UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
Amendment No. 1
Quarterly Report of Small Business Issuers under Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended June 30, 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 of incorporation or (I.R.S. Employer
organization) Identification No.)
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 August 12, 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 ............................................. 1
Item 2. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations ....................................... 17
Item 3. Controls And Procedures ......................................... 22
PART II - OTHER INFORMATION ................................................ 23
Item 1. Legal Proceedings ............................................... 23
Item 6. Exhibits And Reports On Form 8-K ................................ 23
SIGNATURES ................................................................. 24
EXPLANATORY NOTE
This amendment on Form 10-QSB/A amends Item 2 of Part I, and Item 1 of
Part II of the Quarterly Report of DND Technologies, Inc. (the "Company") on
Form 10-QSB previously filed for the quarter ended June 30, 2003. This amendment
discloses a lawsuit against the Company and provides additional disclosures in
Item 2 of Part I.
This amendment to the Company's Quarterly Report on Form 10-QSB for the
fiscal quarter ended June 30, 2003 amends and restates only those items of the
previously filed Form 10-QSB listed above. No other information contained in the
Company's Form 10-QSB for the quarter ended June 30, 2003 has been updated or
amended.
PART I - FINANCIAL INFORMATION
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 2003
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 224,429
Accounts receivable, net of
allowance for doubtful accounts 1,092,398
Other receivables 26,761
Inventories 3,876,679
Prepaid expenses, other 76,339
----------
TOTAL CURRENT ASSETS $5,296,606
PROPERTY AND EQUIPMENT, NET
OF ACCUMULATED DEPRECIATION 467,523
OTHER ASSETS
License agreement 3,970,262
Rent security deposits 17,949
----------
TOTAL OTHER ASSETS 3,988,211
----------
TOTAL ASSETS $9,752,340
==========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES
Notes payable
Line of credit and note due to Merrill Lynch
(including interest) $ 1,145,007
Related parties 120,000
Other current portion 482,398
Capital lease payable, current portion 24,743
Accounts payable 1,830,830
Accounts payable, Lam Research
Corporation 1,467,083
Accrued expenses and taxes 432,680
Royalty payable, current portion 436,585
Amounts due to related parties 299,213
Deferred income 650,675
-----------
TOTAL CURRENT LIABILITIES $6,889,214
LONG-TERM LIABILITIES, NET OF
CURRENT PORTION
Notes payable, other 98,371
Capital lease payable 22,257
Royalty payable 3,684,929
-----------
TOTAL LONG-TERM LIABILITIES 3,805,557
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 (2,922,592)
-----------
TOTAL STOCKHOLDERS' (DEFICIT) (942,431)
----------
TOTAL LIABILITIES AND
STOCKHOLDERS' (DEFICIT) $9,752,340
==========
See Accompanying Notes
2
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
REVENUE
Chiller $ 67,427 $ 122,577 $ 204,832 $ 279,950
Auto Etch Systems 202,926 200,000 293,022 542,500
Parts and consumables 1,891,999 950,119 2,989,908 1,607,712
Field service and training 35,286 78,515 78,577 108,941
Other 381,394 0 709,663 0
----------- ----------- ----------- -----------
TOTAL REVENUE 2,579,032 1,351,211 4,276,002 2,539,103
COST OF REVENUE 1,663,891 580,922 2,703,395 1,422,322
----------- ----------- ----------- -----------
GROSS PROFIT 915,141 770,289 1,572,607 1,116,781
----------- ----------- ----------- -----------
OPERATING EXPENSES
Research and development 1,023 14,292 4,287 42,689
Sales and marketing 258,640 103,407 495,302 318,172
General and administrative 461,702 436,619 903,906 864,039
----------- ----------- ----------- -----------
TOTAL OPERATING
EXPENSES 721,365 554,318 1,403,495 1,224,900
----------- ----------- ----------- -----------
INCOME (LOSS) FROM
OPERATIONS 193,776 215,971 169,112 (108,119)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (112,166) (18,487) (202,421) (41,599)
Other income (expense) (223) 1,395 0 2,644
----------- ----------- ----------- -----------
TOTAL OTHER
INCOME (EXPENSE) (112,389) (17,092) (202,421) (38,955)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES 81,387 198,879 (33,309) (147,074)
INCOME TAXES (2,932) 0 0 0
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 78,455 $ 198,879 $ (33,309) $ (147,074)
=========== =========== =========== ===========
See Accompanying Notes
3
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
----------- ---------- ----------- ----------
NET INCOME (LOSS)
PER COMMON SHARE
Basic and diluted $ .00 $ .08 $ (.00) $ (.06)
=========== ========== =========== ==========
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING
Basic and diluted 22,833,333 2,500,000 22,833,333 2,500,000
=========== ========== =========== ==========
See Accompanying Notes
4
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 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 six
months ended June 30,
2003 0 0 0 0 0 (33,309) (33,309)
----- ----- ----------- -------- ----------- ----------- -----------
Balance, June 30, 2003 0 $ 0 23,000,000 $ 23,000 $ 1,957,161 $(2,922,592) $ (942,431)
===== ===== =========== ======== =========== =========== ===========
See Accompanying Notes
5
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) $ (33,309) $ (147,074)
Adjustments to reconcile net (loss)
to net cash provided (used) by operating activities:
Depreciation 93,403 103,264
Amortization 218,145 0
Changes in operating assets and liabilities:
Accounts receivable (755,142) (303,442)
Other receivables (10,155) 0
Inventories (848,346) (14,109)
Prepaid expenses and other assets (34,920) (7,469)
Accounts payable 1,187,914 492,237
Accrued expenses and amounts due to related parties 515,910 (879,458)
----------- -----------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 333,500 (756,051)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment 0 (9,517)
----------- -----------
NET CASH (USED) BY
INVESTING ACTIVITIES 0 (9,517)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from line of credit 0 253,784
Proceeds from issuance of long-term debt 0 234,313
Principal payments on long-term debt (308,951) 0
----------- -----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (308,951) 488,097
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALANTS 24,549 (277,471)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 199,880 419,690
----------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 224,429 $ 142,219
=========== ===========
See Accompanying Notes
6
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
2003 2002
-------- --------
SUPPLEMENTARY DISCLOSURE
OF CASH FLOW INFORMATION:
Cash paid for interest $215,564 $ 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
7
DND TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Presentation
The interim consolidated financial statements of DND Technologies,
Inc. and subsidiary (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 six months ended June
30, 2003 are not necessarily indicative of the results that may be
expected for the year ending 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. 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 subsidiary is
Aspect Semiquip International, Inc. (located in Arizona and Texas;
hereinafter referred to as "A.S.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. is a supplier of semiconductor manufacturing capital
equipment. The Company also supplies complete after market support
of the Auto Etch and Rainbow Plasma Dry Etch Systems, manufactured
by LAM Research Corporation 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
uncertainty as to the Company's ability to continue as a going
concern.
See Accompanying Notes
8
DND TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 subsidiary, Aspect Semiquip
International, 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.
See Accompanying Notes
9
DND TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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.
See Accompanying Notes
10
DND TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition Policy
Product sales - The Company recognizes revenue when the goods are
shipped and title passes to its customers.
Service income - The Company recognizes 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 Company expenses 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 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
assets and liabilities are adjusted through the provision for income
taxes.
See Accompanying Notes
11
DND TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Income (Loss) Per Share
The Company adopted Statement of Financial Accounting Standards No.
128 that requires the reporting of both basic and diluted income
(loss) per share. Basic income (loss) per share is computed by
dividing net income (loss) available to common stockholders by the
weighted average number of common shares outstanding for the period.
Diluted income (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 income (loss) per share
are excluded.
Accounting Estimates
Management uses estimates and assumptions in preparing financial
statements in accordance with accounting principles generally
accepted in the U.S. 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 Company to
concentrations of credit risk consists principally of cash and trade
accounts receivable. The Company places its 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 Company's customer base and
its dispersion across different geographic areas. The Company
routinely assesses the financial strength of its customers. At June
30, 2003, the Company had one customer which accounted for 34% of
net accounts receivable.
Suppliers
Approximately 12% of gross inventories at June 30, 2003 were
purchased from Lam Research Corp.
See Accompanying Notes
12
DND TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenues
For the six months ended June 30, 2003, the Company had two
customers whose revenues exceeded 10% of total revenues (22 % and
19%, respectively).
Disclosure About Fair Value of Financial Instruments
The Company estimates that the fair value of all financial
instruments as of June 30, 2003, as defined in FASB 107, does not
differ materially from the aggregate carrying values of its
financial instruments recorded in the accompanying consolidated
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 $ 4,175,001
Work-in-process 267,598
Allowance for obsolescence (565,920)
-----------
$ 3,876,679
===========
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, A.S.I. purchased approximately $1.6 million of inventory
(see Note 7) from LAM and entered into a licensing agreement
requiring royalty payments totalling $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%.
See Accompanying Notes
13
DND TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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
----------
$4,188,407
==========
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 Company's 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.
See Accompanying Notes
14
DND TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
NOTE 5 NOTES PAYABLE, OTHER
Term loan payable to Merrill Lynch Business Financial Services, Inc.
for $148,371, payable in sixty monthly installments of $4,167,
including interest at 5.87%.
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 $91,419. 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 an interest rate of 11%. The loans total
$120,000 and are due on demand.
NOTE 7 ACCOUNTS PAYABLE, LAM RESEARCH CORPORATION
The initial inventory purchase from LAM is payable as follows:
June 20, 2003 $ 163,009
Balance in twelve monthly
payments of ($108,673) 1,304,074
----------
Total $1,467,083
==========
NOTE 8 PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares 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 June 30, 2003.
See Accompanying Notes
15
DND TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
NOTE 9 COMMITMENTS AND CONTINGENCIES
Real Estate Leases
The Company leases its Arizona facilities under an operating lease
which expires in December 2004.
Future minimum lease payments on the real estate leases are as
follows:
December 31, 2003 $218,100
December 31, 2004 177,100
--------
$395,200
========
In July 2003, the Company leased a new facility in Texas under an
operating lease with monthly rental payments of $9,762 for the first
three years of the lease.
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, the Company's
available funds and ability to continue its 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 and profits from the sale of its
new Lam product line.
See Accompanying Notes
16
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 June 30, 2003
has negative working capital and a stockholders' deficit and is in default on
its Merrill Lynch 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 - Negotiate a long-term payment plan for the Merrill Lynch line of
credit.
2 - Obtain additional equity or debt financing from investors.
3 - Create additional sales from DND's new Lam product line.
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 Company recognizes revenue from product sales when the
goods are shipped and title passes to its customers.
Service income - The Company recognizes 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. ("ASI"),
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.).
17
5. Inventory
Inventory is valued at the lower of cost (determined by the first-in,
first-out method) or market. Cost includes raw materials, freight, labor and
manufacturing overhead.
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
ASI 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 a 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
------------------------
6/30/2003 6/30/2002
--------- ---------
(Unaudited) (Unaudited)
Statement of Operations Data
Total revenue $2,579,032 $1,351,211
Operating income $193,776 $215,971
Net income (loss) per share $0.00 $0.08
18
Six Month Period Ended
----------------------
6/30/2003 6/30/2002
--------- ---------
(Unaudited) (Unaudited)
Statement of Operations Data
Total revenue $4,276,002 $2,539,103
Operating income (loss) $169,112 ($108,119)
Net income (loss) per share $0.00 $(0.06)
Balance Sheet Data
Total assets $9,752,340 $3,525,982
Total liabilities $10,694,771 $3,285,878
Stockholders' equity (deficit) ($942,431) $240,104
Results of Operations.
Three month period ended June 30, 2003, compared to three month period ended
June 30, 2002.
Revenues. Revenues significantly increased approximately 91% to $2,579,032
for the three month period ended June 30, 2003 from $1,351,211 for the three
month period ended June 30, 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 Lam, and an increased
volume of sales of capital equipment.
Cost of Sales. The cost of sales increased to $1,663,891 (65% of revenues)
in the three month period ended June 30, 2003 from $580,922 (43% of revenues)
for the three month period ended June 30, 2002. This increase of 22% in the cost
of sales percentage is primarily the result of increased sales of lower-margin
products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately 33% to $720,342 (28% of
revenues) in the three months ended June 30, 2003 from $540,026 (40% of
revenues) for the three months ended June 30, 2002. The increase in dollars was
primarily due to amortization of our license agreement, an outside consultant
hired in late 2002 to assist in the integration of the Company's software for
accounting and inventories, and professional fees associated with our required
public filings.
Net Income. DND had net income of $78,455 for the three months ended June
30, 2003, compared to net income of $198,879 for the three months ended June 30,
2002. The decrease in net income was caused primarily by the increase in
interest expense due to our acquired debt with Lam and related amortization of
our license agreement.
Six month period ended June 30, 2003, compared to six month period ended June
30, 2002.
Revenues. Revenues significantly increased approximately 68% to $4,276,002
for the six month period ended June 30, 2003 from $2,539,103 for the six month
period ended June 30, 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 Lam, and an increased
volume of sales of capital equipment.
Cost of Sales. The cost of sales increased to $2,703,395 (63% of revenues)
in the six month period ended June 30, 2003 from $1,422,322 (56% of revenues)
for the six month period ended June 30,
19
2002. This increase of 7% in the cost of sales percentage is primarily the
result of increased sales of lower-margin products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately 18% to $1,399,208 (33% of
revenues) in the six months ended June 30, 2003 from $1,182,211 (47% of
revenues) for the six months ended June 30, 2002. The increase in dollars was
primarily due to amortization of our license agreement, an outside consultant
hired in late 2002 to assist in the integration of the Company's software for
accounting and inventories, and professional fees associated with our required
public filings.
Net Loss. DND had a net loss of $33,309 for the six months ended June 30,
2003, compared to a net loss of $147,074 for the six months ended June 30, 2002.
The decrease in the net loss was caused primarily by the increase in revenues
experienced in 2003, offset by an increase in interest expense due to our
acquired debt with Lam and related amortization of our license agreement.
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 two quarters of
FY2003, our cash flow remains tight. Our operating income has shown improvement
in this quarter but is still considered insufficient to meet our current
obligations. 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 certain assets that amounted to approximately $5,000,000 at June 30,
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
balance on the line of credit and a term loan, including accrued interest, at
June 30, 2003 was $1,145,007. 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,
on April 7, 2003, as part of its answer, filed a counterclaim against Merrill
Lynch, alleging breach of the covenant of good faith and fair dealing in
connection with the loan agreements, interference with contract, and
interference with business relations, and is continuing its negotiations with
Merrill Lynch as of the date of this filing.
For the six months ended June 30, 2003, two customers, Intel and
International Rectifier Corp., accounted for at least 10% of our revenues. We
have no relationship with either customer beyond the normal relationship between
a customer and its supplier. If we lost both of these major customers, our
revenues would be reduced by approximately $500,000 per year if we were unable
to find customers to replace these orders.
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 spent for technology 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
20
any commitments for financing or other plans in place to obtain financing.
Additional financing may not be available on acceptable terms, or at all.
Our investing activities for the six months ended June 30, 2003 used $0,
as compared to $9,517, which was used (for purchases of property and equipment)
in the six months ended June 30, 2002. In the six months ended June 30, 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 six
months ended June 30, 2003 used cash of $308,951 compared to $488,097 provided
for the six months ended June 30, 2002. Financing activities in the six months
ended June 30, 2003 consisted of principal payments on long-term debt. Financing
activities in the six months ended June 30, 2002 consisted of $253,784 net
borrowings from the line of credit and issuance of $234,313 long-term debt.
Capital Resources
Working capital is summarized and compared as follows:
June 30, 2003 June 30, 2002
------------- -------------
Current assets $5,296,606 $2,866,404
Current liabilities $6,889,214 $2,778,751
----------- ----------
Working capital (deficit) $(1,592,608) $87,653
=========== ==========
The increase in the deficit in working capital was primarily due to the
acquisition of the Lam product line which increased current liabilities
$1,903,668 (consisting of approximately $1.5 million in purchases of inventories
from Lam and the current portion of the royalty due to Lam amounting to
approximately $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 alone 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
21
and uncertainties not presently known to us or that we currently deem immaterial
also may impair our business operations.
o We depend on Douglas Dixon, our CEO, and Dennis Key, President of
Aspect SemiQuip, and their relationships within the semiconductor
industry. Their loss would seriously disrupt our operations.
o We depend upon revenues generated by our contract with Lam Research
Corp.
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.
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.
22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In connection with the Company's previously disclosed lawsuit, Merrill
Lynch Business Financial Services, Inc. v. Aspect SemiQuip International, et
al., the Company is providing a status update. The Company, on April 7, 2003, as
part of its answer, filed a counterclaim against Merrill Lynch, alleging breach
of the covenant of good faith and fair dealing in connection with the loan
agreements, interference with contract, and interference with business
relations, and is continuing its negotiations with Merrill Lynch as of the date
of this filing.
On May 2, 2003, Scott Magoon, a former shareholder and employee of Aspect
Semiquip International, Inc., a subsidiary of the Registrant, filed a complaint
in the Dallas County, Texas court, naming DND Technologies, Inc., Aspect
Semiquip International, Inc., Semiquip, Inc. and Doug N. Dixon as defendants.
The complaint alleges that the defendants defrauded Mr. Magoon and requests,
among other forms of relief, that the court divest the Registrant of its wholly
owned subsidiary, Semiquip, Inc. The action has since been removed to federal
district court. If Mr. Magoon is successful in his claim, it is possible the
Company could lose its Texas operations, which would adversely affect our
operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Rule 13a-14(a)/15d-14(a) Certification of Principal
Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal
Financial Officer
32 Section 1350 Certifications
(b) Reports on Form 8-K:
During the second quarter of 2003, the Company filed the
following current report on Form 8-K:
On June 3, 2003, the Company filed a Current Report on Form
8-K announcing the filing of a complaint against the Company
by Scott Magoon on May 2, 2003 in Dallas County, Texas.
23
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: January 26, 2004
DND TECHNOLOGIES, INC., a Nevada
corporation
By: /s/ Douglas N. Dixon
--------------------------------------
Douglas N. Dixon, CEO and Director
24