<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGES COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FIRST QUARTER ENDED MARCH 31, 1996
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 15,472,342 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE OF
$.001 PER SHARE, OUTSTANDING ON MARCH 31, 1996.
<PAGE> 2
PAIRGAIN TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at March 31, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Income
for the three months ended March 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 13
Part II. Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
<PAGE> 3
PART I: ITEM 1
FINANCIAL INFORMATION
PAIRGAIN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
-------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 42,776 $ 24,576
Short-term investments (Note 3) 31,276 31,149
Accounts receivable 13,962 13,044
Inventories (Note 4) 25,233 22,522
Other current assets and deferred taxes 4,413 4,870
-------- --------
Total current assets 117,660 96,161
Property and equipment, net (Note 5) 6,666 6,402
Note receivable (Note 6) 2,708 2,708
Other assets 55 55
-------- --------
Total assets $127,089 $105,326
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities $ 21,652 $ 11,395
Bank line of credit (Note 7) -- --
-------- --------
Total current liabilities 21,652 11,395
-------- --------
Commitments and contingencies (Note 9)
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 - 15,472,342 and
15,177,267 at March 31, 1996 and December 31,
1995, respectively 15 15
Additional paid-in capital 92,360 87,175
Deferred compensation (60) (82)
Unrealized gain on marketable securities 112 67
Retained earnings 13,010 6,756
-------- --------
Total stockholders' equity 105,437 93,931
-------- --------
Total liabilities and stockholders' equity $127,089 $105,326
======== ========
</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>
THREE MONTHS ENDED MARCH 31,
------------------------------
1996 1995
------- --------
<S> <C> <C>
Revenues $40,511 $19,078
Cost of revenues 21,472 9,653
------- -------
Gross profit 19,039 9,425
------- -------
Operating expenses:
Research and development 3,621 1,892
Selling and marketing 3,724 1,868
General and administrative 2,334 1,451
------- -------
Total operating expenses 9,679 5,211
------- -------
Income from operations 9,360 4,214
Interest and other income, net 765 587
Gain on investments -- 100
------- -------
Income before income taxes 10,125 4,901
Provision for income taxes (Note 8) 3,875 1,759
------- -------
Net income $ 6,250 $ 3,142
======= =======
PER SHARE DATA:
Earnings per share $ 0.35 $ 0.20
======= =======
Weighted average number of common
and common equivalent shares 17,645 16,103
======= =======
</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>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,250 $ 3,142
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 975 619
Gains on sales of investments -- (100)
Change in operating assets and liabilities:
Accounts receivable (918) 2,017
Inventories (2,711) (4,008)
Other current assets 426 15
Other assets -- (8)
Accounts payable and other current liabilities 6,857 (223)
Federal income tax refund (Note 8) 6,900 --
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 17,779 1,454
------- -------
Cash flows from investing activities:
Net (purchases of) proceeds from short-term investments (272) 17,948
Purchase of property and equipment (995) (1,684)
------- -------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (1,267) 16,264
------- -------
Cash flows from financing activities:
Payments on bank line of credit -- (1,000)
Proceeds from issuance of common stock and warrants 1,688 13,429
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,688 12,429
------- -------
Increase in cash and cash equivalents 18,200 30,147
Cash and cash equivalents at beginning of period 24,576 711
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $42,776 $30,858
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ -- $ 18
======= =======
Income tax paid $ -- $ 872
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
PairGain Technologies, Inc., (the "Company") designs, manufactures,
markets and supports a comprehensive line of digital telecommunications
products that enable telecommunication exchange carriers and private networks
to more efficiently provide high speed digital service to end users over the
large infrastructure of unconditioned copper wires.
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 March 31,
1996, and consolidated results of operations for the three months ended March
31, 1996, and March 31, 1995, and cash flows for the three months ended March
31, 1996, and March 31, 1995. Results of operations for the three months ended
March 31, 1996, are not necessarily indicative of results to be expected for
the full year ending December 31, 1996.
Although the Company believes that the disclosures in the accompanying
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,
1995.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries: PairGain Services Group, Inc.,
which provides support services for the Company's customers throughout the
United States; PairGain Canada Inc., a sales company focused on the Canadian
market; and PairGain International Sales Corporation, a foreign sales
corporation ("FSC"). All significant intercompany transactions have been
eliminated in consolidation.
6
<PAGE> 7
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
TRANSLATION OF FOREIGN CURRENCIES
Foreign subsidiary financial statements are translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards No. 52,
Foreign Currency Translations. The functional currency of the Company's
Canadian subsidiary is the U.S. dollar, therefore, translation gains and losses
are included in results of operations. Transaction and translation gains and
losses were not significant in 1996 or 1995.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities at
the date of purchase of less than three months to be cash equivalents.
SHORT-TERM INVESTMENTS
Effective January 1, 1994, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The adoption did not have a
significant impact on the Company's consolidated financial statements.
Management determines the appropriate classification of such securities at the
time of purchase and reevaluates such classification as of each balance sheet
date. Based on its intent, the Company's investments are classified as
available-for-sale and are carried at fair value, with unrealized gains and
losses, net of tax, reported as a separate component of stockholders' equity.
The investments are adjusted for amortization of premiums and discounts to
maturity and such amortization is included in interest income. Realized gains
and losses and declines in value judged to be other than temporary are
determined based on the specific identification method and are reported in the
consolidated statements of income.
INVENTORIES
Inventories are stated at lower of cost (determined on a first-in,
first-out basis) or market. The Company maintains allowances for estimated
obsolete and excess inventories based upon projected sales levels.
7
<PAGE> 8
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. The Company provides for
depreciation and amortization using the straight-line method. The estimated
useful life of equipment is three years. Leasehold improvements are amortized
over the lesser of five years or the life of the lease.
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment.
Provision is made currently for estimated product returns. Revenue for
technology and licensing fees and royalty income is recognized when earned.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
PER SHARE INFORMATION
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 and are calculated using the treasury stock
method.
STATEMENT OF CASH FLOWS
During the quarter ended March 31, 1996, the Company recorded noncash tax
benefits from exercises of common stock options aggregating $3.5 million.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("Statement No. 123"), which became effective for the Company
beginning January 1, 1996. Statement No. 123 requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but does
not require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Companies are permitted, however, to continue to
apply APB Opinion No. 25, which recognizes compensation cost based on the
intrinsic value of the equity instrument awarded. The Company will continue to
apply APB Opinion No. 25 to its stock-based compensation awards to employees.
8
<PAGE> 9
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
2. CONCENTRATION OF CREDIT RISK, MAJOR CUSTOMERS AND PRODUCTS
The Company markets its products principally to telephone companies in
the United States and Canada. Credit is extended based on an evaluation of the
customer's financial condition and collateral is not required. Credit losses
are provided for in the financial statements and consistently have been
minimal.
A decision by a significant customer to substantially decrease or
delay purchases from the Company or the Company's inability to collect
receivables from these customers could have a material adverse effect on the
Company's financial condition and results of operations.
Revenues from HiGain products represented approximately 82% and 74% of
the Company's total revenues for the quarter ended March 31, 1996 and 1995,
respectively. A decline in demand for HiGain products, whether as a result of
competition, deployment of fiber cable, technological change or otherwise,
could have a material adverse effect on the Company's operating results.
3. SHORT-TERM INVESTMENTS
Short-term investments as of March 31, 1996 and December 31, 1995 are
summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
MARCH 31, 1996
Municipal bonds $31,095 $181 $-- $31,276
DECEMBER 31, 1995
Municipal bonds $31,042 $107 $-- $31,149
</TABLE>
Net realized gains were $0 and $100,000 for the three months ended
March 31, 1996 and 1995, respectively. Unrealized gains on short-term
investments, net of tax, included as a separate component of stockholders'
equity at March 31, 1996 and December 31, 1995 were $112,000 and $67,000,
respectively.
The amortized cost and estimated fair value of investments at March
31, 1996 by contractual maturity are shown below. Actual maturities may differ
from contractual maturities because the issuer of the securities may have the
right to repurchase such securities.
9
<PAGE> 10
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
<TABLE>
<CAPTION>
FAIR
COST VALUE
------- -------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less $16,483 $16,575
Due after one year through three years 14,612 14,701
------- -------
$31,095 $31,276
======= =======
</TABLE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials $ 4,869 $ 4,987
Work in process 11,411 9,693
Finished goods 8,953 7,842
------- -------
$25,233 $22,522
======= =======
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Furniture and fixtures $ 135 $ 50
Machinery and equipment 10,529 9,722
Leasehold improvements 1,214 1,111
------- -------
11,878 10,883
Less accumulated depreciation and amortization 5,212 4,481
------- -------
$ 6,666 $ 6,402
======= =======
</TABLE>
10
<PAGE> 11
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
6. NOTE RECEIVABLE
In July 1995, the Company entered into certain agreements with
Sourcecom Corporation of Valencia, California ("Sourcecom"). Sourcecom
designs, manufactures and markets 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 loaned Sourcecom $2.7
million and has rights to purchase a minority ownership position. The note
bears interest at the prime rate less one percent (7.25% at March 31, 1996),
payable monthly, with the principal balance due July 1999.
7. BANK LINE OF CREDIT
The Company maintains an unsecured line of credit with a bank. The
line allows maximum borrowings of $10,000,000, of which up to $2,000,000 may be
utilized for the secured purchase of fixed assets (term loan), $2,000,000 for
letters of credit and $2,000,000 for foreign exchange contracts. The line
bears interest at prime (8.25% at March 31, 1996) and borrowings under term
loan provisions of the agreement bear interest at prime plus 1%. At March 31,
1996, the Company had no outstanding borrowings under this line of credit. The
debt agreement specifies certain financial and other covenants. The Company was
in compliance with the financial and other covenants at March 31, 1996. The
agreement expires May 1, 1996.
8. INCOME TAXES
Income taxes are provided at the rate expected to be in effect for the
entire year.
During the quarter ended March 31, 1996, the Company received a $6.9
million refund of its Federal income taxes paid for the year ended December 31,
1995. This refund arises out of certain deductions the Company claimed in its
tax return for the year ended December 31, 1995. Until the Internal Revenue
Service audits the Company's 1995 income tax return, the treatment of these
deductions is uncertain. The Company believes the ultimate resolution of these
uncertainties will not have a material adverse effect on the Company's
financial statements.
9. CONTINGENCIES
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 Mr. S. Jay
Goldinger and Capital Insight, Inc., a third party investment advisor. This
11
<PAGE> 12
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
suit arises out of losses incurred by the Company in 1995 of approximately
$15.8 million in connection with investments made by Mr. Goldinger and Capital
Insight on the Company's behalf. The derivative complaint states causes of
action for breach of fiduciary duty, abuse of control, constructive fraud,
gross mismanagement and waste of corporate assets. The complaint seeks in
excess of $15.8 million in damages and legal fees and expenses in connection
with the loss by the Company of the funds it provided to Mr. Goldinger and
Capital Insight. The suit was filed in Superior Court of the State of
California, County of Orange.
In January 1996, the Company filed suit, in Los Angeles federal court,
against Mr. S. Jay Goldinger and Capital Insight, Inc. 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.
Both of these suits arise out of losses the Company incurred in 1995
in one of its investment accounts. In early 1995, the Company had invested
approximately $28 million of its excess cash with Capital Insight, Inc., a
financial advisor and broker based in Beverly Hills, California, 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 of 1994. However, these instructions were violated and
the funds were used to engage in unauthorized trading in options and futures,
resulting in pre-tax trading losses of $15.8 million in 1995.
The Company's outside directors retained independent legal counsel to
perform a complete investigation of the facts surrounding these losses and the
Company's existing investment policies and procedures. The independent legal
counsel retained forensic accountants to perform a full analysis of the
unauthorized trading activity in order to ascertain both the details of the
transactions involved and the periods in which the losses occurred. This
investigation revealed no improper involvement by any Company director, officer
or employee in the unauthorized trading.
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
cannot presently be determined; accordingly, no provision for any loss or
recovery that may result has been made in the Company's financial statements.
10. PUBLIC OFFERING
In March 1995, the Company completed a secondary public offering and
sold 500,000 shares of its common stock at a price of $23.625 per share. The
net proceeds raised by the Company were approximately $10,970,000. In
connection with the offering, certain outstanding warrants were exercised to
purchase 1,437,655 shares of common stock at an aggregate exercise price of
$2,717,000.
12
<PAGE> 13
PART I: ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PAIRGAIN TECHNOLOGIES, INC.
Except for the historical information contained herein, the matters
discussed in this Form 10-Q are forward-looking statements which involve
risk and uncertainties, including but not limited to economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices and other factors discussed in the
Company's filings with the Securities and Exchange Commission.
RESULTS OF OPERATIONS (quarter ended March 31, 1996, compared to quarter ended
March 31, 1995)
REVENUES
Revenues for the three months ended March 31, 1996 increased $21.4
million, or 112%, to $40.5 million as compared to $19.1 million for the three
months ended March 31, 1995. Of this increase in revenue, product revenue
increased $21.5 million, and royalty income decreased $102,000. The increase in
product revenue was primarily due a 158% increase in the unit sales volume of
the Company's HiGain product, and to a lesser extent, a 74% and 122% increase
in unit sales volume of the Company's PG-2 and Campus products, respectively.
These increases were partially offset by declines in the average selling prices
of HiGain and Campus products.
The decrease in royalty income was primarily due to a reduction in
royalty fees generated by Alcatel for the use of the Company's HDSL technology
as a result of the renegotiation and termination of its agreement with Alcatel
in the fourth quarter of 1995. As part of terminating the agreement, the
Company granted royalty-free licenses of current company technology to Alcatel
and Alcatel granted a royalty-free license of its network management software
to the Company. The agreement also reduced the royalty rate for standalone T1
products which incorporate the Company's HDSL technology being sold by Alcatel.
Consequently, technology licensing fees and royalty income will continue to
decline in the future.
GROSS PROFIT
Gross profit represents total revenues for a period, including
technology fees and royalty income, less the cost of revenues for such period.
Cost of revenues represents primarily product costs, together with associated
overhead expenditures. Gross profit increased $9.6 million, or 102%, to $19.0
million for the three months ended March 31, 1996 compared to $9.4 million for
the same period in the prior year. This growth in gross profit was principally
attributed to the increase in the Company's revenues.
As a percentage of revenues, gross profit was 47% for the quarter
ended March 31, 1996, compared to 49% in the 1995 quarter. This decrease in
gross profit percentage resulted primarily from the declines in average selling
prices of HiGain and Campus products. Continuing engineering design
13
<PAGE> 14
changes, reduced prices for components from vendors and reduced manufacturing
overhead rates partially offset the effects of these declines in average
selling prices.
The Company expects that increased future 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
reductions in average sales prices 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.
OPERATING EXPENSES
In order to support the growth of its business, the Company
significantly expanded its levels of operations in all areas. Accordingly,
operating expenses increased $4.5 million, or 86%, for the three months ended
March 31, 1996 as compared with the same period in the prior year.
Approximately 50% of this increase was due to the addition of personnel.
However, as a percentage of revenues, operating expenses decreased to 24% in
the 1996 period from 27% in the 1995 quarter.
Research and development expense increased $1.7 million, or 91%, to
$3.6 million for the three months ended March 31, 1996 compared to $1.9 million
in the prior year period. This increase was primarily due to the addition of
personnel, depreciation on additions of capital equipment, and prototype
expenditures associated with new products. In addition, the 1996 quarter
includes expenses related to the Company's Raleigh, North Carolina design
center, which was established in the fourth quarter of 1995. Research and
development expense as a percentage of revenues was 9% in the 1996 quarter
compared to 10% in 1995. The Company plans to continue to expend at least 9%
of its revenues on new product development, product enhancements, and
continuing efforts toward product cost reductions.
Selling and marketing expense increased to $3.7 million in the 1996
quarter compared to $1.9 million in the prior year quarter. Additional sales
and marketing support personnel, commissions, advertising, trade show and
travel costs primarily accounted for the increase in expenditures. Selling and
marketing expense as a percentage of revenues was 9% in the 1996 quarter
compared to 10% in 1995.
General and administrative expense increased $883,000 to $2.3 million
for the quarter ended March 31, 1996 compared to $1.4 million in the same
period in the prior year. As a percentage of revenues, general and
administrative expense decreased to 6% in the first quarter of 1996 from 7% in
1995.
INCOME FROM OPERATIONS
As a result of the above, income from operations for the quarter ended
March 31, 1996 increased 122% to $9.4 million, compared to $4.2 million for the
1995 quarter. As a percentage of revenues, income from operations was 23% in
the 1996 quarter compared to 22% in 1995.
14
<PAGE> 15
INTEREST AND OTHER INCOME, NET
Net interest income increased to $765,000 for the three months ended
March 31, 1996 from $587,000 in the 1995 quarter. This increase resulted
primarily from higher average cash levels available for investment. There was
no interest expense for the three months ended March 31, 1996. Interest
expense for the three months ended March 31, 1995 was $18,000.
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $3.9 million, for the
three months ended March 31, 1996, from $1.8 million for the same period in the
prior year. The Company's effective rate increased to 38% in the 1996 quarter
from 36% in the 1995 quarter, as tax credits and tax-free interest income
represented a smaller proportion of total pre-tax income as a result of the
earnings growth. The Company expects to maintain its tax rate at 38% for the
remainder of 1996.
NET INCOME AND EARNINGS PER SHARE
Net income for the three months ended March 31, 1996 was $6.2 million,
or $0.35 per share, compared to $3.1 million or $0.20 per share for the 1995
quarter. The weighted average number of common and common equivalent shares
outstanding was 17.6 million and 16.1 million for the three months ended March
31, 1996 and 1995, respectively. This increase in common and common equivalent
shares was primarily attributable to the issuance of 500,000 shares in the
Company's secondary offering in March 1995 which were outstanding for the
entire 1996 quarter, the granting of options to key employees of the Company,
and the reduction in the number of shares assumed to be repurchased upon the
exercise of options and warrants, using the treasury stock method, as a result
of the Company's higher stock price in 1996 over 1995.
15
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company had $74.1 million in cash, cash
equivalents and short-term investments and $96.0 million in working capital.
These figures represent an increase of $18.3 million in cash, cash equivalents
and short-term investments and $11.2 million in working capital over the
amounts at December 31, 1995. These increases are primarily attributable to
cash generated from operations (net of capital expenditures) of $9.7 million,
the receipt of a Federal income tax refund of $6.9 million and $1.7 million
from the exercise of stock options. The increase in the Company's accounts
receivable to $14.0 million at March 31, 1996, compared to $13.0 million at
December 31, 1995, was primarily reflective of higher revenue levels. The
increase in inventory to $25.2 million at March 31, 1996, compared to $22.5
million at December 31, 1995, was due to increased stocking and production
levels to support future shipments. The Company has historically maintained
relatively high levels of inventory. However, annualized inventory turnover
increased to 3.4 times for the quarter ended March 31, 1996, compared to 2.5
times for 1995.
Capital expenditures relating primarily to the purchase of computer
equipment, machinery and test equipment, and leasehold improvements amounted to
$1.0 million for the three months ended March 31, 1996. Capital expenditures
in the 1995 quarter aggregated $1.7 million and included $1.0 million for
expenditures related to machinery and test equipment and $0.6 million in
leasehold improvements related to the Company's Tustin, California,
manufacturing, development and administrative facility. The Company was fully
relocated into the Tustin facility in the first quarter of 1995.
Accounts payable and other current liabilities increased to $21.7
million at March 31, 1996 from $11.4 million at December 31, 1995. This
increase consisted of $7.0 million in income tax liabilities and $3.3 million
in accrued compensation and other accrued expenses. During the quarter ended
March 31, 1996, the Company received a $6.9 million refund of its Federal
income taxes paid for the year ended December 31, 1995. This refund arises out
of certain deductions the Company claimed in its tax return for the year ended
December 31, 1995. Until the Internal Revenue Service audits the Company's
1995 income tax return, the treatment of these deductions is uncertain. The
Company believes the ultimate resolution of these uncertainties will not have a
material adverse effect on the Company's financial statements.
The Company has no material near-term commitments for its funds. The
Company believes that the current cash, cash equivalents and short-term
investment balances and internally generated cash flow will be sufficient to
meet its working capital and capital expenditure requirements through 1996. To
the extent that the Company's existing resources, together with future
earnings, are insufficient to fund the Company's future activities, the Company
may need to raise additional funds through public or private financings.
16
<PAGE> 17
PART II. OTHER INFORMATION
PAIRGAIN TECHNOLOGIES, INC.
Item 1. Legal Proceedings
The section titled "Legal Proceedings" appearing in the Company's
Annual Report on Form 10-K as filed with the Securities and Exchange
Commission on March 28, 1996 is incorporated herein by reference.
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 Computation of Earnings Per Share
27.1 Financial Data Schedule
(B) Reports on Form 8-K
None.
17
<PAGE> 18
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: April 26, 1996 /s/ CHARLES W. McBRAYER
------------------------------------------
Charles W. McBrayer
Vice President, Finance and Administration
Chief Financial Officer
(Duly Authorized Officer)
Date: April 26, 1996 /s/ ROBERT R. PRICE
-----------------------------------------
Robert R. Price
Corporate Controller
(Chief Accounting Officer)
18
<PAGE> 1
PAIRGAIN TECHNOLOGIES, INC.
EXHIBIT 11.1-COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
--------------------------
1996 1995
------- -------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
PRIMARY EARNINGS PER SHARE
Net income $ 6,250 $ 3,142
======= =======
Calculation of weighted average number of common and common
equivalent shares:
Weighted average of actual common shares outstanding 15,372 13,157
Weighted average of common share equivalents:
Weighted average warrants outstanding 10 1,255
Weighted average options outstanding 3,252 2,785
Shares assumed to be repurchased using the
treasury stock method (683) (864)
Shares assumed to be repurchased to reflect
the effects of tax benefits (306) (230)
------- -------
Weighted average number of common and common equivalent shares 17,645 16,103
======= =======
Earnings per share $ 0.35 $ 0.20
======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------------------
1996 1995
-------- -------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
FULLY DILUTIVE EARNINGS PER SHARE
Net income $ 6,250 $ 3,142
======= =======
Calculation of weighted average number of common and common
equivalent shares:
Weighted average of actual common shares outstanding 15,372 13,157
Weighted average of common share equivalents:
Weighted average warrants outstanding 10 1,255
Weighted average options outstanding 3,252 2,785
Shares assumed to be repurchased using the
treasury stock method (579) (707)
Shares assumed to be repurchased to reflect
the effects of tax benefits (315) (242)
------- -------
Weighted average number of common and common equivalent shares 17,740 16,248
======= =======
Earnings per share $ 0.35 $ 0.19
======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 42,776
<SECURITIES> 31,276
<RECEIVABLES> 13,962
<ALLOWANCES> 0
<INVENTORY> 25,233
<CURRENT-ASSETS> 117,660
<PP&E> 6,666
<DEPRECIATION> 0
<TOTAL-ASSETS> 127,089
<CURRENT-LIABILITIES> 21,652
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 105,422
<TOTAL-LIABILITY-AND-EQUITY> 127,089
<SALES> 40,511
<TOTAL-REVENUES> 40,511
<CGS> 21,472
<TOTAL-COSTS> 21,472
<OTHER-EXPENSES> 9,679
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,125
<INCOME-TAX> 3,875
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,250
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
</TABLE>
