD AND POOR'S 500 INDEX
AND NASDAQ TELECOMMUNICATIONS INDUSTRY INDEX
PERFORMANCE GRAPH APPEARS HERE
<TABLE>
<CAPTION>
Measurement Period ASCEND S&P NASDAQ TELECOM.
(Fiscal Year Covered) COMMUNICATIONS, INC. 500 STOCKS INDUSTRY INDEX
- --------------------- -------------------- ---------- ---------------
<S> <C> <C> <C>
Measurement Pt- 05/13/94 $100.0 $100.0 $100.0
FYE 12/30/94 $271.7 $103.4 $102.4
FYE 12/29/95 $2163.3 $138.7 $137.3
FYE 12/31/96 $3313.3 $166.8 $142.3
FYE 12/31/97 $1306.7 $218.5 $202.1
</TABLE>
- --------
(1) Assumes that $100.00 was invested on May 13, 1994 in the Corporation's
Common Stock and each index. Stockholder returns over the indicated period
should not be considered indicative of future stockholder returns.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1994, the Corporation 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. The
Corporation waived an aggregate of approximately $33,000, $30,000 and $26,000
of interest which had accrued on these notes during 1995, 1996 and 1997,
respectively. The Corporation 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.
In January 1997, Cascade Communications Corp. ("Cascade"), a wholly-owned
subsidiary of the Corporation, completed its acquisition of Sahara Networks,
Inc. ("Sahara"), a privately held developer of scaleable high-speed broadband
access products, by means of a merger (the "Sahara Merger") of a wholly-owned
subsidiary of Cascade with and into Sahara. As a result of the Sahara Merger,
Sahara became a wholly-owned subsidiary of Cascade. Cascade issued
approximately 3.4 million shares of Cascade Common Stock (or 2.4 million
equivalent shares of the Corporation's Common Stock after exchange ratio) in
exchange for all outstanding shares of Sahara, of which 840,583 shares were
issued to Greylock Equity Limited Partnership. Mr. Evans, a director of the
Corporation, is a general partner of Greylock Equity GP Limited Partnership,
the general partner of Greylock Equity Limited Partnership.
In April 1997, the Corporation completed its acquisition of Whitetree, Inc.
("Whitetree"), a privately held developer and manufacturer of high speed
Asynchronous Transfer Mode switching products, by means of a merger (the
"Whitetree Merger") of a wholly-owned subsidiary of the Corporation with and
into Whitetree. As a result of the Whitetree Merger, Whitetree become a
wholly-owned subsidiary of the Corporation. The Corporation issued
approximately 1.3 million shares of the Corporation's Common Stock in exchange
for all outstanding shares of Whitetree, of which 215,661 shares were issued
to Greylock Limited Partnership. Mr. Evans, a director of the Corporation , is
a general partner of Greylock Limited Partnership.
In June 1997, the Corporation completed its acquisition of Cascade, a
developer and manufacturer of wide area network switches, by means of a merger
(the "Cascade Merger") of a wholly-owned subsidiary of the Corporation with
and into Cascade. As a result of the Cascade Merger, Cascade became a wholly-
owned subsidiary of the Corporation. The Corporation issued approximately 66.3
million shares of the Corporation's Common Stock in exchange for all
outstanding shares of Cascade, of which 588,408 shares were issued to Greylock
Equity Limited Partnership. Mr. Evans, a director of the Corporation, is a
general partner of Greylock Equity GP Limited Partnership, the general partner
of Greylock Equity Limited Partnership.
To date, the Corporation 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 the Corporation's independent and
disinterested directors.
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PROPOSAL TO APPROVE THE IMPLEMENTATION OF THE 1998 STOCK INCENTIVE PLAN
The Corporation's stockholders are being asked to approve the 1998 Stock
Incentive Plan (the "1998 Plan"), pursuant to which 9,000,000 shares of Common
Stock will be reserved for issuance plus the number of shares of Common Stock
remaining for issuance under the Corporation's First Restated and Amended 1989
Stock Option Plan (the "Predecessor Plan"). The Board of Directors has
authorized the implementation of the 1998 Plan as a comprehensive equity
incentive program to attract and retain the services of those individuals
essential to the Corporation's growth and financial success. The 1998 Plan
will become effective upon the approval of the stockholders at the 1998 Annual
Meeting.
SUMMARY OF THE PROVISIONS OF THE 1998 PLAN
The following summary of the 1998 Plan is qualified in its entirety by the
specific language of the 1998 Plan, a copy of which is available to any
stockholder upon request.
General. The 1998 Plan provides for the grant of (i) incentive stock options
within the meaning of section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") to employees (including officers and directors) and (ii)
non-statutory stock options, direct stock awards and authorizations to make
direct stock purchases to employees (including officers and directors), non-
employee Board members and consultants. All equity incentives granted under
the 1998 Plan shall be referred to hereafter collectively as "Stock Rights".
Initially, a maximum of 37,000,000 of the authorized but unissued shares or
treasury shares of the Common Stock of the Corporation may be issued upon the
exercise of Stock Rights granted pursuant to the 1998 Plan, which amount
includes (i) approximately 4,000,000 shares remaining available for issuance
under the Predecessor Plan, (ii) approximately 24,000,000 shares subject to
outstanding options under the Predecessor Plan, plus (iii) an additional
increase of 9,000,000 shares. The 1998 plan limits the number of shares for
which Stock Rights may be granted to any person within any fiscal year of the
Corporation to 500,000 (the "Stock Right Limit"). In the event of any stock
dividend, stock split, reverse stock split, recapitalization, combination,
reclassification, or like change in the capital structure of the Corporation,
appropriate adjustments will be made to the shares subject to the 1998 Plan,
to the Stock Right Limit and to outstanding Stock Rights. To the extent any
outstanding Stock Right under the 1998 Plan, or the Predecessor Plan, expires
or terminates prior to exercise in full or if shares issued upon exercise of a
Stock Right are repurchased by the Corporation, the shares of Common Stock for
which such Stock Right is not exercised or the repurchased shares are returned
to the 1998 Plan and become available for future grant. The Corporation
intends that compensation related to Stock Rights granted under the 1998 Plan
qualifies for the "performance-based compensation" exemption under Section
162(m) of the Code. Section 162(m) generally limits the deductibility by the
Corporation for federal income tax purposes of compensation paid to certain
executive officers.
Administration. The 1998 Plan is administered by the Board or a duly
appointed committee of the Board. Subject to the provisions of the 1998 Plan,
the Board or the committee determines the persons to whom Stock Rights are to
be granted, the number of shares to be covered by each Stock Right, the terms
of vesting and exercisability of each Stock Right, the type of consideration
to be paid to the Corporation upon exercise of a Stock Right, whether an
option is to be an incentive stock option or a non-statutory stock option, the
term of each option, and all other terms and conditions of Stock Rights. The
Board or committee will interpret the 1998 Plan and Stock Rights granted under
the 1998 Plan, and all determinations of the Board or committee will be final
and binding on all persons having an interest in the 1998 Plan or any Stock
Right.
Eligibility. All employees (including officers and directors), non-employee
Board members, consultants, advisors or other independent contractors of the
Corporation or of any present or future parent or subsidiary corporations of
the Corporation are eligible to participate in the 1998 Plan. As of February
28, 1998 the Corporation had approximately 1,736 employees, including 11
executive officers and 6 non-employee Board members. Only employees may be
granted incentive stock options.
Terms and Conditions of Options. Each option granted under the 1998 Plan is
evidenced by a written agreement between the Corporation and the optionee
specifying the number of shares subject to the option and
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<PAGE>
the other terms and conditions of the option, consistent with the requirements
of the 1998 Plan. The per share exercise price of an option must equal at
least the fair market value of a share of the Corporation's Common Stock on
the date of grant. The per share exercise price of any option granted to a
person who at the time of grant owns stock possessing more than 10% of the
total combined voting power of all classes of stock of the Corporation or any
parent or subsidiary corporation of the Corporation must be at least 110% of
the fair market value of a share of the Corporation's Common Stock on the date
of grant, and the term of any such option cannot exceed five years.
Generally, options may be exercised by payment of the exercise price in
cash, by check, or in cash equivalent, by tender of shares of the
Corporation's Common Stock owned by the optionee having a fair market value
not less than the exercise price, by the assignment of the proceeds of a sale
of some or all of the shares of Common Stock being acquired upon the exercise
of the option, or by any combination of these. However, the Board or committee
may restrict the forms of payment permitted in connection with any option
grant or may grant options permitting payment of the exercise price with a
promissory note.
Options granted under the 1998 Plan will become exercisable and vested at
such times as specified by the Board or committee. Generally, options granted
under the 1998 Plan are exercisable on and after the date of grant, subject to
the right of the Corporation to reacquire at the optionee's exercise price any
unvested shares held by the optionee upon termination of employment or service
with the Corporation or if the optionee attempts to transfer any unvested
shares. Shares subject to options generally vest in installments subject to
the optionee's continued employment or service. The Board or committee shall
have the right to accelerate the date of exercise of any installment of any
option, provided such acceleration does not adversely affect the optionee's
rights thereunder. The maximum term of options granted under the 1998 Plan is
ten years. Options are nontransferable by the optionee other than by will or
by the laws of descent and distribution, and are exercisable during the
optionee's lifetime only by the optionee.
Terms and Conditions of Direct Stock Awards and Purchases. Participants in
the 1998 Plan may be provided the opportunity to make direct purchases of
shares under the 1998 Plan at a price per share not less than one hundred
percent (100%) of fair market value, payable in cash, check, cash equivalent
or, if permitted by the Board or committee, through a promissory note payable
to the Corporation. Shares may also be awarded solely as a bonus for past
services. Each such grant under the 1998 Plan is evidenced by a written
agreement between the Corporation and the grantee specifying the number of
shares to be awarded and/or purchased and the other terms and conditions of
the grant, consistent with the requirements of the 1998 Plan.
The shares issued upon such awards or direct purchases may either be
immediately vested upon issuance or subject to a vesting schedule tied to the
performance of service or the attainment of performance goals. The Board will,
however, have the discretionary authority at any time to accelerate the
vesting of any unvested shares.
Transfer of Control. A "Transfer of Control" will be deemed to have occurred
in the event any of the following occurs with respect to the Corporation
(including a successor whose stock is issued under the Plan): (i) the direct
or indirect sale or exchange by the stockholders of the Corporation of all or
substantially all of the stock of the Corporation where the stockholders of
the Corporation immediately before such sale or exchange do not retain,
directly or indirectly and in substantially the same proportion, beneficial
interest in voting stock of the Corporation or surviving entity representing
at least a majority of the voting power of all voting stock of the
Corporation, (ii) a merger, consolidation, reorganization or similar
transaction in which the stockholders of the Corporation immediately before
such merger do not retain, directly or indirectly and in substantially the
same proportion, beneficial interest in the voting stock of the surviving
entity representing a majority of the voting power of all stock, or (iii) the
sale, exchange, or transfer (including without limitation, pursuant to a
liquidation or dissolution) of all or substantially all of the Corporation's
assets (other than a sale, exchange, or transfer to one (1) or more
corporations where the stockholders of the Corporation immediately before such
sale, exchange, or transfer retain, directly or indirectly and in
substantially the same proportion, beneficial interest in voting stock of the
corporation(s) to which the assets were transferred, representing at least a
majority of the combined voting power of all voting stock of such entity. If a
Transfer of Control occurs, the successor corporation, or parent
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<PAGE>
corporation thereof, will either assume outstanding options or substitute
options for the stock of the successor corporation for the outstanding
options. However, if the successor corporation elects not to assume or
substitute outstanding options in connection with a merger described in clause
(ii) above, the Corporation's Board will provide that any unexercisable and/or
unvested portion of the outstanding options will be immediately exercisable
and vested. Any options which are neither assumed or substituted by the
successor corporation nor exercised as of the date of the Transfer of Control
will terminate effective as of such date.
Options held by individuals at the level of corporate vice president or
higher at the time of a Transfer of Control shall be accelerated such that the
optionee shall be entitled to an additional twelve months of vesting, or if
the Option would have been fully vested in less than twelve months, then the
option shall be fully vested.
Termination or Amendment. The Board shall have complete and exclusive power
and authority to amend or modify the 1998 Plan in any or all respects.
However, no such amendment or modification may adversely affect the rights and
obligations with respect to Stock Rights at the time outstanding under the
1998 Plan unless the grantee consents to such amendment or modification. In
addition, certain amendments may, as determined by the Board in its sole
discretion, require stockholder approval pursuant to applicable laws or
regulations. The Board may terminate the 1998 Plan at any time, and the 1998
Plan will in all events terminate on March 3, 2008.
Nothing in the 1998 Plan prohibits the Corporation from adopting any other
equity compensation plan for employees of the Corporation and its
subsidiaries, including employees to receive Stock Rights under the 1998 Plan.
As of February 28, 1998, the Corporation had outstanding under the
Predecessor Plan options to purchase an aggregate of approximately 24,000,000
shares at a weighted average exercise price of $24.54 per share. The exercise
price of all options granted under the Predecessor Plan has been at least
equal to the fair market value per share of the Common Stock on the date of
grant as determined in good faith by the Board. As of February 28, 1998,
options to purchase approximately 17,000,000 shares of Common Stock granted
pursuant to the Predecessor Plan had been exercised, and there were
approximately 4,000,0000 shares of Common Stock available for future grants
under the Predecessor Plan. On February 27, 1998, the closing price of the
Corporation's Common stock, as reported by the Nasdaq National Market, was
$37.4375 per share.
The adoption of the 1998 Plan shall not restrict the authority of the
Corporation to maintain or implement any additional equity incentive plans or
programs under which individuals eligible to participate in the 1998 Plan, or
other persons, may receive option grants or direct stock issuances.
NEW PLAN BENEFITS
Since the Stock Rights proposed provide various criteria from which the
Board or committee may choose to determine grants, it is not possible to
determine the benefits or amounts that will be received by eligible
individuals if the 1998 Plan is approved by stockholders.
SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES OF THE 1998 PLAN
Options granted under the 1998 Plan may be either incentive stock options
which satisfy the requirements of Section 422 of the Internal Revenue Code or
non-statutory options which are not intended to meet such requirements. The
Federal income tax treatment for the two types of options differs as follows:
Incentive Options. No taxable income is recognized by the optionee at the
time of the option grant, and no taxable income is generally recognized at the
time the option is exercised. The optionee will, however, recognize taxable
income in the year in which the purchased shares are sold or otherwise
disposed of. For Federal tax purposes, dispositions are divided into two
categories: (i) qualifying and (ii) disqualifying. A qualifying disposition
occurs if the sale or other disposition is made after the optionee has held
the shares for more than
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two years after the option grant date and more than one year after the
exercise date. If either of these two holding periods is not satisfied, then a
disqualifying disposition will result.
If the optionee makes a disqualifying disposition of the purchased shares,
then the Corporation will be entitled to an income tax deduction, for the
taxable year in which such disposition occurs, equal to the excess of (i) the
fair market value of such shares on the option exercise date over (ii) the
exercise price paid for the shares. In no other instance will the Corporation
be allowed a deduction with respect to the optionee's disposition of the
purchased shares.
Non-Statutory Options. No taxable income is recognized by an optionee upon
the grant of a non-statutory option. The optionee will in general recognize
ordinary income, in the year in which the option is exercised, equal to the
excess of the fair market value of the purchased shares on the exercise date
over the exercise price paid for the shares, and the optionee will be required
to satisfy the tax withholding requirements applicable to such income.
If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by the Corporation in the event of the
optionee's termination of service prior to vesting in those shares, then the
optionee will not recognize any taxable income at the time of exercise but
will have to report as ordinary income, as and when the Corporation's
repurchase right lapses, an amount equal to the excess of (i) the fair market
value of the shares on the date the repurchase right lapses over (ii) the
exercise price paid for the shares. The optionee may, however, elect under
Section 83(b) of the Internal Revenue Code to include as ordinary income in
the year of exercise of the option an amount equal to the excess of (i) the
fair market value of the purchased shares on the exercise date over (ii) the
exercise price paid for such shares. If the Section 83(b) election is made,
the optionee will not recognize any additional income as and when the
repurchase right lapses.
The Corporation will be entitled to an income tax deduction equal to the
amount of ordinary income recognized by the optionee with respect to the
exercised non-statutory option. The deduction will in general be allowed for
the taxable year of the Corporation in which such ordinary income is
recognized by the optionee.
Direct Stock Awards and Purchases. The tax principles applicable to direct
stock awards and purchases under the 1998 Plan will be substantially the same
as those summarized above for the exercise of non-statutory option grants.
ACCOUNTING TREATMENT
Under APB No. 25, which the Corporation has elected to follow, Stock Rights
with exercise or purchase prices less than the fair market value of the shares
on the grant date will result in a compensation expense to the Corporation's
earnings equal to the difference between the exercise or purchase price and
the fair market value of the shares on the grant date. Such expense will be
accruable by the Corporation over the period that the underlying shares are to
vest. Stock Rights issued at fair market value on the date of grant will not
result in any charge to the Corporation's earnings. Whether or not granted at
a discount, the number of outstanding Stock Rights may be a factor in
determining the Corporation's earnings per share on a fully-diluted basis.
Under FAS No. 123, footnote disclosure will be required as to the impact the
outstanding Stock Rights under the 1998 Plan would have upon the Corporation's
reported earnings were those Stock Rights valued as compensation expense under
the fair value based method prescribed thereunder for issuers who elect to use
that method.
STOCKHOLDER APPROVAL
The affirmative vote of a majority of the outstanding voting shares of the
Corporation present or represented and entitled to vote at the Annual Meeting
is required for approval of the 1998 Plan. If such approval is obtained, the
1998 Plan will become effective upon the date of the Annual Meeting, and no
future grants under the Predecessor Plan will be made. Should such stockholder
approval not be obtained, then the 1998 Plan will not become effective. The
Corporation's Predecessor Plan would, however, continue to remain in effect,
and option
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grants may continue to be made pursuant to the provisions of that plan until
the available reserve of Common Stock under such plan is issued.
The Board of Directors recommends a vote FOR the approval of the
implementation of the 1998 Plan.
PROPOSAL TO AMEND THE 1994 OUTSIDE DIRECTORS STOCK OPTION PLAN
The Corporation's 1994 Outside Directors Stock Option Plan (the "Directors
Option Plan") was adopted by the Board of Directors in March 1994, and adopted
by the Corporation's stockholders in May 1994. The Directors Option Plan
provides for the automatic grant of non-statutory stock options to directors
of the Corporation who are not employees of the Corporation ("Outside
Directors"). The maximum number of shares of Common Stock of the Corporation
which may be issued upon the exercise of options granted pursuant to the
Directors Option Plan is 2,000,000. There are currently 224,000 shares of
Common Stock of the Corporation available for future issuance under the
Directors Option Plan. Currently under the Directors Option Plan, each Outside
Director automatically receives an option for 192,000 shares on the date of
his or her first election to the Board of Directors (each, an "Initial
Grant"). Each Outside Director who continues to be a Outside Director
immediately following each annual meeting of stockholders occurring after his
or her Initial Grant automatically receives an option to purchase 48,000
shares of Common Stock on each such annual meeting date (each, a "Subsequent
Grant"). The Corporation currently has six Outside Directors eligible to
participate in the Directors Option Plan.
It is now proposed to approve amendments to the Directors Option Plan to (i)
decrease the Initial Grant from 192,000 shares to 75,000 shares for Outside
Directors first elected after this Annual Meeting; (ii) to decrease the
Subsequent Grant for each subsequent year of service on the Board of Directors
from 48,000 shares to 25,000 shares for all Outside Directors following this
Annual Meeting; (iii) to limit the number of shares granted for each Initial
Grant and Subsequent Grant for each subsequent year of service on the Board of
Directors to the amount stated above effective after this Annual Meeting; and
(iv) to increase the number of shares of Common Stock available for issuance
under the Directors Option Plan from 2,000,000 shares to 2,400,000 shares. The
executive officers of the Corporation believe that the Directors Option Plan
is important to permit the Corporation to obtain and retain the service of
qualified persons who are neither employees nor officers of the Corporation to
serve as members of the Board of Directors.
If the proposed amendments to the Directors Option Plan are not approved by
the stockholders of the Corporation, the current provisions of the Directors
Option Plan regarding the number of options granted to Outside Directors and
number of shares of Common Stock issuable under the Directors Option Plan will
remain in effect.
SUMMARY OF THE PROVISIONS OF THE DIRECTORS OPTION PLAN AS AMENDED
General. The Directors Option Plan provides for the automatic grant of non-
statutory stock options to non-employee directors of the Corporation.
Currently, a maximum of 1,844,000 shares of the authorized but unissued shares
or treasury shares of Common Stock of the Corporation may be issued upon the
exercise of options granted pursuant to the Directors Option Plan. In the
event of any stock dividend, stock split, reverse stock split,
recapitalization, combination, reclassification, or like change in the capital
structure of the Corporation, appropriate adjustments will be made to the
shares subject to the Directors Option Plan, to the terms of automatic option
grants under the plan, and to outstanding options. To the extent that any
outstanding option under the Directors Option Plan expires or terminates prior
to exercise in full or if shares issued upon the exercise of an option are
repurchased by the Corporation, the shares of Common Stock for which such
option is not exercised or the repurchased shares are returned to the plan and
become available for future grants.
Administration. The Directors Option Plan is administered by the Board of
Directors or a duly appointed committee of the Board of Directors. However,
the Board or the committee has no discretion to select the non-
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<PAGE>
employee directors of the Corporation who are granted options under the
Directors Option Plan, to set the exercise price of such options, to determine
the number of shares for which or the time at which particular options are
granted or to establish the duration of such options. The Board or committee
is authorized to interpret the Directors Option Plan and options granted under
the plan, and all such determinations of the Board or committee will be final
and binding on all persons having an interest in the Directors Option Plan or
any option.
Eligibility. Only directors of the Corporation who are not at the time of
option grant employees of the Corporation or of any parent or subsidiary of
the Corporation (the "Outside Directors") are eligible to participate in the
Directors Option Plan. As of February 28, 1998, six Outside Directors were
eligible to participate in the Directors Option Plan.
Automatic Grant of Options. The Directors Option Plan became effective on
May 13, 1994, the date of the Corporation's initial registration of its Common
Stock under Section 12 of the Securities Exchange Act of 1934 (the "Effective
Date"). Currently under the Directors Option Plan, each Outside Director
automatically receives an Initial Grant for 192,000 shares. Each Outside
Director who continues to be a Outside Director immediately following each
annual meeting of stockholders occurring after his or her Initial Grant
automatically receives an option to purchase 48,000 shares of Common Stock on
each such annual meeting date.
Terms and Conditions of Options. The exercise price of any option granted
under the Directors Option Plan must equal the fair market value, as
determined pursuant to the plan, of a share of the Corporation's Common Stock
on the date of grant. Each option granted under the Directors Option Plan is
evidenced by a written agreement between the Corporation and the Outside
Director specifying the number of shares subject to the option and of the
other terms and conditions of the option, consistent with the requirements of
the Directors Option Plan. No option is exercisable after the expiration of 10
years after the date such option is granted, subject to earlier termination in
the event the optionee ceases to be a director of the Corporation or in the
event of a Transfer of Control of the Corporation, as exercisable in equal
annual installments over a four-year period beginning on the date of grant.
Shares subject to an option granted under the Directors Option Plan may be
purchased for cash, by check, or in cash equivalent, by tender of shares of
the Corporation's Common Stock owned by the optionee having a fair market
value not less than the exercise price, by the assignment of the proceeds of a
sale of some or all of the shares of Common stock being acquired upon the
exercise of the option, or by any combination of these. During the lifetime of
the optionee, the option may be exercised only by the optionee. An option may
not be transferred or assigned, except by will or the laws of descent and
distribution.
Transfer of Control. A "Transfer of Control" will be deemed to occur upon
any of the following events in which the stockholders of the Corporation do
not retain, directly or indirectly, at least a majority of the beneficial
interest in the voting stock of the Corporation or its successor: (i) the
direct or indirect sale or exchange by the stockholders of the Corporation of
all or substantially all of the stock of the Corporation, (ii) a merger in
which the Corporation is a party, or (iii) the sale, exchange or transfer of
all or substantially all of the assets of the Corporation. Upon a Transfer of
Control of the Corporation, all options outstanding under the Directors Option
Plan will become immediately exercisable and fully vested as of the date 15
days prior to such event. In addition, the Board may arrange with the
surviving, continuing, successor, or purchasing corporation or parent
corporation thereof (the "Acquiring Corporation") to either assume the
outstanding options or substitute options for the Acquiring Corporation's
stock for the outstanding options. Any options which are neither assumed or
substituted for by the Acquiring Corporation nor exercised as of the date of
the Transfer of Control will terminate effective as of such date.
Termination or Amendment. All options must be granted, if at all, within 10
years from March 10, 1994, the date the Directors Option Plan was adopted by
the Board of Directors. The Board or committee may terminate or amend the
Directors Option Plan at any time, but, without stockholder approval, the
Board of Directors may not amend the Directors Option Plan to increase the
total number of shares of Common Stock reserved for issuance thereunder or
expand the class of persons eligible to receive options.
20
<PAGE>
Options to purchase an aggregate of 240,000 shares of Common Stock were
automatically granted pursuant to the Directors Option Plan to the
Corporation's Outside Directors during 1997.
SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES OF THE DIRECTORS OPTION PLAN
The federal income tax consequences of the options granted under the
Directors Option Plan are the same as the federal income tax consequences
described for non-statutory options granted pursuant to the 1998 Stock
Incentive Plan set forth above.
OPTION INFORMATION
The following table sets forth as of February 28, 1998, options granted in
the aggregate under the Directors Option Plan to each Outside Director:
<TABLE>
<CAPTION>
NAME TITLE NO. OF OPTIONS GRANTED
---- -------- ----------------------
<S> <C> <C>
Betsy S. Atkins.............................. Director 336,000
Robert K. Dahl............................... Director 192,000
Roger L. Evans............................... Director 336,000
C. Richard Kramlich.......................... Director 336,000
James P. Lally............................... Director 336,000
Martin L. Schoffstall........................ Director 240,000
</TABLE>
STOCKHOLDER APPROVAL
The affirmative vote of a majority of the outstanding voting shares of the
Corporation present or represented and entitled to vote at the Annual Meeting
is required for the approval of the above amendments to the Directors Option
Plan.
The Board of Directors recommends a vote FOR the approval of the amendments
to the Directors Option Plan.
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors of the Corporation has selected Ernst & Young LLP as
independent auditors to audit the financial statements of the Corporation for
the year ending December 31, 1998. Ernst & Young LLP has acted as the
Corporation's independent auditors since the Corporation's inception. A
representative of Ernst & Young LLP is expected to be present at the Annual
Meeting with the opportunity to make a statement if the representative desires
to do so, and is expected to be available to respond to appropriate questions.
The Board of Directors recommends a vote FOR the ratification of this
selection.
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<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act of 1934, as amended, requires the
Corporation's directors, executive officers and holders of more than 10% of
the Corporation's outstanding shares of Common Stock (collectively, "Reporting
Persons") to file with the Securities and Exchange Commission (the
"Commission") initial reports of ownership and reports of changes in ownership
of Common Stock of the Corporation. Such persons are required by regulations
of the Commission to furnish the Corporation with copies of all such filings.
Based on its review of the copies of such filings received by it with respect
to the fiscal year ended December 31, 1997 and written representations from
certain Reporting Persons, the Corporation believes that all Reporting Persons
complied with all Section 16(a) filing requirements in the fiscal year ended
December 31, 1997, with the following exceptions: Bernard Schneider, Vice
President and Treasurer of the Corporation, filed a late Form 4 in March 1998,
reporting a transaction which should have been reported in June 1997; Martin
Schoffstall, a director of the Corporation, filed a late Form 4 in March 1998,
reporting a transaction which should have been reported in June 1997, Robert
K. Dahl, a director of the Corporation (former Vice President, Planning of the
Corporation) filed an Amended Form 4 in March 1998, reporting a transaction
which should have been reported in November 1996, Anthony Stagno, Vice
President, Manufacturing of the Corporation, filed a late Form 4 in March
1998, reporting a transaction which should have been reported in March 1997,
Michael E. Hendren, Senior Vice President, North American Sales and Service,
filed a late Form 4 in March 1998, reporting transactions which should have
been reported in previous periods, Betsy S. Atkins, a director of the
Corporation, filed a late Form 4, reporting transactions which should have
been reported in previous periods and Michael J. Johnson filed a late Form 5
in March 1998, reporting a transaction which should have been reported on his
initial Form 3 in 1994.
STOCKHOLDER PROPOSALS
Proposals of stockholders intended for inclusion in the proxy statement to
be furnished to all stockholders entitled to vote at the next Annual Meeting
of Stockholders of the Corporation must be received at the Corporation's
principal executive offices not later than December 10, 1998. In order to
curtail any controversy as to the date on which a proposal was received by the
Corporation, it is suggested that proponents submit their proposals by
Certified Mail, Return Receipt Requested.
TRANSACTION OF OTHER BUSINESS
At the date of this Proxy Statement, the only business which the Board of
Directors intends to present or knows that others will present at the Annual
Meeting is as set forth above. If any other matter or matters are properly
brought before the Annual Meeting, or an adjournment or postponement thereof,
it is the intention of the persons named in the accompanying form of proxy to
vote the proxy on such matters in accordance with their best judgment.
EXPENSES AND SOLICITATION
The cost of solicitation of proxies will be borne by the Corporation, and,
in addition to soliciting stockholders by mail through its regular employees,
the Corporation may request banks, brokers and other custodians, nominees and
fiduciaries to solicit their customers who have stock of the Corporation
registered in the names of a nominee and, if so, will reimburse such banks,
brokers and other custodians, nominees and fiduciaries for their reasonable
out-of-pocket costs. Solicitation by officers and employees of the Corporation
may also be made of some stockholders in person or by mail, telephone or
telegraph following the original solicitation. The Corporation has retained
Corporate Investors Communications, Inc. to assist in the solicitation of
proxies and will pay this Corporation a fee of approximately $8,500 plus out-
of-pocket expenses.
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<PAGE>
PROXY
ASCEND COMMUNICATIONS, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
MAY 21, 1998
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Mory Ejabat and Michael Ashby, and each
of them, proxies, with full power of substitution, to vote all shares of stock
of Ascend Communications, Inc. (the "Corporation") which the undersigned is
entitled to vote at the Annual Meeting of Stockholders of the Corporation to be
held on Thursday, May 21, 1998 (the "Annual Meeting ") at 9:00 a.m. local time,
at the Palace Hotel, 2 Montgomery Street, San Francisco, California 94105, and
at any adjournments thereof, upon matters set forth in the Notice of Annual
Meeting of Stockholders and Proxy Statement dated April 8, 1998, a copy of which
has been received by the undersigned. The proxies are further authorized to
vote, in their discretion, upon such other business as may properly come before
the meeting or any adjournments thereof.
[See Reverse Side] CONTINUED AND TO BE SIGNED ON REVERSE SIDE [See Reverse Side]
<PAGE>
[ASCEND LOGO APPEARS HERE]
[X] Please mark
votes as in
this example.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO
DIRECTION IS GIVEN, WILL BE VOTED "FOR" THE ELECTION OF DIRECTORS AND "FOR" THE
PROPOSALS IN ITEMS 2, 3, AND 4.
1. To elect eight members to the Board of Directors to serve until the 1999
Annual Meeting of Stockholders:
Nominees: Mory Ejabat, Daniel E. Smith, Robert K. Dahl, Betsy S. Atkins,
Roger L. Evans, C. Richard Kramlich, James P. Lally, Martin L. Schoffstall
FOR WITHHELD MARK HERE IF YOU PLAN
ALL FROM ALL TO ATTEND THE MEETING [__]
NOMINEES [__] NOMINEES [__]
MARK HERE FOR ADDRESS
CHANGE AND NOTE BELOW [__]
[__]______________________________________
For all nominees except as noted above
2. To approve the implementation of the For Against Abstain
Corporation's 1998 Stock Incentive Plan [__] [__] [__]
3. To approve amendments to the Corporation's For Against Abstain
1994 Outside Directors Stock [__] [__] [__]
Option Plan (the "Directors Option Plan")
to (i) decrease the initial stock option grant from 192,000 shares to 75,000
shares for Outside Directors first elected after the Annual Meeting; (ii) to
decrease the stock option grant for each subsequent year of service on the
Board of Directors from 48,000 to 25,000 shares for all Outside Directors
following the Annual Meeting ; (iii) to limit the number of shares granted
for each initial stock option grant and the stock option grant for each
subsequent year of service on the Board of Directors to the amount stated
above effective after the Annual Meeting ; and (iv) increase the number of
shares of Common Stock available for issuance under the Directors Option
Plan from 2,000,000 share to 2,400,000 shares.
4. To ratify the selection of Ernst & Young For Against Abstain
LLP as auditors for the fiscal year ending [__] [__] [__]
December 31, 1998.
5. To transact such other business as may properly come before the meeting and
any adjournment thereof.
If signing as attorney, executor, trustee, or guardian, please give your full
title as such. If stock is held jointly, each owner should sign.
Signature:______________ Date:______ Signature:______________ Date:______
