U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________
Commission file number: 33-28417
PRODEO TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 86-0923886
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1817 West Fourth Street
Tempe, Arizona 85281
(Address of principal executive offices)
Issuer's telephone number: (602) 921-8555
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
Indicate by check mark 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 preceding 12 months (or for such shorter period that the
registrant was required to file such report(s)), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant, based upon the closing bid price of
the registrant's Common Stock as reported on the OTC Bulletin Board on June 15,
2000 was approximately $26,694,202. Shares of Common Stock held by each officer
and director and by each person who owns 30% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily conclusive.
The number of outstanding shares of the registrant's Common Stock on
June 15, 2000 was 12,321,146.
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PRODEO TECHNOLOGIES, INC.
FORM 10-K ANNUAL REPORT
YEAR ENDED MARCH 31, 1999
TABLE OF CONTENTS
PART I 1
ITEM 1. DESCRIPTION OF BUSINESS 1
ITEM 2. PROPERTIES 7
ITEM 3. LEGAL PROCEEDINGS 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 7
PART II 8
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS 8
ITEM 6. SELECTED FINANCIAL DATA 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 16
ITEM 9. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT 16
PART III 17
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 17
ITEM 11. EXECUTIVE COMPENSATION 17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 17
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 17
PART IV 17
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 17
SIGNATURES S-1
FINANCIAL STATEMENTS F-1
EXHIBITS E-1
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Prodeo Technologies, Inc., a Delaware corporation ("Prodeo"), formerly known as
Sitek, Incorporated, manufactures and sells semiconductor manufacturing
equipment and provides certain wafer processing foundry services for the global
semiconductor electronics manufacturing industry. As of March 31, 2000, Prodeo
was the parent of three wholly-owned subsidiary corporations: Advanced
Technology Services, Inc. ("ATSI"), CMP Solutions, Inc. ("CMP Solutions") and
VSM Corporation ("VSM"), all located in Tempe, Arizona.
ATSI, an Arizona corporation, is in the business of buying and selling pre-owned
semiconductor manufacturing equipment. CMP Solutions, an Arizona corporation, is
in the early development stages of providing chemical mechanical planarization
("CMP") foundry (wafer processing) and engineering services for semiconductor
fabrication customers and manufacturers of optical and micromechanical devices.
In addition, CMP Solutions provides installation and refurbishment services for
certain pre-owned CMP manufacturing tools. VSM, an Arizona corporation, which
was acquired by Prodeo in April 1999, is a supplier of wafer processing furnaces
and complex, ultra high purity gas and vapor control systems used in the
manufacture of semiconductor wafers.
Prodeo's executive offices are located at 1817 West Fourth Street, Tempe,
Arizona 85281, and its telephone number is 480-921-8555. The Prodeo website
address is www.prodeotech.com.
ORGANIZATIONAL HISTORY AND STRUCTURE
Although Prodeo was incorporated in Delaware on June 30, 1998 under the name
Sitek, Incorporated, its predecessor, the Elgin Corporation, had been in
existence for over 10 years. Until merging with Prodeo, Elgin Corporation and
its successors were dormant and did not engage in any commercial operations. The
Elgin Corporation, incorporated in Delaware on April 5, 1989, entered into a
merger from which the ultimate surviving corporation was Dentmart Group, Inc. on
February 15, 1991.
Elgin was originally established to create a publicly held corporation with
which a suitable privately held company or companies could be merged. Toward
that goal, Elgin filed a registration statement with the United States
Securities and Exchange Commission on Form S-18 that was declared effective on
November 30, 1989. Elgin filed a certification and notice of suspension of duty
to file reports under Section 15(d) of the Securities Exchange Act of 1934 on
Form 15 in February 1991 and remained dormant until April 14, 1998 when Dentmart
filed a current report with the Securities and Exchange Commission reporting its
change in fiscal year from December 31 to March 31, its number of shareholders
exceeding 300 and its intention to resume filing of periodic reports under
Section 15(d) of the Securities Exchange Act of 1934.
On July 14, 1998, Dentmart then merged into and became part of its wholly-owned
subsidiary, Sitek, Incorporated. Sitek, Incorporated then entered into a Stock
Purchase Agreement with CMP Solutions, Inc. to acquire all of its outstanding
stock and create a wholly-owned subsidiary on July 14, 1998. Sitek, Incorporated
formed Advanced Technology Services, Inc. as a wholly-owned subsidiary in July
1998 to handle the Company's interest in purchasing and reselling pre-owned
semiconductor manufacturing tools and systems. Sitek, Incorporated acquired VSM
Corporation as a wholly-owned subsidiary on April 28, 1999 when it purchased all
of the outstanding stock of VSM.
VSM brought proprietary products, services, equipment manufacturing, design and
engineering capabilities to the Company as well as on-going sales revenues. VSM
Corporation was acquired for cash obtained through short-term debt financing.
VSM manufactures and re-manufactures semiconductor process equipment and
subassemblies, including ultra-pure gas and chemical handling systems and
thermal systems used in semiconductor wafer manufacturing operations.
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VSM's capabilities include large frame fabrication, machining, system assembly
and ultra clean tubing welding and clean-room assembly operations. The VSM staff
is also skilled at equipment refurbishment, which complements both the VSM
business as well as the Company's pre-owned equipment business.
On June 5, 2000, Sitek, Incorporated changed its name to Prodeo Technologies,
Inc.
Prodeo is internally organized into three divisions: Finance and Administrative;
Sales and Marketing; and Technology.
FINANCE AND ADMINISTRATIVE DIVISION. This division of nine employees is
responsible for all general management administrative, finance and accounting
operations in the Company. The Company plans to move all operations in the
subsidiaries into the parent, Prodeo, in the next fiscal year to take advantage
of efficiencies in centralized accounting, reporting and operations.
SALES AND MARKETING DIVISION. The Sales and Marketing Division was established
in the fiscal year ending March 31, 2000 to provide a consolidated sales and
marketing support system for the entire Company, with the exception of ATSI
which maintains its own sales force for pre-owned equipment sales. The sales and
marketing division has six employees that provide sales support, product
introduction, and post-sale product support for the pre-owned equipment, the
Corona Polishing Head, Wet-Q-2000 wet buffer station, TCS Flash Evaporator, the
Magnetic Anneal Model 910, and the VSM furnace and fluid delivery system
products. See "Products."
A special project was initiated in the Sales and Marketing Division to sell the
residual inventory from the equipment purchased from Fujitsu Limited at the
former Durham County, United Kingdom fabrication plant.
The Sales and Marketing Division has the responsibility for trade show
management, advertising and sales support and customer relations. It has also
been instrumental in the generation of corporate press releases during the year.
TECHNOLOGY DIVISION. The Technology Division ("TD") is responsible for product
development and process engineering for the Company. The nature of almost all of
the ongoing applied engineering and product development projects must be kept
confidential for competitive reasons. The TD's 12 engineers are experienced in
product design, with between eight and 20 years of experience in development,
testing and market introduction of silicon wafer manufacturing products. In the
fiscal year ending March 31, 2000, the Company purchased $26,767 worth of
state-of-the-art tools for the division staff to enhance engineering
capabilities and to shorten engineering cycles and the time to market for newly
developed products. During the last fiscal year, the TD launched three new
products, the Corona Head, the Wet-Q-2000 and the TCS Flash Evaporator. See
"Products" and "Research and Development."
The TD includes the machine and factory automation group, whose purpose is to
exploit the Prodeo "Control Act" automation software development package
developed originally by Honeywell Corp. and SEMATECH, Inc. and licensed to
Prodeo. This automation software, when applied to semiconductor manufacturing
equipment will automate some of the processes and controls traditionally handled
by fabrication engineers and product staff. These "smart" machines will handle
many routine engineering decisions, safety and malfunction issues and the
application of physics and chemical principles to the processes under control.
PRODUCTS AND SERVICES
PRE-OWNED EQUIPMENT SALES. Prodeo's subsidiary ATSI is in the business of
purchasing and re-selling pre-owned, semiconductor manufacturing tools and
systems. The pre-owned semiconductor equipment market is estimated to be over $1
billion per year, with Comdisco Inc. having the largest market share.
In April, 1999, Prodeo was able to purchase with debt financing essentially all
of the manufacturing equipment in the Fujitsu semiconductor plant in Durham
County, United Kingdom for $5.2 million. The equipment was subsequently sold
during the year or moved to the Prodeo warehouse in Eaglescliffe, United
Kingdom. During the fiscal year ended March 31, 2000, sales of the Durham
inventory and other pre-owned equipment accounted for $17.4 million in revenues
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and cash receipts of the Company (approximately 76% of the Company's revenue),
enabling the Company to meet its cash requirements for the year with minimal,
short term debt financing and no additional equity financing. Prodeo has sold
70% of the equipment at the U.K. warehouse and is seeking other opportunities to
purchase pre-owned equipment.
Like all the subsidiaries of Prodeo, ATSI will be undergoing restructuring in
the next fiscal year. ATSI's restructuring will be followed by the departure of
its president, Julian Gates, and the sale of the shell company to Mr. Gates. See
"Item 7 -- Plan of Operations."
CMP SOLUTIONS FOUNDRY SERVICES. CMP Solutions' foundry provides the chemical
mechanical planarization process of silicon wafers to semiconductor
manufacturers on an outsourced basis. Management believes that CMP Solutions
offers the only CMP foundry service to fabricate products for small and/or
emerging circuit and micro-mechanical manufacturers in the world. Additionally,
the foundry offers emerging suppliers of CMP related slurries, pads and other
consumables the opportunity to test their products without making the investment
in CMP facilities themselves.
In the fiscal year ending March 31, 2000, CMP Solutions implemented major
enhancements to its foundry and clean-room facilities and process library as
well as conducting extensive tests for the Corona wafer carrier. CMP Solutions
is in a developmental and emerging stage.
CORONA POLISHING HEAD. The Corona Polishing Head is a polishing head retrofit to
the IPEC 472 CMP tool. "CMP" refers to the term "chemical mechanical
planarization," a critically important process by which surface films on a
silicon wafer (or "chip") are made very uniformly flat on a microscopic scale to
make it possible to fabricate several layers of interconnecting metal
(conductor) patterns on modern, highly complex integrated circuits. The process
is applied to both insulator (various oxide, nitride and organic) films and
metal films (generally tungsten or copper). In addition to electronic integrated
circuits used in advanced technology computer chips, the CMP process is finding
useful application in optical circuits and new "micro-mechanical" ("MEMS")
devices. The Corona Polishing Head is a new product introduced in January 2000.
The Company made its first installation of this equipment in the June 2000.
The Corona Polishing Head improves the polishing processes on the surface film
of the silicon wafer by the IPEC 472 CMP. The Corona Head allows manufacturers
using the IPEC 471 CMP to upgrade the equipment rather than purchase new
equipment. It is estimated that at least 300 units of the IPEC 472 CMP tools are
installed in the field. The Corona Polishing Head has been demonstrated to
increase machine throughput and to reduce wasted area at the edges of the
wafers. The Corona Polishing Head is manufactured by VSM.
WET-Q-2000. The Wet-Q-2000 system is a stand alone unit that stores
semiconductor wafers in water during certain processing steps. Because it is
necessary to keep wafers wet during CMP processing, the Wet-Q-2000 can be used
in conjunction with or as a stand alone storage unit for wafers undergoing CMP
processing. This product was only recently introduced to the market.
TCS FLASH EVAPORATOR. The TCS Flash Evaporator is used for silicon chemical
vapor deposition ("CVD") applications. TCS is the shortname for trichlorosilane,
which is commonly used starting material for the CVD of silicon films. The TCS
Flash Evaporator precisely meters liquid TCS to the reactor in very small
amounts and replaces cumbersome and poorly controlled hydrogen `bubbler' units.
This product was only recently introduced to the market.
FLUID DELIVERY PRODUCTS. VSM offers a variety of products for storing,
controlling and delivery of ultra-high purity chemicals.
THERMAL PRODUCTS. VSM offers a series of new and re-manufactured horizontal
diffusion and low pressure Chemical Vapor Deposition ("CVD") systems for
processing 100-200 mm semiconductor wafers.
THE MAGNETIC ANNEAL MODEL 910. The Magnetic Anneal Model 910 system is a furnace
that aligns the magnetic polarization of films on silicon wafers and is used in
manufacturing non-volatile memory products. The system has been adapted to batch
rapid thermal processing applications without a magnetic field. Ongoing research
on this system is focused on increasing the magnetic field strength of the
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system in order to serve a wider range of customers and compete with current
competitors, who have limited their systems to single wafer processing. The
Prodeo machines will process batches of more than 25 silicon wafers at a time.
The Magnetic Anneal Model 910 is manufactured by VSM. Patent applications have
been filed with the U.S. Patent and Trademark Office for protection of the
intellectual property associated with this product.
RELIABILITY TOOLKIT. Prodeo acquired the rights to an advanced machine
reliability tracking software system, "The Reliability Toolkit," that will be
marketed to both semiconductor and non-semiconductor equipment suppliers and
users. The Company has not yet marketed this product.
MARKETS
PRE-OWNED EQUIPMENT MARKET. Prodeo participates in the worldwide semiconductor
equipment and materials markets, a market forecasted to reach $35 to $45 billion
in sales for the calendar year 2000. The market for pre-owned equipment sales is
forecasted to reach over $1 billion for the calendar year 2000. Because of the
growing demand for semiconductors and the impending shortage of new
manufacturing equipment and silicon materials, the market for pre-owned
equipment could grow substantially for the next several years. This is an
important factor in the Prodeo strategic plan since these sales provide much of
the cash required by the Company to support growth in other areas. In the fiscal
year ended March 31, 2000, pre-owned equipment sales accounted for 76% of the
Company's revenue. An important competitive advantage for Prodeo derives from
the Company's engineering support for resales in this industry segment. See
"Item 7 -- Plan of Operations."
CMP FOUNDRY MARKET. The CMP foundry operations will serve the market segments
for products that require one or at most three CMP cycles, such as
micro-machines, or optical distribution devices. CMP Solutions believes that
such foundry services will likely grow in time as more and more applications are
found for the CMP technology. Demand from small and/or emerging circuit and MEMS
manufacturers for CMP foundry services provided by CMP Solutions has increased
in the last fiscal year due to increased use of outsourcing. CMP Solutions
believes the demand for its foundry services will increase because
semi-conductor manufacturers will find it more cost effective to outsource their
CMP needs due to the lack of trained technicians and the high cost of CMP
equipment.
FURNACE MARKET. The VSM furnace market is dominated primarily by Silicon Valley
Group/Thermco, which has approximately 60% market share. With the resurgence in
demand for semiconductor equipment worldwide, Silicon Valley Group/Thermco and
other suppliers have had some difficulties meeting customer commitments, and
have out-sourced parts of their business to other suppliers. This out-sourcing
has opened the door for quality products to gain market share and recognition.
Prodeo believes this is an opportunity for VSM's diffusion/LPCVD furnaces to
gain a larger share of the market.
Prodeo distinguishes itself from its furnace competitors by providing turn-key
solutions with guaranteed process results. Prodeo further distinguishes itself
by providing custom and semi-custom furnace designs and refurbishments that are
tailored to meet customer needs. Prodeo has also designed and developed a
proprietary lamp heated rapid batch magnetic anneal system. This system was
originally designed to support the growing MRAM nonvolatile memory market. The
Company also sees broader applications for this tool in conventional
semiconductor device processes such as junction anneals, gate dielectric
formation, silicide formation, dielectric reflow and alloying.
FLUID DELIVERY SYSTEMS MARKET. The other VSM products compete in the fluid
delivery system market. Within the fluid delivery system market, the main
segments Prodeo serves are gas cylinder cabinets, valve manifold boxes (VMB's),
valve manifold panels (VMP's), bulk chemical delivery systems, gas sticks,
weldments and on-tool gas panels. These market segments are dominated primarily
by Kinetics Fluid Systems, a subsidiary of United States Filter Corporation.
Although gross margins are very competitive in the fluid delivery market with
20-40% being typical, Prodeo is enhancing its technical capabilities, design
tools and methodologies, processing tools, and the quality of its products to
stay competitive and gain market share. Additionally, Prodeo is selecting
strategic partners to form alliances with to meet the broadening market
requirements. Prodeo is also concentrating its efforts to develop advanced new
products to serve niche markets, such as its new TCS Flash Vaporizer system for
epitaxial reactors.
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MANUFACTURING PROCESS AUTOMATION. An emerging market Prodeo plans to explore is
automation of semiconductor manufacturing processes. The semiconductor industry
is facing a period of increased demand coupled with a short supply of
manufacturing capacity and skilled personnel to handle the manufacturing
challenges coming. The shortages are attributable to the industry's level
performance and growth period that lasted five years from 1995 through 1999, due
to limited demand for semiconductor wafers during that time period. Many
equipment and silicon suppliers were severely damaged financially during this
period. Skilled engineers and technologists have focused on e-commerce and
internet opportunities, thereby making the shortage problems worse. As a
consequence, Prodeo has invested in creating manufacturing automation systems
like the "Control Act" to compensate for shortages in both capacity and
personnel.
SALES
Prodeo intends to expand its sales and marketing staff in fiscal year ending
March 31, 2001 by implementing a combination of adding internal sales personnel
and contract sales representatives (non-employee) in key locations around the
world, such as in Korea, China and Europe. See "Sales and Marketing Division."
Prodeo sales for the year were distributed among a global market for all types
of equipment sales and services, with 9% of Prodeo's sales in the Pacific Rim,
52% of Prodeo's sales in Europe and 37% of Prodeo's sales in the United States.
Prodeo invoices in U.S. dollars. Sales of pre-owned equipment to Filtronic
Components Semiconductor, Ltd. accounted for approximately 16% of the Company's
sales revenues for the year ending March 31, 2000. There were no foreign
currency exchange issues in fiscal year 2000.
RESEARCH AND DEVELOPMENT
The applied engineering and product development operations in Prodeo consist of
13 professionals, all of whom hold degrees ranging from bachelor to doctorate
degrees. The in-house staff is supplemented by university staff consultants and
engineers on an as needed basis.
Prodeo's research and development efforts focus on product design and
development and process engineering. Each project has a business objective. The
Company is not positioned to do pure research which is left to the universities
or larger companies with which it deals. The Company actively seeks out
potential corporate and university partners for joint product development
programs.
Expenditures for applied development in fiscal 2000 totaled $1,755,387 as
opposed to none in fiscal 1999. The Company expects to budget approximately 10%
of sales revenues to fund development projects, and plans to actively solicit
development funding from U.S. government agencies and other sources. See
"Technology Division."
COMPETITION
PRE-OWNED EQUIPMENT. Prodeo's competition in the pre-owned semiconductor
fabrication equipment market consists of two or three very large firms, such as
Comdisco, Inc., a large company that specializes in financing new equipment and
reselling pre-owned equipment, and numerous, small "broker" firms, such as TLC
in Colorado and Spares L.L.C. in Austin Texas. There are also a number of
specialty firms that re-furbish only equipment related to one or two types of
products. A new consortium has been formed, "SEC/N" which has head-quarters in
the Phoenix area. SEC/N is comprised of about 30 member companies, both large
and small who are invited to participate in agreeing to meet rigid ethical and
operating standards. Prodeo has been invited to join SEC/N and anticipates
becoming a member.
Competitors such as Comdisco are very large and have substantially greater
financial resources and established clientele. Prodeo intends to compete by
providing a high level of experienced engineering support.
CMP FOUNDRY SERVICES. The Company is not aware of competitors for Prodeo in the
CMP wafer services emerging market, other than the original equipment
manufacturers that have installed internal demonstration laboratories that do
produce small lots of silicon wafers for key potential customers. If the market
for CMP wafer services grows, particularly in the MEMS arena, the Company
expects competitors to enter the service market in the fiscal year ending March
31, 2001. However, the Company believes that it has a market advantage over
later market entrants by virtue of having entered the market before competitors
and the high cost and lengthy start up costs.
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The present state of CMP process technology is complex and highly dependent on
skilled engineering staff. Prodeo intends to compete by building a much higher
level of automation and engineering decision making into its foundry machines.
This will enable Prodeo's key CMP employees to handle a greater number of
machines in response to higher demand for CMP services.
FURNACE AND GAS CONTROL PRODUCTS - VSM PRODUCTS. There are three major
competitors for the Prodeo horizontal furnace business: Silicon Valley
Group/Thermco, Amtech and MRL Industries. There are also several major suppliers
of ultra-pure gas control systems. The market is extremely price competitive.
Large competitors are known to compete with low prices or by acquiring competing
businesses. Prodeo believes that its staff with fabrication experience gives
Prodeo a competitive edge in process control, flexibility and know-how. Prodeo's
competitive strategy also includes providing higher value-added products and
avoiding the sale of low-margin products.
The Prodeo Magnetic Anneal Model 910 is designed for production scale
operations, which is currently limited to a magnetic field strength of 3,000
gauss. There is a single competitor in the market with a low-cost, laboratory
scale product. If higher magnetic fields (up to 20,000 gauss) are required by
customers, then the Company intends to offer superconducting electro magnets.
See "Products."
INTELLECTUAL PROPERTY
The Company currently has two patents pending for the Corona Polishing Head and
Magnetic Anneal Model 910. Additionally, Prodeo became the exclusive licensee in
two U.S. patents related to semiconductor apparatus and processing of
semiconductor films. Prodeo also has a non-exclusive, royalty-bearing license
from Raytheon Corporation to use, make and sell apparatus and processes for
depositing borophosphosilicate glass, which is a dielectric film used in the
manufacture of advanced semiconductor devices. Prodeo uses such technology in
VSM's thermal product line. The Company makes it a policy to require key
employees to enter into non-compete agreements.
EMPLOYEES
As of March 31, 2000, Prodeo employed 62 people, all of whom were full-time
employees. Six employees were engaged in sales and service, seven were engaged
in administrative activities, 13 were in engineering and 36 were production
associates. None of the employees is covered by a collective bargaining
agreement, and management believes that its relations with its employees are
good.
REPORTS TO SHAREHOLDERS
Prodeo intends to send an annual report to stockholders which will include
audited financial statements.
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ITEM 2. PROPERTIES
Prodeo leases general office and warehouse facilities in Tempe, Arizona. These
facilities are designed and constructed for manufacturing services and
administration. In addition, Prodeo leases the CMP foundry facility in Tempe,
Arizona which includes a clean room site. The CMP foundry facility lease is
described below:
Approx. Square
Location Feet Leased Expires Description
-------- ---- -------------- -----------
Tempe 7,088 Sept. 30, 2001 Single story, block construction
ITEM 3. LEGAL PROCEEDINGS
On April 1, 1999, Sitek Incorporated was named as a defendant in a lawsuit
involving 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 Incorporated. 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. On January 10, 2000,
Mr. Russo filed a Stipulation for Dismissal with Prejudice dropping his claims
against Sitek et al. On April 26, 2000, Mr. Lonergan filed a motion to amend his
complaint alleging securities fraud involving the same set of facts set forth in
his original complaint. Sitek has prepared its response opposing the motion on
the basis that there are no grounds upon which a valid claim for securities
fraud could exist and denying the allegations of the claim. Sitek is continuing
to defend itself vigorously. Mr. Lonergan has demanded the value of 1,000,000
shares of Sitek's capital stock and other damages to be proven at trial in his
complaint.
On April 9, 2000, Sitek and Don Jackson, the Company's chief executive officer,
were named as defendants in a lawsuit filed in the state of Colorado: JOHN
BOTDORF V. SITEK, INC., ET AL., District Court, City and County of Denver, State
of Colorado, Case No. 00CV1951. Mr. Botdorf alleges that Sitek breached a
contract entered into with Mr. Botdorf in July of 1999 for consulting services
involving equity funding for Sitek. Additionally, Mr. Botdorf claims that Sitek
made false representations and fraudulent non-disclosure with respect to the
July 1999 agreement. Sitek currently is preparing its response and intends to
defend itself vigorously. Mr. Botdorf is seeking an option to purchase 600,000
shares of Sitek capital stock at $0.25 per share and other damages in an amount
to be proven at trial.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 3, 2000 by majority written consent, shareholders approved an amendment
to the Certificate of Incorporation authorizing the issuance of preferred stock
with rights, privileges, preferences and limitations to be determined by the
board of directors upon issuance.
Shareholder Votes
Votes For Votes Against Withheld Abstained
--------- ------------- -------- ---------
5,693,760 N/A N/A N/A
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PART II
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prodeo's common stock, $.005 par value, trades on the OTC Bulletin Board under
the symbol "PDEO." However, because of the limited and sporadic nature of
Prodeo's stock quotations during the last fiscal year, Prodeo does not believe
there is an established public trading market for Prodeo's stock.
The range of high and low bid quotations for the quarterly periods of the
current and prior fiscal years were as follows:
Year Ended March 31, 2000 High* Low*
------------------------- ----- ----
First Fiscal Quarter 6.75 5.50
Second Fiscal Quarter 6.50 2.50
Third Fiscal Quarter 4.63 2.50
Fourth Fiscal Quarter 15.81 4.63
Year Ended March 31, 1999 High* Low*
------------------------- ----- ----
First Fiscal Quarter N/A (1) N/A (1)
Second Fiscal Quarter $7 $5
Third Fiscal Quarter $6 (2) $6 (2)
Fourth Fiscal Quarter $6.50 $5.50
----------
* Bid quotations as reported by the OTC Bulletin Board reflect inter-dealer
prices, without retail mark-up, mark-down, or commission and may not
represent actual transactions. Because of the limited and sporadic trading
of Prodeo's stock, Prodeo does not believe an established public trading
market has been created for the common stock.
(1) Prodeo was formed in June 1998 and therefore its common stock had no trading
activity prior to that date.
(2) Prodeo's trading activity in this quarter was limited to one day's trading,
which accounts for the identical high and low bids for this quarter.
Prodeo has never paid any cash dividends on its common stock, nor does it
anticipate paying dividends on its common stock in the foreseeable future.
The number of stockholders of record of Prodeo's common stock as of June 15,
2000 was 537. This figure does not include individual participants in securities
position listings of registered clearing agencies. Trading activity with respect
to the common stock has been limited and the volume of transactions should not
of itself be deemed to constitute an "established public trading market." A
public trading market having the characteristics of depth, liquidity and
orderliness depends upon the existence of market makers as well as the presence
of willing buyers and sellers, which are circumstances over which Prodeo does
not have control.
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During the fiscal year ending March 31, 2000 Prodeo was involved in four
transactions involving the sale of unregistered securities. First, on March 29,
2000 Prodeo sold 250,000 shares of Prodeo's Series A Preferred Stock, with a
$0.01 par value to Intel Corporation, a Delaware corporation, for $1,500,000.
Each share of Series A Preferred Stock is initially convertible into one share
of common stock of Prodeo, with par value $0.005, and is adjusted by subsequent
sales prices of the common stock of Prodeo.
Prodeo issued the Series A Preferred Stock pursuant to a Rule 506 exemption,
promulgated under Regulation D, from registration pursuant to the Securities Act
of 1933. Prodeo satisfied the requirements of Rule 506, because (a) Prodeo made
no general solicitation or offer to sell the Series A Preferred Stock; (b)
Prodeo reasonably believes it sold the Series A Preferred Stock to one
purchaser; and (c) Prodeo sold the Series A Preferred Stock to an accredited
investor.
Second, on April 4, 2000 Prodeo issued 13,333 shares of Prodeo common stock,
with a $0.005 par value, to Magnum Financial Group, LLC, in exchange for
investor relations services rendered. Prodeo issued such shares of stock to
Magnum Financial Group, LLC pursuant to a Letter of Engagement (the "Engagement
Letter") between Magnum Financial Group, LLC and Sitek dated October 28, 1998.
The Engagement Letter, which was terminated in February 1999, required Prodeo to
issue Magnum Financial Group, LLC warrants to purchase 10,000 shares of Prodeo
common stock at the end of each month during which Magnum Financial Group, LLC
was engaged to provide investor relations services. The exercise price of the
warrants was $6.00, which was the average closing bid price for the ten trading
days preceding the last day of each of the four months during which Magnum
Financial Group, LLC was engaged to provide investors relations services. The
Engagement Letter provided for a cashless exercise of the warrants.
Prodeo issued the warrants pursuant to a Rule 504 exemption, promulgated under
Regulation D, from registration pursuant to the Securities Act of 1933. Prodeo
satisfied the requirements of Rule 504, because (a) Prodeo made no general
solicitation or offer to sell the warrants; and (b) the aggregate offering price
for the warrants did not exceed $1,000,000, less the aggregate offering price
for all securities sold within the preceding twelve months and during the
offering of securities under Rule 504, in reliance on any exemption under 3(b),
or in violation of Section 5(a) of the Securities Act of 1933.
Third, on September 17, 1999, Prodeo issued a warrant to purchase 4,562 shares
of Prodeo common stock to AA Capital Ventures, LLC in exchange for services
rendered in connection with the sale of certain convertible debentures discussed
below. The warrant expires on December 31, 2004.
Prodeo issued the warrant pursuant to a Rule 504 exemption, promulgated under
Regulation D, from registration pursuant to the Securities Act of 1933. Prodeo
satisfied the requirement of Rule 504, because (a) Prodeo made no general
solicitation or offer to sell the warrant; and (b) the aggregate offering price
for the warrant did not exceed $1,000,000, less the aggregate offering price for
all securities within the preceding twelve months and during the offering of
securities under Rule 504, in reliance on any exemption under 3(b), or in
violation of Section 5(a) of the Securities Act of 1933.
Fourth, June 14, 1999 through September 10, 1999, Sitek issued a series of
convertible debentures in the aggregate of $182,500 maturing on June 7, 2001 and
bearing an interest rate of 9.5% per year. The convertible debentures were sold
for cash. The convertible debentures are convertible into the number of common
shares determined by dividing the dollar amount of the interest payable at the
time of conversion by the market price, which means 80% of the average of the 5
day closing bid prices, as reported by Bloomberg, LP 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.
Prodeo issued the convertible debentures pursuant to a Rule 506 exemption,
promulgated under Regulation D, from registration pursuant to the Securities Act
of 1933. Prodeo satisfies the requirements of Rule 506, because (a) Prodeo made
no general solicitation or offer to sell the convertible debentures; (b) Prodeo
reasonably believes it sold the convertible debentures to no more than
thirty-five purchasers; and (c) Prodeo sold the convertible debentures to
accredited investors only.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal year ending Fiscal year ending
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
(in thousands) (in thousands)
(except per share data) (except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS
Net Sales 22,727 2,721
Gross profit 12,077 690
Operating expenses 8,080 1,337
Loss from operations 3,996 (647)
Net Income 1,930 (924)
CASH FLOW
Net cash (used in) operating activities 5,231 (5,446)
Net cash (used in) investing activities (897) (85)
Net cash provided by financing activities (4,119) 5,532
BALANCE SHEET DATA
Cash 215 1
Total assets 8,343 7,322
Current liabilities 4,573 7,989
Long-term liabilities 1,104 254
Shareholders' equity 2,582 (921)
INCOME PER COMMON SHARE OUTSTANDING,
BASIC AND DILUTED 0.09/0.09 (.08)
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Prodeo began operations on July 14, 1998 when it acquired all the outstanding
stock of CMP Solutions, Inc. ("CMP Solutions"). On July 24, 1998, all of the
outstanding stock of Advanced Technology Services, Inc. ("ATSI") was contributed
to Prodeo as a wholly-owned subsidiary. As Prodeo was in its initial year of
operations, there are no financial statements prior to the year ending March 31,
1999. Due to the current state of operations and relatively short operating
history, period to period comparisons of results of operations are not
meaningful.
REVENUES. Net sales of $22,727,729, in the fiscal year ended March 31, 2000,
were principally due to sales of pre-owned semiconductor capital equipment,
which resulted in a gross profit of 53% of net sales. Pre-owned equipment sales
accounted for 76% of the Company's revenues ($17.4 million) in the fiscal year
ending March 31, 2000, with sales from VSM making almost all of the other sales.
Almost all of the $17.4 million of the pre-owned equipment revenues for the last
fiscal year arose out of the sale of inventory in the United Kingdom. The
Company began reselling this equipment in April of 1999 and has sold
approximately 70% of the inventory. The Company has acquired additional
equipment for resale on a smaller basis from time to time. The Company continues
to seek opportunities to purchase pre-owned equipment for resale, on both a
piece-by-piece and as a whole fabrication plant basis. However, there can be no
assurance the Company will be able to acquire additional equipment or will be
able to acquire additional equipment on as favorable terms and conditions as in
the past.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Prodeo incurred $6,325,117 or
27.8% of net sales in selling, general and administrative expenses in the fiscal
year ending March 31, 2000. The majority of the SG&A expenses are related to
continuing start-up activities, the acquisition of VSM and general business
activities. Because the Company was able to purchase its inventory of pre-owned
equipment in the United Kingdom for approximately $5.2 million, the profit
margins on the sale of the equipment have been high. The profit margins on the
Company's other products have been lower, due in part to the products' recent
introduction to the market.
The Company expects that sales from the VSM products and, eventually, CMP
Solutions services will become a larger portion of the Company's revenues in the
future, particularly with the recent introduction of the Corona Polishing Head,
the Magnetic Anneal 910, the Wet-Q-2000 and the TCS Flash Evaporator, all of
which are manufactured by VSM. However, as with all new products, the Company
cannot know what the products' sales will be.
PLAN OF OPERATIONS
As Prodeo's predecessors were dormant until April 1998 and did not have any
revenues from operations in any of the last three fiscal years, the following is
management's discussion of Prodeo's plan of operations for the next 12 months
ending March 31, 2001.
In March 1999, the Company purchased substantially all of the pre-owned
semiconductor production equipment from a semiconductor plant in the United
Kingdom. Prodeo realized $17.4 million of its revenues, or 76% of the total
revenues, from equipment resale operations during the fiscal year ending March
31, 2000. Most of the Company's pre-owned equipment revenues are from the sale
of the United Kingdom equipment, 70% of which has been sold. Prodeo expects to
continue sales of pre-owned equipment utilizing the remaining 30% of the United
Kingdom assets as well as other smaller market acquisitions. Prodeo continues to
seek various sources from which to purchase pre-owned equipment, including
individual equipment and complete plant inventories, to sell. However, there can
be no assurance the Company will be able to acquire additional equipment or will
be able to acquire additional equipment on as favorable terms and conditions as
in the past. Lack of new or adequate inventory could have a materially adverse
impact on the Company as sales of the pre-owned equipment has provided most of
the cash required to support the Company's growth in its VSM and CMP Solutions
businesses.
During the fiscal year, CMP Solutions continued in the development phase and
made efforts in initial marketing activities as well as in operating its silicon
wafer processing clean room facility. CMP Solutions had revenues of $288,578
during the current fiscal year. Prodeo expects continued development expenses
for CMP Solutions during the next 12 months without significant offsetting
revenues from CMP in the immediate future.
On April 28, 1999, Prodeo purchased all the outstanding shares of VSM
Corporation ("VSM") for $1,000,000, of which $50,000 had been paid prior to
March 31, 1999, in cash and for $200,000 to settle an outstanding liability to
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<PAGE>
the current shareholders of the target company. 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 furnace units have wide applications in wafer manufacturing operations
and plant facilities. VSM has recently introduced the Magnetic Anneal 910
furnace system that is utilized in the fabrication of nonvolatile semiconductor
memory circuits and other devices. VSM has sold two Magnetic Anneal 910 furnaces
and is demonstrating it to other customers.
Prodeo has developed a new CMP wafer carrier called the Corona Polishing Head,
which is expected to improve customer device yields. The Company has installed
the Corona Polishing Head with two customers for evaluation.
The Company plans to consolidate its subsidiaries' operations in the parent
company, Prodeo, by the end of the next fiscal year to take advantage of
economies of scale and reduce administrative costs. After the consolidation,
each of the subsidiaries will remain in existence as a non-operating shell
company.
Prodeo has already entered into an agreement with ATSI's president and
co-founder Julian Gates to sell to Mr. Gates all of the outstanding stock of
ATSI on August 1, 2000, after all ATSI's pre-owned equipment inventory has been
transferred to Prodeo. Mr. Gates will be terminating his employment with Prodeo
and will continue to operate ATSI as a pre-owned equipment supplier.
After the sale of ATSI, Prodeo will continue to operate its pre-owned equipment
sales operations through the parent company. In anticipation of Mr. Gates's
departure, Prodeo has hired a new employee to take over the pre-owned equipment
sales operations. The new head of pre-owned equipment has over 12 years
experience in the semiconductor industry with four years in equipment sales and,
more recently, with Motorola procuring semiconductor equipment and designing and
building fabrication plants. Prodeo is confident in its ability to continue to
develop this line of sales. However, in connection with the sale of ATSI to Mr.
Gates, the Company released Mr. Gates from his obligation not to compete against
the Company in the field of pre-owned equipment sales. Mr. Gates will be
competing with the Company in the field of pre-owned equipment sales, for which
the Company will receive a 5% royalty on all of ATSI's sales through January
2002. Although the Company believes it will continue to grow this line of
business, there is no assurance how the sale of ATSI and Mr. Gates's departure
will affect the Company's ability to compete.
Prodeo plans to raise additional capital during fiscal year 2001 with a private
equity placement of up to $7 million of undetermined number of shares of
Prodeo's common stock. Prodeo intends to apply any such additional capital to
product development, corporate acquisitions, and working capital requirements
above those funded from operations. The Company has not yet entered into any
agreements for this planned private equity funding. See "Liquidity and Capital
Resources."
LIQUIDITY AND CAPITAL RESOURCES
Prodeo believes it will need additional capital during the next 12 months to
meet its funding needs, including repayment of debt obligations (described
below), product development, and the continued costs of compliance with
reporting requirements of the Securities Exchange Act of 1934. Prodeo has
several lines of credit with banking institutions and private funding sources.
Assuming the Company's revenues continue at their current level, Prodeo believes
the private funds and the available credit will be adequate to support Prodeo's
plan of operations. There can be no assurance that revenue will continue at
their current level and, if revenues are inadequate, there is no assurance that
Prodeo will be able to attract additional capital or that the funds, if
acquired, will be sufficient to complete and integrate acquisitions or meet
Prodeo's product development or operating capital requirements.
On January 10, 2000, Prodeo entered into a revolving line of credit agreement
with Imperial Bank in the principal amount of $2,000,000. The loan bears
interest at prime plus 4%, matures January 9, 2001, and is secured by
substantially all assets of Prodeo. The credit agreement required a
non-refundable fee of $30,000 that will be amortized over the life of the loan.
Prodeo may borrow the lesser of $2,000,000 or a percentage of the borrowing base
which consists of eligible accounts receivable and eligible inventory. The
current outstanding balance is approximately $600,000.
In July 1999, Prodeo entered into a six-month credit agreement with Imperial
Bank in the amount of $3,000,000. The loan was secured by substantially all of
the assets associated with the United Kingdom, which currently is located in the
United Kingdom and personally guaranteed by a shareholder. The loan required a
non-refundable fee of $75,000, that was amortized over the life of the loan. The
principal balance of this loan was repaid in full and the shareholder guarantee
has been released.
Prodeo entered into a $5.8 million short-term note payable agreement with TLD
Funding Group 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 included $656,000 of financing fees,
which were amortized over the life of the loan. On July 16, 1999, Prodeo paid
the principal balance of this note in full with the $3,000,000 loan obtained
from Imperial Bank in July 1999.
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<PAGE>
In April 1999, Prodeo entered into a loan agreement with TLD Funding Group to
borrow $1,000,000 used to purchase all the outstanding shares of 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 a financing fee of $70,000,
which was amortized over the life of the loan. The loan is unsecured. A portion
of this loan was refinanced with the $3,000,000 loan from Imperial Bank obtained
in July, 1999. The current outstanding balance is approximately $532,000.
In February 1999, Prodeo borrowed $207,000 from TLD Funding Group 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 Prodeo
shareholders and two related companies.
Prodeo also has available a line of credit with TLD Funding Group for amounts up
to $1 million to be utilized to purchase equipment for resale. The line bears
interest on each advance at 1% of the advance amount for the initial 90 days and
2% per month thereafter. An initial financing fee of $20,000 was paid at the
origination of the agreement. Prodeo also must pay a financing fee of 5% at the
time of each advance under the line. At March 31, 2000, Prodeo owed
approximately $377,000 under this line of credit.
Prodeo paid $910,000 in Value Added Tax ("VAT") associated with the purchase of
the Durham County, United Kingdom inventory. The VAT was refunded by the UK
government upon filing appropriate returns.
Prodeo has issued convertible debentures of $80,000 at 6% interest and $182,500
at 9.5% interest. The 6% debentures are convertible any time before the two year
anniversary of their purchase and automatically convert into common shares at
the two year anniversary. The conversion price of 80% of the average five day
closing bid prices as reported by Bloomberg, LP for the five days preceding
conversion.
The 9.5% debentures are convertible into common stock at any time after one year
from purchase through their maturity date of June 7, 2001. The debentures bear
interest annually, 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, LP 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 conversion feature on June 7,
2001, at which time all debentures outstanding will be converted to shares of
common stock. There is no beneficial conversion feature associated with the 6%
or 9.5% convertible debentures if the fair market value, as determined by
independent valuation, is lower than the bid price.
September 17, 1999, Prodeo issued a warrant to purchase 4,562 shares of common
stock of Prodeo to AA Capital Ventures, LLC. The warrants have an exercise price
of $5.00 per share.
Effective May 20, 1999, Prodeo 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 supplement net sales proceeds. The agreement
expires on May 31, 2002. As of March 31, 2000, Prodeo has recognized $1,154,000
in finder's fees expenses due to Bruar Associates.
Advances from a shareholder of $160,941 were received by Prodeo, of which only
$60,941 is now outstanding as of March 31, 2000. There is no interest paid on
this borrowing. The Company plans to pay this debt in August 2000.
Neither management nor other of Prodeo's shareholders has made commitments to
provide additional funds to Prodeo. Accordingly, there can be no assurance that
any additional funds will be available to Prodeo to allow it to cover its
capital needs. Management has a contingency plan to allow Prodeo to sustain
itself without additional funding. However, the success of this plan depends
upon: (i) Prodeo retaining its market position and substantially increasing its
sales revenues in fiscal 2001; (ii) CMP reaching production status and
attracting customers with minimal funding; (iii) VSM generating sufficient
revenues to fund its operations; (iv) collecting receivables in a timely
fashion; and (v) new products introduced in fiscal year 2000 achieving
reasonable market acceptance. If the Company's contingency plan is unsuccessful,
the Company will fund operations by borrowing on its existing lines of credit.
However, because of the costs associated with this type of debt financing, the
Company would also be forced to slow its development of products, reduce its
purchases of pre-owned equipment inventory and/or reduce its production of
semiconductor equipment generally all of which could have a materially adverse
effect on the Company.
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NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financing Accounting Standards Board ("FASB") issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES.
SFAS No. 133, as amended, becomes effective for the Company April 1, 2001 and
requires that entities record all derivatives as assets and liabilities,
measured at fair value, with the change in fair value recognized in earnings or
in comprehensive income, depending on the use of the derivative and whether it
qualifies for hedge accounting. The Company is evaluating the impact, if any,
that will result from the adoption of this standard.
YEAR 2000 COMPLIANCE
Prodeo did not experience any interruptions or slowdown of its operations due to
Year 2000 Compliance issues.
SPECIAL RISKS
FORWARD LOOKING STATEMENTS. Certain of the statements contained in this
document that are not historical facts, including statements of future
expectations, projections of results of operations and financial condition,
statements of future economic performance and other forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995, are
subject to known and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements of Prodeo to differ
materially from those contemplated in such forward-looking statements. There can
be no assurances that the forward-looking information will be accurate. In
addition to the specific matters referred to herein, important factors which may
cause actual results to differ from those contemplated in such forward-looking
statements include: the future supply of silicon; the future demand for
semiconductor and CMP products; world economic conditions; potential costs and
delays in integrating acquisitions; timing of market introductions; the
availability and cost of additional funding; and higher-than-expected costs of
product development.
Developments in any of these areas, which are more fully described elsewhere in
"Item 1. Description of Business" which is incorporated into this section by
reference, could cause Prodeo' s results to differ materially from results that
have been or may be projected by or on behalf of Prodeo.
Prodeo cautions that the foregoing list of important factors is not exclusive.
Prodeo does not undertake to update any forward-looking statement that may be
made from time to time by or on behalf of Prodeo.
NEED FOR ADDITIONAL FINANCING. Prodeo has limited funds, and such funds may not
be adequate to take advantage of any available business opportunities. Even if
Prodeo's funds prove to be sufficient to acquire an interest in, or complete a
transaction with, a business opportunity, Prodeo may not have enough capital to
exploit the opportunity. Prodeo's ultimate success may depend upon its ability
to raise additional capital. If additional capital is needed, there is no
assurance that funds will be available from any source or, if available, that
they can be obtained on terms acceptable to Prodeo. If not available, Prodeo's
operations will be limited to those that can be financed with its modest
capital.
DEPENDENCE ON KEY CUSTOMERS. In the fiscal year ending March 31, 2000, 27% of
the Company's revenue were from sales to two customers, the Company believes its
relationship with these key customers is good. However, losing either customer
would have a materially adverse effect on the Company's revenue.
SPORADIC SUPPLY OF PRE-OWNED EQUIPMENT. During the fiscal year ending March 31,
2000, 76% of Prodeo's revenues were generated by its subsidiary involved in the
sale of pre-owned semiconductor equipment. However, the availability of
pre-owned semiconductor equipment is sporadic and determined in part by the age
of semiconductor equipment currently used by companies in the industry
semiconductor companies decisions to sell their capital equipment, both factors
which are beyond the control of Prodeo. A material reduction in the availability
of pre-owned semiconductor equipment may have a material adverse effect on
Prodeo's business, financial condition, and the results of operations.
RELIANCE ON KEY EXECUTIVES. Prodeo's success depends on the efforts of Dr. Don
M. Jackson, Jr. , Chief Executive Officer and Paul Jackson, Chief Technology
Officer and Secretary of Prodeo. Dr. Jackson has been the key individual
responsible for financing for the development of Prodeo. Paul Jackson and Dr.
Don Jackson were co-founders of CMP Solutions, Inc. Prodeo believes its
relationships with these individuals are good. However, it cannot ensure that
the services of these individuals will continue to be available to us in the
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future. Prodeo has an employment agreement with Dr. Jackson effective June 7,
1999 with a term of five years that automatically renews for additional three
year terms unless either Dr. Jackson or Prodeo gives the other party written
notice of non-renewal at least one year prior to the expiration of the initial
term or Dr. Jackson gives Prodeo 30 days written notice that he is terminating
his employment agreement. Prodeo also has an employment agreement with Paul
Jackson effective March 27, 2000 with a term of four years that automatically
renews for additional three year terms unless either Paul Jackson or Prodeo
gives the other party written notice of non-renewal at least one year prior to
the expiration of the then current term or Mr. Jackson gives Prodeo 30 days
written notice that he is terminating his employment agreement. Julian Gates,
ATSI's President and co-founder, will be departing as of August 1, 2000.
LIMITED OPERATING HISTORY. Prodeo faces all of the same risks as a new business
and the special risks inherent in the investigation, acquisition, or involvement
in new business opportunities. Prodeo has only completed its second year of
operations and therefore has all of the unforeseen costs, expenses, problems,
and difficulties to which such young ventures are subject.
NO FORESEEABLE DIVIDENDS. Prodeo has not paid dividends on its stock and does
not anticipate paying such dividends in the foreseeable future.
LOSS OF CONTROL BY PRESENT MANAGEMENT AND STOCKHOLDERS . Prodeo may consider an
acquisition in which it would issue as consideration for the business
opportunity to be acquired an amount of Prodeo's authorized but unissued common
stock that would, upon issuance, represent the great majority of the voting
power and equity of Prodeo. The result of such an acquisition would be that the
acquired company's stockholders and management would control Prodeo, and
Prodeo's management could be replaced by persons unknown at this time. Such a
merger would result in a greatly reduced percentage of ownership of Prodeo by
its current shareholders.
LIMITED PUBLIC MARKET. There is a developing, but limited public market for
Prodeo's common stock, and no assurance can be given that a market will develop
or that a shareholder ever will be able to liquidate his investment without
considerable delay, if at all. Prodeo's common stock is still thinly traded and
the price is still volatile and sensitive to relatively low levels of trading.
Factors such as those discussed in this "Risk Factors" section may have a
significant impact upon the market price of the securities offered hereby. Owing
to the low price of the securities, many brokerage firms may not be willing to
effect transactions in the securities. Even if a purchaser finds a broker
willing to effect a transaction in these securities, the combination of
brokerage commissions, state transfer taxes, if any, and any other selling costs
may exceed the selling price. Further, many lending institutions will not permit
the use of such securities as collateral for any loans.
REGULATION OF PENNY STOCKS. Prodeo's securities are subject to a Securities and
Exchange Commission rule that imposes special sales practice requirements upon
broker-dealers who sell such securities to persons other than established
customers or accredited investors. For purposes of the rule, the phrase
"accredited investors" means, in general terms, institutions with assets in
excess of $5,000,000, or individuals having a net worth in excess of $1,000,000
or having an annual income that exceeds $200,000 (or that, when combined with a
spouse's income, exceeds $300,000). For transactions covered by the rule, the
broker-dealer must make a special suitability determination for the purchaser
and receive the purchaser's written agreement to the transaction prior to the
sale. Consequently, the rule may affect the ability of broker-dealers to sell
Prodeo's securities and also may affect the ability of purchasers in this
offering to sell their securities in any market that might develop therefor.
Stockholders should be aware that, according to Securities and Exchange
Commission Release No. 34-29093, the market for penny stocks has suffered in
recent years from patterns of fraud and abuse. Such patterns include: (i)
control of the market for the security by one or a few broker-dealers that are
often related to the promoter or issuer; (ii) manipulation of prices through
prearranged matching of purchases and sales and false and misleading press
releases; (iii) "boiler room" practices involving high-pressure sales tactics
and unrealistic price projections by inexperienced sales persons; (iv) excessive
and undisclosed bid-ask differentials and markups by selling broker-dealers; and
(v) the wholesale dumping of the same securities by promoters and broker-dealers
after prices have been manipulated to a desired level, along with the resulting
inevitable collapse of those prices and with consequent investor losses.
Prodeo's management is aware of the abuses that have occurred historically in
the penny stock market. Although Prodeo does not expect to be in a position to
dictate the behavior of the market or of broker-dealers who participate in the
market, management will strive within the confines of practical limitations to
prevent the described patterns from being established with respect to Prodeo's
securities.
COMPETITION. There are other companies in the new semiconductor equipment and
pre-owned semiconductor equipment and businesses which may be better funded
and/or better established than Prodeo.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Report of Independent Certified Public Accountants..................... F-1
Financial Statements:
Consolidated Balance Sheet as of March 31, 2000...................... F-3
Consolidated Statements of Operations for the year ended
March 31, 2000 and the period from June 23, 1998, date of
inception, to March 31, 1999......................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for
the year ended March 31, 2000 and the period from June 23, 1998,
date of inception, to March 31, 1999................................. F-5
Consolidated Statements of Cash Flows for year ended
March 31, 2000 and the period from June 23, 1998, date
of inception, to March 31, 1999...................................... F-6
Notes to Consolidated Financial Statements........................... F-8
Schedules other than those listed above have been omitted because they are
either not required, inapplicable, or the required information is included in
the Consolidated Financial Statements or notes thereto.
The accompanying notes are an integral part of these financial statements.
ITEM 9. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
On May 2,2000, Prodeo dismissed its current accountants, McGladrey & Pullen,
LLP, and hired Deloitte & Touche, LLP.
The auditor's reports from McGladrey & Pullen, LLP for the Company's past fiscal
year did not contain adverse opinion or a disclaimer of opinion, and was not
qualified or modified as to uncertainty, audit scope, or accounting principles.
McGladrey & Pullen became the Company's auditors for the fiscal year ending
March 31, 1999.
The decision to engage Deloitte & Touche, LLP was approved by the audit
committee and the Board of Directors.
During the Company's most recent fiscal year and the subsequent interim period
preceding the change, there has been one disagreement with McGladrey & Pullen,
LLP on a matter involving revenue recognition that was not resolved before
McGladrey and Pullen, LLP's dismissal. The matter has been transferred to the
Company's new accountants, Deloitte & Touche, LLP for their consideration. A
transaction valued at approximately $690,000 involving the exchange of inventory
owned by a third party for the Company's inventory was contemplated in the
quarter ended March 31, 2000. McGladrey & Pullen, LLP disagreed with the
Company's Chief Financial Officer desire to recognize the $690,000 as revenue.
The Company indicated to McGladrey & Pullen, LLP that it would send all required
documentation on this issue to its new accountants, Deloitte & Touche, LLP and
would follow whatever recommendation it received from Deloitte & Touche, LLP.
The Company had not received a recommendation on this matter at the time of
McGladrey & Pullen, LLP's dismissal. The outstanding issue regarding the revenue
recognition was not a factor in the dismissal of McGladrey & Pullen, LLP. The
Company has authorized McGladrey & Pullen, LLP to respond fully to inquiries
from Deloitte & Touche, LLP concerning this disagreement.
16
<PAGE>
Since the dismissal of McGladrey & Pullen, LLP, the Company has consulted with
its new auditors about the revenue recognition matter and informed them that the
inventory exchange was restructured and would not be completed until the
following fiscal year. No revenues relating to the transaction has been recorded
as of March 31, 2000. Should the exchange occur in the future, the Company has
agreed to apply generally accepted accounting principles, including, if
applicable, APB 29 "Accounting for Nonmonetary Transactions" to the transaction,
to which Deloitte & Touche LLP orally concurred.
Deloitte and Touche, LLP was given a copy of this disclosure prior to its filing
and given the opportunity to furnish the Securities and Exchange Commission a
letter containing any new information or clarification of this disclosure which
it has determined was unnecessary.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this Item is incorporated by reference to (i) the
biographical information relating to the Company's directors under the caption
"Election of Directors" in the Company's definitive Proxy Statement for its
Annual Meeting of Stockholders to be held August 24, 2000 (the "Proxy
Statement"). The Company anticipates filing the Proxy Statement within 120 days
after March 31, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information under the heading "Executive Compensation" and "Compensation of
Directors" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the heading "Voting Securities and Principal Holders
Thereof - Security Ownership of Certain Beneficial Owners and Management" in the
Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the heading "Certain Transactions" in the Proxy Statement
is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this report.
(a) Financial Statements
See F-pages attached
(b) Reports on Form 8-K
None
(c) Exhibits
See the Exhibit Index immediately following the signature page and is
incorporated by reference.
(d) Financial Statements
See Item 14(a).
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PRODEO, INCORPORATED
Date: July 14, 2000 By /s/ Dr. Don M. Jackson, Jr.
-------------------------------------
Dr. Don M. Jackson, Jr.
President and Chief Executive Officer
By /s/ David A. Bays
-------------------------------------
David A. Bays
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Don M. Jackson, Jr. Director July 14, 2000
--------------------------
Dr. Don M. Jackson, Jr.
/s/ Howard R. Neff Director July 14, 2000
--------------------------
Howard R. Neff
/s/ Maurice L. McGill Director July 14, 2000
--------------------------
Mr. Maurice L. McGill
/s/ Dan L. Shunk Director July 14, 2000
--------------------------
Dr. Dan L. Shunk
18
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION INCORPORATED BY REFERENCE TO:
----------- --------------------------------------------------------- -----------------------------
<S> <C> <C>
2.1 A copy of the Certificate of Ownership and Merger merging Form 8-K filed with the SEC on
DentMart into SITEK, including the Plan and Agreement of August 17, 1998
Merger
2.2 A copy of the Articles of Merger or Share Exchange filed Form 8-K filed with the SEC on
in the State of Colorado August 17, 1998
2.3 A copy of the Certificate of Amendment and Restatement of Filed Herewith
Certificate of Incorporation of Sitek, Incorporated as
filed in the State of Colorado
2.4 A copy of the Amended and Restated Certificate of Filed Herewith
Incorporation of Prodeo Technologies, Inc.
3.1 Articles of Incorporation of Registrant Form 8-K filed with the SEC on
August 17, 1998
3.2 Bylaws of Registrant Form 10-K filed with the SEC on
April 17, 1998
10.1 A copy of the Exchange Agreement Form 8-K filed with the SEC on
August 17, 1998
10.2 A copy of the Registration Rights Agreement Form 8-K filed with the SEC on
August 17, 1998
10.3 Equipment Lease dated February 5, 1999, as Amended Form 10-Q Filed with the SEC on
February 26, 1999
10.4 Line of Credit Agreement with TLD Funding Group dated Form 10-K Filed with the SEC on
February 5, 1999 July 14, 1999
10.5 Finance Agreement with TLD Funding Group dated Form 10-K Filed with the SEC on
March 19, 1999 July 14, 1999
10.6 $5.2 million Promissory Note and Equipment Finance Form 10-K Filed with the SEC on
Agreement dated March 11, 1999 July 14, 1999
10.7 Amendment to Equipment Finance Agreement Form 10-K Filed with the SEC on
July 14, 1999
10.8 Sitek, Incorporated Investor Rights Agreement entered into Filed Herewith
as of March 29, 2000 by and among Sitek, Incorporated and
Intel Corporation, a Delaware corporation.
10.9 Right of First Refusal, Co-Sale and Subordination Agreement Filed Herewith
made as of March 29, 2000 by and among Sitek, Incorporated
(the "Company"), Intel Corporation, a Delaware corporation,
and the following stockholders of the Company: Don Jackson,
Vince Birdwell, Paul Burke, Julian Gates, Kevin Jackson,
Paul Jackson and Parag Modi, and Richard Myers solely with
respect to Sections 5,6,and 7 thereof.
10.11 Founder, CEO Employment Agreement for Don M. Jackson, Jr. Form 10-Q Filed with the SEC on
dated June 7, 1999 August 16, 1999
10.10 Founder-Executive Employment Agreement for Paul D. Jackson Filed Herewith
dated March 27, 2000
10.11 Warrant Agreement Form 10-K Filed with the SEC on
July 14, 1999
16.1 Letter from McGladry & Pullen, LLP to Securities and
Exchange Commission regarding termination as Registrant's Form 8-K/A Filed with the SEC on
principal accountant June 12, 2000
21.1 Subsidiaries Filed Herewith
23.1 Consent of Deloitte & Touche, LLP Filed Herewith
27.1 Financial Data Schedule Filed Herewith
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Audit Committee
Prodeo Technologies, Inc. and Subsidiaries
Tempe, Arizona
We have audited the accompanying consolidated balance sheet of Prodeo
Technologies, Inc. (formerly Sitek Incorporated) and subsidiaries (the
"Company") as of March 31, 2000, and the related consolidated statements of
operations, stockholders' equity (deficit), 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, such 2000 consolidated financial statements present fairly, in
all material respects, the financial position of the Company at March 31, 2000,
and the results of its operations and its cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.
The Company was in the development stage at March 31, 1999. During the year
ended March 31, 2000, the Company completed its development activities and
commenced its planned principal operations.
/s/ DELOITTE & TOUCHE LLP
June 30, 2000
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Audit Committee
SITEK, Incorporated and Subsidiaries (A Development Stage Company)
Tempe, Arizona
We have audited the accompanying consolidated balance sheet of SITEK,
Incorporated and Subsidiaries (A Development Stage Company) as of March 31,
1999, and the related consolidated statements of operations, stockholders'
deficit, and cash flows for the period from June 23, 1998 (date of inception) to
March 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SITEK,
Incorporated and Subsidiaries (A Development Stage Company) as of March 31,
1999, and the results of their operations and their cash flows for the period
from June 23, 1998 (date of inception) to March 31, 1999, in conformity with
generally accepted accounting principles.
/s/ McGladrey & Pullen, L.L.P.
Phoenix, Arizona
May 28, 1999
F-2
<PAGE>
PRODEO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 2000 1999
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 215,262 $ 863
Restricted cash (Note 9) 1,500,000
Accounts receivable (net of allowance for doubtful
accounts of $63,000 and $0 at March 31, 2000 and 1999) 1,500,860 207,934
Inventories (Notes 2, 5 and 7) 3,418,979 5,389,000
Prepaid expenses and other assets (Note 3) 115,614 1,596,125
Deferred income taxes (Note 13) 246,000
----------- -----------
Total current assets 6,996,715 7,193,922
PROPERTY AND EQUIPMENT - Net (Note 4) 745,015 90,707
OTHER ASSETS 76,406 37,466
INTANGIBLES - Net 497,752
DEFERRED INCOME TAXES (Note 13) 28,000
----------- -----------
TOTAL $ 8,343,888 $ 7,322,095
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Payable to banks (Note 7) $ 600,000 $
Advances from related parties (Note 15) 60,941 330,257
Trade accounts payable 1,322,598 268,774
Other accrued liabilities 1,620,949 499,974
VAT payable 19,665 910,000
Income tax payable (Note 13) 658,000
Current portion of other borrowings 290,894 5,979,510
----------- -----------
Total current liabilities 4,573,047 7,988,515
----------- -----------
Other borrowings (Note 8) 1,104,439 207,181
----------- -----------
Other liabilities 84,224 47,215
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 5, 9, 12 and 14)
STOCKHOLDERS' EQUITY (DEFICIT) (Notes 8, 9 and 11):
Preferred stock, $.01 par value - authorized, 5,000,000
shares; issued, 250,000 shares, liquidation value $1,500,000 2,500
Common stock, $.005 par value - authorized, 50,000,000 shares;
issued and outstanding, 12,307,813 (2000) and 12,230,813 (1999)
shares; issuable, 0 shares (2000) and 5,000 shares (1999) (Note 5) 61,606 61,179
Additional paid-in capital 2,361,323 2,475
Retained Earnings 156,749 (984,470)
----------- -----------
Total stockholders' equity (deficit) 2,582,178 (920,816)
----------- -----------
TOTAL $ 8,343,888 $ 7,322,095
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PRODEO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31, 2000 AND PERIOD FROM JUNE 23, 1998 (Date of Inception)
TO MARCH 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
SALES - Net (Notes 15 and 16) $ 22,727,729 $ 2,720,898
COST OF GOODS SOLD 10,650,636 2,030,900
------------ ------------
Gross profit 12,077,093 689,998
------------ ------------
OPERATING EXPENSES (Note 17):
Selling, general and administrative 6,325,117 911,668
Research and development 1,755,387 425,828
------------ ------------
Total operating expenses 8,080,504 1,337,496
------------ ------------
INCOME (LOSS) FROM OPERATIONS 3,996,589 (647,498)
------------ ------------
OTHER (EXPENSE) INCOME:
Interest expense and financing costs (1,156,650) (277,177)
Miscellaneous income 30,055 359
------------ ------------
Total other expense-net (1,126,595) (276,818)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 2,869,994 (924,316)
INCOME TAX EXPENSE (Note 13) 939,000
------------ ------------
NET INCOME (LOSS) $ 1,930,994 $ (924,316)
------------ ------------
Non cash discount on proceeds of preferred
stock for beneficial conversion feature (789,775)
------------ ------------
Net income (loss) available to common stockholders 1,141,219 (924,316)
------------ ------------
INCOME (LOSS) PER COMMON SHARE, BASIC AND DILUTED (Note 10):
Basic $ .09 $ (0.08)
============ ============
Diluted $ 0.09 $ (0.08)
============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PRODEO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEAR ENDED MARCH 31, 2000 AND PERIOD FROM JUNE 23, 1998 (Date of Inception)
TO MARCH 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
----------------- --------------------- Paid-In Retained
Shares Amount Shares Amount Capital Earnings Total
------ ------ ------ ------ ------- -------- -----
<S> <C> <C> <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 (Note 5) 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)
Issuance of preferred stock 250,000 $2,500 2,287,275 (789,775) 1,500,000
Issuance of common stock 72,000 427 71,573 72,000
Net income 1,930,994 1,930,994
------- ------ ---------- ------- ---------- ---------- ----------
BALANCE, MARCH 31, 2000 250,000 $2,500 12,307,813 $61,606 $2,361,323 $ 156,749 $2,582,178
======= ====== ========== ======= ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PRODEO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31, 2000 AND PERIOD FROM JUNE 23, 1998 (Date of Inception)
TO MARCH 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,930,994 $ (924,316)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Amortization of prepaid financing fees 543,509 87,467
Depreciation and amortization 175,304 18,998
Deferred taxes (246,000)
Gain recognized on sale-leaseback transaction (20,644) (3,441)
Stock issuable for services 2,500
Bad debt expense 63,000
Deferred rent expense 37,009 9,367
Changes in assets and liabilities:
Accounts receivable (1,270,560) (207,934)
Inventories 2,182,633 (5,389,000)
Prepaids expenses and other assets 924,489 (117,592)
Advances from related parties (269,316) 330,257
Accounts payable 560,759 268,774
Accrued expenses 859,337 497,330
Income tax payable 638,000
VAT payable (890,335)
Other liabilities 13,273
----------- -----------
Net cash provided by (used in) operating activities 5,231,453 (5,445,590)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of VSM - net of cash (362,163)
Purchase of property and equipment (535,533)
Proceeds from sale-leaseback transaction 792,819
Purchase of leasehold improvements and equipment, $340,000
from a stockholder (840,591)
Payments on deposits (37,466)
----------- -----------
Net cash used in investing activities (897,696) (85,238)
----------- -----------
</TABLE>
(Continued)
F-6
<PAGE>
PRODEO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31, 2000 AND PERIOD FROM JUNE 23, 1998 (Date of Inception)
TO MARCH 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from bank 3,600,000
Repayments to bank (3,000,000)
Proceeds from issuance of convertible debentures 182,500 80,000
Proceeds from other borrowings 1,393,221 6,301,181
Repayment of other borrowings (6,367,079) (850,490)
Issuance of common stock 72,000 1,000
----------- -----------
Net cash (used in) provided by financing activities (4,119,358) 5,531,691
----------- -----------
NET INCREASE IN CASH 214,163 863
CASH, BEGINNING OF PERIOD 863 --
----------- -----------
CASH, END OF PERIOD $ 215,026 $ 863
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 488,486 $ 162,462
=========== ===========
Taxes paid $ 542,000
===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Debt proceeds to acquire VSM, Inc. $ 1,000,000
Less:
Working capital acquired - net of cash 215,539
Fair value of other assets acquired, principally
property, and equipment 234,035
Long-term debt assumed 7,371
-----------
Goodwill $ (557,797)
===========
Preferred stock issued for restricted cash $ 1,500,000
Financing Costs $ 656,000
=========== ===========
</TABLE>
See notes to consolidated financial statements. (Concluded)
F-7
<PAGE>
PRODEO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2000 AND PERIOD FROM JUNE 23, 1998
(DATE OF INCEPTION) TO MARCH 31, 1999
--------------------------------------------------------------------------------
1. NATURE OF BUSINESS, REORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Prodeo Technologies, Inc., a Delaware corporation
("Prodeo"), formerly known as Sitek, Incorporated, manufactures and sells
semiconductor manufacturing equipment and provides certain wafer processing
foundry services for the global semiconductor electronics manufacturing
industry. Prodeo is the parent of three wholly-owned subsidiary
corporations: Advanced Technical Services, Inc. ("ATSI"), CMP Solutions,
Inc. ("CMP Solutions") and VSM Corporation ("VSM"), all located in Tempe,
Arizona.
The Company was classified as a development stage enterprise at March 31,
1999. During the year ended March 31, 2000, the Company experienced
significant growth in revenue from its planned principal operation, and is
no longer classified as a development stage enterprise.
REORGANIZATION - On July 14, 1998, Dentmart Group, Inc. ("Dentmart"), an
inactive public reporting entity, was merged into Sitek Incorporated
("Sitek"), with Sitek as the surviving corporation. Each stockholder of
Dentmart received one share of Sitek's common stock for every 1.65 shares
of Dentmart's common stock, resulting in 3,030,273 shares of Sitek's common
shares outstanding.
On July 14, 1998, a share exchange agreement between Sitek and CMP
Solutions occurred, resulting in CMP Solutions being a 100 percent
wholly-owned subsidiary of Sitek. Sitek acquired all of the issued and
outstanding shares of CMP in exchange for 9,200,000 shares of Sitek common
stock. CMP Solutions was incorporated on June 23, 1998 and had no activity
prior to the merger. For accounting purposes, this transaction has been
accounted for as a reverse acquisition with CMP Solutions being treated as
the accounting acquirer and no step up in basis of the assets. In
connection with the share exchange agreement, the stockholders have the
right to require their stock to be registered in conjunction with another
future registration of the Company's common stock.
On July 24, 1998, two stockholders contributed all of the outstanding stock
of ATSI as a 100 percent wholly-owned subsidiary of Sitek. ATSI had no
activity prior to the merger.
On April 28, 1999, the Company acquired VSM by paying $1,000,000 in cash
for all of the outstanding common stock. The acquisition has been accounted
for as a purchase with the excess of the total acquisition cost over the
fair value of the net assets acquired of $557,798 recorded in the
consolidated financial statements. The results of operations of VSM have
been included in the consolidated financial statements of the Company from
the date of acquisition.
The following unaudited pro forma combined condensed financial information
for the period ended March 31, 1999 include the results of operations for
the Company, presented as if the Company and VSM had been combined for all
of such period, and are expected to have a continuing impact.
Net sales...................................................$5,320,922
Loss from operations........................................$ (273,255)
Net loss....................................................$ (550,073)
Basic net loss per common share.............................$ (0.05)
F-8
<PAGE>
Pro forma financial information is not presented for the year ended March
31, 2000 because the Company purchased VSM on April 28, 1999, and the
current year operations previous to the purchase would not have a material
effect on the Company's operations.
On June 5, 2000, Sitek, Incorporated changed its name to Prodeo
Technologies, Inc.
Management of the Company believes it will need additional capital during
the next 12 months to meet its funding needs, including repayment of debt
obligations, product development, and the continued costs of compliance
with reporting requirements of the Securities Exchange Act of 1934. The
Company has several lines of credit with banking institutions and private
funding sources. Assuming the Company's revenues continue at their current
level, the Company believes the private funds and the available credit will
be adequate to support the Company's plan of operations. There can be no
assurance that revenues will continue at their current level and, if
revenues are inadequate, there is no assurance that the Company will be
able to attract additional capital or that the funds, if acquired, will be
sufficient to meet the Company's product development or operating capital
requirements. However, management has a contingency plan to allow the
Company to sustain itself without additional funding, which includes
revising the Company plan of operations to reflect the available funds.
SIGNIFICANT ACCOUNTING POLICIES - The Company prepares its financial
statements in accordance with accounting principles generally accepted in
the United States of America. Significant accounting policies of the
Company are as follows:
a. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the amounts of Prodeo and its wholly-owned subsidiaries: ATSI,
CMP and VSM (collectively, the "Company"). All material intercompany
accounts and transactions have been eliminated in consolidation.
b. REVENUE RECOGNITION - The Company recognizes revenue from the sale of
products when the risks and rewards of ownership transfer to
customers, which is generally at the time of shipment. No significant
obligations remain after the product is shipped. Cost for installation
and warranty is accrued when corresponding sales revenues are
recognized. Revenues for services are recognized when performed.
c. INVENTORIES consist of raw materials, work-in-process and pre-owned
equipment held for resale. Inventories are recorded at cost and are
carried at the lower of cost or net realizable value. Manufactured
items are removed from inventory using the first-in, first-out method,
while pre-owned equipment held for resale is based on the specific
identification.
d. PROPERTY AND EQUIPMENT are stated at cost. The equipment is being
depreciated over its useful life, which is estimated to be between
three and five years. Leasehold improvements are depreciated over the
shorter of the lease term or the estimated useful lives of the
improvements. Depreciation and amortization is computed using the
straight-line method.
e. INTANGIBLES are recorded at cost. The Company acquires intangible
assets in the normal course of business. The Company periodically
reviews for changes in circumstances to determine whether there are
conditions that indicate that the carrying amount of such assets may
not be recoverable. If such conditions are deemed to exist, the
Company will determine whether estimated future undiscounted cash
flows are less than the carrying amount of such assets, in which case
the Company will calculate an impairment loss. Impairment losses, if
any, will be recorded as a component of operating earnings.
Intangibles are amortized on a straight-line basis over two to seven
years.
f. INCOME TAXES - The Company accounts for income taxes under the
provisions of Statement of Financial Accounting Standards ("SFAS") No.
109, ACCOUNTING FOR INCOME TAXES. Deferred income taxes are provided
F-9
<PAGE>
for differences between the tax base of certain assets and liabilities
and the reported amounts in the financial statements that will result
in taxable or deductible amounts in future years.
g. STOCK-BASED COMPENSATION - In 1995, SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, the Company has elected to measure cost for
its stock-based compensation plans with employees and directors using
the intrinsic value method of accounting prescribed by Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. Accordingly, no compensation expense has been recognized
for its stock-based compensation plan.
h. RESEARCH AND DEVELOPMENT COSTS are expensed as incurred.
i. BASIC EARNINGS (LOSS) PER COMMON SHARE is computed on the weighted
average number of common shares outstanding during each period.
Diluted earnings (loss) per common share is computed on the weighted
average number of shares of common stock outstanding plus the dilutive
effect of any stock options or warrants.
j. FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying values of cash,
accounts receivable, accounts payable and loans payable approximate
fair values due to the short-term maturities of these instruments. The
fair value of payable to banks and other borrowings approximate the
carrying value of these instruments because the terms are similar to
those in the market place under which they could be replaced.
k. NEW ACCOUNTING PRONOUNCEMENT - In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 requires
that entities record all derivatives as assets or liabilities,
measured at fair value, with the change in fair value recognized in
earnings or in other comprehensive income, depending on the use of the
derivative and whether it qualifies for hedge accounting. The
statement (as amended) is effective for the Company's fiscal year
ending March 31, 2002. The Company has not completed evaluating the
effects this statement will have on its financial position or results
of operations.
l. 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 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.
m. RECLASSIFICATIONS - Certain reclassifications have been made to the
prior period financial statements to conform to the current year
presentation.
2. INVENTORIES
At March 31, inventories consisted of the following:
2000 1999
----------- ----------
Raw materials $ 305,134
Work-in-process 287,988
Pre-owned equipment held for resale 2,985,857 $5,389,000
----------- ----------
Total 3,578,979 5,389,000
Less allowance for obsolete inventories (160,000)
----------- ----------
Inventories - net $ 3,418,979 $5,389,000
=========== ==========
F-10
<PAGE>
3. PREPAID EXPENSES AND OTHER ASSETS
At March 31, prepaid expenses and other assets consisted of the following:
2000 1999
-------- ----------
Prepaid financing fees $ 61,084 $ 568,533
Prepaid VAT 11,836 910,000
Other 42,694 117,592
-------- ----------
Total $115,614 $1,596,125
======== ==========
Prepaid VAT represents Value Added Tax paid or payable by the Company on
inventory purchased in the United Kingdom.
Prepaid financing fees represent additional costs incurred by the Company
to borrow funds. Prepaid financing fees are amortized over the term of the
debt.
4. PROPERTY AND EQUIPMENT
Leasehold improvements and equipment as of March 31 consists of the
following:
2000 1999
-------- --------
Leasehold improvements $ 76,101 $ 70,151
Machinery and equipment 490,556 34,770
Construction in process 286,347
-------- --------
Total 853,004 104,921
Less accumulated depreciation and amortization 107,989 14,214
-------- --------
Total $745,015 $ 90,707
======== ========
5. SALE LEASEBACK TRANSACTION
During the period ended March 31, 1999, the Company sold several pieces of
equipment for $792,819 to TLD Funding Group ("TLD") realizing a gain of
$61,993. Simultaneous with the sale, the Company entered into an agreement
to lease back the equipment for a term of three years under a noncancelable
operating lease. The future minimum lease payments are included in the
total future commitments at Note 14. The gain resulting from the sale has
been recorded as deferred revenue and is being amortized over the lease
term. The unamortized balance at March 31, 2000 and 1999 was $37,848 and
$58,492, respectively.
F-11
<PAGE>
6. INTANGIBLES
At March 31, 2000, intangibles consisted of the following:
2000
---------
Goodwill $ 557,797
Covenant not to compete 24,000
---------
Total 581,797
Less accumulated amortization (84,045)
---------
Inventories, net $ 497,752
=========
7. PAYABLE TO BANKS
On January 10, 2000, the Company entered into a revolving line of credit
agreement with a bank in the principal amount of $2,000,000. The loan bears
interest at prime plus 4 percent per annum, matures January 9, 2001, and is
secured by substantially all assets of the Company. The credit agreement
required a non-refundable fee of $30,000 that is being amortized over the
life of the loan. The Company may borrow the lesser of $2,000,000 or a
percentage of the borrowing base which consists of eligible accounts
receivable and eligible inventory. Outstanding borrowings under this
agreement were $600,000 at March 31, 2000.
The revolving line of credit agreement contains covenants that requires the
maintenance of certain defined financial ratios and income and limits
additional borrowings. The Company was not in compliance with all of these
covenants at March 31, 2000, but has since obtained a waiver from the bank.
In July 1999, the Company entered into a six-month credit agreement with a
bank in the amount of $3,000,000. The loan was secured by substantially all
of the assets located in the United Kingdom and personally guaranteed by a
shareholder. The loan required a non-refundable fee of $75,000, that was
amortized over the life of the loan. The principal balance of this loan was
repaid in full and the shareholder guarantee has been released.
8. OTHER BORROWINGS
The Company has utilized TLD, a private investing group, to meet the
majority of its capital needs. The Company also sold convertible debentures
during 2000. A summary of these borrowings at March 31 consisted of the
following:
2000 1999
---------- ----------
TLD:
24-month financing agreement $ 377,464
Line of credit 207,181 $ 207,181
Note payable for purchase of VSM 532,431
Debt repaid during 1999 5,899,510
Other:
6% convertible debentures 80,000 80,000
9.5% convertible debentures 182,500
Note payable, collateralized by
automobile, 9%, due 2003 15,757
---------- ----------
Total 1,395,333 6,186,691
Less current portion 290,894 5,979,510
---------- ----------
Other borrowings - net $1,104,439 $ 207,181
========== ==========
F-12
<PAGE>
In April 1999, the Company entered into a 24-month finance agreement with
TLD for amounts up to $1,000,000 to be utilized to purchase equipment for
resale. The agreement bears interest at 1 percent of the advanced amount
for the first 90 days and 2 percent monthly of the advanced amount
thereafter. An initial financing fee of $20,000 was paid at the origination
of the agreement. In addition, the Company must pay financing fees of 5
percent for each advance at the time of payment to the equipment vendor.
Outstanding borrowings under this agreement were $377,464 at March 31,
2000.
The Company also has borrowings available under terms of a line of credit
with TLD expiring February 4, 2001, with maximum borrowings of $207,181 at
any time on or before February 4, 2001. The minimum monthly payment is
$3,107, applied first to interest at the rate of 1.5 percent per month and
then to principal. The collateral for this line of credit consists of the
personal guarantee of two stockholders and two related companies.
Outstanding borrowings under this agreement were $207,181 at March 31, 2000
and 1999.
In April 1999, The Company entered into a loan agreement with TLD to borrow
$1,000,000 used to purchase all the outstanding shares of VSM. Payment is
due on April 28, 2001. Interest is charged at 1 percent per month for the
initial 90 days and 2 percent per month thereafter. The note includes a
financing fee of $70,000, which is being amortized over the life of the
loan. The loan is unsecured. A portion of this loan was refinanced with the
$3,000,000 bank loan obtained in July 1999. The balance at March 31, 2000
is $532,431.
During the period ended March 31, 1999, the Company issued $80,000 in 6
percent convertible debentures (the "6 percent debentures"). A relative of
a stockholder purchased $75,000 of the total convertible 6 percent
debentures. The 6 percent debentures are convertible into the Company's
common stock at any time after 90 days from purchase through their maturity
date, 24 months subsequent to the date of purchase which ranges from
September 1998 to March 1999. Also, the 6 percent debentures bear interest
at 6 percent, payable annually on the anniversary date. The 6 percent
debentures, plus accrued interest, are convertible in cash or common stock
at the option of the purchaser. If paid in common stock, the 6 percent
debentures are convertible into common stock at the lesser of (a) 80
percent of the five-day average closing bid price, as reported by
Bloomberg, for the five consecutive trading days immediately preceding the
applicable conversion date or (b) 125 percent of the five-day average
closing bid price, as reported by Bloomberg, for the five consecutive
trading days immediately preceding the purchase date. The 6 percent
debentures are subject to a mandatory 24-month conversion feature, at the
end of which all 6 percent debentures outstanding will be automatically
converted to shares of common stock. There was no beneficial conversion
feature associated with the convertible 6 percent debentures as the fair
market value, as determined by an independent valuation, is lower than the
bid price.
During the year ended March 31, 2000, the Company issued $182,500 in 9.5
percent convertible debentures (the "9.5 percent debentures"). The 9.5
percent debentures are convertible into the Company's common stock at any
time after one year from purchase through their maturity date of June 7,
2001. The 9.5 percent debentures bear interest at 9.5 percent, payable
annually in restricted common stock. The 9.5 percent debentures are
convertible into common stock at 80 percent 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
9.5 percent debentures are subject to a mandatory conversion feature on
June 7, 2001, at which time all debentures outstanding will be converted to
shares of common stock. There is no beneficial conversion feature
associated with the 9.5 percent debentures as the fair market value of the
common stock at the time the debentures were sold, as determined by an
independent valuation, is lower than the bid price.
F-13
<PAGE>
Future minimum maturities of other borrowings as of March 31, 2000 by
fiscal years are as follows:
2001 $ 290,894
2002 1,096,476
2003 4,486
2004 3,477
----------
Total $1,395,333
==========
9. STOCKHOLDERS' EQUITY
PREFERRED STOCK - On March 29, 2000, the Company and a corporate investor
entered into a Series A Preferred Stock Purchase Agreement pursuant to
which the Company issued 250,000 shares of its Series A Preferred Stock
(the "Series A Preferred") to the corporate investor and the corporate
investor paid the Company $1,500,000 in "restricted cash". The Stock
Purchase Agreement also provided for a possible future $1,500,000
investment by the corporate investor for additional shares, priced at the
lower of $6.00 per share and the 30-day trading average immediately prior
to the purchase, subject to certain conditions. The Series A Preferred is
convertible to common stock at a certain exchange ratio, which is initially
one-to-one, but which is subject to adjustment upon certain events. Under
the Stock Purchase Agreement, the corporate investor was granted
registration rights, rights of first refusal and co-sale, as well as Board
observation rights. In addition to the equity investment, the Company
entered into an agreement for the development of certain technology. The
Company is required to use the proceeds of the investment in furtherance of
such agreement.
The holders of the Series A Preferred are entitled to receive annual
dividends of $.48 per share, payable when and if declared by the Board of
Directors and in preference and priority to any payment of any dividend on
the Company's common stock. The Series A Preferred dividends are not
cumulative. Each share of the Series A Preferred is entitled to the number
of votes equal to the number of shares of common stock into which such
share could be converted.
In the event of any liquidation of the Company, the holders of the Series A
Preferred shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus of the Company to the holders
of the common stock, the amount equal to the Initial Series A Preferred
Price for each share of Series A Preferred than held by them and, in
addition, an amount equal to all declared and unpaid dividends on the
Series A Preferred. After setting apart or paying in full the preferential
amounts due to the Series A Preferred holders, the remaining assets of the
Company available for distribution to stockholders, if any, shall be
distributed to the holders of the common stock on a pro rata basis, based
on the number of shares of common stock then held by each holder.
The Series A preferred had a beneficial conversion feature because the
preferred stock was immediately convertible into common stock at a price
less than the then current fair market value, which value was based on the
price of recent sales of common stock at such time. The carrying amount of
the preferred stock was discounted by the intrinsic value of the beneficial
conversion feature, which was determined to be $789,775. The $789,775
discount was immediately amortized and charged to accumulated deficit and
is treated in a manner similar to a dividend to preferred stockholders.
WARRANTS - During the period ended March 31, 1999, in relation to credit
facilities provided, the Company issued TLD warrants to purchase 20,000
shares of its common stock at an exercise price of $6 per share. The
warrants are exercisable immediately anytime before February 5, 2004. No
warrants were exercised during the period ended March 31, 2000 or 1999. The
Company also approved a grant to TLD of 5,000 shares of stock for services
in 1999. The shares were issued during the year ended March 31, 2000.
Effective September 17, 1999, the Company issued warrants to purchase 4,562
shares of its common stock for $5.00 per share to an organization for
services rendered in connection with debenture sales. The warrants are
exercisable immediately anytime before December 31, 2004. No warrants were
exercised during the period ended March 31, 2000.
F-14
<PAGE>
During the period ended March 31, 1999, the Company issued warrants to
purchase 40,000 shares of its common stock for $6.00 per share as
compensation for consulting services. On January 18, 2000, the holder of
the warrants notified the Company of its intention to exercise the warrants
using a cashless exercise. Based on the closing price of the Company's
common stock at time of exercise, the Company issued 13,333 shares
subsequent to March 31, 2000.
STOCKHOLDERS' AGREEMENT - The Company entered into a contract with certain
of its stockholders as of August 1, 1999 in which the stockholders agree to
restrict the transfer and disposition of their shares of common stock. The
shareholders, which control a combined total of 8,371,477 shares of Prodeo
common stock, agree to offer their shares first to the other stockholders
participating in the agreement on the same basis as a third party offer,
and then, if not fully exercised, to the Company. The Company is not
obligated to purchase the shares. Upon termination of the stockholder's
employment with the Company, each stockholder must offer to sell a portion
of his or her shares to the other participating stockholders and to the
Company at a predetermined price. The agreement expires August 1, 2001.
10. BASIC AND DILUTED EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
diluted and basic per share computations for income from continuing
operations as required by SFAS No. 128, EARNINGS PER SHARE, for the year
ended March 31, 2000.
<TABLE>
<CAPTION>
Income Shares Per-share
(Numerator) (Denominator) Amount
---------- ----------- --------
<S> <C> <C> <C>
Net Income 1,930,944
Less: Non cash discount
on proceeds of preferred
stock for beneficial
conversion feature (789,775)
Basic EPS -
Income available to common stockholders $1,141,219 12,299,021 $ 0.09
Effect of Dilutive Securities:
Options 802,771
Warrants 434
Convertible preferred stock 1,366
6% convertible debentures 3,296 20,000
9.5% convertible debentures 9,719 35,638
---------- -----------
Diluted EPS:
Income available to common stockholders
and assumed conversions $1,154,234 13,159,230 $ 0.09
========== =========== ========
</TABLE>
There were no dilutive securities for the year ended March 31, 1999.
Warrants to purchase 60,000 shares of common stock at $6 per share were not
included in the computation of diluted EPS because the warrants exercise
price was greater than the average market price of the common shares. The
warrants, which expire in 2004 were still outstanding at March 31, 2000.
F-15
<PAGE>
11. STOCK OPTIONS
In 1999, the Board of Directors approved the 1999 Stock Incentive Plan (the
"1999 plan") which provides for the granting of incentive and nonqualified
stock options to officers, directors or employees of the Company. The 1999
plan also provides for the granting of nonqualified stock options to any
director, consultant or other individual whose participation the Board of
Directors determines to be in the best interest of the Company. Total
number of shares of Company stock that may be issued under the 1999 plan
shall in aggregate not exceed 2,000,000 shares.
During the period ended March 31, 1999, the Company granted 300,000 options
to three directors with an exercise price of $1. The options vest over four
years and expire 10 years after the grant date. During the year ended March
31, 2000, the Company granted 160,000 shares to three directors with an
exercise price equal to the fair market value at the time of the grant.
Information with respect to stock options granted and exercised for the
periods ended March 31, at historical number of shares and option exercise
price, is as follows:
Weighted
Average
Option Option
Shares Price
---------- --------
Outstanding at June 23, 1998 (date of inception)
Granted 300,000 $ 1.00
----------
Outstanding at March 31, 1999 300,000 1.00
Granted 1,410,000 3.04
Forfeited (50,000) 1.00
----------
Outstanding at March 31, 2000 1,660,000 2.68
==========
Options are generally exercisable one year from the date of grant for up to
ten years at a price equal to 100 percent of the fair market value at the
date of grant or 85 percent of fair market value in the case of
nonstatutory options. As of March 31, 2000 and 1999, exercisable options
were 435,025 and 106,250, respectively.
The following information, aggregated by option price ranges, is applicable
to options outstanding at March 31, 2000:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Range of exercise prices $.65 - $3.09 $4.69 - $6.08 $8.19 - $14.44
Shares outstanding in range 1,313,000 187,000 160,000
Weighted-average exercise price $1.21 $5.43 $12.09
Weighted-average remaining contractual life 9 years 9 years 10 years
Shares currently exercisable 150,000 0 40,000
Weighted-average exercise price of shares
currently exercisable $1.00 0 12.09
</TABLE>
The estimated fair value of options granted during the years ended March
31, 2000 and 1999 was $2.47 and $.17 per share, respectively. The Company
applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option plans. Accordingly, no
compensation cost has been recognized for its
F-16
<PAGE>
fixed stock option plans. Had compensation cost for the Company's stock
option plans been recognized based on the fair value at the grant dates for
awards under those plans consistent with the method of SFAS No. 123, the
Company's net income and earnings(loss) per share for the period ended
March 31, 1999 and the year ended March 31, 2000 would have been reduced to
the pro forma amounts indicated below:
2000 1999
----------- -----------
Net income (loss) - as reported $ 1,930,994 $ (924,316)
=========== ===========
Net income(loss) - pro forma $ (189,817) $ (942,172)
=========== ===========
Diluted income (loss) per share - as reported $ 0.09 $ (0.08)
=========== ===========
Diluted income (loss) per share - pro forma $ (.01) $ (0.08)
=========== ===========
The fair value of each option grant is estimated on the date of grant is
estimated on the date of grant using the Black-Scholes options pricing
model. For the year ended March 31, 2000, the assumptions used for grants
were no dividend yield, expected volatility of 45 to 171 percent, a
risk-free interest rate of 6.51 percent and expected lives of 5 years. For
the period ended March 31, 1999, the assumptions used for grants were no
dividend yield, expected volatility of 45 percent, a risk-free interest
rate of 5 percent, and expected lives of 10 years.
12. PROFIT SHARING PLANS
In connection with the acquisition referred to in Note 1, VSM had a profit
sharing plan for the benefit of its employees. An employee must be 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 year ended March 31, 2000.
Effective July 31, 1999, the Company established the Sitek, Incorporated
Profit Sharing and 401(k) Plan. On September 28, 1999, the Company
authorized the merger of the VSM profit sharing plan into the Sitek,
Incorporated Profit Sharing and 401(k) Plan, which was completed during the
year ended March 31, 2000. The Board of Directors has not established an
employer matching contribution and has not declared a contribution for the
year ended March 31, 2000.
13 INCOME TAXES
The income tax provision for the year ended March 31, 2000 was as follows:
Current $ 1,213,000
Deferred (274,000)
-----------
Total $ 939,000
===========
F-17
<PAGE>
The income tax provision differs from the amount of income tax determined
by applying the U.S. federal income tax rate to pretax income for the
period ended March 31 due to the following:
2000 1999
---------- ---------
Provision (benefit) calculated at
statutory rate $ 976,000 $(324,000)
Increase (decrease) in income taxes
resulting from:
State income taxes 120,000 (32,000)
Valuation allowance (255,000) 255,000
Nondeductible expenses 74,000 101,000
Other 24,000
---------- ---------
Total $ 939,000 $ --
========== =========
Net deferred tax assets consist of the following components as of March 31:
2000 1999
---------- ---------
Deferred tax assets:
Accrued expenses $ 232,000
Operating loss carryforwards $ 233,000
Other 42,000 22,000
---------- ---------
Total 274,000 255,000
Less valuation allowance (255,000)
---------- ---------
Deferred tax assets - net $ 274,000 $ --
========== =========
During the period ended March 31, 1999, the Company recorded a valuation
allowance of $255,000 on the deferred tax assets to reduce the total to
zero. Although management believed the full amount of the deferred tax
assets would ultimately be realized, the Company had no history and,
therefore, management estimated that the Company did not meet the "more
likely than not" threshold for recognizing the assets. Therefore, an
allowance was recorded for the full amount of the deferred tax assets.
Realization of the deferred tax assets is dependent upon sufficient future
taxable income during the period that temporary differences and
carryforwards are expected to be available to reduce taxable income. There
was no other activity in the valuation allowance account during the period
ended March 31, 1999. This allowance was fully reversed in 2000 due to a
change in circumstances causing a change in judgment about the
realizability of the deferred tax asset.
F-18
<PAGE>
14. COMMITMENTS AND CONTINGENCIES
LEASE AGREEMENTS - The Company leases certain facilities and equipment
under noncancelable operating lease agreements, with various renewal
options. The leases expire through February 2004. The total minimum rental
commitments are as follows:
2001 $ 576,405
2002 535,838
2003 205,592
2004 34,000
-----------
Total $ 1,351,835
===========
Total rent expense for the periods ended March 31, 2000 and 1999
approximated $724,000 and $132,000, respectively.
FINDER'S FEE AGREEMENT - 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 percent 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 and for the year ended March 31, 2000, the Company has
recognized $1,154,000 in finder's fees.
CONTINGENCIES - On April 1, 1999, the Company was named as a defendant in a
lawsuit involving two separate claims by two plaintiffs. The first
plaintiff, alleges that he was not paid for consulting services. Trade
secrets were misappropriated in conducting the reverse merger of Dentmart
into the Company. The second plaintiff claims that he was wrongfully
terminated. On January 10, 2000, the second plaintiff filed a Stipulation
for Dismissal with Prejudice dropping his claims against the Company. On
April 26, 2000, the first plaintiff filed a motion to amend his complaint
alleging securities fraud involving the same set of facts set forth in his
original complaint. The Company has prepared its response opposing the
motion on the basis that there are no grounds upon which a valid claim for
securities fraud could exist and denying the allegations of the claim. The
Company is continuing to defend itself vigorously. The plaintiff has
demanded the value of 1,000,000 shares of the Company's capital stock and
other damages to be proven at trial in his complaint.
EMPLOYMENT AGREEMENT - The Company has entered into a five year employment
agreement with its Chief Executive Officer under which if he is terminated
without cause, the Company is obligated to pay him his salary for the
remaining term of the agreement, plus an additional three years' salary.
15. MAJOR CUSTOMER
During the year ended March 31, 2000, two customers accounted for revenues
of approximately $6,126,000. During the period ended March 31, 1999, one
customer accounted for revenues of approximately $2,608,000.
16. 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 Solutions, and VSM. ATSI is
in the business of buying and selling pre-owned semiconductor manufacturing
equipment. CMP Solutions is in the early development stages of providing
chemical mechanical planarization ("CMP") foundry (wafer processing) and
engineering services for semiconductor fabrication customers and
manufacturers of optical and micromechanical devices. In addition, CMP
F-19
<PAGE>
Solutions provides installation and refurbishment services for certain
pre-owned CMP manufacturing tools. VSM, which was acquired by Prodeo in
April 1999, is a supplier of wafer processing furnaces and complex, ultra
high purity gas and vapor control systems used in the manufacturer of
silicon wafers.
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 leasehold improvements
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:
<TABLE>
<CAPTION>
Corporate
and
2000 ATSI CMP VSM Unallocated Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue from external customers $17,364,746 $ 288,578 $ 5,058,427 $ 15,978 $22,727,729
Interest expense 909,644 51,483 (11,066) 206,589 1,156,650
Depreciation and
amortization 2,997 47,363 26,434 98,511 175,305
Segment profit (loss) 6,697,624 (1,198,697) 898,429 (4,466,362) 1,930,994
Segment assets 3,408,161 379,037 2,097,628 2,459,062 8,423,888
Expenditures for segment assets 11,153 158,419 244,047 121,914 535,533
1999
Revenue from external customers $ 2,692,250 $ 28,648 $ 2,720,898
Interest expense 255,390 16,335 $ 5,452 277,177
Depreciation and
amortization 438 18,560 18,998
Segment profit (loss) 233,775 (432,485) (725,606) (924,316)
Segment assets 7,150,336 157,869 72,051 7,380,256
Expenditures for segment assets 321,401 519,190 840,591
</TABLE>
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:
2000 1999
------------------------ ----------------------
Long-Lived Long-Lived
Revenue Assets Revenue Assets
----------- --------- ---------- --------
United States $ 8,100,127 $ 745,015 $ 113,648 $ 90,707
United Kingdom 8,480,129
The Netherlands 2,169,509 2,211,250
Europe 1,250,811 396,000
Pacific Rim 2,015,457
Other 711,696
----------- --------- ---------- --------
Total $22,727,729 $ 745,015 $2,720,898 $ 90,707
=========== ========= ========== ========
F-20
<PAGE>
17. RELATED PARTY TRANSACTIONS
Related party advances consist of the following amounts at March 31:
2000 1999
-------- ---------
Advances from a stockholder $ 60,941 $ 160,940
Advances (to) from an entity ("ACT") related
through common ownership, net (24,492) 182,317
Advances to an entity ("GST") related through
common ownership, net (33,499) (13,000)
-------- ---------
Total 2,950 330,257
Valuation allowance on advances to entities
related through common ownership 57,991
-------- ---------
Advances from related parties $ 60,941 $ 330,257
======== =========
During the year ended March 31, 2000, GST and ACT, entities related through
common ownership, made advances to the Company for administrative services
and rental facilities. The advances totaled $166,243 and $3,908,
respectively, at March 31, 2000 and are included in operating expenses in
the consolidated statements of operations.
The net amount due from GST and ACT at March 31, 2000 is $33,499 and
$24,492, respectively, for which the Company has recorded a valuation
allowance due to the lack of operations at these entities.
In addition, during the period ended March 31, 1999, a stockholder paid
certain expenses on behalf of the Company totaling $160,941. At March 31,
2000, the outstanding balance is $60,941.
Prior to the sale leaseback transaction, the Company leased a portion of
this equipment from a stockholder for six months at a total cost of
$42,000. At the end of the six months, the Company purchased equipment for
$340,000 from the stockholder.
The Company had included in operating expense $125,000 which is payable to
a stockholder at March 31, 1999. This amount was repaid in 2000.
18. SUPPLEMENTAL FINANCIAL INFORMATION
A summary of additions and deductions related to the allowances for
accounts receivable and inventory for the year ended March 31, 2000
follows:
Beginning
of Year Additions Deductions End of Year
------- --------- ---------- -----------
Allowance for doubtful -- 63,000 63,000
accounts
Allowance for obsolete -- 400,000 (240,000) 160,000
inventories
19. SUBSEQUENT EVENTS
On June 14, 2000 the Company entered into an agreement with ATSI's
president and co-founder to sell all of the outstanding stock of ATSI on
August 1, 2000, after all ATSI's pre-owned equipment inventory has been
transferred to the Company the president of ATSI will be terminating his
employment with the Company and will continue to operate ATSI as a
pre-owned equipment supplier. The Company will receive royalty payments on
the new ATSI's equipment sales through January 2002.
After the sale of ATSI, the Company will continue to operate its pre-owned
equipment sales operations through the parent Company. In anticipation of
the presidents departure, the Company has hired a new employee to take over
the pre-owned equipment sales operations.
On April 9, 2000, the Company and Don Jackson, the Company's chief
executive officer, were named as defendants in a lawsuit filed in the state
of Colorado, alleging that the Company breached a contract entered into in
July of 1999 for consulting services involving equity funding for the
Company. Additionally, the plaintiff claims that the Company made false
representations and fraudulent non-disclosure with respect to the July 1999
agreement. The Company currently is preparing its response and intends to
defend itself vigorously. The plaintiff is seeking an option to purchase
600,000 shares of the Company capital stock at $0.25 per share and other
damages in an amount to be proven at trial.
* * * * * *
F-21
