<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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) FEBRUARY 27, 1997
----------------------------
PAIRGAIN TECHNOLOGIES, INC.
(Exact name of registrant as specified in charter)
<TABLE>
DELAWARE 0-22202 33-0282809
<S> <C> <C>
(State or other jurisdiction of incorporation) (Commission File Number) (IRS Employer Identification No.)
</TABLE>
14402 FRANKLIN AVENUE, TUSTIN, CA 92780
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 832-9922
NOT APPLICABLE
(Former name or former address, if changed since last report.)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
(a) On February 27, 1997, PairGain Technologies, Inc. ("PairGain")
acquired all the outstanding shares of Avidia Systems, Inc., a Delaware
corporation ("Avidia"), pursuant to an Agreement and Plan of
Reorganization (the "Merger Agreement") among Avidia, PairGain and
Abalone Corporation ("Sub"), a Delaware corporation and wholly-owned
subsidiary of PairGain, and a related Certificate of Merger. Pursuant
to the Merger Agreement and the Certificate of Merger, Sub was merged
with and into Avidia, with Avidia surviving as a wholly-owned
subsidiary of PairGain (the "Merger"). The Avidia Common Stock,
Preferred Stock and warrants to purchase Avidia Common Stock and
Preferred Stock were converted into the right to receive approximately
2,366,865 shares of PairGain Common Stock. In addition, PairGain
assumed outstanding options to purchase Avidia Common Stock and
converted those options into options to purchase approximately 232,521
shares of PairGain Common Stock. The terms of the Merger Agreement
were the result of arm's-length negotiations among the parties.
PairGain intends to account for the Merger as a pooling-of-interests.
A Form 8-K was filed on March 5, 1997 reporting this
transaction. This amended Current Report is being filed to submit
financial statements of the business acquired and pro forma combined
financial information as required pursuant to Item 7.
2
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired
Financial statements of Avidia prepared in accordance with
Regulation S-X and required to be filed pursuant to this Item are
attached herewith as Exhibit 99.3. An accountants' report is also
provided pursuant to Rule 2-02 of Regulation S-X. The accountants'
consent related to the audited financial statements of Avidia required
to be filed pursuant to this Item is filed herewith as Exhibit 23.
(b) Pro Forma Combined Financial Information
The unaudited pro forma condensed combined financial
statements prepared in accordance with Regulation S-X and required to
be filed pursuant to this Item, including the notes thereto, are
qualified in their entirety by reference to, and should be read in
conjunction with, the historical consolidated financial statements of
PairGain, including the notes thereto, incorporated herein by
reference, and the historical financial statements of Avidia filed
herewith. The unaudited pro forma condensed combined financial
statements are attached herewith in Exhibit 99.4.
The unaudited pro forma condensed combined financial
statements assume a business combination between PairGain and Avidia
accounted for on a pooling-of-interests basis and are based on each
company's respective historical financial statements and notes
thereto. The pro forma condensed combined balance sheet combines
PairGain's consolidated balance sheet as of December 31, 1996 with
Avidia's balance sheet as of December 31, 1996, giving effect to the
Acquisition as of December 31, 1996. The pro forma condensed combined
statements of income combine PairGain's historical results for the
year ended December 31, 1996 with Avidia's historical results for the
year ended December 31, 1996, giving effect to the Acquisition as if
it had occurred at the beginning of the period presented.
Avidia was formed in December 1995 and had no significant
transactions prior to January 1, 1996. Accordingly, pro forma
condensed combined financial statements prior to 1996 have not been
provided as these would reflect only the historical results of
operations and financial position of PairGain as previously filed.
The pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the operating
results or the financial position that would have occurred if the
Acquisition had been consummated at the beginning of the period
presented, nor is it necessarily indicative of future operating
results or financial position.
3
<PAGE> 4
(c) Exhibits
2* Agreement and Plan of Reorganization, dated February 19, 1997,
by and among PairGain Technologies, Inc., Abalone Corporation
and Avidia Systems, Inc. and certain exhibits.
99.1* Text of Press Release dated February 20, 1997.
99.2* Text of Press Release dated March 4, 1997.
99.3 Audited Financial Statements of Avidia Systems, Inc. as of and
for the Year Ended December 31, 1996 and Independent Auditors'
Report.
99.4 Unaudited Pro Forma Condensed Combined Financial Information
of PairGain Technologies, Inc. and Avidia Systems, Inc. as of
and for the Year Ended December 31, 1996.
- ------------------
* Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on March 5, 1997.
4
<PAGE> 5
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.
Date: April 25, 1997 PAIRGAIN TECHNOLOGIES, INC.
\S\ CHARLES W. MCBRAYER
-----------------------------------------
Charles W. McBrayer
Vice President, Finance and Administration
Chief Financial Officer
5
<PAGE> 6
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
- ------- ----------------------------------------------------------------------------------------------------------------
<S> <C>
2* Agreement and Plan of Reorganization, dated February 19, 1997, by and among PairGain Technologies, Inc., Abalone
Corporation and Avidia Systems, Inc. and certain exhibits.
99.1* Text of Press Release dated February 20, 1997.
99.2* Text of Press Release dated March 4, 1997.
99.3 Audited Financial Statements of Avidia Systems, Inc., as of and for the Year Ended December 31, 1996 and Independent
Auditors' Report.
99.4 Unaudited Pro Forma Condensed Combined Financial Information of PairGain Technologies, Inc. and Avidia Systems, Inc.
as of and for the Year Ended December 31, 1996.
_______________
* Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on March 5, 1997.
</TABLE>
6
<PAGE> 1
EXHIBIT 99.3
---------------------------------------
AVIDIA SYSTEMS, INC.
Financial Statements for the
Year Ended December 31, 1996 and
Independent Auditors' Report
<PAGE> 2
AVIDIA SYSTEMS, INC.
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996:
Balance Sheet 2
Statement of Operations 3
Statement of Stockholders' Deficiency and
Redeemable Convertible Preferred Stock 4
Statement of Cash Flows 5
Notes to Financial Statements 6-12
<PAGE> 3
INDEPENDENT AUDITORS' REPORT
Avidia Systems, Inc.
We have audited the accompanying balance sheet of Avidia Systems, Inc. (the
"Company") as of December 31, 1996, and the related statements of operations,
stockholders' deficiency and redeemable convertible preferred stock, and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Avidia Systems, Inc. at December 31, 1996
and the results of its operations, and its cash flows for the year then ended,
in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Hartford, Connecticut
February 19, 1997 (February 27, 1997
as to Note 10)
1
<PAGE> 4
AVIDIA SYSTEMS, INC.
<TABLE>
<CAPTION>
BALANCE SHEET
DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (including $115,125 of restricted cash) $ 1,576,055
Accounts receivable - trade (net of allowance for doubtful accounts of $35,000) 14,920
Inventories (Note 3) 138,780
Prepaid and other expenses 16,325
------------
Total current assets 1,746,080
PROPERTY AND EQUIPMENT - Net (Note 4) 94,722
SOFTWARE LICENSING AGREEMENT - Net (Note 2) 147,028
------------
TOTAL ASSETS $ 1,987,830
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable $ 379,260
Accrued compensation and related expenses 70,117
Accrued expenses (Note 5) 151,867
Notes payable - founders (Note 6) 18,500
------------
Total current liabilities 619,744
REDEEMABLE CONVERTIBLE PREFERRED STOCK (Note 6) 2,617,725
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' DEFICIENCY:
Common stock: $.001 par value; authorized 7,550,000 shares; issued and outstanding,
3,000,000 shares 3,000
Convertible Preferred stock: $.001 par value; authorized, issued and outstanding
266,666 shares 267
Additional paid-in capital 679,566
Accumulated deficit (1,695,091)
Deferred compensation (237,381)
------------
Total stockholders' deficiency (1,249,639)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 1,987,830
============
</TABLE>
See notes to financial statements.
2
<PAGE> 5
AVIDIA SYSTEMS, INC.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------------------------------
<S> <C>
NET SALES $ 95,525
COST OF SALES 68,707
------------
GROSS PROFIT 26,818
------------
OPERATING EXPENSES:
Research and development 918,961
Sales and marketing 366,930
General and administrative 457,384
------------
Total operating expenses 1,743,275
------------
LOSS FROM OPERATIONS (1,716,457)
------------
INTEREST INCOME - Net 21,616
------------
LOSS BEFORE INCOME TAXES (1,694,841)
------------
PROVISION FOR INCOME TAXES (Note 8) 250
------------
NET LOSS $ (1,695,091)
------------
</TABLE>
See notes to financial statements.
3
<PAGE> 6
AVIDIA SYSTEMS, INC.
- ------------------------------------------------------------------------------
STATEMENT OF STOCKHOLDERS' DEFICIENCY AND REDEEMABLE
CONVERTIBLE PREFERRED STOCK
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SERIES B
CONVERTIBLE
COMMON STOCK PREFERRED STOCK DEFERRED
SHARES AMOUNT SHARES AMOUNT COMPENSATION
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Issuance of 2,000 shares of founders stock at no par
value 2,000 $ -- -- $ -- $ --
Subdivision of original 2,000 shares of founders stock
with no par value into 750 shares of common stock with
par value of $.001 in cancellation of $1,500 of notes
payable - founders 1,500,000 1,500 -- -- --
Cancellation of 2,000 shares of founders stock at no
par value (2,000) -- -- -- --
Issuance of Series A Redeemable convertible preferred
stock at $.001 with warrants at $.10 -- -- -- --
Stock split 2:1 1,500,000 1,500 -- -- --
Issuance of B-1 redeemable convertible preferred stock at
$.001 -- -- -- -- --
Conversion of notes payable - stockholder and interest to
Series B-1 redeemable convertible preferred stock -- -- -- -- --
Issuance of Series B convertible preferred stock at $.001 -- -- 266,666 267 --
Issuance of stock options -- -- -- -- (284,110)
Amortization of deferred compensation -- -- -- 46,729
Net loss -- -- -- -- --
--------- --------- --------- --------- ---------
Balance, December 31, 1996 3,000,000 $ 3,000 266,666 $ 267 $(237,381)
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN TOTAL
CAPITAL ACCUMULATED STOCKHOLDERS'
AMOUNT DEFICIT DEFICIENCY
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Issuance of 2,000 shares of founders stock at no par
value $ -- $ -- $ --
Subdivision of original 2,000 shares of founders stock
with no par value into 750 shares of common stock with
par value of $.001 in cancellation of $1,500 of notes
payable - founders -- -- 1,500
Cancellation of 2,000 shares of founders stock at no
par value -- -- --
Issuance of Series A Redeemable convertible preferred
stock at $.001 with warrants at $.10 -- -- --
Stock split 2:1 (1,500) -- --
Issuance of B-1 redeemable convertible preferred stock at
$.001 -- -- --
Conversion of notes payable - stockholder and interest to
Series B-1 redeemable convertible preferred stock -- -- --
Issuance of Series B convertible preferred stock at $.001 396,956 -- 397,223
Issuance of stock options 284,110 -- --
Amortization of deferred compensation -- -- 46,729
Net loss -- (1,695,091) (1,695,091)
------------ ------------ ------------
Balance, December 31, 1996 $ 679,566 $ (1,695,091) $ (1,249,639)
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
SERIES A AND B-1 TOTAL
REDEEMABLE REDEEMED
CONVERTIBLE ADDITIONAL CONVERTIBLE
PREFERRED STOCK PAID-IN PREFERRED
SHARES AMOUNT CAPITAL STOCK
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of 2,000 shares of founders stock at no par
value -- $ -- $ -- $ --
Subdivision of original 2,000 shares of founders stock
with no par value into 750 shares of common stock with
par value of $.001 in cancellation of $1,500 of notes
payable - founders -- -- -- --
Cancellation of 2,000 shares of founders stock at no
par value -- -- -- --
Issuance of Series A Redeemable convertible preferred
stock at $.001 with warrants at $.10 325,000 325 297,815 298,140
Stock split 2:1 325,000 325 (325) --
Issuance of B-1 redeemable convertible preferred stock at
$.001 1,533,338 1,533 2,276,984 2,278,517
Conversion of notes payable - stockholder and interest to
Series B-1 redeemable convertible preferred stock 27,380 274 40,794 41,068
Issuance of Series B convertible preferred stock at $.001 -- -- -- --
Issuance of stock options -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1996 2,210,718 $ 2,457 $ 2,615,268 $ 2,617,725
============ ============ ============ ============
</TABLE>
See notes to financial statements.
4
<PAGE> 7
AVIDIA SYSTEMS, INC.
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,695,091)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 20,059
Provision for doubtful accounts 35,000
Amortization of deferred compensation 46,729
Changes in assets and liabilities:
Accounts receivable - trade (49,920)
Inventories (138,780)
Prepaid and other expenses (16,325)
Software licensing agreement (158,000)
Accounts payable 379,260
Accrued compensation and related expenses 70,117
Accrued expenses 151,867
-----------
Net cash used in operating activities (1,355,084)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (103,366)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Series A Redeemable Convertible Preferred stock 298,140
Net proceeds from issuance of Series B Convertible Preferred stock 397,223
Net proceeds from issuance of Series B-1 Redeemable Convertible Preferred stock 2,278,517
Proceeds from issuance of Notes Payable - Founders 20,000
Proceeds from issuance of Convertible Notes Payable - stockholders 107,625
Payments on Convertible Notes Payable - stockholders (67,000)
-----------
Net cash provided by financing activities 3,034,505
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,576,055
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR --
-----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,576,055
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
State income taxes $ --
===========
Interest paid $ 3,434
===========
NONCASH FINANCING TRANSACTIONS:
Conversion of notes payable and accrued interest to preferred stock $ 41,068
===========
Conversion of a portion of notes payable - Founders to common stock $ 1,500
===========
</TABLE>
See notes to financial statements.
5
<PAGE> 8
AVIDIA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996
- -------------------------------------------------------------------------------
1. DESCRIPTION OF OPERATIONS
Avidia Systems, Inc. (the "Company") is engaged in the business of
developing, manufacturing and marketing PC networking products based
on Asynchronous Transfer Mode ("ATM") technology. The Company
produces innovative ATM switching and wide area access products for
PC's in corporation networks. The Company was originally incorporated
in the state of Delaware under the name ATM, Products Inc. on December
12, 1995, with operations commencing in January 1996. In August,
1996, the Company changed its name from ATM Products Inc. to Avidia
Systems, Inc. From its incorporation in December 1995 through April
1996, the Company was engaged principally in organizational
activities, product development and obtaining financing.
On February 27, 1997, the Company completed a merger of its operations
with PairGain Technologies, Inc. ("PairGain") a publicly traded company
(see Note 10).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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
amount of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
REVENUE RECOGNITION - The Company recognizes revenue when goods or
services are shipped or delivered. In addition, the Company has a
contract to design and develop media interface cards for one of its
customers. In accordance with the agreement the Company recognizes
revenue based on the completion and satisfactory approval by the
customer of the pre-established milestones.
INVENTORIES - Inventories are valued at the lower of cost, determined
on the first-in, first-out (FIFO) method, or market.
PROPERTY AND EQUIPMENT - Property, plant and equipment are recorded at
cost. Assets held under capital leases are recorded at the lower of
the net present value of the minimum lease payments required over the
term of the lease or the fair value of the assets at the inception of
the lease. Additions, renewals and betterments that significantly
extend the life of an asset are capitalized. Minor replacements,
maintenance and repairs are charged to operations as incurred.
Equipment is depreciated over the estimated useful lives of the
related assets, ranging from three to five years, using the
straight-line method. When assets are retired or otherwise disposed
of, the assets and related accumulated depreciation or amortization
are eliminated from the accounts and any resulting gain or loss is
reflected in income.
INCOME TAXES - Income taxes are provided for as required under
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). This Statement requires the use of the
asset and liability method in determining the tax effect on future
years of the "temporary differences" between the tax basis of assets
and liabilities and their financial reporting amounts.
6
<PAGE> 9
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash in
banks and investments with an original maturity of three months or
less. Short-term investments are carried at cost which approximates
market.
RESTRICTED CASH - In accordance with the lease agreement for the
facility located in Wallingford, Connecticut, the Company is required
to maintain certificates of deposit at its bank, for which the bank
holds a security interest, as collateral for the payment of the lease.
PATENT APPLICATION COSTS - Costs incurred in filing for patents are
charged to operations, until such time as it is determined that the
filing will be successful. When it becomes evident with reasonable
certainty that an application will be successful, the costs incurred
in filing for patents will begin to be capitalized. Capitalized costs
related to successful patent applications will be amortized over a
period not to exceed seventeen years or the remaining life of the
patent, whichever is shorter, using the straight- line method. As of
December 31, 1996 all patent application costs have been charged to
operations.
STOCK-BASED COMPENSATION - Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to
account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at
the date of the grant over the amount an employee must pay to acquire
the stock.
MAJOR CUSTOMER - One customer comprised approximately 78% of sales in
1996, respectively, and 82% of accounts receivable at December 31,
1996.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs are
charged to operations as incurred.
SOFTWARE LICENSING AGREEMENT - In October 1996, the Company entered
into a software licensing agreement. Under this agreement, the
Company is allowed to copy, use, sublicense and modify specific
programs for use in connection with the production of ATM switches.
The total purchase price was approximately $158,000 and will be
amortized over the expected useful life of the software programs,
which is three years.
3. INVENTORIES
Inventories at December 31, 1996 consisted of the following:
<TABLE>
<S> <C>
Raw materials and supplies $132,718
Finished goods 6,062
--------
Total $138,780
========
</TABLE>
7
<PAGE> 10
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 consisted of the
following:
<TABLE>
<S> <C>
Furniture and fixtures $ 12,586
Equipment 90,780
---------
Total 103,366
Less accumulated depreciation 8,644
---------
Property and equipment - net $ 94,722
=========
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses at December 31, 1996 consisted of the following:
<TABLE>
<S> <C>
Professional fees $113,539
Other 38,328
--------
Total $151,867
========
</TABLE>
6. STOCKHOLDERS' DEFICIENCY
INITIAL ISSUANCE AND AUTHORIZED CAPITAL - The Company was incorporated
in Delaware in December 1995 as ATM Products, Inc. with 5,000 shares
of common stock authorized at no par.
In February 1996, the founders of the Company loaned $20,000 to the
Company to provide certain working capital ("Notes Payable -
Founders"). On March 27, 1996, the Company issued 2,000 shares of
founders' stock at no par value in cancellation for $1,500 of the
Notes Payable - Founders. The notes payable were due February 1,
1997, bear interest at the rate of 7% per annum compounded annually,
and will be repaid immediately subsequent to the closing of the
PairGain merger (Note 10).
STOCK SUBDIVISION - On March 27, 1996, the Board of Directors
authorized the subdivision of each existing share of common stock
(with no par value) into 750 shares of common stock (with par value of
$.001) and increase of the Company's authorized capital stock to
4,750,000 shares, thereby increasing the number of outstanding common
shares to 1,500,000.
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS TO
PURCHASE COMMON STOCK - On April 2, 1996, the Company completed the
private placement of (i) 325,000 shares of Series A Redeemable
Convertible Preferred Stock, and (ii) warrants to purchase 70,000
shares of common stock (at an exercise price of $.10 per share), at a
price of $1.00 per share, resulting in aggregate net proceeds of
$298,140 (after deducting $26,860 of applicable related issuance
costs). The warrants are fully exercisable as of December 31, 1996
and expire on various dates through 2004. The issuance has an
aggregate liquidation preference of $325,000 as of December 31, 1996.
Voluntary or involuntary liquidation value of each share of stock is
$1.00 ("Liquidation Amount"). After the Liquidation Amount has been
paid, the holders of Preferred and Common will be entitled to receive
the remaining assets, with the Preferred converted into the equivalent
number of shares of Common. The holders of the Preferred may elect to
have the Company redeem, on each of the fifth, sixth and seventh
anniversaries of the closing, one-third of the Preferred originally
issued by paying in cash the
8
<PAGE> 11
original purchase price of the preferred plus any dividends which have
accrued but remain unpaid at such time. The Preferred stock is
convertible at any time at the option of the holder into Common Stock.
CONVERTIBLE NOTES PAYABLE - STOCKHOLDERS - On July 31 and August 1,
1996, investors, employees and directors loaned the Company $107,625
in the form of convertible notes plus warrants to purchase 8,063
shares of common stock. The warrants shall be issued upon the
applicable event of conversion, or repayment of the note in full, and
are exercisable for a period of three years from the date the warrants
are issued at an exercise price of $.50 per share. One nonaccredited
investor received 2,700 nonqualified stock options at $.50 per share.
The notes allowed the investors to either be repaid or to convert to
equity at the next round of equity financing. On September 19, 1996,
$40,625 plus accrued interest of the convertible notes payable were
converted into 27.380 shares of the Company's Series B-1 Redeemable
Convertible Preferred Stock and on September 27, 1996, the remaining
balance of $67,000 of the convertible notes payable was repaid.
STOCK SPLIT - On August 23, 1996, the Board of Directors authorized a
2:1 split of each share of Common and Preferred stock and the
Warrants, thereby increasing the number of outstanding common shares
to 3,000,000, the number of outstanding preferred shares to 650,000,
and the number of outstanding warrants to 140,000.
SERIES B CONVERTIBLE PREFERRED STOCK - On August 22, 1996, the Board
of Directors authorized, and subsequently issued on September 27,
1996, to TECOM CO., Ltd., a manufacturer and distributor for the
Company, 266,666 shares of Series B Preferred Stock par value $.001,
at a price of $1.50 per share, resulting in aggregate net proceeds of
$397,223 after deducting $2,777 of applicable related issuance costs.
In connection with this private placement, the Company entered into a
manufacturing partnership with the TECOM CO., Ltd. Liquidation and
conversion preferences are similar to Series A based on a value of
$1.50 per share.
SERIES B-1 REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS TO
PURCHASE COMMON STOCK - On September 17, 1996, the Board of Directors
authorized the issuance, to outside investors, directors, and
employees of the Company, of (i) 1,533,338 shares of Series B-1
Redeemable Convertible Preferred Stock, and (ii) warrants to purchase
230,000 shares of preferred stock at an exercise price of $1.50 per
share. The warrants were issued ratably to the Series B-1 investors
and become exercisable at anytime after the closing of the Company's
next equity offering, provided such offering is based on a valuation
of the Company of at least $15 million. In addition, the Company
issued warrants to purchase 100,000 shares of common stock at an
exercise price of $1.50 to an investor and an investment banker as an
incentive to raise additional funds (vesting is contingent upon the
Company obtaining future financings). On October 1, 1996, the Company
completed the private placement of 1,533,338 shares of Series B-1
Redeemable Convertible Preferred Stock and Warrants at a price of
$1.50 per share, resulting in aggregate net proceeds of $2,278,517
after deducting $21,483 of applicable related issuance costs.
Liquidation, conversion and redemption preferences are similar to
Series A based on a value of $1.50 per share.
7. STOCK COMPENSATION PLANS
The Company's 1996 Stock Option and Incentive Award Plan (the "1996
Stock Plan"), provides for the grant of any or all of the following
types of awards: (1) stock options, including incentive stock options
and nonqualified stock options; and (2) performance share awards.
Under the terms of the 1996 Stock Plan the Board of Directors
authorized the reserving of 1,500,000 shares of common stock for the
issuance to directors, employees, consultants, advisors and vendors of
the Company and any related Corporations. The majority of the stock
options vest over a four-year period, with one quarter of the shares
becoming exercisable on each of the first four anniversaries of the
grant date, and the
9
<PAGE> 12
options expire 10 years from the date of grant. The Board of
Directors at its discretion may grant accelerated vesting. At
December, 1996, the Company had available for grant under the 1996
Stock Plan options to purchase 1,039,050 shares of common stock. No
stock options have been exercised.
Pursuant to an employee agreement with the Company, as of December 31,
1996, the Vice Chairman received an initial grant of 25,000 options to
purchase shares of common stock, at $.10 per share, plus a stipend
grant of 15,000 options per month, for a total of 115,000 options. In
accordance with the agreement, as of December 31, 1996, the initial
grant of 25,000 options was vested, and the stipend grant will issue
15,000 options a month from January 1997 through June 1997. The
monthly stipend grant will vest one-year from the date they are
granted.
The Company accounts for the 1996 Stock Plan in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," under which the Company recognizes compensation
costs for stock options granted at an exercise price less than market
value at the date of the grant. During 1996, the Company granted all
of its options to officers, directors, employees and advisers of the
Company at less than market value, which resulted in total
compensation of $284,110, which is being amortized over the vesting
period of four years, and resulted in a charge to earnings in 1996 of
$46,729.
Had compensation cost for the Company's stock option plan been
determined based upon the methodology prescribed under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, using a method such as the Black-Scholes Option-Pricing
model to estimate the fair value of the options at the date of grant,
it would have resulted in approximately the same amount of
compensation costs which has been recorded by the Company.
A summary of all stock option activity during the year ended December
31, 1996, is as follows:
<TABLE>
<CAPTION>
OPTIONS OPTIONS OPTIONS
GRANTED OUTSTANDING EXERCISABLE
OPTION FOR THE AT AT
PRICE YEAR ENDED YEAR END YEAR END
<S> <C> <C> <C> <C>
December 31, 1996:
Option Plan nonqualified stock options $0.10 98,000 98,000 25,000
Option Plan nonqualified stock options 0.15 180,250 180,250 --
Option Plan nonqualified stock options 0.50 2,700 2,700 2,700
Option Plan incentive stock options 0.10 180,000 180,000 --
-------- -------- --------
Total stock options 460,950 460,950 27,700
======== ======== ========
</TABLE>
8. INCOME TAXES
SFAS No. 109 requires that a deferred income tax asset be recognized for
temporary differences which will provide future tax benefits. A
deferred income tax liability is recognized for temporary differences
which will result in taxable amounts in future years.
10
<PAGE> 13
The net deferred tax assets at December 31, 1996 consists of the
following:
<TABLE>
<S> <C>
Deferred:
Federal $ 447,637
State 249,673
---------
Total gross deferred tax assets 697,310
Valuation allowance (697,310)
---------
Total net deferred tax assets $ --
=========
</TABLE>
The components of the benefit for income taxes consists of the following at
December 31, 1996:
<TABLE>
<S> <C>
Current:
Federal $ --
State 250
----------
Total $ 250
==========
</TABLE>
The deferred tax assets are primarily a result of the Federal and
Connecticut net operating loss carryforwards and timing differences
relating to warranty reserves and depreciation. As the Company has no
prior earnings history, a valuation allowance has been established due
to the Company's uncertainty in its ability to benefit from the
Federal and Connecticut net operating loss carryforwards. The change
in the valuation allowance was $697,310 for the year ended December
31, 1996.
At December 31, 1996, the Company has Federal and Connecticut net
operating loss carryforwards for income tax purposes of approximately
$1,362,000, which will begin expiring in 2011 and 2001,
respectively. The Company has also Federal and Connecticut research
and development credit carryforwards of approximately $23,400 and
$99,400, respectively, available for use in years beginning on or
after January 1, 1997.
9. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS - The Company leases its headquarters' facility
located in Wallingford, Connecticut (which commenced January 1, 1997)
and certain pieces of equipment under non-cancelable operating leases.
Total future minimum rental payments under noncancelable operating
leases as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
<S> <C>
1997 $ 83,879
1998 119,954
1999 109,206
---------
Total future minimum lease payments $ 313,039
=========
</TABLE>
11
<PAGE> 14
Rent expense totaled $30,388 for the year ended December 31, 1996.
10. SUBSEQUENT EVENT
On February 27, 1997, the Company completed its merger with PairGain
Technologies, Inc., a leading supplier of high speed communications
equipment. Under the terms of the agreement, the Company's common and
preferred stockholders received shares of PairGain's Common Stock in
exchange for shares held. All warrants for preferred and common stock
were converted into PairGain common stock or warrants to purchase
PairGain common stock at the same exchange ratio as the existing
preferred and common stock of the Company. The outstanding and issued
stock options of the Company will be exchanged for options to purchase
PairGain common stock.
******
12
<PAGE> 1
EXHIBIT 99.4
PAIRGAIN TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
PAIRGAIN AVIDIA ADJUSTMENTS PRO FORMA
-------- ------ ----------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 46,840 $ 1,576 $ -- $ 48,416
Short-term investments 65,779 -- -- 65,779
Accounts receivable, less allowance
for doubtful accounts of $935 at
December 31, 1996 23,873 15 -- 23,888
Inventories 26,010 139 -- 26,149
Deferred tax assets 11,074 -- -- 11,074
Other current assets 2,767 16 -- 2,783
-------- -------- -------- --------
TOTAL CURRENT ASSETS 176,343 1,746 -- 178,089
Property and equipment, net 10,295 95 -- 10,390
Note receivable and long-term investments 6,252 -- -- 6,252
Other assets 126 147 -- 273
-------- -------- -------- --------
TOTAL ASSETS $193,016 $ 1,988 $ -- $195,004
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 5,960 $ 379 $ -- $ 6,339
Accrued compensation and related expenses 5,702 70 -- 5,772
Accrued expenses 9,300 171 2,800 (c) 12,271
Accrued income taxes 15,826 -- -- 15,826
-------- -------- -------- --------
TOTAL CURRENT LIABILITIES 36,788 620 2,800 40,208
-------- -------- -------- --------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE PREFERRED STOCK -- 2,618 (2,618)(b) --
Stockholders' equity:
Preferred stock -- -- -- --
Common stock 32 1 -- 33
Additional paid-in-capital 112,782 681 2,618 (b) 116,081
Deferred compensation -- (237) -- (237)
Unrealized gain on short-term investments 71 -- -- 71
Retained earnings 43,343 (1,695) (2,800)(c) 38,848
-------- -------- -------- --------
TOTAL STOCKHOLDERS' EQUITY 156,228 (1,250) (182) 154,796
-------- -------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $193,016 $ 1,988 $ -- $195,004
======== ======== ======== ========
</TABLE>
1
<PAGE> 2
PAIRGAIN TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PAIRGAIN AVIDIA ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 205,312 $ 96 $ -- $ 205,408
Technology fees and royalty income 97 -- -- 97
---------- ---------- ----------- ----------
TOTAL REVENUES 205,409 96 -- 205,505
Cost of revenues 106,449 69 -- 106,518
---------- ---------- ----------- ----------
Gross profit 98,960 27 -- 98,987
---------- ---------- ----------- ----------
Operating expenses:
Research and development 18,593 919 -- 19,512
Selling and marketing 17,218 367 -- 17,585
General and administrative 9,907 457 -- 10,364
---------- ---------- ----------- ----------
Total operating expenses 45,718 1,743 -- 47,461
---------- ---------- ----------- ----------
INCOME (LOSS) FROM OPERATIONS 53,242 (1,716) -- 51,526
Other income:
Interest income, net 3,677 21 -- 3,698
Settlement income related to unauthorized
trading of investments by third parties 2,500 -- -- 2,500
---------- ---------- ----------- ----------
Income (loss) before income taxes 59,419 (1,695) -- 57,724
Provision for income taxes 22,816 -- -- 22,816
---------- ---------- ----------- ----------
NET INCOME (LOSS) $ 36,603 $ (1,695) $ -- $ 34,908
========== ========== =========== ==========
Per Share Data:
Earnings per share $ 0.51 $ 0.47
========== ==========
Weighted average number of common and common
equivalent shares 72,058,000 (d) 73,768,000 (d)
========== ==========
</TABLE>
2
<PAGE> 3
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The unaudited pro forma condensed combined balance sheet combines the
historical balance sheets of PairGain Technologies, Inc. ("PairGain") and
Avidia Systems, Inc. ("Avidia") as of December 31, 1996. The unaudited pro
forma condensed combined statement of income combines the historical
statements of income of PairGain and Avidia for the year ended December 31,
1996.
B. STOCKHOLDERS' EQUITY
At December 31, 1996, Avidia had 3,000,000 shares of common stock,
266,666 shares of series B convertible preferred stock, 650,000 shares of
series A redeemable convertible preferred stock and 1,560,718 shares of series
B-1 redeemable convertible preferred stock outstanding. All Avidia convertible
preferred shares outstanding were convertible into Avidia common shares on a
one-for-one basis. In addition, at December 31, 1996, warrants to purchase
248,064 shares of Avidia common stock and 230,000 shares of series B-1
redeemable convertible preferred stock and options to purchase 458,950 shares
of Avidia common stock were outstanding. As a result of the acquisition, all
Avidia common stock, preferred stock and vested warrants were converted into
the right to receive 2,235,697 shares of PairGain common stock. Unvested
warrants and all options were converted into rights to purchase an aggregate of
363,689 additional shares of PairGain common stock.
C. MERGER-RELATED EXPENSES
PairGain and Avidia estimate that they will incur merger-related
expenses, consisting primarily of transactions costs for investment bankers
fees, attorneys, accountants, financial printing and other related charges, of
approximately $2.8 million. This estimate is preliminary and will be adjusted
to the extent that actual amounts differ from management's estimates. These
nonrecurring expenses will be charged to operations as incurred.
The pro forma condensed combined balance sheet gives effect to such
expenses as if they had been incurred as of December 31, 1996, but the pro
forma combined condensed statements of operations do not include such expenses,
as they are a nonrecurring charge which directly resulted from the acquisition.
3
<PAGE> 4
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS (CONTINUED)
D. PRO FORMA NET INCOME PER SHARE
Pro forma net income per share is computed using the weighted average
number of common shares and common share equivalents outstanding during the
period. Common share equivalents result from outstanding options and warrants
to purchase common stock and are calculated using the treasury stock method.
For purposes of the calculation, all shares of Avidia common stock and
preferred stock have been converted into PairGain common stock at a conversion
rate of approximately .397 to one, using their original date of issue for
purposes of calculating the weighted average common and common equivalent
shares outstanding. In addition, all options and warrants to purchase Avidia
common stock and preferred stock have been converted into options and warrants
to purchase PairGain common stock, using their original date of issue for
purposes of calculating the weighted average common and common equivalent
shares outstanding.
4
