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As filed with the Securities and Exchange Commission on May 1, 1997
Registration No. 333-23067
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2 TO
FORM S-3
REGISTRATION STATEMENT
Under the Securities Act of 1933
PAIRGAIN TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 33-0282809
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
14402 FRANKLIN AVENUE, TUSTIN, CALIFORNIA 92780
(714) 832-9922
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
CHARLES S. STRAUCH
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PAIRGAIN TECHNOLOGIES, INC.
14402 FRANKLIN AVENUE, TUSTIN, CALIFORNIA 92780
(714) 832-9922
(Name, Address, Including Zip Code, and Telephone Number Including Area Code,
of Agent for Service)
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Copies to:
BRUCE R. HALLETT, ESQ.
BROBECK, PHLEGER & HARRISON LLP
4675 MACARTHUR COURT, SUITE 1000
NEWPORT BEACH, CALIFORNIA 92660
(714) 752-7535
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Title of Each Class of Amount to be Registered Proposed Maximum Offering Proposed Maximum Amount of
Securities to be Registered Price Per Share(1) Aggregate Offering Registration Fee
Price
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<S> <C> <C> <C> <C>
Common Stock, par value 2,366,865 shares $30.8125 $72,929,028 $22,100
$0.0005 per share
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</TABLE>
(1) The price of $30.8125 per share, which was the average of the high and low
prices of the Common Stock on the Nasdaq National Market on March 7, 1997,
is set solely for the purpose of calculating the registration fee pursuant
to Rule 457(c) of the Securities Act of 1933, as amended.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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2,366,865 SHARES
PAIRGAIN TECHNOLOGIES, INC.
COMMON STOCK
($0.0005 par value per share)
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This prospectus (the "Prospectus") relates to the public offering,
which is not being underwritten, of up to 2,366,865 shares (the "Shares") of
Common Stock, par value $0.0005 per share, of PairGain Technologies, Inc.
("PairGain," the "Company" or the "Registrant") by certain stockholders of the
Company (the "Selling Stockholders"). The Selling Stockholders received such
shares in connection with PairGain's acquisition of Avidia Systems, Inc.
("Avidia") through a statutory merger of a wholly-owned subsidiary of the
Company with and into Avidia (the "Merger"). The Shares were issued pursuant to
an exemption from the registration requirements of the Securities Act of 1933,
as amended (the "Securities Act"), provided by Section 4(2) thereof. The Shares
are being registered by the Company pursuant to registration rights granted by
the Company to the Selling Stockholders. The Company has agreed to bear certain
expenses (other than selling commissions and fees and expenses of counsel and
other advisers to certain of the Selling Stockholders) in connection with the
registration of the Shares.
The Shares may be offered by the Selling Stockholders, or by pledgees,
donees, transferees or other successors in interest, from time to time in
transactions in the over-the-counter market, in negotiated transactions, or a
combination of such methods of sale, at fixed prices which may be changed, at
market prices prevailing at the time of sale, at prices related to prevailing
market prices or at negotiated prices. The Selling Stockholders, or their
pledgees, donees, transferees or other successors in interest, may effect such
transactions by selling the Shares to or through broker-dealers, and such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Stockholders, or their pledgees, donees,
transferees or other successors in interest, and/or the purchasers of the Shares
for whom such broker-dealers may act as agents or to whom they sell as
principals (which compensation as to a particular broker-dealer might be in
excess of customary commissions). See "Distribution or Sale of the Shares."
The Company will not receive any part of the proceeds from sales of the
Shares by the Selling Stockholders. See "Use of Proceeds."
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THE COMMON STOCK OFFERED HEREBY HAS A HIGH DEGREE OF RISK. SEE "INVESTMENT
CONSIDERATIONS" BEGINNING ON PAGE 4.
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The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol "PAIR." On April 29, 1997, the last reported sale price of the
Company's Common Stock on the Nasdaq National Market was $23.19 per share.
The Selling Stockholders and any broker-dealers or agents that
participate with the Selling Stockholders in the distribution of the Shares may
be deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act, and any commissions received by them and any profit on the
resale of the Shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. See "Distribution or Sale of
the Shares" herein for a description of indemnification arrangements.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1997
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFERING MADE HEREBY, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, ANY SELLING STOCKHOLDER OR BY ANY OTHER PERSON. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES TO ANY PERSON OR BY ANYONE
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION MAY NOT LAWFULLY BE
MADE.
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files annual and quarterly reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information may be inspected, and copies of
such material may be obtained at prescribed rates, at the Commission's Public
Reference Section, Room 1024, 450 Fifth Street, N.W., Washington D.C. 20549, as
well as at the Commission's regional offices at Seven World Trade Center, 13th
Floor, New York, New York 10048, and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
also be obtained from the Public Reference Branch of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission also
maintains a web site that contains reports, proxy and information statements and
other information regarding registrants, such as the Company, that file
electronically with the Commission and the address is http://www.sec.gov.
Reports, proxy statements and other information concerning the Company may also
be inspected at the National Association of Securities Dealers, Inc.
at 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a registration statement on
Form S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act, with respect to the Common
Stock offered hereby. This Prospectus, which is part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and the Shares offered hereby, reference is hereby made to the
Registration Statement. Statements contained in this Prospectus concerning the
provisions of any documents referred to are not necessarily complete, and each
such statement is qualified in its entirety by reference to the copy of such
document filed with the Commission.
INFORMATION INCORPORATED BY REFERENCE
The following documents filed with the Commission are hereby
incorporated by reference in this Prospectus:
(i) the Annual Report of the Company on Form 10-K/A for
the year ended December 31, 1996 filed with the
Commission on April 30, 1997;
(ii) the Current Report of the Company on Form 8-K/A
filed with the Commission on April 25, 1997;
(iii) definitive Proxy Statement filed with the
Commission on April 30, 1997 in connection with
the Company's 1997 Annual Meeting of Stockholders;
and
(iv) the description of the Company's Common Stock
contained in its Registration Statement on Form 8-A
filed with the Commission August 6, 1993, including
any amendment or report filed for the purpose of
updating such description.
All reports and other documents subsequently filed by the Company
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date
of this Prospectus and prior to the termination of this offering shall be deemed
to be incorporated by reference herein and to be a part hereof from the date of
filing of such reports and documents. Any statement incorporated herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
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The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any or all of the foregoing documents incorporated herein by reference (other
than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into such document). Requests for such documents
should be submitted in writing to Charles W. McBrayer, Chief Financial Officer
at PairGain Technologies, Inc., 14402 Franklin Avenue, Tustin, California 92780,
or by telephone at (714) 832-9922.
PairGain(R), Campus-Flex(R), Campus-T1(R), Campus-E1(R),
Campus-Star(TM), Campus-768(TM), Campus-REX(TM), CopperOptics(TM), HiGain(TM),
Megabit Modem(TM), EtherPhone(TM), AccessHub(TM), AccessGate(TM), PG-Plus(TM)
and PG-Flex(TM) are trademarks of the Company.
THE COMPANY
PairGain is a leading provider of telecommunications products based on
high-speed Digital Subscriber Line ("xDSL") technology. The Company designs,
manufactures, markets and supports products that allow telecommunications
carriers and private network owners to more efficiently provide high-speed
digital services to end users over the large existing infrastructure of
unconditioned copper wires. These services enable high-speed data transmission
for applications such as T1/E1, high-speed Internet access, telecommuting, wide
area networking and video conferencing.
The Company's direct sales force markets its products to the regional
Bell operating companies and their local telephone company affiliates and to the
larger independent telephone companies by working closely with the planning,
switching and transmission departments of such customers. The Company sells to
other independent carriers and owners of private networks through direct sales,
telesales and distributors. In addition to the specific sales efforts directed
at its public and private network customers, the Company's marketing activities
include participation in industry trade shows and conferences, distribution of
sales and product literature, media relations, advertising in trade journals,
direct mail and ongoing communications with its customers and industry analysts.
The Company was incorporated in California in February 1988 and changed
its state of incorporation from California to Delaware in September 1993. The
Company maintains its executive offices at 14402 Franklin Avenue, Tustin,
California 92780, and its telephone number at that address is (714) 832-9922.
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INVESTMENT CONSIDERATIONS
In addition to the other information in this Prospectus, the following
Investment Considerations should be considered carefully in evaluating an
investment in the shares of Common Stock offered by this Prospectus. Except for
the historical information contained herein, the matters discussed in this
Prospectus 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 Commission.
Acquisition-Related Risks
The Company's acquisition of Avidia was its first significant
acquisition of another company. The Avidia acquisition will present the Company
with numerous challenges, including difficulties in the assimilation of the
operations, technologies and products of Avidia and managing separate geographic
operations. The process of integrating Avidia's business into the Company's
operations may result in unforeseen operating difficulties and expenditures and
may absorb significant management attention that would otherwise be available
for the ongoing development of the Company's business. If the Company's
management does not respond to these challenges effectively, the Company's
results of operations could be adversely affected. Moreover, there can be no
assurance that the anticipated benefits of the Avidia acquisition will be
realized.
Average Sales Price Reductions
Commencing in mid-1993, the Company began reducing the average sales
prices of its HiGain(TM) products in an effort to increase market demand for its
products and in anticipation of expected price competition. These reductions
have been significant, representing a reduction of as much as 14%, in 1996, 23%
in 1995 and 40% in 1994. The Company expects to continue to reduce the average
sales prices of its products, including its HiGain products, in future periods.
Accordingly, the Company's ability to maintain or increase revenues will depend
in part upon its ability to increase unit sales volumes of HiGain products and
to introduce and sell new products at rates sufficient to compensate for the
reduced revenue effect of such continuing reductions in the average sales prices
of the Company's HiGain products. Declining average sales prices may also
adversely affect gross margins on the Company's HiGain products if the Company
is unable to fully offset such reductions in average sales prices by reductions
in the Company's per unit costs. There can be no assurance that the Company will
be able to increase the unit sales volumes of its HiGain products, introduce and
sell new products, reduce its per unit costs or maintain or increase revenues or
margins attributable to such products.
Product Concentration
Revenues from HiGain products represented approximately 76% of the
Company's total revenues in each of the years 1996, 1995 and 1994. The Company
expects that revenues from HiGain products will continue to account for a
majority of the Company's revenues for the foreseeable future, although there
can be no assurance that the Company will be able to sustain recent levels of
HiGain product sales. 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.
Future Operating Results Subject to Fluctuation
The Company's operating results may fluctuate in the future as a result
of a number of factors, including the timing of orders from, and shipments to,
major customers, the timing of new product announcements by the Company or its
competitors, variations in the Company's sales channels or the mix of products
its sells, changes in pricing policies by the Company's suppliers, the
availability and cost of key components, the timing of personnel hirings, the
market acceptance of new and enhanced versions of the Company's products and the
timing of final product approvals from any of the Regional Bell Operating
Companies ("RBOC's"). Further, the Company's expense levels are based in part on
expectations of future revenues, and the Company has been significantly
increasing and intends to continue to significantly increase operating
expenditures and to increase inventory as its expands its levels of operations.
The Company anticipates that the rate of new orders may vary significantly from
month to month. Consequently, if anticipated sales and shipments in any quarter
do not occur when expected, operating expenses and inventory levels could be
disproportionately high, and the Company's operating results for that quarter,
and potentially future quarters, would be adversely affected.
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Competition
Competition in the Company's markets is intense, and the Company
expects that competition will increase. Many of the Company's potential
competitors have substantially greater name recognition and technical, financial
and marketing resources than the Company. There can be no assurance that the
Company will have the financial resources, technical expertise or marketing,
distribution and support capabilities to compete successfully in the future.
Competitive pressures could reduce demand for the Company's products, cause the
Company to further reduce prices on its existing products, increase expenses or
cause delays or cancellations of customer orders, any one of which could
adversely affect the Company's business and results of operations.
The Company's most significant domestic competitors are ADTRAN, Inc.
("ADTRAN") and ADC Telecommunications, which offer High-bit-rate Digital
Subscriber Line ("HDSL") systems and have often competed with the Company on the
basis of price. The Company may also face competition from the licensees of its
own HDSL technology. Specifically, the Company and Alcatel Network Systems, Inc.
("Alcatel") have granted each other royalty-free cross licenses of current
PairGain HDSL technology and Alcatel's current Network Management Software.
Many companies have introduced or announced xDSL-based products,
including both T1 and E1 products, including HDSL chips currently offered by
Brooktree Corporation, the former supplier of the Company's SPAROW I chip, Level
One Communications and Metalink. Other companies that offer xDSL-based products
include Ascend, ADTRAN, Westel, Amati and Cisco. The Company also faces
significant competition from providers of other technologies used by private
network users to transmit information, including fiber and conventional
repeatered T1 lines. The Company expects that additional companies will
introduce competitive products in the future, and there can be no assurance that
the Company will continue to compete successfully in the future.
All manufacturers of products based on HDSL technology face competition
from fiber optic and conventional repeatered systems as alternate solutions for
the delivery of T1, E1 and other high-bandwidth services to end users. As
telephone companies continue to install fiber cable and conventional repeatered
T1 systems to provide high-bandwidth service in local subscriber loops, the
demand for HDSL products may decline. Further, the deployment of fiber to
replace existing HDSL installations will result in the availability of those
existing HDSL systems for installation elsewhere and may adversely affect future
demand for HDSL products.
Dependence on Suppliers and Subcontractors
Certain components used in the Company's HDSL products are currently
purchased from a single source (including the Company's SPAROW II chip) and
others are available from a limited number of sources. In the past, the Company
has experienced delays in the receipt of certain of its key components, which
have resulted in delays in product deliveries. There can be no assurance that
delays in key component and product deliveries will not occur in the future. The
inability to obtain sufficient key components as required, or to develop
alternative sources if and as required in the future, could result in delays or
reductions in product shipments to the Company's customers. Any such delays or
reductions could have a material adverse effect on the Company's reputation and
customer relationships which could, in turn, have a material adverse effect on
the Company's business and results of operations. In addition, the Company uses
third-party subcontractors for the manufacture of its products. This reliance on
third-party subcontractors involves several risks, including the potential
absence of adequate capacity, the unavailability of or interruptions in access
to certain process technologies and reduced control over product quality,
delivery schedules, manufacturing yields and costs.
Shortage of raw materials or production capacity constraints at the
Company's subcontractors could negatively affect the Company's ability to meet
its production obligations and result in increased prices for affected parts.
Any such reduction may result in delays in shipments of the Company's products
or increases in the price of components, either of which could have a material
adverse impact on the Company.
Customer Concentrations
Aggregate sales to local telephone companies affiliated with Bell
Atlantic, BellSouth, NYNEX, Pacific Telesis, and SBC Communications (formerly
Southwestern Bell) accounted for approximately 59%, 63% and 66% of the Company's
total revenues for 1996, 1995 and 1994, respectively. As a result of the
Company's dependence on its largest customers, the Company's future success will
significantly depend upon the timeliness and size of future
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purchase orders, if any, from its largest customers, the product requirements of
such customers, the financial and operational success of such customers, and in
particular, the success of such customers' services deployed using the Company's
products. The Company's sales to its largest customers have in the past
fluctuated and may in the future fluctuate significantly from quarter-to-quarter
and year-to-year. The loss of any such customer or the occurrence of any such
sales fluctuations could have a material adverse effect on the Company's
business and results of operations.
Dependence on New Markets and Technologies
The Company is evaluating new applications of high-speed copper
transmission technologies, is investing significant corporate resources in the
development of Asymmetric Digital Subscriber Line ("ADSL") technology, and
expects to devote significant additional resources to the development of other
new technologies in the future. In addition, the Company does not expect to
generate significant revenues from ADSL products in 1997, and there can be no
assurance that the Company will ever generate significant revenues from ADSL
products. There can be no assurance that such technologies will be viable or
that markets for such technologies will develop. Any failure in the development
of new markets and technologies could have a material adverse effect on the
Company's business.
Rapid Technological Change and Dependence on New Products
The market for the Company's products is characterized by rapid
technological advances, evolving industry standards, changes in end user
requirements and frequent new product introductions and enhancements. The
introduction of xDSL products involving superior technologies or the emergence
of alternative technologies or new industry standards could render the Company's
existing products, as well as products currently under development, obsolete and
unmarketable. The Company believes its future success will depend in part upon
its ability to continue, on a cost-effective and timely basis, to enhance its
xDSL products, develop and introduce new products for the xDSL market and other
markets, meet changing customer needs and achieve broad market acceptance for
its products. There can be no assurance that the Company will be able to respond
effectively to technological changes or new product announcements, that the
Company will be able to successfully develop and market new products or product
enhancements or that such products or enhancement will achieve market
acceptance. Any failure by the Company to anticipate or respond on a cost
effective and timely basis to technological developments, changes in industry
standards or end user requirements, or any significant delays in product
development or introduction, could have a material adverse effect on the
Company's business. Further, there are physical limits to the speed at which
transmissions can travel over copper wire, and the Company's copper-based xDSL
products will not be a viable solution for customers requiring service at
performance levels beyond the limits of copper wire.
Need to Generate International Sales
To date, sales of the Company's products outside of the United States
and Canada have been limited. The Company's ability to meet its objectives will
require it to generate significant international sales in 1997 and beyond.
International business is subject to risks in addition to those inherent in the
Company's North American business including substantially different regulatory
requirements in different jurisdictions, varying technical standards, tariffs
and trade barriers, political and economic instability, reduced protection for
intellectual property rights in certain countries, difficulties in staffing and
maintaining foreign operations, difficulties in managing distributors,
potentially adverse tax consequences, foreign currency exchange fluctuations,
the burden of complying with a wide variety of complex foreign laws and treaties
and the possibility of difficulties in collecting accounts receivable and
increased days sales outstanding. There can be no assurance that the Company
will be able to generate significant international sales, or establish new
strategic marketing relationships in the future. In addition, in the event the
Company is successful in doing business outside of North America, the Company
may also face economic, political and foreign currency situations that are
substantially more volatile than those commonly experienced in the United States
and other international markets. There can be no assurance that any of these
factors will not have a material adverse effect on the Company's business and
results of operations.
Proprietary Technology
The Company's success and future revenue growth will depend, in part,
on its ability to protect trade secrets, obtain or license patents and operate
without infringing on the rights of others. Although the Company regards its
technology as proprietary, it has limited patents on such technology. The
Company relies on a combination of technical leadership, trade secrets,
copyright and trademark law and nondisclosure agreements to protect its
unpatented proprietary know-how. However, there can be no assurance that such
measures will provide meaningful protection for
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the Company's trade secrets or other proprietary information. Moreover, in the
absence of patent protection, the Company's business may be adversely affected
by competitors who independently develop substantially equivalent technology. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States. The
Company is also subject to the risk of adverse claims and litigation alleging
infringement of the intellectual property rights of others. From time to time
the Company has received claims of infringement of other parties' proprietary
rights, although the Company is not party to any pending intellectual property
litigation. There can be no assurance that third parties will not assert
infringement claims against the Company in the future or that any such claims
will not result in costly litigation or require the Company to obtain a license
to intellectual property rights of such parties, regardless of the merit of such
claims. No assurance can be given that any necessary licenses will be available
or that, if available, such licenses can be obtained on commercially reasonable
terms.
Dependence on Key Personnel
The success of the Company is dependent in large part on two of its
founders, Howard S. Flagg and Benedict A. Itri, on its Chairman and Chief
Executive Officer, Charles S. Strauch, and on other key management and technical
personnel, the loss of one or more of whom could adversely affect the Company's
business. The Company does not have employment contracts with any of its
executive officers. In addition, the Company believes that its future success
will depend in large part upon its continued ability to attract, retain and
motivate highly skilled employees, who are in great demand. There can be no
assurance that the Company will be able to do so.
Management of Expanding Operations
The Company has experienced a period of significantly expanding
operations and headcount, which has placed, and will continue to place, a
significant strain on the Company's personnel and other resources. The Company's
ability to manage any future increases in the scope of its operations or
headcount, should they occur, will depend on significant expansion of its
manufacturing, research and development, marketing and sales, management and
financial and administrative capabilities. The failure of the Company's
management to effectively manage any expansion in its business could have a
material adverse effect on the Company's business and results of operations.
Reliance on Primary Manufacturing Facilities
The Company historically conducted virtually all final assembly and
final test functions at its manufacturing facility in Tustin, California. In
1996, the Company entered into an agreement to have its PG-2 products
manufactured, on a turnkey basis, by Jabil Circuits at Jabil's St. Petersburg,
Florida facility. Any extended interruption of operations at either of these
facilities could have a material adverse effect on the Company's business and
results of operations.
Capital Requirements
The Company's capital requirements will depend on many factors,
including the levels at which the Company maintains inventory, the continued
market acceptance of the Company's products, growth in unit sales volume of
HiGain products, the extent to which the Company invests in new technology and
improvements to its existing xDSL technology, the marketing expenditures
associated with launching new products and maintaining a competitive position in
the marketplace and the response of competitors to products based on the
Company's technology. 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. No assurance can be given that additional financing will be
available or that, if available, it can be obtained on terms favorable to the
Company and its stockholders.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of
Shares by the Selling Stockholders. See "Selling Stockholders."
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SELLING STOCKHOLDERS
The following table sets forth the number of shares of Common Stock
beneficially owned by each of the Selling Stockholders. Except as indicated, no
Selling Stockholder has had a material relationship with the Company within the
past three years other than as a result of the ownership of the Shares. Because
(i) the Selling Stockholders may offer all or some of the Shares which they hold
pursuant to the offering contemplated hereby, and (ii) there are currently no
agreements, arrangements or understandings with respect to the sale of any of
the Shares, no estimate can be given as to the amount of Shares that will be
held by the Selling Stockholders after completion of this offering. See
"Distribution or Sale of the Shares."
The Shares being offered pursuant to this Prospectus by the Selling
Stockholders were acquired from the Company in connection with its acquisition
of Avidia. In accordance with an agreement entered into with the Selling
Stockholders at the time of the acquisition, the Company agreed to effect a
shelf registration (of which this Prospectus is a part) of all Shares in order
to permit the Selling Stockholders to effect sales of such Shares from time to
time in the market or in privately-negotiated transactions. The Company will
prepare and file such amendments and supplements to the Registration Statement
as may be necessary in accordance with the rules and regulations of the
Securities Act to keep it effective until the earlier to occur of the following
events: (i) twenty-four (24) months have elapsed since the Effective Time of the
Merger; (ii) all Shares have been sold pursuant to the Registration Statement;
or (iii) all Shares held by each Selling Stockholder can be sold by such
stockholder in a three month period pursuant to Rule 144 under the Securities
Act.
The Shares offered by this Prospectus may be offered from time to time
by the Selling Stockholders named below:
<TABLE>
<CAPTION>
NAME OF SELLING STOCKHOLDER NUMBER OF
SHARES NUMBER OF PERCENT OF
BENEFICIALLY SHARES BEING OUTSTANDING
OWNED(1) OFFERED(1)(2) SHARES
-------- ------------- -----------
<S> <C> <C> <C>
Sun, Paul K. 427,542 427,542 *
Jenkins, David R. 264,899 264,899 *
Eaton, Paul 264,899 264,899 *
McCormack, Charles N. 221,509 221,509 *
Point Venture Partners, L.P. 118,583 118,583 *
Juliano, Lisa 117,657 117,657 *
TECOM Co., Ltd. 104,651 104,651 *
Price, Michael J. 94,840 94,840 *
Windsong Partners, L.P. 75,217 75,217 *
Mezzacappa, Damon 75,217 75,217 *
Mainz Holdings Limited 75,217 75,217 *
David-Weill, Michel 75,217 75,217 *
Gilbertson, Robert. 71,411 71,411 *
Richard Kayne, as trustee under the Agreement of Trust made
as of November 22, 1996 between Michael B.
Targoff, as grantor, and the trustee 30,087 30,087 *
J. Ira Harris, as trustee under the Trust Agreement dated
June 8, 1983, as amended and restated, creating the 30,087 30,087 *
"J. Ira Harris Living Trust"
Firstmark Telluride Group 30,087 30,087 *
Audrey MacLean and Michael M. Clair, as Trustees, or their
successors, of the Audrey MacLean and Michael Clair
Trust Agreement UAO 12/1/90 30,087 30,087 *
Centrella, Michael S. 25,574 25,574 *
Lazard Freres & Co. LLC 19,622 19,622 *
Rock Ventures LLC(3) 18,052 18,052 *
Aguis, Marcus 15,043 15,043 *
Rice, L. Gregory 15,043 15,043 *
Golman, Jeffrey A. 15,043 15,043 *
Friedman, Dennis 15,043 15,043 *
Emerson, Richard P. 15,043 15,043 *
Araskog, William R. 15,043 15,043 *
Cinq Partners 12,035 12,035 *
Wasserman, Harvey 7,849 7,849 *
Lee, David C. 7,522 7,522 *
Lacoff, Dan 7,522 7,522 *
Abramson, Marc 7,522 7,522 *
Point Venture Partners Pennsylvania, L.P. 6,642 6,642 *
Lederman, Dr. Sanford 6,017 6,017 *
Skrzypczak, Casimir 3,008 3,008 *
</TABLE>
8
<PAGE> 10
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Parten, Adam P. 3,008 3,008 *
Meskin, Melvin 3,008 3,008 *
Lacoff, David 3,008 3,008 *
Kahan, James S. 3,008 3,008 *
Hoffman, Scott 3,008 3,008 *
Ha, Gil 3,008 3,008 *
Wells Fargo Bank, N.A., as Escrow Agent under the
Indemnity Escrow Agreement dated February 27, 1997 by
and among the Company, Abalone Corporation, Wells 29,987 (4) 29,987 (4) *
Fargo Bank, N.A., and Derek Minno
--------------------------------------------
2,366,865 2,366,865
</TABLE>
----------------
* Less than 1%.
(1) Except with respect to Wells Fargo Bank, N.A., each Selling Stockholder's
Shares (i) include the maximum number of Shares that may be distributed to
the Selling Stockholder from an escrow fund established pursuant to that
certain Indemnity Escrow Agreement dated as of February 27, 1997 by and
among the Company, Abalone Corporation, Wells Fargo Bank, N.A., and Derek
Minno (the "Indemnity Escrow Agreement") to pay for potential
indemnification claims that may be asserted against such stockholder
pursuant to the Indemnity Escrow Agreement and that certain Agreement and
Plan of Reorganization dated as of February 19, 1997 by and among the
Company, Abalone Corporation and Avidia, but (ii) exclude that number of
Shares held in escrow pursuant to the Indemnity Escrow Agreement to be used
to reimburse the Company for certain transaction expenses paid by the
Company on behalf of the Selling Stockholder.
(2) This Registration Statement shall also cover any additional shares of
Common Stock which become issuable in connection with the Shares registered
for sale hereby by reason of any stock dividend, stock split,
recapitalization or other similar transaction effected without the receipt
of consideration which results in an increase in the number of the
Company's outstanding shares of Common Stock.
(3) Subsequent to the date of this Prospectus, the Shares held by Rock Ventures
LLC may be distributed to the following members thereof: Richard J. Malone;
Rosemary M. Cochran.
(4) These Shares are beneficially owned by the Selling Stockholders pro rata
according to the number of Shares held by all such stockholders, but are to
be used to reimburse the Company for certain transaction expenses paid by
the Company on behalf of the Selling Stockholders. Pursuant to the
Indemnity Escrow Agreement, the Company shall instruct Wells Fargo Bank,
N.A. to liquidate these shares on the Company's behalf or deliver them
directly to the Company.
The Company has agreed to bear certain expenses (other than
selling commissions and fees and expenses of counsel and other advisors to
certain of the Selling Stockholders) in connection with the registration of the
Shares.
9
<PAGE> 11
DISTRIBUTION OR SALE OF THE SHARES
The Shares offered hereby are being offered directly by the Selling
Stockholders. The Company will not receive any proceeds from the sale of any of
the Shares by the Selling Stockholders. The sale of the Shares may be effected
by the Selling Stockholders, or by pledgees, donees, transferees or other
successors in interest, from time to time in transactions in the
over-the-counter market, on the Nasdaq National Market, in negotiated
transactions, or a combination of such methods of sale, at fixed prices which
may be changed, at market prices prevailing at the time of sale, at prices
related to prevailing market prices or at negotiated prices. The Selling
Stockholders, or their pledgees, donees, transferees or other successors in
interest, may effect such transactions by selling the Shares to or through
broker-dealers, and such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Stockholders, their
pledgees, donees, transferees or other successors in interest, and/or the
purchasers of the Shares for whom such broker-dealers may act as agents or to
whom they sell as principals (which compensation as to a particular
broker-dealer might be in excess of customary commissions).
At the time a particular offer of Shares is made, to the extent
required, a supplemental Prospectus will be distributed which will set forth the
number of Shares being offered and the terms of the offering including the name
or names of any underwriters, dealers or agents, the purchase price paid by any
underwriter for the Shares purchased from the Selling Stockholders, any
discounts, commissions and other items constituting compensation from the
Selling Stockholders and any discounts, commissions or concessions allowed or
reallowed or paid to dealers.
In order to comply with the securities laws of certain states, if
applicable, the Shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with by the Company and the Selling
Stockholders.
The Selling Stockholders and any broker-dealers, agents or underwriters
that participate with the Selling Stockholders in the distribution of the Shares
may be deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act, and any commissions received by them and any profit on the
resale of the Shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
Under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the Shares may not simultaneously engage
in market making activities with respect to the Common Stock of the Company for
a period of two business days prior to the commencement of such distribution. In
addition and without limiting the foregoing, each Selling Stockholder will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including, without limitation, Rules 10b-6 and 10b-7,
which provisions may limit the timing of purchases and sales of shares of the
Company's Common Stock by the Selling Stockholders.
The Shares were originally issued to former stockholders of Avidia in
connection with the statutory merger of a wholly-owned subsidiary of the Company
with and into Avidia pursuant to an exemption from the registration requirements
of the Securities Act. The Company has agreed to register the Shares under the
Securities Act and to indemnify and hold certain Selling Stockholders harmless
against certain liabilities under the Securities Act that could arise in
connection with the sale by the Selling Stockholders of the Shares.
There can be no assurance that the Selling Stockholders will sell all
or any of the shares of Common Stock offered hereunder.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
the Company by Brobeck, Phleger & Harrison LLP, Newport Beach, California.
10
<PAGE> 12
EXPERTS
The Supplemental Consolidated Financial Statements of PairGain
Technologies, Inc. as of December 31, 1996 and 1995 and for the years then
ended included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report thereon appearing elsewhere
herein, and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The Consolidated Financial Statements and related Financial Statement
Schedule of PairGain Technologies, Inc. as of December 31, 1996 and 1995 and for
the years then ended appearing in the Company's Annual Report on Form 10-K/A for
the year ended December 31, 1996, and the financial statements of Avidia
Systems, Inc. as of December 31, 1996 and for the year then ended appearing in
the Company's report on Form 8-K/A filed on April 25, 1997, which are
incorporated by reference, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports which are incorporated by
reference, and have been so incorporated in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
The Consolidated Financial Statements and related Financial Statement
Schedule of PairGain Technologies, Inc. for the year ended December 31, 1994
appearing in the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1996 have been audited by Ernst & Young LLP, independent auditors,
as set forth in their report thereon included therein and incorporated herein by
reference. Such Consolidated Financial Statements and related Financial
Statement Schedule are incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
11
<PAGE> 13
PAIRGAIN TECHNOLOGIES, INC.
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Independent Auditors' Reports F-2
Supplemental Consolidated Financial Statements:
Supplemental Consolidated Balance Sheets F-4
Supplemental Consolidated Statements of Income F-5
Supplemental Consolidated Statements of Stockholders' Equity F-6
Supplemental Consolidated Statements of Cash Flows F-7
Notes to Supplemental Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE> 14
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
PairGain Technologies, Inc.
Tustin, California
We have audited the accompanying supplemental consolidated balance sheets of
PairGain Technologies, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the related supplemental consolidated statements of income, stockholders'
equity, and cash flows for the years then ended. These supplemental financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such supplemental consolidated financial statements present
fairly, in all material respects, the financial position of the Company and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 27, 1997
F-2
<PAGE> 15
INDEPENDENT AUDITORS' REPORT
Board of Directors
PairGain Technologies, Inc.
We have audited the accompanying supplemental consolidated statements of income,
stockholders' equity and cash flows of PairGain Technologies, Inc. for the year
ended December 31, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations of
PairGain Technologies, Inc. and its cash flows for the year ended December 31,
1994, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Orange County, California
February 17, 1995
F-3
<PAGE> 16
PAIRGAIN TECHNOLOGIES, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 48,416 $ 24,576
Short-term investments (Note 4) 65,779 31,149
Accounts receivable, less allowance for doubtful accounts of
$935 and $469 at December 31, 1996 and 1995, respectively 23,888 13,044
Inventories (Note 5) 26,149 22,522
Deferred tax assets (Note 10) 11,074 3,353
Other current assets 2,783 1,517
--------- ---------
TOTAL CURRENT ASSETS 178,089 96,161
Property and equipment, net (Note 6) 10,390 6,402
Note receivable and long-term investments (Note 7) 6,252 2,708
Other assets 273 55
--------- ---------
TOTAL ASSETS $ 195,004 $ 105,326
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 6,339 $ 6,402
Accrued compensation and related expenses 5,772 2,605
Accrued expenses 9,471 2,388
Accrued income taxes (Note 10) 15,826 --
--------- ---------
TOTAL CURRENT LIABILITIES 37,408 11,395
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTES 2 AND 11)
Stockholders' equity (Note 12):
Preferred stock, $.001 par value:
Authorized shares -- 2,000,000
Issued and outstanding shares -- None -- --
Common stock, $.0005 par value:
Authorized shares -- 175,000,000
Issued and outstanding shares-- 66,278,293 and 60,709,068
at December 31, 1996 and 1995, respectively 33 15
Additional paid-in-capital 116,081 87,175
Deferred compensation (237) (82)
Unrealized gain on short-term investments 71 67
Retained earnings 41,648 6,756
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 157,596 93,931
========= =========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 195,004 $ 105,326
========= =========
</TABLE>
See notes to supplemental consolidated financial statements.
F-4
<PAGE> 17
PAIRGAIN TECHNOLOGIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1994
----------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Product sales $ 205,408 $ 106,173 $ 57,417
Technology fees and royalty income (Note 9) 97 1,051 2,101
----------- ------------ -----------
TOTAL REVENUES 205,505 107,224 59,518
Cost of revenues 106,518 56,223 33,141
----------- ------------ -----------
Gross profit 98,987 51,001 26,377
----------- ------------ -----------
Operating expenses:
Research and development 19,512 10,728 5,849
Selling and marketing 17,585 9,944 5,765
General and administrative 10,364 6,797 4,250
----------- ------------ -----------
Total operating expenses 47,461 27,469 15,864
----------- ------------ -----------
INCOME FROM OPERATIONS 51,526 23,532 10,513
Other income (loss):
Interest income, net 3,698 2,118 1,482
Gain on sales of short-term investments, net -- 415 1,185
Unusual loss due to unauthorized trading of investments
by third parties (Note 15) -- (15,827) --
Settlement income related to unauthorized trading of
investments by third parties (Note 16) 2,500 -- --
----------- ------------ -----------
Income before income taxes 57,724 10,238 13,180
Provision for income taxes (Note 10) 22,816 9,182 4,613
----------- ------------ -----------
NET INCOME $ 34,908 $ 1,056 $ 8,567
=========== ============ ===========
Per Share Data (Note 1):
Earnings per share $ 0.47 $ 0.02 $ 0.14
=========== ============ ===========
Weighted average number of common and common
equivalent shares 73,768,000 67,280,000 61,612,000
=========== ============ ===========
</TABLE>
See notes to supplemental consolidated financial statements.
F-5
<PAGE> 18
PAIRGAIN TECHNOLOGIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
ADDITIONAL GAIN(LOSS) ON RETAINED TOTAL
COMMON STOCK PAID-IN DEFERRED SHORT-TERM EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION INVESTMENTS (DEFICIT) EQUITY
------ ------ ------- ------------ ----------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 49,350,440 $12 $ 68,348 $(257) $ -- $(2,867) $ 65,236
Exercise of common stock 1,484,104 1 203 -- -- -- 204
options
Tax benefits from exercise of
common stock options -- -- 962 -- -- -- 962
Amortization of deferred
compensation -- -- -- 87 -- -- 87
Unrealized loss on short-term
investments, net of tax
benefit of $141 -- -- -- -- (210) -- (210)
Net income -- -- -- -- -- 8,567 8,567
---------- --- ------- ----- ----- ------ --------
BALANCE AT DECEMBER 31, 1994 50,834,544 13 69,513 (170) (210) 5,700 74,846
Issuance of common stock for
cash, net of offering costs
of $842 2,000,000 1 10,969 -- -- -- 10,970
Exercise of warrants 5,771,124 1 2,726 -- -- -- 2,727
Exercise of common stock 2,024,380 -- 1,440 -- -- -- 1,440
options
Issuance of common stock
sold under Employee Stock
Purchase Plan 79,020 -- 386 -- -- -- 386
Tax benefits from exercise of
common stock options -- -- 2,141 -- -- -- 2,141
Amortization of deferred
compensation -- -- -- 88 -- -- 88
Unrealized gain on short-term
investments, net of tax of -- -- -- -- 277 -- 277
($181)
Net income -- -- -- -- -- 1,056 1,056
---------- --- ------- ----- ----- ------ --------
BALANCE AT DECEMBER 31, 1995 60,709,068 15 87,175 (82) 67 6,756 93,931
Exercise of common stock 3,258,320 1 6,252 -- -- -- 6,253
options
Issuance of common stock (Note 2) 2,235,697 1 3,014 -- -- -- 3,015
Issuance of common stock
sold under Employee Stock
Purchase Plan 75,208 -- 1,110 -- -- -- 1,110
Tax benefits from exercise of
common stock options -- -- 18,245 -- -- -- 18,245
Deferred compensation related
to stock options -- -- 285 (285) -- -- --
Amortization of deferred
compensation -- -- -- 130 -- -- 130
Unrealized gain on short-term
investments, net of tax of $1 -- -- -- -- 4 -- 4
Stock split effected as a
stock dividend (Note 12) -- 16 -- -- -- (16) --
Net income -- -- -- -- -- 34,908 34,908
---------- --- ------- ----- ----- ------ --------
BALANCE AT DECEMBER 31, 1996 66,278,293 $33 $116,081 $(237) $ 71 $41,648 $157,596
========== === ======== ===== ===== ======= ========
</TABLE>
See notes to supplemental consolidated financial statements.
F-6
<PAGE> 19
PAIRGAIN TECHNOLOGIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
-------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 34,908 $ 1,056 $ 8,567
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,749 4,048 1,726
Gains on sales of investments -- (415) (1,185)
Unusual loss due to unauthorized trading of investments by
third parties -- 15,827 --
Provision for deferred tax assets and valuation allowance (7,721) (1,400) (2,133)
Change in operating assets and liabilities:
Accounts receivable (10,844) (2,876) (4,718)
Inventories (3,627) (6,048) (5,875)
Other current assets (1,667) (421) (508)
Other assets (229) (8) (17)
Trade accounts payable (63) (268) 4,408
Accrued compensation 3,167 1,259 758
Accrued expenses 7,046 1,634 537
Income taxes (Note 1) 34,472 132 3,112
-------- -------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 60,191 12,520 4,672
-------- -------- ---------
Cash flows from investing activities:
Purchases of short-term investments (68,620) (43,272) (115,610)
Proceeds from sales of short-term investments 33,025 48,711 98,817
Purchase of property and equipment (7,590) (5,909) (2,022)
Issuance of note receivable -- (2,708) --
Purchases of long-term investments (3,544) -- --
-------- -------- ---------
NET CASH USED IN INVESTING ACTIVITIES (46,729) (3,178) (18,815)
-------- -------- ---------
Cash flows from financing activities:
Net (payments on) borrowings under bank line of credit -- (1,000) 1,000
Proceeds from issuance of common stock 10,378 15,523 204
-------- -------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,378 14,523 1,204
-------- -------- ---------
Increase (decrease) in cash and cash equivalents 23,840 23,865 (12,939)
Cash and cash equivalents at beginning of year 24,576 711 13,650
-------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 48,416 $ 24,576 $ 711
======== ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 4,335 $ 10,887 $ 3,625
======== ======== =========
Income tax refunds received $ 8,342 $ -- $ --
======== ======== =========
</TABLE>
See notes to supplemental consolidated financial statements.
F-7
<PAGE> 20
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
PairGain Technologies, Inc., ("PairGain" or 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.
On February 27, 1997 the Company acquired Avidia Systems, Inc.
("Avidia"). (See Note 2) Avidia is engaged in the business of developing,
manufacturing and marketing PC networking products based on Asynchronous
Transfer Mode ("ATM") technology. Avidia produces innovative ATM switching and
wide area access products for PCs in corporation networks.
The accompanying supplemental consolidated financial statements have
been restated to reflect the business combination between PairGain and Avidia
accounted for on a pooling-of-interests basis and are based on each company's
respective historical financial statements and notes thereto. Avidia was formed
in December 1995 and had no significant transactions prior to January 1, 1996.
accordingly, the supplemental consolidated financial statements prior to 1996
reflect only the historical results of operations and financial position of
PairGain as previously filed.
PRINCIPLES OF CONSOLIDATION
The consolidated supplemental 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 worldwide; PairGain
Canada Inc., a sales company focused on the Canadian market; PairGain
International Sales Corporation, a foreign sales corporation ("FSC"); and
Avidia. All significant intercompany transactions have been eliminated in
consolidation.
TRANSLATION OF FOREIGN CURRENCIES
Foreign subsidiary financial statements are translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards ("SFAS")
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, 1995 or 1994.
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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
F-8
<PAGE> 21
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Pursuant to SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," the Company is required to estimate the fair value of all
financial instruments included on its balance sheet at December 31, 1996. The
Company considers the carrying value of such amounts in the financial
statements to approximate their fair value due to the relatively short period
of time between origination of the instruments and their expected realization
or the overall immateriality of the amounts.
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 SFAS
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.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. The Company provides for
depreciation and amortization using the straight-line method. Equipment is
depreciated over an estimated useful life of 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.
F-9
<PAGE> 22
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PER SHARE INFORMATION
Earnings 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.
STOCK SPLIT
All share and per share amounts have been adjusted to reflect the
two-for-one stock splits, effective June 18, 1996 and December 18, 1996, for all
periods presented. (See Note 12)
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." (See Note 13)
STATEMENT OF CASH FLOWS
Significant noncash transactions in 1996, 1995 and 1994 affecting the
Company's accounts consisted of tax benefits from exercises of common stock
options of $18.2 million, $2.1 million and $962,000, respectively, and $285,000
in deferred compensation related to stock options issued in 1996.
2. ACQUISITION OF AVIDIA
On February 27, 1997, the Company acquired Avidia pursuant to an
Agreement and Plan of Reorganization (the "Merger Agreement") among Avidia and
others, with Avidia surviving as a wholly-owned subsidiary of the Company (the
"Acquisition") in a transaction accounted for as a pooling-of-interests.
Pursuant to the Merger Agreement, the Company issued approximately 2,235,697
shares of PairGain Common Stock to Avidia stockholders in exchange for all
outstanding Avidia Common Stock and Preferred Stock and vested warrants to
purchase Avidia Common Stock. In addition, outstanding options and unvested
warrants to purchase Avidia Common Stock were exchanged for options and warrants
to purchase approximately 232,521 and 131,168 shares, respectively, of the
Company's Common Stock. The Company's historical consolidated financial
statements have been restated to reflect the financial position and results of
operations of Avidia.
The following table shows the separate historical results of the
Company and Avidia for the year ended December 1996. Avidia's operations prior
to January 1, 1996 were insignificant.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------------
(IN THOUSANDS)
<S> <C> <C>
Revenues
PairGain $ 205,409
Avidia 96
-----------------------
Total $ 205,505
=======================
Net Income (Loss)
PairGain $ 36,603
Avidia (1,695)
-----------------------
Total $ 34,908
=======================
</TABLE>
F-10
<PAGE> 23
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. 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
insignificant. Sales to major customers as a percentage of total product revenue
were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C>
Customer A 15% 15% 18%
Customer B 13% 17% 19%
Customer C 12% 12% 13%
Customer D 10% 11% 10%
</TABLE>
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 76% of the
Company's total revenues in each of the years 1996, 1995 and 1994. 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 financial condition and results of operations.
4. SHORT-TERM INVESTMENTS
Short-term investments as of December 31, 1996 and 1995 are summarized
as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1996
Municipal bonds $59,686 $ 41 $-- $59,727
Other short-term investments 5,982 70 -- 6,052
------- ---- --- -------
$65,668 $111 $-- $65,779
======= ==== === =======
1995
Municipal bonds $31,042 $107 $-- $31,149
======= ==== === =======
</TABLE>
Unrealized gains on short-term investments, net of tax, included as a
separate component of stockholders' equity were $71,000 and $67,000 in 1996 and
1995, respectively.
The amortized cost and estimated fair value of investments at December
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.
F-11
<PAGE> 24
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
COST FAIR VALUE
---- ----------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less $ 30,084 $ 30,242
Due after one year through three years 35,584 35,537
--------- ---------
$ 65,668 $ 65,779
========= =========
</TABLE>
5. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Finished goods $ 10,603 $ 7,842
Work in process 9,745 9,693
Purchased parts 5,801 4,987
-------- --------
$ 26,149 $ 22,522
======== ========
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment $16,991 $ 9,772
Leasehold improvements 1,520 1,111
------- -------
18,511 10,883
Less accumulated depreciation and amortization (8,121) (4,481)
------- -------
$10,390 $ 6,402
======= =======
</TABLE>
7. NOTE RECEIVABLE AND LONG-TERM INVESTMENTS
On July 20, 1995, the Company entered into certain agreements with
Sourcecom Corporation of Westlake Village, 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 December 31, 1996),
payable monthly, with the principal balance due July 1999.
In April 1996, the Company purchased approximately 150,000 shares of
Sourcecom's Series A Preferred Stock for an aggregate of $273,000. In September
1996, the Company purchased approximately 321,000 shares of Sourcecom's Common
Stock for an aggregate of $271,000. Shares purchased have been adjusted to
reflect Sourcecom's two-for-one stock split, effective September 24, 1996.
F-12
<PAGE> 25
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In June 1996, the Company made a minority investment in E/O Networks of
Hayward, California ("E/O"). E/O supplies low-density fiber optic access
equipment to public carriers both domestically and internationally. The Company
purchased approximately 545,000 shares of E/O's Series D Preferred Stock for an
aggregate of $3.0 million.
These investments are accounted for using the cost method.
8. BANK LINE OF CREDIT
The Company maintains an unsecured line of credit with a bank. The line
allows maximum borrowings of $5,000,000, including the issuance of letters of
credit and foreign exchange contracts. The line bears interest at the prime rate
(8.25% at December 31, 1996). At December 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 December 31, 1996. The agreement expires May 1,
1997.
9. LICENSE AND DISTRIBUTION AGREEMENTS
In 1992, the Company granted an exclusive worldwide noncancelable
license to its HDSL technology configured for general use in specified markets
outside the U.S. and a nonexclusive, worldwide, noncancelable license to its
HDSL technology configured for general use in the U.S. to a U.S. subsidiary of
Alcatel, SA, a French telecommunications company. In November 1995, this
agreement was terminated. 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 revised the royalty rate for standalone T1 products
which incorporate the Company's HDSL technology being sold by Alcatel.
10. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal $25,179 $ 8,150 $ 5,546
State and foreign 5,358 2,432 1,200
------- ------- -------
Total current 30,537 10,582 6,746
------- ------- -------
Deferred:
Federal (7,047) (1,207) (1,875)
State and foreign (1,371) (193) (258)
------- ------- -------
Total deferred (8,418) (1,400) (2,133)
Valuation allowance 697 -- --
------- ------- -------
Total provision $22,816 $ 9,182 $ 4,613
======= ======= =======
</TABLE>
F-13
<PAGE> 26
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income taxes for the years ended December 31, 1996,
1995, and 1994 differs from the U.S. federal statutory tax expense for the years
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. federal statutory tax expense $20,204 $3,583 $4,481
Unusual loss due to unauthorized trading of investments by third parties -- 4,980 --
State taxes, net of federal tax benefit 1,942 1,422 792
Increase (decrease) in valuation allowance for deferred tax assets 697 -- (994)
Other items, net (27) (803) 334
------- ------ ------
Total provision $22,816 $9,182 $4,613
======= ====== ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components for the Company's deferred tax assets at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Inventory and related reserves $ 6,867 $1,915
Warranty reserve 1,538 400
Other reserves and accruals 1,450 457
Other 1,219 581
Net operating loss and research and development credit carryforwards 697 --
------- ------
Gross deferred tax assets 11,771 3,353
Valuation allowance (697) --
------- ------
Net deferred tax assets $11,074 $3,353
======= ======
</TABLE>
The net operating loss and tax credit carryforwards are subject to
separate return limitation year ("SRLY") rules related to the Company's
acquisition of Avidia. A valuation allowance has been established due to the
Company's uncertainty in its ability to benefit from these SRLY operating loss
and credit carryforwards.
11. COMMITMENTS
The Company has entered into several operating leases for its
facilities with varying terms and escalation clauses. Future annual minimum
lease payments under the noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
Years ending December 31, (IN THOUSANDS)
------------------------- --------------
<S> <C> <C>
1997 $1,279
1998 1,242
1999 1,111
2000 670
2001 601
Thereafter 1,522
------
$6,425
======
</TABLE>
F-14
<PAGE> 27
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Rent expense for the years ended December 31, 1996, 1995 and 1994
aggregated $747,000, $424,000 and $298,000, respectively.
12. STOCKHOLDERS' EQUITY
STOCK SPLITS
In June 1996, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation (the "Amendment") to increase the
authorized Common Stock of the Company from 30 million shares, par value $.001,
to 60 million shares, par value $.0005, and to effect a two-for-one stock split
(the "Stock Split").
In December 1996, the Company's stockholders approved an amendment to
the Company's Amended and Restated Certificate of Incorporation (the "Second
Amendment") to increase the authorized Common Stock of the Company from 60
million shares, par value $.0005, to 175 million shares, par value $.0005. The
Second Amendment was proposed to facilitate a two-for-one stock split (the
"Second Stock Split") which was effected in the form of a 100% stock dividend.
All references in the accompanying consolidated financial statements
related to common stock, common stock options, common stock warrants and
earnings per share have been adjusted to reflect both stock splits.
STOCK OFFERINGS
In a series of private placements during 1996, Avidia sold common and
preferred shares which converted in the Merger into 2,235,697 of the Company's
shares. The net proceeds raised were approximately $3,015,000.
In March 1995, the Company completed a secondary public offering and
sold 2,000,000 shares of its common stock at a price of $5.91 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
5,750,620 shares of common stock at an aggregate exercise price of $2,717,000.
WARRANTS
In 1996, Avidia granted warrants to certain stockholders which
converted in the Merger into the right to purchase approximately 131,168 shares
of the Company's common stock at exercise prices of $3.77. Such warrants were
exercised in February 1997.
In 1995, the Company granted warrants for the purchase of 40,000 shares
of its common stock at exercise prices of $5.00 to $6.25 per share in exchange
for services. Such warrants were outstanding at December 31, 1996 and expire
beginning in May 1998 through September 1999.
In 1993, the Company granted warrants for the purchase of 57,240 shares
of its common stock at an exercise price of $0.47 per share to a company and its
affiliate in connection with an equipment leasing transaction. Such warrants
were exercised during 1995.
F-15
<PAGE> 28
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK OPTION PLANS
1993 EMPLOYEE STOCK OPTION PLAN
Under the Company's 1993 Stock Option/Stock Issuance Plan ("the Plan"),
which is the successor plan to its 1990 Stock Option Plan ("the 1990 Plan"), a
Committee consisting of non-employee members of its Board of Directors, is
authorized to grant stock options or issue common stock to officers, key
employees, members of the Board of Directors, and certain consultants or other
independent contractors of the Company. In addition, the Plan also provides for
the purchase of the Company's common stock by eligible individuals at a price
per share not less than 85% of the fair market value at the time of issuance. No
shares have been issued under the purchase provisions. Incentive options are
granted at a price equal to 100% of the fair market value at the date of grant
(at least 85% of the fair market value for non-qualified options) and vested
options are exercisable for a period determined by the Committee that is not to
exceed ten years from the date of grant. Options issued under the 1990 Plan are
exercisable immediately upon grant and shares issued related to options
exercised but not vested are subject to repurchase by the Company at the
exercise price of such options. At the discretion of the Committee, the Plan
provides option holders stock appreciation rights which allow the holder to
exercise such options in exchange for the payment of the difference between the
fair market value and option price of the underlying shares in the form of cash
or shares of common stock. Under certain circumstances in the event of a merger,
sale or other significant transaction involving the Company, the options and
stock issued may become fully vested and exercisable.
In January 1995, the Company's Board of Directors approved an increase
in the number of common shares reserved and available for issuance under the
Plan from 14,800,000 shares to 18,800,000 shares.
1996 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
In June 1996, the Company's stockholders approved the 1996 Non-Employee
Directors Stock Option Plan (the "Directors Plan"). Under the terms of the
Directors Plan, 400,000 shares of Common Stock have been reserved for issuance
to non-employee members of the Board. Following the 1996 Annual Meeting, initial
options to purchase 40,000 shares of the Company's Common Stock were granted to
each non-employee director who had not previously received any stock option
grants from the Company. On an annual basis beginning with the 1997 Annual
Meeting, an option to purchase an additional 20,000 shares of Common Stock will
be granted to each individual who is to continue to serve as a non-employee
Board member. There is no limit to the number of such annual 20,000-share option
grants any one non-employee Board member may receive over his or her period of
continued Board service during the term of the Directors Plan. Each option will
have an exercise price per share equal to 100% of the fair market value per
share of Common Stock on the option grant date and a maximum term of ten years
measured from the option grant date. Each option will be immediately exercisable
for all the option shares, but any purchased shares will be subject to
repurchase by the Company, at the exercise price paid per share, upon the
optionee's cessation of Board service. Each initial option grant will vest (and
the Company's repurchase rights will lapse) in four successive equal annual
installments over the optionee's period of Board service, with the first such
installment to vest upon the completion of one year of Board service measured
from the option grant date. Additional option grants will vest (and the
Company's repurchase rights will lapse) upon the completion of one year of Board
service measured from the option grant date. The term of the Directors Plan is
ten years.
AVIDIA STOCK OPTION AND INCENTIVE AWARD PLAN
In 1996, Avidia established the 1996 Stock Option and Incentive Award
Plan (the "Avidia Plan") which provides for the grant of any or all of the
following types of awards: (1) stock options, including incentive stock options
and non-qualified stock options, and (2) performance share awards. Under the
terms of the Avidia Plan, 232,521 shares of Common Stock have been reserved for
issuance to directors, employees, consultants, advisors and
F-16
<PAGE> 29
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
vendors of Avidia and any related corporations. The majority of the stock
options vest over a four-year period, with 25% of the shares becoming
exercisable on each of the first four anniversaries of the grant date. The Board
of Directors at its discretion may grant accelerated vesting. The options expire
ten years from the date of the grant. During 1996, all of the options under the
Avidia Plan were granted at less than market value, which resulted in total
compensation of $284,110, which is being amortized over the vesting period of
four years, and resulted in a charge to earnings in 1996 of $46,729.
Option activity under the plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Outstanding, January 1, 1994 9,630,784 $ 0.35
Granted 3,240,400 $ 2.36
Exercised (1,484,104) $ 0.07
Canceled (705,908) $ 1.52
----------
Outstanding, December 31, 1994
(4,649,244 exercisable at a weighted average price of $0.34) 10,681,172 $ 0.90
Granted (weighted average fair value of $2.96) 4,956,400 $ 5.14
Exercised (2,024,380) $ 0.71
Canceled (286,700) $ 3.39
----------
Outstanding, December 31, 1995
(5,692,132 exercisable at a weighted average price of $0.66) 13,326,492 $ 2.48
Granted (weighted average fair value of $13.47) 3,025,386 $19.70
Exercised (3,258,320) $ 1.92
Canceled (228,611) $ 6.87
----------
Outstanding, December 31, 1996 12,864,947 $ 6.59
==========
</TABLE>
The outstanding stock options primarily vest ratably over a four year
period. Stock options outstanding at December 31, 1996 are summarized as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- -----------------------------------
WEIGHTED
AVERAGE
NUMBER OUTSTANDING REMAINING WEIGHTED NUMBER EXERCISABLE WEIGHTED
RANGE OF AT CONTRACTUAL AVERAGE AT AVERAGE
EXERCISE PRICES DECEMBER 31, 1996 LIFE EXERCISE PRICE DECEMBER 31, 1996 EXERCISE PRICE
--------------- ----------------- ---- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$0.04 - $0.38 3,684,723 5.5 $ 0.08 3,540,267 $ 0.07
$0.83 - $3.44 3,365,349 7.4 $ 2.48 1,538,184 $ 2.17
$4.00 - $7.63 3,029,223 8.6 $ 5.86 781,781 $ 5.79
$10.31 - $17.31 1,328,258 9.2 $14.15 91,990 $13.40
$20.50 - $30.00 1,457,394 9.6 $27.19 142,182 $26.39
---------------- ----------- -------------- ----------------- --------------
$0.04 - $30.00 12,864,947 7.5 $ 6.59 6,094,404 $ 2.15
================ =================
</TABLE>
F-17
<PAGE> 30
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1996, 1,039,615 and 320,000 shares were available for
future grants under the Option Plan and Directors' Plan, respectively.
EMPLOYEE STOCK PURCHASE PLAN
Under the Company's Employee Stock Purchase Plan, (the "Purchase
Plan"), eligible employees are permitted to have salary withholdings to purchase
shares of common stock at a price equal to 85% of the lower of the market value
of the stock at the beginning or end of each six-month offer period, subject to
an annual limitation. Stock issued under the Purchase Plan was 75,208 and 79,020
shares in 1996 and 1995 at weighted average prices of $14.77 and $4.89,
respectively. The weighted average fair value, per share, of the 1996 and 1995
awards was $17.38 and $5.75, respectively. At December 31, 1996, 845,772 shares
were reserved for future issuances under the Purchase Plan.
ADDITIONAL STOCK PLAN INFORMATION (SFAS NO. 123)
As discussed in Note 1, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
interpretations.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income and earnings per share had the Company
adopted the fair value method as of the beginning of fiscal 1995. Under SFAS No.
123, the fair value of stock-based awards to employees is calculated through the
use of option pricing models, even though such models were developed to estimate
the fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values.
The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions: expected life,
six months following vesting; stock volatility, 65% in 1996 and 65% in 1995;
risk free interest rates, 6.26% in 1996 and 6.11% in 1995; and no dividends
during the expected term. The Company's calculations are based on a single
option valuation approach and forfeitures are recognized as they occur. If the
computed fair values of the 1996 and 1995 awards had been amortized to expense
over the vesting period of the awards, pro forma net income would have been
$31.3 million, or $0.43 per share, in 1996 and a loss of $258,000, or $0.00 per
share, in 1995. These amounts are based on calculated values for option awards
in 1996 and 1995 of $34.4 million and $14.7 million, respectively. The impact of
stock options granted prior to 1995 has been excluded from the pro forma
calculation; accordingly, the 1996 and 1995 pro forma adjustments are not
indicative of future period pro forma adjustments, when the calculation may
apply to all applicable stock options.
14. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution 401(K) Savings and
Investment Plan, which was established in 1993, covering substantially all of
the Company's employees subject to certain eligibility requirements. At its
discretion, the Company may make contributions to the plan. In April 1996, the
Board approved a resolution to match employee contributions provided that a
threshold earnings per share level was reached. Employee deferrals from April
28, 1996 through December 31, 1996 were eligible for a matching contribution
equal to fifty percent (50%) of the employee's salary deferral, not to exceed
$500 per employee. Matching contributions vest over a period of four years of
service. The aggregate accrual for this contribution included in the
accompanying supplemental consolidated balance sheet as of December 31, 1996 was
$145,000. No contributions were made by the Company in 1995 or 1994.
F-18
<PAGE> 31
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. UNUSUAL LOSS DUE TO UNAUTHORIZED TRADING OF INVESTMENTS 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 amended its quarterly statements for both 1994 and 1995 to reflect
the proper reporting of the trading gains and losses.
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.
16. SETTLEMENT INCOME RELATED TO UNAUTHORIZED TRADING OF INVESTMENTS BY THIRD
PARTIES
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 stated
causes of action for breach of fiduciary duty, abuse of control, constructive
fraud, gross mismanagement and waste of corporate assets by reason of unusual
losses incurred by the Company as a result unauthorized trading of investment by
third parties (See Note 15). The suit sought 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 September 1996, the Company and other parties to the derivative
suits described above executed definitive settlement agreements to settle and
dismiss the derivative suits. The Court approved the settlement in November
1996. Under the terms of the settlement, the Company received $2.5 million from
a brokerage firm involved in processing the investments for Capital Insight, and
paid plaintiff's attorneys fees of $450,000. The impact of the settlement has
been recorded in the Company's financial statements for the year ended December
31, 1996.
F-19
<PAGE> 32
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with
the sale or the distribution of the securities being registered, other than
underwriting discounts and commissions and finder's fees. All of the amounts
shown are estimates except for the Securities and Exchange Commission
registration fee and the Nasdaq National Market additional listing fee.
<TABLE>
<CAPTION>
<S> <C> <C>
Securities and Exchange Commission registration fee $ 22,100
Nasdaq National Market additional listing fee 17,500
Accounting fees and expenses 7,500
Legal fees and expenses 15,000
Miscellaneous 5,400
--------
Total $ 67,500
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("Section 145")
authorizes a court to award, or a corporation's Board of Directors to grant,
indemnity to directors and officers in terms sufficiently broad to permit
indemnification (including reimbursement of expenses incurred) under certain
circumstances for liabilities arising under the Securities Act. The Registrant's
Bylaws, as amended, provide for indemnification of any director, officer, or
employee to the maximum extent permitted by such Section 145.
The Company's Certificate of Incorporation provides that its directors
shall not be personally liable to the corporation or its stockholders for
monetary damages for breach of the director's fiduciary duty. Each director will
continue to be subject to liability for breach of the director's duty of loyalty
to the Company, for acts or omissions not in good faith or involving intentional
misconduct, or knowing violations of law, or actions lending to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law.
ITEM 16. EXHIBITS.
Exhibit No.
- ---------------
5.1* Opinion of Brobeck, Phleger & Harrison LLP
23.1 Consent of Deloitte & Touche LLP, independent auditors of
PairGain Technologies, Inc. and Avidia Systems, Inc.
23.2 Consent of Ernst & Young LLP, independent auditors of PairGain
Technologies, Inc.
23.3* Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit
5.1)
24.1* Power of Attorney.
- ---------------
* Exhibit previously filed
II-1
<PAGE> 33
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933, as amended (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or the most
recent post-effective amendment hereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering price may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement.
Provided, however, that paragraphs (i) and (ii) do not apply
if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed by
the Company pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act") that are incorporated by
reference in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the Company's
Annual Report pursuant to Section 13(a) or Section 15(d) of the Exchange Act
that is incorporated by reference into this Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 15 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933, as amended, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE> 34
The undersigned Registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance under Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 35
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment
No. 2 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Tustin, State of
California, on May 1, 1997.
PAIRGAIN TECHNOLOGIES, INC.
By: /s/ Charles S. Strauch
-------------------------------------
Charles S. Strauch
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 to the Registration Statement on Form S-3 has been signed below
by the following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Charles S. Strauch Chairman, Chief Executive Officer and Director May 1, 1997
- ----------------------------------
Charles S. Strauch (Principal Executive Officer)
/s/ Charles W. McBrayer Vice President, Finance and Administration, May 1, 1997
- ----------------------------------
Charles W. McBrayer and Chief Financial Officer
(Principal Financial Officer)
/s/ Robert R. Price Corporate Controller May 1, 1997
- ----------------------------------
Robert R. Price (Principal Accounting Officer)
* President and Director May 1, 1997
- ----------------------------------
Howard S. Flagg
* Executive Vice President, May 1, 1997
- ----------------------------------
Benedict A. Itri Chief Technical Officer and Director
* Director May 1, 1997
- ----------------------------------
Robert C. Hawk
* Director May 1, 1997
- ----------------------------------
Robert A. Hoff
* Director May 1, 1997
- ----------------------------------
B. Allen Lay
*By: /s/ Charles W. McBrayer
---------------------------
Charles W. McBrayer
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 36
PAIRGAIN TECHNOLOGIES, INC.
Index to Exhibits
5.1* Opinion of Brobeck, Phleger & Harrison LLP
23.1 Consent of Deloitte & Touche LLP, independent auditors of
PairGain Technologies, Inc. and Avidia Systems, Inc.
23.2 Consent of Ernst & Young LLP, independent auditors of PairGain
Technologies, Inc.
23.3* Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit
5.1)
24.1* Power of Attorney.
- ---------------
* Exhibit previously filed
II-5
<PAGE> 1
Exhibit 23.1
Independent Auditors Consent
We consent to the use in this Amendment No. 1 to Registration Statement
No. 333-23067 of PairGain Technologies, Inc. on Form S-3 of our report
dated February 27, 1997 on the supplemental consolidated financial
statements of PairGain Technologies, Inc. as of December 31, 1996 and
1995 and for the years then ended, appearing in the Prospectus, which
is part of this Registration Statement, to the incorporation by
reference in such Registration Statement of (i) our reports dated
February 27, 1997, appearing in the Annual Report on Form 10-K/A of
PairGain Technologies, Inc. for the year ended December 31, 1996, and
(ii) our report dated February 10, 1997 (February 27, 1997 as to Note
10) on the financial statements of Avidia Systems, Inc. as of and for
the year ended December 31, 1996 appearing in the report on Form 8-K/A
of PairGain Technologies, Inc. filed on April 25, 1997, and to the
reference to us under the heading "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
May 1, 1997
<PAGE> 1
Exhibit 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" in
the Registration Statement (Form S-3) and related Prospectus of
PairGain Technologies, Inc. for the registration of 2,366,865 shares of
its common stock and to the incorporation by reference therein of our
report dated February 17, 1995, with respect to the consolidated
financial statements and schedule of PairGain Technologies, Inc.
included in its Annual Report (Form 10-K/A) for the year ended December
31, 1996, filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Orange County, California
May 1, 1997