<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGES COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE THIRD QUARTER ENDED SEPTEMBER 30, 1995
COMMISSION FILE NUMBER 0-22202
PAIRGAIN TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0282809
------------------------------- ------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OF ORGANIZATION) IDENTIFICATION NO.)
14402 FRANKLIN AVENUE, TUSTIN, CALIFORNIA 92680-7013
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(714) 832-9922
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS ), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
-------- --------
THERE WERE 15,076,948 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE OF
$.001 PER SHARE, OUTSTANDING ON SEPTEMBER 30, 1995.
<PAGE> 2
PAIRGAIN TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at September 30, 1995 and December 31, 1994 3
Condensed Consolidated Statements of Income for the quarters
and nine months ended September 30, 1995 and 1994 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1995 and 1994 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 11
Part II. Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE> 3
PART I: ITEM 1
FINANCIAL INFORMATION
PAIRGAIN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- -----------
(UNAUDITED)
(RESTATED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $12,945 $ 711
Short-term investments 30,767 52,565
Accounts receivable 11,193 9,693
Inventories 21,409 16,474
Other current assets and deferred taxes 3,269 3,704
------- -------
Total current assets 79,583 83,147
Property and equipment, net 6,515 3,431
Other assets 89 47
Note receivable 1,354 --
------- -------
Total assets $87,541 $86,625
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit $ -- $ 1,000
Accounts payable and other current liabilities 11,110 10,779
------- -------
Total current liabilities 11,110 11,779
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares - 2,000,000; Issued and
outstanding shares - None -- --
Common stock, $.001 par value:
Authorized shares - 30,000,000; Issued and outstanding shares -
15,076,948 and 12,708,636 at September 30, 1995
and December 31, 1994, respectively 15 13
Additional paid-in capital 84,180 69,513
Deferred compensation (104) (170)
Unrealized gain (loss) on marketable securities 89 (210)
(Accumulated deficit) retained earnings (7,749) 5,700
Total stockholders' equity ------- -------
76,431 74,846
------- -------
Total liabilities and stockholders' equity $87,541 $86,625
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
PAIRGAIN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
(RESTATED)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
1995 1994 1995 1994
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues $29,602 $15,246 $ 72,599 $ 41,391
Cost of revenues 15,834 8,431 37,958 23,250
------- ------- -------- --------
Gross profit 13,768 6,815 34,641 18,141
Operating expenses:
Research and development 2,804 1,523 7,565 4,172
Sales and marketing 2,736 1,392 6,827 4,010
General and administrative 1,769 1,051 4,857 2,787
------- ------- -------- --------
Total operating expenses 7,309 3,966 19,249 10,969
------- ------- -------- --------
Income from operations 6,459 2,849 15,392 7,172
Interest and other income, net 426 285 1,500 983
Gain (loss) on investments 56 (1,237) 415 (10,665)
Unusual gain (loss) due to unauthorized
trading of investments by third parties 1,660 -- (25,114) --
------- ------- -------- --------
Income (loss) before income taxes 8,601 1,897 (7,807) (2,510)
Provision for income taxes 2,436 1,126 5,642 3,154
------- ------- -------- --------
Net income (loss) $ 6,165 $ 771 $(13,449) $ (5,664)
======= ======= ======== ========
PER SHARE DATA:
Earnings (loss) per share $ 0.36 $ 0.05 $ (0.94) $ (0.45)
======= ======= ======== ========
Weighted average number of common and common
equivalent shares 17,051 15,319 14,365 12,490
======= ======= ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
PAIRGAIN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
(RESTATED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1995 1994
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(13,449) $(5,664)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 2,856 1,195
(Gains) losses on sales of investments (415) 10,665
Unusual loss due to unauthorized trading of
investments by third parties 25,114 --
Change in operating assets and liabilities:
Accounts receivable (1,500) (1,868)
Inventories (4,935) (2,877)
Other current assets 435 (252)
Other assets (42) (20)
Accounts payable and other current liabilities 331 3,768
-------- -------
Net cash provided by operating activities 8,395 4,947
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchases of investments (3,412) (3,423)
Issuance of note receivable (1,354) --
Purchases of property and equipment (5,064) (1,269)
-------- -------
Net cash used in investing activities (9,830) (4,692)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on bank line of credit (1,000) --
Issuance of common stock 14,669 121
-------- -------
Net cash provided by financing activities 13,669 121
-------- -------
Increase in cash and cash equivalents 12,234 376
Cash and cash equivalents at beginning of period 711 13,650
-------- -------
Cash and cash equivalents at end of period $ 12,945 $14,026
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 18 $ 8
======== =======
Income tax paid $ 5,028 $ 3,058
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. RESTATEMENT OF PREVIOUSLY REPORTED QUARTERLY FINANCIAL STATEMENTS
In 1993 and 1994, the Company invested a portion of its excess cash with
Capital Insight, Inc. ("Capital Insight"), a financial advisor and broker based
in Beverly Hills, California. The Company had no funds invested with Capital
Insight at either December 31, 1993 or December 31, 1994, as all such invested
funds were returned to the Company prior to the end of each of those years.
In early 1995, the Company again invested a portion of its excess cash
with Capital Insight, with instructions that the funds be invested solely in
U.S. Treasury securities with maturities of one year or less. These
instructions were consistent with the investment guidelines which had been
approved by the Company's Board of Directors in October 1994. However, these
instructions were violated and the funds were used to engage in unauthorized
trading in options and futures. In November 1995, the Company confirmed that it
had incurred non-recurring losses of $15.8 million resulting from these
inappropriate and unauthorized trading activities.
The Company's outside directors retained independent legal counsel and
forensic accountants to determine the facts and circumstances surrounding this
matter. This investigation revealed no improper involvement by any Company
director, officer or employee in the unauthorized trading. Additionally, the
investigation found that the Company was provided with fictitious statements by
Capital Insight, and the Company had actually incurred substantial losses in
the second quarter of 1995. During the third and fourth quarters of 1995, the
unauthorized trading generated significant gains resulting in net trading
losses of $15.8 million for the year. Furthermore, it was determined that the
1994 statements provided by this advisor and relied upon by the Company for its
quarterly reporting were also incorrect. Although total financial results for
1994 were not impacted by these false statements, previously reported 1994
quarterly financial statements did not reflect the proper periods in which the
trading gains and losses occurred. Based on the results of the investigation,
the Company has amended its quarterly statements for both 1994 and 1995 to
reflect the proper reporting of the trading gains and losses. The effect on
net income and net income per share for the three and nine months ended
September 30, 1995 and 1994 was as follows:
6
<PAGE> 7
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ------------------------
1995 1994 1995 1994
-------- -------- ------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income as previously reported $ 4,505 $ 2,239 $ 11,250 $ 5,624
======= ======= ======== ========
Net income before adjustment for investment losses
and unauthorized activity $ 4,505 $ 2,239 $ 11,250 $ 5,624
Adjustments to properly reflect investment losses
and unauthorized activity:
Investment losses -- (1,579) -- (11,637)
Unauthorized trading gains (losses) 1,660 -- (25,114) --
Provision for income taxes -- 111 415 349
------- ------- -------- --------
Net income (loss) after adjustment for investment
losses and unauthorized activity $ 6,165 $ 771 $(13,449) $ (5,664)
======= ======= ======== ========
Net income (loss) per share $ 0.36 $ 0.05 $ (0.94) $ (0.45)
======= ======= ======== ========
Weighted average shares outstanding used to compute
net income (loss) per share 17,051 15,319 14,365 12,490
======= ======= ======== ========
Net income per share, as previously reported $ 0.26 $ 0.52 $ 0.68 $ 0.37
======= ======= ======== ========
Weighted average shares outstanding used to compute
net income per share, as previously reported 17,051 15,319 16,624 15,366
======= ======= ======== ========
</TABLE>
In January 1996, the Company received a copy of a complaint, filed
derivatively by a Company stockholder on behalf of the Company, naming as
defendants the Company's directors and certain officers, as well as Capital
Insight and Mr. S. Jay Goldinger, its president. The derivative complaint
states causes of action for breach of fiduciary duty, abuse of control,
constructive fraud and gross mismanagement and waste of corporate assets. The
suit seeks an award in the amount of all damages sustained by the Company
including the losses of $15.8 million and legal fees and expenses.
In January 1996, the Company filed suit, in Los Angeles federal court,
against Mr. S. Jay Goldinger and Capital Insight, charging unauthorized
trading, fraudulent misrepresentation, violation of federal securities laws and
breach of fiduciary duties. The suit seeks $15.8 million in damages by reason
of the losses incurred by the Company, as well as punitive damages and legal
fees.
The Company does not maintain Directors and Officers liability insurance.
However, under the terms of its articles of incorporation, the Company
indemnifies its directors and officers for damages and legal fees arising from
litigation matters. The ultimate outcome of these complaints can not presently
be determined and, accordingly, no provision for any loss or recovery that may
result has been made in the Company's financial statements.
7
<PAGE> 8
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
2. INTERIM PERIOD ACCOUNTING POLICIES
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements contain all normal recurring
adjustments necessary to present fairly the financial position as of September
30, 1995, and consolidated results of operations for the three and nine months
ended September 30, 1995, and September 30, 1994, and cash flows for the nine
month periods ended September 30, 1995, and September 30, 1994. Results of
operations for the three and nine months ended September 30, 1995, are not
necessarily indicative of results to be expected for the full year ending
December 31, 1995.
Although the Company believes that the disclosures in the financial
statements are adequate to make the information presented not misleading,
certain information and footnote information normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, these financial statements
should be read in conjunction with the Company's audited consolidated
financial statements included in the Company's Form 10-K/A for the year ended
December 31, 1994.
Certain prior year amounts have been reclassified to conform with the
current period's presentation.
3. PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of the Company, PairGain Technologies, Inc., and its wholly owned
subsidiaries, PairGain Canada, Inc., and PairGain Services Group, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
4. SHORT-TERM INVESTMENTS
The Company adopted the provision of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities ("Statement 115") on January 1, 1994. Pursuant to Statement 115, the
Company's short-term investments have been classified as either trading or
available for sale at the time of purchase. Trading securities are carried at
fair value with unrealized gains and losses included in the Company's results
of operations. Securities classified as available for sale are carried at fair
value with unrealized gains and losses ported in a separate component of
stockholders' equity. The unrealized gain (loss), net of tax, related to
available for sale securities and included in stockholders' equity was $89,000
and $(210,000) at September 30, 1995, and December 31, 1994, respectively.
8
<PAGE> 9
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
5. INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market
and consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials $ 4,228 $ 4,743
Work in process 11,135 9,529
Finished goods 6,046 2,202
------- -------
$21,409 $16,474
======= =======
</TABLE>
6. BANK LINE OF CREDIT
The Company maintains an unsecured line of credit with a bank. The line
allows maximum borrowings of $10.0 million, of which up to $2.0 million may be
utilized for the secured purchase of fixed assets (term loan), $2.0 million for
letters of credit and $2.0 million for foreign exchange contracts. The line
bears interest at the prime rate (8.75% at September 30, 1995) and borrowings
under term loan provisions of the agreement bear interest at prime plus 1%. At
September 30, 1995, the Company had no outstanding borrowings under this line
of credit.
9
<PAGE> 10
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
7. PROVISION FOR INCOME TAXES
Income taxes are provided at the rate expected to be in effect for the
entire year.
8. PER SHARE DATA
Earnings per share is computed using the weighted average number of
shares of common stock and common equivalent shares outstanding during the
periods presented. Common equivalent shares include the Company's stock
options and warrants outstanding during the periods presented computed using
the treasury stock method, to the extent that such inclusion is not
antidilutive.
10
<PAGE> 11
PART I: ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PAIRGAIN TECHNOLOGIES, INC.
RESULTS OF OPERATIONS (quarter and nine months ended September 30, 1995,
compared to quarter and nine months ended September 30, 1994)
REVENUES
Revenues for the quarter ended September 30, 1995, were $29.6 million, an
increase of $14.4 million or 94% compared to the third quarter of 1994.
Revenues for the 1995 nine month period were $72.6 million, an increase of 75%
compared to revenues of $41.4 million in the prior year period. Of these
increases in revenues, product revenues increased $14.5 million in the 1995
quarter compared to the 1994 quarter, and $31.8 million in the nine month
period. These increases were offset by decreases in royalty income of $88,000
and $569,000, respectively, for the quarter and nine month periods. The
increase in product revenues was due primarily to increases in unit sales
volume of the Company's HiGain, PG-2, and Campus products. These increases
were marginally offset by a decline in the average selling prices due to
competitive pressures. The decrease in royalty income was due to a reduction
of fees generated by licenses for the use of the Company's HDSL technology.
GROSS PROFIT
Gross profit increased $7.0 million or 102% to $13.8 million in the
quarter ended September 30, 1995. Gross Profit for the nine month period was
$34.6 million compared to $18.1 million in the prior year period. Gross profit
as a percentage of revenues was 47% for the quarter ended September 30, 1995
compared to 45% in the 1994 quarter. For the nine months ended September 30,
1995 gross profit as a percentage of revenues was 48% compared to 44% in the
1994 period. These improvements in gross profit percentage are attributable to
the Company's continuing engineering design changes, reduced prices for
components, increased manufacturing efficiencies, and increases in volume. For
the 1995 reporting periods, cost reductions more than offset declines in
average selling prices, as compared with the 1994 periods.
The Company expects that increased competition will continue to place
downward pressure on the average sales prices of its existing products.
Declining average sales prices may adversely affect gross product margins on
the Company's existing products if the Company is unable to fully offset such
price reductions by reductions in the Company's per unit cost. The Company's
ability to mitigate future declines in its gross product margin will depend in
part upon its ability to introduce and sell new products with higher gross
product margins and further reduce its per unit costs.
11
<PAGE> 12
OPERATING EXPENSES
Research and development expenses increased to $2.8 million in the
quarter ended September 30, 1995, compared to $1.5 million in the prior year
period. Research and development expenses were $7.6 million compared to $4.2
million for the nine months ended September 30, 1995, and 1994, respectively.
The 1995 increases in expenses were primarily due to the addition of personnel,
depreciation on additional capital equipment, prototype expenditures and
payments to outside consultants. As a percentage of revenues, research and
development expenses were approximately 10% during the quarter and nine month
periods ended September 30, 1995 and 1994.
Sales and marketing expenses increased $1.3 million or 97% to $2.7
million and increased $2.8 million or 70% to $6.8 million, respectively, for
the quarter and nine months ended September 30, 1995, as compared with the same
periods in the prior year. The 1995 increases were primarily due to the
addition of sales and marketing support personnel, commissions related to
higher revenue levels, and increased advertising and travel. As a percentage
of revenues, sales and marketing expenses were approximately 9% during the
quarter ended September 30, 1995 and 1994, and 9% and 10%, respectively, in the
nine month periods.
General and administrative expenses increased $0.7 million or 68% and
$2.1 million or 74%, respectively, for the quarter and nine months ended
September 30, 1995, as compared with the 1994 periods. These increases were
primarily due to the addition of personnel, payments to outside consultants
related to the implementation of an information systems upgrade, and additional
bad debt provisions. As a percentage of revenues, general and administrative
expenses decreased to 6% and 7%, respectively, for the quarter and nine months
ended September 30, 1995 compared to 7% for the quarter and nine months ended
September 30, 1994.
INCOME FROM OPERATIONS
As a result of the above, income from operations for the quarter ended
September 30, 1995 increased 127% to $6.5 million, compared to $2.8 million
for the 1994 quarter. Income from operations for the nine months ended
September 30, 1995 increased 115% to $15.4 million, compared to $7.2 million
for the 1994 period.
LOSS ON INVESTMENTS AND UNUSUAL LOSS DUE TO UNAUTHORIZED TRADING BY THIRD
PARTIES
In 1993 and 1994, the Company invested a portion of its excess cash with
Capital Insight, Inc. ("Capital Insight"), a financial advisor and broker based
in Beverly Hills, California. The Company had no funds invested with Capital
Insight at either December 31, 1993 or December 31, 1994, as all such invested
funds were returned to the Company prior to the end of each of those years.
In early 1995, the Company again invested a portion of its excess cash
with Capital Insight, with instructions that the funds be invested solely in
U.S. Treasury securities with maturities of one year or less. These
instructions were consistent with the investment guidelines which had been
approved by the Company's Board of Directors in October 1994. However, these
instructions were violated and the funds were used to engage in unauthorized
trading in options and futures. In November 1995, the Company confirmed that it
had incurred non-recurring losses of $15.8 million resulting from these
inappropriate and unauthorized trading activities.
The Company's outside directors retained independent legal counsel and
forensic accountants to determine the facts and circumstances surrounding this
matter. This investigation revealed no improper involvement by any Company
director, officer or employee in the unauthorized trading. Additionally, the
investigation found that the Company was provided with fictitious statements by
Capital Insight, and the Company had actually incurred substantial losses in
the second quarter of 1995. During the third and fourth quarters of 1995, the
unauthorized trading generated significant
12
<PAGE> 13
gains resulting in net trading losses of $15.8 million for the year.
Furthermore, it was determined that the 1994 statements provided by this
advisor and relied upon by the Company for its quarterly reporting were also
incorrect. Although total financial results for 1994 were not impacted by
these false statements, previously reported 1994 quarterly financial statements
did not reflect the proper periods in which the trading gains and losses
occurred. Based on the results of the investigation, the Company has amended
its quarterly statements for both 1994 and 1995 to reflect the proper reporting
of the trading gains and losses. The effect on net income and net income per
share for the three and nine months ended September 30, 1995 and 1994 was as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -----------------------
1995 1994 1995 1994
------- ------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMUONTS)
<S> <C> <C> <C> <C>
Net income as previously reported $ 4,505 $ 2,239 $ 11,250 $ 5,624
======= ======= ======== ========
Net income before adjustment for investment losses
and unauthorized activity $ 4,505 $ 2,239 $ 11,250 $ 5,624
Adjustments to properly reflect investment losses
and unauthorized activity:
Investment losses -- (1,579) -- (11,637)
Unauthorized trading gains (losses) 1,660 -- (25,114) --
Provision for income taxes -- 111 415 349
------- ------- -------- --------
Net income (loss) after adjustment for investment
losses and unauthorized activity $ 6,165 $ 771 $(13,449) $ (5,664)
======= ======= ======== ========
Net income (loss) per share $ 0.36 $ 0.05 $ (0.94) $ (0.45)
======= ======= ======== ========
Weighted average shares outstanding used to compute
net income (loss) per share 17,051 15,319 14,365 12,490
======= ======= ======== ========
Net income per share, as previously reported $ 0.26 $ 0.52 $ 0.68 $ 0.37
======= ======= ======== ========
Weighted average shares outstanding used to compute
net income per share, as previously reported 17,051 15,319 16,624 15,366
======= ======= ======== ========
</TABLE>
In January 1996, the Company received a copy of a complaint, filed
derivatively by a Company stockholder on behalf of the Company, naming as
defendants the Company's directors and certain officers, as well as Capital
Insight and Mr. S. Jay Goldinger, its president. The derivative complaint
states causes of action for breach of fiduciary duty, abuse of control,
constructive fraud and gross mismanagement and waste of corporate assets. The
suit seeks an award in the amount of all damages sustained by the Company
including the losses of $15.8 million and legal fees and expenses.
In January 1996, the Company filed suit, in Los Angeles federal court,
against Mr. S. Jay Goldinger and Capital Insight, charging unauthorized
trading, fraudulent misrepresentation, violation of federal securities laws and
breach of fiduciary duties. The suit seeks $15.8 million in damages by reason
of the losses incurred by the Company, as well as punitive damages and legal
fees.
13
<PAGE> 14
The Company does not maintain Directors and Officers liability insurance.
However, under the terms of its articles of incorporation, the Company
indemnifies its directors and officers for damages and legal fees arising from
litigation matters. The ultimate outcome of these complaints can not presently
be determined and, accordingly, no provision for any loss or recovery that may
result has been made in the Company's financial statements.
INTEREST AND OTHER INCOME, NET
Interest and other income increased $141,000 and $517,000, respectively,
for the quarter and nine months ended September 30, 1995, as compared with the
same periods in the prior year, largely due to higher cash levels available for
investment which resulted from the secondary offering.
PROVISION FOR INCOME TAXES
The provision for income taxes for the three and nine months ended
September 30, 1995, was $2.4 million and $5.6 million, respectively, compared
to $1.1 million and $3.2 million for the three and nine months ended
September 30, 1994. The Company did not record any tax benefit from its
unusual trading losses in 1995 or its investment losses in 1994 in excess of
its investment gains.
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE
As a result of the above, net income for the quarter ended September 30,
1995 was $6.2 million or $0.36 per share, compared to $771,000 or $0.05 for the
1994 quarter. The weighted average number of common and common equivalent
shares outstanding was 17.1 million and 15.3 million for the three months ended
September 30, 1995 and 1994, respectively.
Net loss for the first nine months of 1995 was $13.4 million or $0.94 per
share, compared to a loss of $5.7 million or $0.45 per share in 1994. The
weighted average number of common and common equivalent shares outstanding was
14.4 million and 12.5 million for the nine months ended September 30, 1995 and
1994, respectively. The increase in shares in 1995 is due primarily to the
secondary public offering of the Company's stock and the exercise of warrants
in connection therewith in March 1995.
14
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1995, the Company had $43.7 million in cash, cash
equivalents and short-term investments and $68.5 million in working capital.
These figures represent a decrease of $9.6 million in cash, cash equivalents
and short-term investments and $2.9 million in working capital over the
December 31, 1994 amounts. These decreases are primarily due to investment
losses that resulted from unauthorized trading by third parties offset by the
receipt of $13.2 million in cash from the Company's secondary stock offering
(including cash recieved for warrant exercises) that took place in March 1995.
Although accounts receivable collection days at September 30, 1995, decreased
to 35 days compared to 53 days at December 31, 1994, the Company's accounts
receivable balance increased to $11.5 million from $10.2 million at the end of
1994 as a result of increased sales levels during the third quarter of 1995.
Inventories increased to $21.4 million at September 30, 1995, compared to $16.5
million at December 31, 1994, due to higher shipment levels. However,
inventory turns increased to 3.0 at the end of the third quarter, compared to
2.4 at the end of 1994.
Capital expenditures during the nine month period ended September 30,
1995 were $4.8 million compared to $1.3 million for the comparable period in
1994. The increase in capital spending was primarily due to tenant
improvements at the Company's Tustin facility totaling $849,000 and the
purchase of computer equipment, test equipment and software. The Company has
entered into an agreement to purchase software and equipment to upgrade its
information system capabilities. The total commitment thereunder is
approximately $750,000, of which $561,000 has been invested as of September 30,
1995.
In May 1995, the Company amended the Loan and Security Agreement with its
bank which provides for a revolving unsecured credit facility of $10 million,
subject to sublimits for amounts utilized for term loans, letters of credit and
foreign exchange contracts. The Loan Agreement contains operating covenants,
including limitations on the ability to take certain corporate actions. The
Loan Agreement also requires the Company to be in compliance with certain
financial ratios. At September 30, 1995 the Company had no outstanding
borrowings under the Loan Agreement and was in compliance with all financial
and operating covenants. The amended Loan Agreement expires May 1, 1996.
On July 20, 1995, the Company entered into certain agreements with
Sourcecom Corporation of Valencia, California ("Sourcecom"). Sourcecom is a
cost/performance leader in remote networking devices which enable the
integration of Ethernet local area networks with wide area networking over
copper wire. The agreements provide for the incorporation of Sourcecom's
networking technology into the Company's current and future transmission
products. Under the terms of the agreements, the Company will lend Sourcecom
$2.7 million and has rights to obtain a minority ownership position. During
the third quarter, the Company advanced $1.4 million to Sourcecom. The
remainder is to be funded during the fourth quarter of 1995.
The Company has no other material near-term commitments for its funds,
which are currently held in investment grade, interest-bearing securities. The
Company believes that cash generated from operations will be sufficient to fund
anticipated operating expenses for the foreseeable future, although cash
requirements in certain quarters may exceed internally-generated funds.
15
<PAGE> 16
PART II. OTHER INFORMATION
PAIRGAIN TECHNOLOGIES, INC.
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Mr. Brian Kouri, a director of the Company since August 1992,
resigned effective September 15, 1995. There were no disagreements
between Mr. Kouri and the Company. Mr. Kouri's decision to resign
was based solely upon the fact that during the third quarter of 1995,
BCE Venture Capital, Inc., of which Mr. Kouri is an executive
officer, disposed of the majority of its shares in the Company.
As a result, BCE is no longer a significant stockholder in the
Company. Accordingly, Mr. Kouri decided to focus his attention on
BCE's other investments and businesses.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
Exhibit No.
-----------
10.34 PairGain Technologies, Inc. Common Stock Purchase
Warrant dated May 10, 1995, issued to Brobeck,
Phleger & Harrison
10.35 PairGain Technologies, Inc. Common Stock Purchase
Warrant dated August 3, 1995, issued to Nexus
Applied Research, Inc.
10.36 Amendment to Loan and Security Agreement dated
May 3, 1995, between the Registrant and Silicon
Valley Bank
11.1 Computation of Per Share Earnings
27 Financial Data Schedule
(B) Reports filed on Form 8-K during the period:
None.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PairGain Technologies, Inc.
----------------------------------
(Registrant)
Date: March 28, 1996 /S/ Charles W. McBrayer
----------------------------------
Charles W. McBrayer
Vice President, Finance
and Administration
Chief Financial Officer
(Duly Authorized Officer)
Date: March 28, 1996 /S/ Robert R. Price
---------------------------------
Robert R. Price
Corporate Controller
(Chief Accounting Officer)
17
<PAGE> 1
PAIRGAIN TECHNOLOGIES, INC.
EXHIBIT 11.1--COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------- -------------------------------
PRIMARY EARNINGS PER SHARE 1995 1994 1995 1994
------- ------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income (loss) $ 6,165 $ 771 $(13,449) $(5,664)
======= ======= ======== =======
Calculation of shares outstanding for computing
income (loss) per share
Weighted average common and common stock
equivalents shares outstanding used in calculating
net income (loss) per share in accordance with
generally accepted accounting principles 17,302 15,523 14,365 12,490
Adjustment to reflect requirements of the SEC:
Adjustment to reflect the effects of tax
benefit repurchase (251) (204) -- --
------- ------- -------- -------
Shares used in computing net income (loss)
per share 17,051 15,319 14,365 12,490
======= ======= ======== =======
Net income (loss) per share $ 0.36 $ 0.05 $ (0.94) $ (0.45)
======= ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------- -------------------------------
FULLY DILUTIVE EARNINGS PER SHARE 1994 1994 1994 1994
-------- ------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income (loss) $ 6,165 $ 771 $(13,449) $(5,664)
======= ======= ======== =======
Calculation of shares outstanding for computing
income (loss) per share
Weighted average common and common stock
equivalents shares outstanding used in calculating
net income (loss) per share in accordance with
generally accepted accounting principles 17,456 15,523 14,365 12,490
Adjustment to reflect requirements of the SEC:
Adjustment to reflect the effects of tax
benefit repurchase (262) (204) -- --
------- ------- ------- -------
Shares used in computing net income (loss)
per share 17,194 15,319 14,365 12,490
======= ======= ======== =======
Net income (loss) per share $ 0.36 $ 0.05 $ (0.94) $ (0.45)
======= ======= ======== =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 12,945
<SECURITIES> 30,767
<RECEIVABLES> 11,193
<ALLOWANCES> 0
<INVENTORY> 21,409
<CURRENT-ASSETS> 79,583
<PP&E> 6,515
<DEPRECIATION> 0
<TOTAL-ASSETS> 87,541
<CURRENT-LIABILITIES> 11,110
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 76,416
<TOTAL-LIABILITY-AND-EQUITY> 87,541
<SALES> 72,599
<TOTAL-REVENUES> 72,599
<CGS> 37,958
<TOTAL-COSTS> 37,958
<OTHER-EXPENSES> 19,249
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,807)
<INCOME-TAX> 5,642
<INCOME-CONTINUING> (13,449)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,449)
<EPS-PRIMARY> (.94)
<EPS-DILUTED> (.94)
</TABLE>
