<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) August 8, 2000
--------------
Turnstone Systems, Inc.
--------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<S> <C> <C>
Delaware 000-28843 77-0473640
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
</TABLE>
2220 Central Expressway, Santa Clara, California 95050
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (408) 907-1400
--------------
--------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
The undersigned Registrant hereby amends the following item of its
Current Report on Form 8-K filed August 11, 2000, for the event of August 8,
2000.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS.
1) Audited financial statements of Paragon Solutions
Limited for the years ended March 31, 2000 and 1999;
2) Notes to Paragon Solutions Limited's Financial
Statements.
3) Audit Report applicable to the year ended 31 March 1999
of Sherwin Chan & Walshe dated 31 August 2000
4) Audit Report applicable to the year ended 31 March 2000
of Sherwin Chan & Walshe dated 31 August 2000
(b) PRO FORMA FINANCIAL INFORMATION.
1) Unaudited Pro Forma Condensed Combined Balance Sheet as
of June 30, 2000;
<PAGE> 2
2) Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1999;
3) Unaudited Pro Forma Condensed Combined Statement of
Operations for the six months ended June 30, 2000;
4) Notes to the Unaudited Pro Forma Condensed Combined
Financial Information.
(c) EXHIBITS.
2.1* Agreement relating to sale and purchase of all the
shares in Paragon Solutions Limited, dated July 19,
2000, among the Registrant, each vendor listed in
Schedule 1 thereto and Graham Parkins, as the vendors'
representative. Except for Schedule 2, annexes and
schedules to this Exhibit have not been filed; upon
request, the Registrant will furnish supplementally to
the Commission a copy of any omitted annex or schedule.
2.2* Deed relating to accession under an agreement for sale
and purchase, dated August 8, 2000, between the
Registrant and Turnstone New Zealand Holdings, a
wholly-owned subsidiary of Registrant, as nominated
transferee.
23.1A Consent of Sherwin Chan & Walshe, Independent Auditors
23.1B Consent of Sherwin Chan & Walshe, Independent Auditors
*Incorporated by reference to Exhibits 2.1 and 2.2 to the Registrant's Form 8-K
filed August 11, 2000.
FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
INTRODUCTION TO FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
The financial statements and other financial information of Turnstone
Systems, Inc. ("Turnstone") are presented in U.S. dollars and have been prepared
in accordance with US generally accepted accounting principles ("US GAAP"). The
financial statements and other financial information of Paragon Solutions
Limited ("Paragon") are presented in New Zealand dollars and have been prepared
in accordance with New Zealand generally accepted accounting principles ("NZ
GAAP"). US GAAP and NZ GAAP differ in certain respects. A description of the
differences between US GAAP and NZ GAAP and a reconciliation of the financial
position, results of operations and cash flows of Paragon to US GAAP are
provided in Note 9 of Notes to Paragon Solutions Limited's Financial Statements.
The financial information of Paragon used in the preparation of the pro forma
information included as Item 7.(b) in this Form 8-K/A complies with US GAAP and
contains translations of New Zealand dollars into US dollars at rates specified
in the Notes to Unaudited Pro Forma Condensed Combined Financial Information.
The translations should not be construed as representations that the New Zealand
dollar amounts represent, or have been or could be converted into US dollars at
that or any other rate.
<PAGE> 3
AUDIT REPORT
To the Readers of the financial statements of Paragon Solutions Limited.
We have audited the attached financial statements. The financial statements
provide information about the past financial performance and financial position
of the Company as at 31 March 1999. This information is stated in accordance
with the accounting policies described in the notes to the financial statements.
DIRECTORS RESPONSIBILITIES
The Directors are responsible for the preparation and presentation of the
financial statements which give a true and fair view of the financial position
of the Company as at 31 March 1999 and of the results of its operations and
cashflows for the year ended on that date.
AUDITORS RESPONSIBILITIES
We are responsible for preparing an independent opinion on the financial
statements presented by the Directors and report our opinion to you.
BASIS OF OPINION
An audit includes examining on a test basis, evidence relevant to the amounts
and disclosures in the financial statements. It also includes assessing:
- the significant estimates and judgements made in the preparation of the
financial statements; and
- whether the accounting policies are appropriate to the Company's
circumstances and have been consistently applied and adequately
disclosed.
We have conducted our audit in accordance with generally accepted auditing
standards in New Zealand that are substantially equivalent to auditing standards
generally accepted in the United States. We planned and performed our audit so
as to obtain all the information and explanations which we considered necessary
in order to provide us with sufficient evidence to give reasonable assurance
that the financial statements are free from material misstatements, whether
caused by fraud or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
We provide taxation consultancy services in addition to acting as auditors for
the Company.
UNQUALIFIED OPINION
We have obtained all the information and explanations we have required.
In our opinion,
- proper accounting records have been kept by the Company as far as
appears from our examination of those records; and
- the financial statements
- comply with generally accepted accounting practice;
- give a true and fair view of the financial position of the
Company as at 31 March 1999 and the results of its operations
and cashflows for the year ended on that date.
Our audit was completed on 27 May 1999 and our unqualified opinion is expressed
as at that date.
Accounting principles generally accepted in New Zealand vary in certain
respects from accounting principles accepted in the United States. Application
of accounting principles generally accepted in the United States would not have
affected the financial position of the Company for the year ended 31 March 1999
and the results of its operations and cash flows for the year ended on that
date.
/s/ Sherwin Chan & Walshe
------------------------
SHERWIN CHAN & WALSHE
LOWER HUTT
31 August 2000
<PAGE> 4
AUDIT REPORT
To the Readers of the financial statements of Paragon Solutions Limited.
We have audited the attached financial statements. The financial statements
provide information about the past financial performance and financial position
of the Company as at 31 March 2000. This information is stated in accordance
with the accounting policies described in the notes to the financial statements.
DIRECTORS RESPONSIBILITIES
The Directors are responsible for the preparation and presentation of the
financial statements which give a true and fair view of the financial position
of the Company as at 31 March 2000 and of the results of its operations and
cashflows for the year ended on that date.
AUDITORS RESPONSIBILITIES
We are responsible for preparing an independent opinion on the financial
statements presented by the Directors and report our opinion to you.
BASIS OF OPINION
An audit includes examining on a test basis, evidence relevant to the amounts
and disclosures in the financial statements. It also includes assessing:
- the significant estimates and judgements made in the preparation of the
financial statements; and
- whether the accounting policies are appropriate to the Company's
circumstances and have been consistently applied and adequately
disclosed.
We have conducted our audit in accordance with generally accepted auditing
standards in New Zealand that are substantially equivalent to auditing standards
generally accepted in the United States. We planned and performed our audit so
as to obtain all the information and explanations which we considered necessary
in order to provide us with sufficient evidence to give reasonable assurance
that the financial statements are free from material misstatements, whether
caused by fraud or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
We provide taxation consultancy services in addition to acting as auditors for
the Company.
UNQUALIFIED OPINION
We have obtained all the information and explanations that we have required.
In our opinion,
- proper accounting records have been kept by the Company as far as
appears from our examination of those records; and
- the financial statements
- comply with generally accepted accounting practice;
- give a true and fair view of the financial position of the
Company as at 31 March 2000 and the results of its operations
and cashflows for the year ended on that date.
Our audit was completed on 14 August 2000 and our unqualified opinion is
expressed as at that date.
Accounting principles generally accepted in New Zealand vary in certain respects
from accounting principles accepted in the United States. Application of
accounting principles generally accepted in the United States would have
affected the financial position of the Company for the year ended 31 March 2000
and the results of its operations and cash flows for the year ended on that date
to the extent summarized in Note 9 to the financial statements.
/s/ Sherwin Chan & Walshe
-------------------------
SHERWIN CHAN & WALSHE
LOWER HUTT
31 August 2000
<PAGE> 5
PARAGON SOLUTIONS LIMITED
COMPANY DIRECTORY
AS AT 31 MARCH 2000
<TABLE>
<S> <C>
PRINCIPAL BUSINESS: Contract Electronic and Software Design and
Development
DIRECTORS: G Parkins
K Gwynn
C Baker
S Harrison
REGISTERED OFFICE: Level 3, 17 Market Grove, Lower Hutt
AUDITORS: Sherwin Chan and Walshe
SOLICITORS: Gillespie Young Watson
BANKERS: National Bank of New Zealand Limited
</TABLE>
<PAGE> 6
STATE OF THE COMPANY'S AFFAIRS
The state of the Company's affairs is as set out in the financial statements and
in particular (in New Zealand dollars):
<TABLE>
<CAPTION>
Year Ended 31 March
2000 1999
------------ ------------
<S> <C> <C>
Retained Profits/(Losses) as at Beginning of Year 124,584.21 (230,354.15)
Dividend Paid 124,362.88 --
------------ ------------
Retained Profits/(Losses) after Dividend Payment 221.33 (230,354.15)
Tax Paid Profit/(Loss) for the year (156,249.90) 355,182.58
------------ ------------
(156,028.57) 124,828.43
Other appropriations
Capital gain on Assets Sales Transferred to Capital -- 244.22
Reserve
Leaving Retained Profits at End of Year of (156,028.57) 124,584.21
Assets totalled at end of year 1,863,269.32 2,193,603.53
These were financed by Shareholders Funds of 1,630,964.36 1,911,577.14
Liabilities of 232,304.96 282,026.39
------------ ------------
1,863,269.32 2,193,603.53
============ ============
</TABLE>
DIVIDEND
The directors recommend that no dividend be declared.
ACCOUNTING POLICIES
There have been no changes in accounting policies during the year.
NATURE OF THE BUSINESS
The business of the company is that of contract electronics and software design
and development.
As required by Section 211 of the Companies Act 1993 we disclose the following
information:
INTERESTS REGISTER
Director's interests: No transactions have occurred in which the directors had
an interest.
Use of company information: The board received no notices during the period from
the directors requesting to use company information received in their capacity
as directors which would not have been otherwise available to them.
Share dealing: The directors, neither acquired nor sold shares during the period
1st April 1999 to 31 March 2000.
<PAGE> 7
DIRECTORS REMUNERATION
Director's remuneration and other benefits paid during the period was as
follows (in New Zealand dollars):
<TABLE>
<CAPTION>
Year Ended 31 March
2000 1999
---------- ----------
<S> <C> <C>
G Parkins 135,984.90 128,652.00
K Gwynn 88,765.53 79,218.00
C Baker 89,683.53 82,818.00
S Harrison 98,376.57 86,397.00
---------- ----------
412,810.53 377,085.00
========== ==========
</TABLE>
Remuneration and other benefits were paid to each director solely as a salaried
employee of the company. No fees were paid to any director for services provided
in their capacity as a director of the company, which was normally carried out
in the time for which they were paid a company employee salary.
AUDITORS REMUNERATION
Amounts received or due and receivable by the auditors are as follows:
<TABLE>
<S> <C>
Audit fees $ 3,690.00
Fees for Other Services $ 798.00
</TABLE>
It is proposed that the company's auditors, Sherwin Chan and Walshe continue in
office for the following year.
DONATIONS
No donations were made by the company during the year.
ON BEHALF OF THE BOARD
/s/ GRAHAM PARKINS /s/ SHANE HARRISON
--------------------------------- ---------------------------------
DIRECTOR DIRECTOR
<PAGE> 8
PARAGON SOLUTIONS LIMITED
TRADING STATEMENT
<TABLE>
<CAPTION>
FOR THE YEARS ENDED 31 MARCH
(in New Zealand dollars)
<S> <C> <C>
INCOME 2000 1999
------ ---- ----
Sales 2,613,471.33 2,955,338.36
LESS COST OF SALES
------------------
Project Costs 1,596,844.97 1,353,294.84
------------ ------------
GROSS PROFIT FROM TRADING 1,016,626.36 1,602,043.52
============ ============
</TABLE>
STATEMENT OF FINANCIAL PERFORMANCE
<TABLE>
<CAPTION>
FOR THE YEARS ENDED 31 MARCH
(in New Zealand dollars)
<S> <C> <C>
2000 1999
---- ----
GROSS INCOME
Gross Profit From Trading 1,016,626.36 1,602,043.52
OTHER INCOME
Work in Progress -- 32,182.15
Trading Stock -- 20,225.11
In-House Development -- 10,013.22
GH Sales 6,110.43 5,649.20
Interest Received 47,928.92 41,885.63
Depreciation Recovered -- 73.61
Other Income 202.44 --
Gain on Sale of Assets -- 244.22
------------ ------------
TOTAL GROSS INCOME 1,070,868.15 1,712,316.66
Less Expenses (refer schedule) 1,227,118.05 1,291,145.63
------------ ------------
NET PROFIT/(LOSS) (156,249.90) 421,171.03
Provision for Tax (Note 4) -- 65,988.45
------------ ------------
TAX PAID PROFIT/(LOSS) for YEAR (156,249.90) 355,182.58
============ ============
</TABLE>
The attached notes form part of these financial statements.
<PAGE> 9
PARAGON SOLUTIONS LIMITED
STATEMENT OF MOVEMENTS IN EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED 31 MARCH
(in New Zealand dollars)
----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPENING BALANCE 1,911,577.14 1,556,394.56
Less Dividend Paid 124,362.88
------------
1,787,214.26
Add Tax Paid Profit/(Loss) For Year (156,249.90) 355,182.58
Total recognised Revenue and Expense for Year (156,249.90) 355,182.58
------------ ------------
CLOSING BALANCE 1,630,964.36 1,911,577.14
============ ============
</TABLE>
SCHEDULE OF EXPENSES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED 31 MARCH
(in New Zealand dollars)
---------------------------------
2000 1999
------------ ------------
<S> <C> <C>
SHORT FORM EXPENSE BREAKDOWN
Audit Fees 3,690.00 3,500.00
Depreciation 239,917.14 261,191.58
Directors Remuneration 412,810.53 377,085.00
Interest Expense 1,159.36 --
Loss on Disposal 4,809.44 180,130.53
Rent 133,280.53 119,821.32
Sales and Marketing 91,656.12 7,827.66
Other Expenses 339,794.93 341,589.54
------------ ------------
1,227,118.05 1,291,145.63
============ ============
</TABLE>
The attached notes form part of these financial statements.
<PAGE> 10
PARAGON SOLUTIONS LIMITED
STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
AS AT 31 MARCH
(in New Zealand dollars)
----------------------------------
2000 1999
------------- -------------
<S> <C> <C>
CURRENT ASSETS
National Bank On Call Account 110,097.99 195,409.27
Term Deposit 500,000.00 800,000.00
Petty Cash 250.00 250.00
Accounts Receivable 772,728.66 410,355.71
Income Tax Refund Due 34,576.17 47,809.57
Work in Progress -- 32,182.15
Project Stock on Hand 20,225.11 20,225.11
Prepayments 18,550.53 80,278.52
Accrued Interest 3,960.73 5,712.03
Retained Overseas Currency 933.00 1,520.53
------------ ------------
1,461,322.19 1,593,742.89
FIXED ASSETS (Note 2) 401,947.13 599,860.64
------------ ------------
1,863,269.32 2,193,603.53
============ ============
CURRENT LIABILITIES
National Bank Cheque Account 1,156.12 143.77
Accounts Payable 225,422.01 233,924.87
GST Net Liability 5,726.83 47,957.75
------------ ------------
232,304.96 282,026.39
------------ ------------
EQUITY
Share Capital 1,755,000.00 1,755,000.00
Capital Reserve 31,992.93 31,992.93
------------ ------------
1,786,992.93 1,786,992.93
Retained Profit/(Losses) (156,028.57) 124,584.21
------------ ------------
TOTAL EQUITY 1,630,964.36 1,911,577.14
------------ ------------
1,863,269.32 2,193,603.53
============ ============
</TABLE>
/s/ GRAHAM PARKINS /s/ SHANE HARRISON
--------------------------------- ---------------------------------
DIRECTOR DIRECTOR
The attached notes form part of these financial statements.
<PAGE> 11
PARAGON SOLUTIONS LIMITED
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED 31 MARCH
(in New Zealand dollars)
---------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash was provided from:
Sales 2,243,338.39 2,754,150.42
Tax Refund & Interest Received (excluding RWT) 47,168.07 38,795.47
Other Income 6,312.87 5,649.20
Sale of Work in Progress 32,182.15 --
Prepayments 61,727.99 --
------------ ------------
2,390,729.47 2,798,595.09
Cash was applied to:
Operating Expenses 2,622,210.23 2,100,591.26
Provisional Tax Paid (15,745.55) 100,000.00
------------ ------------
2,606,464.68 2,200,591.26
Net Cash Inflow (Outflow) from Operating (215,735.21) 598,003.83
Activities
CASH FLOWS FROM INVESTING ACTIVITIES
Cash was provided from:
Sale of Fixed Assets -- 3,894.22
Cash was applied to:
Purchase of Fixed assets 46,813.07 178,478.62
Net Cash Inflow (Outflow) from Investing (46,813.07) (174,584.40)
Activities
CASH FLOWS FROM FINANCING ACTIVITIES
Dividend Payment (124,362.88) --
Net Cash Inflow (Outflow) from Financing (124,362.88) --
Activities
Net Increase (Decrease) in Cash Held (386,911.16) 423,419.43
Add Cash at Start of Year 997,036.03 573,616.60
------------ ------------
Cash at End of Year 610,124.87 997,036.03
============ ============
This is comprised of the following:
NBNZ Cheque Account (1,156.12) (143.77)
NBNZ On Call Account 110,097.99 195,409.27
Term Deposit 500,000.00 800,000.00
Petty Cash 250.00 250.00
Retained Overseas Currency 933.00 1,520.53
------------ ------------
610,124.87 997,036.03
============ ============
</TABLE>
The attached notes form part of these financial statements.
<PAGE> 12
PARAGON SOLUTIONS LIMITED
RECONCILIATION OF NET PROFIT/(LOSS) TO NET
CASH FLOWS FROM OPERATING ACTIVITIES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED 31 MARCH
(in New Zealand dollars)
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net Profit/(Loss) After Tax (156,249.90) 355,182.58
Non Cash Revenue Items:
Depreciation Recovered -- (73.61)
In-House Development -- (10,013.22)
Non Cash Expenditure Items:
Depreciation 239,917.14 261,191.58
----------- -----------
83,667.24 606,287.33
Add (Increase)/Decrease in Current Assets:
Prepayments 61,727.99 (5,702.54)
Accrued Interest 1,751.30 (51.80)
Accounts Receivable (362,372.95) (217,648.21)
Stock and Work in Progress 32,182.15 (52,407.26)
Income Tax Refund 13,233.40 (37,049.91)
----------- -----------
(253,478.11) (312,859.72)
Add Increase/(Decrease) in Current
Liabilities
Accounts Payable (8,502.86) 75,794.84
GST (42,230.92) 48,895.07
----------- -----------
(50,733.78) 124,689.91
Less Gain on Disposal of Fixed Assets -- (244.22)
Add Loss on Disposal of Fixed Assets 4,809.44 180,130.53
----------- -----------
Net Cashflow from Operating Activities (215,735.21) 598,003.83
=========== ===========
</TABLE>
The attached notes form part of these financial statements.
<PAGE> 13
PARAGON SOLUTIONS LIMITED
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 MARCH 2000 AND 1999
(in New Zealand dollars)
1) STATEMENT OF ACCOUNTING POLICIES
REPORTING ENTITY
Paragon Solutions Limited is a company registered under the Companies Act 1993.
Paragon Solutions Limited is a reporting entity for the purposes of the
Financial Reporting Act 1993. The financial statements are presented in
accordance with the Companies Act 1993 and have been prepared in accordance with
the requirements of the Financial Reporting Act 1993 and generally accepted
accounting principles in New Zealand.
MEASUREMENT BASE
The general accounting policies recognised as appropriate for the measurement
and reporting of results, cashflows, and financial position have been followed
in the preparation of these financial statements. The historical cost method has
been followed.
PARTICULAR ACCOUNTING POLICIES
The particular accounting policies which materially affect the measurement of
results, cashflows and financial position have been applied as follows:-
ACCOUNTS RECEIVABLE
Accounts Receivable are stated at the expected realisable value.
FIXED ASSETS
Fixed Assets are stated at cost less accumulated depreciation. Depreciation is
provided using the following rates:
<TABLE>
<CAPTION>
DESCRIPTION DEPRECIATION RATE
<S> <C> <C>
Software 40% DV
PCB Design 30% to 36% SL
Test Equipment 8% to 24% SL
PBX Sopho-S 18% to 22% SL
Office 18.6% to 36% SL
Furniture and Chattels 6.5% to 40% SL
Computer Equipment 18% to 40% SL
Books 9.5% DV
Specifications 18% DV
Custom Tools 36% SL
</TABLE>
OPERATING LEASES
Operating lease payments have been included as an expense in the Statement of
Financial Performance in the year in which they have been incurred.
REVENUE RECOGNITION
The Company recognizes revenue from services using the percentage-of-completion
method based on hours incurred.
GOODS AND SERVICES TAX
The statement of financial performance has been prepared so that all components
are stated exclusive of GST. All items in the statement of financial position
are stated net of GST, with the exception of receivables and payables, which
include GST invoiced.
TAXATION
The Company adopts the liability method of tax-effect accounting whereby the
Income Tax expense shown in the statement of financial performance is based on
the profit before tax adjusted for any permanent differences.
<PAGE> 14
PARAGON SOLUTIONS LIMITED
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 MARCH 2000 AND 1999
(in New Zealand dollars)
FOREIGN CURRENCIES
Transactions in foreign currencies are converted at the New Zealand rate of
exchange ruling at the date of the transaction. Foreign monetary assets and
liabilities are translated into New Zealand dollars at the exchange rate ruling
at balance date. Exchange variations arising from these translations are
included in the statement of financial performance.
STATEMENT OF CASH FLOWS
The following are the definitions of the terms used in the Statement of Cash
Flows:
a) Cash is considered to be cash on hand and current accounts in banks, net
of bank overdrafts.
b) Investing activities are those activities relating to the acquisition,
holding and disposal of fixed assets and of investments. Investments can
include securities not falling due within the definition of cash.
c) Financing activities are those activities which result in changes in the
size and composition of the capital structure of the company. This
includes both equity and debt not falling within the definition of cash.
d) Operating activities include all transactions and other events that are
not investing or financing activities.
CHANGES IN ACCOUNTING PRACTICES
There have been no changes in accounting policies. All policies have been
applied on bases consistent with those used during the year.
<PAGE> 15
PARAGON SOLUTIONS LIMITED
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 MARCH 2000 AND 1999
(in New Zealand dollars)
2) FIXED ASSETS
DEPRECIATION SCHEDULE FOR THE YEAR ENDED 31 MARCH 1999
<TABLE>
<CAPTION>
ACCUMULATED CLOSING
DESCRIPTION COST DEPRECIATION VALUE
<S> <C> <C> <C>
PBX Sopho-S 119,747.49 61,010.10 58,737.28
Software 104,824.94 38,722.45 66,102.49
PCB Design 279,584.35 233,246.34 46,338.00
Test Equipment 351,657.01 147,587.39 204,069.60
Office 18,720.00 13,821.05 4,898.95
Furniture and Chattels 95,200.00 29,249.32 65,950.69
Computing 249,356.68 120,440.35 128,916.33
Books 4,200.00 923.49 3,276.51
Standards 28,000.00 12,838.67 15,161.33
Custom Tools 10,013.22 3,604.76 6,408.46
Goodwill 1.00 -- 1.00
------------ ------------ ------------
1,261,304.69 661,443.92 599,860.64
------------ ------------ ------------
</TABLE>
DEPRECIATION SCHEDULE FOR THE YEAR ENDED 31 MARCH 2000
<TABLE>
<CAPTION>
ACCUMULATED CLOSING
DESCRIPTION COST DEPRECIATION VALUE
<S> <C> <C> <C>
PBX Sopho-S 113,023.24 77,935.74 35,087.51
Software 121,822.20 68,562.90 53,259.30
PCB Design 285,635.96 277,590.36 8,045.60
Test Equipment 352,262.12 202,842.12 149,419.98
Office 18,720.00 17,629.25 1,090.75
Furniture and Chattels 95,200.00 37,135.60 58,064.41
Computing 260,369.01 182,862.54 77,506.47
Books 4,401.61 1,244.34 3,157.27
Standards 29,893.60 16,382.46 13,511.14
Custom Tools 10,013.22 7,209.52 2,803.70
Goodwill 1.00 -- 1.00
------------ ------------ ------------
1,291,341.96 889,394.83 401,947.13
------------ ------------ ------------
</TABLE>
3) NATURE OF THE BUSINESS
The principal activity of the business, which commenced trading on 1 April 1996
is contract electronics and software design and development.
<PAGE> 16
PARAGON SOLUTIONS LIMITED
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 MARCH 2000 AND 1999
(in New Zealand dollars)
4) TAX RECONCILIATION
<TABLE>
<CAPTION>
Year ended Year ended
31 March 2000 31 March 1999
<S> <C> <C>
Net Profit as per Financial Statements (156,249.90) 421,171.03
Add: Non Deductible Entertainment 1,576.96 1,245.61
Holiday Pay Accrual This Year 92,871.46 79,897.05
ACC Accrual This Year 4,719.76 14,562.03
Less: Capital Gain on Asset Sales -- (244.22)
Holiday Pay Accrual Last Year (79,897.05) (88,896.88)
ACC Accrual Last Year (14,562.03) (16,381.51)
Unrealised Foreign Exchange Gain (44.46) --
---------- ----------
Taxable Income/(Loss) (151,585.26) 411,353.11
Losses Brought Forward -- 211,388.00
---------- ----------
Taxable Income/(Losses available to Carry Forward) (151,585.26) 199,965.00
Tax @ 33% -- 65,988.45
Resident Withholding Tax Paid 16,310.17 13,798.02
Provisional Tax Paid 18,266.00 100,000.00
---------- ----------
Tax to pay/(to be refunded) (34,576.17) (47,809.57)
========== ==========
</TABLE>
Subject to Inland Revenue Department confirmation, losses of $151,585.26 are
available to carry forward.
5) IMPUTATION CREDIT ACCOUNT
<TABLE>
<CAPTION>
Year ended Year ended
31 March 2000 31 March 1999
<S> <C> <C>
Balance as at 1 April 1999 159,790.06 56,751.70
Tax Refunded (29,543.57) (10,759.66)
Add Resident Withholding Tax on Interest Paid 16,310.17 13,798.02
Add Tax Paid -- 100,000.00
Less Credits Distributed (61,253.37) --
---------- ----------
Balance as at 31 March 2000 85,303.29 159,790.06
---------- ----------
</TABLE>
6) EVENTS SUBSEQUENT TO BALANCE DATE
There have been no matters since the end of the financial year not otherwise
dealt with within these financial statements that have significantly or may
significantly affect the operations of the company.
7) CONTINGENT LIABILITIES
There are no contingent liabilities at year end (1999 nil). Paragon Solutions
Limited has not granted any securities nor given any guarantees in respect of
liabilities payable by it or any other party.
8) OPERATING LEASE COMMITMENTS
The company has made a commitment with Brian Green Corporation Ltd to lease the
premises at Level 3, Telecom House, Lower Hutt. The lease expires on 15th July
2002 and the annual rent is $ 127,500.00.
<PAGE> 17
PARAGON SOLUTIONS LIMITED
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 MARCH 2000 AND 1999
(in New Zealand dollars)
9) RECONCILIATION TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED
STATES
Under generally accepted accounting principles in the United States, the Company
would use the asset and liability method of accounting for income taxes. The
asset and liability method has not been applied to the financial statements
under generally accepted accounting principles of New Zealand. Under the asset
and liability method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in the tax rates is recognized as income in
the period that includes the enactment date.
Applying the asset and liability method would result in the recording of a
deferred tax asset of approximately $82,000 for the year ended March 31, 2000
representing the tax benefit of operating loss carryforwards. Because the
Company is in a loss position, and future profits are uncertain, management
would establish a valuation allowance to offset the deferred tax asset. This
would result in a presentational adjustment, with no impact on the financial
position of the Company as of March 31, 2000 or the results of operations and
cash flows for the year ended on that date.
No other material effects on the financial position of the Company as of March
31, 2000 and 1999 and the results of operations and cash flows for the years
then ended would result from the application of accounting principles generally
accepted in the United States.
<PAGE> 18
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial
information gives effect to the acquisition of Paragon by Turnstone. The
acquisition will be accounted for under the purchase method of accounting in
accordance with Accounting Principles Board Opinion No. 16. Under the purchase
method of accounting, the purchase price is allocated to the assets acquired and
liabilities assumed based on their estimated fair values. Estimates of the fair
values of the assets and liabilities of Paragon have been combined with the
recorded values of the assets and liabilities of Turnstone in the unaudited pro
forma condensed combined financial information.
The unaudited pro forma condensed combined balance sheet as of June 30,
2000 gives pro forma effect to the acquisition as if it occurred on June 30,
2000. The Turnstone balance sheet information was derived from its unaudited
June 30, 2000 balance sheet. The Paragon balance sheet information was derived
from their audited March 31, 2000 balance sheet. The unaudited pro forma
condensed combined statements of operations give pro forma effect to the
acquisition as if the transaction was consummated as of January 1, 1999. The
unaudited pro forma condensed combined statements of operations for the year
ended December 31, 1999 combine Turnstone's historical results for the year
ended December 31, 1999 with the results for Paragon for the year ended March
31, 2000. The unaudited pro forma condensed combined statements of operations
for the six months ended June 30, 2000 combine Turnstone's historical results
for the six months ended June 30, 2000 with the results for Paragon for the six
months ended March 31, 2000. Results of operations for Paragon for the six
months ended March 31, 2000 are therefore included in both the pro forma
condensed combined statements of operations for the year ended December 31, 1999
and the six months ended June 30, 2000. The statements of operations of Paragon
have been translated from New Zealand dollars to US dollars at the weighted
average exchange rates for the year and six months ended March 31, 2000 and at
the March 31, 2000 exchange rate for the balance sheet amounts.
The unaudited pro forma condensed combined financial information is not
necessarily indicative of the condensed combined financial position or results
of operations in future periods or the results that actually would have been
realized had Turnstone and Paragon been a combined company during the specified
periods. The unaudited pro forma condensed combined financial information,
including the notes thereto, is qualified in their entirety by reference to, and
should be read in conjunction with, the historical financial statements of
Turnstone included in its Form S-1 and Forms 10-Q filed January 31, 2000, May 8,
2000 and August 7, 2000, respectively, with the Securities and Exchange
Commission, and the historical financial statements of Paragon included in this
Form 8-K/A.
<PAGE> 19
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------
TURNSTONE PARAGON PRO FORMA PRO FORMA
SYSTEMS, INC. SOLUTIONS LTD. ADJUSTMENTS COMBINED
------------- -------------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 55,254 $ 305 (5,000)(a) $ 50,559
Short-term investments 49,509 -- 49,509
Accounts receivable, net 20,186 387 (43)(b),(e) 20,530
Inventory 9,665 10 9,675
Prepaid expenses and other current
assets 4,163 29 4,192
--------- --------- ---------
Total current assets 138,777 731 134,465
Property and equipment, net 2,256 201 (101)(b) 2,356
Restricted cash 3,639 -- 3,639
Intangible assets -- -- 6,592(a) 6,592
Other assets 207 -- 207
--------- --------- ---------
Total assets 144,879 932 147,259
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current obligations under capital
leases 221 -- 221
Accounts payable 10,352 113 (19)(e) 10,446
Accrued compensation and benefits 2,637 -- 2,637
Income tax payable 2,610 -- 2,610
Customer deposits 905 -- 905
Other current liabilities and
accrued expenses 2,422 3 2,425
Deferred revenue 3,770 -- 3,770
--------- --------- ---------
Total current liabilities 22,917 116 23,014
Long-term obligations under capital
leases, net of current portion 125 -- 125
Other long-term liabilities 35 -- 2,283(a) 2,318
--------- --------- ---------
Total liabilities 23,077 116 25,457
========= ========= =========
Stockholders' equity:
Convertible preferred stock -- -- --
Common stock, $.001 stated value,
200,000 shares authorized; 60,752
shares issued and outstanding at
June 30, 2000 60 878 (878)(c) 60
Additional paid-in capital 123,363 -- 123,363
Deferred stock compensation (10,246) -- (10,246)
Accumulated other comprehensive loss (31) -- (31)
Retained earnings (accumulated
deficit) 8,656 (62) 62(c) 8,656
--------- --------- ---------
Total stockholders' equity 121,802 816 121,802
--------- --------- ---------
Total liabilities and stockholders' equity $ 144,879 $ 932 $ 147,259
========= ========= =========
</TABLE>
See accompanying notes to unaudited pro forma
condensed combined financial information.
<PAGE> 20
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------
TURNSTONE PARAGON PRO FORMA PRO FORMA
SYSTEMS, INC. SOLUTIONS, LTD. ADJUSTMENTS COMBINED
------------- --------------- ----------- --------
<S> <C> <C> <C> <C>
Net revenues $ 27,196 $ 1,357 (124)(e) $ 28,429
Cost of revenues 12,359 829 13,188
-------- -------- --------
Gross profit 14,837 528 15,241
Operating expenses:
Research and development 5,731 -- 5,731
Sales and marketing 3,912 48 3,960
General and administrative 1,559 586 2,145
Amortization of intangible assets -- -- 1,648(a) 1,648
Amortization of deferred stock compensation 3,584 -- 3,584
-------- -------- --------
Total operating expenses 14,786 634 17,068
--
Operating income (loss) 51 (106) (1,827)
Interest income (expense) and other, net 180 25 (217)(a) (12)
-------- -------- --------
Income (loss) before income tax 231 (81) (1,839)
Income tax expense 463 -- (463)(d) --
-------- -------- --------
Net loss $ (232) $ (81) $ (1,839)
======== ======== ========
Basic net loss per share of common stock $ (0.03) $ (0.22)
Diluted net loss per share of common stock $ (0.03) $ (0.22)
Weighted-average shares outstanding used in
computing basic net loss per share of common stock 8,474 8,474
Weighted-average shares outstanding used in
computing diluted net loss per share of common stock 8,474 8,474
</TABLE>
See accompanying notes to unaudited pro forma
condensed combined financial information.
<PAGE> 21
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------
TURNSTONE PARAGON PRO PRO
SYSTEMS, SOLUTIONS, FORMA FORMA
INC. LTD. ADJUSTMENTS COMBINED
------- --------- ----------- --------
<S> <C> <C> <C> <C>
Net revenues $64,160 $ 785 (124)(e) $64,821
Cost of revenues 25,832 419 26,251
------- ------- -------
Gross profit 38,328 366 38,570
Operating expenses:
Research and development 6,350 -- 6,350
Sales and marketing 5,713 24 5,737
General and administrative 1,896 286 2,182
Amortization of intangible assets -- -- 824(a) 824
Amortization of deferred stock compensation 3,814 -- 3,814
------- ------- -------
Total operating expenses 17,773 310 18,907
Operating income 20,555 56 19,663
Interest income (expense) and other, net 2,393 13 2,406
------- ------- -------
Income before income tax 22,948 69 22,069
Income tax expense 9,311 -- (379)(d) 8,932
------- ------- -------
Net income $13,637 $ 69 $13,137
======= ======= =======
Basic net earnings per share of common stock $ 0.31 $ 0.30
Diluted net earnings per share of common stock $ 0.21 $ 0.20
Weighted-average shares outstanding used in
computing basic net earnings per share of common stock 44,108 44,108
Weighted-average shares outstanding used in
computing diluted net earnings per share of common stock 64,234 64,234
</TABLE>
See accompanying notes to unaudited pro forma
condensed combined financial information.
<PAGE> 22
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
BACKGROUND
Turnstone acquired all of the outstanding shares of Paragon on August 8,
2000 for a total maximum cash purchase price of $10 million. The purchase price
is payable in two installments. The initial payment of $5 million was paid in
cash upon the effective date of the acquisition. The second installment will be
payable in cash upon the first anniversary of the effective date of the
acquisition. The second installment will be a minimum of $2.5 million and, if
not more than 4 of 30 former Paragon employees, specified in the purchase
agreement, terminate employment with Turnstone prior to August 9, 2001, will be
$5 million in cash.
The acquisition was accounted for under the purchase method of
accounting in accordance with APB Opinion No. 16. Under the purchase method of
accounting, the purchase price is allocated to the assets acquired and
liabilities assumed based on their estimated fair values. Management's best
estimates of the fair values of the assets and liabilities of Paragon have been
combined with the recorded values of the assets and liabilities of Turnstone in
the unaudited pro forma condensed combined financial information.
In July 2000, the Board of Directors of Turnstone authorized a
two-for-one stock split of the Company's common stock, paid on or about August
23, 2000 in the form of a stock dividend by distribution to each stockholder of
record as of the close of business on August 9, 2000 of one share of the
Company's common stock for each share of common stock held. All of the pro forma
condensed combined financial information presented herein have been adjusted to
give effect to the stock split.
CONFORMING AND RECLASSIFICATION ADJUSTMENTS
Paragon's balance sheet information as of June 30, 2000 has been
translated into U.S. Dollars using the exchange rate at June 30, 2000. Paragon's
statements of operations for the six months ended June 30, 2000 and the year
ended December 31, 1999 have been translated into U.S. Dollars using the
respective weighted average exchange rates for the periods presented. The rates
used for translations are based on the Interbank rates as determined by the
Federal Reserve Bank of New York.
The financial statements of Paragon used in the preparation of the
unaudited pro forma condensed combined financial information were prepared in
accordance with NZ GAAP. There were no adjustments to the financial statements
of Paragon to conform to US GAAP. A description of the differences between US
GAAP and NZ GAAP for the periods presented are provided in Note 9 of Notes to
Financial Statements of Paragon Solutions Limited. Certain amounts have been
reclassified to conform to Turnstone's financial statement presentation.
PRO FORMA ADJUSTMENTS
(a) To reflect the payment of $5 million of the purchase price in cash in
connection with the Paragon acquisition, a liability in connection with
the minimum amount of the second installment of the purchase price to be
paid on the first anniversary of the closing and the allocation of the
excess of the purchase price over the fair values of the tangible assets
and liabilities acquired to intangible assets comprised of assembled
workforce and goodwill. For purposes of this allocation, the purchase
price is based on the first installment of $5 million and the minimum
$2.5 million payment amount of the second installment. The minimum
amount of the second installment is valued at approximately $2,283,000
based on the present value computed at an average annual return of 9.5%,
and is included in the pro forma adjustment to other long-term
liabilities, resulting in interest expense during the first year after
the close of the acquisition of $217,000. The purchase price will be
adjusted if the payment of the maximum amount of the second installment
is made pursuant to certain contract conditions having been met. The
purchase price allocation is based on management's
<PAGE> 23
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
estimates of the fair values of the tangible assets and liabilities.
After allocating a portion of the purchase price to tangible assets and
liabilities, $1,160,000 was allocated to assembled workforce and
$5,432,000 was allocated to goodwill.
The assembled workforce and goodwill will be amortized on a
straight-line basis over four years, resulting in total amortization
expense for assembled workforce and goodwill of $1,648,000 per year.
The allocation of the purchase price is as follows (in thousands):
<TABLE>
<S> <C>
Property and equipment $ 100
Accounts receivable, net 363
Net tangible assets acquired, excluding property
and equipment and accounts receivable 228
Assembled workforce 1,160
Goodwill 5,432
------
Total $7,283
======
</TABLE>
If the maximum amount of the second installment payment is made on the
first anniversary of the consummation of the transaction and is added to
the purchase price, the pro forma adjustment at that time would be to
increase intangible assets by $2,500,000. Amortization of this
additional purchase consideration would commence at that time on a
straight-line basis over the remainder of the initial four year period.
The pro forma amortization of intangible assets for the year ended
December 31, 1999 and the six months ended June 30, 2000 would remain
unchanged.
(b) To reflect adjustments to fair values of tangible assets acquired from
Paragon.
(c) To reflect the elimination of stockholders' equity balances of Paragon.
(d) To reflect the tax effect of pro forma adjustments.
(e) To eliminate intercompany transactions between Turnstone and Paragon.
<PAGE> 24
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 hereunto duly authorized.
TURNSTONE SYSTEMS, INC.
DATE: September 1, 2000 By: /s/ Richard N. Tinsley
---------------------------------
Richard N. Tinsley
President and Chief Executive
Officer
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
2.1* Agreement relating to sale and purchase of
all the shares in Paragon Solutions Limited,
dated July 19, 2000, among the Registrant,
each vendor listed in Schedule 1 thereto and
Graham Parkins, as the vendors'
representative. Except for Schedule 2,
annexes and schedules to this Exhibit have
not been filed; upon request, the Registrant
will furnish supplementally to the Commission
a copy of any omitted annex or schedule.
2.2* Deed relating to accession under an agreement
for sale and purchase, dated August 8, 2000,
between the Registrant and Turnstone New
Zealand Holdings, a wholly-owned subsidiary
of Registrant, as nominated transferee.
23.1A Consent of Sherwin Chan & Walshe, Independent Auditors
23.1B Consent of Sherwin Chan & Walshe, Independent Auditors
</TABLE>
*Incorporated by reference to Exhibits 2.1 and 2.2 to the Registrant's Form 8-K
filed August 11, 2000.
