UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 33-28417
SITEK, INCORPORATED (FORMERLY KNOWN AS DENTMART GROUP, INC.
AN ELGIN CORPORATION)
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 86-0923886
- ------------------------------- ------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1817 West 4th Street, Tempe, Arizona 85281
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(602) 921-8555
------------------------------------------------
(Issuer's telephone number, including area code)
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 12,307,813 shares of common
stock outstanding as of August 9, 1999.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999
and March 31, 1999............................................ 1
Consolidated Statements of Operations (unaudited)
Three Months ended June 30, 1999 and 1998..................... 2
Consolidated Statements of Cash Flows (unaudited)
Three Months ended June 30, 1999 and 1998..................... 3
Consolidated Statement of Stockholders' Equity
Period from June 23, 1998, date of inception,
to June 30, 1999 (unaudited)................................ 4
Notes to Consolidated Financial Statements (unaudited)........... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 14
Item 2. Changes in Securities and Use of Proceeds........................ 14
Item 5. Other Information................................................ 14
Item 6. Exhibits and Reports on Form 8-K................................. 14
i
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SITEK, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30, 1999 and March 31, 1999
(unaudited)
June 30, March 31,
1999 1999
---------- ----------
ASSETS
CURRENT ASSETS
Cash $1,319,785 $ 863
Accounts receivable 1,430,379 207,934
Related party receivables 244,113 58,161
Inventory 4,289,109 5,389,000
Prepaid financing fees 135,233 568,533
Prepaid VAT 15,025 910,000
Prepaid expenses and other assets 75,176 117,592
Deferred tax asset 214,000 --
---------- ----------
Total current assets 7,722,820 7,252,083
---------- ----------
PROPERTY AND EQUIPMENT, net of
accumulated depreciation and amortization
of $29,638 as of June 30, 1999 and $14,214
as of March 31, 1999 394,814 90,707
DEPOSITS 63,476 37,466
GOODWILL, less accumulated amortization of $13,329 544,469 --
COVENANT NOT TO COMPETE, less accumulated
amortization of $2,000 22,000 --
---------- ----------
$8,747,579 $7,380,256
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 234,700 $ 154,000
Convertible debentures 80,000 80,000
Advances from related parties 510,323 388,418
Notes payable 3,336,256 5,745,510
Accounts payable 1,058,037 268,774
Customer deposits 1,302,743 171,250
Accrued expenses 1,110,268 308,080
VAT payable 153,682 910,000
Deferred revenue, current portion 17,070 20,644
Income tax payable 462,000 --
---------- ----------
Total current liabilities 8,265,079 8,046,676
---------- ----------
CAPITAL LEASE OBLIGATION 6,640 --
---------- ----------
DEFERRED REVENUE, long term portion 36,261 37,848
---------- ----------
CONVERTIBLE DEBENTURES 147,500 --
---------- ----------
DEFERRED RENT PAYABLE 24,695 9,367
---------- ----------
LINE OF CREDIT 207,181 207,181
---------- ----------
STOCKHOLDERS' EQUITY (Deficit)
Preferred stock, $.01 par value,
2,000,000 shares authorized, none issued -- --
Common stock, $.005 par value, 50,000,000
authorized; 12,230,813 shares issued and
outstanding as of March 31, 1999 with 5,000
shares issuable, 12,307,813 shares issued and
outstanding as of June 30, 1999 61,539 61,179
Additional paid-in-capital 74,115 2,475
Accumulated (deficit) (75,431) (984,470)
---------- ----------
60,223 (920,816)
---------- ----------
$8,747,579 $7,380,256
========== ==========
1
<PAGE>
SITEK, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended June 30, 1999 and 1998 (Unaudited)
Three Months Three Months
Ended Ended
June 30, 1999 June 30, 1998
----------- -----------
Net sales $ 6,423,670 $ --
Cost of goods sold 2,907,300 --
----------- -----------
Gross profit 3,516,370 --
----------- -----------
Operating expenses:
Selling, general and administrative 1,419,458 --
Research development & engineering 278,766 --
----------- -----------
1,698,224 --
----------- -----------
Income from operations 1,818,146 --
----------- -----------
Other income (expense)
Interest expense (638,347) --
Other expense (14,760) --
----------- -----------
(653,107) --
----------- -----------
Income before income taxes 1,165,039 --
Income tax expense 256,000 --
----------- -----------
Net income $ 909,039 $ --
=========== ===========
Basic and diluted earnings
per share $ .07 $ --
=========== ===========
2
<PAGE>
SITEK, Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended June 30, 1999 and 1998 (Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 909,039 $ --
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 28,237 --
Deferred taxes (186,000) --
Gain recognized on sale leaseback transaction (5,161) --
Deferred rent expense 15,328 --
Stock issuable for services --
Changes in assets anad liabilities:
Accounts receivable (1,137,079) --
Inventory 1,312,503 --
Prepaid financing fees 433,300 --
Prepaid VAT 894,975 --
Prepaid expenses and other assets 68,443 --
Advances from related parties 121,905 --
Accounts payable 296,198 --
Customer deposits 933,483 --
Accrued expenses 481,295 --
Income tax payable 442,000 --
VAT payable (756,318) --
Profit sharing liability 1,769 --
----------- -----------
Net cash provided by (used in)
operating activities 3,853,917 --
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Related party advances (185,952) --
Purchase of VSM, net of cash (106,268) --
Proceeds from sale leaseback transaction -- --
Purchase of property and equipment (106,980) --
Payments on deposits (26,010) --
----------- -----------
Net cash (used in) investing activities (425,210) --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on lines of credit 809,000 --
Repaymants of lines of credit (728,300) --
Proceeds from Issuance of convertible debentures 147,500 --
Repayments of notes payable (3,409,254) --
Proceeds from notes payable 1,000,000 --
Repayments of capital leases (731) --
Issuance of common stock 72,000 --
----------- -----------
Net cash (used in) provided by
financing activities (2,109,785) --
----------- -----------
Net increase in cash 1,318,922 --
Cash, Beginning 863 --
----------- -----------
Cash, Ending $ 1,319,785 $ --
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payment for interest $ 13,101 $ --
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Acquisition of VSM Corporation:
Cash purchase price $ 1,000,000 $ --
=========== ===========
Working capital acquired, net of cash
and cash equivalents $ (678,194) $ --
Fair value of other assets acquired,
principally property and equipment 210,035 --
Long-term debt assumed (7,371) --
----------- -----------
$ (475,530) $ --
=========== ===========
</TABLE>
3
<PAGE>
SITEK, INCORPORATED AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Period from June 23, 1998, date of inception, to June 30, 1999
<TABLE>
<CAPTION>
Common stock Additional
-------------------- paid-in Accumulated
Shares Amount capital Deficit Total
---------- ------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Issuance of stock, June 23, 1998 1,000,000 $ 1,000 $ -- $ -- $ 1,000
Effect of merger/recapitalization 11,230,813 60,154 -- (60,154) --
Stock issuable for services 5,000 25 2,475 -- 2,500
Net (loss) -- -- -- (924,316) (924,316)
---------- ------- ------- ---------- ----------
Balance, March 31, 1999 12,235,813 61,179 2,475 (984,470) (920,816)
Net income -- -- -- 909,039 909,039
Issuance of stock 72,000 360 71,640 -- 72,000
---------- ------- ------- ---------- ----------
Balance, June 30, 1999 12,307,813 $61,539 $74,115 $ (75,431) $ 60,223
========== ======= ======= ========== ==========
</TABLE>
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Basis of Presentation
The accompanying unaudited consolidated financial statements of SITEK,
Incorporated and Subsidiaries (the Company) have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the fiscal year ending March
31, 2000. For further information refer to the financial statements and
footnotes included in the company's annual report on Form 10-K for the fiscal
year ended March 31, 1999.
The consolidated financial statements include the accounts of SITEK,
Incorporated and its wholly-owned subsidiaries, Advanced Technology Services,
Inc. (ATSI), CMP Solutions, Inc. (CMP), and VSM Corporation (VSM). All
significant intercompany accounts are eliminated upon consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The Company recognizes revenue from the sale of products when the risks and
rewards of ownership transfer to the customers, which is generally at the time
of shipment. No significant obligations remain after the product is shipped.
Cost for installation and warranty are accrued when the corresponding sales are
recognized.
Note B. Basic and Diluted Earnings per Share
Basic net income per common share is computed based on weighted average common
shares outstanding during the period. Diluted net income per share is computed
using the weighted average common and dilutive common equivalent shares
outstanding during the period. Convertible debt are considered a common stock
equivalent and is included in the weighted average share computation using the
treasury stock method. Options for 300,000 shares and warrants for 20,000 shares
were not included in the computation of diluted earnings per share as their
effect would be antidilutive.
Three Months Ended
June 30, 1999
------------------
Net income $ 909,039
===========
Basic weighted average shares outstanding 12,276,165
Convertible debentures 58,143
Stock options 16,438
-----------
Diluted weighted average shares outstanding 12,350,746
===========
Basic earnings per share $ .07
===========
Diluted earnings per share $ .07
===========
5
<PAGE>
Note C. Inventories
Inventories are valued at the lower of cost or market. Cost of pre-owned
equipment held for resale is determined on the specific identification method.
Costs of all other inventories are determined on a first-in, first-out (FIFO)
basis. Inventories consisted of the following:
June 30, 1999 March 31, 1999
------------- -------------
Pre-owned equipment held for resale $3,907,987 $5,389,000
Raw materials 72,294 --
Work-in-process 308,828 --
---------- ----------
Total $4,289,109 $5,389,000
========== ==========
Note D. Accrued Expenses
The components of accrued expenses are as follows:
June 30, 1999 March 31, 1999
------------- -------------
Finder's fee $ 441,000 $ --
Profit sharing 257,265 --
Interest expense 146,452 24,506
Promoter/Shareholder expense 125,000 125,000
Directors fees 18,000 72,000
Compensation and benefits 42,707 --
Legal/audit 25,000 67,074
Warranty 23,837 --
Other 31,007 19,500
---------- --------
Total $1,110,268 $308,080
========== ========
Note E. Convertible Debentures
At June 30, 1999, the Company issued convertible debentures of $147,500. The
debentures are convertible into the Company's common stock at any time after one
year from purchase through their maturity date, 24 months subsequent to the date
of purchase. Also, the debentures bear interest at 9.5%, payable annually in
restricted common stock. If paid in common stock, the debentures are convertible
into common stock at 80% of the average of the five day closing bid prices, as
reported by Bloomberg, for the five consecutive trading days immediately
preceding the date of conversion, but in no event at a price lower than $3.50
per share or higher than $5.00 per share. The debentures are subject to a
mandatory 24 month conversion feature at the end of which all debentures
outstanding will be converted to shares of common stock. There is no beneficial
conversion feature associated with the convertible debentures as the fair market
value, as determined by an independent valuation, is lower than the bid price.
Note F. Business Combination
On April 28, 1999, the Company acquired a company, VSM, engaged in the
manufacture and/or refurbishment of semiconductor process equipment and
subassemblies, including ultra-pure gas and chemical handling systems. The
Company completed this transaction by paying $ 1,000,000 in cash for all the
outstanding common stock of VSM. The excess of the total acquisition cost over
the fair value of the net assets acquired of $557,798 is being amortized over
seven years by the straight-line method. The covenant not to compete of $24,000
is being amortized over two years, the term of the agreement, by the
straight-line method. The acquisition has been accounted for as a purchase and
results of operations of VSM since the date of acquisition are included in the
consolidated financial statements. VSM sales and net loss for the year ended
December 31, 1998 totalled $4,374,558 and $(138,345), respectively.
6
<PAGE>
In conjunction with this transaction, the Company borrowed $ 1,000,000 from TLD
Funding Group. The note bears interest at approximately 24% per year. The note
is due on April 28, 2001. Subsequent to quarter end, this note payable was
partially paid off through the refinancing with Imperial Bank referred to in
Note L.
Note G. Contingencies
The Company has been named a defendant in a lawsuit from a former employee of a
Company with common ownership and from a former consultant of a Company with
common ownership, alleging wrongful termination, related to amounts owed for
consulting services and misappropriated trade secrets. Management denies these
allegations and intends to defend itself vigorously. The defendants have
demanded the value of 1,000,000 shares of the Company's stock. No provision has
been made to the financial statements as a result of this lawsuit.
Note H. Segment Information
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business unit requires different strategies.
There are three reportable segments: ATSI, CMP, and VSM. ATSI buys and sells
pre-owned semiconductor processing and manufacturing equipment to the worldwide
market of semiconductor companies. CMP provides engineering and manufacturing
services to the semiconductor electronics industry. CMP also provides foundry
services and on-site operations, management services and technical support to
semiconductor customers. VSM manufactures and/or refurbishes semiconductor
process equipment and subassemblies.
The accounting policies applied to determine the segment information are the
same as those described in the summary of significant accounting policies.
Interest expense on long-term debt is allocated based upon the specific
identification of debt incurred to finance property and equipment.
Management evaluates the performance of each segment based on profit or loss
from operations before income taxes, exclusive of nonrecurring gains and losses.
Financial information with respect to the reportable segments follows for the
quarter ended June 30, 1999:
<TABLE>
<CAPTION>
Corporate and
VSM ATSI CMP unallocated Totals
---------- --------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenue from external customers $ 522,102 5,853,198 48,370 -- $6,423,670
Interest expense $ -- 596,822 9,323 32,202 $ 638,347
Depreciation and amortization $ 3,908 506 7,424 16,399 $ 28,237
Segment profit (loss) before
income taxes $ 205,162 1,756,815 (170,690) (626,248) $1,165,039
Segment assets $1,503,568 5,956,690 236,868 1,050,453 $8,747,579
Expenditures for segment assets $ 16,548 6,570 43,176 40,686 $ 106,980
</TABLE>
7
<PAGE>
The following table presents information about the Company's revenue (attributed
to countries based on the location of the customer) and long-lived assets by
geographic area for the quarter ended June 30, 1999:
Revenue Long-Lived Assets
------- -----------------
United Kingdom $2,972,486 $ --
Japan 891,712 --
United States 751,815 394,814
Netherlands 610,000 --
Italy 499,000 --
France 450,000 --
Mexico 90,832 --
Malaysia 84,312 --
Denmark 70,000 --
Other 3,513 --
---------- --------
Total $6,423,670 $394,814
========== ========
Note I. Income tax matters
Pretax income from continuing operations for the quarter ended June 30, 1999 was
taxed all domestically.
The income tax provision charged to continuing operations for the quarter ended
June 30, 1999 was as follows:
Current:
U.S. federal $ 353,000
State and local 89,000
Deferred tax (benefit) (186,000)
---------
$ 256,000
=========
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income from continuing
operations for the quarter ended June 30, 1999 due to the following:
Computed "expected" tax expense $408,000
Increase (decrease) in income taxes
resulting from:
Nondeductible expenses 11,000
State taxes, net of federal benefit 65,000
Change in valuation allowance (255,000)
Other 27,000
--------
$256,000
========
Net deferred tax assets consist of the following components:
June 30, 1999 March 31, 1999
------------- --------------
Deferred tax assets:
Other current liabilities $ 214,000 $ 22,000
Operating loss carry forwards -- 233,000
Less valuation allowance -- (255,000)
--------- ---------
$ 214,000 $ --
========= =========
The components giving rise to the net deferred tax assets described above have
been included in the accompanying consolidated balance sheet as a current asset
as of June 30, 1999.
8
<PAGE>
Note J. Employment Agreements
During the quarter ended June 30, 1999, the Company entered into three
employment agreements.
The employment agreement with the Chief Executive Officer (CEO) is for a term of
five years, unless terminated earlier, and shall automatically renew for an
additional three-year term unless either the Company or the employee gives
written notice of nonrenewal at least one year prior to expiration of the
contract. The agreement calls for compensation as follows: annual base salary
with potential annual increases; an incentive bonus determined by the Board of
Directors based upon the performance of the Company; and a monthly auto
allowance. The CEO may terminate this agreement at any time upon delivery of
thirty days' written notice. The Company may terminate this agreement at any
time without cause, by giving 120 days written notice. Within seventy-two hours
of termination without cause, the Company shall pay to the CEO the base salary
due him through the date of termination plus the amount remaining under the term
of this agreement plus an additional three years' salary. The Company will also
be responsible for insurance and other benefits for the CEO and his family for a
period of three years after termination without cause. If the CEO is terminated
without cause, all non-vested options and shares in the company due the CEO
shall vest and these shares and options shall have piggyback registration rights
in any subsequent public offering for a period of ten years. In the event of
termination due to death of the CEO, the agreement shall terminate immediately
and the CEO's beneficiaries shall be entitled to receive the base salary and
benefits due the CEO through the term of the agreement. In the event the Company
is acquired, merged or taken over by another entity, the CEO's stock and options
shall vest immediately and this agreement shall automatically renew for five
years.
The Company entered into an employment agreement with the Chief Financial
Officer (CFO) for a period of three years, unless terminated earlier, which
shall automatically renew for additional one-year terms unless either party
gives written thirty-day notice. The agreement calls for compensation as
follows: annual base salary with potential annual increases; an incentive bonus
of up to 40% of the employee's annual base salary based one-half on the
employee's individual performance as evaluated by the CEO and one-half on
achieving budgeted pre-tax income goals for the company; 150,000 common stock
options which vest over three years with an exercise price equal to fair market
value; and a monthly auto allowance. The Company may terminate this agreement at
any time without cause, by giving written notice to the employee. Within
seventy-two hours of termination without cause, the Company shall pay the CFO
the base salary due her through the date of termination plus an amount equal to
base salary for ninety (90) days or the remaining term of the agreement,
whichever is longer.
The Company entered into an employment agreement with the Vice President and
Chief Legal and Administrative Officer (CLAO) for a period of five years, unless
terminated earlier, which shall automatically renew for additional three-year
terms unless either party gives written one-year notice. The agreement calls for
compensation as follows: annual base salary with potential annual increases; an
incentive bonus of up to 40% of the employee's annual base salary based one-half
on the employee's individual performance as evaluated by the CEO and one-half on
9
<PAGE>
achieving budgeted operating income goals for the company; and a monthly auto
allowance. The Company may terminate this agreement at any time without cause,
by giving 120 days' written notice to the employee. Within seventy-two hours of
termination without cause, the Company shall pay the CLAO the base salary due
him through the date of termination plus the amount remaining under the term of
this agreement plus an additional three years' salary. The Company will also be
responsible for insurance and other benefits for the CLAO and his family for a
period of three years after termination without cause. If the CLAO is terminated
without cause, all non-vested options and shares in the company due the CLAO
shall vest and these shares and options shall have piggyback registration rights
in any subsequent public offering for a period of ten years. In the event of
death of the CLAO, the agreement shall terminate immediately and the CLAO's
beneficiaries shall be entitled to receive the base salary and benefits due the
CLAO through the term of the agreement. In the event the company is acquired,
merged or taken over by another entity, the CLAO's stock and options shall vest
immediately and this agreement shall automatically renew for five years.
Note K. Profit Sharing Plan
In connection with the acquisition referred to in Note F, VSM had a profit
sharing plan for the benefit of its employees. An employee must be twenty-one
(21) and work at least 1,000 hours in the plan year to be eligible. The Company
did not make a contribution to the plan for the quarter ended June 30, 1999.
Note L. Finder's Fee Arrangement
Effective May 20, 1999, the Company agreed to pay a finder's fee to Bruar
Associates in exchange for efforts in arranging the purchase of pre-owned
semiconductor equipment located in the United Kingdom. The fee is based upon 15%
of net sales proceeds relating to the purchased equipment when and if such sales
exceed $6,583,000. Fees are due on the next $8,417,000 in net sales proceeds.
The agreement expires on May 31, 2002. As of June 30, 1999, the Company has
accrued $441,000 in finder's fees as management expects sales to exceed
$15,000,000 during the contract term.
Note M. Subsequent Events
In July, 1999, the Company entered into a six month credit agreement with
Imperial Bank in the amount of $ 3,000,000. The loan bears interest at 15% and
is secured by substantially all assets associated with the United Kingdom
operation. The credit amount is guaranteed by a stockholder and required a
non-refundable fee of $ 75,000 which will be amortized over the life of the
loan. If the bank does not receive 50% of the proceeds from the sale of the
inventory in the United Kingdom within three days of collection, then an
additional 5% will be charged. The proceeds of this credit agreement were used
to payoff the balance of the short term note payable to TLD Funding Group and a
portion of the debt incurred in the acquisition.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including projections of
results of operations and financial condition, statement of future economic
performance, and general or specific statements of future expectations and
beliefs. The matters covered by such forward-looking statements are subject to
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company to differ materially
from those contemplated or implied by such forward-looking statements. Important
factors which may cause actual results to differ include, but are not limited to
matters which are discussed in more detail in the Company's Form 10-K for the
1999 fiscal year.
RESULTS OF OPERATIONS
SITEK began operations on July 14, 1998 when it acquired all the outstanding
stock of CMP Solutions, Inc. (CMP). On July 24, 1998, all of the outstanding
stock of Advanced Technology Services, Inc. (ATSI) was contributed to SITEK as a
wholly owned subsidiary. ATSI was formed on July 23, 1998. As SITEK began
operations on July 14, 1998, the June 30, 1998 financial statements show no
activity.
Net sales of approximately $6,424,000 in the current fiscal quarter resulted in
a gross profit of 54.5% and were principally due to sale of $5,853,000 by ATSI
of pre-owned semiconductor capital equipment.
Net sales of $522,000 were earned by VSM Corporation subsequent to SITEK's
acquisition of all the outstanding shares of common stock.
CMP continued to develop its chemical planerization processes and generated net
sales of $48,000 during the quarter.
Research, development, and engineering expenses of $279,000 or 4.3% were
incurred primarily to develop a new CMP wafer carrier, which is expected to
improve product yields. The carrier head is anticipated to be available for
initial beta site sales in the second quarter of fiscal 2000 with production
versions available in the third quarter of fiscal 2000. CMP incurred engineering
expenses associated with development of planarization processes related to its
foundry operation.
SITEK incurred $1,419,000 or 22.1% of net sales in selling, general and
administrative expense primarily relating to general business activities,
including selling and general wages, travel, consulting, legal and accounting,
facility rent, and equipment rentals as well as $441,000 in finder's fees
associated with the pre-owned U.K. inventory acquisition referred to in Note L.
Interest expense of $638,000 or 9.9% of net sales relate to borrowings mainly
from TLD Funding Group (TLD). SITEK entered into a short-term note payable
agreement with TLD on March 15, 1999 for funds used to acquire substantially all
of the pre-owned semiconductor production equipment from a semiconductor plant
in Durham County, United Kingdom. The note includes $656,000 of financing fees,
which are amortized over the life of the loan. Payment is due on July 13, 1999.
The balance due on the note at June 30, 1999 is $2,336,000. This note was
refinanced subsequent to quarter end with a financial institution as referred to
in Note M.
Income taxes as a percentage of income before income taxes were 22.0% in the
quarter ended June 30, 1999 while the federal tax rate was 35%. The redued tax
rate was caused by utilization of net operating losses partially offset by the
impact of state income taxes and non-deductible expenses.
In February 1999, SITEK borrowed $207,000 from TLD under a line of credit, which
will expire on February 4, 2001. Interest is due monthly on the unpaid balance
at 1.5%. The line is personally guaranteed by two of SITEK's shareholders and
two related companies.
SITEK also has available a line of credit with TLD for amounts up to $1,000,000
to be utilized to purchase equipment for resale. The line bears interest on each
advance at 1% of the advance amount for the initial 30 days and 2% per month
thereafter. The Company also must pay a financing fee of 7% at the time of each
advance under the line. At June 30, 1999, the Company owed $235,000 under this
line of credit. The loan is secured by equipment purchased using the proceeds of
the line.
In April 1999, SITEK entered into a loan agreement with TLD to borrow $1,000,000
to be used to purchase all the outstanding shares of VSM Corporation ("VSM").
Payment is due on April 28, 2001. Interest is charged at 1% per month for the
initial 90 days and 2% per month thereafter. The note includes financing fees of
$70,000, which are amortized over the life of the loan. The loan is unsecured. A
portion of this loan was refinanced subsequent to June 30, 1999 with a financial
institution as referred to in Note L.
SITEK sold convertible debentures totaling $147,500 during the quarter. The
debentures earn interest at the rate of 9.5% and may be converted into the
Company's common stock after one year from the date of purchase through 24
months at which time they mature. The debentures are subject to mandatory
conversion to common stock after June 7, 2002. The conversion price is based
upon a formula, but in no case at a price lower than $3.50 or higher than $5.00.
11
<PAGE>
Advances from a shareholder and a related company have been received by the
Company of which $510,000 is outstanding on June 30, 1999.
PLAN OF OPERATIONS
In March 1999, ATSI purchased substantially all of the pre-owned semiconductor
production equipment from a semiconductor plant in the United Kingdom. As a
result, ATSI net revenues from equipment resale operations during the fiscal
quarter ending June 30, 1999 significantly exceeded revenues earned in the
previous fiscal period ending March 31, 1999.
During the fiscal quarter, CMP continued in the development phase and made
efforts in initial marketing activities. CMP had revenues of $48,000 during the
current fiscal quarter due to start-up activities. The Company expects continued
development and facilitization expenses for CMP during the next 12 months and
anticipates CMP revenues to commence in the second half of its fiscal year
ending March 31, 2000.
On April 28, 1999, SITEK purchased all the outstanding shares of VSM Corporation
for $1,000,000. VSM is located in Tempe, Arizona and is engaged in the
manufacture and/or refurbishment of semiconductor process equipment and
subassemblies. The VSM ultra-pure gas and chemical handling systems have wide
applications in wafer manufacturing operations and plant facilities. VSM has
recently introduced a proprietary furnace system that is utilized in the
fabrication of nonvolatile semiconductor memory circuits and other devices.
SITEK has hired advanced development engineers and is developing a new chemical
mechanical planarization wafer carrier, which is expected to improve customer
device yields. The carrier head is anticipated to be available for initial beta
site sales in the second quarter of fiscal 2000 with production versions in the
second half of fiscal 2000.
During the next 12 months, SITEK expects to engage in funding efforts and
acquisitions, increase CMP's revenues, introduce the new carrier head product,
and develop VSM's business. SITEK also expects to acquire all of the capital
stock of Global Semiconductor Technologies, Inc., an Arizona corporation ("GST")
and Advanced Control Technologies, Inc., an Arizona corporation ("ACT"), both
located in Tempe, Arizona and under common ownership. At the present time, SITEK
shares office space and staff with GST and ACT. All expenditures to date between
the companies have been treated as loans to or from these entities.
SITEK plans to raise additional capital with a private placement of up to $3
million in convertible debentures which earn interest at 9.5% and are
convertible into the Company's common stock based upon a formula, but in no case
at a price per share lower than $3.50 or higher than $5.00. SITEK also expects a
possible private placement of an undetermined number of shares of SITEK common
and/or preferred stock. SITEK plans to apply any such additional capital to
product development, equipment, and corporate acquisitions in addition to
working capital requirements above those funded from operations.
LIQUIDITY AND SOURCES OF CAPITAL
SITEK believes it will need additional capital to meet its funding needs,
including repayment of debt obligations when due, future acquisitions, product
development, and the continued costs of compliance with reporting requirements
of the Securities Exchange Act of 1934. CMP will need additional funding before
it is able to generate material revenues. There is no assurance that SITEK will
be able to attract additional capital or that the funds, if acquired, will be
sufficient to complete and integrate the acquisitions of GST or ACT, or to meet
SITEK's product development or operating capital requirements.
Subsequent to June 30, 1999, SITEK entered into a six month credit agreement
with Imperial Bank. Proceeds were used to repay TLD Funding Group for debt which
matured July 13, 1999 as well as a portion of debt incurred relating to the VSM
acquisition.
ATSI collected deposits from customers of $1,303,000. Upon shipment of the
pre-owned equipment, ATSI will recognize these deposits as revenue.
Neither management nor other of SITEK's shareholders has made commitments to
provide additional funds to SITEK. Accordingly, there can be no assurance that
any additional funds will be available to SITEK to allow it to cover its capital
needs. Management has a contingency plan to allow SITEK to sustain itself
without additional funding. However, the success of this plan depends upon: (i)
12
<PAGE>
ATSI retaining its market position and substantially increasing its sales
revenues in fiscal 2000; (ii) CMP reaching production status and attracting
customers with minimal funding; (iii) VSM generating sufficient revenues to fund
its operations; and (iv) ACT and GST generating approximately $1.0 million in
revenues during fiscal 2000, assuming SITEK acquires ACT and GST.
Irrespective of whether SITEK's cash assets meet SITEK's operational capital
needs during the next 12 months, SITEK might compensate providers of services by
issuances of SITEK's common stock in lieu of cash.
EXPECTED PURCHASES OF SIGNIFICANT EQUIPMENT
Depending on market conditions, demand, and the availability of funding, SITEK
expects to purchase certain silicon wafer processing and metrology equipment
during fiscal year 2000. SITEK believes this equipment will materially increase
the likelihood of SITEK's efforts to produce ultra-flat, ultra-uniform silicon
wafers for future electronic circuit production as well as expand capacity at
its CMP foundry and engineering/manufacturing services operation.
During the next 12 months, SITEK expects to update business and manufacturing
systems for all aspects of SITEK. To conserve cash, SITEK may elect to lease
rather than purchase these systems.
YEAR 2000
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 Compliance issue. As the
Year 2000 approaches, such systems may be unable to accurately process certain
data-based information.
Most of SITEK's currently installed computer systems and software products have
been updated and made Year 2000 compliant.
SITEK relies exclusively on personal computer ("PC") based systems and does not
use mainframe or medium sized computer systems that employ older software
programs written in "COBAL." In recent months, numerous software packages have
become available at nominal cost that will evaluate PC systems for Year 2000
compliance, and in many cases apply corrections to the PC system or its
software. SITEK has evaluated all PC systems under its control for Year 2000
compliance, including all PC equipment of VSM. All accounting programs and the
PC system hardware have been upgraded and made Year 2000 compliant.
Approximately 20 percent of the Company's spreadsheet software applications
continue to use the two-digit date code and are not Year 2000 compliant.
Software upgrades for these programs are available at a cost of approximately
$2,000. The Company intends on purchasing the upgrades and plans to have all its
software Year 2000 compliant well before the end of calendar year 1999. However,
there can be no assurance that such upgrades or adjustments to hardware and
software will be sufficient to make SITEK's computers or equipment Year 2000
compliant in a timely manner or that allocated resources will be sufficient. A
failure to become Year 2000 compliant on its computers or equipment could
disrupt materially SITEK's operating results and financial condition.
Because there are a large number of potential vendors and customers for
pre-owned semiconductor equipment and because the Year 2000 compliance of these
potential vendors and customers is unknown and is unreasonably burdensome to
ascertain, SITEK is unable to determine the impact, if any, of Year 2000
compliance issues on its pre-owned semiconductor equipment sales. If SITEK is
unable to address its Year 2000 compliance successfully or in a timely fashion,
the Company may need to devote more resources to the process and additional
costs may be incurred.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk that losses may occur in the values of
financial instruments as a result of movements in interest rates, foreign
currency exchange rates and commodity prices.
Interest Rate Risk - The company's primary market risk exposure for changes in
interest rates relates to the company's long-term debt obligations. The company
currently has short-term debt with an effective interest rate of 38% which is
due July 13, 1999. In the event the note is not repaid at the due date, a 5%
penalty will be assessed on the outstanding balance every 30 days. Assuming a $2
million outstanding balance at July 13, 1999 the company would owe $100,000 in
penalty payments. This assessment would continue on the 13th day of each month
thereafter until the note is paid off.
The company evaluated the potential effect that near term changes in interest
rates would have had on the fair value of its interest rate risk sensitive
financial instruments at year-end. Since the company's current debt has high
interest rates, any near term changes in interest rates would not have a
material adverse affect.
Foreign Exchange Rate Risk - The company conducts business in various parts of
the world and in various foreign currencies. As of June 30, 1999, the company
did not have any material foreign currency transactions. The company expects to
have foreign currency exchange rate risk in the future.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS.
SITEK was named as a defendant in a lawsuit that was filed on April 1,
1999. The lawsuit involves two separate claims by two plaintiffs; Edmond L.
Lonergan and Robert F. Russo, Jr. v. SITEK, Incorporated, et al., Superior Court
for the State of Arizona, County of Maricopa, Case No. CV 99- 05785. The first
plaintiff, Edmond Lonergan, alleges that he was not paid for consulting services
by Global Semiconductor Technologies, Inc., a company controlled by certain
shareholders of SITEK. Mr. Lonergan also claims that Global Semiconductor
Technologies, Inc. and/or the other defendants misappropriated trade secrets in
conducting the reverse merger of Dentmart into SITEK. The second plaintiff,
Robert Russo, Jr., was a former employee of Global Semiconductor Technologies,
Inc. Mr. Russo claims that he was wrongfully terminated. SITEK filed its answer
denying these allegations and intends to defend itself vigorously. Mr. Lonergan
and Mr. Russo have demanded the value of 1,000,000 shares of SITEK's capital
stock and other damages to be proven at trial in their complaint.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the three month period ending June 30, 1999, in reliance on the
exemption from registration set forth in Section 4(2) of the Securities Act of
1933, the Company issued debentures in the aggregate of $147,500 convertible
into shares of the Company's common stock to six individual investors. Each of
the investors is an accredited investor.
The debentures bear an interest rate of 9.5 percent per year and are
payable in the form of the Company's common stock at the market price, defined
as 80 percent of the average of the five-day closing bid price as reported by
Bloomberg, LP for the five consecutive trading days prior to conversion, but in
no event at a price less than $3.50 per share or more than $5.00 per share. The
Company agrees to furnish the Securities and Exchange Commission a copy of the
debenture agreement upon request. See Note E to the Consolidated Financial
Statements.
ITEM 5. OTHER INFORMATION.
(a) On April 28, 1999, the Company entered into a Finance Agreement
with TLD Funding Group pursuant to which TLD Funding Group agreed to provide a
$1,000,000 line of credit to the Company for the use of purchasing equipment.
(b) On April 5, 1999, the Company entered into a three-year employment
agreement with its Chief Financial Officer, Gloria Zemla. See Note J to the
Consolidated Financial Statements.
(c) On June 7, 1999, the Company entered into a five-year employement
agreement with its Chief Executive Officer, Chairman of the Board and President,
Dr. Don M. Jackson, Jr. See Note J to the Consolidated Financial Statements.
(d) On June 14, 1999, the Company entered into a five-year employment
agreement with its Vice President and Chief Legal and Administrative Officer,
Kevin B. Jackson. See Note J to the Consolidated Financial Statements.
(e) On May 20, 1999, the Company entered into a Finder's Fee Agreement
with Bruar Associates to compensate for efforts in arranging the purchase of
pre-owned U.K. equipment. The agreement expires on May 31, 2002. A copy of the
Finder's Fee Agreement is filed herewith. See Note L to the Consolidated
Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index following the signature page which is incorporated
herein by reference.
(b) Reports on Form 8-K:
On May 13, 1999, the Company filed a Form 8-K to report in Item 2,
an acquisition of all the outstanding shares of VSM Corporation for
$1,000,000 pursuant to a Stock Purchase Agreement dated April 28,
1999.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SITEK, INCORPORATED
(Registrant)
Date: November 15, 1999 By:/s/ Dr. Don M. Jackson
-------------------------------------
Dr. Don M. Jackson
President and Chief Executive Officer
Date: November 15, 1999 By:/s/Gloria Zemla
-------------------------------------
Gloria Zemla
Chief Financial Officer
15
<PAGE>
SITEK, INCORPORATED
EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
Incorporated by
Exhibit No. Description Reference to:
----------- ----------- -------------
2.1 Stock Purchase Agreement Form 8-K filed with the
dated April 28, 1999 SEC on May 13, 1999
3.1 Articles of Incorporation of Form 8-K filed with the
Registrant SEC on August 17, 1998
3.2 Bylaws of Registrant Form 10-K filed with the
SEC on April 17, 1998
10.1 Finder's Fee Agreement with Filed Herewith
Bruar Associates dated May 20, 1999
27.1 Financial Data Schedule Filed Herewith
FINDER'S FEE AGREEMENT
THIS FINDER'S FEE AGREEMENT (this "Agreement") dated as of May 20,
1999, is by and between Bruar Associates ("Bruar") and Advanced Technology
Services, Inc. ("ATSI").
RECITALS
A. Bruar was instrumental in arranging the purchase from Fujitsu by
ATSI of various items personal property located at the Fujitsu fab in Durham
County, U.K. Such personal property includes, in part, semiconductor production
equipment, computers, spare parts, a clean room and furniture, and, for purposes
of this Agreement, is collectively called the "Equipment."
B. Bruar acknowledges that ATSI is generally involved in the sale of
personal property of the same type as the Equipment and understands that the fee
arrangements described in this Agreement only apply to the Equipment acquired
from the one specific Fujitsu fab described in Recital paragraph A.
C. ATSI is aware of certain prospective purchasers which may be
interested in purchasing the Equipment and is attempting to sell as much of the
Equipment as possible.
D. In exchange for Bruar's efforts in arranging ATSI's purchase of the
Equipment, ATSI has agreed to compensate Bruar at the times and in the manner
described in this Agreement.
AGREEMENTS
In consideration of the recitals and agreements contained in this
Agreement, and for other valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows:
1. FEE. As the Equipment is sold by ATSI, Bruar shall be entitled to
receive fees as described in this Section 1. All payments shall be calculated on
Net Sales Proceeds, which shall be defined to mean "gross receipts from sales of
Equipment, less returns and allowances, packing, insurance, freight, taxes or
excise duties imposed on the transactions and wholesale and cash discounts." All
fees shall be payable in US Dollars to a commercial bank in either the United
States or the United Kingdom designated by Bruar. Each payment shall be
accompanied by a report from ATSI describing generally the Equipment to which it
relates and how the payment was calculated. During a period of one year
following the date of any payment, Bruar may examine the books and records of
ATSI specifically relating to such payment, at ATSI's place of business, upon
reasonable notice, during normal business hours, and at Bruar's expense.
<PAGE>
a. No fees are due or payable on the first US $6,583,000 in Net Sales
Proceeds. Fees in the amount of 15% of incremental Net Sales
Proceeds shall be due on the next US $8,417,000 in Net Sales
Proceeds received by ATSI between the date of this agreement and May
31, 2002.
b. The first payment from ATSI to Bruar shall be due when ATSI has
received at least U.S. $9 million in Net Sales Proceeds (cash in).
Such payment shall be in the amount of U.S. $362,550. Subsequent
commissions shall be in the amount of 15% of the incremental Net
Sales Proceeds (cash) received by ATSI in excess of the U.S. $9
million threshold.
c. Additional payments shall be made by ATSI to Bruar on the last day
of each calendar month beginning with the month following the date
on which the first payment is due, until a total of U.S. $15 million
in Net Sales Proceeds has been received by ATSI (thus, Bruar could
earn a total of up to US $1,262,550 in fees pursuant to this
Agreement). Such payments shall be in the amount of 15% of the
incremental Net Sales Proceeds received by ATSI during the preceding
calendar month.
d. No payments shall be due or payable with respect to amounts received
by ATSI in excess of U.S. $15 million in Net Sales Proceeds, or for
any sales of Equipment by ATSI after May 31, 2002.
2. ENTIRE AGREEMENT. This Agreement represents the entire understanding
between Bruar and ATSI and supersedes all other oral or written agreements and
communications relating to such matters.
3. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Arizona, U.S.A., without
regard to principles relating to conflicts of laws.
4. SEVERABILITY. The invalidity or unenforceability of any provision
herein shall not affect the validity or enforceability of the remainder of the
Agreement or any other provision herein.
5. MODIFICATION; WAIVER. Any modification or additional obligation
assumed by either party in connection with this Agreement shall be binding only
if evidenced in writing and signed and dated by each party or an authorized
representative of each party.
<PAGE>
IN WITNESS WHEREOF, each of the undersigned acknowledges it has
reviewed this document with legal counsel to its full satisfaction and has
signed below as its own free act and deed.
Bruar Associates Advanced Technology Services, Inc.
By: Iain Campbell By: Julian Gates
--------------------------- ----------------------------
Title: Financial Director Title: President
------------------------ -------------------------
Date: 6/7/99 Date: 5/25/99
------------------------- --------------------------
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