<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FIRST QUARTER ENDED MARCH 31, 1999
COMMISSION FILE NUMBER 0-22202
PAIRGAIN TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0282809
(State or other jurisdiction of (IRS Employer
incorporation of organization) Identification No.)
14402 FRANKLIN AVENUE, TUSTIN, CALIFORNIA 92780-7013
(Address of principal executive offices)
(714) 832-9922
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports ), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
THERE WERE 70,812,104 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE $.0005
PER SHARE, OUTSTANDING ON MARCH 31, 1999.
<PAGE> 2
PAIRGAIN TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Income
for the three months ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Comprehensive Income
for the three months ended March 31, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 16
Part II. Other Information
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 3. Defaults upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
</TABLE>
2
<PAGE> 3
PART I: ITEM 1
FINANCIAL INFORMATION
PAIRGAIN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 124,190 $ 131,923
Short-term investments (Note 3) 103,785 102,011
Accounts receivable 25,809 20,226
Inventories (Note 4) 31,239 34,320
Other current assets and deferred taxes 19,438 18,712
--------- ---------
TOTAL CURRENT ASSETS 304,461 307,192
Property and equipment, net (Note 5) 19,819 19,482
Long-term investments (Note 6) 6,500 1,500
Other assets 338 346
--------- ---------
TOTAL ASSETS $ 331,118 $ 328,520
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 6,770 $ 6,358
Accrued expenses (Note 7) 22,634 27,002
Accrued income taxes 17,505 16,119
--------- ---------
TOTAL CURRENT LIABILITIES 46,909 49,479
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 9)
Stockholders' equity:
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 - 70,812,104 and 70,039,814
at March 31, 1999 and December 31, 1998, respectively 35 35
Additional paid-in capital 151,729 150,807
Deferred compensation (63) (84)
Accumulated other comprehensive loss (Note 8) (462) (501)
Retained earnings 132,970 128,784
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 284,209 279,041
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 331,118 $ 328,520
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
PAIRGAIN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
------- -------
<S> <C> <C>
REVENUES (Note 2) $60,896 $72,619
Cost of revenues 35,386 35,734
------- -------
Gross profit 25,510 36,885
------- -------
Operating expenses:
Research and development 10,126 9,536
Selling and marketing 7,898 7,205
General and administrative 3,575 3,083
------- -------
Total operating expenses 21,599 19,824
------- -------
INCOME FROM OPERATIONS 3,911 17,061
Interest and other income, net 2,432 2,092
------- -------
Income before income taxes 6,343 19,153
Provision for income taxes (Note 1) 2,157 6,991
------- -------
NET INCOME $ 4,186 $12,162
======= =======
Per Share Data (Note 1):
Earnings per common share
Basic $ 0.06 $ 0.17
======= =======
Diluted $ 0.06 $ 0.16
======= =======
Average shares outstanding
Basic 70,351 69,543
======= =======
Diluted 74,491 75,203
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
PAIRGAIN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
Net income $ 4,186 $ 12,162
-------- --------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 121 (77)
-------- --------
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising during period (82) 55
Reclassification adjustment for losses included in
net income -- (20)
-------- --------
Net unrealized (losses) gains on securities (82) 35
-------- --------
Other comprehensive income (loss) (Note 8) 39 (42)
-------- --------
Comprehensive income $ 4,225 $ 12,120
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
PAIRGAIN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,186 $ 12,162
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,929 2,396
Loss on sale of equipment -- 73
Change in operating assets and liabilities:
Accounts receivable (5,515) (1,931)
Inventories 3,106 (8,779)
Other current assets (688) (2,115)
Other assets (81) (38)
Accounts payable 454 2,598
Accrued expenses (4,403) (152)
Income taxes 1,987 6,892
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,975 11,106
--------- ---------
Cash flows from investing activities:
Net purchases of short-term investments (2,362) (7,046)
Purchases of property and equipment (2,717) (1,855)
Purchase of long-term investment (5,000) --
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (10,079) (8,901)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 317 2,560
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 317 2,560
--------- ---------
Effect of exchange rate changes on cash balances 54 (77)
--------- ---------
(Decrease) increase in cash and cash equivalents (7,733) 4,688
Cash and cash equivalents at beginning of period 131,923 111,602
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 124,190 $ 116,290
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 431 $ 2,591
========= =========
Income tax refunds $ 259 $ 2,500
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 allow telecommunications carriers and private
network owners to more efficiently provide high-speed digital services to end
users over the large 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.
INTERIM PERIOD ACCOUNTING POLICIES
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements contain all normal recurring
adjustments necessary to present fairly the financial position as of March 31,
1999, and consolidated results of operations, comprehensive income and cash
flows for the three months ended March 31, 1999 and March 31, 1998. Results of
operations for the three months ended March 31, 1999 are not necessarily
indicative of results to be expected for the full year ending December 31, 1999.
Although the Company believes that the disclosures in the accompanying
financial statements are adequate to make the information presented not
misleading, certain information and footnote information normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission (the "SEC"), and these financial
statements should be read in conjunction with the Company's audited consolidated
financial statements included in the Company's Form 10-K for the year ended
December 31, 1998.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
balances and 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 Swiss subsidiary is the Swiss Franc. The functional currency of the
Company's Canadian subsidiary is the Canadian dollar. Assets and liabilities of
these subsidiaries are translated at the exchange rate in effect at each
year-end. Income statement accounts are translated at the average rate of
exchange prevailing during the year. Translation adjustments arising from
differences in exchange rates from period to period are included as accumulated
other comprehensive income (loss) within stockholders' equity. Realized gains or
losses from foreign currency transactions are included in operations as
incurred, and have historically been insignificant.
7
<PAGE> 8
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
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.
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 March 31, 1999 and
December 31, 1998. 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.
COMPREHENSIVE INCOME
Pursuant to SFAS No. 130, "Reporting Comprehensive Income," the Company
has included Condensed Consolidated Statements of Comprehensive Income for the
periods ended March 31, 1999 and 1998. (See Note 8)
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
Short-term investments are accounted for in accordance with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
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, included in accumulated other comprehensive income in
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.
8
<PAGE> 9
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
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.
WARRANTY RESERVE
The Company accrues warranty reserves, which are charged against cost
of goods sold, based upon historical rates and estimated future costs.
CONTINGENCIES
The Company is involved from time to time in litigation incidental to
its business. The Company believes that none of its pending litigation matters,
individually or in the aggregate, will have a material adverse effect on its
financial position or results of operations.
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment.
Provision is made currently for estimated product returns which historically
have been insignificant. Revenue from technology and licensing fees and royalty
income is recognized when earned. Advance payments are classified as deferred
revenue.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
INCOME TAXES
Income taxes are provided at the rate expected to be in effect for the
entire year.
PER SHARE INFORMATION
Pursuant to SFAS No. 128, "Earnings Per Share," ("SFAS No. 128"), the
Company provides dual presentation of "Basic" and "Diluted" earnings per share
("EPS"). SFAS No. 128 replaced "Primary" and "Fully diluted" EPS under
Accounting Principles Board ("APB") Opinion No. 15.
9
<PAGE> 10
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
Basic EPS excludes dilution from common stock equivalents and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution from common stock equivalents, similar to fully diluted
EPS, but uses only the average stock price during the period as part of the
computation.
The following table reconciles the weighted average shares outstanding
for basic and diluted earnings per share for the periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------- --------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net income $ 4,186 $ 12,162
======== ========
Basic earnings per common share:
Weighted average of common shares outstanding 70,351 69,543
======== ========
Basic earnings per common share $ 0.06 $ 0.17
======== ========
Diluted earnings per common share:
Weighted average of common shares outstanding 70,351 69,543
Weighted average of common share equivalents:
Weighted average warrants outstanding 20 40
Weighted average options outstanding 11,803 11,167
Anti-dilutive options (528) (1,802)
Shares assumed to be repurchased using the treasury stock method
(6,051) (2,821)
Shares assumed to be repurchased to reflect the effects of tax
benefits (1,104) (924)
-------- --------
Weighted average number of common and common equivalent shares
74,491 75,203
======== ========
Diluted earnings per common share $ 0.06 $ 0.16
======== ========
</TABLE>
STATEMENT OF CASH FLOWS
The Company recorded noncash tax benefits from exercises of common
stock options aggregating approximately $606,000 and $2.3 million during the
quarters ended March 31, 1999 and 1998, respectively.
10
<PAGE> 11
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees."
2. CONCENTRATION OF CREDIT RISK, MAJOR CUSTOMERS AND PRODUCTS
The Company engages in business activity in only one operating segment
which entails the design, manufacture and sale of a comprehensive line of
digital telecommunications products that allow telecommunications carriers and
private network owners to more efficiently provide high-speed digital services
to end users over the large infrastructure of unconditioned copper wires. The
Company offers a wide variety of products for sale which are manufactured at
common production facilities. The Company sells all of its products to a similar
customer base made up of telecommunications carriers and private network owners
through a common sales organization.
Credit is extended based on an evaluation of the customer's financial
condition and collateral is not required. Credit losses are provided for in the
financial statements and consistently have been minimal. A decision by a
significant customer to substantially decrease or delay purchases from the
Company or the Company's inability to collect receivables from these customers
could have a material adverse effect on the Company's financial condition and
results of operations.
Comparative product revenues as a percentage of sales during the three
months ended March 31, 1999 and 1998 were:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
HiGain / ETSI 52% 66%
Subscriber Carrier 31% 20%
Campus 5% 7%
Megabit Access 3% 2%
OEM 2% 2%
Royalty 7% 3%
--- ---
Total Revenues 100% 100%
=== ===
</TABLE>
11
<PAGE> 12
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
Export sales represented 21% and 20% of product revenue during the
three months ended March 31, 1999 and 1998, respectively. Product sales by
geographical region is summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
United States $44,750 $56,370
Canada 5,656 6,077
Other international 6,391 8,249
------- -------
Total product revenues 56,797 70,696
Royalty income and technology and licensing fees 4,100 1,923
------- -------
Total revenues $60,897 $72,619
======= =======
</TABLE>
3. SHORT-TERM INVESTMENTS
Short-term investments as of March 31, 1999 and December 31, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
MARCH 31, 1999
Municipal bonds $103,353 $ 432 $ -- $103,785
======== ======== ========= ========
DECEMBER 31, 1998
Municipal bonds $101,432 $ 579 $ -- $102,011
======== ======== ========= ========
</TABLE>
There were no realized gains or losses on short-term investments during
the three months ended March 31, 1999 and 1998. Unrealized holding gains on
short-term investments, net of tax, included in accumulated other comprehensive
loss in stockholders' equity at March 31, 1999 and December 31, 1998 were
$285,000 and $367,000, respectively.
12
<PAGE> 13
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods $ 19,704 $ 18,489
Work in process 1,492 1,647
Raw materials 10,043 14,184
-------- --------
$ 31,239 $ 34,320
======== ========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Production and engineering equipment $ 23,220 $ 22,169
Computers, software, furniture and other 17,939 16,155
Leasehold improvements 4,200 4,129
-------- --------
45,359 42,453
Less accumulated depreciation and amortization (25,540) (22,971)
-------- --------
$ 19,819 $ 19,482
======== ========
</TABLE>
6. LONG-TERM INVESTMENTS
In March 1999, the Company made a minority investment in ANDA Networks,
Inc., a California-based private company which develops next generation access
systems. The Company purchased approximately 2,500,000 shares of ANDA's Series C
Preferred Stock for an aggregate of $5.0 million.
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. In the fourth quarter of 1998, the Company recorded
an impairment adjustment of $1.5 million to reflect an impairment in its
investment in E/O. See also Note 9, Subsequent Events.
13
<PAGE> 14
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
7. ACCRUED EXPENSES
Accrued expenses consist of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Accrued compensation and related expenses $ 9,702 $ 9,343
Accrued warranty 6,416 7,413
Deferred revenue -- 3,500
Other accrued expenses 6,516 6,746
------- -------
$22,634 $27,002
======= =======
</TABLE>
8. OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME
The gross amount and related tax effects allocated to each component of
other comprehensive income (loss) consist of:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------
1999 1998
------------------------------------ ------------------------------------
GROSS AMOUNT INCOME TAX NET AMOUNT GROSS AMOUNT INCOME TAX NET AMOUNT
------------ ---------- ---------- ------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Foreign currency translation
adjustments $ 121 $ -- $ 121 $ (77) $ -- $ (77)
Unrealized (losses) gains
on securities:
Unrealized holding (losses)
gains arising during period (147) (65) (82) 88 33 55
Reclassification adjustment for
losses included in net income -- -- -- (32) (12) (20)
----- ----- ----- ----- ----- -----
Net unrealized (losses) gains
on securities (147) (65) (82) 56 21 35
----- ----- ----- ----- ----- -----
Other comprehensive income
(loss) $ (26) $ (65) $ 39 $ (21) $ 21 $ (42)
===== ===== ===== ===== ===== =====
</TABLE>
14
<PAGE> 15
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
The components of accumulated other comprehensive income (loss) at
March 31, 1999 and December 31, 1998 included foreign currency translation
adjustments and unrealized gains on securities.
<TABLE>
<CAPTION>
FOREIGN CURRENCY UNREALIZED GAINS ACCUMULATED OTHER
TRANSLATION (LOSSES) ON COMPREHENSIVE
ADJUSTMENT SECURITIES INCOME (LOSS)
---------------- ---------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31, 1998 $(868) $ 367 $(501)
Other comprehensive income (loss) for the three
months ended March 31, 1999 121 (82) 39
----- ----- -----
Balance at March 31, 1999 $(747) $ 285 $(462)
===== ===== =====
</TABLE>
9. SUBSEQUENT EVENTS
In April 1998, Harris Corporation ("Harris") filed a complaint in
California Superior Court against the Company and others, alleging claims for
breach of contract, breach of the implied covenant of good faith and fair
dealing, breach of fiduciary duty, intentional or negligent interference of
contractual relations and prospective economic advantage and violation of
California Business and Professions Code Section 17200 et seq. These claims
related to an alleged agreement giving Harris the right to buy the Company's
Falcon 1A chipset and the impingement of this alleged agreement by the Company
in entering into a licensing agreement in March 1998 with respect to the Falcon
1A chipset. Under this licensing agreement, the Company granted a third party
the right to manufacture and sell the Falcon 1A chipset to the Company and
others. Harris's complaint sought specific performance, declaratory relief, an
accounting and unspecified compensatory and punitive damages. Harris's claim was
later amended to include a claim for fraud and the Company filed a
cross-complaint for declaratory relief.
In May 1999, the Company reached an agreement with Harris Corporation
to settle and dismiss the complaints described above. Under the terms of the
settlement, in order to avoid further litigation and controversy, the Company
agreed to pay the sum of $1.5 million to Harris and both parties agreed to
dismiss their actions with prejudice. The impact of the settlement will be
recorded in the Company's financial statements for the quarter ended June 30,
1999.
During the second quarter of 1999, E/O Networks filed for protection
under Chapter 11 of the U.S. Bankruptcy Act. The Company is currently evaluating
the impact this may have on the carrying value of its investment. No adjustment
has been made to the carrying value of the investment in the Company's financial
statements for the quarter ended March 31, 1999.
15
<PAGE> 16
PART I: ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PAIRGAIN TECHNOLOGIES, INC.
The following discussion and other sections of this Form 10-Q may contain
forward-looking statements within the meaning of the private securities
Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended, and
is subject to the safe harbors created by those sections. These forward-looking
statements are subject to significant risks and uncertainties, including without
limitation those identified in PairGain's Form 10-K for the year ended December
31, 1998, as filed with the Securities and Exchange Commission (the "SEC"). Such
risks and uncertainties may cause actual results to differ materially and
adversely from those discussed in such forward-looking statements. The
forward-looking statements within this Form 10-Q are identified by words such as
"believes," "anticipates," "expects," "intends," "may" and other similar
expressions. However, these words are not the exclusive means of identifying
such statements. In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances are
forward-looking statements. We disclaim any obligation to publicly release the
results of any revisions to these forward-looking statements which may be made
to reflect events or circumstances occurring subsequent to the filing of this
Form 10-Q with the SEC or otherwise to revise or update any oral or written
forward-looking statement that may be made from time to time by or on behalf of
PairGain.
The information contained in this Form 10-Q is not a complete description of our
business or the risks associated with an investment in PairGain. You are urged
to carefully review and consider the various disclosures made by us in this
Report and in our other filings with the SEC, including our 1998 Form 10-K, that
attempt to advise interested parties of certain risks, uncertainties and other
factors that may affect our business.
RESULTS OF OPERATIONS (quarter ended March 31, 1999, compared to quarter ended
March 31, 1998)
REVENUES
Revenues for the three months ended March 31, 1999 were $60.9 million,
compared to $72.6 million for the three months ended March 31, 1998. Product
revenues for virtually all product lines except the PG-Flex and PG-Plus
decreased when compared to the 1998 quarter. The decrease in product revenues
for the HiGain and Megabit Access products resulted from lower average selling
prices that were not fully offset by increases in units shipments. Both unit
shipments and average selling prices decreased for the ETSI, Campus and PG-2
products as well as for the OEM modules. Revenue for the PG-Flex product
increased 77% over the revenue levels in the 1998 quarter as unit shipments
increased 82% and the average selling price decreased only slightly. Revenue for
the PG-Plus product increased 74% despite a 29% reduction in average selling
price. Revenue from royalty and technology fees was $4.1 million in the first
quarter of 1999, the result of an agreement entered into for licensing of our
Falcon chip in the first quarter of 1998. Revenue from royalty income and
technology fees in the first quarter of 1998 was $1.9 million.
16
<PAGE> 17
Subsequent to March 31, 1999, a large customer informed us that we no
longer held primary supplier status with them. We previously supplied the
dominant share of HDSL product to this customer. The customer did not elaborate
as to the level of orders they would continue to place, if any, and whether or
not they had awarded primary supplier status to another company. If there is a
significant decline in HDSL revenue sold to this account, it could have a
material adverse effect on our future operating results.
GROSS PROFIT
Gross profit represents total revenues for a period, including royalty
income and technology fees, less the cost of revenues for such period. Cost of
revenues represents primarily product costs, together with associated overhead
expenditures and provisions for inventory and related reserves. Gross profit
decreased to $25.5 million for the three months ended March 31, 1999 compared to
$36.9 million for the same period in the prior year. As a percentage of
revenues, gross profit was 42% for the quarter ended March 31, 1999, a decline
from 51% in the first quarter of 1998, but consistent with the 42% gross margin
for the fourth quarter of 1998. The decrease in gross margin and gross margin
percentage was largely the result of decreases in average selling prices, which
were partially offset by our cost reduction efforts and higher margin royalty
income, and manufacturing inefficiencies caused by decreased product volume. We
expect that increased competition will continue to place downward pressure on
average selling prices. To the extent that we are unable to offset these
decreases with our cost reduction efforts, or to introduce and sell new products
with higher gross product margins, we will continue to experience a decline in
our gross margin.
OPERATING EXPENSES
Operating expenses increased $1.8 million, or 9%, for the three months
ended March 31, 1999 as compared with the same period in the prior year. The
majority of this increase was related to the addition of personnel in all
operating expense categories. As a percentage of revenues, operating expenses
increased to 35% in the 1999 period from 27% in the 1998 quarter.
Research and development expense increased 6%, to $10.1 million, for
the three months ended March 31, 1999, compared to $9.5 million in the prior
year period. This increase was due to the addition of personnel, outside
development consulting fees, external engineering charges and costs for
developmental tools and software, offset by a reduction in prototype
expenditures. Research and development expense as a percentage of revenues was
17% in the 1999 quarter compared to 13% in 1998.
Selling and marketing expense increased to $7.9 million in the 1999
quarter compared to $7.2 million in the prior year quarter. The increase in
expense levels was primarily due to the addition of personnel and the associated
increase in salaries, benefits and travel expenses, offset by a reduction in
advertising expenses. Trade show and other related promotional expenditures
designed to market our new products and technology, including the Avidia System,
also increased over the prior year quarter. Costs related to the expansion of
PairGain's presence in the international market increased 16% from the prior
year period. Selling and marketing expense as a percentage of revenues was 13%
in the 1999 quarter compared to 10% in the first quarter of 1998.
17
<PAGE> 18
General and administrative expense was $3.6 million for the quarter
ended March 31, 1999 compared to $3.1 million in the same period in the prior
year. Increases in payroll due to the addition of information management
personnel and increases in software and machinery maintenance and payments to
outside firms assisting us with our Year 2000 compliance project were offset by
reductions in legal fees. As a percentage of revenues, general and
administrative expense was 6% in the first quarter of 1999 compared to 4% in
1998.
INCOME FROM OPERATIONS
As a result of the overall increase in operating expenses and the
reduction in revenues and gross margin, income from operations for the quarter
ended March 31, 1999 decreased to $3.9 million, compared to $17.1 million for
the 1998 quarter. As a percentage of revenues, income from operations was 6% in
the 1999 quarter compared to 23% in 1998.
INTEREST AND OTHER INCOME, NET
Net interest income increased to $2.4 million for the three months
ended March 31, 1999 from $2.1 million in the 1998 quarter. The increase in
interest income was the result of increased average cash balances.
PROVISION FOR INCOME TAXES
The provision for income taxes was $2.2 million, for the three months
ended March 31, 1999, compared to $7.0 million for the same period in the prior
year. PairGain's estimated effective tax rate for the first quarter of 1999
decreased to 34% from 37% for the three months ended March 31, 1998.
NET INCOME AND EARNINGS PER SHARE
Net income for the three months ended March 31, 1999 was $4.2 million
compared to $12.2 million for the 1998 quarter.
Basic earnings per share for the three months ended March 31, 1999 were
$0.06 per share, compared to $0.17 per share for the 1998 quarter.
The weighted average number of common shares outstanding was 70.4
million and 69.5 million for the three months ended March 31, 1999 and 1998,
respectively. This increase in common shares was attributable to the exercise of
stock options and warrants and the issuance of shares under the Employee Stock
Purchase Plan offset by shares repurchased during the first quarter of 1999
under the Share Buyback Plan announced in October 1998.
Dilutive earnings per share, which take into account the dilutive
effects of common stock options and warrants, were $0.06 per share and $0.16 per
share for the three months ended March 31, 1999 and 1998, respectively. The
weighted average number of common and common equivalent shares outstanding were
74.5 million in 1999 and 75.2 million in 1998.
18
<PAGE> 19
SUBSEQUENT EVENTS
In May 1999, we reached an agreement with Harris Corporation to settle
and dismiss the complaints Harris filed in April 1998. Under the terms of the
settlement, in order to avoid further litigation and controversy, we agreed to
pay the sum of $1.5 million to Harris and both parties agreed to dismiss their
actions with prejudice. The impact of the settlement will be recorded in our
financial statements for the quarter ended June 30, 1999. See Note 9, Subsequent
Events, in the Notes to the Condensed Consolidated Financial Statements in this
Report.
During the second quarter of 1999, E/O Networks filed for protection
under Chapter 11 of the U.S. Bankruptcy Act. We are currently evaluating the
impact this may have on the carrying value of our investment. No adjustment has
been made to the carrying value of the investment in our financial statements
for the quarter ended March 31, 1999.
19
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, PairGain had $228.0 million in cash, cash
equivalents and short-term investments and $257.6 million in working capital.
This is a decrease of $6.0 million in cash, cash equivalents and short-term
investments and $161,000 in working capital compared to the December 31, 1998
amounts. These decreases are primarily attributable to cash generated from
operations of $2.0 million and $2.2 million from the issuance of stock under our
1993 Stock Option Plan and Employee Stock Purchase Plan, offset by capital
expenditures of $2.7 million, a long-term investment of $5.0 million and
repurchases of PairGain common stock under the Share Buyback Plan aggregating
$1.9 million. Accounts receivable increased to $25.8 million at March 31, 1999,
compared to $20.2 million at December 31, 1998. This increase in receivables was
primarily due to a larger proportion of total revenue for the 1999 quarter being
shipped during the last four weeks of the quarter. Accounts receivable days
outstanding were 39 at March 31, 1999 compared to 30 days at December 31, 1998.
Gross inventories decreased $5.7 million to $46.0 million at March 31, 1999
compared to $51.7 million at December 31, 1998. Approximately $4.2 million of
the decrease was related to raw materials and $1.2 million related to finished
goods. Reserves for inventory obsolescence, excess quantities, cost reductions
and test and evaluation inventories decreased $2.6 million to $14.8 at March 31,
1999 compared to $17.4 million at December 31, 1998. The primary reason for the
decrease in these reserves was the disposal of obsolete inventories. Net
inventory turns increased to four-and-a-half times for the first quarter of 1999
versus four times in the 1998 quarter.
Capital expenditures, primarily related to the purchase of computer
software and hardware and test equipment, were $2.7 million during the first
quarter of 1999. Capital expenditures in the 1998 quarter aggregated
approximately $1.9 million and were primarily related to the purchase of
computer equipment, machinery and test equipment.
Accounts payable and other current liabilities decreased to $46.9
million at March 31, 1999 from $49.5 million at December 31, 1998. The primary
reason for the decrease was the recognition of revenue in the first quarter of
1999 that was deferred as of December 31, 1998, offset by an increase in income
taxes payable.
On October 14, 1998 we announced that our Board of Directors approved a
plan to repurchase up to 7,000,000 shares, or approximately 10%, of our
outstanding common shares. As of March 31, 1999, we had repurchased 1,200,000
shares at a cost of approximately $9.1 million. Future repurchases of shares
under this plan, if any, will be made with existing cash balances.
We have signed an agreement to purchase our Tustin, California
headquarters facility from our current landlord. The purchase price is $4.9
million, which will be paid with $3.1 million in cash and assumption of a $1.8
million note. The note bears interest at 8.25% and is due December 1, 2005. The
purchase is expected to be completed in May 1999.
During the second quarter of 1999, we will pay $1.5 million under an
agreement to settle our litigation with Harris Corporation. See Note 9,
Subsequent Events, in the Notes to the Condensed Consolidated Financial
Statements in this Report.
We believe that our current cash, cash equivalents and short-term
investment balances and internally generated cash flow will be sufficient to
meet our working capital and capital expenditure
20
<PAGE> 21
requirements through 1999. To the extent that our existing resources, together
with future earnings, are insufficient to fund our future activities, we may
need to raise additional funds through public or private financings.
Use of Proceeds From Registered Securities
The effective date of the Company's first registration statement (the
"Registration Statement") filed on Form S-1 (Registration No. 33-66680) under
the Securities Act of 1993, as amended, was September 13, 1993. The class of
securities registered was Common Stock. The offering commenced on September 15,
1993 and all securities were sold in the offering. The managing underwriters for
the offering were Lehman Brothers, Inc. and Hambrecht & Quist, Inc.
Pursuant to the Registration Statement, the Company sold 4,140,000
shares of its Common Stock for an aggregate offering price of $58.0 million, and
certain selling shareholders sold 632,500 shares of the Common Stock of the
Company for an aggregate offering price of $8.9 million.
The Company incurred expenses of $4.7 million of which $4.1 million
represented underwriting discounts and commissions and $573,000 represented
other expenses. All such expenses were direct or indirect payments to others.
The net offering proceeds to the Company after total expenses was $53.3 million.
Of the net proceeds from the offering, $5.3 million was used to pay off
indebtedness in 1993 and $48.0 million has been invested in short-term
investments. In 1995, the Company realized a $15.8 million unauthorized trading
loss.
The use of the proceeds from the offering does not represent a material
change in the use of the proceeds described in the prospectus which is part of
the Registration Statement.
YEAR 2000 READINESS DISCLOSURE
Many of the world's computer systems currently record years in a
two-digit format. Such computer systems will be unable to properly interpret
dates beyond the year 1999, which could lead to business disruptions globally
(the "Year 2000 Issue"). The potential costs and uncertainties associated with
the Year 2000 Issue will depend on a number of factors, including software,
hardware and the nature of the industry in which a company operates.
Additionally, companies must coordinate with other entities with which they
electronically interact, such as customers, creditors and suppliers.
The following discussion addresses the manner in which the Year 2000
Issue affects PairGain, including: our state of readiness; the costs to address
our Year 2000 issues; the risks of our Year 2000 issues; and our contingency
plans.
Our State of Readiness
In determining our state of readiness regarding the Year 2000 Issue,
management is assessing compliance in the following areas: our products, our
internal systems and the readiness of our key suppliers and major customers.
21
<PAGE> 22
We have implemented a Year 2000 Project (the "Project") to address and
correct Year 2000 compliance issues with regard to our operating systems and the
readiness of our suppliers and customers. The Project is administered by a
Steering Committee, which includes senior representatives from operations,
engineering, finance, information management and independent outside
consultants. The Project is composed of five phases:
o Awareness;
o Inventory and Assessment;
o Replacement and Upgrade;
o Testing and Validation; and
o Implementation and Post-Implementation.
The AWARENESS phase is intended to ensure that our senior management,
Board of Directors, associates and customers are aware of the Year 2000 Issue
and the possible problems it may cause. Initial contact has been completed, and
communication will continue throughout the span of the Project and beyond
December 31, 1999 to ensure successful business operation after the Year 2000.
The INVENTORY AND ASSESSMENT phase of the Project will assess the
readiness of all computer hardware and software that we, including all of our
departments, business partners, properties and interfaces to vendors, use in all
aspects of our business operations. This includes, but is not limited to,
information technology systems and non-information technology systems (which may
include embedded technology such as microcontrollers) as follows:
<TABLE>
<CAPTION>
Information Technology Systems Non-Information Technology Systems
- ----------------------------------------- ----------------------------------------
<S> <C>
o Personal computer hardware, software o Building systems including elevators,
and applications HVAC, life safety systems, public
utilities and others
o Mainframe hardware, software and o Facsimile and photocopy machines
applications
o Telephone systems o Alarms
o Local Area Networks hardware, software o Access systems and door locks
and applications
</TABLE>
Our products that are currently being sold or that have been sold in
the past will be classified into three main categories.
o No Impact: Units with no internal electronics or processing
capabilities or units with processing capabilities that do not
perform date math calculations.
o Minor Impact: Units that possess date math processing
capabilities, but any Year 2000 related failure with either
have no impact on the actual performance of the unit (i.e.,
incorrect date display only), or would require a one-time user
intervention to rest the unit once the clock turned from
December 31, 1999 to January 1, 2000. Units in this category
will be reviewed on a case by case basis by the Product
Manager to determine whether or not testing is warranted.
o Major Impact: Units that possess significant date math
processing capabilities. Every unit in this classification
will be tested for Year 2000 compliance.
22
<PAGE> 23
We have adopted BellCore GR-2945-CORE, Issue 1 standard for definition
of "Year 2000 Compliant" products as the majority of our products are sold to
Bell operating companies. Testing of our products is being completed by
Nationally Recognized Test Labs ("NRTL"). To date, all PairGain products tested
have been Year 2000 compliant without modification. If any products are
subsequently determined not to be compliant, we have pledged to immediately
notify all customers who have purchased any of the non-complaint products and to
upgrade or replace any of the installed, non-compliant products in accordance
with our standard warranty policy, regardless of whether the equipment is still
in the warranty period.
Inventory of our internal systems has been completed. An assessment of
the readiness of the external entities with which we interface such as vendors,
customers, payment systems and others is ongoing. Letters were sent to 100 of
our suppliers. Responses have been received from 90% of those companies with 35%
indicating they were already Year 2000 compliant and the remaining still working
on the issue. We have multiple sources for almost every part that we use in our
products. If any one supplier cannot, for one reason or another, comply with the
Year 2000 requirements, we anticipate being able to procure the parts from
another supplier who is compliant. We plan to work closely with those suppliers
who provide sole source components to ensure that they are Year 2000 compliant
before any interruption occurs or will address the sole source issue in other
ways. We have established a target date of July 1, 1999 for completion of this
task.
Our major customers have disclosed their intent to be Year 2000
compliant by December 31, 1999 in recent SEC filings and on public websites. We
continue to have formal communications with all of our significant suppliers and
large customers to determine the extent, if any, to which we are vulnerable to
those third parties' failure to remedy their own Year 2000 Issue. There can be
no guarantee that our systems or the systems of other companies will be
compliant in a timely manner. We are aggressively seeking resolution to those
situations which might carry a material impact and might adversely affect us.
During the REPLACEMENT AND UPGRADE phase of the Project, our internal
software and systems that are not Year 2000 compliant will be repaired or
replaced. In addition, vendor monitoring will be performed to ensure and oversee
efforts made by vendors regarding Year 2000 compliance. It is our intention to
gain Year 2000 compliance assurances with all new contracts and leases, renewals
of existing contracts and purchases of software applications. This phase is
expected to be completed by July 1, 1999.
During the TESTING AND VALIDATION phase, a standard test methodology
will be used to ensure that all components correctly handle the century date
changes and that those changes do not adversely impact current functionality and
operation of the components. A checklist of ten minimum requirements was created
to certify an internal system or application is compliant. The target date for
completion of the initial testing and validation of components has been set for
July 1, 1999. Testing and validation of these systems will continue through the
end of 1999 to ensure successful business operations.
During the IMPLEMENTATION AND POST-IMPLEMENTATION phase, components
will be implemented into production upon completion of upgrade and testing, and
operated in a production environment. Constant monitoring and communication will
also be a focus point and objective. A system change control process will be
used to ensure that subsequent changes are not made to Year 2000 compliant
23
<PAGE> 24
components unless those changes have been tested for compliance. Implementation
of the Project is expected to be completed by July 1, 1999. A team will be
established to cater to all questions and issues that may arise during and post
century change. Post-implementation, including continued monitoring and
communication, will continue through March 31, 2000 to ensure our successful
operation after January 1, 2000.
The Costs to Address Our Year 2000 Issues
The total cost to address our Year 2000 Issue is not expected to be
material to our financial condition. We are using both internal and external
resources to reprogram, or replace, and test our software for Year 2000
modifications. We do not separately track internal costs incurred on the Year
2000 Project, which principally include payroll and related costs for our
Information Management employees that are being expensed as incurred. Excluding
internal costs, we have budgeted approximately $1.1 million for activities
specific to the Year 2000 compliance of our information systems. An additional
$5.0 million has been budgeted for various other upgrades to software and
hardware related to operational functionality which will also make those systems
Year 2000 compliant. Purchased hardware and software will be capitalized in
accordance with our standard capitalization policy. All other costs related to
the project are being expensed as incurred. Budgeted amounts are expected to be
spent during 1998 and 1999 but will not be incurred equally over all phases of
the Project. As of March 31, 1999 we had spent approximately $4.4 million of
these budgeted amounts. These costs are being funded through operating cash
flows.
The Risks of Our Year 2000 Issues
We have placed great importance on our Year 2000 Project and
anticipate that our systems will be Year 2000 compliant before the end of 1999.
The following are representative of the types of risks that could result in the
event that we are not fully compliant by the end of 1999:
o Legal risks, including customer, supplier, employee or
shareholder lawsuits over failure to deliver contracted
services or product failure.
o Loss of sales due to failure to meet customer quality
expectations or inability to ship products.
o Increased operational costs due to manual processing, data
corruption or disaster recovery.
o Inability to bill or invoice customers and collect payments in
a timely manner.
In addition to the Year 2000 compliance issues we face with respect to
our own systems, we face risks that our vendors' and/or customers' systems,
which are not directly under our control, may not become compliant prior to
January 1, 2000. In addition, if certain public infrastructure interruptions in
areas such as utilities (electricity, water or telephone), transportation,
banking or government, result in a disruption of our service, our operations at
individual facilities could be impacted for the duration of the disruption.
As companies shift their information technology budgets toward Year
2000 compliance requirements, it is possible that a reduction in spending for
telecommunications equipment could occur in 1999. Because we market our products
principally to telephone companies in the United States and Canada, a reduction
in telecommunications equipment spending could reduce our revenues and have a
material adverse effect on our financial condition and results of operations.
24
<PAGE> 25
Our Contingency Plans
A contingency plan has not yet been developed for dealing with the most
reasonably likely worst case scenario with respect to our Year 2000 compliance,
and such scenario has not yet been clearly identified. It is impossible to fully
assess the potential consequences in the event service interruptions from
suppliers occur or in the event that there are disruptions in such
infrastructure areas as utilities, communications, transportation, banking and
government. Assuming no major public infrastructure service disruption occurs,
we believe that we will be able to manage our Year 2000 transition without a
material effect on our results of operations or financial condition. We have not
completed contingency plans in the event that a disruption in the public
infrastructure does occur.
The above information is based upon management's best estimates, which
were derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third party modification plans and
other factors. There can be no assurance that these estimates can be achieved
and actual results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, the nature and amount of
programming required to upgrade or replace each of the affected programs, the
rate and magnitude of related labor and consulting costs, and the success of our
external customers, suppliers and governmental agencies in addressing the Year
2000 issue.
The above discussion regarding Year 2000 contains many statements that
are "forward-looking" within the meaning of the Reform Act. When used in the
Year 2000 discussion, the words "believes," "expects," "estimates," "planned,"
"could" and similar expression are intended to identify forward-looking
statements. Forward-looking statements included, without limitation, our
expectations as to when we will complete the remediation and testing phases of
our Year 2000 Plan as well as any contingency plans we formulate; our estimated
cost of achieving Year 2000 readiness; and our belief that our internal systems
and equipment will be Year 2000 compliant in a timely manner.
25
<PAGE> 26
PART II. OTHER INFORMATION
PAIRGAIN TECHNOLOGIES, INC.
Item 1. Legal Proceedings
As discussed in Item 3. Legal Proceedings in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, the U.S.
Attorney's office and the Securities and Exchange Commission have been
investigating S. Jay Goldinger and Capital Insight, Inc. in connection
with their 1995 loss of nearly $100 million of their clients' funds,
including $15.8 million of PairGain's funds. The U.S. Attorney and the
SEC are also investigating whether PairGain and some of its past and
present officers and employees engaged in any wrongdoing with respect
to PairGain's investment of its excess cash with Capital Insight, the
disclosure of such investments and the disclosure of losses incurred.
By letter dated May 11, 1999, we received notification that the U.S.
Attorney views PairGain, Charles S. Strauch, our Chairman, and Charles
W. McBrayer, our Chief Financial Officer, as targets of its criminal
investigation. The letter further states that no final decision has
been made whether to pursue charges against PairGain, Mr. Strauch or
Mr. McBrayer by the U.S. Attorney.
See Item 1. Legal Proceedings in PairGain's Quarterly Report on Form
10-Q for the first quarter ended March 31, 1998 for disclosure
regarding Harris Corporation's suit against PairGain and others. In May
1999, PairGain and Harris reached a settlement agreement related to
this matter. See Note 9 of Notes to Condensed Consolidated Financial
Statements in this quarterly report.
PairGain is involved from time to time in litigation incidental to our
business. We believe that none of our pending litigation matters,
individually or in the aggregate, will have a material adverse effect
on our financial position or results of operations.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
27.1 Financial Data Schedule
(B) Reports on Form 8-K
None.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PairGain Technologies, Inc.
---------------------------------------------
(Registrant)
Date: May 17, 1999 /s/ Charles W. McBrayer
------------ ---------------------------------------------
Charles W. McBrayer
Senior Vice President,
Chief Financial Officer and Secretary
(Principal Financial Officer)
Date: May 17, 1999 /s/ Robert R. Price
------------ ---------------------------------------------
Robert R. Price
Vice President and Corporate Controller
(Principal Accounting Officer)
27
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 124,190
<SECURITIES> 103,785
<RECEIVABLES> 25,809
<ALLOWANCES> 0
<INVENTORY> 31,239
<CURRENT-ASSETS> 304,461
<PP&E> 45,359
<DEPRECIATION> 25,540
<TOTAL-ASSETS> 331,118
<CURRENT-LIABILITIES> 46,909
<BONDS> 0
0
0
<COMMON> 35
<OTHER-SE> 284,174
<TOTAL-LIABILITY-AND-EQUITY> 331,118
<SALES> 56,797
<TOTAL-REVENUES> 60,896
<CGS> 35,386
<TOTAL-COSTS> 35,386
<OTHER-EXPENSES> 21,599
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,432)
<INCOME-PRETAX> 6,343
<INCOME-TAX> 2,157
<INCOME-CONTINUING> 4,186
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,186
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
