<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A-1
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 28, 1999
AGATE TECHNOLOGIES, INC.
(Exact name of registrant as specified in charter)
Delaware 333-5278-NY 94-3334052
(State or other (Commission (IRS Employer
jurisdiction File Number) Identification No.)
of incorporation)
46783 Lakeview Boulevard
Fremont, California 94538
(Address of principal executive offices)
Registrant's telephone number, including area code (510) 492-5430
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired.
Registrant's financial statements for the fiscal years ended December 31,
1998, and 1997, and for the period from January 1, 1999, through March 31, 1999,
together with report of Ernst & Young LLP, independent auditors, are attached
as Exhibit 99.
(b) Pro Forma Financial Information
Registrant has determined that it is not required to provide any pro forma
financial information pursuant to this item 7(b).
(c) Exhibits
23 Consent of Ernst & Young LLP is attached as Exhibit 23.
27 Financial Data Schedule will be filed by subsequent amendment when
available.
99 Financial Statements referred to in Item 7(a) are attached as Exhibit 99.
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.
AGATE TECHNOLOGIES, INC.
/s/ Francis CS Khoo
DATED: August 11, 1999
By: Francis CS Khoo
Chairman of the Board and CEO
<PAGE>
Exhibit 23
CONSENT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8) pertaining to the ARCA Corporation 1999 Dual Stock Option Plan of our
report dated July 21, 1999, with respect to the consolidated financial
statements of Agate Technologies, Inc. included in this Form 8-K/A-1.
/s/ Ernst & Young LLP
San Jose, California
August 11, 1999
<PAGE>
Exhibit 99
Consolidated Financial Statements
Agate Technologies, Inc.
Years ended December 31, 1998 and 1997
and the period from
January 1, 1999 through March 31, 1999
with Report of Independent Auditors
<PAGE>
Agate Technologies, Inc.
Consolidated Financial Statements
Years ended December 31, 1998 and 1997
and the period from
January 1, 1999 through March 31, 1999
Contents
Report of Independent Auditors............................................... 1
Audited Consolidated Financial Statements
Consolidated Balance Sheets.................................................. 2
Consolidated Statements of Operations........................................ 3
Consolidated Statements of Shareholders' Equity (Deficit).................... 4
Consolidated Statements of Cash Flows........................................ 5
Notes to Consolidated Financial Statements................................... 6
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors and Shareholders
Agate Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Agate
Technologies, Inc., of which 64% of the voting stock is owned by Pacific Rim
Trading Limited, as of March 31, 1999 and December 31, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity (deficit),
and cash flows for the three months ended March 31, 1999 and for the years ended
December 31, 1998 and 1997. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Agate
Technologies, Inc. at March 31, 1999 and December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for the three months
ended March 31, 1999 and for the years ended December 31, 1998 and 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
July 21, 1999
1
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
<PAGE>
Agate Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
-----------------------------------------
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,012,603 $ 2,352,351 $ 4,595,242
Accounts receivable, net of allowance for doubtful
accounts of $27,999 194,533 230,591 46,069
Inventories 395,279 319,279 92,775
Prepaid expenses and other current assets 50,046 168,783 121,418
-----------------------------------------
Total current assets 2,652,461 3,071,004 4,855,504
Restricted cash 149,897 138,954 20,000
Property and equipment, net 120,412 138,615 230,536
Other assets 27,926 27,925 25,769
-----------------------------------------
Total assets $ 2,950,696 $ 3,376,498 $ 5,131,809
=========================================
Liabilities and shareholders' equity (deficit)
Current liabilities:
Accounts payable $ 131,867 $ 277,012 $ 37,246
Accrued liabilities 429,314 316,592 200,531
Long-term debt, current portion 178,133 17,511 19,950
Obligation under capital lease, current portion 6,327 8,540 8,094
-----------------------------------------
Total current liabilities 745,641 619,655 265,821
Long-term debt, net of current portion 4,798 9,475 40,308
Obligation under capital lease, net of current portion - - 8,540
Commitments and contingencies
Shareholders' equity (deficit):
Convertible preferred stock, no par value: 10,000,000
shares authorized, 2,075,000 shares issued and
outstanding, liquidation preference of $7,262,500 7,256,589 7,256,589 7,256,589
Common stock, no par value: 20,000,000 shares
authorized, 7,050,000 shares issued and outstanding 1,188,068 1,188,068 1,188,068
Additional paid-in capital 234,663 234,663 234,663
Accumulated other comprehensive loss - - (32,719)
Accumulated deficit (6,479,063) (5,931,952) (3,829,461)
-----------------------------------------
Total shareholders' equity 2,200,257 2,747,368 4,817,140
-----------------------------------------
Total liabilities and shareholders' equity $ 2,950,696 $ 3,376,498 $ 5,131,809
=========================================
</TABLE>
See accompanying notes.
2
<PAGE>
Agate Technologies, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three months Years ended
ended March 31, December 31,
--------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 405,870 $ 947,543 $ 36,443
Cost of sales 163,438 304,849 8,854
--------------------------------------------------------------
Gross profit 242,432 642,694 27,589
Operating expenses:
Research and development 190,783 888,885 974,719
Sales and marketing 299,205 1,009,318 767,295
General and administrative 321,317 953,148 887,980
--------------------------------------------------------------
Total operating expenses 811,305 2,851,351 2,629,994
--------------------------------------------------------------
Operating loss (568,873) (2,208,657) (2,602,405)
Interest and other income 30,520 164,285 170,813
Interest expense and other expense (2,919) (46,216) (4,408)
--------------------------------------------------------------
Loss before income taxes (541,272) (2,090,588) (2,436,000)
Income taxes (5,839) (11,903) (800)
--------------------------------------------------------------
Net loss $ (547,111) $ (2,102,491) $ (2,436,800)
==============================================================
Net loss per share -- basic and diluted $ (0.08) $ (0.30) $ (0.35)
==============================================================
Shares used to compute net loss per share -- basic
and diluted 7,050,000 7,050,000 7,051,329
==============================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Agate Technologies, Inc.
Consolidated Statements of Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
--------------------------------------------------------------
Shares Amount Shares Amount
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 -- $ -- 6,955,000 $ 1,141,068
Components of comprehensive loss:
Net loss -- -- -- --
Cumulative translation adjustment -- -- -- --
Total comprehensive loss
Issuance of common stock for cash -- -- 100,000 50,000
Issuance of common stock for services -- -- 5,000 5,000
Issuance of preferred stock for cash 750,000 2,625,000 -- --
Issuance of preferred stock for cash, net of
issuance costs of $5,911 1,325,000 4,631,589 -- --
Repurchase of common stock -- -- (10,000) (8,000)
--------------------------------------------------------------
Balance at December 31, 1997 2,075,000 7,256,589 7,050,000 1,188,068
Components of comprehensive loss:
Net loss -- -- -- --
Cumulative translation adjustment -- -- -- --
Total comprehensive loss
--------------------------------------------------------------
Balance at December 31, 1998 2,075,000 7,256,589 7,050,000 1,188,068
Net loss -- -- -- --
--------------------------------------------------------------
Balance at March 31, 1999 2,075,000 $ 7,256,589 7,050,000 $ 1,188,068
==============================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated Total
Other Shareholders'
Additional Comprehensive Accumulated Equity
Paid-In Capital Loss Deficit (Deficit)
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ 236,663 $ -- $ (1,392,661) $ (14,930)
Components of comprehensive loss:
Net loss -- -- (2,436,800) (2,436,800)
Cumulative translation adjustment -- (32,719) -- (32,719)
-------------
Total comprehensive loss (2,469,519)
-------------
Issuance of common stock for cash -- -- -- 50,000
Issuance of common stock for services -- -- -- 5,000
Issuance of preferred stock for cash -- -- -- 2,625,000
Issuance of preferred stock for cash, net of
issuance costs of $5,911 -- -- -- 4,631,589
Repurchase of common stock (2,000) -- (10,000)
---------------------------------------------------------------
Balance at December 31, 1997 234,663 (32,719) (3,829,461) 4,817,140
Components of comprehensive loss:
Net loss -- -- (2,102,491) (2,102,491)
Cumulative translation adjustment -- 32,719 -- 32,719
-------------
Total comprehensive loss (2,069,772)
---------------------------------------------------------------
Balance at December 31, 1998 234,663 -- (5,931,952) 2,747,368
Net loss -- -- (547,111) (547,111)
---------------------------------------------------------------
Balance at March 31, 1999 $ 234,663 $ -- $ (6,479,063) $ 2,200,257
===============================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Agate Technologies, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three months Years ended
ended March 31, December 31,
---------------------------------------------
1999 1998 1997
---------------------------------------------
<S> <C> <C> <C>
Operating activities
Net loss $ (547,111) $(2,102,491) $(2,436,800)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on disposal of property, plant, and equipment - 3,742 -
Depreciation and amortization 22,705 102,359 48,779
Common stock issued for services - - 5,000
Changes in assets and liabilities:
Accounts receivable 36,058 (184,522) (46,069)
Interest receivable - - -
Inventories (76,000) (226,504) (92,775)
Prepaid expenses and other assets 118,736 (49,520) (135,832)
Accounts payable and accrued liabilities (32,423) 355,827 98,084
-----------------------------------------------
Net cash used in operating activities (478,035) (2,101,109) (2,559,613)
Investing activities
Restricted cash (10,943) (118,954) (20,000)
Acquisition of property and equipment (4,502) (26,633) (239,061)
Proceeds from sales of property, plant, and equipment - 45,171 -
-----------------------------------------------
Net cash used in investing activities (15,445) (100,416) (259,061)
Financing activities
Proceeds from notes payable 155,945 - 73,545
Repayment of notes payable - (33,272) (13,287)
Repayment of notes payable to related party - - (25,000)
Repayment of capitalized leases (2,213) - (725)
Proceeds from the issuance of debt - (8,094) -
Proceeds from issuance of common stock - - 50,000
Repurchase of common stock - - (10,000)
Proceeds from issuance of preferred stock, net of
issuance costs - - 7,256,589
-----------------------------------------------
Net cash provided by (used in) financing activities 153,732 (41,366) 7,331,122
-----------------------------------------------
Net increase (decrease) in cash and cash equivalents (339,748) (2,242,891) 4,512,448
Cash and cash equivalents at beginning of period 2,352,351 4,595,242 82,794
-----------------------------------------------
Cash and cash equivalents at end of period $ 2,012,603 $ 2,352,351 $ 4,595,242
===============================================
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 2,919 $ 4,051 $ 4,406
Income tax $ 5,839 $ 11,903 $ 1,600
Supplemental schedule of noncash investing and
financing activities
Acquisition of property and equipment under $ - $ 15,531 $ 17,359
capitalized leases
Issuance of common stock in exchange for services $ - $ - $ 5,000
</TABLE>
See accompanying notes.
5
<PAGE>
Agate Technologies, Inc.
Notes to Consolidated Financial Statements
March 31, 1999
1. Business and Basis of Presentation
Agate Technologies, Inc. (the "Company") was incorporated on January 17, 1996.
Pacific Rim Trading Limited holds approximately 64% of the Company's common
stock. If the Series A convertible preferred stock is converted to common stock,
Pacific Rim Trading Limited would hold less than 50% of the Company's common
stock.
In the prior years, the Company's primary activities had been devoted to
developing its product, recruiting key management, sales, and technical
personnel, and raising capital to fund operations. The Company has been
unprofitable since inception. During the year, the Company launched some
software products and has diverted its efforts to sales and marketing activities
while continuing to develop new products. The Company matured from a development
stage company to an operating company in fiscal 1999. As such, its financial
statements are no longer prepared on a development stage basis.
2. Summary of Significant Accounting Policies and Liquidity
Liquidity
The Company continues to incur losses from operating results and had an
accumulated deficit of approximately $6,479,000 at March 31, 1999. As a result
of its significant research and development, customer support, and selling and
marketing efforts, the Company has required substantial working capital to fund
its operations. To date, the Company has financed its operations principally
through its equity offerings. Management believes that under its current
business plans, its current working capital, cash flows from operating
activities and funds available from borrowing arrangements are sufficient to
fund its operations and capital requirements through at least March 31, 2000.
Any substantial inability to achieve the current business plan could have a
material adverse impact on the Company's financial position, liquidity, or
results of operations and may require the Company to reduce expenditures to
enable it to continue operations through March 31, 2000.
Basis of Consolidation
The Company has a wholly owned subsidiary in Malaysia, ATI Technologies, Snd
Bhd. The consolidated financial statements include the accounts of this wholly
owned subsidiary. All intercompany balances and transactions have been
eliminated. The subsidiary ceased operations in June 1998 but remains a legal
entity.
6
<PAGE>
Agate Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies and Liquidity
Change in Year End
In January 1999, the Company changed from a calendar year ended December 31 to a
fiscal year ended March 31. The Company's financial statements have been
presented to reflect this change.
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 period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers highly liquid investments with maturities of less than
three months as of the date of purchase to be cash equivalents. As of March 31,
1999 and December 31, 1998 and 1997, cash equivalents consisted of money market
funds and short-term certificates of deposit. The Company's investments are
carried at cost which approximates their fair market value.
Financial Instruments
For financial instruments consisting of cash and cash equivalents, deposits,
accounts receivable, accounts payable, accrued liabilities, and long-term debt
included in the Company's financial statements, the carrying amounts approximate
fair value due to their short-term maturity and current market interest rates of
the long-term debt.
Financial instruments that potentially subject the Company to concentrations of
credit risk principally are comprised of cash and trade accounts receivable. The
Company maintains its cash balances at four financial institutions and has not
experienced any losses relating to any of its bank deposits.
Certain Risks and Concentrations
Ongoing customer credit evaluations are performed by the Company, and collateral
is not required. The Company maintains allowances for potential returns and
credit losses.
7
<PAGE>
Agate Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Certain Risks and Concentrations (continued)
The Company's products include components subject to rapid technological change.
Significant technological change could adversely affect the Company's operating
results and subject the Company to returns of product and inventory losses.
While the Company has ongoing programs to minimize the adverse effect of such
changes and considers technological change in estimating its allowances, such
estimates could change in the future. In addition, two of the Company's products
are currently manufactured by a single supplier, and certain key components are
currently available from only single sources.
During the year ended December 31, 1998 and the three-month period ended
March 31, 1999, major customers of the Company represented the following
percentages of product revenues:
<TABLE>
<CAPTION>
Three-month
period ended Year ended
March 31, December 31,
1999 1998
---------------------------------------
<S> <C> <C>
Customer A 28% 19%
Customer B 12% 12%
Customer C * 10%
Customer D 15% *
Customer E 11% *
Customer F 12% *
*Less than 10%
</TABLE>
Inventories
Inventories are stated at the lower of cost, calculated on a first-in, first-out
basis, or market.
8
<PAGE>
Agate Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided using the straight-line method over the
estimated useful lives of the respective assets, generally three years.
Amortization of leasehold improvements is provided on a straight-line basis over
the life of the related asset or the lease term, if shorter.
Advertising
The Company's policy is to expense advertising and promotion costs as incurred.
The Company's advertising and promotion expenses were not significant for any
period presented.
Software Development
Costs related to the conceptual formulation and design of software products are
expensed as research and development. Generally, technological feasibility is
established upon completion of a working model. Costs incurred subsequent to
such points have not been significant and all such costs have been expensed.
Revenue Recognition
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants' Statement of Position No. 97-2 ("SOP 97-2"), as
amended by SOP 98-4, "Software Revenue Recognition." Revenue is recognized upon
shipment provided no significant vendor obligations remain, and collection of
the resulting receivable is deemed probable by management. Provisions for
estimated warranty costs, insignificant vendor obligations, and anticipated
retroactive price adjustments are recorded at the time products are shipped.
The Accounting Standards Executive Committee issued SOP 98-4 which amends SOP
97-2 and extends the deferral of the application of certain provisions of SOP
97-2 through fiscal years beginning on or before March 15, 1999. All other
provisions of SOP 98-4 are effective for transactions entered into in fiscal
years beginning after March 15, 1999. The Company has not yet determined the
effect of the final adoption of SOP 98-4 on its financial condition or results
of operations. However, SOP 98-4 may require revenue be deferred for certain
types of transactions.
9
<PAGE>
Agate Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition (continued)
The Company charges royalties to OEM customers based on the units they sell to
end users. Royalty revenue is recognized when earned.
Foreign Currency Exchange Gains and Losses
The reporting currency for the Company is the U.S. dollar. The functional
currency of the Company's foreign subsidiary is the Malaysian ringitt. Its
assets and liabilities are translated into U.S. dollars at the exchange rate in
effect at the balance sheet date. Revenues and expenses are translated at
average rates of exchange prevailing during the period. The resulting cumulative
translation adjustments are disclosed as a component of accumulated other
comprehensive loss in shareholder's equity. Foreign currency transaction gains
and losses are recorded in the statement of operations as a component of general
and administrative expense and have been immaterial for periods presented.
Net Loss Per Share
Basic and diluted net loss per common share are presented in conformity with FAS
No. 128, "Earnings Per Share" ("FAS 128"), for all periods presented. In
accordance with FAS 128, basic and diluted net loss per share has been computed
using the weighted-average number of shares of common stock outstanding during
the period.
The following table presents the calculation of basic and diluted net loss per
share:
<TABLE>
<CAPTION>
Three-month period
ended Years ended
March 31, December 31,
------------------------------------------------
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
Net loss $ (547,111) $(2,102,491) $(2,436,800)
------------------------------------------------
Basic and diluted
weighted-average shares of
common stock outstanding 7,050,000 7,050,000 7,051,329
-------------------------------------------------
Basic and diluted net loss per
common share $ (0.08) $ (0.30) $ (0.35)
================================================
</TABLE>
10
<PAGE>
Agate Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Net Loss Per Share (continued)
The Company has excluded all convertible preferred stock and outstanding stock
options from the calculation of diluted loss per share because all such
securities are antidilutive for all periods presented. Weighted-average options
outstanding to purchase 873,667, 977,700, and 1,021,300 shares of common and
convertible preferred stock for the years ended December 31, 1997 and 1998 and
for the three months ended March 31, 1999 were not included in the computation
of diluted net loss per share because the effect would be antidilutive. Such
securities, had they been dilutive, would have been included in the computation
of diluted net loss per share using the treasury stock method.
Comprehensive Loss
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for the
reporting and display of comprehensive income (loss) and its components. The
adoption of this statement had no impact on the Company's results of operations,
financial position, or cash flows.
Recent Accounting Pronouncements
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). The Company is required to
adopt FAS 133 for the year ending December 31, 2000. FAS 133 established methods
of accounting for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities. Because the
Company currently holds no derivative financial instruments and does not
currently engage in hedging activities, adoption of FAS 133 is not expected to
have a material impact on the Company's financial condition or results of
operations.
11
<PAGE>
Agate Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
3. Balance Sheet Detail
Inventories
<TABLE>
<CAPTION>
March 31, December 31,
------------------------------
1999 1998 1997
------------------------------
<S> <C> <C> <C>
Goods in transit $ - $107,500 $ -
Raw materials 57,209 62,739 7,960
Work in progress 100,127 100,127 -
Finished goods 237,943 48,913 84,815
------------------------------
$395,279 $319,279 $92,775
==============================
</TABLE>
Property and Equipment
<TABLE>
<CAPTION>
March 31, December 31,
---------------------------------
1999 1998 1997
---------------------------------
<S> <C> <C> <C>
Laboratory equipment $ 10,865 $ 10,865 $ 10,865
Computer hardware and software 173,773 170,671 121,037
Office equipment 3,472 1,850 2,815
Furniture and fixtures 41,606 41,606 46,822
Motor vehicles 50,000 50,000 73,545
Leasehold improvements 9,121 9,121 38,883
---------------------------------
288,837 284,113 293,967
Less accumulated depreciation
and amortization 168,425 145,498 63,431
---------------------------------
$120,412 $138,615 $230,536
=================================
</TABLE>
Computer software acquired under a capital lease agreement included in property
and equipment above is comprised of:
<TABLE>
<CAPTION>
March 31, December 31,
---------------------------------
1999 1998 1997
---------------------------------
<S> <C> <C> <C>
Computer software $17,359 $17,359 $17,359
Less accumulated amortization (7,233) (5,786) -
---------------------------------
$10,126 $11,573 $17,359
=================================
</TABLE>
12
<PAGE>
Agate Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
3. Balance Sheet Detail (continued)
Accrued Liabilities
<TABLE>
<CAPTION>
March 31, December 31,
---------------------------------
1999 1998 1997
---------------------------------
<S> <C> <C> <C>
Accrued compensation $114,779 $ 93,497 $ 53,184
Deferred revenue 50,406 59,016 42,500
Accrued professional fees 31,083 72,311 37,707
Other 233,046 91,768 67,140
---------------------------------
$429,314 $316,592 $200,531
=================================
</TABLE>
4. Commitments
Capital Leases
The Company leases certain of its computer software under a capital lease
agreement with a financial institution, which expires in November 1999. This
capital lease bears interest at the rate of 14.5% per annum and is facilitated
by a master lease agreement of $50,000. Advances under the master lease
agreement are collateralized by cash balances held by the financial institution
up to a maximum of $50,000.
At March 31, 1999, the present value of future minimum payments under these
capital leases in fiscal 2000 were $6,327.
Operating Leases
The Company leases its facilities under a noncancelable operating lease that
expires in January 2000 through June 2000 and the Company is responsible for
certain maintenance costs, taxes, and insurance under the lease. The Company
subleased one of its premises starting in September 1998. Total future minimum
rentals under this noncancelable sublease are $9,000. In addition, the Company
has four noncancelable operating leases for items of office equipment, which
expire in June 2000 through February 2003.
13
<PAGE>
Agate Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
4. Commitments (continued)
Operating Leases (continued)
At March 31, 1999, future minimum payments under noncancelable operating leases
are as follows:
<TABLE>
<S> <C>
2001 $ 96,665
2002 16,736
2003 2,585
--------------------
115,986
Less sublease income 9,000
--------------------
Net operating lease commitments $106,986
====================
</TABLE>
Rent expense for both facilities and equipment was $115,842, $138,615, and
$15,421 for the years ended December 31, 1997 and 1998 and for the three months
ended March 31, 1999, respectively.
5. Long-Term Debt
The Company has a business loan agreement with a financial institution. The
principal amounts of $50,000 bears interest at the rate of 10.50% and is
repayable in equal monthly installments maturing in May 2000. Under the terms of
the business loan agreement, the Company is prohibited from paying dividends,
and the bank has the right of set-off against cash balances maintained by the
Company at the financial institution. A Certificate of Deposit for $21,040 was
assigned to the financial institution in connection with the loan for $50,000.
This Certificate of Deposit will mature in June 1999 and is disclosed as
restricted cash on the face of the balance sheet.
The Company also entered into a credit agreement with the same financial
institution which provides for a revolving line of credit up to a maximum amount
of $2,000,000 for a year commencing October 1998. The loans are secured by the
following:
(a) Certificate of Deposit for a minimum of 50% of the outstanding loan
amount ($117,177; certificate of deposit balance at March 31, 1999)
(b) 70% of eligible accounts receivable.
(c) 30% of inventory, capped at $250,000.
All the credit facilities bear interest at a rate equal to the prime rate plus
1.25% (9% at March 31, 1999).
14
<PAGE>
Agate Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt (continued)
In connection with the line of credit, the Company has to comply with the
following covenants:
(a) current ratio shall be maintained at no less than 2 to 1
(b) effective debt to net worth shall be maintained at no higher than 2 to 1
(c) minimum tangible net worth shall be maintained at $3,000,000
As of March 31, 1999, the Company is noncompliant with (c), but it has obtained
a letter of waiver dated July 22, 1999 from the financial institution.
At March 31, 1999, future payments of principal under these loan agreements are
as follows:
<TABLE>
<S> <C>
2000 $178,133
2001 4,798
--------------------
$182,931
====================
</TABLE>
6. Shareholders' Equity
Preferred Stock
Under the Company's Articles of Incorporation, preferred stock is issuable in
series, and the Company's board of directors is authorized to determine the
rights, preferences, and terms of each series.
Dividends
The holders of Series A preferred stock are entitled to receive dividends, out
of any assets legally available, prior and in preference to any declaration or
payment of any dividend on the common stock of the Company, at the rate of
$0.175 per share, per year, respectively, or if greater, (as determined on a
per-year basis and on an as-converted basis for the preferred stock), an amount
equal to that paid on the common stock of the Company. Such dividends are
payable when, as, and if declared by the board of directors and are not
cumulative. As of March 31, 1999, no dividends have been declared.
15
<PAGE>
Agate Technologies, Inc
Notes to Consolidated Financial Statements (continued)
6. Shareholders' Equity (continued)
Preferred Stock (continued)
Liquidation
In the event of any liquidation, dissolution, or winding up of the Company,
either voluntary or involuntary, the holders of Series A preferred stock are
entitled to receive, prior and in preference to any distribution of any assets
of the Company to the holders of common stock by reason of their ownership, an
amount equal to the sum of $3.50 for each outstanding share of Series A
preferred stock (as adjusted for any stock dividends, combinations, or splits)
plus any declared but unpaid dividends on such shares. Any remaining assets will
be distributed ratably to the holders of common stock based on the number of
shares held by each shareholder.
Voting
The holder of each share of Series A preferred stock has no voting rights and is
entitled, only upon conversion, to the number of votes equal to the number of
shares of common stock into which each share could be converted.
Conversion
Each share of Series A preferred stock, at the option of the holder, is
convertible into the number of fully paid and nonassessable shares of common
stock, which results from dividing the conversion price per share in effect for
the preferred stock at the time of conversion into the per share conversion
value of such shares. The initial conversion price per share and the per share
conversion value of Series A preferred stock is $3.50. The initial conversion
price of Series A preferred stock is subject to adjustment from time to time.
The number of shares into which a share of preferred stock is convertible is
referred to as the conversion rate.
Conversion is automatic at its then effective conversion rate immediately upon
the closing of a firm commitment underwritten public offering pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
covering the offer and sale of common stock in which the aggregate proceeds
raised equal, or exceed, $5,000,000 or when fewer than 150,000 shares of Series
A preferred stock are outstanding. The board of directors has reserved 2,075,000
shares of common stock for future issuance to effect the conversion of the
preferred stock into common stock.
16
<PAGE>
Agate Technologies, Inc
Notes to Consolidated Financial Statements (continued)
6. Shareholders' Equity (continued)
Preferred Stock (continued)
Redemption
The Company may, at the option of the board of directors, redeem in whole or in
part, the Series A preferred stock by paying cash equal to the sum of $3.50 for
each outstanding share of Series A preferred stock plus any declared but unpaid
dividends.
Common Stock
Each share of common stock is entitled to one vote. The holders of common stock
are also entitled to receive dividends whenever funds are legally available and
when declared by the board of directors, subject to the prior rights of holders
of all classes of stock outstanding.
Stock Option Plan
The Company has two incentive stock option plans under which shares of common
stock are reserved for issuance to employees and consultants. Under the 1996
Stock Option Plan, which was approved in 1996 and expires ten years from
adoption, the Company may grant up to 1,000,000 incentive stock options,
nonstatutory stock options, or stock purchase rights. In December 1997, the
board of directors resolved to grant only stock purchase rights under the 1996
Stock Option Plan. Under the 1997 Stock Option Plan, which was approved in
December 1997 and expires ten years from the date of adoption, the Company may
grant up to 3,000,000 incentive stock options or nonstatutory options.
Both the 1996 and 1997 Plans provide that (i) the exercise price of an incentive
stock option or stock purchase right will be no less than the fair market value
of the Company's common stock (as determined by the board of directors) on the
date of grant; (ii) the exercise price of a nonstatutory stock option will be no
less than 85% of the fair market value of the common stock on the date of grant;
and (iii) the exercise price of an incentive stock option to a person who
possesses more than 10% of the total combined voting power of all classes of
stock will be no less than 110% of the fair market value of the common stock on
the date of grant. Options generally vest over a four-year period (25% vesting
after one year and the remainder vesting ratably monthly over the remaining
three years) and expire ten years after the date of grant.
17
<PAGE>
Agate Technologies, Inc
Notes to Consolidated Financial Statements (continued)
6. Shareholders' Equity (continued)
Stock Option Plan (continued)
Shares purchased pursuant to stock purchase rights may be repurchased by the
Company upon the termination of the employee until such date that the shares
have vested. Shares vest at a rate of no less than 20% per year. The Company
granted 5,000 purchase rights (at $0.60 per share) in 1996 and 5,000 purchase
rights (at $1.00 per share) in 1997. As the shares vested immediately, there are
no shares subject to repurchase.
Option and purchase right activity under both plans is as follows:
<TABLE>
<CAPTION>
Outstanding Options and Purchase Rights
------------------------------------------------------------
Shares Weighted-Average
Available for Number of Exercise
Grant Shares Price
------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1996 995,000 - -
Shares authorized 3,000,000 - -
Shares issued under stock
purchase rights (5,000) - -
Options granted (530,000) 530,000 $1.14
Options canceled 60,000 (60,000) $1.25
---------------------------------------
Balance at December 31, 1997 3,520,000 470,000 $1.13
Options granted (366,300) 366,300 $1.50
Options canceled 315,000 (315,000) $1.22
---------------------------------------
Balance at December 31, 1998
and March 31, 1999 3,468,700 521,300 $1.34
=======================================
</TABLE>
At March 31, 1999, 105,124 outstanding options were exercisable.
Of the 3,468,700 shares available for grant at March 31, 1999, 990,000 can only
be used for stock purchase right grants under the 1996 Stock Option Plan and
2,478,700 can be used for stock option grants under the 1997 Stock Option Plan.
In addition, the Company granted 500,000 nonstatutory stock options outside of
both the 1996 and 1997 plans at approximately $0.13 in January 1997. The stock
options were fully vested on the date of grant.
18
<PAGE>
Agate Technologies, Inc
Notes to Consolidated Financial Statements (continued)
6. Shareholders' Equity (continued)
Stock Option Plan (continued)
The options outstanding and currently exercisable by exercise price at March 31,
1999 are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Currently Exercisable
- -------------------------------------------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In years)
$0.60 40,000 9.81 $0.60 40,000 $0.60
$1.00 100,000 9.81 $1.00 56,250 $1.00
$1.50 381,300 9.81 $1.50 8,874 $1.50
------------------- -------------------
521,300 9.81 $1.34 105,124 $0.89
=================== ===================
</TABLE>
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net loss and net loss per share is required by
FAS 123, which also requires that the information be determined as if the
Company had accounted for its employee stock options granted under the fair
value method of FAS 123. The fair value for options was estimated at the date of
grant using the minimum value method with the following weighted-average
assumptions for 1999, 1998 and 1997: expected dividend yield of 0%, expected
stock price volatility of 1%, a risk-free interest rate of 5.61% 5.67%, and the
expected life of options of four years.
19
<PAGE>
Agate Technologies, Inc
Notes to Consolidated Financial Statements (continued)
6. Shareholders' Equity (continued)
Stock-Based Compensation (continued)
Option valuation models were developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.
The pro forma effect of applying FAS 123 was not material to the Company's
reported net loss in any period presented and the impact would not be material
in future years. The weighted-average fair value of options granted in 1999,
1998, and 1997 was $0.27, $0.27, and $0.13 per share, respectively.
7. Related Party Transactions
Francis C. S. Khoo, CEO and chairman of the board of directors, Shirley Ooi,
chief financial officer and director, and Vincent Ooi, president own
approximately 50% of the stock of Pacific Rim Trading Limited.
20
<PAGE>
Agate Technologies, Inc
Notes to Consolidated Financial Statements (continued)
8. Income Taxes
Income tax expenses consists of the following:
<TABLE>
<CAPTION>
Three-month
period ended Years ended
March 31, December 31,
---------------------------------------------
1999 1998 1997
---------------------------------------------
<S> <C> <C> <C>
Current tax expense:
State $ 800 $ 800 $ 800
Foreign 5,039 11,103 -
---------------------------------------------
Income tax expense $5,839 $11,903 $ 800
=============================================
</TABLE>
The Company's income tax expense differs from the income tax determined by
applying the U.S. federal statutory rate to the pretax loss as follows:
<TABLE>
<CAPTION>
Three-month
period ended Years ended
March 31, December 31,
----------------------------------------------
1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
Tax expense at U.S.
statutory rate $(140,942) $(686,115) $(828,240)
Foreign income tax 5,039 11,103 -
State minimum taxes 800 800 800
Unbenefitted net operating
losses 140,942 686,115 828,240
----------------------------------------------
Income tax expense $ 5,839 $ 11,903 $ 800
==============================================
</TABLE>
21
<PAGE>
Agate Technologies, Inc
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities for federal and state income
taxes are as follows:
<TABLE>
<CAPTION>
Years ended
March 31, December 31,
-----------------------------------------
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 2,000,000 $ 1,800,000 $ 670,000
Tax credit carryforwards 150,000 140,000 118,000
Capitalized research and
development 102,000 110,000 600,000
Other, net 308,000 280,000 102,000
-----------------------------------------
Total deferred tax assets 2,560,000 2,330,000 1,490,000
Less valuation allowance (2,560,000) (2,330,000) (1,490,000)
Net deferred tax assets $ - $ - $ -
=========================================
</TABLE>
Realization of deferred tax assets is dependent upon future earnings, the timing
and amount of which are uncertain. Accordingly, a valuation allowance, in the
amount equal to the net deferred tax assets, has been established to reflect
these uncertainties. The valuation allowance increased by $230,000, $840,000,
and $1,010,520 during the periods from January 1, 1999 to March 31, 1999 and for
the years ended December 31,1998 and 1997, respectively.
As of March 31, 1999, the Company had federal and state net operating loss
carryforwards each of approximately $5,100,000. The Company also had federal and
state research and development tax credit carryforwards of approximately
$105,000 and $65,000, respectively. The net operating loss and tax credit
carryforwards will expire at various dates beginning in 2004, if not utilized.
Utilization of the net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986, as amended, and similar state
provisions. The annual limitation may result in the expiration of net operating
loss and tax credit carryforwards before utilization.
22
<PAGE>
Agate Technologies, Inc
Notes to Consolidated Financial Statements (continued)
9. Impact of the Year 2000 (Unaudited)
The Company has determined that its current computer systems are Year 2000 ready
and would function properly with respect to dates in the year 2000 and beyond.
However, the Company has plans to replace its current computer systems to meet
the needs of the business as the Company continues to grow. The replacement
system will be Year 2000 compliant. The Company has yet to initiate discussions
with all of its third-party relationships to ensure that those parties have
appropriate plans to remediate Year 2000 issues where their systems impact the
Company's operations. The Company is assessing the extent to which its
operations are vulnerable should those organizations fail to properly remediate
their computer systems. While the Company believes its planning efforts are
adequate to address its Year 2000 concerns, there can be no guarantee that the
systems of other companies on which the Company's operations rely will be
converted on a timely basis and will not have a material effect on the Company.
The cost of the Year 2000 initiatives is not expected to be material to the
Company's results of operations or financial position.
10. Segment Information
The Company adopted Financial Accounting Standards Board's Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("FASB
131"). The new standard revises the way operating segments are reported. The
Company operates and tracks its results in one operating segment. The Company
designs, manufactures, develops, and markets removable storage devices and
complementary software.
Net revenue for non-U.S. locations are substantially the result of export sales
from the United States. Net revenue by geographic region based on customer
locations were as follows:
<TABLE>
<CAPTION>
Three-month
period ended Year ended
March 31, December 31,
1999 1998
----------------------------------------
<S> <C> <C>
Net revenue:
United States $214,511 $508,525
Pacific Rim 188,461 436,077
Europe 2,898 2,941
----------------------------------------
Total $405,870 $947,543
========================================
</TABLE>
23
<PAGE>
Agate Technologies, Inc
Notes to Consolidated Financial Statements (continued)
11. Contingencies
From time to time, the Company may be a party of litigation and claims pursuant
to the ordinary course of its business. Although the results of litigation and
claims cannot be predicted with certainty, the Company believes that the final
outcome of such matters will not have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
12. Subsequent Events (unaudited)
During June 1999, holders of 250,000 Series A preferred shares converted such
shares into common shares. Also during June 1999, the Company raised $241,002 by
selling 321,336 common shares in a private placement at $0.75 per share.
On June 29, 1999, all former shareholders of Agate Technologies, Inc. ("Agate-
California"), a California corporation were issued series in ARCA Corp.
("ARCA"), a New Jersey corporation with no known assets or liabilities, in
exchange for the contribution of their Agate-California shares. Each common
shareholder received 1.5 ARCA common shares for each Agate-California share
exchanged. Each Series A preferred shareholder received an equal number of ARCA
Series A preferred shares, which had substantially identical rights,
preferences, privileges, and restrictions, except each share is convertible into
1.5 ARCA common shares. As a result, shareholders of Agate-California owned in
excess of 90% of ARCA's outstanding shares and Agate-California became a wholly
owned subsidiary of ARCA. The transaction between ARCA and Agate-California will
be considered to be an acquisition of ARCA by Agate-California (reverse
acquisition).
On June 30, 1999, ARCA was merged into its other wholly owned subsidiary, Agate
Technologies, Inc. ("Agate-Delaware"), a Delaware corporation in order to
reincorporate ARCA in Delaware. Agate-Delaware has Series A preferred stock that
is identical in rights, preferences, privileges, and restrictions to the ARCA
Series A preferred stock. Each ARCA shareholder received one share of Agate-
Delaware for each ARCA share.
24
<PAGE>
Agate Technologies, Inc
Notes to Consolidated Financial Statements (continued)
12. Subsequent Events (unaudited) (continued)
The pro forma basic and diluted net loss per common share restated for the
equivalent number of shares received in the merger would be as follows:
<TABLE>
<CAPTION>
Three-month
period ended
March 31 Years ended December 31,
--------------------------------------------
1999 1998 1997
--------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Net loss $ (547,111) $(2,102,491) $(2,436,800)
============================================
Pro forma basic and diluted
weighted-average shares of
common stock outstanding 10,575,000 10,575,000 10,576,993
============================================
Pro forma basic and diluted net
loss per common share $ (0.05) $ (0.20) $ (0.23)
============================================
</TABLE>
25
