UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report of Small Business Issuers under Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended March 31, 2003
Commission File No. 333-42936
DND TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Nevada 84-1405298
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
375 E. Elliot Rd., Bldg. 6 85225
Chandler, Arizona (Zip Code)
(Address of principal executive offices)
Issuer's telephone number, including area code: (480) 892-7020
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year,
if changed since last report)
The issuer has (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) been subject to
such filing requirements for the past 90 days.
Number of shares outstanding of each of the issuer's classes of common equity:
Class Outstanding as of May 14, 2003
Common stock, $0.001 par value 23,000,000
The issuer is not using the Transitional Small Business Disclosure format.
DND TECHNOLOGIES, INC.
Table of Contents
Page
----
PART I FINANCIAL INFORMATION............................................ 3
Item 1. Consolidated Unaudited Financial Statements...................... 3
Consolidated Unaudited Balance Sheet........................................ 4
Consolidated Unaudited Statements of Operations............................. 6
Consolidated Unaudited Statements of Stockholders' (Deficit)................ 7
Consolidated Unaudited Statements of Cash Flows............................. 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................. 19
Item 3. Controls and Procedures.......................................... 23
PART II OTHER INFORMATION................................................ 24
Item 6. Exhibits and Reports on Form 8-K................................. 24
SIGNATURES ................................................................. 25
CERTIFICATIONS ............................................................. 26
11
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)
3
DND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2003
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 437,352
Accounts receivable, net of
allowance for doubtful accounts 558,622
Other receivables 12,171
Inventories 2,846,589
Prepaid expenses, other 56,832
----------
TOTAL CURRENT ASSETS $3,911,566
PROPERTY AND EQUIPMENT, NET
OF ACCUMULATED DEPRECIATION 509,955
OTHER ASSETS
License agreement 4,101,150
Rent security deposits 7,762
----------
TOTAL OTHER ASSETS 4,108,912
----------
TOTAL ASSETS $8,530,433
==========
4
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable
Line of credit (including interest) $ 1,000,245
Related parties 130,000
Other current portion 628,513
Capital lease payable, current portion 17,150
Accounts payable 892,735
Accounts payable, Lam Research
Corporation, current 1,304,074
Accrued expenses and taxes 374,385
Royalty payable, current portion 430,102
Amounts due to related parties 299,959
Deferred income 191,250
-----------
TOTAL CURRENT LIABILITIES $ 5,268,413
LONG-TERM LIABILITIES, NET OF
CURRENT PORTION
Notes payable, other 134,589
Capital lease payable 25,762
Accounts payable, Lam Research Corporation 326,018
Royalty payable 3,796,537
-----------
TOTAL LONG-TERM LIABILITIES 4,282,906
STOCKHOLDERS' (DEFICIT)
Preferred stock 0
Common stock, par value $.001 per share
Authorized - 50,000,000 shares
Issued and outstanding - 23,000,000 shares 23,000
Paid-in capital 1,957,161
Accumulated deficit (3,001,047)
-----------
TOTAL STOCKHOLDERS' (DEFICIT) (1,020,886)
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' (DEFICIT) $ 8,530,433
===========
See Accompanying Notes
5
DND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
2003 2002
------------ ------------
REVENUE
Chiller machines $ 137,405 $ 157,373
Auto Etch Systems 5,096 342,500
Parts and consumables 1,097,909 657,593
Field service and training 43,291 30,426
Other 413,269 0
------------ ------------
TOTAL REVENUE 1,696,970 1,187,892
COST OF REVENUE 1,039,504 841,400
------------ ------------
GROSS PROFIT 657,466 346,492
------------ ------------
OPERATING EXPENSES
Research and development 3,264 28,397
Sales and marketing 236,662 214,765
General and administrative 442,204 427,420
------------ ------------
TOTAL OPERATING EXPENSES 682,130 670,582
------------ ------------
(LOSS) FROM OPERATIONS (24,664) (324,090)
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (90,255) (23,112)
Other income 223 1,249
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (90,032) (21,863)
------------ ------------
(LOSS) BEFORE INCOME TAXES (114,696) (345,953)
INCOME TAXES (BENEFIT) (2,932) 0
------------ ------------
NET (LOSS) $ (111,764) $ (345,953)
============ ============
NET (LOSS) PER COMMON SHARE
Basic and diluted $ (.01) $ (.09)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic and diluted 22,666,667 4,000,000
============ ============
See Accompanying Notes
6
DND TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
Preferred Stock Common Stock
------------------------- ------------------------- Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, January 1, 2003 0 $ 0 22,000,000 $ 22,000 $ 1,798,161 $(2,889,283) $(1,069,122)
Common stock issued
for accounts payable 0 0 1,000,000 1,000 159,000 0 160,000
Net (loss) for the three
months ended March 31, 2003 0 0 0 0 0 (111,764) (111,764)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 2003 0 $ 0 23,000,000 $ 23,000 $ 1,957,161 $(3,001,047) $(1,020,886)
=========== =========== =========== =========== =========== =========== ===========
See Accompanying Notes
7
DND TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) $(111,764) $(345,953)
Adjustments to reconcile net (loss)
to net cash provided (used) by operating activities:
Depreciation 50,971 60,472
Amortization 87,258 0
Changes in operating assets and liabilities:
Accounts receivable (221,366) (210,197)
Other receivables 4,435 0
Inventories 181,744 36,021
Prepaid expenses and other assets (5,226) (1,103)
Accounts payable 249,817 394,564
Accrued expenses and amounts due to related parties 2,545 (644,013)
--------- ---------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 238,414 (710,209)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment 0 (28,132)
--------- ---------
NET CASH (USED) BY
INVESTING ACTIVITIES 0 (28,132)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from line of credit 0 317,724
Proceeds from issuance of long-term debt 0 250,962
Principal payments on long-term debt (942) 0
--------- ---------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (942) 568,686
--------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALANTS 237,472 (169,655)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 199,880 419,690
--------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 437,352 $ 250,035
========= =========
See Accompanying Notes
8
DND TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
2003 2002
-------- --------
SUPPLEMENTARY DISCLOSURE
OF CASH FLOW INFORMATION:
Cash paid for interest $117,486 $ 12,235
======== ========
Cash paid for taxes $ 0 $ 0
======== ========
SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Common stock issued for
accounts payable $160,000 $ 0
======== ========
See Accompanying Notes
9
DND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Presentation
The interim consolidated financial statements of the Company are condensed
and do not include some of the information necessary to obtain a complete
understanding of the financial data. Management believes that all
adjustments necessary for a fair presentation of results have been
included in the unaudited consolidated financial statements for the
interim periods presented. Operating results for the three months ended
March 31, 2003 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2003. Accordingly, your attention
is directed to footnote disclosures found in the December 31, 2002 Annual
Report and particularly to Note 1, which includes a summary of significant
accounting policies.
Nature of Business and History of Company
DND Technologies, Inc. (hereinafter referred to as the "Company" or
collectively as the "Companies") was organized on May 9, 1997, under the
laws of the state of Nevada. The Company operates as a holding company for
subsidiary acquisitions. The Company's operating subsidiaries are Aspect
Semiquip International, Inc. (located in Arizona; hereinafter referred to
as "A.S.I.") and Semiquip, Inc. (located in Texas; hereinafter referred to
as "S.E.I.").
The Company also owns 85% of A.S.I. Team. A.S.I. Team is inactive and has
no significant assets or liabilities and has not had any revenue or
expenses.
A.S.I. and S.E.I. are suppliers of Semiconductor manufacturing capital
equipment. The Companies also supply complete after market support of the
Auto Etch and Rainbow Plasma Dry Etch Systems, manufactured by LAM
Research Corp. including parts and assemblies.
Going Concern
These consolidated financial statements are presented on the basis that
the Company is a going concern. Going concern contemplates the realization
of assets and the satisfaction of liabilities in the normal course of
business over a reasonable length of time. The Company has incurred
significant operating losses in 2001 and 2002, has negative working
capital and a stockholders' deficit and is in default on its Merrill Lynch
line of credit. These factors raise substantial doubt as to the Company's
ability to continue as a going concern.
10
DND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of DND
Technologies, Inc. and its wholly-owned subsidiaries, Aspect Semiquip
International, Inc. and Semiquip, Inc. and its 85% owned subsidiary, ASI
Team Asia Ltd. All material inter-company accounts and transactions have
been eliminated.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of
three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable are reported at the customers' outstanding balances
less any allowance for doubtful accounts. Interest is not accrued on
overdue accounts receivable. A.S.I. does require advance payments on
certain orders of large systems.
Allowance For Doubtful Accounts
The allowance for doubtful accounts on accounts receivable is charged to
income in amounts sufficient to maintain the allowance for uncollectible
accounts at a level management believes is adequate to cover any probable
losses. Management determines the adequacy of the allowance based on
historical write-off percentages and information collected from individual
customers. Accounts receivable are charged off against the allowance when
collectibility is determined to be permanently impaired (bankruptcy, lack
of contact, account balance over one year old, etc.)
Inventory
Inventory is valued at the lower of cost or market. Cost is determined on
the first-in, first-out method. Cost includes raw materials, freight,
labor and manufacturing overhead.
11
DND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
License Agreement
The license agreement is being amortized using the straight-line method
over the life of the contract with Lam Research Corporation (8 years).
Property and Equipment
Property and equipment are stated at cost. Major renewals and improvements
are charged to the asset accounts while replacements, maintenance and
repairs, which do not improve or extend the lives of the respective
assets, are expensed. At the time property and equipment are retired or
otherwise disposed of, the asset and related accumulated depreciation
accounts are relieved of the applicable amounts. Gains or losses from
retirements or sales are credited or charged to income.
Depreciation is provided for by the accelerated and straight-line methods
over the following estimated useful lives:
Office furniture, fixtures and equipment 5-7 Years
Leasehold improvements Term of lease
Machinery and equipment 7 Years
Laboratory tools 7 Years
Vehicles 5 Years
Long-Lived Assets
Statement of Financial Accounting Standards No.121, "Accounting For The
Impairment of Long-Lived Assets and For Long-Lived Assets to Be Disposed
of ", requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the historical
cost-carrying value of an asset may no longer be appropriate. The Company
assesses recoverability of the carrying value of an asset by estimating
the future net cash flows expected to result from the asset, including
eventual disposition. If the future net cash flows are less than the
carrying value of the asset, an impairment loss is recorded equal to the
difference between the asset's carrying value and fair value. This
standard did not have a material effect on the Company's results of
operations, cash flows or financial position.
Warranty Reserve
A.S.I. provides a reserve on its Chiller and Auto Etch Systems to cover
anticipated repairs and/or replacement. The warranty on these systems
normally ranges from 90 days to six months.
12
DND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition Policy
Product sales - The Companies recognize the revenue when the goods are
shipped and title passes to its customers.
Service income - The Companies recognize revenue from service income when
services are performed and completed.
Shipping and Handling Costs
The Company's policy is to classify shipping and handling costs as part of
cost of goods sold in the statement of operations.
Advertising
The Companies expense all advertising as incurred.
Research and Development Costs
Costs incurred in research and development are expensed as incurred.
Income Taxes
Provisions for income taxes are based on taxes payable or refundable for
the current year and deferred taxes on temporary differences between the
amount of taxable income and pretax financial income and between the tax
bases of assets and liabilities and their reported amounts in the
financial statements. Deferred tax assets and liabilities are included in
the financial statements at currently enacted income tax rates applicable
to the period in which the deferred tax assets and liabilities are
expected to be realized or settled as prescribed in FASB Statement No.
109, "Accounting for Income Taxes". As changes in tax laws or rates are
enacted, deferred assets and liabilities are adjusted through the
provision for income taxes.
13
DND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net (Loss) Per Share
The Company adopted Statement of Financial Accounting Standards No. 128
that requires the reporting of both basic and diluted (loss) per share.
Basic (loss) per share is computed by dividing net (loss) available to
common stockholders by the weighted average number of common shares
outstanding for the period. Diluted (loss) per share reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. In
accordance with FASB 128, any anti-dilutive effects on net (loss) per
share are excluded.
Accounting Estimates
Management uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting principles.
Those estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could vary from the
estimates that were used.
Concentration of Risk
Financial Instruments
Financial instruments which potentially subject the companies to
concentrations of credit risk consists principally of cash and trade
accounts receivable. The Companies place their temporary cash investments
in reputable financial institutions. Concentration of credit risk with
respect to trade receivables is limited due to the large number of
customers comprising the Companies' customer base and their dispersion
across different geographic areas. The Companies routinely assess the
financial strength of its customers. At March 31, 2003, the Companies had
one customer which accounted for 11% of net accounts receivable.
Suppliers
Approximately 45% of gross inventories at March 31, 2003 were purchased
from Lam Research Corp. The Company does not anticipate purchasing any
more inventories from Lam Research Corp. in the foreseeable future.
14
DND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenues
For the quarter ended March 31, 2003 Companies had two customers whose
revenues exceeded 10% of total revenues (2003 - 27 % and 14%,
respectively).
Disclosure About Fair Value of Financial Instruments
The Company estimates that the fair value of all financial instruments as
of March 31, 2003, as defined in FASB 107, does not differ materially from
the aggregate carrying values of its financial instruments recorded in the
accompanying balance sheet. The estimated fair value amounts have been
determined by the Company using available market information and
appropriate valuation methodologies. Considerable judgment is required in
interpreting market data to develop the estimates of fair value, and
accordingly, the estimates are not necessarily indicative of the amounts
that the Company could realize in a current market exchange.
NOTE 2 INVENTORIES
The inventories are comprised of the following:
Parts and materials $ 3,255,254
Work-in-process 236,257
Allowance for obsolescence (644,922)
-----------
$ 2,846,589
===========
NOTE 3 LICENSE AGREEMENT AND ROYALTY PAYABLE
In November 2002, A.S.I. entered into an asset purchase and licensing
agreement with Lam Research Corporation ("Lam"). Under the agreement, ASI
purchased approximately $1.6 million of inventory (see Note 9) from LAM
and entered into a licensing agreement requiring royalty payments totally
$5,376,000 (payable in 96 equal monthly installments of $56,000). A.S.I.
has recorded the royalty payable as a long-term liability after imputing
interest at 6%. The royalty payable is collateralized by the inventory
noted above.
15
DND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 3 LICENSE AGREEMENT AND ROYALTY PAYABLE (CONTINUED)
Estimated amortization of the license agreement is as follows:
December 31, 2003 $ 436,293
December 31, 2004 523,551
December 31, 2005 523,551
December 31, 2006 523,551
December 31, 2007 and thereafter 2,181,461
------------
$ 4,188,107
============
Future minimum royalty payments under the agreement are as follows:
Total Principal
Payments Portion
----------- -----------
December 31, 2003 $ 560,000 $ 281,919
December 31, 2004 672,000 449,848
December 31, 2005 672,000 477,594
December 31, 2006 672,000 507,050
December 31, 2007 and thereafter 2,800,000 2,471,996
----------- -----------
$ 5,376,000 $ 4,188,407
=========== ===========
NOTE 4 LINE OF CREDIT
A.S.I. had a $1,000,000 revolving line of credit with Merrill Lynch
Business Financial Services, Inc. ("Merrill Lynch") which matured on April
1, 2002. Interest accrued at Libor plus 2.75%. The note is secured by a
first lien on the Companies' accounts receivable and inventories and has
been personally guaranteed by the majority shareholder.
The note contains numerous loan covenants for which A.S.I. is not in
compliance. A.S.I. has not received waivers on the covenants and is trying
to renegotiate the note and establish a repayment plan for the loan.
16
DND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 5 NOTES PAYABLE, OTHER
Term loan payable to Merrill Lynch Business Financial Services, Inc. for
$160,871, payable in sixty monthly installments of $4,167.
Note payable for $200,000, bearing interest at 12%, is due in November
2003, requires monthly interest payments of $2,000 and is secured by a
second lien on the receivables and inventory. The note includes options to
purchase shares of the Company's common stock (200,000 shares @ $0.20 per
share and 200,000 shares at $1.00 per share).
Note payable to an individual for $112,881. The note is payable in
quarterly installments of $24,319 including interest at 10% and matures on
May 15, 2004. The note is secured by 947,000 shares of A.S.I. stock held
in escrow.
Various unsecured demand notes due to an individual totaling $289,350,
with interest accruing at 7%.
NOTE 6 NOTES PAYABLE, RELATED PARTIES
Notes payable to related parties represents various loans from the
Company's President at interest rates of 7% and 11%. The loans total
$130,000 and are due on demand.
NOTE 7 ACCOUNTS PAYABLE, LAM RESEARCH CORPORATION
The initial inventory purchase from LAM is payable as follows:
March 20, 2003 (Paid April 2003) $ 163,009
June 20, 2003 163,009
Balance in twelve monthly
payments of ($108,673) 1,304,074
------------
Total $ 1,630,092
============
NOTE 8 PREFERRED STOCK
The Company is authorized to issue 10,000,000 of $.0001 par value
preferred stock. The Board of Directors is authorized to establish the
series of preferred stock and all preference rights. No shares were issued
or outstanding at March 31, 2003.
17
DND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 9 COMMITMENTS AND CONTINGENCIES
Real Estate Leases
The Company leases its Arizona and Texas facilities under operating leases
which expire in December 2004 and June 2003, respectively.
Future minimum lease payments on the real estate leases are as follows:
December 31, 2003 $ 218,100
December 31, 2004 177,100
----------
$ 395,200
==========
Litigation
Merrill Lynch has filed a lawsuit against the Company seeking repayment of
its line of credit and term loan. The Company has filed a countersuit
against Merrill Lynch. Should Merrill Lynch successfully foreclose on its
line of credit, our available funds and ability to continue our operations
will be adversely affected.
NOTE 10 MANAGEMENT PLANS
Management's plans to eliminate the going concern situation include, but
are not limited to, payment of debt by issuing common stock, negotiate a
long-term payment plan for the Merrill Lynch line of credit and create
additional sales an profits from the sale of its new Lam product line.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. In consultation with our Board of Directors and Audit
Committee, we have identified eight accounting policies that we believe are key
to an understanding of our financial statements. These are important accounting
policies that require management's most difficult, subjective judgments.
1. Going Concern
These financial statements are presented on the basis that the Company is
a going concern. Going concern contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business over a reasonable
length of time. The Company has incurred significant operating losses for the
years ended December 31, 2002 and 2001 and for the quarter ended March 31, 2003
and has negative working capital and a stockholders' deficit and is in violation
of its loan covenants on its line of credit. These factors raise uncertainty as
to the Company's ability to continue as a going concern.
Management's plans to eliminate the going concern situation include, but
are not limited to, the following:
1 - Restructure the line of credit to allow amortization of the principal
balance.
2 - Obtain additional equity or debt financing from investors.
In addition, the Company completed an agreement with Lam Research
Corporation whereby the Company received inventory, intellectual properties and
support programs of Lam's Auto Etch and Dry Tek models of plasma dry etch
equipment. This agreement has enabled the Company to increase its revenues and
may eventually result in operating profits.
2. Revenue Recognition
Product sales - The Companies recognize revenue from product sales when
the goods are shipped and title passes to its customers.
Service income - The Companies recognize revenue from service income when
services are performed and completed.
3. Accounts Receivable
Accounts receivable are reported at the customers' outstanding balances
less any allowance for doubtful accounts. Interest is not accrued on overdue
balances. The Company's subsidiary, Aspect Semiquip International, Inc.
("A.S.I."), does require advance payments on certain orders of its larger
systems.
4. Allowance for Doubtful Accounts
The allowance for doubtful accounts on accounts receivable is charged to
income in amounts sufficient to maintain the allowance for uncollectible
accounts at a level management believes is adequate to cover any probable
losses. Management determines the adequacy of the allowance based on historical
write-off percentages and information collected from individual customers.
Accounts receivable are charged off against the allowance when collectibility is
determined to be permanently impaired (bankruptcy, lack of contact, account
balance over one year old, etc.
5. Inventories
Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market. Cost includes raw materials, labor and
manufacturing overhead.
19
6. Income Taxes
Provisions for income taxes are based on taxes payable or refundable for
the current year and deferred taxes on temporary differences between the amount
of taxable income and pretax financial income and between the tax basis of
assets and liabilities and their reported amounts in the financial statements.
Deferred tax assets and liabilities are included in the financial statements at
currently enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled as
prescribed in FASB Statement No. 109, Accounting for Income Taxes. As changes in
tax laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
7. Property and Equipment
Depreciation is provided for by the accelerated and straight-line methods
over the following estimated useful lives:
Office furniture, fixtures and equipment 5-7 Years
Leasehold improvements Term of Lease
Machinery and equipment 7 Years
Laboratory tools 7 Years
Vehicles 5 Years
8. Warranty Reserve
A.S.I. provides a reserve on its Chiller and Auto Etch systems to cover
anticipated repairs or replacement. The Company provides a warranty on its
systems ranging from 90 days to six months from date of sale.
Results of Operations
Through its wholly owned subsidiary, Aspect Semiquip International, Inc.
("ASI"), DND Technologies, Inc. ("DND" or the "Company") provides proprietary
capital equipment to the manufacturers of computer chips and is manufacturer and
supplier of wholesale parts and contract services to the semiconductor industry.
ASI is a supplier of re-manufactured single chamber dry etch equipment,
re-manufactured process chillers, etch-system consumables, spares and
sub-assemblies for Lam Research Corporation's AutoEtch, Rainbow and TCP etch
tools, as well as ASI's own line of single-chamber etch equipment.
Selected Financial Information.
Three Month Period Ended
--------------------------
3/31/2003 3/31/2002
----------- -----------
(Unaudited) (Unaudited)
Statement of Operations Data
Total revenue $ 1,696,970 $ 1,187,892
Operating income (loss) $ (24,664) $ (445,069)
Net earnings (loss) per share $ (0.01) $ (0.09)
3/31/2003 3/31/2002
--------- ---------
Balance Sheet Data
Total assets $ 8,530,433 $3,545,464
Total liabilities $ 9,551,319 $3,504,239
Stockholders' equity (deficit) ($1,020,866) $ 41,225
20
Results of Operations.
Three month period ended March 31, 2003, compared to three month period ended
March 31, 2002.
Revenues. Revenues significantly increased approximately 43% to $1,696,970
for the three month period ended March 31, 2003 from $1,187,892 for the three
month period ended March 31, 2002. This increase was the result of sales of the
product line of inventories purchased from Lam Research Corp. ("Lam") through
distribution channels developed through our agreement with it.
Cost of Sales. The cost of sales increased to $1,039,504 (61% of revenues)
in the three month period ended March 31, 2003 from $841,400 (71% of revenues)
for the three month period ended March 31, 2002. This decrease of 10% in the
cost of sales is primarily the result of our sales mix of higher margin sales of
the Lam product line in 2003.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses slightly increased approximately 6% to $678,866 (40% of
revenues) in the three months ended March 31, 2003 from $642,185 (54% of
revenues) for the three months ended March 31, 2002. The slight increase in
dollars was due to outside consultants hired in late 2002 to assist in
implementation of the Company's new software for accounting and inventories.
Net Loss. DND had a net loss of $111,764 for the three months ended March
31, 2003, compared to a net loss of $345,953 for the three months ended March
31, 2002. The decrease in the net loss was caused primarily by the increase in
revenues and margins experienced in 2003, offset by an increase in interest
expense due to its acquired debt with Lam.
CAPITAL AND SOURCES OF LIQUIDITY
Our liquidity was negatively impacted by the decline in sales revenues we
experienced during the year ended December 31, 2002. We attribute last year's
decline in revenues primarily to the general decline in the economy of the
United States, which we believe has driven down discretionary spending by
consumers. As a result, consumers are purchasing fewer products in the computer
and semiconductor industries.
Although our revenues have increased during the first quarter of FY2003,
our cash flow remains tight and we are still incurring operating losses. To
date, we have financed our operations with cash from our operating activities, a
bank line of credit and a bridge loan for $200,000.
Our bank line of credit with Merrill Lynch Business Financial Services,
Inc. matured on April 1, 2002. Interest accrued at Libor plus 2.75% with an
effective rate of 6.13% at December 31, 2002. The note is secured by a first
lien on all of our corporate assets which amounted to $8,530,433 at March 31,
2003 and has been personally guaranteed by the majority shareholder. The note
contains numerous loan covenants that we are not in compliance with. As of the
date of this report, we have not received waivers on the covenants and are
trying to renegotiate the note and establish a repayment plan for the loan. The
loan balance, including accrued interest, at March 31, 2003 was $1,000,245.
Merrill Lynch filed a lawsuit against us in connection with our default on the
line of credit in December of 2002. Should Merrill Lynch successfully foreclose
on its line of credit, our available funds and ability to continue our
operations will be adversely affected. The Company is continuing its
negotiations with Merrill Lynch as of the date of this filing.
Our future cash requirements and the adequacy of available funds will
depend on many factors, including the pace at which we expand our business
generally, and our inventory in particular, the general state of the economy,
which impacts the amount of money that may be spend for computer related
purchases and our ability to negotiate a repayment plan for our line of credit
with Merrill Lynch Business Financial Services, Inc. and a settlement of the
Merrill Lynch lawsuit.
Because of our tight cash flow, it is likely that, during the next 12
month period we will seek financing from one or more sources such as lending
institutions or private individuals. We do not have any plans in place to obtain
financing. Additional financing may not be available on acceptable terms, or at
all.
21
Our investing activities for the three months ended March 31, 2003 used
$0, as compared to $28,132, which was used in the three months ended March 31,
2002. In the quarter ended March 31, 2003, we did not make any investments in
property and equipment, nor do we anticipate any significant capital additions
through 2003. Our financing activities for the three months ended March 31, 2003
used cash of $942 compared to $568,686 provided for the three months ended March
31, 2002. Financing activities in the three months ended March 31, 2003
consisted of principal payments on long-term debt. Financing activities in the
three months ended March 31, 2002 consisted of $317,724 net borrowings from the
line of credit and issuance of $250,962 long-term debt.
Capital Resources
Working capital is summarized and compared as follows:
March 31, 2003 March 31, 2002
-------------- --------------
Current assets $ 3,911,566 $ 2,832,241
Current liabilities $ 5,268,413 $ 3,504,239
-------------- --------------
Working capital (deficit) $ (1,356,847) $ (671,998)
============== ==============
The increase in the deficit in working capital was primarily due to the
acquisition of the Lam product line which increased current liabilities
$1,734,176 (consisting of $1.3 million in purchases of inventories from Lam and
the current portion of the royalty due to Lam amounting to $430,000). The
Company plans to remedy this working capital deficit through its newly
engineered sales plan that allows the Company to break even selling replacement
parts coupled with increasing the revenue generated from the sales of capital
equipment.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS
The Company's Form 10-KSB, any Form 10-QSB or any Form 8-K of the Company or any
other written or oral statements made by or on behalf of the Company may contain
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. The words "believe,"
"expect," "anticipate," "intends," "estimate," "forecast," "project," and
similar expressions identify forward-looking statements. All statements other
than statements of historical fact are statements that could be deemed
forward-looking statements, including any statements of the plans, strategies
and objectives of management for future operations; any statements concerning
proposed new products, services, developments or industry rankings; any
statements regarding future economic conditions or performance; any statements
of belief; and any statements of assumptions underlying any of the foregoing.
Such "forward-looking statements" are subject to risks and uncertainties set
forth from time to time in the Company's SEC reports and are generally set forth
below and particularly discussed in the Company's Form 10-KSB for the year ended
December 31, 2002.
Readers are cautioned not to place undue reliance on such forward-looking
statements as they speak only of the Company's views as of the date the
statement was made. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
Risk Factors
You should consider the following discussion of risks as well as other
information regarding our operations. The risks and uncertainties described
below are not the only ones. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may impair our business
operations.
o We heavily depend on Douglas Dixon, our CEO, and his relationships
within the semiconductor industry. His loss would seriously disrupt
our operations.
o We depend upon revenues generated by our contract with Lam Research
Corp., which also accounts for our highest margin products.
o Demand for our products is subject to cyclical downturns in the
semiconductor industry and our ability to keep pace with rapidly
changing technology.
o Our independent accountants have expressed doubt about our ability
to continue as a going concern, which may hinder our ability to
obtain future financing.
22
o We are in default on our $1 million line of credit with Merrill
Lynch Business Financial Services and our creditor could foreclose
on our business at any time.
o We are subject to the risks associated with the intensely
competitive and capital-intensive nature of the semiconductor
industry.
o We are exposed to the risks of operating a global business.
o We are exposed to risks associated with a highly concentrated
customer base, with one customer accounting for approximately 20% of
sales.
o We are subject to risks of non-compliance with environmental and
safety regulations.
o We are exposed to risks associated with our acquisition strategy.
o Our ability to raise additional financing is uncertain.
o Our operations are not diversified and we will not have the benefit
of reducing our financial risks by relying on other revenues.
o There is a limited market for our common stock.
o Our common stock is subject to penny stock regulation.
ITEM 3. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the design and operation of our disclosure controls
and procedures, as such term is defined under Rules 13a-14(c) and 15d-14(c)
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), within 90 days of the filing date of this report. Based on that
evaluation, our principal executive officer and our principal financial officer
concluded that the design and operation of our disclosure controls and
procedures were effective to ensure that information required to be included in
our Securities and Exchange Commission reports is recorded, processed,
summarized and reported within the time periods specified in the Commission's
rules and forms.
(b) In addition, there were no significant changes in our internal controls or
in other factors that could significantly affect these controls subsequent to
the Evaluation Date, including any corrective actions with regard to significant
deficiencies and material weaknesses.
23
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification of CEO and CFO
(b) Reports on Form 8-K:
During the first quarter of 2003, the Company filed the following
current reports on Form 8-K:
On January 14, 2003, the Company filed a Current Report on Form 8-K
announcing the filing of a complaint against the Company by Merrill
Lynch Business Financial Services, Inc. on December 18, 2002 in
United States District Court for the District of Arizona.
On February 4, 2003, the Company filed a Current Report on Form 8-K
announcing the Company's entry into a Letter of Intent with ESL
Elektronik GmbH, Weissenfeld Germany on January 31, 2003.
24
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: May 15, 2003
DND TECHNOLOGIES, INC., a Nevada corporation
By: /s/ Douglas N. Dixon
--------------------------------------------
Douglas N. Dixon, CEO and Director
25
CERTIFICATION
I, Douglas N. Dixon, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of DND
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls;
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
By: /s/ Douglas N. Dixon
--------------------
Douglas N. Dixon
Chief Executive Officer
26
CERTIFICATION
I, Paul Gallo, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of DND
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls;
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
By: /s/ Paul Gallo
--------------
Paul Gallo
Chief Financial Officer
27