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 June 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.
(FORMERLY KNOWN AS SITEK, INCORPORATED, DENTMART GROUP, INC.
AND ELGIN CORPORATION)
------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 86-0923886
------------------------------- -------------------
(State of other jurisdiction of (I.R.S. Employer
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)
----------------------------------------------------
(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: 12,371,146 shares of common
stock outstanding as of August 9, 2000.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets June 30, 2000 and March 31, 2000 2
Consolidated Statements of Operations
Three Months ended June 30, 2000 and 1999 (unaudited) 3
Consolidated Statement of Stockholders' Equity
Three Months ended June 30, 2000 (unaudited) 4
Consolidated Statements of Cash Flows
Three Months ended June 30, 2000 and 1999 (unaudited) 5
Notes to Consolidated Financial Statements
Three Months ended June 30, 2000 and 1999 6
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risks 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit List 17
<PAGE>
PRODEO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND MARCH 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
---------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 717,105 $ 215,262
Restricted 1,348,273 1,500,000
Accounts receivable 1,322,659 1,500,860
Inventory 3,300,736 3,418,979
Prepaid expenses and other assets 85,372 115,614
Deferred tax asset 246,000 246,000
---------- ----------
Total current assets 7,020,145 6,996,715
PROPERTY AND EQUIPMENT - Net of accumulated depreciation
and amortization of $143,283 and $107,989 799,622 745,015
OTHER ASSETS 66,406 76,406
DEFERRED INCOME TAXES 38,000 28,000
INTANGIBLES - Net 484,831 497,752
---------- ----------
TOTAL $8,409,004 $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 1,099,168 1,322,598
Accrued expenses 1,862,907 1,620,949
VAT payable 4,813 19,665
Income tax payable 344,000 658,000
Current portion of other borrowings 290,894 290,894
---------- ----------
Total current liabilities 4,305,414 4,573,047
---------- ----------
OTHER LIABILITIES 81,899 84,224
---------- ----------
OTHER BORROWINGS 1,280,378 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, 12,321,146 shares and 12,307,813 shares at
June 30 and March 31, 2000, respectively 61,606 61,606
Additional paid-in capital 2,361,323 2,361,323
Retained earnings 315,884 156,749
---------- ----------
Total stockholders' equity 2,741,313 2,582,178
---------- ----------
TOTAL $8,409,004 $8,343,888
========== ==========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
PRODEO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999 (Unaudited)
--------------------------------------------------------------------------------
2000 1999
----------- -----------
NET SALES $ 4,526,916 $ 6,423,670
COST OF GOODS SOLD 2,097,257 2,907,300
----------- -----------
Gross profit 2,429,659 3,516,370
----------- -----------
OPERATING EXPENSES:
Selling, general and administrative 1,478,076 1,419,458
Research and development 603,236 278,766
----------- -----------
Total operating expenses 2,081,312 1,698,224
----------- -----------
INCOME FROM OPERATIONS 348,347 1,818,146
----------- -----------
OTHER (EXPENSE) INCOME:
Interest expense and financing costs (116,101) (638,347)
Miscellaneous income (expense) 52,889 (14,760)
----------- -----------
Total expense - net (63,212) (653,107)
----------- -----------
INCOME BEFORE INCOME TAXES 285,135 1,165,039
INCOME TAX EXPENSE 126,000 256,000
----------- -----------
NET INCOME $ 159,135 $ 909,039
=========== ===========
Income per common share:
Basic $ 0.01 $ 0.07
=========== ===========
Diluted $ 0.01 $ 0.07
=========== ===========
See notes to consolidated financial statements.
3
<PAGE>
PRODEO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED JUNE 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
Net income 159,135 159,135
Issuance of stock 13,333
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE,
JUNE 30, 2000 250,000 $ 2,500 12,321,146 $ 61,606 $2,361,323 $ 315,884 $2,741,313
========== ========== ========== ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
PRODEO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 159,135 $ 909,039
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 48,215 28,237
Deferred income taxes (10,000) (186,000)
Changes in assets and liabilities:
Change in restricted cash 151,727 --
Accounts receivable 178,201 (1,137,079)
Inventory 118,243 1,312,503
Prepaid expenses and other assets 40,242 1,396,718
Advances from related parties (7,309) 121,905
Accounts payable (223,430) 296,198
Accrued expenses 241,958 1,414,778
Income tax payable (314,000) 442,000
VAT payable (14,852) (756,318)
Other liabilities (2,325) 11,936
----------- -----------
Net cash provided by operating activities 365,805 3,853,917
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Related party advances -- (185,952)
Purchase of VSM - net of cash -- (106,268)
Purchase of property and equipment (89,901) (106,980)
Payments on deposits -- (26,010)
----------- -----------
Net cash used in investing activities (89,901) (425,210)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments to bank -- (3,409,254)
Borrowings from bank 50,000 1,000,000
Proceeds from other borrowings 222,000 809,000
Repayments of other borrowings (46,061) (729,031)
Proceeds from issuance of convertible debentures -- 147,500
Issuance of common stock -- 72,000
----------- -----------
Net cash provided by (used in) financing activities 225,939 (2,109,785)
----------- -----------
NET INCREASE IN CASH 501,843 1,318,922
CASH, BEGINNING OF PERIOD 215,262 863
----------- -----------
CASH, END OF PERIOD $ 717,105 $ 1,319,785
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 63,510 $ 13,101
=========== ===========
Cash paid for income taxes $ 450,000 $ --
=========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
PRODEO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE-MONTH PERIODS ENDED JUNE 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 June 30, 2000 and its
results of operations and its cash flows for the quarters ended June 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. INVENTORIES
At June 30 and March 31, 2000, inventories consisted of the following:
JUNE 30, MARCH 31,
2000 2000
----------- -----------
Raw materials $ 545,994 $ 305,134
Work-in-process 434,396 287,988
Pre-owned equipment held for resale 2,480,346 2,985,857
----------- -----------
Total 3,460,736 3,578,979
Less allowance for obsolete inventories (160,000) (160,000)
----------- -----------
Inventories - net $ 3,300,736 $ 3,418,979
=========== ===========
3. EQUITY
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. Using the Black-Scholes method for
determining value, these warrants were valued at $117 at time of issue. 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 the time of exercise, the
Company issued 13,333 shares on April 4, 2000.
6
<PAGE>
4. 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 June 30, 2000:
<TABLE>
<CAPTION>
(NUMERATOR) (DENOMINATOR) AMOUNT
---------- ---------- --------
<S> <C> <C> <C>
Basic EPS -
Income available to common stockholders $ 159,135 12,318,802 $ 0.01
========
Effect of dilutive securities:
Options 976,906
Convertible preferred stock 250,000
6% convertible debentures 780 10,415
9.5% convertible debentures 2,817 36,500
---------- ----------
Diluted EPS - Income available to
common stockholders and fully diluted
shares outstanding, assuming conversions $ 162,732 13,592,623 $ 0.01
========== ========== ========
</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 June 30, 2000.
5. 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.
As of and for the year ended June 30, 2000, the Company has recognized
$1,248,000 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, 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 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
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. The
Company is continuing to defend itself vigorously.
7
<PAGE>
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." Restricted cash
as of June 30, 2000 is $1,348,273. 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.
6. 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
Solutions provides installation and refurbishing 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 manufacture 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.
8
<PAGE>
Financial information with respect to the reportable segments follows for
the quarters ended June 30, 2000 and June 30, 1999:
<TABLE>
<CAPTION>
Three Months Ended Corporate and
June 30, 2000 VSM ATSI CMP Unallocated Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue from external
customers $ 1,593,220 $ 692,225 $ 96,471 $ 2,145,000 $ 4,526,916
=========== =========== =========== =========== ===========
Interest expense $ 216 $ 54,578 $ 13,251 $ 48,056 $ 116,101
=========== =========== =========== =========== ===========
Depreciation and
amortization $ 8,767 $ 1,117 $ 15,084 $ 23,247 $ 48,215
=========== =========== =========== =========== ===========
Segment profit (loss)
before income taxes $ 255,829 $ (14,046) $ (202,762) $ 246,114 $ 285,135
=========== =========== =========== =========== ===========
Segment assets $ 2,296,145 $ 1,746,985 $ 285,718 $ 4,080,156 $ 8,409,004
=========== =========== =========== =========== ===========
Expenditures for
segment assets $ 68,613 $ 21,288 $ 89,901
=========== =========== ===========
Three Months Ended
June 30, 1999
Revenue from external
customers $ 522,102 $ 5,853,198 $ 48,370 $ 6,423,670
=========== =========== =========== ===========
Interest expense $ 596,822 $ 9,323 $ 32,202 $ 638,347
=========== =========== =========== ===========
Depreciation and
amortization $ 3,908 $ 506 $ 7,424 $ 16,399 $ 28,237
=========== =========== =========== =========== ===========
Segment profit (loss)
before income taxes $ 205,162 $ 1,756,815 $ (170,690) $ (626,248) $ 1,165,039
=========== =========== =========== =========== ===========
Segment assets $ 1,503,568 $ 5,956,690 $ 236,868 $ 1,050,453 $ 8,747,579
=========== =========== =========== =========== ===========
Expenditures for
segment assets $ 16,548 $ 6,570 $ 43,176 $ 40,686 $ 106,980
=========== =========== =========== =========== ===========
</TABLE>
7. INCOME TAX MATTERS
The income tax provision for the quarters ended June 30, 2000 and June 30,
1999 was as follows:
2000 1999
--------- ---------
Current $ 136,000 $ 442,000
Deferred (10,000) (186,000)
--------- ---------
Total $ 126,000 $ 256,000
========= =========
9
<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 from
continuing operations for the quarters ended June 30, 2000 and June 30,
1999 due to the following:
2000 1999
--------- ---------
Provision calculated at statutory rate $ 100,000 $ 408,000
Increase (decrease) in income taxes resulting from:
Nondeductible expenses 24,000 11,000
State taxes - net of federal benefit 17,000 65,000
Change in valuation allowance (255,000)
Other (15,000) 27,000
--------- ---------
Total $ 126,000 $ 256,000
========= =========
Net deferred tax assets consist of the following components as of June 30,
2000 and March 31, 2000:
JUNE 30, MARCH 31,
2000 2000
-------- --------
Deferred tax asset:
Accrued expenses $236,000 $232,000
Other 48,000 42,000
-------- --------
Total $284,000 $274,000
======== ========
The components giving rise to the net deferred tax assets described above
have been included in the accompanying consolidated balance sheet as a
current asset and noncurrent asset as of June 30 and March 31, 2000.
8. SUBSEQUENT EVENTS
Prodeo has 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. All of ATSI's pre-owned equipment inventory will be owned
by 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. 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 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.
* * * * * * *
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Prodeo Technolgies, Inc. (the "Company" or "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.
REVENUES. Net sales were $4,526,916 in the fiscal quarter ended June 30, 2000,
compared to $6,423,670 in the same period in 1999, a decline of 29.5%. The
decline is due principally to lower revenues from pre-owned semiconductor
capital equipment in the fiscal quarter ended June 30, 2000 compared to the same
period of 1999, $2,837,225 and $5,853,198 respectively. Sales during both
quarters were still principally due to sales of pre-owned semiconductor capital
equipment. Pre-owned equipment sales accounted for 63% of the Company's net
sales in the fiscal quarter ending June 30, 2000, with sales from VSM making
almost all of the other sales.
The Company's inventory of pre-owned equipment arises predominantly from a March
1999 purchase of semiconductor production equipment from a plant in the United
Kingdom. Approximately 75% of this equipment inventory has already been sold and
Prodeo expects to sell the remainder of the United Kingdom pre-owned equipment.
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 of August 1, 2000, Prodeo sold all the outstanding shares of ATSI to the ATSI
president and co-founder Julian Gates. Mr. Gates has terminated his employment
with Prodeo and will continue to operate ATSI as a pre-owned equipment supplier.
The pre-owned equipment inventory was transferred to Prodeo as of April 1, 2000.
Prodeo is continuing to operate its pre-owned equipment sales operations through
the parent company. Prodeo 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 there is no assurance how the
sale of ATSI and Mr. Gates' departure will affect the Company's ability to
compete.
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 $96,471
during the current fiscal quarter compared to $48,370 in the same period of
1999. Prodeo expects continued development expenses for CMP Solutions during the
next 12 months.
11
<PAGE>
On April 28, 1999, Prodeo purchased VSM Corporation ("VSM"), which 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 also
manufactures the Corona Polishing Head and the recently announced Wet-Q-2000 and
TCS Flash Evaporator. VSM had revenues of $1,593,220, or 35% of net sales,
during the current fiscal quarter compared to $522,102 in revenues for the same
quarter in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Prodeo incurred $1,478,076, or
32.6% of net sales, in selling, general and administrative expenses in the
fiscal quarter ending June 30, 2000 compared to $1,419,458, or 22% of net sales,
for the same period in 1999. 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, sales development
and a corporate name change.
GROSS PROFITS. Gross profits for the fiscal quarter ending June 30, 2000 were
$285,135, or 6.3% of net sales, compared to $1,165,039, or 18% of net sales for
the fiscal quarter ending June 30, 1999. The decline in gross profits resulted
from a combination of lower net sales and increased expenses.
RESEARCH AND DEVELOPMENT. Research, development and engineering expenses were
$603,236, or 13.3% of net sales, for the fiscal quarter ending June 30, 2000
compared to $278,766, or 4% of net sales, for the same fiscal quarter in 1999.
The increase was due to costs incurred on the development of new products.
The Company expects that sales from the VSM products and 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
predict what the products' sales will be.
LIQUIDITY AND CAPITAL RESOURCES
Prodeo believes it will need additional capital during this fiscal year 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 it's
available credit lines will be adequate to support Prodeo's operations for the
next 12 months. However, there can be no assurance that revenues will continue
at their current level. 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. 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 $650,000.
12
<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. The
current outstanding balance is approximately $487,000.
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 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 June 30, 2000, Prodeo owed approximately
$600,000 under this line of credit.
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.
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.
13
<PAGE>
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 19% compared to an
interest rate of 38% for the same fiscal quarter in 1999.
The Company incurs on-going expenses in foreign countries in which the Company
pays in the local currency, however, these expenses were less than 2% of net
sales for the current fiscal quarter.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index following the signature page which is incorporated herein
by reference.
(b) Reports on Form 8-K:
On April 28, 2000, the Company filed a Form 8-K announcing under an Item 5
disclosure the departure of the Company's Chief Financial Officer Gloria Zemla
and the appointment of the Company's Chief Financial Officer David A. Bays.
On May 2, 2000, the Company filed a Form 8-K announcing under an Item 5
disclosure that the Company and a corporate investor entered into a Series A
Preferred Stock Purchase Agreement dated March 31, 200, pursuant to which the
Company issued 250,000 shares of its Series A Preferred Stock to the corporate
investor and the corporate investor paid the Company $1.5 million in immediately
available funds.
On May 11, 2000, the Company filed a Form 8-K announcing under an Item 4
disclosure that the Company dismissed its accountants McGladrey & Pullen LLP and
hired Deloitte & Touch LLP as its new accountants and auditors.
On June 12, 2000, the Company filed a Form 8-K announcing under an Item 5
disclosure that the Company changed its name from Sitek, Incorporated to Prodeo
Technologies, Inc.
On June 12, 2000, the Company filed a Form 8-K announcing under an Item 4
disclosure a dispute with its former accountants McGladrey & Pullen LLP, which
was not resolved at the time of its dismissal. The Company also filed under an
Item 7 disclosure a copy of McGladrey & Pullen LLP's letter to the Securities
and Exchange Commission describing the dispute.
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: August 14, 2000 By: /s/ Dr. Don M. Jackson
-------------------------------------
Dr. Don M. Jackson
President and Chief Executive Officer
Date: August 14, 2000 By: /s/ David A. Bays
-------------------------------------
David A. Bays
Chief Financial Officer
16
<PAGE>
PRODEO TECHNOLOGIES, INC.
EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
Exhibit No. Incorporated by
Filed Herewith Description Reference to:
--------------- ----------- -------------
27 Financial Data Schedule Filed Herewith
17
