Exhibit 99.1
Consolidated Financial Statements and
Report of Independent Certified Public Accountants
Arques Technology, Inc. and Subsidiary
December 31, 2005 and 2004
CONTENTS
Page | ||||
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS | 3 | |||
CONSOLIDATED FINANCIAL STATEMENTS | ||||
Consolidated Balance Sheets | 4 | |||
Consolidated Statements of Operations | 5 | |||
Consolidated Statement of Shareholders’ Equity and Comprehensive Income | 6 | |||
Consolidated Statements of Cash Flows | 7 | |||
Notes to Consolidated Financial Statements | 8 |
2
Report of Independent Certified Public Accountants
To the Board of Directors of
Arques Technology, Inc.
We have audited the accompanying consolidated balance sheets of Arques Technology, Inc., and subsidiary as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive income and cash flows for the years 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 audits.
We conducted our audits 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 financial position of Arques Technology Inc. and subsidiary as of December 31, 2005 and 2004, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Grant Thornton Taiwan
Taipei, Taiwan
February 18, 2006 (except for Note 13 as to
which the date is April 13, 2006)
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Arques Technology, Inc.
CONSOLIDATED BALANCE SHEETS
December 31,
2005 | 2004 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 545,270 | $ | 1,254,514 | ||||
Account receivables, net | 33,601 | 13,193 | ||||||
Inventories | 200,773 | 212,813 | ||||||
Prepayments | 25,281 | 51,056 | ||||||
Other current assets | 35,882 | 36,034 | ||||||
Total current assets | 840,807 | 1,567,610 | ||||||
Property, plant and equipment—net | 166,598 | 226,082 | ||||||
Other assets | ||||||||
Refundable deposits | 19,047 | 19,667 | ||||||
Other assets | 13,130 | 209 | ||||||
Total other assets | 32,177 | 19,876 | ||||||
Total assets | $ | 1,039,582 | $ | 1,813,568 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 42,591 | $ | 71,969 | ||||
Accrued expenses | 114,764 | 63,228 | ||||||
Other current liabilities | 11,380 | 7,882 | ||||||
Total current liabilities | 168,735 | 143,079 | ||||||
Total liabilities | 168,735 | 143,079 | ||||||
Stockholders’ equity | ||||||||
Series A Preferred stock, 5% non-cumulative convertible, $0.30 par value, 20,000,000 shares authorized, issued and outstanding at December 31, 2005 and 2004, liquidation preference of $12,000,000 | 6,000,000 | 6,000,000 | ||||||
Series B Preferred stock, 5% non-cumulative convertible, $0.12 par value, 25,000,000 shares authorized at December 31, 2005 and 2004, respectively, 25,000,000 and 16,150,000 shares issued and outstanding at December 31, 2005 and 2004, liquidation preference of $9,000,000 and $5,814,000, respectively | 3,000,000 | 1,938,000 | ||||||
Common stock, no par value, 69,375,000 shares authorized, 5,825,000 and 5,325,000 shares issued and outstanding at December 31, 2005 and 2004, respectively | 324,750 | 309,750 | ||||||
Notes receivable from stockholders | (299,400 | ) | (284,400 | ) | ||||
Accumulated deficit | (8,178,315 | ) | (6,285,603 | ) | ||||
Cumulative translation adjustment | 23,812 | (7,258 | ) | |||||
Total stockholders’ equity | 870,847 | 1,670,489 | ||||||
Total liabilities and stockholders’ equity | $ | 1,039,582 | $ | 1,813,568 | ||||
The accompanying notes are an integral part of these financial statements.
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Arques Technology, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
2005 | 2004 | |||||||
Sales | $ | 199,660 | $ | 31,392 | ||||
Cost of goods sold | (110,032 | ) | (26,289 | ) | ||||
Gross profit | 89,628 | 5,103 | ||||||
Research and development | 886,384 | 890,299 | ||||||
Selling, general and administrative | 1,104,977 | 932,660 | ||||||
1,991,361 | 1,822,959 | |||||||
Operating loss | (1,901,733 | ) | (1,817,856 | ) | ||||
Interest income | 9,021 | 5,313 | ||||||
Net loss | $ | (1,892,712 | ) | $ | (1,812,543 | ) | ||
The accompanying notes are an integral part of these financial statements.
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Arques Technology, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
For the Years Ended December 31, 2005 and 2004
Series A Preferred Stock | Series B Preferred Stock | Common Stock | Notes Receivable from Stockholders | Cumulative Translation Adjustment | Accumulated Deficit | Comprehensive Income | |||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Total | |||||||||||||||||||||||||||||||
Balance at January 1, 2004 | 20,000,000 | $ | 6,000,000 | — | $ | — | 3,600,000 | $ | 36,000 | $ | — | $ | (3,389 | ) | $ | (4,473,060 | ) | $ | 1,559,551 | ||||||||||||||||||
Issuance of Series B | |||||||||||||||||||||||||||||||||||||
Preferred Stock for cash, net of issuance costs | — | — | 16,150,000 | 1,938,000 | — | — | — | — | — | 1,938,000 | |||||||||||||||||||||||||||
Repurchase of common stock | — | — | — | — | (1,125,000 | ) | (11,250 | ) | — | — | — | (11,250 | ) | ||||||||||||||||||||||||
Exercise of stock option for common at $0.10 per share | — | — | — | — | 2,850,000 | 285,000 | (284,400 | ) | — | — | 600 | ||||||||||||||||||||||||||
Currency translation adjustment | — | — | — | — | — | — | — | (3,869 | ) | — | (3,869 | ) | (3,869 | ) | |||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | (1,812,543 | ) | (1,812,543 | ) | (1,812,543 | ) | |||||||||||||||||||||||
Balance at December 31, 2004 | 20,000,000 | 6,000,000 | 16,150,000 | 1,938,000 | 5,325,000 | 309,750 | (284,400 | ) | (7,258 | ) | (6,285,603 | ) | 1,670,489 | (1,816,412 | ) | ||||||||||||||||||||||
Issuance of Series B | |||||||||||||||||||||||||||||||||||||
Preferred Stock for cash, net of issuance costs | — | — | 8,850,000 | 1,062,000 | — | — | — | — | — | 1,062,000 | |||||||||||||||||||||||||||
Exercise of stock options for common stock at $0.03 per share | — | — | — | — | 500,000 | 15,000 | (15,000 | ) | — | — | — | ||||||||||||||||||||||||||
Currency translation adjustment | — | — | — | — | — | — | — | 31,070 | — | 31,070 | 31,070 | ||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | (1,892,712 | ) | (1,892,712 | ) | (1,892,712 | ) | |||||||||||||||||||||||
Balance at December 31, 2005 | 20,000,000 | $ | 6,000,000 | 25,000,000 | $ | 3,000,000 | 5,825,000 | $ | 324,750 | $ | (299,400 | ) | $ | 23,812 | $ | (8,178,315 | ) | $ | 870,847 | $ | (1,861,642 | ) | |||||||||||||||
The accompanying notes are an integral part of these financial statements.
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Arques Technology, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2005 | 2004 | |||||||
Cash flows used by operating activities : | ||||||||
Net loss | $ | (1,892,712 | ) | $ | (1,812,543 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation | 67,365 | 109,826 | ||||||
Provision for diminishing inventory value | (635 | ) | 11,201 | |||||
Increase in accounts receivable | (20,408 | ) | (13,162 | ) | ||||
Decrease (increase) in inventories | 12,675 | (224,015 | ) | |||||
Decrease (increase) in prepayments | 25,775 | (6,851 | ) | |||||
Decrease (increase) in other current assets | 152 | (22,191 | ) | |||||
Decrease in accounts payable | (29,378 | ) | (185,283 | ) | ||||
Decrease (increase) in other assets | (12,921 | ) | 209 | |||||
Increase in accrued expenses and other current liabilities | 55,034 | 13,943 | ||||||
Net cash used in operating activities | (1,795,053 | ) | (2,128,866 | ) | ||||
Cash flows used in investing activities: | ||||||||
Decrease in deposits | 620 | 985 | ||||||
Purchase of fixed assets | (7,881 | ) | — | |||||
Net cash provided by (used in) investing activities | (7,261 | ) | 985 | |||||
Cash flows from financing activities: | ||||||||
Proceeds from exercise of stock options | — | 600 | ||||||
Issuance of preferred stock | 1,062,000 | 1,938,000 | ||||||
Repurchase of common stock | — | (11,250 | ) | |||||
Net cash provided by financing activities | 1,062,000 | 1,927,350 | ||||||
Effect of exchange rate on cash | 31,070 | 1,744 | ||||||
Net decrease in cash and cash equivalents | (709,244 | ) | (198,787 | ) | ||||
Cash at beginning of the year | 1,254,514 | 1,453,301 | ||||||
Cash at ending of the year | $ | 545,270 | $ | 1,254,514 | ||||
Non-cash financing activity: | ||||||||
Stock options exercised using notes receivable | $ | 15,000 | $ | 284,400 |
The accompanying notes are an integral part of these financial statements
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Arques Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
NOTE 1—HISTORY AND ORGANIZATION
Arques Technology, Inc.
Arques Technology, Inc. (the “Company”) was incorporated in the United States of America and commenced operations in 2001. Arques Technology, Inc. is the investment holding company for Arques Technology Taiwan Inc. and is also involved in trading of power management integrated circuits (“ICs”), communication and electronic components.
Arques Technology Taiwan Inc.
Arques Technology Taiwan, Inc. was incorporated as a Company Limited by Shares under the provisions of the Company Law of the Republic of China (R.O.C.) and commenced operations in January 2002. Its main activities include design and manufacture of power management ICs, communication and electronic components.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Arques Technology Taiwan, Inc. All significant inter-company accounts and transactions are eliminated in the consolidated financial statements.
Translation of Foreign Currency Financial Statements
The accounts of the Company are maintained in US dollars. Assets and liabilities of foreign operations where the functional currency is the local currency, are translated into U.S. dollars at the balance sheet date exchange rate. Revenues and expenses are translated at the average rate prevailing during the period. The related gains and losses from translation are recorded as a translation adjustment in a separate component of stockholders’ equity. Foreign currency transaction gains and losses have been immaterial to date.
Cash and Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments with remaining maturity dates of 90 days or less when purchased. Cash equivalents are carried at cost, which approximates their fair market value. The Company is exposed to credit risk in the event of default by the financial institutions and issuers of the investments. The Company maintains cash and cash equivalent balances in highly-rated financial institutions and has not experienced any material losses relating to any cash or cash equivalents.
Risks and Uncertainties and Concentration of Credit Risk
The Company’s operating results are dependent on its ability to market and develop products. The inability of the Company to successfully develop and market its products as a result of competition or other factors would have a material adverse affect on the Company’s business, financial condition, and results of operations.
The Company designs, develops, manufactures and markets a variety of electronic products. The Company’s revenues and trade accounts are derived primarily from the sale of power management ICs. For the year ended December 31, 2005, the Company distributes its products on a global basis but mainly to customers in Asia (98%) and others (2%). The Company’s sales are primarily denominated in New Taiwan (“NT”) Dollars. The Company routinely assesses the financial strength of substantially all customers.
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Arques Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2005 and 2004
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories
Inventories are stated at the lower of aggregate cost or market value. Market value is determined based on the replacement cost for raw materials and the net realizable value for work in process and finished goods. The provision for obsolete inventories is recognized and included in current net income.
Property, Plant and Equipment
A. Property, plant and equipment are stated at cost. Cost includes all expenditures incurred before the assets are placed in service.
B. Depreciation on property, plant and equipment is provided on the straight-line basis using the estimated useful lives of the assets plus an additional year as salvage value. Salvage values of assets which are still in use at the end of their original estimated useful lives are depreciated over the new estimated remaining useful lives of the assets. The estimated useful lives of the major assets are 3 to 5 years.
C. Maintenance and repairs are expensed as incurred. Renewals and improvements are capitalized and are depreciated accordingly. When an asset is sold or retired, the cost and accumulated depreciation are removed from the respective accounts and the resultant gain or loss is included in current net income. Rentals under operating lease agreements are expensed as incurred.
Income Taxes
The Company accounts for income taxes under the provision of Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized.
Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board (“FASB”) Issued Statement of Financial Accounting Standards (“SFAS”) No.148 Accounting for Stock Based Compensation-Transition and Disclosures an Amendment of FASB Statement No. 123. This Statement provides alternative methods of transition for companies who voluntarily change to the fair value-based method of accounting for stock-based employee compensation in accordance of SFAS No. 123, Accounting for Stock-Based Compensation, and enhances the disclosure requirements. This statement was effective upon its issuance.
The fair value of stock-based awards to employees is calculated through the use of option pricing models even though such models were developed to estimate the fair value of freely tradable, full transferable options without vesting restrictions, which significantly differ from the Company’s stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculation values. The Company’s calculations were made during the Black-Scholes model with the following weighted average assumptions for grants during the current year: expected life, four years; risk-free interest rate 3.30% to 4.04% for 2005 and 1.24% to 3.60% for 2004; no dividends during the expected term; and volatility of zero.
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Arques Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2005 and 2004
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
If the Company had elected to recognize compensation cost based on the fair value of the options granted at the grant date as prescribed by SFAS No.123, net loss for the years ending December 31, 2005 and 2004 would have been adjusted to the pro forma amounts indicated in the table below for the years ended December 31:
2005 | 2004 | |||||
Net loss –as reported | $ | 1,892,712 | $ | 1,812,543 | ||
Less total stock-based employee compensation expense determined under fair-value-based method for all awards | 6,625 | 4,992 | ||||
Pro forma net loss | $ | 1,899,337 | $1,817,535 | |||
The Company accounts for equity instruments granted to nonemployees under SFAS No. 123, EITF Issue No. 96-18, Accounting for Equity Instruments That are Issued Other Than Employees for Acquiring, or In Conjunctions with Selling Goods or Services and Financial Accounting Standards Interpretation No. (“FIN”) 28, Accounting for Stock Appreciation Rights and Other Variable Option or Award Plans. The options are recorded at fair value under SFAS No. 123 and are measured and recognized in accordance with EITF No. 96-18 and FIN 28.
Income and Expenses Recognition
Revenue is recognized when customers accept the goods, except for sales to majority owned subsidiaries, which are recognized when the goods are sold by the subsidiaries to third parties. Expenses, including research and development, are recognized as incurred.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimated or assumed. The more significant estimates reflected in these financial statements include provision for inventory obsolescence and valuation allowance against net deferred tax assets.
New Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. This Statement is a revision of SFAS No. 123 and supersedes APB Opinion No. 25 and its related implementation guidance. The Statement requires entities to recognize stock-based compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123R is effective for the Company in 2006. Management does not expect the adoption of this pronouncement to have a significant impact on the Company’s operations.
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Arques Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2005 and 2004
NOTE 3 – INVENTORIES
December 31, | ||||||
2005 | 2004 | |||||
Finished goods | $ | 34,629 | $ | 27,450 | ||
Work in process | 135,044 | 185,363 | ||||
Raw materials | 31,100 | — | ||||
$ | 200,773 | $ | 212,813 | |||
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT – NET
December 31, 2005 | ||||||||||
Cost | Accumulated Depreciation | Net Book Value | ||||||||
Machinery and equipment | $ | 232,574 | $ | (126,231 | ) | $ | 106,343 | |||
Office equipment | 271,085 | (212,410 | ) | 58,675 | ||||||
Vehicles | 4,737 | (3,157 | ) | 1,580 | ||||||
$ | 508,396 | $ | (341,798 | ) | $166,598 | |||||
December 31, 2004 | ||||||||||
Cost | Accumulated Depreciation | Net Book Value | ||||||||
Machinery and equipment | $ | 233,174 | $ | (89,571 | ) | $ | 143,603 | |||
Office equipment | 264,263 | (184,154 | ) | 80,109 | ||||||
Vehicles | 4,737 | (2,367 | ) | 2,370 | ||||||
$ | 502,174 | $ | (276,092 | ) | $ | 226,082 | ||||
NOTE 5 – COMMON STOCK
Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive dividends only when and if declared by the Board of Directors, subject to the preferential dividend rights of the holders of the preferred stock.
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Arques Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2005 and 2004
NOTE 6 – PREFERRED STOCK
The Company is authorized to issue 20,000,000 shares of Series A Preferred Stock (“Series A”) and 25,000,000 shares of Series B Preferred Stock (“Series B”). Together the Series A and B (collectively, the “Preferred Stock”) have the following characteristics:
Voting – The holders of Preferred Stock are entitled to vote, together with the holders of common stock, on all matters submitted to stockholders for a vote. Each holder of Preferred Stock is entitled to vote equally with holders of common stock and not as a separate class holder.
Dividends – The holders of Preferred Stock are entitled to receive, when and if declared by the Board of Directors and out of funds legally available, noncumulative dividends at a rate per share based upon a percent of the issue price as declared by the Board of Directors. Any dividends will be paid pro rata with the dividends to holders of common stock. For years ended December 31, 2005 and 2004, no dividends were declared or paid.
Liquidation Rights – In the event of any liquidation, dissolution or winding-up of the affairs of the Company, the holders of the then-outstanding Series A and B shall receive, for each share, an amount equal to the sum of $0.60 and $0.36 per share of Series A and B, respectively, plus all declared but unpaid dividends, payable in preference and priority to any payments made to the holders of the then-outstanding common stock.
Conversion – Each share of Preferred Stock, at the option of the holder, is convertible into a number of fully paid shares of common stock as determined by dividing the respective Preferred Stock issue price by the conversion price in effect at the time of conversion. At December 31, 2005, the conversion price of Series A and B is $0.30 and $0.12, respectively, adjusted in accordance with anti-dilution provisions. Conversion is automatic immediately upon the closing of a firm commitment, underwritten, public offering, registered under the Securities Act of 1933, as amended, at a per share price of not less than $8.00 and aggregate proceeds to the Company equal to at least $20,000,000.
NOTE 7 – STOCK OPTION PLANS
As of 31 December 2005, the Company had total 9,675,000 shares of common stock option outstanding under the Company’s Stock Option Plan (“the Plan”). Generally, options vest over a four-year period and are exercisable for a period of ten years from the date of grant. There were 6,225,000 options available for grant under the Plan at December 31, 2005.
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Arques Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2005 and 2004
NOTE 7 – STOCK OPTION PLANS (continued)
Option activity under the Plans is as follows:
Number of Shares | Exercise Price | Weighted Average Exercise Price | ||||||
Outstanding January 1, 2004 | 5,570,000 | $ | 0.10 | $ | 0.10 | |||
Options granted | 9,055,000 | 0.03-0.10 | 0.05 | |||||
Options exercised | 2,844,000 | 0.10 | 0.10 | |||||
Options canceled | 2,586,000 | 0.03-0.10 | 0.10 | |||||
Outstanding December 31, 2004 | 9,195,000 | 0.03-0.10 | 0.05 | |||||
Options granted | 1,230,000 | 0.03 | 0.03 | |||||
Options exercised | 500,000 | 0.03 | 0.03 | |||||
Options canceled | 250,000 | 0.03-0.10 | 0.04 | |||||
Outstanding December 31, 2005 | 9,675,000 | $ | 0.03-0.10 | $ | 0.05 | |||
As of December 31, 2005 there were 5,245,500 options exercisable with a weighted average exercise price of $.05. The options outstanding have a weighted average remaining contractual life of 7.3 years. Exercise prices ranged from $.03 to $.10.
NOTE 8 – INCOME TAX
The provision for income taxes differs from the amount computed by applying the U.S. statutory rate of 34% to the income (loss) before income taxes for the years ended December 31, 2005 and December 31, 2004. The principal reasons for this difference are as follows:
December 31, | ||||||||
2005 | 2004 | |||||||
Income tax expense (benefit) at U.S. statutory rate | $ | (644,000 | ) | $ | (616,000 | ) | ||
Losses with no current tax benefit | 643,000 | 600,000 | ||||||
Other | 1,000 | 16,000 | ||||||
Provision for income taxes | $ | — | $ | — | ||||
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Arques Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2005 and 2004
NOTE 8 – INCOME TAX (continued)
Deferred income taxes reflect the tax effects of net operating loss and credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting and tax purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows:
December 31, | ||||||||
Deferred Tax Assets: | 2005 | 2004 | ||||||
Net operating loss carryforwards | $ | 2,789,000 | $ | 2,182,000 | ||||
Research and development credits | 379,000 | 339,000 | ||||||
Capital losses | 34,000 | 34,000 | ||||||
Other non-deductible accruals and reserves | 3,000 | 3,000 | ||||||
Total deferred tax assets | 3,205,000 | 2,558,000 | ||||||
Valuation Allowance | (3,205,000 | ) | (2,558,000 | ) | ||||
Total net deferred tax assets | $ | — | $ | — | ||||
Statement of Financial Accounting Standard No. 109 (“Accounting for Income Taxes”) provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based on the weight of available evidence, we have provided a valuation allowance against net deferred tax assets. We will continue to evaluate our ability to realize the deferred tax asset on a quarterly basis. The valuation allowance increased by $647,000 and $652,000 during the years ended December 31, 2005 and December 31, 2004.
As of December 31, 2005, we had net operating loss carry forwards for federal and state income tax purposes of approximately $5,270,000 and $5,280,000 respectively, which expire in the years 2011 through 2025 and federal and state research and development credits of approximately $244,000 and $205,000, respectively. The federal research and development tax credits expire in the years 2021 through 2025, while the state research and development tax credits carry forward indefinitely.
Utilization of our net operating loss may be subject to substantial annual limitation due to the ownership change provisions of the Internal Revenue Code and similar state provisions. The annual limitation could result in the expiration of the net operating loss before utilization.
NOTE 9 – PENSION PLAN AND PENSION FUND
A. Employees of Arques Technology Inc. are not covered by a pension plan.
B. Arques Technology Taiwan Inc. has a defined benefit retirement plan covering all regular employees. Under the funding policy of the Plan, Arques Technology Taiwan Inc. contributes monthly an amount equal to 6% of the employees’ monthly base salaries to an independent fund held by the Bureau of Labor Insurance. The Company made contributions to the fund for the year ended December 31, 2005 and 2004 of approximately $370,992 and $0 respectively.
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Arques Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2005 and 2004
NOTE 10 – RELATED PARTY TRANSACTIONS
A. Names and Relationship of Related Parties
Names of Related Parties | Relationship with the Company | |
Gerome Tseng | CEO of the Company | |
Sorin Laurentiu Negru | Shareholder of the Company |
B. Summary of Significant Transactions with Related Parties
Notes Receivable from Stockholders
December 31, | ||||||
2005 | 2004 | |||||
Gerome Tseng | $ | 284,400 | $ | 284,400 | ||
Sorin Laurentiu Negru | 15,000 | — | ||||
Total | $ | 299,400 | $ | 284,400 | ||
The above notes receivable represent amounts owing by related party for exercising stock option. The notes bear no interest. Principal is due June 30, 2011 and October 14, 2014 respectively.
NOTE 11 – OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION
A. Financial Information by Industry
The Company and its consolidated subsidiary operate in one single industry—the design and manufacture of ICs.
B. Financial Information by Geographic Area
The following table summarizes the percentages of revenue by the customers’ geographic regions for the years ended December 31,:
2005 | 2004 | |||||
Hong Kong | 30 | % | 1 | % | ||
Philippines | 12 | % | 0 | % | ||
Taiwan | 56 | % | 97 | % | ||
Other | 2 | % | 2 | % | ||
Total sales | 100 | % | 100 | % | ||
NOTE 12 – COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases office space under non-cancelable operating leases. Total rent expenses under these operating leases were approximately $103,100 and $115,216 for the years ended December 31, 2005 and 2004, respectively. At December 31, 2005 remaining future minimum lease payments aggregated $82,381, all due to be paid in 2006.
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Arques Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2005 and 2004
NOTE 13 – SUBSEQUENT EVENTS
On February 25, 2006 the Company entered into a Repurchase Agreement with Release and Waiver with a shareholder. Under the Agreement, the Company agreed to make a payment of $ 48,750 in exchange for 1,875,000 shares and also a payment of $200,000 in exchange for release and waiver of rights of the shareholder, if there is a closing of a Corporate Transaction before December 31, 2006.
Subsequent to December 31, 2005 two notes receivable from stockholders were forgiven.
On March 26, 2006, the Company entered into an Agreement and Plan of Merger which closed on April 13, 2006, to sell the Company to California Micro Devices Corporation for an up-front payment of $8.3 million, subject to a holdback of $1.0 million of such up-front payment related to indemnification obligations of the Arques shareholders. Further, the agreement provides for payment of additional, contingent consideration based upon future net revenues and gross profit over an 18-month period.
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