<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE SECOND QUARTER ENDED JUNE 30, 1994
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 12,547,342 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE OF
$.001 PER SHARE OUTSTANDING ON JUNE 30, 1994.
<PAGE> 2
PAIRGAIN TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at June 30, 1994 and December 31, 1993 3
Condensed Consolidated Statements of Income for the
quarters and six months ended June 30, 1994 and 1993 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1994 and 1993 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 10
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>
JUNE 30, DECEMBER 31,
1994 1993
----------- ------------
(UNAUDITED)
(RESTATED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,419 $13,650
Short-term investments 41,547 36,270
Accounts receivable 6,466 5,049
Inventories 11,266 10,499
Other current assets and deferred taxes 709 440
------- -------
Total current assets 61,407 65,908
Property and equipment, net 2,803 2,265
Other assets 24 30
------- -------
Total assets $64,234 $68,203
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit $ 1,000 $ --
Accounts payable and other current liabilities 4,743 2,967
------- -------
Total current liabilities 5,743 2,967
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 - 12,547,342 and
12,337,610 at June 30, 1994 and December 31, 1993,
respectively 13 12
Additional paid-in capital 68,427 68,348
Deferred compensation (213) (257)
Unrealized loss on marketable securities (434) --
Accumulated deficit (9,302) (2,867)
------- -------
Total stockholders' equity 58,491 65,236
------- -------
Total liabilities and stockholders' equity $64,234 $68,203
======= =======
</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)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
1994 1993 1994 1993
------- ------- ------- -------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Revenues $13,663 $ 7,967 $26,145 $15,415
Cost of revenues 7,704 3,961 14,819 7,576
------- ------- ------- -------
Gross profit 5,959 4,006 11,326 7,839
Operating expenses:
Research and development 1,403 890 2,649 1,732
Sales and marketing 1,443 824 2,618 1,569
General and administrative 890 659 1,736 1,335
------- ------- ------- -------
Total operating expenses 3,736 2,373 7,003 4,636
------- ------- ------- -------
Income from operations 2,223 1,633 4,323 3,203
Interest and other income (expense), net 330 (60) 698 (144)
Gain (loss) on investments 236 -- (9,428) --
------- ------- ------- -------
Income (loss) before income taxes 2,789 1,573 (4,407) 3,059
Provision for income taxes 1,012 172 2,028 336
------- ------- ------- -------
Net income (loss) $ 1,777 $ 1,401 $(6,435) $ 2,723
======= ======= ======= =======
PER SHARE DATA:
Earnings (loss) per share $ 0.12 $ 0.12 $ (0.52) $ 0.24
======= ======= ======= =======
Weighted average number of common and
common equivalent shares 15,236 11,565 12,441 11,492
======= ======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
PAIRGAIN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
1994 1993
--------- -------
(RESTATED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (6,435) $ 2,723
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 803 294
Losses on sales of investments 9,428 --
Change in operating assets and liabilities:
Accounts receivable (1,417) (707)
Inventories (767) (3,748)
Other current assets (269) (2)
Other assets 6 (6)
Accounts payable and other current liabilities 1,776 2,224
-------- -------
Net cash provided by operating activities 3,125 778
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchases of investments (15,495) --
Purchase of property and equipment (941) (652)
-------- -------
Net cash used in investing activities (16,436) (652)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under bank line of credit 1,000 1,572
Payments on bank line of credit -- (64)
Payments on capital lease -- (19)
Proceeds from issuance of common stock and warrants 80 10
-------- -------
Net cash provided by financing activities 1,080 1,499
-------- -------
(Decrease) increase in cash and cash equivalents (12,231) 1,625
Cash and cash equivalents at beginning of period 13,650 3,302
-------- -------
Cash and cash equivalents at end of period $ 1,419 $ 4,927
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ -- $ 153
======== =======
Income tax paid $ 1,774 $ 100
======== =======
</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 six months ended June 30,
1994 was as follows:
6
<PAGE> 7
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
------------ ----------
JUNE 30, 1994
--------------------------
(IN THOUSANDS EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Net income as previously reported $ 1,765 $ 3,385
======= ========
Net income before adjustment for investment losses $ 1,765 $ 3,385
Adjustments to properly reflect investment losses:
Investment losses (108) (10,058)
Provision for income taxes 120 238
------- --------
Net income (loss) after adjustment for investment losses $ 1,777 $ (6,435)
======= ========
Net income (loss) per share $ 0.12 $ (0.52)
======= ========
Weighted average shares outstanding used to compute
net income (loss) per share 15,236 12,441
======= ========
Net income per share, as previously reported $ 0.12 $ 0.22
======= ========
Weighted average shares outstanding used to compute
net income per share, as previously reported 15,236 15,340
======= ========
</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 June 30,
1994, and consolidated results of operations for the condensed consolidated
statements of income for the three and six months ended June 30, 1994, and June
30, 1993, and cash flows for the six month periods ended June 30, 1994, and
June 30, 1993. Results of operations for the three and six months ended June
30, 1994, are not necessarily indicative of results to be expected for the full
year ending December 31, 1994.
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, and these financial statements should be
read in conjunction with the Company's audited consolidated financial
statements included in the Company's Form 10-K for the year ended December 31,
1993.
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 reported in a separate component of
stockholders' equity. The unrealized loss related to available for sale
securities and included in stockholders' equity at June 30, 1994 was $434,000,
net of tax.
8
<PAGE> 9
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
5. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
------- ----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials $ 3,081 $ 3,697
Work in process 4,900 4,442
Finished goods 3,285 2,360
------- -------
$11,266 $10,499
======= =======
</TABLE>
6. BANK LINE OF CREDIT
The Company maintains a $10 million unsecured line of credit with a
bank. During June 1994, $1 million was borrowed against this line.
7. INCOME TAXES
Income taxes are provided at the rate expected to be in effect for the
entire year.
8. PER SHARE DATA
Net income per share is computed using the weighted average number of
common shares and common share equivalents outstanding during the periods
presented. Common share equivalents result from outstanding options and
warrants to purchase common stock. Pursuant to the requirements of the
Securities and Exchange Commission, common and preferred shares issued by the
Company during the twelve months immediately preceding the initial public
offering, plus the number of shares issuable upon exercise of stock options
granted during this period, have been included in the calculation of the shares
used in computing net income per share as if they were outstanding for all
periods presented (using the treasury stock method and the estimated public
offering price in calculating equivalent shares).
9
<PAGE> 10
PART I: ITEM 2
PAIRGAIN TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (quarter and six months ended June 30, 1994, compared to
quarter and six months ended June 30, 1993)
REVENUES
Revenues for the three months and six months ended June 30, 1994
increased $5.7 million or 72% and $10.7 million or 70%, respectively, as
compared with the same periods in the prior year. Of this increase in revenue,
product revenue increased $5.8 million and $11.3 million, respectively, royalty
income increased $277,000 and $848,000, respectively, and technology fees
decreased $365,000 and $1.4 million, respectively. The increase in product
revenue was due to three factors. First, unit sales volume of the Company's
HiGain product increased 231% and 241%, respectively, for the three and six
month periods ended June 30, 1994, as compared with the same periods in the
prior year. Second, unit sales volume of the PG-2 product for the three and six
month periods ended June 30, 1994, increased 110% and 81%, respectively, as
compared to the same periods in the prior year. Third, the Company introduced
its Campus product line in June 1993. These increases were somewhat offset by a
decline in the average selling price in both the HiGain and PG-2 products due
to competitive pressures. The increase in royalty income was primarily due to
fees paid by Alcatel for the use of the Company's HDSL technology in products
sold by Alcatel.
GROSS PROFIT
For the three months ended June 30, 1994, as compared with the same
period in 1993, gross product margins decreased to 41% from 50%. For the six
months ended June 30, 1994, as compared with the same period in 1993, product
margins decreased to 43% from 51%. Although the Company's gross profit margins
decreased in these periods actual gross profit grew substantially. Gross profit
increased $2.0 million and $3.5 million, respectively, for the three and six
month periods ended June 30, 1994, as compared with the same periods in the
prior year. This growth in gross profits was attributable to the same factors
that contributed to the growth in the Company's revenues. In addition, the
decline in average sales price was somewhat offset by a reduction in the per
unit cost of the Company's HiGain product. This reduction in per unit cost was
a result of continuing engineering design changes, reduced prices for
components from vendors and reduced manufacturing overhead rates achieved
through increases in volume.
10
<PAGE> 11
PRODUCT MARGIN
For the three months ended June 30, 1994, as compared with the same
period in 1993, product margins decreased to 42% from 46%. For the six months
ended June 30, 1994, as compared with the same period in 1993, product margins
decreased to 41% from 45%. These decreases in product margin were due to the
reduction in average selling price at a rate greater than product cost
reductions. The Company expects that competition, with respect to its HiGain
products, will continue to place downward pressure on average sales prices but
less than has been experienced in the past. However, the ongoing per unit cost
reduction effort should continue to offset sales price erosion, with an
objective of limiting further erosion and creating an opportunity for margin
improvement in the short run.
OPERATING EXPENSES
In order to support the growth of its business, the Company has
expanded significantly its levels of operations in all areas resulting in
increased operating expenses. Operating expenses increased $1.4 million or 63%
and $2.4 million or 51%, respectively, for the three and six month periods
ended June 30, 1994, as compared with the same periods in the prior year. Of
these increases, approximately half were due to the addition of personnel.
Research and development expense increased $513,000 or 58% and $917,000
or 53%, respectively, for the three and six month periods ended June 30, 1994,
as compared with the same periods in the prior year. These increases were
primarily due to the addition of personnel, depreciation on additional capital
equipment, prototype expenditures as new products were tested in the lab and
payments to outside consultants.
Selling and marketing expense increased $619,000 or 75% and $1.0
million or 67%, respectively, for the three and six month periods ended June
30, 1994, as compared with the same periods in the prior year. These increases
were primarily due to growing levels of sales and marketing support personnel,
commissions related to higher revenue levels, advertising and travel costs.
General and administrative expense increased $231,000 or 35% and
$401,000 or 30%, respectively, for the three and six month periods ended June
30, 1994, as compared with the same periods in the prior year. These increases
were due to the addition of an incentive compensation plan for 1994, personnel
expenses, sales tax, travel costs and investor relations. These increases were
somewhat offset by a decrease in the provision for doubtful accounts.
INCOME FROM OPERATIONS
As a result of the above, income from operations for the quarter ended
June 30, 1994 increased 36% to $2.2 million, compared to $1.6 million for the
1993 quarter. Income from operations for the six months ended June 30, 1994
increased 35% to $4.3 million, compared to $3.2 million for the first half of
1993.
LOSS ON INVESTMENTS
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
11
<PAGE> 12
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 six months ended June 30,
1994 was as follows:
12
<PAGE> 13
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
------------ ----------
JUNE 30, 1994
--------------------------
(IN THOUSANDS EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Net income as previously reported $ 1,765 $ 3,385
======= ========
Net income before adjustment for investment losses $ 1,765 $ 3,385
Adjustments to properly reflect investment losses:
Investment losses (108) (10,058)
Provision for income taxes 120 238
------- --------
Net income (loss) after adjustment for investment losses $ 1,777 $ (6,435)
======= ========
Net income (loss) per share $ 0.12 $ (0.52)
======= ========
Weighted average shares outstanding used to compute
net income (loss) per share 15,236 12,441
======= ========
Net income per share, as previously reported $ 0.12 $ 0.22
======= ========
Weighted average shares outstanding used to compute
net income per share, as previously reported 15,236 15,340
======= ========
</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.
13
<PAGE> 14
INTEREST INCOME (EXPENSE), NET
Net interest income increased to $330,000 and $698,000, respectively,
for the three and six months ended June 30, 1994, from net interest expense of
$60,000 and $144,000, respectively, for the three and six months ended June 30,
1993. These changes were due to interest earned on cash and short-term
investments and a decrease in interest expense due to the repayment of amounts
owed under the Company's line of credit and borrowings of $3.0 million from
Alcatel.
PROVISION FOR INCOME TAXES
The provision for income taxes for the three and six months ended
June 30, 1994, was $1.0 million and $2.0 million, respectively, as the Company
did not record any tax benefit from its investment losses in excess of its
investment gains. The provision for income taxes for the three and six months
ended June 30, 1993, was $172,000 and $336,000, respectively, or an 11%
effective tax rate primarily due to the use of net operating loss carryforwards
in 1993. All of the Company's net operating loss carryforwards were used in
1993.
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE
Net income for the three months ended June 30, 1994 was $1.8 million or
$0.12 per share, compared to $1.4 million or $0.12 per share for the same
period in 1993. The weighted average number of common and common equivalent
shares outstanding was 15.2 million and 11.6 million for the three months ended
June 30, 1994 and 1993, respectively. The increase in shares in 1994 is due to
the initial public offering of the Company's stock in September 1993.
The net loss for the first six months of 1994 was $6.4 million or $0.52
per share, compared to income of $2.7 million or $0.24 per share in 1993. The
weighted average number of common and common equivalent shares outstanding was
12.4 million and 11.5 million for the six months ended June 30, 1994 and 1993,
respectively. The increase in shares in 1994 was due to the initial public
offering of the Company's stock in September 1993.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1994, cash and cash equivalents
decreased $12.2 million compared to an increase of $1.6 million in the six
months ended June 30, 1993. The decrease in cash and cash equivalents resulted
from the investment losses during the first half of 1994. Working capital
needs (accounts receivable plus net inventory minus accounts payable) remained
at prior year levels due to more efficient management of these balance sheet
items. Inventories increased as the Company added additional contract
suppliers, who required components to build products, meet current backlog
needs and future product demands. The income tax liability increased as the
Company began providing for income taxes at statutory rates. In addition, the
Company has a Loan and Security Agreement with its bank which provides for a
revolving unsecured credit facility of $10.0 million, subject to sublimits for
amounts utilized for term loans, letters of credit and exchange contracts. At
June 30, 1994, $1.0 million remained outstanding under the Loan Agreement to
finance short-term requirements. This amount was repaid the following quarter.
14
<PAGE> 15
Capital expenditures relating primarily to the purchase of computer
equipment, test equipment and software amounted to $941,000 and $652,000 for
the six months ended June 30, 1994, and 1993, respectively. The Company had no
material capital commitments as of June 30, 1994, and believes that its cash
and short-term investments together with internally generated cash flow will be
sufficient to meet its working capital requirements, capital expenditure needs
and strategic business demands through the end of its next fiscal year.
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
None.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
11.1 Calculation of Per Share Earnings
(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
under signed 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------- ------------------------
PRIMARY EARNINGS PER SHARE 1994 1993 1994 1993
-------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income (loss) $ 1,777 $ 1,401 $(6,435) $ 2,723
======= ======= ======= =======
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 15,478 2,362 12,441 2,354
Adjustment to reflect requirements of the SEC:
Effects of SAB 83 -- 2,635 -- 2,570
Adjustments to reflect the effects of the
assumed conversion of convertible stock
from date of issuance -- 6,568 -- 6,568
Adjustment to reflect the effects of tax
benefit repurchase (242) -- -- --
------- ------- ------- -------
Shares used in computing net income (loss)
per share 15,236 11,565 12,441 11,492
======= ======= ======= =======
Net income (loss) per share $ 0.12 $ 0.12 $ (0.52) $ 0.24
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------ --------------------------
FULLY DILUTIVE EARNINGS PER SHARE 1994 1993 1994 1993
-------- ------- -------- -------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income (loss) $ 1,777 $ 1,401 $(6,435) $ 2,723
======= ======= ======= =======
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 15,478 2,362 12,441 2,354
Adjustment to reflect requirements of the SEC:
Effects of SAB 83 -- 2,635 -- 2,570
Adjustments to reflect the effects of the
assumed conversion of convertible stock
from date of issuance -- 6,568 -- 6,568
Adjustment to reflect the effects of tax
benefit repurchase (242) -- -- --
------- ------- ------- -------
Shares used in computing net income (loss)
per share 15,236 11,565 12,441 11,492
======= ======= ======= =======
Net income (loss) per share $ 0.12 $ 0.12 $ (0.52) $ 0.24
======= ======= ======= =======
</TABLE>
