-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WPSIde2m9kOmW1QR3ZHLF1E2xJ0b+BLBpWXf65Xc/YYjhapAeGakXVJyQWK+TdOd 96hvEBYqxm8u8dK6iiV8wQ== 0000892569-96-000442.txt : 19960430 0000892569-96-000442.hdr.sgml : 19960430 ACCESSION NUMBER: 0000892569-96-000442 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960429 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAIRGAIN TECHNOLOGIES INC /CA/ CENTRAL INDEX KEY: 0000910032 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 330282809 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22202 FILM NUMBER: 96552025 BUSINESS ADDRESS: STREET 1: 14402 FRANKLIN AVE CITY: TUSTIN STATE: CA ZIP: 92680 BUSINESS PHONE: 7148329922 MAIL ADDRESS: STREET 1: 14402 FRANKLIN AVE CITY: TUSTIN STATE: CA ZIP: 92680-7013 10-Q 1 PAIRGAIN TECHNOLOGIES - FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGES COMMISSION WASHINGTON D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FIRST QUARTER ENDED MARCH 31, 1996 COMMISSION FILE NUMBER 0-22202 PAIRGAIN TECHNOLOGIES, INC. ------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 33-0282809 ---------------------------------- ------------------- (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OF ORGANIZATION) IDENTIFICATION NO.) 14402 FRANKLIN AVENUE, TUSTIN, CALIFORNIA 92680-7013 ------------------------------------------------------------------------ (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (714) 832-9922 ------------------------------------------------------------------------ (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS ), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --------- ---------- THERE WERE 15,472,342 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE OF $.001 PER SHARE, OUTSTANDING ON MARCH 31, 1996. 2 PAIRGAIN TECHNOLOGIES, INC. INDEX
Page ---- Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets at March 31, 1996 and December 31, 1995 3 Condensed Consolidated Statements of Income for the three months ended March 31, 1996 and 1995 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1996 and 1995 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Part II. Other Information Item 1. Legal Proceedings 17 Item 2. Changes in Securities 17 Item 3. Defaults upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18
2 3 PART I: ITEM 1 FINANCIAL INFORMATION PAIRGAIN TECHNOLOGIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
MARCH 31, DECEMBER 31, 1996 1995 -------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 42,776 $ 24,576 Short-term investments (Note 3) 31,276 31,149 Accounts receivable 13,962 13,044 Inventories (Note 4) 25,233 22,522 Other current assets and deferred taxes 4,413 4,870 -------- -------- Total current assets 117,660 96,161 Property and equipment, net (Note 5) 6,666 6,402 Note receivable (Note 6) 2,708 2,708 Other assets 55 55 -------- -------- Total assets $127,089 $105,326 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and other current liabilities $ 21,652 $ 11,395 Bank line of credit (Note 7) -- -- -------- -------- Total current liabilities 21,652 11,395 -------- -------- Commitments and contingencies (Note 9) Stockholders' equity: Preferred stock, $.001 par value: Authorized shares - 2,000,000 Issued and outstanding shares - None -- -- Common stock, $.001 par value: Authorized shares - 30,000,000 Issued and outstanding shares - 15,472,342 and 15,177,267 at March 31, 1996 and December 31, 1995, respectively 15 15 Additional paid-in capital 92,360 87,175 Deferred compensation (60) (82) Unrealized gain on marketable securities 112 67 Retained earnings 13,010 6,756 -------- -------- Total stockholders' equity 105,437 93,931 -------- -------- Total liabilities and stockholders' equity $127,089 $105,326 ======== ========
See notes to condensed consolidated financial statements. 3 4 PAIRGAIN TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------------------ 1996 1995 ------- -------- Revenues $40,511 $19,078 Cost of revenues 21,472 9,653 ------- ------- Gross profit 19,039 9,425 ------- ------- Operating expenses: Research and development 3,621 1,892 Selling and marketing 3,724 1,868 General and administrative 2,334 1,451 ------- ------- Total operating expenses 9,679 5,211 ------- ------- Income from operations 9,360 4,214 Interest and other income, net 765 587 Gain on investments -- 100 ------- ------- Income before income taxes 10,125 4,901 Provision for income taxes (Note 8) 3,875 1,759 ------- ------- Net income $ 6,250 $ 3,142 ======= ======= PER SHARE DATA: Earnings per share $ 0.35 $ 0.20 ======= ======= Weighted average number of common and common equivalent shares 17,645 16,103 ======= =======
See notes to condensed consolidated financial statements. 4 5 PAIRGAIN TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------------- 1996 1995 ------- ------- Cash flows from operating activities: Net income $ 6,250 $ 3,142 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 975 619 Gains on sales of investments -- (100) Change in operating assets and liabilities: Accounts receivable (918) 2,017 Inventories (2,711) (4,008) Other current assets 426 15 Other assets -- (8) Accounts payable and other current liabilities 6,857 (223) Federal income tax refund (Note 8) 6,900 -- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 17,779 1,454 ------- ------- Cash flows from investing activities: Net (purchases of) proceeds from short-term investments (272) 17,948 Purchase of property and equipment (995) (1,684) ------- ------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (1,267) 16,264 ------- ------- Cash flows from financing activities: Payments on bank line of credit -- (1,000) Proceeds from issuance of common stock and warrants 1,688 13,429 ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES 1,688 12,429 ------- ------- Increase in cash and cash equivalents 18,200 30,147 Cash and cash equivalents at beginning of period 24,576 711 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $42,776 $30,858 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ -- $ 18 ======= ======= Income tax paid $ -- $ 872 ======= =======
See notes to condensed consolidated financial statements. 5 6 PAIRGAIN TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES PairGain Technologies, Inc., (the "Company") designs, manufactures, markets and supports a comprehensive line of digital telecommunications products that enable telecommunication exchange carriers and private networks to more efficiently provide high speed digital service to end users over the large infrastructure of unconditioned copper wires. INTERIM PERIOD ACCOUNTING POLICIES In the opinion of the Company's management, the accompanying unaudited condensed consolidated financial statements contain all normal recurring adjustments necessary to present fairly the financial position as of March 31, 1996, and consolidated results of operations for the three months ended March 31, 1996, and March 31, 1995, and cash flows for the three months ended March 31, 1996, and March 31, 1995. Results of operations for the three months ended March 31, 1996, are not necessarily indicative of results to be expected for the full year ending December 31, 1996. Although the Company believes that the disclosures in the accompanying financial statements are adequate to make the information presented not misleading, certain information and footnote information normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, and these financial statements should be read in conjunction with the Company's audited consolidated financial statements included in the Company's Form 10-K for the year ended December 31, 1995. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: PairGain Services Group, Inc., which provides support services for the Company's customers throughout the United States; PairGain Canada Inc., a sales company focused on the Canadian market; and PairGain International Sales Corporation, a foreign sales corporation ("FSC"). All significant intercompany transactions have been eliminated in consolidation. 6 7 PAIRGAIN TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued) TRANSLATION OF FOREIGN CURRENCIES Foreign subsidiary financial statements are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52, Foreign Currency Translations. The functional currency of the Company's Canadian subsidiary is the U.S. dollar, therefore, translation gains and losses are included in results of operations. Transaction and translation gains and losses were not significant in 1996 or 1995. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with the current year presentation. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with maturities at the date of purchase of less than three months to be cash equivalents. SHORT-TERM INVESTMENTS Effective January 1, 1994, the Company adopted the provisions of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. The adoption did not have a significant impact on the Company's consolidated financial statements. Management determines the appropriate classification of such securities at the time of purchase and reevaluates such classification as of each balance sheet date. Based on its intent, the Company's investments are classified as available-for-sale and are carried at fair value, with unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. The investments are adjusted for amortization of premiums and discounts to maturity and such amortization is included in interest income. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in the consolidated statements of income. INVENTORIES Inventories are stated at lower of cost (determined on a first-in, first-out basis) or market. The Company maintains allowances for estimated obsolete and excess inventories based upon projected sales levels. 7 8 PAIRGAIN TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued) PROPERTY AND EQUIPMENT Property and equipment are carried at cost. The Company provides for depreciation and amortization using the straight-line method. The estimated useful life of equipment is three years. Leasehold improvements are amortized over the lesser of five years or the life of the lease. REVENUE RECOGNITION Revenue from product sales is recognized at the time of shipment. Provision is made currently for estimated product returns. Revenue for technology and licensing fees and royalty income is recognized when earned. RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as incurred. PER SHARE INFORMATION Net income per share is computed using the weighted average number of common shares and common share equivalents outstanding during the periods presented. Common share equivalents result from outstanding options and warrants to purchase common stock and are calculated using the treasury stock method. STATEMENT OF CASH FLOWS During the quarter ended March 31, 1996, the Company recorded noncash tax benefits from exercises of common stock options aggregating $3.5 million. ACCOUNTING FOR STOCK-BASED COMPENSATION In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement No. 123"), which became effective for the Company beginning January 1, 1996. Statement No. 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply APB Opinion No. 25, which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB Opinion No. 25 to its stock-based compensation awards to employees. 8 9 PAIRGAIN TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued) 2. CONCENTRATION OF CREDIT RISK, MAJOR CUSTOMERS AND PRODUCTS The Company markets its products principally to telephone companies in the United States and Canada. Credit is extended based on an evaluation of the customer's financial condition and collateral is not required. Credit losses are provided for in the financial statements and consistently have been minimal. A decision by a significant customer to substantially decrease or delay purchases from the Company or the Company's inability to collect receivables from these customers could have a material adverse effect on the Company's financial condition and results of operations. Revenues from HiGain products represented approximately 82% and 74% of the Company's total revenues for the quarter ended March 31, 1996 and 1995, respectively. A decline in demand for HiGain products, whether as a result of competition, deployment of fiber cable, technological change or otherwise, could have a material adverse effect on the Company's operating results. 3. SHORT-TERM INVESTMENTS Short-term investments as of March 31, 1996 and December 31, 1995 are summarized as follows:
GROSS GROSS UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------- ---------- ---------- --------- (IN THOUSANDS) MARCH 31, 1996 Municipal bonds $31,095 $181 $-- $31,276 DECEMBER 31, 1995 Municipal bonds $31,042 $107 $-- $31,149
Net realized gains were $0 and $100,000 for the three months ended March 31, 1996 and 1995, respectively. Unrealized gains on short-term investments, net of tax, included as a separate component of stockholders' equity at March 31, 1996 and December 31, 1995 were $112,000 and $67,000, respectively. The amortized cost and estimated fair value of investments at March 31, 1996 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because the issuer of the securities may have the right to repurchase such securities. 9 10 PAIRGAIN TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
FAIR COST VALUE ------- ------- (IN THOUSANDS) Due in one year or less $16,483 $16,575 Due after one year through three years 14,612 14,701 ------- ------- $31,095 $31,276 ======= =======
4. INVENTORIES Inventories consist of the following:
MARCH 31, DECEMBER 31, 1996 1995 -------- ----------- (IN THOUSANDS) Raw materials $ 4,869 $ 4,987 Work in process 11,411 9,693 Finished goods 8,953 7,842 ------- ------- $25,233 $22,522 ======= =======
5. PROPERTY AND EQUIPMENT Property and equipment consist of:
MARCH 31, DECEMBER 31, 1996 1995 -------- ----------- (IN THOUSANDS) Furniture and fixtures $ 135 $ 50 Machinery and equipment 10,529 9,722 Leasehold improvements 1,214 1,111 ------- ------- 11,878 10,883 Less accumulated depreciation and amortization 5,212 4,481 ------- ------- $ 6,666 $ 6,402 ======= =======
10 11 PAIRGAIN TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued) 6. NOTE RECEIVABLE In July 1995, the Company entered into certain agreements with Sourcecom Corporation of Valencia, California ("Sourcecom"). Sourcecom designs, manufactures and markets remote networking devices which enable the integration of Ethernet local area networks with wide area networking over copper wire. The agreements provide for the incorporation of Sourcecom's networking technology into the Company's current and future transmission products. Under the terms of the agreements, the Company loaned Sourcecom $2.7 million and has rights to purchase a minority ownership position. The note bears interest at the prime rate less one percent (7.25% at March 31, 1996), payable monthly, with the principal balance due July 1999. 7. BANK LINE OF CREDIT The Company maintains an unsecured line of credit with a bank. The line allows maximum borrowings of $10,000,000, of which up to $2,000,000 may be utilized for the secured purchase of fixed assets (term loan), $2,000,000 for letters of credit and $2,000,000 for foreign exchange contracts. The line bears interest at prime (8.25% at March 31, 1996) and borrowings under term loan provisions of the agreement bear interest at prime plus 1%. At March 31, 1996, the Company had no outstanding borrowings under this line of credit. The debt agreement specifies certain financial and other covenants. The Company was in compliance with the financial and other covenants at March 31, 1996. The agreement expires May 1, 1996. 8. INCOME TAXES Income taxes are provided at the rate expected to be in effect for the entire year. During the quarter ended March 31, 1996, the Company received a $6.9 million refund of its Federal income taxes paid for the year ended December 31, 1995. This refund arises out of certain deductions the Company claimed in its tax return for the year ended December 31, 1995. Until the Internal Revenue Service audits the Company's 1995 income tax return, the treatment of these deductions is uncertain. The Company believes the ultimate resolution of these uncertainties will not have a material adverse effect on the Company's financial statements. 9. CONTINGENCIES In January 1996, the Company received a copy of a complaint, filed derivatively by a Company stockholder on behalf of the Company, naming as defendants the Company's directors and certain officers, as well as Mr. S. Jay Goldinger and Capital Insight, Inc., a third party investment advisor. This 11 12 PAIRGAIN TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued) suit arises out of losses incurred by the Company in 1995 of approximately $15.8 million in connection with investments made by Mr. Goldinger and Capital Insight on the Company's behalf. The derivative complaint states causes of action for breach of fiduciary duty, abuse of control, constructive fraud, gross mismanagement and waste of corporate assets. The complaint seeks in excess of $15.8 million in damages and legal fees and expenses in connection with the loss by the Company of the funds it provided to Mr. Goldinger and Capital Insight. The suit was filed in Superior Court of the State of California, County of Orange. In January 1996, the Company filed suit, in Los Angeles federal court, against Mr. S. Jay Goldinger and Capital Insight, Inc. charging unauthorized trading, fraudulent misrepresentation, violation of federal securities laws and breach of fiduciary duties. The suit seeks $15.8 million in damages by reason of the losses incurred by the Company, as well as punitive damages and legal fees. Both of these suits arise out of losses the Company incurred in 1995 in one of its investment accounts. In early 1995, the Company had invested approximately $28 million of its excess cash with Capital Insight, Inc., a financial advisor and broker based in Beverly Hills, California, with instructions that the funds be invested solely in U.S. Treasury securities with maturities of one year or less. These instructions were consistent with the investment guidelines which had been approved by the Company's Board of Directors in October of 1994. However, these instructions were violated and the funds were used to engage in unauthorized trading in options and futures, resulting in pre-tax trading losses of $15.8 million in 1995. The Company's outside directors retained independent legal counsel to perform a complete investigation of the facts surrounding these losses and the Company's existing investment policies and procedures. The independent legal counsel retained forensic accountants to perform a full analysis of the unauthorized trading activity in order to ascertain both the details of the transactions involved and the periods in which the losses occurred. This investigation revealed no improper involvement by any Company director, officer or employee in the unauthorized trading. The Company does not maintain Directors and Officers liability insurance. However, under the terms of its articles of incorporation, the Company indemnifies its directors and officers for damages and legal fees arising from litigation matters. The ultimate outcome of these complaints cannot presently be determined; accordingly, no provision for any loss or recovery that may result has been made in the Company's financial statements. 10. PUBLIC OFFERING In March 1995, the Company completed a secondary public offering and sold 500,000 shares of its common stock at a price of $23.625 per share. The net proceeds raised by the Company were approximately $10,970,000. In connection with the offering, certain outstanding warrants were exercised to purchase 1,437,655 shares of common stock at an aggregate exercise price of $2,717,000. 12 13 PART I: ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PAIRGAIN TECHNOLOGIES, INC. Except for the historical information contained herein, the matters discussed in this Form 10-Q are forward-looking statements which involve risk and uncertainties, including but not limited to economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices and other factors discussed in the Company's filings with the Securities and Exchange Commission. RESULTS OF OPERATIONS (quarter ended March 31, 1996, compared to quarter ended March 31, 1995) REVENUES Revenues for the three months ended March 31, 1996 increased $21.4 million, or 112%, to $40.5 million as compared to $19.1 million for the three months ended March 31, 1995. Of this increase in revenue, product revenue increased $21.5 million, and royalty income decreased $102,000. The increase in product revenue was primarily due a 158% increase in the unit sales volume of the Company's HiGain product, and to a lesser extent, a 74% and 122% increase in unit sales volume of the Company's PG-2 and Campus products, respectively. These increases were partially offset by declines in the average selling prices of HiGain and Campus products. The decrease in royalty income was primarily due to a reduction in royalty fees generated by Alcatel for the use of the Company's HDSL technology as a result of the renegotiation and termination of its agreement with Alcatel in the fourth quarter of 1995. As part of terminating the agreement, the Company granted royalty-free licenses of current company technology to Alcatel and Alcatel granted a royalty-free license of its network management software to the Company. The agreement also reduced the royalty rate for standalone T1 products which incorporate the Company's HDSL technology being sold by Alcatel. Consequently, technology licensing fees and royalty income will continue to decline in the future. GROSS PROFIT Gross profit represents total revenues for a period, including technology fees and royalty income, less the cost of revenues for such period. Cost of revenues represents primarily product costs, together with associated overhead expenditures. Gross profit increased $9.6 million, or 102%, to $19.0 million for the three months ended March 31, 1996 compared to $9.4 million for the same period in the prior year. This growth in gross profit was principally attributed to the increase in the Company's revenues. As a percentage of revenues, gross profit was 47% for the quarter ended March 31, 1996, compared to 49% in the 1995 quarter. This decrease in gross profit percentage resulted primarily from the declines in average selling prices of HiGain and Campus products. Continuing engineering design 13 14 changes, reduced prices for components from vendors and reduced manufacturing overhead rates partially offset the effects of these declines in average selling prices. The Company expects that increased future competition will continue to place downward pressure on the average sales prices of its existing products. Declining average sales prices may adversely affect gross product margins on the Company's existing products if the Company is unable to fully offset such reductions in average sales prices by reductions in the Company's per unit cost. The Company's ability to mitigate future declines in its gross product margin will depend in part upon its ability to introduce and sell new products with higher gross product margins and further reduce its per unit costs. OPERATING EXPENSES In order to support the growth of its business, the Company significantly expanded its levels of operations in all areas. Accordingly, operating expenses increased $4.5 million, or 86%, for the three months ended March 31, 1996 as compared with the same period in the prior year. Approximately 50% of this increase was due to the addition of personnel. However, as a percentage of revenues, operating expenses decreased to 24% in the 1996 period from 27% in the 1995 quarter. Research and development expense increased $1.7 million, or 91%, to $3.6 million for the three months ended March 31, 1996 compared to $1.9 million in the prior year period. This increase was primarily due to the addition of personnel, depreciation on additions of capital equipment, and prototype expenditures associated with new products. In addition, the 1996 quarter includes expenses related to the Company's Raleigh, North Carolina design center, which was established in the fourth quarter of 1995. Research and development expense as a percentage of revenues was 9% in the 1996 quarter compared to 10% in 1995. The Company plans to continue to expend at least 9% of its revenues on new product development, product enhancements, and continuing efforts toward product cost reductions. Selling and marketing expense increased to $3.7 million in the 1996 quarter compared to $1.9 million in the prior year quarter. Additional sales and marketing support personnel, commissions, advertising, trade show and travel costs primarily accounted for the increase in expenditures. Selling and marketing expense as a percentage of revenues was 9% in the 1996 quarter compared to 10% in 1995. General and administrative expense increased $883,000 to $2.3 million for the quarter ended March 31, 1996 compared to $1.4 million in the same period in the prior year. As a percentage of revenues, general and administrative expense decreased to 6% in the first quarter of 1996 from 7% in 1995. INCOME FROM OPERATIONS As a result of the above, income from operations for the quarter ended March 31, 1996 increased 122% to $9.4 million, compared to $4.2 million for the 1995 quarter. As a percentage of revenues, income from operations was 23% in the 1996 quarter compared to 22% in 1995. 14 15 INTEREST AND OTHER INCOME, NET Net interest income increased to $765,000 for the three months ended March 31, 1996 from $587,000 in the 1995 quarter. This increase resulted primarily from higher average cash levels available for investment. There was no interest expense for the three months ended March 31, 1996. Interest expense for the three months ended March 31, 1995 was $18,000. PROVISION FOR INCOME TAXES The provision for income taxes increased to $3.9 million, for the three months ended March 31, 1996, from $1.8 million for the same period in the prior year. The Company's effective rate increased to 38% in the 1996 quarter from 36% in the 1995 quarter, as tax credits and tax-free interest income represented a smaller proportion of total pre-tax income as a result of the earnings growth. The Company expects to maintain its tax rate at 38% for the remainder of 1996. NET INCOME AND EARNINGS PER SHARE Net income for the three months ended March 31, 1996 was $6.2 million, or $0.35 per share, compared to $3.1 million or $0.20 per share for the 1995 quarter. The weighted average number of common and common equivalent shares outstanding was 17.6 million and 16.1 million for the three months ended March 31, 1996 and 1995, respectively. This increase in common and common equivalent shares was primarily attributable to the issuance of 500,000 shares in the Company's secondary offering in March 1995 which were outstanding for the entire 1996 quarter, the granting of options to key employees of the Company, and the reduction in the number of shares assumed to be repurchased upon the exercise of options and warrants, using the treasury stock method, as a result of the Company's higher stock price in 1996 over 1995. 15 16 LIQUIDITY AND CAPITAL RESOURCES As of March 31, 1996, the Company had $74.1 million in cash, cash equivalents and short-term investments and $96.0 million in working capital. These figures represent an increase of $18.3 million in cash, cash equivalents and short-term investments and $11.2 million in working capital over the amounts at December 31, 1995. These increases are primarily attributable to cash generated from operations (net of capital expenditures) of $9.7 million, the receipt of a Federal income tax refund of $6.9 million and $1.7 million from the exercise of stock options. The increase in the Company's accounts receivable to $14.0 million at March 31, 1996, compared to $13.0 million at December 31, 1995, was primarily reflective of higher revenue levels. The increase in inventory to $25.2 million at March 31, 1996, compared to $22.5 million at December 31, 1995, was due to increased stocking and production levels to support future shipments. The Company has historically maintained relatively high levels of inventory. However, annualized inventory turnover increased to 3.4 times for the quarter ended March 31, 1996, compared to 2.5 times for 1995. Capital expenditures relating primarily to the purchase of computer equipment, machinery and test equipment, and leasehold improvements amounted to $1.0 million for the three months ended March 31, 1996. Capital expenditures in the 1995 quarter aggregated $1.7 million and included $1.0 million for expenditures related to machinery and test equipment and $0.6 million in leasehold improvements related to the Company's Tustin, California, manufacturing, development and administrative facility. The Company was fully relocated into the Tustin facility in the first quarter of 1995. Accounts payable and other current liabilities increased to $21.7 million at March 31, 1996 from $11.4 million at December 31, 1995. This increase consisted of $7.0 million in income tax liabilities and $3.3 million in accrued compensation and other accrued expenses. During the quarter ended March 31, 1996, the Company received a $6.9 million refund of its Federal income taxes paid for the year ended December 31, 1995. This refund arises out of certain deductions the Company claimed in its tax return for the year ended December 31, 1995. Until the Internal Revenue Service audits the Company's 1995 income tax return, the treatment of these deductions is uncertain. The Company believes the ultimate resolution of these uncertainties will not have a material adverse effect on the Company's financial statements. The Company has no material near-term commitments for its funds. The Company believes that the current cash, cash equivalents and short-term investment balances and internally generated cash flow will be sufficient to meet its working capital and capital expenditure requirements through 1996. To the extent that the Company's existing resources, together with future earnings, are insufficient to fund the Company's future activities, the Company may need to raise additional funds through public or private financings. 16 17 PART II. OTHER INFORMATION PAIRGAIN TECHNOLOGIES, INC. Item 1. Legal Proceedings The section titled "Legal Proceedings" appearing in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 28, 1996 is incorporated herein by reference. Item 2. Changes in Securities None. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (A) Exhibits 11.1 Computation of Earnings Per Share 27.1 Financial Data Schedule (B) Reports on Form 8-K None. 17 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PairGain Technologies, Inc. ------------------------------------------ (Registrant) Date: April 26, 1996 /s/ CHARLES W. McBRAYER ------------------------------------------ Charles W. McBrayer Vice President, Finance and Administration Chief Financial Officer (Duly Authorized Officer) Date: April 26, 1996 /s/ ROBERT R. PRICE ----------------------------------------- Robert R. Price Corporate Controller (Chief Accounting Officer) 18 EX-11.1 2 COMPUTATION OF EARNINGS PER SHARE 1 PAIRGAIN TECHNOLOGIES, INC. EXHIBIT 11.1-COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED MARCH 31, -------------------------- 1996 1995 ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) PRIMARY EARNINGS PER SHARE Net income $ 6,250 $ 3,142 ======= ======= Calculation of weighted average number of common and common equivalent shares: Weighted average of actual common shares outstanding 15,372 13,157 Weighted average of common share equivalents: Weighted average warrants outstanding 10 1,255 Weighted average options outstanding 3,252 2,785 Shares assumed to be repurchased using the treasury stock method (683) (864) Shares assumed to be repurchased to reflect the effects of tax benefits (306) (230) ------- ------- Weighted average number of common and common equivalent shares 17,645 16,103 ======= ======= Earnings per share $ 0.35 $ 0.20 ======= =======
THREE MONTHS ENDED MARCH 31, --------------------------- 1996 1995 -------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FULLY DILUTIVE EARNINGS PER SHARE Net income $ 6,250 $ 3,142 ======= ======= Calculation of weighted average number of common and common equivalent shares: Weighted average of actual common shares outstanding 15,372 13,157 Weighted average of common share equivalents: Weighted average warrants outstanding 10 1,255 Weighted average options outstanding 3,252 2,785 Shares assumed to be repurchased using the treasury stock method (579) (707) Shares assumed to be repurchased to reflect the effects of tax benefits (315) (242) ------- ------- Weighted average number of common and common equivalent shares 17,740 16,248 ======= ======= Earnings per share $ 0.35 $ 0.19 ======= =======
EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 OTHER DEC-31-1996 JAN-01-1996 MAR-31-1996 42,776 31,276 13,962 0 25,233 117,660 6,666 0 127,089 21,652 0 0 0 15 105,422 127,089 40,511 40,511 21,472 21,472 9,679 0 0 10,125 3,875 0 0 0 0 6,250 0.35 0.35
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