<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, 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 14,947,362 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE OF
$.001 PER SHARE OUTSTANDING ON JUNE 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 June 30, 1995 and December 31, 1994 3
Condensed Consolidated Statements of Income for the
quarters and six months ended June 30, 1995 and 1994 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 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 10
Part II. Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</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,
1995 1994
----------- ------------
(UNAUDITED)
(RESTATED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,065 $ 711
Short-term investments 37,399 52,565
Accounts receivable 7,703 9,693
Inventories 23,810 16,474
Other current assets and deferred taxes 3,375 3,704
-------- -------
Total current assets 73,352 83,147
Property and equipment, net 6,592 3,431
Other assets 86 47
-------- -------
Total assets $ 80,030 $86,625
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit $ -- $ 1,000
Accounts payable and other current liabilities 10,125 10,779
-------- -------
Total current liabilities 10,125 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 - 14,947,362 and 12,708,636 at June 30, 1995
and December 31, 1994, respectively 15 13
Additional paid-in capital 83,760 69,513
Deferred compensation (126) (170)
Unrealized gain (loss) on marketable securities 171 (210)
(Accumulated deficit) retained earnings (13,915) 5,700
-------- -------
Total stockholders' equity 69,905 74,846
-------- -------
Total liabilities and stockholders' equity $ 80,030 $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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ---------------------------
1995 1994 1995 1994
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues $ 23,919 $13,663 $ 42,997 $26,145
Cost of revenues 12,471 7,704 22,124 14,819
-------- ------- -------- -------
Gross profit 11,448 5,959 20,873 11,326
Operating expenses:
Research and development 2,869 1,403 4,761 2,649
Sales and marketing 2,223 1,443 4,091 2,618
General and administrative 1,637 890 3,088 1,736
-------- ------- -------- -------
Total operating expenses 6,729 3,736 11,940 7,003
-------- ------- -------- -------
Income from operations 4,719 2,223 8,933 4,323
Interest and other income, net 488 330 1,075 698
Gain (loss) on investments 258 236 358 (9,428)
Unusual loss due to unauthorized trading
of investments by third parties (26,774) -- (26,774) --
-------- ------- -------- -------
(Loss) income before income taxes (21,309) 2,789 (16,408) (4,407)
Provision for income taxes 1,447 1,012 3,206 2,028
-------- ------- -------- -------
Net (loss) income $(22,756) $ 1,777 $(19,614) $(6,435)
======== ======= ======== =======
PER SHARE DATA:
(Loss) earnings per share $ (1.52) $ 0.12 $ (1.40) $ (0.52)
======== ======= ======== =======
Weighted average number of common and
common equivalent shares 14,922 15,236 14,040 12,441
======== ======= ======== =======
</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>
SIX MONTHS ENDED JUNE 30,
--------------------------
1995 1994
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(19,614) $ (6,435)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 1,317 803
(Gains) losses on sales of investments (358) 9,428
Unusual loss due to unauthorized trading of investments
by third parties 26,774 --
Change in operating assets and liabilities:
Accounts receivable 1,990 (1,417)
Inventories (7,336) (767)
Other current assets 329 (269)
Other assets (39) 6
Accounts payable and other current liabilities (654) 1,776
-------- --------
Net cash provided by operating activities 2,409 3,125
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchases of investments (11,433) (15,495)
Purchase of property and equipment (3,871) (941)
-------- --------
Net cash used in investing activities (15,304) (16,436)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under bank line of credit -- 1,000
Payments on bank line of credit (1,000) --
Proceeds from issuance of common stock and warrants 14,249 80
-------- --------
Net cash provided by financing activities 13,249 1,080
-------- --------
Increase (decrease) in cash and cash equivalents 354 (12,231)
Cash and cash equivalents at beginning of period 711 13,650
-------- --------
Cash and cash equivalents at end of period $ 1,065 $ 1,419
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 18 $ --
======== ========
Income tax paid $ 4,053 $ 1,774
======== ========
</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,
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1995 1994 1995 1994
-------- ------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income as previously reported $ 3,603 $ 1,765 $ 6,745 $ 3,385
======== ======= ======== ========
Net income before adjustment for investment
losses and unauthorized activity $ 3,603 $ 1,765 $ 6,745 $ 3,385
Adjustments to properly reflect investment
losses and unauthorized activity:
Investment losses -- (108) -- (10,058)
Unauthorized trading losses (26,774) -- (26,774) --
Provision for income taxes 415 120 415 238
-------- ------- -------- --------
Net income (loss) after adjustment for
investment losses and unauthorized activity $(22,756) $ 1,777 $(19,614) $ (6,435)
======== ======= ======== ========
Net income (loss) per share $ (1.52) $ 0.12 $ (1.40) $ (0.52)
======== ======= ======== ========
Weighted average shares outstanding used to
compute net income (loss) per share 14,922 15,236 14,040 12,441
======== ======= ======== ========
Net income per share, as previously reported $ 0.22 $ 0.12 $ 0.41 $ 0.22
======== ======= ======== ========
Weighted average shares outstanding used to
compute net income per share, as previously
reported 16,717 15,236 16,421 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,
1995, and consolidated results of operations for the condensed consolidated
statements of income for the three and six months ended June 30, 1995, and June
30, 1994, and cash flows for the six month periods ended June 30, 1995, and
June 30, 1994. Results of operations for the three and six months ended June
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, 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/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 reported 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 $434,000
and ($210,000) at June 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 lower of cost (first-in, first-out) or market
and consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials $ 6,809 $ 4,743
Work in process 11,477 9,529
Finished goods 5,524 2,202
------- -------
$23,810 $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 (9% at June 30, 1995) and borrowings
under term loan provisions of the agreement bear interest at prime plus 1%. At
June 30, 1995, the Company had no outstanding borrowings under this line of
credit.
7. INCOME TAXES
Income taxes are provided at the rate expected to be in effect for the
entire year.
8. PER SHARE INFORMATION
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. Pursuant to the requirements of the Securities and Exchange
Commission, stock options and warrants granted during the twelve months
preceding the Company's initial public offering have been treated as if
outstanding during all periods presented.
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, 1995, compared to
quarter and six months ended June 30, 1994)
REVENUES
Revenues for the quarter and six months ended June 30, 1995, increased
$10.3 million or 75% and $16.9 million or 64%, respectively, as compared with
the same periods in the prior year. Of these increases in revenues, product
revenues increased $10.4 million and $17.3 million, respectively. These
increases were offset by decreases in royalty income of $109,000 and $481,000,
respectively, for the quarter and six 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 price 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 represents total revenues, which includes product
revenues and royalty income, less the cost of sales. Cost of sales represents
primarily product costs, together with associated overhead expenditures. Gross
profit increased $5.5 million or 92% and $9.5 million or 84% for the quarter
and six months ended June 30, 1995, as compared with the prior year periods.
Gross profit as a percentage of revenues was 48% for the quarter ended June 30,
1995 compared to 44% in the 1994 quarter. For the six months ended June 30,
1995 gross profit as a percentage of revenues was 49% compared to 43% in the
year ago 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.
Research and development expense increased $1.5 million or 104% and
$2.1 million or 80%, respectively, for the quarter and six months ended June
30, 1995, 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 and payments to outside consultants.
10
<PAGE> 11
Sales and marketing expense increased $780,000 or 56% and $1.5 million
or 56%, respectively, for the quarter and six months ended June 30, 1995, as
compared with the same periods in the prior year. These increases were
primarily due to the addition of sales and marketing support personnel,
commissions related to higher revenue levels, increased advertising, and travel
costs.
General and administrative expense increased $747,000 or 84% and $1.4
million or 78%, respectively, for the quarter and six months ended June 30,
1995, as compared with the same periods in the prior year. These increases were
primarily due to increases in personnel and an overall increase in the level of
purchasing associated with general supplies and non-capitalized equipment.
INCOME FROM OPERATIONS
As a result of the above, income from operations for the quarter ended
June 30, 1995 increased 53% to $4.7 million, compared to $2.2 million for the
1994 quarter. Income from operations for the six months ended June 30, 1995
increased 107% to $8.9 million, compared to $4.3 million for the first half of
1994.
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 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,
1995 and 1994 was as follows:
11
<PAGE> 12
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
1995 1994 1995 1994
--------- ------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income as previously reported $ 3,603 $ 1,765 $ 6,745 $ 3,385
======== ======= ======== ========
Net income before adjustment for investment
losses and unauthorized activity $ 3,603 $ 1,765 $ 6,745 $ 3,385
Adjustments to properly reflect investment
losses and unauthorized activity:
Investment losses -- (108) -- (10,058)
Unauthorized trading losses (26,774) -- (26,774) --
Provision for income taxes 415 120 415 238
--------- ------- -------- --------
Net income (loss) after adjustment for
investment losses and unauthorized activity $(22,756) $ 1,777 $(19,614) $ (6,435)
======== ======= ======== ========
Net income (loss) per share $ (1.52) $ 0.12 $ (1.40) $ (0.52)
======== ======= ======== ========
Weighted average shares outstanding used to
compute net income (loss) per share 14,922 15,236 14,040 12,441
======== ======= ======== ========
Net income per share, as previously reported $ 0.22 $ 0.12 $ 0.41 $ 0.22
======== ======= ======== ========
Weighted average shares outstanding used to
compute net income per share, as previously
reported 16,717 15,236 16,421 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.
12
<PAGE> 13
INTEREST AND OTHER INCOME, NET
Net interest income increased $158,000 and $377,000, respectively, for
the quarter and six months ended June 30, 1995, as compared with the same
periods in the prior year. This increase was primarily due to an increase in
the 1995 cash balances following the Company's March 20, 1995 secondary stock
offering.
PROVISION FOR INCOME TAXES
The provision for income taxes for the three and six months ended June
30, 1995, was $1.4 million and $3.2 million, respectively, compared to $1.0
million and $2.0 million for the three and six months ended June 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, the net loss for the three months ended June
30, 1995 was $22.8 million, compared to net income of $1.8 million in 1994. The
net loss for the first six months of 1995 was $19.6 million, compared to a loss
of $6.4 million in the first half of 1994.
Loss per share for the three and six months ended June 30, 1995 was
$1.52 and $1.40, respectively, compared to income per share of $0.12 for the
1994 quarter and a loss per share of $0.52 for the first half of 1994. The
weighted average number of common and common equivalent shares outstanding was
14.9 million and 15.2 million for the three months ended June 30, 1995 and
1994, respectively. The weighted average number of common and common equivalent
shares outstanding was 14.0 million and 12.4 million for the first half of 1995
and 1994, respectively. The increase in 1995 is due to the secondary public
offering of the Company's stock and the exercise of certain warrants in
connection therewith in March 1995.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1995, the Company had $38.5 million in cash, cash
equivalents and short-term investments and $63.2 million in working capital.
These figures represent a decrease of $14.8 million in cash, cash equivalents
and short-term investments and $8.1 million in working capital over the year
ending December 31, 1994. These decreases are primarily due to losses
resulting 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 received for warrant exercieses) that took place in March 1995. The
decrease in the Company's accounts receivable to $8.1 million at June 30, 1995,
compared to $10.2 million at December 31, 1994, was primarily due to a decrease
in collection days during 1995. The increase in inventory to $23.8 million at
June 30, 1995, compared to $16.5 million at December 31, 1994, was due to
increasing shipment levels. The Company had built-up inventory in anticipation
of relocating manufacturing operations in March 1995. As part of its growth
strategy, the Company intends to increase inventory turns in the future,
although there can be no assurance of the success of these efforts.
Capital expenditures increased by $2.9 million in the six month period
ended June 30, 1995 over the comparable period in 1994. The increase was
primarily due to tenant improvements at the Company's Tustin facility 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 $480,000 has been invested as of June 30,
1995.
On May 1, 1995, the Company entered into a 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 financial
and 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 June 30, 1995 the Company had no
outstanding borrowings under the Loan Agreement and was in compliance with all
financial and operating covenants. The 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 HDSL and ADSL transmission products.
Under the terms of the agreements, the Company will lend Source com $2.7
million and has rights to obtain a minority ownership position.
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.
14
<PAGE> 15
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
The Company held its annual meeting of Shareholders ("Annual Meeting")
on June 13, 1995. At the Annual Meeting, the Shareholders voted upon
and approved the following proposals: (1) the election of two
individuals, Mr. Ben Itri and Mr. Al Lay, to serve on the Company's
Board of Directors until 1998 (2) the approval of an amendment to the
1993 Stock Option/Stock Issuance Plan and (3) the approval of the
adoption of and reservation of 250,000 shares of Common Stock for
issuance under the 1995 Employee Stock Purchase Plan. For proposal
No. 1, 11,713,425 votes were cast in favor, and 42,402 votes were
withheld. Proposal No. 2, received 7,873,055 votes in favor,
2,314,158 against, and 19,360 abstentions. Proposal No. 3 received
10,088,871 votes in favor, 104,550 against, and 21,641 abstentions.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
Exhibit No.
10.30 Senior Note and Warrant Purchase Agreement dated
July 24, 1995 between PairGain Technologies, Inc. and
Source-Comm Corporation
10.31 Warrant Agreement dated July 24, 1995 between PairGain
Technologies, Inc. and Source-Comm Corporation
10.32 Investor' Right Agreement dated July 24, 1995 between
PairGain Technologies, Inc. and Source-Comm Corporation
10.33 Stock Purchase Agreement dated July 24, 1995 between
PairGain Technologies, Inc. and Source-Comm Corporation
11.1 Calculation of Per Share Earnings
(B) Reports filed on Form 8-K during the period:
A report on Form 8-K was filed with the SEC on July 7, 1995,
citing Item 4, Changes in Registrant's Certifying Accountant. In
this report, the Registrant dismissed Ernst & Young LLP as the
principal independent public accountant for the audit of the
Registrant's financial statements. There were no disagreements
with Ernst & Young LLP on any matter of accounting principles or
practices. Also on July 7, 1995, the Registrant engaged Deloitte
& Touche LLP as principal independent accountant for the
Registrant's financial statements for the fiscal year ending
December 31, 1995.
15
<PAGE> 16
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)
16
<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 1995 1994 1995 1994
-------- -------- --------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income (loss) $(22,756) $ 1,777 $(19,614) $(6,435)
======== ======= ======== =======
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 14,922 15,478 14,040 12,441
Adjustment to reflect requirements of the SEC:
Adjustment to reflect the effects of tax
benefit repurchase -- (242) -- --
-------- ------- -------- -------
Shares used in computing net income (loss)
per share 14,922 15,236 14,040 12,441
======== ======= ======== =======
Net income (loss) per share $ (1.52) $ 0.12 $ (1.40) $ (0.52)
======== ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------- ------------------------
FULLY DILUTIVE EARNINGS PER SHARE 1995 1994 1995 1994
-------- ------- -------- -------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income (loss) $(22,756) $ 1,777 $(19,614) $(6,435)
======== ======= ======== =======
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 14,922 15,478 14,040 12,441
Adjustment to reflect requirements of the SEC:
Adjustment to reflect the effects of tax
benefit repurchase -- (242) -- --
-------- ------- -------- -------
Shares used in computing net income (loss)
per share 14,922 15,236 14,040 12,441
======== ======= ======== =======
Net income (loss) per share $ (1.52) $ 0.12 $ (1.40) $ (0.52)
======== ======= ======== =======
</TABLE>
