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, 2004
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 (I.R.S. Employer Identification No.)
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, 2004
----- ------------------------------
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 1. Consolidated Unaudited Financial Statements ...................... 1
Consolidated Unaudited Balance Sheet ..................................... 1-2
Consolidated Unaudited Statements of Operations .......................... 3-4
Consolidated Unaudited Statements of Stockholders' (Deficit) ............. 5
Consolidated Unaudited Statements of Cash Flows .......................... 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................ 23
Item 3. Controls and Procedures .......................................... 30
PART II OTHER INFORMATION ............................................... 32
Item 1. Legal Proceedings ................................................ 32
Item 6. Exhibits and Reports on Form 8-K ................................. 32
SIGNATURES ............................................................... 33
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MARCH 31, 2004
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 762,673
Accounts receivable, net of
allowance for doubtful accounts 1,536,547
Inventories, net of allowance for obsolescence 1,364,637
Prepaid expenses 35,809
-----------
Total current assets 3,699,666
-----------
PROPERTY AND EQUIPMENT, Net of
accumulated depreciation 375,040
-----------
OTHER ASSETS:
License agreements 3,764,084
Deposits 32,602
-----------
Total other assets 3,796,686
-----------
TOTAL ASSETS $ 7,871,392
===========
(Continued)
1
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET (CONTINUED)
MARCH 31, 2004
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable, current portion $ 624,589
Line of credit due to Merrill Lynch
(including interest) 997,618
Capital leases payable, current portion 21,650
Lawsuit payable, current portion 70,000
Accounts payable and accrued expenses 1,571,469
Deposits from customers 1,388,960
Accounts payable, Lam Research Corporation 1,993,109
Licenses payable 3,996,600
Amounts due to related parties 436,050
------------
Total current liabilities 11,100,045
------------
COMMITMENTS AND CONTINGENCIES
LONG-TERM LIABILITIES, NET OF CURRENT PORTION:
Capital lease payable 29,347
Lawsuit settlement 70,000
------------
Total long-term liabilities, net of current portion 99,347
------------
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 1,957,160
Common stock subscribed 55,000
Accumulated deficit (5,363,160)
------------
Total stockholders' deficit (3,328,000)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 7,871,392
============
See accompanying notes.
2
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
2004 2003
---- ----
REVENUE:
Systems and Chillers $ 1,733,866 $ 142,501
Parts, assemblies and consumables 1,507,224 1,097,909
Field service and training 49,685 456,560
----------- -----------
Total revenue 3,290,775 1,696,970
----------- -----------
COST OF REVENUE:
Cost of revenues 1,930,155 1,022,534
Reserve for slow moving
and obsolete inventory 16,970
----------- -----------
Total cost of revenue 1,930,155 1,039,504
----------- -----------
GROSS PROFIT 1,360,620 657,466
----------- -----------
OPERATING EXPENSES:
Research and development 15,187 16,121
Sales and marketing 416,532 236,662
General and administrative 431,597 429,347
----------- -----------
Total operating expenses 863,316 682,130
----------- -----------
INCOME (LOSS) FROM OPERATIONS 497,304 (24,664)
----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (94,123) (90,255)
Lawsuit settlement (140,000) 0
Other income 0 223
----------- -----------
Other expense, net (234,123) (90,032)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE 263,181 (114,696)
INCOME TAX EXPENSE (BENEFIT) 800 (2,932)
----------- -----------
NET INCOME (LOSS) $ 262,381 $ (111,764)
=========== ===========
(Continued)
3
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS - Continued
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
2004 2003
---- ----
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ 0.01 $ (.01)
========== ==========
Diluted $ 0.01 $ (.01)
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING AND SUBSCRIBED:
Basic 23,000,000 22,666,667
========== ==========
Diluted 24,909,690 22,666,667
========== ==========
See accompanying notes.
4
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(UNAUDITED)
Stock Subscribed Common Stock
------------------------- ------------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ------- ------- -----
BALANCE,
DECEMBER 31, 2003 1,100,000 $ 55,000 23,000,000 $ 23,000 $ 1,957,160 $(5,625,541) $(3,590,381)
NET INCOME 0 0 0 0 0 262,381 262,381
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE,
MARCH 31, 2004 1,100,000 $ 55,000 23,000,000 $ 23,000 $ 1,957,160 $(5,363,160) $(3,328,000)
=========== =========== =========== =========== =========== =========== ===========
See accompanying notes.
5
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 262,381 $ (111,764)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation 44,880 50,971
Amortization 136,245 87,258
Provision for slow moving and
obsolete inventories 16,970
Loss on disposal of fixed asset 2,349
Changes in operating assets
and liabilities:
Accounts receivable (482,986) (221,366)
Inventories (212,636) 164,774
Prepaid expenses and other assets 8,036 (791)
Accounts payable and accrued expenses (13,293) 249,817
Deposits from customers 1,183,960
Accrued expenses and amounts due
to related parties (81,340) 2,545
----------- -----------
Net cash provided by operating activities 734,456 238,414
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment (10,295)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayment on line of credit (5,992)
Principal payments on long-term debt (113,297) (942)
----------- -----------
Net cash used by financing
activities (119,289) (942)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALANTS 604,872 237,472
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 157,801 199,880
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 762,673 $ 437,352
=========== ===========
(Continued)
6
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
2004 2003
---- ----
SUPPLEMENTARY DISCLOSURE
OF CASH FLOW INFORMATION:
Cash paid for interest $ 63,152 $ 117,486
========= =========
Cash paid for taxes $ 0 $ 0
========= =========
SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Common stock issued for
accounts payable $ 0 $ 160,000
========= =========
Cancellation of capital lease
and return of asset to vendor $ 9,202 $ 0
========= =========
See accompanying notes.
7
DND TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
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 three months ended
March 31, 2004, are not necessarily indicative of the results that may be
expected for the year ended December 31, 2004. Accordingly, you attention
is directed to footnote disclosures found in the December 31, 2003 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 Systems, Inc. (located in Arizona
and Texas; hereinafter referred to as "ASI").
ASI also owns 100% of ASI Team Asia Ltd. ASI Team Asia Ltd. is inactive
and has no significant assets or liabilities and has not had any revenue
or expenses.
ASI is a supplier of semiconductor manufacturing equipment and also
supplies complete after market support of the aforementioned equipment,
which currently includes Lam AutoEtch, Rainbow, and TCP plasma etch
systems, plus products manufactured on the Matrix System One and Ten
platforms. Elements of support include spare parts and assemblies, and
various engineering services.
8
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
incurred significant operating losses in 2003 and 2002 and has negative
working capital and a stockholders' deficit. These factors raise
uncertainty as to the Company's ability to continue as a going concern.
Principles of Consolidation - The consolidated financial statements
include the accounts of DND Technologies, Inc. and its wholly-owned
subsidiaries ASI and 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. ASI 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, age of account balance, 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.
9
License Agreements - The Company has license agreements, which are being
amortized using the straight-line method over the life of the contract
with Lam Research Corporation ("Lam") (8 years) and Axcelis Technologies,
Inc. ("Axcelis") (7 years) (see Notes 6 and 7).
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
Long-Lived Assets - The Company reviews its long-lived assets 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. The
Company did not record any impairment in the three months ended March 31,
2004.
Product Warranty Provision - ASI provides a warranty provision on sales of
its systems to cover anticipated repairs and/or replacement. The warranty
on selected systems ranges from ninety days to twelve months from date of
acceptance, not to exceed fourteen months from the ship date.
Preferred Stock - The Company has approved the creation of a Preferred
Stock. As of this date no shares have been authorized and no terms or
rights attributable to this stock have been created.
10
Revenue Recognition Policy - The Company recognizes revenue when
persuasive evidence of an arrangement exists, title transfer has occurred,
the price is fixed or readily determinable, and collectibility is
probable. Sales are recorded net of sales discounts. The Company
recognizes revenue in accordance with Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements." Revenues are recorded under
two categories:
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.
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. For the
three months ended March 31, 2004 and 2003, the Company charged to
operations $0 and $2,800, respectively.
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 tax assets and liabilities are
adjusted through the provision for income taxes.
Concentration of Risk - Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of cash
and trade accounts receivable. The Company places its temporary cash
investments in reputable financial institutions. At March 31, 2004,
approximately $563,000 represents deposits in excess of Federally insured
limits.
11
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 their dispersion across different geographic areas. The Company
routinely assesses the financial strength of its customers. At March 31,
2004, the Company had one customer whose balance was 37% of net accounts
receivable.
Significant Customers - For the three months ended March 31, 2004 and
2003, the Company had four customers and two customers, respectively,
whose revenues exceeded 10% of total revenues (2004 - 10%, 13%, 16%, and
18%; 2003 - 27% and 14%).
Revenues in 2004 outside the United States included Europe (27%), Asia
(7%) and Canada (7%).
Significant Suppliers - For the three months ended March 31, 2004,
approximately 15% of gross inventory purchases were purchased from Lam
Research Corp. The Company expects to have significant purchases of
inventory from Lam in the coming year.
Disclosure About Fair Value of Financial Instruments - The Company
estimates that the fair value of all financial instruments as of March 31,
2004, 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.
Recently-Issued Accounting Pronouncements - In January 2003 the FASB
issued Interpretation 46 "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51". This Interpretation requires a Company to
consolidate the financial statements of a "Variable Interest Entity"
("VIE"), sometimes also known as a "special purpose entity", even if the
entity does not hold a majority equity interest in the VIE. The
Interpretation requires that if a business enterprise has a "controlling
financial interest" in a VIE, the assets, liabilities, and results of the
activities of the VIE should be included in consolidated financial
statements with those of the business enterprise, even if it holds a
minority equity position. This Interpretation was effective immediately
for all VIE's created after January 31, 2003; for the first fiscal year or
interim period beginning after June 15, 2003 for VIE's in which a Company
holds a variable interest that it acquired before February 1, 2003. In
December
12
2003, the FASB issued a revision to FIN 46 ("FIN46R") to clarify some of
the provisions of FIN 46. The Company currently has no entities which have
the characteristics of a variable interest entity. Furthermore, the
Company's adoption of the remaining provisions of FIN 46R in the quarter
ending March 31, 2004 did not have an impact on the Company's financial
statements.
In December 2003, the FASB issued SFAS 132R. This Statement revises
employers' disclosures about pension plans and other postretirement
benefit plans. It does not change the measurement or recognition of those
plans required by FASB Statements No. 87, "Employers' Accounting for
Pensions", No. 88, "Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits", and No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions. This Statement retains the disclosure requirements contained in
FASB Statement No. 132, "Employers' Disclosures About Pensions and Other
Postretirement Benefits", which it replaces. It requires additional
disclosures to those in the original Statement No. 132 about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans. The Company
adopted the provisions of SFAS No. 132R on January 1, 2004.
The Company does not believe that any of these recent accounting
pronouncements will have a material impact on their financial position or
results of operations.
Reclassifications - Certain 2003 amounts have been reclassified to conform
to 2004 presentations.
2. ACCOUNTS RECEIVABLE
A summary of accounts receivable and allowance for doubtful accounts is as
follows:
Accounts receivable $1,570,547
Allowance for doubtful accounts 34,000
----------
Net accounts receivable $1,536,547
==========
Allowance For Doubtful Accounts:
Balance, January 1, 2004 $ 34,000
Additions for the year 0
Collection of accounts previously written off 0
----------
Balance, March 31, 2004 $ 34,000
==========
13
3. INVENTORIES
The inventories are comprised of the following:
Parts and materials $ 3,814,946
Work-in-process 562,773
Allowance for obsolescence (3,013,082)
-----------
$ 1,364,637
===========
4. PROPERTY AND EQUIPMENT
Property and equipment and accumulated depreciation at March 31, 2004
consist of:
Office, furniture, fixtures and equipment $ 345,890
Leasehold improvements 437,544
Machinery and equipment 323,938
Laboratory tools 25,833
-----------
1,133,205
Less accumulated depreciation 758,165
-----------
Total property and equipment $ 375,040
===========
5. LICENSE AGREEMENT AND PAYABLE, LAM RESEARCH CORPORATION
In November 2002, ASI entered into an asset purchase and licensing
agreement with Lam. Under the agreement, ASI purchased approximately $2.1
million of inventory (see Note 11) from Lam and entered into a licensing
agreement requiring payments totaling $5,376,000 (payable in 96 equal
monthly installments of $56,000). ASI has recorded the payable after
imputing interest at 6%.
Estimated amortization of the license agreement is as follows:
December 31, 2004 $ 523,551
December 31, 2005 523,551
December 31, 2006 523,551
December 31, 2007 523,551
December 31, 2008 523,551
Thereafter 1,134,359
-----------
$ 3,752,114
===========
14
Future minimum payments under the agreement are as follows:
Total Principal
Payments Portion
-------- -------
December 31, 2004 $ 672,000 $ 486,134
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
---------- ----------
$4,816,000 $3,942,774
========== ==========
The Company has questioned the realized value of the products received and
is currently in default on its payments. Negotiations are in process with
Lam to revise the terms and dollar value of repayment; accordingly, the
full amount has been classified as current in the consolidated balance
sheet.
6. LICENSE AND ROYALTY PAYABLE, AXCELIS TECHNOLOGIES, INC.
In November 2003, the Company entered into an agreement with Axcelis,
acquiring an exclusive license to all future manufacturing, sales,
service, and parts support for certain dry strip semi-conductor
manufacturing equipment marketed under the trade names "System One" and
"System Ten". The agreement provides for the payment of a License fee of
$150,000 plus 18% of net revenues (from these sales) per quarter until a
$2,750,000 fee has been paid and a royalty on related sales ranging from
10% to 2% through December 31, 2010.
Estimated amortization of the license fee is as follows:
December 31, 2004 $ 21,428
December 31, 2005 21,428
December 31, 2006 21,428
December 31, 2007 21,428
December 31, 2008 21,428
Thereafter 41,074
--------
$148,214
========
The license and royalty payable at March 31, 2004 consisted of the
following:
License payable $ 99,230
Royalty payable 27,350
--------
Total License and Royalty Payable $126,580
========
15
7. LINE OF CREDIT
ASI 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 is accrued at Libor plus 2.75% (5.84% at March 31, 2004). 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.
On May 14, 2004, the Company entered into an agreement with Merrill Lynch
which provides for the dismissal of all litigation between the companies
and the restructure of the outstanding balance of the line of credit and
the term loan (see Note 8) into a term loan.
8. NOTES PAYABLE, OTHER
On May 19, 2001, the Company received a $250,000 term $111,520
loan from Merrill Lynch Business Financial Services,
Inc. The loan is payable in sixty monthly installments
of $4,167, including interest at Libor plus 2.75% with
an effective rate of 5.84% at March 31, 2004. The loan
is secured by the same assets as the line of credit to
Merrill Lynch and has been restructured into the term
loan as referenced in Note 7
A note payable, bearing interest at 12% was due in 200,000
November 2003, required monthly interest payments of
$2,000 and is secured by a second lien on the
receivables and inventory of ASI . 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)
A note payable to an individual. On June 12, 1997, the 23,719
Company acquired 35% of the outstanding stock of ASI
from the former president of ASI and issued a note
payable to the seller for $483,630. 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 ASI stock held in escrow. The final
payment was made on May 14, 2004
Various unsecured demand notes due to an individual with
interest accruing at 7% 289,350
--------
Total (all current) $624,589
========
16
9. CAPITAL LEASES PAYABLE
The Company leases various assets under capital leases. The leases require
thirteen to sixty monthly payments that vary from $286 to $1,626,
including interest at 6% to 19%. The leases mature September 2005 through
October 2008.
Future minimum lease payments under the leases are a follows:
December 31, 2004 $ 26,520
December 31, 2005 21,642
December 31, 2006 7,008
Thereafter 11,704
--------
Total 66,874
Less amount representing interest (15,877)
--------
Present value of future minimum lease payments 50,997
Less current portion (21,650)
--------
Long-term portion $ 29,347
========
10. LAWSUIT SETTLEMENT
On April 30, 2004, the Company and a former employee settled
counter-claims against each other arising from the employee's prior
association with the Company. The Company has recorded the entire
settlement payable to the employee, $140,000, as of March 31, 2004.
Payments in the amount of $10,000 per month begin September 1, 2004 and
continue until October 1, 2005, without interest.
Future minimum payments under the agreement are a follows:
December 31, 2004 $ 40,000
December 31, 2005 100,000
--------
Total $140,000
========
11. ACCOUNTS PAYABLE, LAM RESEARCH CORPORATION
The inventory purchase from Lam (see Note 5) is due in equal monthly
installments beginning in July 2003.
The Company has questioned the realized value of the products received and
is currently in default on its payments. Negotiations are in process with
Lam to revise the terms and dollar value of repayment; accordingly, the
full amount has been classified as current in the consolidated balance
sheet.
17
12. AMOUNTS DUE TO RELATED PARTIES
The due to related parties at March 31, 2004 consists of the following:
Notes payable to Chairman of Company at 7.0% $120,000
Accrued interest on notes payable 35,890
Accrued officer's salaries 280,160
--------
Total Amount Due To Related Parties $436,050
========
13. INCOME TAXES
Provision (Benefit)
The provision for income taxes for the three months ended March 31, 2004
represents primarily California franchise taxes and consists of the
following:
2004
----
Current $ 800
Deferred $ 0
Deferred Tax Components
Significant components of the Company's deferred tax assets are as follows
at March 31, 2004:
Net operating loss carryforwards $ 928,000
Timing difference for expense deductions 30,000
-----------
958,000
Less valuation allowance (958,000)
-----------
Net deferred tax assets $ 0
===========
Summary of valuation allowance:
Balance, January 1, 2004 $ 1,083,000
Reduction for the three months ended March 31, 2004 (125,000)
-----------
Balance, March 31, 2004 $ 958,000
===========
In assessing the realizeability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities,
18
projected future taxable income and tax planning strategies in making this
assessment.
14. NET OPERATING LOSSES
The Company has the following net operating loss carryforwards:
Aspect
Semiquip
International
Inc.
DND and
Technologies Semiquip
Year of Loss Expiration Date Inc. Inc. Total
------------ --------------- ---- ---- -----
December 31, 1997 December 31, 2017 $ 82,403 $ 0 $ 82,403
December 31, 1998 December 31, 2018 17,297 0 17,297
December 31, 2000 December 31, 2020 117,915 0 117,915
December 31, 2001 December 31, 2021 142,448 134,299 276,747
December 31, 2002 December 31, 2022 1,507,813 0 1,273,204
December 31, 2003 December 31, 2023 2,876,627 0 2,876,627
----------- ----------- -----------
Subtotal 4,744,503 134,299 4,878,802
Less estimated use March 31, 2004 (234,609) (134,299) (368,908)
----------- ----------- -----------
$ 4,509,894 $ 0 $ 4,509,894
=========== =========== ===========
$360,063 of DND Technology, Inc.'s loss can only be used to offset income
derived by that company.
15. COMMITMENTS AND CONTINGENCIES
Real Estate Leases
The Company leases its Arizona and Texas facilities under operating leases
which expire in November 2007 and November 30, 2008, respectively. Rent
expense in 2004 and 2003 amounted to $107,167 and $93,709, respectively.
Future minimum lease payments on the real estate leases are as follows:
December 31, 2004 $ 279,000
December 31, 2005 293,000
December 31, 2006 302,000
December 31, 2007 299,000
December 31, 2008 122,000
----------
Total $1,295,000
==========
19
16. EMPLOYEE STOCK OPTIONS
On August 11, 2003, the Board of Directors and stockholders approved the
DND Technologies, Inc. Stock Option Plan, which permits the Board of
Directors to grant, for a ten year period, options to purchase up to
5,000,000 shares of its common stock to directors, employees and
consultants. The Plan is administered by the Board of Directors. The
administrators have the authority and discretion, subject to the
provisions of the Plan, to select persons to whom stock options will be
granted, to designate the number of shares to be covered by each option,
to specify the type of consideration to be paid, and to establish all
other terms and conditions of each option. Options granted under the Plan
will not have a term that exceeds ten years from date of grant.
The stock subject to the Plan and issuable upon exercise of options
granted under the Plan are shares of the Company's common stock, $.001 par
value, which may be either unissued or treasury shares.
The exercise price is no less than 100% of the fair market value of the
shares at the date of the grant of the options, as specified by the Board
of Directors.
Vesting terms of the options range from immediate to four years.
The Company has elected to account for stock-based compensation under APB
Opinion No. 25, under which no compensation expense has been recognized
for stock options granted to employees at fair market value.
20
A summary of the option activity for the three months ended March 31,
2004, pursuant to the terms of the Plan is as follows:
Options outstanding at January 1, 2004 4,774,226 $.06
Granted 0 $.00
Exercised 0 $.00
Cancelled and expired 0 $.00
---------
Options outstanding at March 31, 2004 4,774,226
=========
3,004,226 shares are exercisable at March 31, 2004.
Information regarding stock options outstanding as of March 31, 2004 is as
follows:
Price $ .06
Weighted average exercise price $ .06
Weighted average remaining contractual life 9 years, 4 months
The weighted average fair value of options granted in the year ended
December 31, 2003 were estimated as of the date of grant using the
Black-Scholes stock option pricing model, based on the following weighted
average assumptions:
Dividend yield $ -0-
Expected volatility 50%
Risk-free interest rate 4.37%
Expected life 10 years
For purposes of proforma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
Company's proforma information follows:
Net income:
As reported $262,381
Proforma $258,263
Net Income per common stock share:
Basic:
As reported $.01
Proforma $.01
Diluted:
As reported $.01
Proforma $.01
21
17. MANAGEMENT PLANS IN REGARDS TO GOING CONCERN
Management's plans include, but are not limited to, renegotiating the Lam
agreement, negotiating a long-term payment plan for the Merrill Lynch line
of credit, increasing revenue by continuing to expand the legacy product
lines, and obtaining additional equity or debt financing from investors.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Aspect Systems, Inc, ("ASI") a wholly owned subsidiary of DND
Technologies, Inc, ("DND" or the Company) is a supplier of semiconductor
manufacturing equipment and also provides complete after market support of the
aforementioned equipment, which currently include Lam AutoEtch, Rainbow, and TCP
plasma etch systems, plus products manufactured on the Matrix System One and Ten
platforms. Elements of support range from a full line of spare parts and
assemblies, to various engineering services. ASI also offers a wide variety of
sub-assembly repair services and reconditioning/refurbishing of an array of
temperature control units used in the semiconductor industry.
Management's discussion and analysis of results of operations and
financial condition are based upon the Company's financial statements. These
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America. These principles require management to
make certain estimates, judgments and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates based on historical experience and various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Critical Accounting Policies and Estimates
In consultation with our Board of Directors, we have identified ten
accounting principles that we believe are key to an understanding of our
financial statements. These important accounting policies 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 in 2002
and 2003 and has negative working capital and a stockholders' deficit. These
factors raise doubt 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. succeeded: litigation settled and new term loan
negotiated
2. Negotiate repayment terms and assessed inventory value with
Lam Research Corporation. succeeded: inventory revaluated and
new terms negotiated
3. Obtain additional equity or debt financing from investors. in
progress: campaign plans are underway
4. Increase revenue by capturing greater market share through
aggressive sales efforts in a recovering market economy. in
progress: first quarter book-to-bill ~1.5:1
5. Expand the ASI product base by obtaining rights to other
legacy products, thereby increasing revenue.
23
2. 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. The Company's subsidiary, Aspect Systems, Inc. ("ASI"),
does require advance payments on certain orders of large systems.
3. 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, age of account balance, etc.).
4. Inventory
Inventory is valued at the lower of cost or market. Cost includes raw
materials, freight, labor and manufacturing overhead.
5. License Agreements
The Company has license agreements, which are being amortized using the
straight-line method over the life of the contract with Lam Research Corporation
("Lam") (8 years) and Axcelis Technologies, Inc. ("Axcelis") (7 years).
6. 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
7. Product Warranty Provision
ASI provides a warranty provision on sales of its parts and systems to
cover anticipated repairs and/or replacement. The Company provides a warranty on
its systems ranging from ninety days to twelve months from date of acceptance,
not to exceed fourteen months from the ship date.
8. Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement
exists, title transfer has occurred, the price is fixed or readily determinable,
and collectibility is probable. Sales are recorded net of sales discounts. The
Company recognizes revenue in accordance with Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," (SAB 101). Our revenues are
recorded under two categories:
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.
9. 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
24
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.
10. Employee Stock Options
We account for stock-based compensation under APB Opinion No. 25, under
which no compensation expense has been recognized for stock options.
Selected Financial Information
Three Months Ended
Increase
3/31/2004 3/31/2003 (Decrease) %
----------- ----------- ----------- ----
Statements of Operations
Total Revenue $ 3,290,775 $ 1,696,970 $ 1,593,805 94%
----------- -----------
Cost of Revenue:
Costs of revenues 1,930,155 1,022,534 907,621 89%
Reserve for slow moving and
Obsolete inventory 16,970 16,970 100%
-----------
Total Cost of Revenues 1,930,155 1,039,504 890,651 86%
----------- -----------
Percentage of Sales 59% 61%
Gross Profit 1,360,620 657,466 703,154 107%
----------- -----------
Percentage of Sales 41% 39%
Operating Expenses:
Research and development 15,187 16,121 (934) 6%
Sales and marketing 416,532 236,662 179,870 76%
General and administrative 431,597 429,347 (10,607) (2%)
----------- -----------
Total Operating Expenses 863,316 682,130 181,186 27%
----------- -----------
Income (Loss) from Operations 497,304 (24,664) 521,968 2116%
----------- -----------
Other Income (Expense):
Interest Expense (94,123) (90,255) 3,868 4%
Lawsuit Settlement (140,000) 0 140,000 100%
Other Income 0 223 (233) (100%)
----------- -----------
Total Other Income (Expense) (234,123) (90,032) 144,091 160%
----------- -----------
Income (Loss) Before Income Tax Expense 263,181 (114,696) 377,877 329%
Income Tax Expense (Benefit) 800 (2,932) 3,732 127%
----------- -----------
Net Income (Loss) $ 262,381 $ (111,764) 374,145 335%
=========== ===========
Net (Loss) Per Share
Basic .01 (.01) .02 200%
Diluted .01 (.01) .02 200%
Results of Operations
Three months ended March 31, 2004, compared to three months ended March 31,
2003.
Revenues
Our revenue increase of $1,593,805, or 94%, was due to an increase in
system sales ($1,734,000 in 2004 versus $137,000 in 2003) to customers who are
purchasing additional capital equipment capacity to meet the demands of a
recovering economy.
25
Cost of Revenues - Recurring Operations
Our cost of revenues for recurring operations increased $907,621 or 89%.
This increase is primarily the result of costs associated with increased
revenues in 2004. Our cost of revenues as a percentage to revenues decreased
from 61% in 2003 to 59% in 2004. This decrease in percentage is primarily due to
improved operating efficiencies achieved through a higher level of business
activity, particularly in our equipment sector .
Cost of Revenues - Reserve for Slow Moving and Obsolete Inventory
Our cost of revenues - reserve for slow moving and obsolete inventory, is
the change due to analysis of slow-moving and obsolete inventory. In the third
quarter of 2003, we performed an analysis of our slow moving and obsolete
inventories and accordingly, recorded an increase in our reserve of over $2
million. Based on our analysis in the first quarter of 2004, there was no
significant adjustment to the reserve considered necessary.
Operating Expenses
Research and Development
Research and development costs decreased $934 or 6% in the three months
ended March 31, 2004. The decrease is related to the discontinuation of the
"Crystal Development" project in 2003. We normally do not incur significant
research and development expenses.
Sales and Marketing
Sales and marketing costs increased $179,870 or 76% in the three months
ended March 31, 2004. The increase is primarily related to royalties ($100,000)
and commissions ($78,000) increasing with the increase in system sales.
General and Administrative
Three Months Ended
Increase
3/31/2004 3/31/2003 (Decrease) %
--------- --------- ---------- ---
General and Administrative
Salaries and wages $170,584 $159,707 $ 10,877 7%
Professional fees 81,115 103,893 (22,778) (22%)
Rent, less amount allocated to Cost of Revenue 58,773 45,336 13,437 30%
Other general and administrative expenses 121,125 120,411 714 1%
-------- --------
Total General and Administrative $431,597 $429,347 2,250 1%
======== ========
Professional fees decreased in 2004 in the amount of $22,778 primarily due
to the integration of our accounting and inventory/production control systems
that was completed in the first quarter of 2003. There was also a decrease in
accounting fees of $17,000 due to our improvements in delivering financial
information to our outside independent auditor thus decreasing our reliance on
outside consultants, offset by increased legal fees of $16,000 due to our
efforts to settle outstanding litigation.
26
Lawsuit Settlement
The Company settled litigation with a former employee which provided for the
payment of $140,000 in installments of $10,000 per month beginning September
2004. (See further discussion below under Liquidity and Capital Resources.)
Net Income
We had a net income of $262,381 for the three months ended March 31, 2004,
compared to a net loss of $111,764 for the three months ended March 31, 2003.
The increase in the net income was caused primarily by improved manufacturing
efficiencies achieved through an increased level of business activity,
particularly in our equipment sector.
Capital Resources
Three Months Ended
------------------
Working Capital Increase
- --------------- 3/31/2004 3/31/2003 (Decrease)
------------ ------------ ------------
Current Assets $3,699,666 $3,911,566 ($223,100)
Current Liabilities 11,100,045 5,268,413 6,266,632
------------ ------------ ------------
Deficit Working Capital ($7,400,379) ($1,356,847) $6,043,532
============ ============ ============
Long-term Debt $99,347 $4,282,906 ($4,183,559)
============ ============ ============
Stockholders' (Deficit) ($3,328,000) ($1,020,886) $2,307,114
============ ============ ============
Statements of Cash Flows Select Information
Three Months Ended
3/31/2004 3/31/2003
--------- ---------
Net Cash Provided (Used) By:
Operating Activities $734,456 $238,414
Investing Activities ($10,295) $0
Financing Activities ($119,289) ($942)
Operating Activities
During the three months ended March 31, 2004 cash provided from operations
increased from $238,000 in 2003 to $734,000 in 2004. This increase resulted from
an increase in our revenues and gross margin and a significant increase in our
customer deposits in this quarter of $1.4 million. Our gross margin increased
from approximately $650,000 in the three months ended March 31, 2003 to $1.4
million in the three months ended March 31, 2004 primarily as a result of
selling higher margin capital equipment.
Investing Activities
Cash used of $10,000 in the three months ended March 31, 2004 was for the
minor purchases of equipment.
The Company currently has no material commitments for capital
expenditures.
Financing Activities
Financing activities in the three months ended March 31, 2004 consisted of
proceeds principal payments on long-term debt. Based on our increased profits
and available cash, we were able to reduce our term debt by $119,000 in 2004.
We have $8,139,616 and $99,347 of term-debt payments due within the next
year and next two to five years, respectively. Our ability to repay this debt is
contingent upon continued improvement of cash
27
flow from operations, and upon our ability to continue the expansion of our
product line and market share.
Liquidity and Capital Resources
Our liquidity has been negatively impacted by the operating losses we
experienced in 2002 and 2003. We attribute these operating losses primarily to
the general decline in the economy of the United States, which we believe
substantially decreased discretionary spending by consumers. As a result,
consumers purchased fewer products in the computer and semiconductor industries.
With the improvement in the economy beginning in this first quarter of 2004, we
are now experiencing improving liquidity as a result of the sales of a greater
number of products at higher margins and the related significant increase in
customer deposits.
To date, we have financed our operations with cash from our operating
activities, a bank line of credit and a loan for $200,000. This loan for
$200,000 was made by Jean Charles Cartier in October of 2002, with a
twelve-month term and at an interest rate of 12% per annum. Mr. Cartier also
received warrants to acquire 200,000 shares at $0.20 per share and 200,000
shares at $1.00 per share. As of November of 2003, we are in default on our
$200,000 bridge loan due to Mr. Cartier, which is secured by a second lien on
our accounts receivable and inventories. The interest of $24,000 has now been
paid, and we are in negotiations with the heirs of the Jean Charles Cartier
estate to possibly even convert the indebtedness to equity, but there can be no
assurance that we will succeed.
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 5.84% at March 31, 2004. The note is secured by a first lien
on our accounts receivable and inventories that amounted to approximately
$2,260,000 at December 31, 2003 and has been personally guaranteed by the
majority shareholder. Our wholly-owned subsidiary, Aspect Systems, Inc. has been
in default on payment of this line of credit since in matured on April 1, 2002
and faced ongoing litigation with Merrill Lynch as a result of nonpayment. On
May 14, 2004, we reached a settlement agreement with Merrill-Lynch which
dismisses all litigation and restructures repayment of our existing debt into
one single term loan instrument due in approximately 17 months. The restructured
term loan ("New Loan") will have a balance of $1,145,000, requires interest only
payments for a term of 17 months at an interest rate of two percent (2%) plus
the prime rate and a balloon payment upon the expiration of the term. The New
Loan is guaranteed by both DND Technologies, Inc. and Doug Dixon. The settlement
agreement and related New Loan remain subject to final execution by the parties.
Our Asset Sale and License Agreement with Lam, dated November 8, 2002,
granted us a non-exclusive license to several of Lam's patents and other
intellectual property, which enables us to sell, import, repair and distribute
products using this licensed intellectual property. To date, we have purchased
approximately $2.1 million in product under the Agreement, and we are required
to pay approximately $5.3 million over the next 7 years as a license for the
licensed intellectual property.
The Company and Lam are mutually in default under the Lam license
agreement. We are in the process of negotiating a resolution for the default,
and management believes that Lam and the Company will reach an agreement to
resolve the defaults, without damages payable by the Company, but there can be
no assurance that this will occur. Management's view is that Lam's sole remedy
under the license agreement is to recover under its purchase money security
interest in the inventory we have purchased from Lam, but Lam may choose to
bring additional claims against us, and a court could give Lam remedies not
provided for in our agreement.
In view of recent developments and ongoing discussions with Lam Research
and representatives of the Cartier heirs, it is management's view that it would
be highly unlikely that any attempt would be made to foreclose on their security
interests as provided in their agreements with the Company. However, there can
be no assurance that they would not seek to foreclose and should either party
obtain a judgment against us in court, we could lose part or all of our assets,
the Company could be forced to cease operations and our stock could become
worthless.
On May 2, 2003, Scott Magoon, a former shareholder and employee of Aspect
Systems, Inc., a subsidiary of DND, 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. On April 30,
28
2004, we entered into a Settlement Agreement and Mutual Release with Mr. Magoon.
The Settlement Agreement provides for dismissal of the lawsuit filed by Mr.
Magoon; transfer of 2,400,000 shares from Douglas Dixon (our CEO) to Mr. Magoon,
with 400,000 of such shares to be held in escrow until our common stock reaches
a certain price; transfer of 800,000 shares from Mr. Dixon to Korn, Bowditch &
Diaz, LLP; payment to Mr. Magoon of $10,000 per month for fourteen months
beginning in September of 2004; a mutual release of claims by the parties; and
certain other agreements between the parties. While this settlement alleviates
ongoing legal fees and costs related to litigation, the Company will be required
to make a total of $140,000 in payments.
In November 2003, the Company entered into an agreement with Axcelis
Technologies, Inc. and acquired an exclusive license to manufacture, sell, and
provide service and parts support for certain dry strip semiconductor
manufacturing equipment marketed under the trade names "System One" and "System
Ten". The agreement provides for a one time payment of $150,000 plus a quarterly
payment equal to 18% of net revenues from the sale of these products by the
Company, until $2,750,000 (the license fee) has been paid, and payment of a
royalty on related sales ranging from 2% to 10% through December 31, 2010.
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 computer related
purchases and achieving final execution of a new agreement with Lam Research
which replaces that under which the parties are in default.
Our current obligations consist of $200,000 due immediately to Mr.
Cartier, approximately $1.2 million due to Merrill Lynch over the next 17
months, and a total of approximately $8 million due to Lam and Axcelis over the
next several years. Even if we are able to increase revenue, expand our product
base and obtain additional financing, we cannot be certain that we can meet
these obligations, particularly if we fail to negotiate favorable agreements
with Cartier and Lam.
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 capital
investment firms or private fund managers. Preparations are underway to present
a corporate profile and backgrounder to this end, followed by an aggressive
search for funding. However, we do not have any commitments for financing or
other plans in place to obtain financing. Additional financing may not be
available on acceptable terms or at all.
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, 2003.
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
29
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 Our settlement agreement and related new loan with Merrill Lynch
remain subject to execution by the parties and failure to execute it
could result in ongoing costly litigation and ultimately foreclosure
of our assets.
o We are in default on a $200,000 note with Cartier and the Cartier
estate could foreclose on our business at any time.
o We are in default on our license agreement with Lam Research Corp.,
and Lam could seek to foreclose on its purchase money security
interest under the agreement at any time.
o We depend on Douglas Dixon, our CEO, and Dennis Key, our CFO and CEO
of ASI, and their relationships within the semiconductor industry.
Their loss would seriously disrupt our operations.
o Demand for our products is unpredictable and based in part on
factors beyond our control.
o Demand for our products is subject to cyclical downturns in the
semiconductor industry.
o We are subject to the risks associated with the intensely
competitive and capital-intensive nature of the semiconductor
industry.
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 subject to risks relating to product concentration and lack
of product revenue diversification.
o The semiconductor industry is based on rapidly changing technology.
o We may experience supply shortages.
o We are exposed to the risks of operating a global business.
o We are exposed to risks as a result of ongoing changes in the
semiconductor industry that are increasing the importance of spare
equipment, parts and service.
o We are exposed to risks associated with a highly concentrated
customer base, with four customers accounting for approximately 57%
of sales.
o We are exposed to risks associated with our acquisition strategy.
o Our ability to raise additional financing is uncertain.
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
30
procedures were effective in timely alerting them to material information
required to be included in the Company's periodic reports filed with the SEC
under the Securities Exchange Act of 1934, as amended. The design of any system
of controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote.
(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 date of evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
31
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 14, 2004, the Company reached a settlement agreement with Merrill
Lynch ("Merrill Lynch Settlement Agreement") dismissing all claims and ongoing
litigation against its subsidiary, Aspect Systems, Inc. related to a failure to
repay a line of credit which matured on April 1, 2002. Pursuant to the terms of
the settlement agreement, the new note consolidating previous indebtedness is
due and payable approximately 17 months from the date of execution in a one lump
sum payment amount. Both DND Technologies, Inc. and Douglas N. Dixon have
guaranteed the new note. The Merrill Lynch Settlement Agreement is subject to
final execution by the parties and payment of certain fees and costs which the
Company anticipates completing on or before May 21, 2004.
On April 30, 2004, we entered into a Settlement Agreement and Mutual
Release with Scott Magoon and the other parties to the lawsuit filed by Mr.
Magoon in May of 2003. The Settlement Agreement provides for dismissal of the
lawsuit filed by Mr. Magoon; transfer of 2,400,000 shares from Douglas Dixon
(our CEO) to Mr. Magoon, with 400,000 of such shares to be held in escrow until
our common stock reaches a certain price; transfer of 800,000 shares from Mr.
Dixon to Korn, Bowditch & Diaz, LLP; payment to Mr. Magoon of $10,000 per month
for fourteen months beginning in September of 2004; a mutual release of claims
by the parties; and certain other agreements between the parties.
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:
On January 28, 2004, we filed a Current Report on Form 8-K/A,
amending the Report filed on August 7, 2002, to provide the
required financial statements related to the merger of the
Company with Aspect Semiquip International, Inc.
32
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 17, 2004
DND TECHNOLOGIES, INC., a Nevada
corporation
By: /s/ Douglas N. Dixon
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Douglas N. Dixon, CEO and Director
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