SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended:
March 31, 2000
Commission File Number
333-5278-NY
Agate Technologies, Inc.
(Name of small business issuer in its charter)
Delaware 94-3334052
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
519 Montague Expressway 95035
Milpitas, California (Zip Code)
(Address of Principal Executive offices)
Issuer's telephone number: (408) 956-7950
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: None
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
State issuer's revenues for the most recent fiscal year. $1,400,153.
The aggregate market value of the voting common stock held by non-affiliates of
the Registrant as of June 2, 2000 was $5,541,914 . The Company's common stock is
traded on the OTC Electronic Bulletin Board.
There were 12,942,508 shares of common stock $.0001 par value outstanding as of
June 2, 2000.
Documents incorporated by reference: None
Transitional Small Business Format (check one); Yes__; No X
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ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
The Company is a holding company and through its subsidiaries is
engaged in:
(i) design and development of software solutions, associated hardware,
and services enabling cross PC platform connectivity, making it easier for data
and device sharing and reducing computer downtime;
(ii) marketing and distribution of such software solutions, hardware,
and services and those of third parties, and;
(iii) development of an Internet Web service featuring a transportable
personalized Web portal.
The Company became publicly traded by combining with a publicly traded
corporation as follows. On June 29 1999, all former shareholders of Agate
Technologies Inc., a California corporation ("Agate-California"), were issued
shares in ARCA corporation, a New Jersey corporation ("ARCA") 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 of
this transaction, shareholders of Agate California owned in excess of 90% of
ARCA's outstanding shares and Agate-California became a wholly owned subsidiary
of ARCA. Accordingly, the transaction between ARCA and Agate-California is
considered to be an acquisition of ARCA by Agate-California.
On June 30, 1999, ARCA was merged into its other wholly owned
subsidiary, Agate Technologies, Inc., a Delaware corporation ("Agate-Delaware"),
in order to re-incorporate 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 in exchange for each ARCA share.
The Company's principle offices are located at 519 Montague Expressway,
Milpitas, California 95035. Its telephone number is (408) 956 7950; its fax
number is (408) 956-7955 and its e-mail address is [email protected].
BUSINESS OVERVIEW
The Company was formed in January 1996, initially focusing on
developing "plug and play" software for PCs designed to eliminate the need to
restart and reconfigure the system whenever a peripheral device is added or
changed. Hot swap or hot insertion techniques allow applications to be
instantaneously upgraded or expanded without affecting the rest of the system.
Implemented properly, the software creates more flexibility, reducing downtime
or simplifying system repair. The Company successfully developed its Tioman(TM)
softwARe, the industry's first IDE hot swap software, which was licensed to
notebook manufacturers eventually creating a standard for notebook plug and play
software. Tioman led to the development of a generic retail notebook software
called, ProSwap(TM), offering similar plug and play features across a broad
platform of notebook PCs. This achievement was significant because it enables
increased user
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productivity, better utilization of expensive storage devices and became a core
architecture for the development of other software applications. To date, the
Company's Tioman and ProSwap software have been incorporated into over 1,000,000
notebook computers through OEM licensing agreements with notebook manufacturers
such as Hewlett Packard, Acer, IBM (Acer) NEC, Siemens and Trigem, as well as
direct Web and retail sales. In June, 1999, the Company filed a continuation to
its November, 1996, US patent application covering certain aspects of its
ProSwap technology (and specifically as it applies to IDE devices).
Thereafter, the Company developed the Hot Data Shuttle (TM) (HDS), a
device bay which incorporates the Company's ProSwap software into a 5.25"
generic PC device bay using a proprietary designed printed circuit board (PCB)
and a programmable ASIC chip. The Company also developed a 3.5" form factor
device bay for 2.5" HDD called the Hot Data Xchange(TM) (HDX or HDXchange). Hot
Data Shuttle and Hot Data Xchange enable plug and plAy functionality on IDE mass
storage devices such as hard disk drives, zip drives and other storage media
making devices readily interchangeable across various PC makes, models and
platforms. The proprietary ASIC chip, that is the basis of the HDS and HDX
together with Tioman has broad applicability across PC platforms.
The Company then introduced the Personal Data Carrier (TM) (PDC) in
conjunction with the HDXchange, a smaller form factor generic device bay that
makes the contents of a 2.5-inch hard drive available to both notebook and
desktop. The PDC allows one to carry up to 15 gigabytes or more of data in one's
shirt pocket making it easier to transport and access or store away in a safe.
The HDXchange's plug and play capability provided the connectivity to the
desktop making the PDC portable and ideal for sharing data or device. Access to
the data is now made immediately available via a standard PCMCIA while
connectivity to the desktop is made possible by simply plugging the Personal
Data Carrier into the Xchange bay of a PC.
In late 1999, the Company completed the development of its HotShadow
(TM) software application that enables one's alternate or secondary storage
device to mirror or "shadow" the contents of one's primary storage devices on a
selective or ongoing basis much more rapidly than through a regular backup.
HotShadow has the ability to replicate the computer's hard disk drive in quick
time utilizing the Company's core software technology integrated with an instant
recovery capability. The HotShadow software led to the introduction of the
Disaster Recovery System (TM) (DRS), a user friendly backup software known for
its unique recovery solution. DRS is a combination of the Hot Shadow software,
ProSwap software, and the Hot Data Shuttle. DRS allows a user to recover almost
instantly from a hard disk crash by causing one's secondary storage device that
can "take over" in real time. The DRS can be configured to meet various user
needs.
DISTRIBUTION AND MANUFACTURING
The Company incorporated a new subsidiary, ei Corporation in 1999 to
market and distribute its bundled products and solutions through selective
distribution, retail, and direct selling efforts to VARs and system integrators.
ei Corporation complements its sales efforts through a network of sales
representatives covering the markets of US, Canada and Latin America. ei
Corporation has since introduced its products through select national, regional
distributors and retailers like Fry's, MidWest Micro, D&H Distribution and
MicroCenter In the future, ei Corporation expects to expand its direct sales
through the Web and in line with this strategy, it will focus on building Web
partnership affiliations , improving its ecommerce site and extending its
product range to include Internet related storage and communication products.
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The Company's early revenue model was based entirely on OEM sales from
software licensing and Hot-chip integration. In 1999, it implemented its plan to
market its bundled products and solutions through selected distribution channels
and direct marketing to VARs and system integrators. This strategy, will,
however need substantial marketing funds to create name brand awareness . In
this regard, the Company is intending to seek to raise additional financing to
promote its products.
All of the Company's hardware components are outsourced and
manufactured in cooperation with ODMs in Asia who are also allowed to resell the
products to their own customers. The Company uses its own proprietary PCB
design, ASIC chip and software.
CURRENT PRODUCTS SUMMARY
All of Agate's products are designed to be "DataReady(TM)". Thus , they
take advantage of the plug and play capability to provide the following
characteristics:
o User friendly plug and play - this allows ready install/removal
of any storage device without requiring system shutdown or
additional knowledge of the system operation.
o Transportability - inherently mobile, immutable and easily
migratable defacto standard medium.
o Security - enhanced through readily available auxiliary storage
devices and data redundancy.
Agate's products available today as described above are:
o Tioman - a customized "hot swap" software licensed to OEMs for
the notebook platforms
o ProSwap - a generic swap software for both desktop and laptops .
Agate has extended the plug and play, transportable and security
features and benefits typically enjoyed with the floppy diskette
down to the storage device layer.
o Hot Data Shuttle - a bundled solution built on top of the ProSwap
hot swap engine allowing hot access to any 3.5 inch media device
such as zip drives, super disk, and hard drives, readily
interchangeable across personal computers without any need to
power down. It supports Windows 95,98, and NT and Linux.
o Hot Data Exchange -a bundled solution built on top of the ProSwap
hot swap engine allowing hot access to any 2.5 inch hard drive
readily interchangeable across personal computers without any
need to power down. It supports Windows 95,98, and NT and Linux.
o Hot Chip - Hot Chip is a proprietary chip which is based on the
Company's based on the Company's , intelliswap(TM) architecture ,
enables automatic user friendly applications for accessing data
immediately after a device is entered into the desktop computer.
This chip is not limited to devices but can be extended to any
level of physical interface within the ATAPI/IDE architecture.
This flexibility opens OEM design windows to incorporate hot
access to docking stations and other features/functions that may
be desirable in the future.
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o Hot Shadow - a software solution designed to be used directly
with the ProSwap software engine allowing 2nd hard drive
mirroring and full /incremental back-up.
o Disaster Recovery System for Desktop and Notebook - a product
which enables seamless system level back up and instant recovery
functionality in a one step process. The key feature is the
ability to trigger a storage device that takes over in real time
within seconds.
FUTURE PRODUCTS AND SERVICES
The Company's current focus is to extend its Windows plug and play
functionality and features to the Linux platform. Other products and solutions
will then be developed on the Linux platform focussing on low-cost, ease of use,
and cross PC platform data availability. The Company intends to target PC
integrators and VAR business partners who market and distribute Linux products
and services. The development of products and services on the Linux platform
represents the Company's initiative towards the Internet and related software
solutions. The introduction and expansion of the Linux platform is therefore an
important development for the Company.
Web2Drive ("W2D")is a new Internet development with the objective of
creating a personal web access for everyone. The objective of the W2D portal is
to enable users to have web data anywhere in the world (i) anytime you want it
(ii) as fast as you want it and (iii) and as secure as you want it.
The Company's planned Web2Drive product will employ a mobile web
appliance concept integrated with a PDC or any other storage device enabling a
speedier and more efficient download of a personalized portal. Integration of
this software will enable a user to be mobile and capable of on and off line
surfing of the World Wide Web. The Company is devoting a substantial portion of
its research and development effort to the completion of this ongoing Internet
project.
The Company believes that the combination of the Personal Data Carrier
and the personalized portal, which allows one to carry critical, proprietary or
sensitive data on one's person, combined with the ability to access applications
and non-critical information via the Internet, will create a compelling
universal mobility solution. The Company believes that its technology forms an
important component of a future potential computing paradigm based on three
components:
1. Ubiquitous set-top boxes and dumb terminals (at home, at work, in
airports, on airplanes, in phone booths);
2. Application Service Providers; and
3. Personal Data Carriers.
The Company's future products and services will depend on its ability
to raise adequate funding to finance its research and development and marketing
and the continued services of key personnel. It is expected that the Company's
initiative into Internet web services will require substantial funding for
development and marketing. The Company's future success also depends on its
ability to identify, attract, hire, train, retain and motivate highly skilled
technical, managerial, sales and marketing and business development personnel.
The Company intends to
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hire technical and marketing and development personnel during the next year.
Qualified personnel, however, are difficult to recruit and if we fail to attract
such personnel, the Company could be adversely affected.
COMPETITION
The market for the Company's products is highly competitive and
characterized by rapid technological change, frequent new product introductions,
and evolving industry standards. The Company currently experiences competition
from various companies including Phoenix Technologies and Softex in "hot swap"
software. In future versions of Windows 2000, Microsoft is targeting some level
of "plug and play" technology which may address IDE "hot swap". There are also
smaller companies which are providing various IDE hardware and software
products.
Most of the Company's competitors have significantly greater financial,
development, marketing and other resources than the Company. As a result, these
competitors may be in better position than the Company to quickly respond to
technological change and consumer demand. Accordingly, there can be no assurance
that the Company will be successful in its ability to enhance current products
and develop and introduce future products that will achieve market acceptance
The Company's future is largely dependent on development of new
products including, for example, DRS products, Web service, and LINUX version of
its plug and play software. These products and services are in varying stages of
development and there can be no assurance that development of these products and
services will be successful or timely completed.
PATENTS, PROPRIETARY TECHNOLOGY AND OTHER INTELLECTUAL PROPERTY
The Company relies primarily on a combination of copyright, trademark
and patent laws, trade secrets, confidentiality procedures and contractual
provision to protect its proprietary technology. For example, the Company
distributes its software pursuant to license agreements which impose certain
restrictions on licensee's ability to utilize the software. In addition, the
Company seeks to avoid disclosure of its trade secrets, including requiring
those persons with access to the Company's proprietary information to execute
confidentiality agreements with the Company and restricting access to the
Company's source code. The Company seeks to protect its software, documentation,
and other written materials under trade secret and copyright laws, which afford
only limited protection. The Company has two patent applications pending with
the United States Patent and Trademark Office. The first relates to the
Company's "hotswap" technology and the second to the Company's Web2Drive
Internet portal. There can be no assurance that any patent will ever be issued
or that if issued such patent will contain valid claims which are broad enough
to prevent competitors from designing around the patent or that if infringed the
Company will have the resources to enforce the patent.
To date, the Company has not been notified that the Company's products
infringe the proprietary rights of third parties, but there can be no assurance
that third parties will not claim infringement by the Company with respect to
current or future products. The Company expects that software product developers
will increasingly be subject to infringement claims as the number of products
and competitors in the Company's industry segment grows and the functionality of
products in different industry segments overlaps. Any such claims, with or
without merit, could be time-consuming, result in costly litigation, cause
product shipment delays or require the Company to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to the Company or at all, which
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could have a material adverse effect upon the Company's business, operation
results and financial condition.
PRINCIPAL SUPPLIERS
The Company's custom ASIC HotChip is sole sourced. Any termination or
significant disruption in the Company's relationship with this manufacturer or
any material adverse change to the financial condition of such manufacturer
could prevent the Company from filling customer orders in a timely manner and
would have a material adverse effect on the Company's financial position and
results of operation. Although management believes that its relationship with
this manufacturer is good, there can be no assurance that this relationship will
continue or that it will continue to be in a position to manufacture products
for the Company in a timely and cost efficient manner. Although the Company
attempts to reduce the adverse impact a problem with this supplier could cause
by maintaining a safety stock; there can be no assurance that the Company would
be able to replace the supplier before its safety stock ran out.
RESEARCH AND DEVELOPMENT SPENDING
During the two most recent full-year fiscal periods ended March 31,
2000 and December 31 1998, the Company spent $537,722 and $888,885 respectively
on research and development activities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
EMPLOYEES
The Company currently has 14 employees, of whom 12 are full time and 2
are part time.
COMPLIANCE WITH ENVIRONMENTAL LAWS
Because of the nature of the Company's business, it does not believe
that the costs and effects of compliance with environmental laws, whether
federal, state or local, would be significant or even material.
ITEM 2. DESCRIPTION OF PROPERTY
The Company does not own any real property. The Company leases
approximately 3,820 square feet of office space from a non-affiliate at 519
Montague Expressway , Milpitas, California under a three year office lease which
requires an annual lease obligation of $76,500. Management believes that its
current leased space is sufficient for its proposed operations for at least the
remaining term of the lease.
The Company does not invest in, nor does the Company intend in the
future, to invest in real estate or interests in real estate, real estate
mortgages or securities of or interests in persons primarily engaged in real
estate activities.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings
nor is any of its property subject to any such legal proceedings except as
follows. The Company's defunct Malaysian subsidiary was sued in 1998 in
Industrial Court in Malaysia by its former CEO for reinstatement which, if
granted, would most likely result in monetary damages against the
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subsidiary. As the subsidiary has no assets or funds, this former employee has
attempted to add the Company's subsidiary Agate-California to the suit. However,
her application was denied, which denial she has appealed to the Malaysian
Supreme Court. This former employee is the owner of a corporation which
beneficially owns more than five percent (5%) of the Company's outstanding
common stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the Company's fiscal year ended March 31, 2000, either through
the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since June 30, 1999, the Company's common stock has been eligible for
trading on the OTC Bulletin Board under the symbol "AGTE." No assurance can be
given that the present market for the Company's common stock will continue or
will be maintained.
The following table sets forth the range of the high and low sales
prices for shares of the Company's common stock during each of the calendar
quarters identified below. Based on the limited public float and trading in the
Company's common stock, management of the Company believes that such data is
anecdotal and may bear no relation to the true value of the Company's common
stock or the range of prices which would prevail in a more fluid higher volume
market.
Quarter Ending HIGH LOW
September 30, 1999 $2.50 $1.25
December 31, 1999 $1.875 $0.812
March 31, 2000 $6.00 $0.812
The last price of the Company's common stock as reported on the OTC
Electronic Bulletin Board on June 2, 2000 was $1.74. On such date the Company
had 423 holders of record of the Company's common stock .
The Company has not paid any dividends on its common stock and the
Board of Directors presently intends to continue a policy of retaining earnings,
if any, for use in the Company's operations and to finance expansion of its
business. The declaration and payment of dividends in the future, of which there
can be no assurance, will be determined by the Board of Directors in light of
conditions then existing, including earnings, financial condition, capital
requirements and other factors. There are no restrictions that currently
materially limit the Company's ability to pay dividends or which the Company
reasonably believes are likely to limit materially the future payment of
dividends on common stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
The statements contained in this report on Form 10-KSB that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and
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Section 21E of the Securities and Exchange Act of 1934, including statements
regarding Agate's expectations, hopes, intentions, beliefs, or strategies
regarding the future. Words such as "anticipates", expects", "intends", "plans",
"believes", "seeks", "hopes", and "estimates", and variations of these words and
similar expressions are intended to identify forward-looking statements.
Examples of forward-looking statements contained in this Report, including in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", include the Company's statements regarding planned new Linux and
Web 2 Drive products, anticipated product revenue increase and loss reduction,
ability to reduce or increase R&D and marketing expenses depending upon the
Company's cash resources, and anticipated cash needs, credit line availability
and ability to raise financing. Forward-looking statements contained herein or
in other statements made by the Company are made based on management's
expectations and beliefs concerning future events and trends impacting the
Company and are subject to uncertainties and risks that could cause actual
results of the Company to differ materially from those matters expressed in or
implied by forward-looking statements. The Company believes that the following
factors, among others, could affect its future performance and cause actual
results of the Company to differ materially from those expressed in or implied
by forward looking statements made by or on behalf of the Company: (a) ability
to raise financing, (b) demand for Company products, (c) effectiveness of
marketing and promotion, and (d) ability to complete development of new products
and services. Other risks which could also so affect Company performance and
results are discussed in the "Risks and Other Factors Affecting Future
Performance" section below. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. Except
as required by law, we undertake no obligation to update any forward-looking
statement, whether as a result of new information, future events, or otherwise.
GENERAL
The Company is a holding company and through its subsidiaries is
engaged in: (i) design and development of software solutions, associated
hardware, and services enabling cross PC platform connectivity, making it easier
for data and device sharing and reducing computer downtime, (ii) marketing and
distribution of such software solutions, hardware, and services, and those of
third parties, and (iii) development of an Internet Web service featuring a
transportable personalized Web portal. The Company is currently seeking to
expand its customer base and raise additional working capital in order to
continue its research and development activity, broaden its marketing capability
and fund other operating expenses.
The Company has changed its fiscal year end from December 31 to March
31.The following discussion compares the operating results, liquidity and
capital resources for the fiscal year ended March 31, 2000 with the prior fiscal
year ended December 31,1998. As such, a discussion of the two fiscal years is
not directly comparable. However, management believes that a discussion of the
two fiscal years is informative and suggestive of trends in revenues, expenses
and the overall financial results of the Company. The Company has also included
a discussion of the three-month period ended March 31, 1999.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED MARCH 31, 2000 AND DECEMBER 31, 1998.
Net sales for the year ended March 31, 2000 rose to $1,400,153 compared
with net sales of $947,543 for the year ended December 31, 1998, an increase of
47%. Net sales for both fiscal years were derived from three basic groups of
products: bundled products and software-
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distribution and retail; Hotchip-OEM; and Licensing OEM. For the year ended
March 31, 2000, these groups of products accounted for 49%, 10% and 41%
respectively of all net sales. This compares to 35%, 21% and 44% respectively
for the year ended December 31, 1998. Gross profit rose to $877,605 for the year
ended March 31, 2000 compared to $642,694 for the year ended December 31, 1998,
an increase of 36%.
Operating expenses decreased slightly in the year ended March 31, 2000
to $2,765,426 from $2,851,351 for the year ended December 31, 1998, a decrease
of 3%. The decrease in operating expenses can be attributed primarily to a
decline in research and development expenses which offset an increase in sales
and marketing and general and administrative expenses.
Research and development expenses decreased to $537,722 for the year
ended March 31, 2000 from $888,885 in the year ended December 31, 1998, a
decrease of 40%. This decrease reflects a reduction in cash resources necessary
to maintain research and development at the prior year's level and a decreased
R&D headcount in California as the Company moved the bulk of its R&D and support
activities to Singapore where salaries were lower.
Sales and marketing expenses increased to $1,177,883 for the year ended
March 31, 2000 compared to $1,009,318 for the year ended December 31, 1998, an
increase of 16%. This increase was mainly due to promotions and marketing
expense due to the launch of products into distribution and the addition of
sales representatives in Latin America and Europe. The Company anticipates that
it will increase its sales and marketing efforts in the ensuing year and will
incur additional expenses in support of such efforts if it is successful in
obtaining additional debt or equity financing.
General and administrative expenses increased to $1,135,900 for the
year ended March 31, 2000 from $953,148 for the year ended December 31, 1998, an
increase of 17%. The increase in general and administrative expenses was largely
due to the merger transaction with ARCA and the higher professional fees (legal,
audit, insurance and others) as a result of the Company becoming a fully
reporting public company on the OTC-BB. Management ,however, expects general and
administrative expenses to stabilize at the current levels for the year ending
March 31, 2001 unless significant increases in revenues dictate increased levels
of personnel related expenses, including salaries, to support the Company's
sales activities.
Interest income and other income decreased to $87,255 for the year
ended March 31, 2000 from $164,285 for the year ended December 31, 1998. This
reflects a depletion of the Company's cash and cash equivalent reserves as the
Company utilized its cash resources to support its operations.
The Company narrowed its operating loss to $1,887,821 for the year
ended March 31, 2000 from $2,208,657 for the year ended December 31, 1998, a
decrease in operating losses of $320,836 or 15%. The Company's net loss also
narrowed. For the year ended March 31, 2000 the Company had a net loss of
$1,872,328 compared to a net loss of $2,102,491 for the year ended December 31,
1998, a decrease of $230,163 or 11%. Management expects that its operating
losses will continue to narrow in the year ending March 31, 2001 if its product
lines gain increased market acceptance and resulting sales revenues continue to
grow.
THREE MONTHS ENDED MARCH 31, 1999.
Net sales in the three months ended March 31, 1999 were $405,870 and
reflected the increase in net sales that became more evident in the year ended
March 31, 2000. Gross profit for
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the three month period was $242,432. Operating expenses also continued to
increase in the three months ended March 31, 1999 over what the Company had
experienced in prior quarters. Management believes this was a reflection of
increased sales and marketing activity ($299,205) and increased general and
administrative expenses ($321,317) necessary to support expanded activity. These
respective quarterly levels of expenditures continued to increase as was evident
from the total operating expenses incurred in the year ended March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the year ended March 31, 2000
was $1,889,526. This compares to net cash used in operating activities of
$2,101,109 for the year ended December 31, 1998. Net cash provided by investing
activities was $15,439 for the year ended March 31, 2000. This compares to net
cash provided by investing activities of $100,416 for the year ended December
31, 1998. Working capital (current assets minus current liabilities) was
$349,124 at March 31, 2000 compared to working capital of $1,906,820 at December
31, 1998. The reduction in working capital of $1,557,696 or 82% reflects the
Company's utilization of its working capital to fund its continuing losses from
operations. At March 31, 2000, the Company had cash and cash equivalents on hand
of $309,894 and other current assets of $650,561. Current liabilities at March
31, 2000 were $611,331.
The Company's cash on hand as of March 31, 2000, would not be adequate
to fund the Company's operations for one quarter if the Company continued to use
cash in operating activities at the same rate as in fiscal 2000. The Company
has, however, reduced its cash used in operations through a variety of
cost-cutting measures. In addition, the Company hopes to have increased
revenues. In order to fund its operations, the Company has also extended its
$800,000 working capital credit line through April 1, 2001, which is expected to
provide additional borrowing capacity assuming the Company is able to fulfil the
loan covenants. The Company is in the process of seeking additional equity or
debt financing to increase its working capital and fund anticipated operations.
There can be no assurance that the Company will be successful in obtaining such
additional funding on terms it deems acceptable or at all. If it is unable to
raise additional financing, the Company may be required to reduce its operating
losses by cutting costs further through layoffs or to raise money by other means
such as technology licenses or consulting or else face other severe
consequences.
The Company currently does not have any material commitments for
capital expenditures.
YEAR 2000 ISSUES
The Company did not experience any material disruptions in its
operations or activities as a result of the so-called "Y2K Problem". Nor did the
Company incur material expenses in correcting perceived or suspected Y2K
problems. In addition, the Company is not aware that any of its suppliers,
customers or on-line partners has experienced any material disruptions in their
operations or activities. The Company does not expect to encounter any such
problems in the foreseeable future, although it continues to monitor its
computer operations for signs or indications of such a problem.
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<PAGE>
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
The Company's consolidated financial statements (including the notes
thereto and the independent auditors' reports thereon) can be found on pages F-1
through F-21 immediately following the signature pages to this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Upon the recommendation of its board of directors, on April 5, 2000,
Registrant appointed Grant Thornton LLP as Registrant's independent accountants
to replace Ernst & Young, LLP who was dismissed. Ernst & Young LLP's report on
the financial statements for the past two years did not contain an adverse
opinion or a disclaimer of opinion, nor was it qualified or modified as to
uncertainty, audit scope, or accounting principles. During Registrant's two most
recent fiscal years, and any subsequent interim period preceding such dismissal,
there were no disagreements with Ernst & Young LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreement(s), if not resolved to the satisfaction of Ernst &
Young LLP, would have caused Ernst & Young LLP to make reference to the subject
matter of the disagreement(s) in connection with its report.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The executive officers and directors of the Company and their ages are
as follows:
Name Age Position
----------------- ----- -------------------------------------------------
Mr. Francis Khoo 59 Chairman of the Board and Chief Executive Officer
Ms. Shirley Ooi 49 Chief Financial Officer and Director
Mr. Vincent Ooi 33 President and Chief Technology Officer
MR. FRANCIS KHOO, CO-FOUNDER, has served as Chairman, Chief Executive
Officer since the Company started in January 1996. Beginning in the last quarter
of 1995, Mr. Khoo worked with Pacific Rim Trading Co., Ltd. to organize the
investment in and formation of the Company. Before that, Mr. Khoo obtained a
broad range of experience and knowledge in the investment and financial services
industry. He has followed this up by becoming involved with several emerging
growth businesses. His career in financial services includes senior assignments
at the Bank of America, Dean Reynolds and Shearson Lehman. In 1991, Mr. Khoo
became an entrepreneur and was both investor and director of a private US
company which ultimately went public.
MS. SHIRLEY OOI has served as Chief Financial Officer and member of the
Board of Directors since she co-founded the Company in January 1996. Ms. Ooi has
over 20 years of experience in the investment and financial services industry.
Prior to joining the Company, Ms. Ooi worked with Bank Leu (subsidiary of Credit
Suisse group) in Hong Kong and subsequently served as Regional Managing
Director, Southeast Asia and Asia Representative in Singapore from 1992 through
1995. Prior to this, she had worked as Private Banking Head with Scotiabank in
Singapore.
-12-
<PAGE>
MR. VINCENT OOI, a co-founder of the Company, has served as President
and Chief Technology Officer since March 1996. Prior to joining the Company, Mr.
Ooi had worked with JTS, a mass storage technology company for one year as
Director of Engineering. Prior to this, Mr. Ooi spent 6 years in Conner
Peripherals where he was involved in various key engineering and management
positions and helped develop and patent various firmware and software. Mr. Ooi
is an Electrical Engineering graduate from the Singapore Polytechnic.
Ms. Ooi and Mr. Ooi are brother and sister.
Messrs. Khoo and Ooi, and Ms. Ooi have entered into Confidentiality and
Intellectual Property Agreements with the Company assigning ownership of
inventions they make to the Company and agreeing to maintain the confidentiality
of the Company's confidential information.
The directors of the Company are elected at the annual meeting of
shareholders, serving until the next annual meeting and until his or her
successor is duly elected and qualified unless earlier resignation or removal.
Executive officers of the Company serve at the pleasure of the Board of
Directors until their resignation or removal.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows all cash compensation paid or to be paid by
the Company during the fiscal years indicated to the chief executive officer and
the highest paid executive officers of the Company as of the end of the
Company's last fiscal year whose salary and bonus for such period in all
capacities in which the executive officer served exceeded $100,000.
-13-
<PAGE>
<TABLE>
ANNUAL COMPENSATION
<CAPTION>
(A) (B) (C) (D) (E) (G)
NAME AND
PRINCIPAL OTHER
POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS GRANTED
<S> <C> <C> <C> <C> <C>
Francis Khoo 2000 $129,600 (0) $22,255 0
Chief 1999 129,600 (0) 20,880 150,000 (1)
Executive 1998 127,095 (0) 15,100 0
Officer
Shirley Ooi 2000 108,000 (0) 19,500 0
Chief 1999 108,000 (0) 19,500 100,000 (1)
Financial 1998 106,663 (0) 19,500 0
Officer
Vincent Ooi 2000 110,000 (0) 6,500
President and 1999 106,668 (0) 6,500
Chief Technical 1998 100,000 (0) 6,500
Officer
Yong Thye Lin 2000 14,625 (0) 24,000 200,000 (2)
CEO, 1999(2) N/A
ei Corporation 1998(2) N/A
</TABLE>
(1) The options vest at the rate of 2-1/12% per month over four years from their
date of grant.
(2) Mr. Lin became a Company officer and employee on January 24, 2000; his per
annum salary rate is $78,000. Of the 200,000 incentive stock options granted at
the exercise price of $1.75 per share, 100,000 options vest 25% after one year
and 2-1/12%over the following three year while the remaining 100,000 options
vest in full after seven year subject to earlier vesting in whole or part, in
the event the optionee satisfies certain sales performance or other milestones
established by the Corporation's CEO who shall also determine if such milestones
were satisfied in his sole and absolute discretion.
OPTION GRANTS TABLE
The following table sets forth information with respect to the named
executives, concerning the grants of options during the fiscal year ended March
31, 2000.
-14-
<PAGE>
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<CAPTION>
Name Number of Shares Percent of Total Exercise Expiration
Underlying Options Options Granted to Price Date
Granted to Employees in
Fiscal Year
<S> <C> <C>
Francis Khoo 0 0 N/A N/A
Shirley Ooi 0 0 N/A N/A
Vincent Ooi 0 0 N/A N/A
Yong Thye Lin 200,000 85 $1.75 3/15/10
</TABLE>
OPTION EXERCISES AND FY END OPTION VALUES
The following table sets forth information with respect to the named
executives, concerning the exercise of options during the last fiscal year and
unexercised options and held as of the end of the fiscal year March 31, 2000.
The Company has never granted any stock appreciation rights
<TABLE>
AGGREGATED OPTIONS EXERCISES IN LAST FISCAL YEAR AND FY-END OPTIONS VALUES:
<CAPTION>
Number of Value
Shares Acquired Realized Value of Unexercised
Upon Exercise Upon Number of Unexercised In-the-Money Options
Name of Option Exercise Options 03/31/00 03/31/00(1)
Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Francis Khoo 0 0 534,375 140,625 $2,282,313 $492,188
Shirley Ooi 0 0 356,250 93,750 1,521,542 328,125
Yong Thye Lin 0 0 0 200,000 0 550,000
</TABLE>
(1) In accordance with SEC rules, values are calculated by subtracting the
exercised price from the fair market value of the underlying common stock .For
purposes of this table, fair market value is deemed to be closing bid price of
the common stock on 3/31/00, which was $4.50 per share.
Messrs. Khoo and Ooi and Ms. Ooi are parties to employment agreements
with the Company. These agreements provide for a base salary (currently $129,600
for Mr. Khoo, $110,000 for Mr. Ooi, and $108,000 for Ms. Ooi), to be increased
each April for cost of living. In addition, Messrs. Khoo and Ooi each receive an
automobile allowance. Messrs. Khoo and Ooi and Ms Ooi are to receive a bonus
equal to 2% of the Company's net profits capped at $500,000. To date, no bonuses
have been paid as the Company has not been profitable.
The Employment Agreements for Mr. Khoo and Ms. Ooi provide that
termination without cause results in six months severance pay, termination with
cause results in three months severance pay, and termination for malfeasance
results in no severance pay. Messrs. Khoo and Ms. Ooi also receive a housing
allowance of up to $2,600 per month, airfare twice per year for home leave to
Singapore, and cost of storing belongings in Singapore and relocating to
Singapore when Company employment terminates. In addition, there are provisions
for tax equalization and payment for tax preparation services by personal
accountants.
-15-
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning the beneficial
ownership of the Company's common stock as of June 2, 2000 for (a) each person
known to the Company to be a five percent beneficial owner of the common stock;
(b) each director; (c) each executive officer designated in the section
captioned "MANAGEMENT-Executive Compensation;" and (d) all directors and
executive officers as a group. Except as otherwise noted, each person named
below had sole voting and investment power with respect to such securities.
<TABLE>
<CAPTION>
Amount and Nature Percent
of of
Name and Address Title Beneficial Ownership Class (1)
---------------- ----- -------------------- ---------
<S> <C> <C> <C>
Francis Khoo Chief Executive 1,078,125(2),(6) 7.9%
519 Montague Expressway Officer, Chairman
Milpitas, CA 95035 of the Board
Shirley Ooi Chief Financial 781,250(3),(6) 5.8%
519 Montague Expressway Officer, Director
Milpitas, CA 95035
Vincent Ooi President, Chief 637,500(6) 4.9%
519 Montague Expressway Technical Officer
Milpitas, CA 95035
Pacific Rim Trading Ltd.(4) 6,750,000 52.2%
C/O Acceptor Corporation Ltd.
12th Floor, Ruttonjee House
11 Duddell Street
Hong Kong
Just Gems, Inc. 1,125,000(6) 8.7%
No. 36, Jalan Terasek Lapan
Bangsar Baru
59100 Kuala Lumpur
Malaysia
Gordon Pan 862,500 6.7%
2nd Floor, Wisma Takada
Jalan Gaya, Tanjong Lipat
88000 Kota Kinabalu
Sabah, Malaysia
Pitisan Sdn Berhad 2,737,500(5) 18.5%
31, Jalan Riong
59100 Kuala Lumpur
Malaysia
-16-
<PAGE>
All officers and directors as a group
(includes holdings under Pacific Rim
Trading Ltd-see note 4 below) 9,223,438 65.6%
</TABLE>
(1) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of
1934. Unless otherwise stated below, each such person has sole voting and
investment power with respect to all such shares. Under Rule 13d-3(d),
shares not outstanding which are subject to options, warrants, rights or
conversion privileges exercisable within 60 days are deemed outstanding for
the purpose of calculating the number and percentage owned by such person,
but are not deemed outstanding for the purpose of calculating the
percentage owned by each other person listed.
(2) Includes 553,125 shares issuable upon exercise of options held by Mr. Khoo
which are exercisable within 60 days of June 20, 2000. Does not include
121,875 shares subject to options which are not then exercisable.
(3) Includes 368,750 shares issuable upon exercise of options held by Ms. Ooi
which are exercisable within 60 days of June 20, 2000. Does not include
81,250 shares subject to options which are not then exercisable.
(4) Pacific Rim Trading Co., Ltd., a BVI corporation, is a single asset holding
company that owns 6,750,000 shares of common stock of the Company. Mr.
Francis Khoo and Ms. Shirley Ooi are the sole directors of Pacific Rim
Trading Co., Ltd. See note (6) below for certain information on stock
ownership of Pacific Rim Trading Co, Ltd. by Company affiliates.
(5) Consists of shares issuable upon conversion of 1,825,000 shares of the
Company's Series A Preferred Stock.
(6) Excludes any attribution of Company shares due to ownership of Pacific Rim
Trading Co., Ltd. Shareholders of Pacific Rim Trading Co., Ltd. include
Francis Khoo (21.6%), Shirley Ooi (21.6%), Vincent Ooi (7.3%), and Just
Gems, Inc. and/or its shareholder (20%).
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The promoters of the Company were Pacific Rim Trading Co., Ltd.,
Francis Khoo, Shirley Ooi, and Vincent Ooi. Pacific Rim Trading Co., Ltd.
purchased 6,750,000 Company shares in exchange for $570,000 cash in the first
half of 1996. Vincent Ooi purchased 637,500 Company shares in exchange for
certain intellectual property relating to removable hard drives during the first
half of 1996.
ITEM 13. RISKS AND OTHER FACTORS AFFECTING FUTURE RESULTS
NEED FOR ADDITIONAL CAPITAL
The Company anticipates that its current cash balance will not be
sufficient to meet the Company's capital requirements through March of 2001. If
the Company were to use cash in operations during fiscal 2001 at the same rate
as in fiscal 2000, which it does not expect to do, the Company would run out of
cash prior to September 30, 2000. The Company is currently attempting to raise
debt or equity financing. There can be no assurance that the Company will be
able to raise any financing, much less adequate financing to fund its ongoing
operations, on terms that are acceptable to the Company. The Company's
operations would be severely constrained if
-17-
<PAGE>
it is unable to raise financing during the calendar year 2000. If the Company is
unable to raise financing during 2000 or to reduce its cash requirements through
cuts in expenses and/or increases in revenues, then the Company could face other
severe consequences.
RECENT AND EXPECTED LOSSES
From inception, the Company has never been profitable. There can be no
assurance that it ever will generate positive revenues from its operating
activities, or that it will achieve and sustain a profit during any future
period. Failure to achieve significant revenues or profitability would
materially and adversely affect the Company's business, financial condition, and
results of operations.
MARKET ACCEPTANCE OF BUNDLED PRODUCTS
During the current quarter, ei Corporation increased its distribution
channels for bundled products. The Company's bundled products are relatively new
and unproven and need substantial marketing funds to create name brand
awareness. There can be no assurance that there is a viable market for these
products. The Company's marketing arm, ei Corporation, is also new. Even if
there is a viable market for the Company's bundled products, there can be no
assurance that ei Corporation can successfully penetrate such market. In this
regard, unless the Company raises additional financing as described above,
efforts of ei Corporation will be constrained by a lack of resources to
adequately promote the bundled products.
CONCENTRATION OF CONTROL
The Company is controlled in the majority by Francis Khoo and Vincent
and Shirley Ooi through their individual ownership and ownership through Pacific
Rim. As a result, these shareholders may be able to exercise significant
influence over all matters involving shareholder approval, including the
election of directors and approval of significant corporate transactions.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon a number of
key management employees, in particular, upon Francis Khoo and Vincent and
Shirley Ooi. Loss of the services of any one of them would be materially
detrimental. There can be no assurance that the Company will be successful in
retaining these individuals and other key technical and management personnel.
PERSONNEL RECRUITMENT
The Company recognizes the difficulty in recruiting and retaining
talent but intends to recruit a chief operating officer who will be critical to
the success of the Company. There can be no assurance that such person will be
located. Also, the Company needs to retain current and recruit additional
engineering talent which is difficult in the intensely competitive job market of
Silicon Valley. This is one reason the Company has relocated a large portion of
its engineering operations to Singapore. If the Company is unable to obtain and
retain highly skilled individuals to fulfill technical and managerial functions,
the Company's business and financial condition may be materially affected.
-18-
<PAGE>
SUPPLY RELATIONSHIPS WITH THIRD PARTIES
The Company will be dependent upon the hardware products of third
parties for its products that are "bundled" with other products for sale or that
are resold by ei Corporation. There is no assurance that the relationship
between the Company and the third parties will continue to be beneficial to the
Company. There can be no assurance that the third parties will continue to
produce products in the future that retain their current level of market
acceptance, that the products will continue to be available in adequate
quantities at the times required by the Company, or that the third party
products will not contain defects or errors. The Company may experience lost
revenues due to the third party's delay in correcting defects in their products,
delay in getting an adequate supply of their products to the Company, or from
any resulting loss of market share.
UNEXPLORED MARKETS
The Company is actively looking for new OEMs partnership for its
desktop solutions either in the form of joint marketing and distribution or
licensing of its software and ASIC chip while building its own markets and
distribution channels for its newly released products. There can be no assurance
that the Company will be successful in this regard.
TECHNOLOGICAL CHANGE AND MARKET COMPETITION
Competition in the data storage industry continues to be intense. The
industry is characterized by changing technologies and customer demands for new
products. Third parties could develop products and technologies which cause
those of the Company to become obsolete. Most of the Company's competitors have
significantly greater financial, development, marketing and other resources than
the Company. In light of the intense competition in the industry, there can be
no assurance that the Company will be successful in its ability to enhance
current products and develop and introduce future products that will achieve
market acceptance.
DEPENDENCE ON NEW PRODUCTS UNDER DEVELOPMENT
The Company's future is largely dependent on development of new
products including, for example, Web service and Web2D, and LINUX version of its
plug and play software. These products and services are in varying stages of
development and there can be no assurance that development of these products and
services will be successfully or timely completed.
MINIMAL MARKET IN AGATE STOCK
Prior to its take-over by Agate-California shareholders on June 29,
1999, ARCA stock was very thinly traded. The three market makers sold less than
10,000 shares during the first five months of 1999. During the quarter ended
September 30, 1999, the market remained thin as only 17,650 Company shares were
traded while during the quarter ended December 31, 1999, 115,200 shares traded,
and during the quarter ended March 31, 2000, 1,041,600 shares traded, with
526,500 shares trading during the one-week period ending March 24, 2000. There
can be no assurance that any material trading market will develop for the
Company's stock. Such lack of active trading may cause a hesitance to purchase
Company shares on the part of potential shareholders due to the perceived
illiquidity of the shares, thereby perpetuating the lack of a market in the
stock and a corresponding artificial depression in value of Company stock.
-19-
<PAGE>
INTELLECTUAL PROPERTY
The Company has copyrighted its software executable code. However, to
protect the remainder of its intellectual property, the Company currently relies
primarily on trade secret law and the Company's perpetual innovation of its
products. The nature of the Company's product line is such that the products are
susceptible to reverse engineering by competitors. The Company has applied for a
patent to protect some of the technology underlying its planned interactive Web
service; however, there can be no assurance that such patent will be granted,
and if it should be granted, that it will be sufficient to be effective against
competitors. In addition, there can be no assurance that a third party has not
filed or will not file applications for patents or obtain additional proprietary
rights that will prevent, limit, or interfere with the Company's ability to
make, use, or sell its products. In the event the Company found it necessary to
acquire a license to a product from a third party, there can be no assurance
that such license would be available, or if available, that it would be
available on terms acceptable to the Company, or that the Company could
successfully redesign its products to avoid infringement of the third party's
patent.
FOREIGN CURRENCY FLUCTUATIONS
As the Company's R&D operations move overseas and its foreign revenues
increase, the Company becomes more vulnerable to exchange rate fluctuations. The
Company may in the future hedge against this risk.
SUPPLY OF PUBLIC STOCK
Currently only 1,000,000 shares are available for trading in the public
market under SEC rules. As of mid-June 2000, an additional 450,000 shares become
available and on June 28, 2000, twelve months after the closing date of the
Company's transaction with ARCA Corp., another 13,500,000 shares become
available for trading, all subject to Rule 144, including in the instance of
shares held by affiliates, its volume limitations. The large availability of
shares for public trading could affect the market adversely and drive the market
price down.
SUBORDINATION
The Company's common stock is subordinate to its 1,850,000 shares of
outstanding Series A Preferred Stock. In addition, the Company's common stock
will be subordinate to any future preferred stock that the Company creates and
issues. No vote of the Company's common shareholders is required to issue
preferred stock.
MANUFACTURING
The Company's custom ASIC HotChip is sole sourced. The Company attempts
to reduce the adverse impact a problem with the supplier could cause by
maintaining a safety stock; however, there can be no assurance that the Company
would be able to replace the supplier before its safety stock ran out.
GENERAL
The Company's business is subject to general economic conditions,
interest rate changes and uninsurable risks.
-20-
<PAGE>
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.01 Articles of Incorporation: Exhibit O to Exhibit 10.19 to
Registrant's (then ARCA Corp.) Current Report on Form 8-K
filed on June 10, 1999, is hereby incorporated by reference.
3.02 Bylaws: Exhibit O to Exhibit 10.19 to Registrant's (then ARCA
Corp.) Current Report on Form 8-K filed on June 10, 1999, is
hereby incorporated by reference.
10.20 Material Contracts: Employment Agreement with Yong Thye Lin
follows page F-21 after the signature page to this Report.
16.1 Letter on change in certifying accountant: Exhibit 16 to
Registrant's Current Report on Form 8-K/A filed on May 2,
2000, is hereby incorporated by reference.
21.1 Subsidiaries of the Registrants: Follows Exhibit 10.20.
23.1 Consent of independent accountant: Follows Exhibit 21.1.
23.2 Consent of independent accountant: Follows Exhibit 23.1.
27.1 Financial Data Schedule: Follows Exhibit 23.2.
(b) No reports on Form 8-K were filed during the quarter ended March
31, 2000.
-21-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AGATE TECHNOLOGIES, INC.
By: /S/ FRANCIS KHOO
--------------------------------
Francis Khoo
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
SIGNATURES TITLE DATE
/S/ FRANCIS KHOO Chief Executive Officer, Director July 13, 2000
---------------------------
Francis Khoo
/S/ SHIRLEY OOI Chief Financial Officer, Director July 13, 2000
---------------------------
Shirley Ooi
<PAGE>
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
AGATE TECHNOLOGIES, INC.
Year ended March 31, 2000,
three months ended March 31, 1999
and year ended December 31, 1998
F - 1
<PAGE>
CONTENT
PAGE
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS....................F - 3-4
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS....................................F - 5
CONSOLIDATED STATEMENTS OF OPERATIONS..........................F - 6
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY................F - 7
CONSOLIDATED STATEMENTS OF CASH FLOWS..........................F - 8
NOTES TO THE FINANCIAL STATEMENTS..............................F - 9
F - 2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Agate Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Agate
Technologies, Inc. as of March 31, 2000, and the related consolidated statements
of operations, shareholders' equity 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 auditing standards generally accepted
in the United States of America. 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Agate
Technologies, Inc. as of March 31, 2000, and the consolidated results of its
operations and its consolidated cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As more fully discussed in Note B to the
financial statements, the Company has sustained recurring losses and has used
cash in operating activities, which raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note B. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
GRANT THORNTON LLP
San Francisco, California
June 2, 2000 (except for Note E,
as to which the date is June 28, 2000)
F - 3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Agate Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Agate
Technologies, Inc. of which 64% of the voting stock is owned by Pacific Rim
Trading Limited, as of March 31, 1999, and the related consolidated statements
of operations, shareholders' equity, and cash flows for the three months ended
March 31, 1999 and for the year ended December 31, 1998. 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 the consolidated
results of their operations and their cash flows for the three months ended
March 31, 1999 and for the year ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
July 21, 1999
F - 4
<PAGE>
<TABLE>
AGATE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
March 31,
<CAPTION>
2000 1999
------------------ -------------------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents.................................. $ 309,894 $ 2,012,603
Accounts receivable, net of allowance for doubtful accounts of 224,578 194,533
$19,457 and $27,999, respectively........................
Inventories................................................ 360,606 395,279
Prepaid expenses and other current assets.................. 65,377 50,046
------------------ -------------------
Total current assets.................................... 960,455 2,652,461
Restricted cash............................................ 98,719 149,897
Property and equipment, net................................ 77,348 120,412
Other assets............................................... 7,000 27,926
------------------ -------------------
Total assets............................................ $ 1,143,522 $ 2,950,696
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Line of credit............................................. $ 155,000 $ 160,158
Accounts payable........................................... 121,388 131,867
Accrued liabilities........................................ 333,618 429,314
Long-term debt, current portion............................ 1,325 17,975
Obligation under capital lease, current portion............ -- 6,327
------------------ -------------------
Total current liabilities............................... 611,331 745,641
Long-term debt, net of current portion........................ 13,734 4,798
Commitments and contingencies
Shareholders' equity
Convertible preferred stock, 0.0001 par value: 10,000,000
shares authorized, 1,825,000 and 2,075,000 shares issued and
outstanding, liquidation preference of $6,387,500....... 7,256,589
183
Common stock, 0.0001 par value: 20,000,000 shares authorized,
12,932,004 and 10,575,000 shares issued and outstanding.
1,293 1,188,068
Additional paid-in capital................................. 8,918,846 234,663
Accumulated other comprehensive (loss)..................... (80,932) (30,458)
Accumulated deficit........................................ (8,320,933) (6,448,605)
------------------ -------------------
Total shareholders' equity.............................. 518,457 2,200,257
------------------ -------------------
Total liabilities and shareholders' equity.............. $ 1,143,522 $ 2,950,696
================== ===================
</TABLE>
F - 5
<PAGE>
<TABLE>
AGATE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Year ended Three months Year ended
March 31, ended March 31, December 31,
2000 1999 1998
-------------- -------------- -------------
<S> <C> <C> <C>
Net sales........................................ $ 1,400,153 $ 405,870 $ 947,543
Cost of sales.................................... 522,548 163,438 304,849
-------------- -------------- -------------
Gross profit.................................. 877,605 242,432 642,694
Operating expenses
Research and development...................... 537,722 190,783 888,885
Sales and marketing........................... 1,177,883 299,205 1,009,318
General and administrative.................... 1,049,821 321,317 953,148
-------------- -------------- -------------
Total operating expenses.................... 2,765,426 811,305 2,851,351
-------------- -------------- -------------
Operating loss................................... (1,887,821) (568,873) (2,208,657)
Interest and other income........................ 87,255 30,520 164,285
Interest expense................................. (10,955) (2,919) (46,216)
-------------- -------------- -------------
Loss before income taxes...................... (1,811,521) (541,272) (2,090,588)
Income taxes..................................... (60,807) (5,839) (11,903)
-------------- -------------- -------------
Net loss...................................... $ (1,872,328) $ (547,111) $ (2,102,491)
============== ============== =============
Net loss per share--basic and diluted......... $ (0.15) $ (0.05) $ (0.20)
============== ============== =============
Shares used to compute net loss per share--basic
and diluted................................. 12,360,170 10,575,000 10,575,000
============== ============== =============
</TABLE>
F - 6
<PAGE>
<TABLE>
AGATE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
Convertible
Preferred Stock Common Stock Additional
------------------------ -------------------------- Paid-In
Shares Amount Shares Amount Capital
--------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998.......... 2,075,000 $7,256,589 10,575,000 $ 1,188,068 $ 234,663
Net loss......................... -- -- -- -- --
Cumulative translation adjustment -- -- -- -- --
Total comprehensive loss....... -- -- -- -- --
--------- --------- ---------- ----------- ----------
Balance at December 31, 1998........ 2,075,000 7,256,589 10,575,000 1,188,068 234,663
Net loss......................... -- -- -- -- --
Cumulative translation adjustment
Total comprehensive loss....... -- -- -- -- --
--------- --------- ---------- ----------- ----------
Balance at March 31, 1999........... 2,075,000 7,256,589 10,575,000 1,188,068 234,663
Issuance of common stock for cash -- -- 482,004 241,002 --
Conversion of preferred stock into
common stock................... (250,000) (875,000) 375,000 875,000 --
Change in par value in connection
with exchange of Agate-California
stock for Agate-Delaware
(formerly ARCA)
Common stock................. -- -- -- (2,302,927) 2,302,927
Preferred Stock.............. -- (6,381,406) -- -- 6,381,406
Issuance of Agate-Delaware common
stock in exchange for common
stock of ARCA upon merger with
Agate-Delaware................. -- -- 1,500,000 150 (150)
Net loss......................... -- -- -- -- --
Cumulative translation adjustment -- -- -- -- --
Total comprehensive loss....... -- -- -- -- --
--------- --------- ---------- ---------- ----------
Balance at March 31, 2000........... 1,825,000 $ 183 12,932,004 $ 1,293 $8,918,846
========= ========= ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Total
Comprehensive Accumulated Comprehensive Shareholders'
Income (Loss) Deficit Income (Loss) Equity
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998.......... $ (63,177) $(3,799,003) $ 4,817,140
Net loss......................... -- (2,102,491) $ (2,102,491) (2,102,491)
Cumulative translation adjustment 32,719 -- 32,719 32,719
-------------
Total comprehensive loss....... -- -- $ (2,069,772) --
------------- ------------ ============= -------------
Balance at December 31, 1998........ (30,458) (5,901,494) 2,747,368
Net loss......................... -- (547,111) $ (547,111) (547,111)
Cumulative translation adjustment --
-------------
Total comprehensive loss....... -- -- $ (547,111) --
------------- ------------ ============= -------------
Balance at March 31, 1999........... (30,458) (6,448,605) 2,200,257
Issuance of common stock for cash -- -- 241,002
Conversion of preferred stock into
common stock................... -- -- --
Change in par value in connection
with exchange of Agate-California
stock for Agate-Delaware
(formerly ARCA)
Common stock................. -- -- --
Preferred Stock.............. -- -- --
Issuance of Agate-Delaware common
stock in exchange for common
stock of ARCA upon merger with
Agate-Delaware................. -- -- -- --
Net loss......................... -- (1,872,328) $ (1,872,328) (1,872,328)
Cumulative translation adjustment (50,474) -- (50,474) (50,474)
------------
Total comprehensive loss....... -- -- $ (1,922,802) --
------------- ------------ ============= -------------
Balance at March 31, 2000........... $ (80,932) $(8,320,933) $ 518,457
============= ============ =============
</TABLE>
F - 7
<PAGE>
<TABLE>
AGATE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year ended Three months Year ended
March 31, ended March 31, December 31,
2000 1999 1998
-------------- --------------- -------------
<S> <C> <C> <C>
Operating activities
Net loss................................................... $ (1,872,328) $ (547,111) $ (2,102,491)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on disposal of property, plant, and equipment..... (98) - 3,742
Depreciation and amortization.......................... 78,851 22,705 102,359
Changes in assets and liabilities:
Accounts receivable.................................. (30,045) 36,058 (184,522)
Inventories.......................................... 34,673 (76,000) (226,504)
Prepaid expenses and other asserts................... (15,329) 118,736 (49,520)
Other assets......................................... 20,925 - -
Accounts payable and accrued liabilities............. (106,175) (32,423) 355,827
-------------- --------------- -------------
Net cash used in operating activities.............. (1,889,526) (478,035) (2,101,109)
Investing activities
Restricted cash............................................ 51,178 (10,943) (118,954)
Acquisition of property and equipment...................... (40,917) (4,502) (26,633)
Proceeds from sales of property and equipment.............. 5,228 - 45,171
-------------- --------------- -------------
Net cash provided by (used in) investing activities 15,489 (15,445) (100,416)
Financing activities
Proceeds from notes payable................................ - 155,945 -
Repayment of notes payable................................. (12,872) - (33,272)
Repayment of capitalized leases............................ (6,328) (2,213) -
Proceeds from the issuance of debt......................... - - (8,094)
Proceeds from issuance of common stock..................... 241,002 - -
-------------- --------------- -------------
Net cash provided by (used in) financing activities 221,802 153,732 (41,366)
Effect of exchange rate change on cash and cash equivalents (50,474) - -
-------------- --------------- -------------
Net decrease in cash and cash equivalents..................... (1,702,709) (339,748) (2,242,891)
Cash and cash equivalents at beginning of period.............. 2,012,603 2,352,351 4,595,242
-------------- --------------- -------------
Cash and cash equivalents at end of period.................... $ 309,894 $ 2,012,603 $ 2,352,351
============== =============== =============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................. $ 10,995 $ 2,919 $ 4,051
Income tax............................................... $ 60,807 $ 5,839 $ 11,903
Supplemental disclosure of non-cash investing and financing activities:
Acquisition of property and equipment under capitalized lease
$ - $ - $ 15,531
</TABLE>
See accompanying notes to financial statements
F - 8
<PAGE>
AGATE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
For the year ended March 31, 2000, the three months ended March 31, 1999
and the year ended December 31, 1998
NOTE A - BUSINESS AND BASIS OF PRESENTATION
Agate Technologies, Inc. (the "Company") was incorporated on January 17,
1996. Pacific Rim Trading Limited held approximately 52% and 64% of the
Company's common stock as of March 31, 2000 and 1999, respectively. 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.
On June 29, 1999, all former shareholders of Agate Technologies, Inc.
("Agate-California"), a California corporation were issued series of stock
in ARCA Corp. ("ARCA"), a non-operating public shell with no known assets or
liabilities, in exchange for 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, Agate-California became a wholly
owned subsidiary of ARCA. The transaction between ARCA and Agate-California
is accounted for as a recapitalization of Agate-California. All references
to the number of shares and amounts per share herein have been adjusted to
reflect the effect of this 1.5 adjustment for all periods presented.
On June 30, 1999, ARCA was merged into its other wholly-owned subsidiary,
Agate Technologies, Inc., a Delaware Corporation, ("Agate-Delaware") in
order to re-incorporate ARCA in Delaware. Agate-Delaware has Series A
Preferred Stock that has identical rights, preferences, privileges and
restrictions, to the ARCA Series A Preferred Stock. Each ARCA shareholder
received one share of Agate-Delaware stock in exchange for each ARCA share
of the same class. Agate-California continued as a wholly owned subsidiary
of Agate-Delaware.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND LIQUIDITY
REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the company as a going concern. However, the company has sustained
substantial losses from operations in recent years and has an accumulated
deficit of $8,320,933 at March 31, 2000. In addition, the company has used,
rather than provided, cash in its operations.
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts shown in the accompanying
balance sheet is dependent upon continued operations of the company, which
in turn is dependent upon the company's ability to meets its financing
requirements on a continuing basis, to maintain present financing, and to
succeed in its future operations. The financial statements do not include
any adjustments relating to the recoverability and classification of the
recorded asset amounts or amounts and classification of liabilities that
might be necessary should the company be unable to continue in existence.
Management has reduced operating expenses and had its line of credit
extended to April 1, 2001. Additionally, management is currently looking for
additional financing which it anticipates will be completed in fiscal 2001.
Management believes the Company will have sufficient working capital to
provide it with the ability to continue in existence through its next fiscal
year.
F - 9
<PAGE>
AGATE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
For the year ended March 31, 2000, the three months ended March 31, 1999
and the year ended December 31, 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND LIQUIDITY (CONTINUED)
BASIS OF CONSOLIDATION
The consolidated financial statements include the Company and its
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
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.
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 several financial
institutions and has not experienced any losses relating to any of its bank
deposits.
F - 10
<PAGE>
AGATE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
For the year ended March 31, 2000, the three months ended March 31, 1999
and the year ended December 31, 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND LIQUIDITY (CONTINUED)
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.
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 product returns 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.
Major customers of the Company represented the following percentage of
product revenues:
Year Three-month
Ended period ended Year ended
March 31, March 31, December 31,
2000 1999 1998
--------- ------------ ------------
Customer A 10% 28% 19%
Customer B - 12% 12%
Customer C 14% -* 10%
Customer D - 15% -
Customer E - 11% -
Customer F - 12% -
* less than 10%
INVENTORIES
Inventories are stated at the lower of cost, calculated on a first-in,
first-out basis, or market.
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.
F - 11
<PAGE>
AGATE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
For the year ended March 31, 2000, the three months ended March 31, 1999
and the year ended December 31, 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND LIQUIDITY (CONTINUED)
SOFTWARE DEVELOPMENT COST
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 technological feasibility have not been significant
and all such costs have been expensed.
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.
FOREIGN CURRENCY EXCHANGE GAINS AND LOSSES
The reporting currency for the Company is the U.S. dollar. The functional
currencies of the Company's foreign subsidiaries are the Malaysian ringitt
and the Singapore dollar. Subsidiaries' assets and liabilities are
translated into U.S. dollars at the exchange rate in effect at the balance
sheet date. Revenue and expenses are translated at average rates of exchange
prevailing during the period. The resulting cumulative translation
adjustments are disclosed as a component of accumulate 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 share has been computed using the
weighted-average number of shares of common stock outstanding during the
period. Weighted average shares have been adjusted for all periods presented
for the June 1999 recapitalization as discussed in Note A.
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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with current
year presentation.
F - 12
<PAGE>
AGATE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
For the year ended March 31, 2000, the three months ended March 31, 1999
and the year ended December 31, 1998
NOTE C - BALANCE SHEET DETAIL
INVENTORIES
March 31, March 31,
2000 1999
------------- -------------
Raw materials $ 9,954 $ 57,209
Work in progress - 100,127
Finished goods 350,652 237,943
------------- -------------
$ 360,606 $ 395,279
============= =============
PROPERTY AND EQUIPMENT
March 31, March 31,
2000 1999
------------- -------------
Time share in a condominium $ 25,000 $ -
Laboratory equipment 10,865 10,865
Computer hardware and software 188,017 173,773
Office equipment 4,995 3,472
Furniture and fixtures 41,606 41,606
Motor vehicles - 50,000
Leasehold improvements 9,121 9,121
------------- -------------
279,604 288,837
Less accumulated depreciation and
amortization 202,256 168,425
------------- -------------
$ 77,348 $ 120,412
============= =============
ACCRUED LIABILITIES
March 31, March 31,
2000 1999
------------- -------------
Accrued compensation $ 55,917 $ 114,779
Deferred revenue - 50,406
Accrued professional fees 65,586 31,083
Other 212,115 233,046
------------- -------------
$ 333,618 $ 429,314
============= =============
F - 13
<PAGE>
AGATE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
For the year ended March 31, 2000, the three months ended March 31, 1999
and the year ended December 31, 1998
NOTE D - COMMITMENTS
CAPITAL LEASES
The Company leased certain of its computer software under a capital lease
agreement with a financial institution, which expired in November 1999. This
capital lease bore interest at the rate of 14.5% per annum and was
facilitated by a master lease agreement of $50,000. Advances under the
master lease agreement were collateralized by cash balances held by the
financial institution up to a maximum of $50,000.
OPERATING LEASES
The Company leases its facilities under noncancelable operating leases that
expire in May 2000 through April 2003 and is responsible for certain
maintenance costs, taxes, and insurance under the leases. The Company
subleased one of its premises from September 1998 through January 2000. In
addition, the Company has two noncancelable operating leases for items of
office equipment, which expire in July 2000 through March 2002.
At March 31, 2000, future minimum payments under noncancelable operating
leases are as follows:
2001 $ 103,362
2002 79,202
2003 81,954
2004 6,871
------------
$ 271,389
Rent expense for both facilities and equipment was $112,478, $15,421, and
$138,615 for the year ended March 31, 2000, the three months ended March 31,
1999, and the year ended December 31, 1998, respectively.
NOTE E - LINE OF CREDIT
The Company has a credit agreement with a financial institution which
provides for a revolving line of credit up to a maximum amount of $800,000
for a period through July 30, 2000. On June 28, 2000, the line was extended
to April 1, 2001. As of March 31, 2000, the Company has used $155,000 of the
line. The line is collateralized by the following: certificate of Deposit
for a minimum of 50% of the outstanding loan amount, ($20,000 is the
certificate of deposit balance at March 31, 2000), 70% of eligible accounts
receivable, and 30% of inventory, capped at $250,000. The line of credit
bears interest at prime rate plus 1.25% (10.25% at March 31, 2000).
F - 14
<PAGE>
AGATE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
For the year ended March 31, 2000, the three months ended March 31, 1999
and the year ended December 31, 1998
NOTE F - LONG TERM DEBT
The Company purchased a time-share interest in a condominium and financed
the purchase with a loan that bears interest at 14.36% and is payable in
equal monthly installments maturing in June 2008.
At March 31, 2000, future payments of principal under these loan agreements
are as follows:
2001 $ 1,325
2002 1,155
2003 1,335
2004 1,542
2005 1,781
Thereafter 7,921
------------
$ 15,059
============
NOTE G - 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, 2000, no dividends have
been declared.
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.
F - 15
<PAGE>
AGATE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
For the year ended March 31, 2000, the three months ended March 31, 1999
and the year ended December 31, 1998
NOTE G - SHAREHOLDERS' EQUITY (CONTINUED)
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 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, converting 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.
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 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 had two incentive stock option plans under which shares of
common stock are reserved for issuance to employees and consultants. In
connection with the reorganization, the 1996 Stock Option Plan and the 1997
Stock Option Plan were canceled and the shares were transferred and adopted
under the 1999 Dual Stock Option Plan, under which shares of common stock
are reserved for issuance to employees and consultants. Under this plan,
which was approved by the shareholders in June 1999, the Company may grant
up to 4,500,000 incentive stock options or nonstatutory options.
The 1999 Plan 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. The terms of the 1999 Plan are the same as the former plans.
F - 16
<PAGE>
AGATE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
For the year ended March 31, 2000, the three months ended March 31, 1999
and the year ended December 31, 1998
NOTE G - SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
Option activity under the plan is as follows:
Outstanding Options
------------------------------------------
Shares Weighted-average
Available Number Exercise
for Grant of Shares Price
---------- --------- ----------------
Balance at January 1, 1998 5,280,000 705,000 $ 0.75
Options granted (549,450) 549,450 1.00
Options canceled 472,500 (472,500) 0.81
---------- --------- ----------------
Balance at December 31, 1998 and 5,203,050 781,950 0.89
March 31, 1999
Change in authorized shares (703,050) -
Options granted (243,500) 243,500 1.43
Options canceled 118,950 (118,950) 1.00
---------- --------- ----------------
Balance at March 31, 2000 4,375,450 906,500 $ 1.10
========== ========= ================
The weighted-average fair value of options granted in 2000, 1999 and 1998
was $1.53, $0.27 and $0.27 per share, respectively.
The options outstanding and currently exercisable under the 1999 Plan by
exercise price at March 31, 2000 are as follows:
Weighted-
Average
Remaining
Exercise Number Contractual Number
Price Outstanding Life Exercisable
------------- -------------- ------------ --------------
(in years)
$ 0.40 60,000 6.75 60,000
$ 0.67 150,000 7.75 118,750
$ 1.00 460,500 8.49 176,313
$ 1.50 20,000 8.58 1,645
$ 1.75 216,000 9.96 -
------------- ------------- -------------
906,500 8.60 356,708
============= =============
In addition, in January 1997 the Company granted 750,000 nonstatutory stock
options outside of both the 1996 and 1997 Plan at approximately $0.08. The
stock options were fully vested on the date of grant. As of March 31, 2000,
all options are outstanding and have a remaining contractual life of seven
years.
F - 17
<PAGE>
AGATE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
For the year ended March 31, 2000, the three months ended March 31, 1999
and the year ended December 31, 1998
NOTE G - SHAREHOLDERS' EQUITY (CONTINUED)
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 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 Black Scholes method with the following
weighted-average assumptions for 2000, 1999, and 1998: expected dividend
yield of 0%, expected stock price volatility of 157%, 1% and 1%, a risk-free
interest rate of 5.6 - 5.7%, and the expected life of options of ten years.
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 the FAS 123 was not material to the Company's
reported net loss and no effect on net loss per share in any period
presented but could be material in future years.
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.
NOTE H - RELATED PARTY
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.
F - 18
<PAGE>
AGATE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
For the year ended March 31, 2000, the three months ended March 31, 1999
and the year ended December 31, 1998
NOTE I - INCOME TAXES
Income tax expenses consists of the following:
<TABLE>
<CAPTION>
Three-month
Year ended period ended Year ended
March 31, March 31, December 31,
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Current tax expense:
State $ 800 $ 800 $ 800
Foreign 60,007 5,039 11,103
------------- ------------- -------------
Income tax expense $ 60,807 $ 5,839 $ 11,903
============= ============= =============
</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
Year ended period ended Year ended
March 31, March 31, December 31,
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Tax benefit at U.S.
statutory rate $ (61,517) $ (140,942) $ (686,115)
Foreign income tax 60,007 5,039 11,103
State minimum taxes 800 800 800
Net operating losses not utilized 61,517 140,942 686,115
------------- ------------- -------------
Income tax expense $ 60,807 $ 5,839 $ 11,903
============= ============= =============
</TABLE>
F - 19
<PAGE>
AGATE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
For the year ended March 31, 2000, the three months ended March 31, 1999
and the year ended December 31, 1998
NOTE I - 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>
March 31, March 31, December 31,
2000 1999 1998
-------------- -------------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 2,958,000 $ 2,000,000 $ 1,800,000
Tax credit carryforwards 150,000 150,000 140,000
Capitalized research and development 170,000 102,000 110,000
Other, net 138,000 308,000 280,000
-------------- -------------- -------------
Total deferred tax assets 3,416,000 2,560,000 2,330,000
Less valuation allowance (3,416,000) (2,560,000) (2,330,000)
-------------- -------------- --------------
Net deferred tax assets $ - $ - $ -
============== ============== =============
</TABLE>
Realization of deferred tax asset 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 $856,000, $230,000, and $840,000 during the year ended March
31, 2000, the period ended March 31, 1999 and the year ended December 31,
1998, respectively.
As of March 31, 2000, the Company had federal and state net operating loss
carryforwards each of $7,400,000 and $6,300,000, respectively. The Company
also had federal and state research and development tax credit carryforwards
of approximately $145,000 and $9,000, respectively. The net operating loss
and tax credit carryforwards will expire at various date beginning in 2005,
if not utilized.
The Tax Reform Act of 1986, as amended, and the California Conformity Act of
1987 imposes substantial restrictions on the utilization of the net
operating loss and tax credit carryforwards in the event of an "ownership
change" as defined by the Internal Revenue Service Code. The Company's
ability to offset taxable income with loss carryforwards could be limited.
F - 20
<PAGE>
AGATE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
For the year ended March 31, 2000, the three months ended March 31, 1999
and the year ended December 31, 1998
NOTE J - SEGMENT INFORMATION
The Company operates and tracks its results in one operating segment. The
company designs, manufactures, develops, and markets removable storage
devices and complementary software. The Company manages revenues by
geographic region, but does not manage operations by region.
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:
Three-month
Year ended period ended Year ended
March 31, March 31, December 31,
2000 1999 1998
------------- ------------- -------------
Net Revenue:
United States $ 1,004,722 $ 214,511 $ 508,525
Pacific Rim 439,991 188,461 436,077
Europe 130,423 2,898 2,941
Rest of world 8,917 - -
------------- ------------- -------------
Subtotal 1,584,053 405,870 947,543
Elimination Adjustments (183,900) - -
-------------- ------------- -------------
Total $ 1,400,153 $ 405,870 $ 947,543
============= ============= =============
NOTE K - 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.
F - 21
