UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________ to ___________
Commission File Number: 33-28417
PRODEO TECHNOLOGIES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 86-0923886
---------------------------- ----------------
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1817 West 4th Street, Tempe, Arizona 85281
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(602) 921-8555
----------------------------------------------------
(Registrant's telephone number, including area code)
Sitek, Incorporated, Dentmart Group, Inc. and Elgin Corporation
---------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 12,432,233 shares of common
stock outstanding as of November 8, 2000.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets September 30, 2000
and March 31, 2000 3
Consolidated Statements of Operations Three and
Six Months ended September 30, 2000 and 1999 (unaudited) 4
Consolidated Statement of Stockholders' Equity
Three and Six Months ended September 30, 2000 (unaudited) 5
Consolidated Statements of Cash Flows
Six Months ended September 30, 2000 and 1999 (unaudited) 6
Notes to Consolidated Financial Statements
Three Months ended September 30, 2000 and 1999 7
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risks 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
<PAGE>
PRODEO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND MARCH 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, March 31,
2000 2000
---------- ----------
<S> <C> <C>
ASSETS (Unaudited)
CURRENT ASSETS:
Cash $ 431,072 $ 215,262
Restricted Cash 1,325,715 1,500,000
Accounts receivable 2,147,563 1,500,860
Inventory 4,113,241 3,418,979
Prepaid expenses and other assets 100,487 115,614
Deferred tax asset 246,000 246,000
---------- ----------
Total current assets 8,364,078 6,996,715
PROPERTY AND EQUIPMENT - Net of accumulated depreciation
and amortization of $180,372 and $107,989 991,820 745,015
OTHER ASSETS 81,082 76,406
DEFERRED INCOME TAXES 38,000 28,000
INTANGIBLES - Net 451,910 497,752
---------- ----------
TOTAL $9,926,890 $8,343,888
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Advances from related parties $ 53,632 $ 60,941
Notes payable 650,000 600,000
Accounts payable 2,234,621 1,322,598
Accrued expenses 1,599,839 1,620,949
VAT payable 0 19,665
Income tax payable 570,000 658,000
Current portion of other borrowings 1,523,144 290,894
---------- ----------
Total current liabilities 6,631,236 4,573,047
---------- ----------
OTHER LIABILITIES 79,554 84,224
---------- ----------
OTHER BORROWINGS 23,701 1,104,439
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value - authorized, 5,000,000 shares;
issued, 250,000 shares; liquidation value, $1,500,000 2,500 2,500
Common stock, $.005 par value - authorized, 50,000,000 shares;
issued and outstanding, 12,432,232 shares and 12,307,813 shares at
September 30 and March 31, 2000, respectively 62,161 61,606
Additional paid-in capital 2,502,103 2,361,323
Retained earnings 625,635 156,749
---------- ----------
Total stockholders' equity 3,192,399 2,582,178
---------- ----------
TOTAL $9,926,890 $8,343,888
========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
PRODEO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For three and six months ended September 30, 2000 and 1999 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended September 30 Six months Ended September 30
--------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
NET SALES $ 4,674,042 $ 6,592,619 $ 9,200,958 13,016,289
COST OF GOODS SOLD 1,980,391 2,724,864 4,077,648 5,632,164
----------- ----------- ----------- ------------
Gross profit 2,693,651 3,867,755 5,123,310 7,384,125
----------- ----------- ----------- ------------
OPERATING EXPENSES:
Selling, general and administrative 1,532,731 1,613,059 3,010,806 3,030,232
Research and development 506,884 386,328 1,110,120 667,137
----------- ----------- ----------- ------------
Total operating expenses 2,039,615 1,999,387 4,120,926 3,697,369
----------- ----------- ----------- ------------
INCOME FROM OPERATIONS 654,036 1,868,368 1,002,384 3,686,756
----------- ----------- ----------- ------------
OTHER (EXPENSE) INCOME:
Interest expense and financing costs (142,141) (307,280) (258,242) (945,868)
Miscellaneous income (expense) 23,855 41,839 76,744 27,078
----------- ----------- ----------- ------------
Total expense - net (118,286) (265,441) (181,498) (918,790)
----------- ----------- ----------- ------------
INCOME BEFORE INCOME TAXES 535,750 1,602,927 820,886 2,767,966
INCOME TAX EXPENSE 226,000 659,800 352,000 915,800
----------- ----------- ----------- ------------
NET INCOME $ 309,750 $ 943,127 $ 468,886 $ 1,852,166
=========== =========== =========== ============
Income per common share:
Basic $ 0.03 $ 0.08 $ 0.04 $ 0.15
=========== =========== =========== ============
Diluted $ 0.02 $ 0.08 $ 0.04 $ 0.15
=========== =========== =========== ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD ENDED SEPTEMBER 30, 2000 (Unaudited)
--------------------------------------------------------------------------------
<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>
BALANCE,
MARCH 31, 2000 250,000 $ 2,500 12,307,813 $61,606 $2,361,323 $156,749 $2,582,178
Conversion of 6% debentures 38,420 192 88,244 88,436
Net income 468,886 468,886
Issuance of common shares stock 85,999 363 52,536 52,899
------- -------- ---------- ------- ---------- -------- ----------
BALANCE,
SEPTEMBER 30, 2000 250,000 $ 2,500 12,432,232 $62,161 $2,502,103 $625,635 $3,192,399
======= ======== ========== ======= ========== ======== ==========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
PRODEO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 468,886 $ 1,852,166
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 131,878 73,400
Deferred taxes (10,000) (185,000)
Changes in assets and liabilities:
Accounts receivable (646,703) (1,453,705)
Inventory (694,262) 2,301,809
Prepaid expenses and other assets 10,451 1,413,649
Advances from related parties (7,309) (227,477)
Accounts payable 912,024 49,560
Accrued expenses (21,109) 1,420,244
Income tax payable (88,000) 814,000
VAT payable (19,665) (333,002)
Change in restricted cash balance 174,285
Other liabilities (4,672) (41,025)
----------- -----------
Net cash provided by operating activities 205,804 5,684,619
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Related party advances 15,511
Purchase of VSM - net of cash (106,268)
Purchase of property and equipment (264,840) (97,273)
Payments on deposits
Net cash used in investing activities (264,840) (188,030)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments to bank (9,274,051)
Borrowings from bank 50,000 1,387,964
Proceeds from other borrowings 244,705 4,000,000
Repayments of other borrowings (72,948) (76,842)
Proceeds from issuance of convertible debentures 182,500
Issuance of common stock 53,091 72,000
----------- -----------
Net cash provided by (used in) financing activities 274,848 (3,708,429)
----------- -----------
NET INCREASE IN CASH 215,812 1,788,160
CASH, BEGINNING OF PERIOD 03/31/00 215,262 863
----------- -----------
CASH, END OF PERIOD 09/30/00 $ 431,074 $ 1,789,023
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 59,209
===========
Cash paid for income taxes $ 440,000
===========
Converted debt to stock $ 88,244
===========
Financial purchase of trade booth $ 68,000
===========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
1. Basis of Presentation
The interim Consolidated Financial Statements of Prodeo Technologies, Inc.
("Prodeo" or the "Company") include the accounts of Prodeo and all of its
subsidiaries, Advanced Technology Services, Inc. ("ATSI"), CMP Solutions,
Inc. ("CMP Solutions"), and VSM Corporation ("VSM"). This information
should be read in conjunction with the financial statements set forth in
the Prodeo Annual Report on Form 10-K for the year ended March 31, 2000.
Accounting policies utilized in the preparation of the financial
information herein presented are the same as set forth in Prodeo's annual
financial statements except as modified for interim accounting policies
which are within the guidelines set forth in Accounting Principles Board
Opinion No. 28, INTERIM FINANCIAL REPORTING. The interim consolidated
financial information is unaudited. In the opinion of management, all
adjustments, consisting only of normal recurring accruals, necessary to
present fairly Prodeo's financial position as of September 30, 2000 and its
results of operations and its cash flows for the quarters ended September
30, 2000 and 1999 have been included. Interim results of operations are not
necessarily indicative of the results of operations for the full year.
2. ATSI STOCK SALE
Effective August 1, 2000, the Company sold to ATSI's president and
co-founder Julian Gates all of the outstanding stock of ATSI in exchange
for future royalties on ATSI sales. All ATSI's pre-owned equipment
inventory was transferred to Prodeo effective April 1, 2000. Mr. Gates
terminated his employment with Prodeo and will continue to operate ATSI as
a pre-owned equipment supplier. In addition, fixed assets with a net
carrying value of $13,653 were included along with the ATSI stock, which
were expensed through accelerated depreciation.
The Company continues to operate its pre-owned equipment sales operations
through Prodeo XS, division of the parent company. Prodeo believes it will
be able 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
percent 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' departure will affect the
Company's ability to compete.
3. INVENTORIES.
At September 30 and March 31, 2000, inventories consisted of the following:
SEPTEMBER 30, MARCH 31,
2000 2000
----------- -----------
Finished Goods $ 240,000
Raw materials 394,539 $ 305,134
Work-in-process 1,730,065 287,988
Pre-owned equipment held for resale 1,908,637 2,985,857
----------- -----------
Total 4,273,241 3,578,979
Less allowance for obsolete inventories (160,000) (160,000)
----------- -----------
Inventories - net $ 4,113,241 $ 3,418,979
=========== ===========
7
<PAGE>
4. EQUITY
During the three-month period ending September 30, 2000, all of the 6%
convertible debentures were converted into 38,420 common shares. The total
value of the convertible debentures was $80,000 plus interest. In addition,
three employees who left the Company during the three months ending
September 30, 2000 exercised vested options for a total of 72,666 common
shares. A total of 111,086 common shares were issued during the three
months ending September 30, 2000.
5. 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 quarter
ended September 30, 2000:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET INCOME $ 309,750 $ 943,127 $ 468,886 $ 1,852,166
STOCK ISSUANCE 1,662 0 3,901 0
----------- -----------
$ 311,412 $ 472,787
WEIGHTED AVERAGE SHARES OUTSTANDING 12,377,390 12,307,818 12,358,527 12,291,989
EFFECT OF DILUTIVE SECURITIES
OPTIONS 528,786 41,667 737,526 25,000
CONVERTIBLE PREFERRED STOCK 250,000 0 250,000 0
CONVERTIBLE DEBENTURE 54,332 36,715 42,299 52,429
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 13,210,508 12,386,195 13,388,352 12,369,418
BASIC EARNINGS PER SHARE $ .03 $ .08 $ .04 $ .15
DILUTED EARNINGS PER SHARE $ .02 $ .08 $ .04 $ .15
</TABLE>
Warrants to purchase 20,000 and 4,562 shares of common stock at $6 and $5,
respectively, 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 September 30, 2000.
6. COMMITMENTS AND CONTINGENCIES
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. Maximum finder's fee
under the agreement is $1,262,550. The agreement expires on May 31, 2002.
8
<PAGE>
As September 30, 2000, the Company has recognized the maximum $1,262,500 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, where 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 plaintiff 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. This suit was completely settled when the first plaintiff was
paid $17,500 during the three months ending September 30, 2000.
EMPLOYMENT AGREEMENT - The Company 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.
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. Restricted
cash as of September 30, 2000 is $1,325,715.
7. 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 - Prodeo XS, CMP Solutions, and VSM.
Prodeo XS, which took over the operations of ATSI, is in the business of
buying and selling pre-owned semiconductor manufacturing equipment. CMP
Solutions is in market 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 refurbishing services for certain pre-owned CMP manufacturing tools.
VSM 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 March 31, 2000 10-K. 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.
9
<PAGE>
Financial information with respect to the reportable segments follows for
three and six months ended September 30, 2000 and September 30, 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 2000 PRODEO XS CMP VSM TOTAL
------------------ ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
Revenue from external customers $ 1,648,000 $ 688,319 $2,337,723 $ 4,674,042
============ ============ ========== ============
Segment Operating Income $ (289,870) $ 167,914 $ 775,992 $ 654,036
Net Other (Expense) Income $ (93,160) $ (12,373) $ (12,753) $ (118,286)
Income before Income Taxes $ (383,030) $ 155,541 $ 763,238 $ 535,749
Depreciation & Amortization $ 57,795 $ 10,056 $ 5,812 $ 73,663
THREE MONTHS ENDED
SEPTEMBER 30, 1999 PRODEO XS(1) CMP VSM TOTAL
------------------ ------------ ------------ ---------- ------------
Revenue from external customers $ 5,264,979 $ 76,466 $1,251,175 $ 6,592,619
============ ============ ========== ============
Segment Operating Income $ 1,917,130 $ (212,313) $ 163,550 $ 1,868,368
Net Other (Expense) Income $ (251,835) $ (15,269) $ 1,663 $ (265,441)
Income before Income Taxes $ 1,665,296 $ (227,582) $ 165,213 $ 1,602,927
Depreciation & Amortization $ 30,854 $ 11,487 $ 6,384 $ 48,725
SIX MONTHS ENDED
SEPTEMBER 30, 2000 PRODEO XS(1) CMP VSM TOTAL
------------------ ------------ ------------ ---------- ------------
Revenue from external customers $ 4,465,500 $ 804,515 $3,930,943 $ 9,200,958
============ ============ ========== ============
Segment Operating Income $ 26,848 $ (56,462) $1,031,998 $ 1,002,383
Net Other (Expense) Income $ (177,809) $ 9,241 $ (12,929) $ (181,498)
Income before Income Taxes $ (150,962) $ (47,221) $1,019,068 $ 820,885
Depreciation & Amortization $ 92,158 $ 25,140 $ 14,579 $ 131,878
SIX MONTHS ENDED
SEPTEMBER 30, 1999 PRODEO XS(1) CMP VSM TOTAL
------------------ ------------ ------------ ---------- ------------
Revenue from external customers $ 11,118,176 $ 124,836 $1,773,277 $ 13,016,289
============ ============ ========== ============
Segment Operating Income $ 3,691,706 $ (374,079) $ 369,129 $ 3,686,756
Net Other (Expense) Income $ (896,021) $ (24,192) $ 1,424 $ (918,790)
Income before Income Taxes $ 2,795,684 $ (398,271) $ 370,553 $ 2,767,966
Depreciation & Amortization $ 44,196 $ 18,912 $ 10,292 $ 73,400
</TABLE>
----------
(1) Includes sales of ATSI prior to sale, see Note 2 to the financial
statements.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Prodeo Technologies, Inc. (the "Company" or "Prodeo") began operations on
July 14, 1998.
REVENUES. Net sales were $4,674,042 in the three months ended September 30,
2000, compared to $6,592,619 in the same period in 1999, a decline of 29.1%. For
the six months ended September 30, 2000, net sales were $9,200,958 compared to
$13,016,289 for the same period in 1999, a decline of 29.3%. The decline is due
principally to lower revenues from sales of pre-owned semiconductor capital
equipment which were $1,648,000 in the three months ended September 30, 2000
compared to $5,264,978 in the same period of 1999. However, manufacturing sales
by wholly-owned subsidiary VSM Corporation ("VSM") for the three months ended
September 30, 2000 rose 87% to $2,337,723 compared to $1,251,175 for the same
period in 1999. VSM manufacturing sales represent 50% of total net sales in the
fiscal quarter ended September 30, 2000 with sales of pre-owned equipment being
35%. During this same period in 1999, VSM was 19% of total net sales and
pre-owned equipment was 80%. This change in the sales mix between pre-owned
equipment sales versus VSM manufacturing sales this quarter and the six months
ending September 30, 2000 reflects the Company's continued focus on VSM
manufacturing sales.
On August 1, 2000, all outstanding shares of Advanced Technical Services, Inc.
("ATSI"), the wholly-owned subsidiary involved in pre-owned equipment sales,
were sold to the ATSI president and co-founder Julian Gates. Mr. Gates
terminated his employment with Prodeo and will continue to operate ATSI as a
pre-owned equipment supplier. The pre-owned equipment in ATSI inventory was
transferred to Prodeo as of April 1, 2000 in anticipation of the sale of ATSI.
Prodeo continues to operate the pre-owned equipment sales operations through its
parent company.
During the fiscal quarter ended September 30, 2000, CMP Solutions, Inc. ("CMP"),
the Company's foundry subsidiary, continued in the development phase and made
significant progress in its marketing activities and operations. CMP Solutions
had revenues of $688,319 during the current fiscal quarter compared to $76,466
in the same period of 1999. Prodeo expects continued sales development for CMP
Solutions during the coming months.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Prodeo incurred $1,532,730, or
32.8% of net sales, in selling, general and administrative expenses in the
fiscal quarter ending September 30, 2000 compared to $1,613,059, or 24.5% of net
sales, for the same period in 1999. This percentage change is due to increased
marketing and advertising of VSM products and lower sales of pre-owned
equipment. The majority of the selling, general and administrative expenses are
related to marketing activities and general business activities. Marketing
expenses were related to new products and sales development.
NET INCOME. Net Income for the fiscal quarter ending September 30, 2000 was
$309,750, or 6.6% of net sales, compared to $943,127, or 14.3% of net sales for
the fiscal quarter ending September 30, 1999. The decline in net income resulted
from a combination of lower net sales in pre-owned equipment, increased
marketing and research and development expenses.
11
<PAGE>
RESEARCH AND DEVELOPMENT. Research, development and engineering expenses were
$506,884, or 13.3% of net sales, for the fiscal quarter ending September 30,
2000 compared to $386,328, or 5.8% of net sales, for the same fiscal quarter in
1999. The increase was due to costs incurred for the development of new
products.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000 Prodeo had cash of $431,072 available for general use
and $1,325,715 of cash restricted to a specific development project, see note 6
to the financial statements. However, Prodeo believes it will need additional
capital during the next twelve months to meet its funding needs, including
repayment of debt obligations (described below), and product development.
Assuming the Company's revenues continue at their current level, Prodeo believes
its available credit lines will be adequate to repay its debt obligations as
they become due and to support Prodeo's operations for the coming 12 months.
However, there can be no assurance that revenues will continue at their current
level. If revenues are inadequate, Prodeo will seek funds by establishing
additional credit lines and/or equity investment.
There is no assurance that Prodeo will be able to negotiate favorable lending
terms or attract additional capital or that the funds, if acquired, will be
sufficient to meet Prodeo's operating capital requirements. The Company has
already established certain measures including reduction of expenses and
delaying general corporate expenditures. As a contingency plan, if revenues are
inadequate and financing is unavailable, the Company believes cost cutting
measures along with the bulk sale of its portfolio of pre-owned equipment and
spare parts, even at a discount, will be adequate to support the Company's
operations and debt obligations. If the Company is required to implement its
contingency plan, 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.
Debt obligations in next two quarters:
DUE DATE LENDER PRINCIPAL AMOUNT DUE
-------- ------ --------------------
January 9, 2001 Imperial Bank $1,150,000.00
February 4, 2001 TLD Funding Group $ 207,181.00
March 31, 2001 TLD Funding Group $ 554,453.00
April 28, 2001 TLD Funding Group $ 532,430.00
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. 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 as of October
31, 2000 is approximately $1,150,000 leaving $850,000 available.
In April 1999, Prodeo entered into a loan agreement with TLD Funding Group to
borrow $1,000,000 which was 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. The current outstanding balance is approximately $532,430. Company
management has no intention of expanding this borrowing.
12
<PAGE>
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 of $207,181 as of September 30, 2000 at 1.5%. The line is
personally guaranteed by two 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 September 30, 2000, Prodeo owed
approximately $554,453 under this line of credit.
Prodeo issued two convertible debentures totaling $80,000 at 6% interest which
were converted to 38,420 common shares during the three months ended September
30, 2000.
Prodeo also issued convertible debentures of $182,500 at 9.5% interest which 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 and
may be paid 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.
Certain statements in this report constitute "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward looking statements involve known and unknown risks, uncertainties, and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements, expressed or implied in such forward
looking statements. Such risks for Prodeo including but are no limited to,
expected sales revenue levels, delays in research and development, inadequate
funding, the availability of pre-owned equipment, customers' reactions to the
Company's new proprietary equipment, the effect of Mr. Gates' departure from the
Company and other such uncertainties. Some of these and other uncertainties and
risk factors are discussed in greater detail in the Company's Form 10-K for the
fiscal year ending March 31, 2000 filed with the Securities and Exchange
Commission and available from the Company upon request.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's primary market risk exposure is changes in interest rates on the
Company's debt obligations. For the current fiscal quarter, the Company has
short-term debts with an effective overall interest rate of 18.92% compared to
an interest rate of 37.8% for the same fiscal quarter in 1999. The Company paid
$94,445 interest for the three months ended September 30, 2000 and $178,724
interest for the six months ended September 30, 2000.
The Company incurs on-going expenses in foreign countries in which the Company
pays in the local currency, however, these expenses were less than 1% of net
sales for the current fiscal quarter an 1% for the six months ending September
30, 2000.
13
<PAGE>
PART II
ITEM 1: LEGAL PROCEEDINGS.
Prodeo was named as a defendant in a lawsuit that was filed on April 1,
1999. The lawsuit involves two separate claims by two plaintiffs; EDMOND L.
LONERGAN AND ROBERT F. RUSSO JR. V. SITEK, INCORPORATED, ET AL., Superior Court
for the State of Arizona, County of Maricopa, Case No. CV 99-05785. The first
plaintiff, Edmond Lonergan, alleges that he was not paid for consulting services
by Global Semiconductor Technologies, Inc., a company controlled by certain
shareholders of Prodeo. Mr. Lonergan also claims that Global Semiconductor
Technologies, Inc. and/or the other defendants misappropriated trade secrets.
The second plaintiff, Robert Russo, Jr., was a former employee of Global
Semiconductor Technologies, Inc. Mr. Russo claims that he was wrongfully
terminated. The Company filed its answer denying these allegations and defended
itself vigorously. Mr. Lonergan and Mr. Russo demanded the value of 1,000,000
shares of Prodeo's capital stock and other damages to be proven at trial in
their complaint. Mr. Russo dropped his claim on January 10, 2000. Mr. Lonergan
settled with the Company on August 23, 2000 for a payment of $17,500.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 2000 Annual Meeting of Shareholders on August 28, 2000. The
shareholders voted on three proposals at the Annual Meeting:
1. The election of Don M. Jackson, Jr., Maurice Mc Gill, Daniel L. Shunk,
and Howard R. Neff to the Board of Directors.
2. The amendment of the Company's By-Laws to create two classes of
Directors to service on staggered two year terms, with Mssrs. Shunk
and McGill as class I directors whose terms shall expire at the next
annual meeting and with Mssrs. Jackson and Neff as class II directors
whose terms shall expire at the 2002 annual meeting of the
stockholders, and
3. The ratification of the appointment of Deloitte & Touche, LLP as
auditors for the fiscal year ending March 31, 2001.
All three proposals were approved by the following margins:
VOTES IN VOTES BROKER
FAVOR OPPOSED ABSTENTIONS NON VOTES
----- ------- ----------- ---------
PROPOSAL 1
Don M. Jackson 7,601,823 475,407 0 0
Maurice McGill 8,736,377 475,407 0 0
Daniel L. Shunk 8,736,377 475,407 0 0
Howard R. Neff 7,556,377 475,407 0 0
PROPOSAL 2 Amendment
of By-Laws for two
classes of directors 6,501,677 2,757,873 1,273 0
PROPOSAL 3 Ratification
of Deloitte & Touche as
Auditors 9,259,560 50 1,213 0
14
<PAGE>
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
There were no reports filed on From 8-K in the quarter covered by this 10-Q.
EXHIBITS:
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 By-Laws as amended Filed herewith
27 Financial Data Schedule Filed herewith
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Prodeo Technologies, Inc.
(Registrant)
Date: November 14, 2000 By: /s/ Dr. Don M. Jackson
------------------------------------
Dr. Don M. Jackson
President and Chief Executive Officer
Date: November 14, 2000 By: /s/ David A. Bays
-------------------------------------
David A. Bays
Chief Financial Officer
16
