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 June 30, 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 incorporation or (I.R.S. Employer Identification No.)
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 August 16, 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......................................... 3
Item 1. Consolidated Unaudited Financial Statements................... 3
Consolidated Unaudited Balance Sheet..................................... 4
Consolidated Unaudited Statements of Operations.......................... 6
Consolidated Unaudited Statements of Stockholders' (Deficit)............. 8
Consolidated Unaudited Statements of Cash Flows.......................... 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................... 26
Item 3. Controls and Procedures....................................... 35
PART II OTHER INFORMATION............................................. 37
Item 1. Legal Proceedings .............................................. 37
Item 6. Exhibits and Reports on Form 8-K.............................. 37
SIGNATURES .............................................................. 38
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
3
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 2004
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 393,101
Accounts receivable, net of
allowance for doubtful accounts 1,503,911
Inventories, net of allowance for obsolescence 1,555,464
Prepaid expenses 184,701
----------
Total current assets 3,637,177
----------
PROPERTY AND EQUIPMENT, Net of
accumulated depreciation 341,512
----------
OTHER ASSETS:
License agreements 3,627,839
Loan fees 11,450
Deposits 20,366
----------
Total other assets 3,659,655
----------
TOTAL ASSETS $7,638,344
==========
(Continued)
4
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable, current portion $ 489,350
Note payable, Merrill Lynch, current portion 270,402
Capital leases payable, current portion 21,960
Lawsuit payable, current portion 90,000
Accounts payable and accrued expenses 1,939,619
Deposits from customers 1,026,549
Accounts payable, Lam Research Corporation, current portion 503,864
License payable, Lam Research Corporation, current portion 500,902
License and royalty payable, Axcelis 223,244
Amounts due to related parties 438,806
-----------
Total current liabilities 5,504,696
-----------
COMMITMENTS AND CONTINGENCIES
LONG-TERM LIABILITIES, NET OF CURRENT PORTION:
Capital lease payable 23,921
Accounts payable, Lam Research Corporation 537,006
Note payable, Merrill Lynch 835,789
License payable, Lam Research Corporation 3,221,416
Lawsuit payable 50,000
-----------
Total long-term liabilities, net of current portion 4,668,132
-----------
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 (4,569,644)
-----------
Total stockholders' deficit (2,534,484)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 7,638,344
===========
See accompanying notes.
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5
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
Three Months Six Months
-------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
REVENUE:
Systems and Chillers $ 2,074,235 $ 900,963 $ 3,808,101 $ 1,043,464
Parts, assemblies
and consumables 1,619,561 1,393,612 3,126,785 2,904,790
Field service and
training 43,738 160,093 93,423 203,384
----------- ----------- ----------- -----------
Total revenue 3,737,534 2,454,668 7,028,309 4,151,638
----------- ----------- ----------- -----------
COST OF REVENUE:
Cost of revenues -
recurring operations 2,526,313 1,588,759 4,456,468 2,645,233
Reserve for slow moving
and obsolete inventory (800,668) (49,232) (800,668) (66,202)
----------- ----------- ----------- -----------
Total cost of revenue 1,725,645 1,539,527 3,655,800 2,579,031
----------- ----------- ----------- -----------
GROSS PROFIT 2,011,889 915,141 3,372,509 1,572,607
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Research and development 16,656 13,987 31,843 30,108
Sales and marketing 551,328 257,210 967,860 493,872
General and
administrative 566,056 450,168 997,653 879,515
----------- ----------- ----------- -----------
Total operating expenses 1,134,040 721,365 1,997,356 1,403,495
----------- ----------- ----------- -----------
INCOME FROM
OPERATIONS 877,849 193,776 1,375,153 169,112
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (84,333) (112,166) (178,456) (202,421)
Lawsuit settlement 0 0 (140,000) 0
Other income 0 (223) 0 0
----------- ----------- ----------- -----------
Other expense, net (84,333) (112,389) (318,456) (202,421)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAX EXPENSE 793,516 81,387 1,056,697 (33,309)
INCOME TAX EXPENSE
(BENEFIT) 0 2,932 800 0
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 793,516 $ 78,455 $ 1,055,897 $ (33,309)
=========== =========== =========== ===========
(Continued)
6
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS - Continued
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
Three Months Six Months
----------------------- -----------------------
2004 2003 2004 2003
---- ---- ---- ----
NET INCOME (LOSS)
PER COMMON SHARE:
Basic $ .03 $ .01 $ .05 $ (.01)
========== ========== ========== ==========
Diluted $ .03 $ .01 $ .04 $ (.01)
========== ========== ========== ==========
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING
AND SUBSCRIBED:
Basic 23,000,000 22,000,000 23,000,000 22,000,000
========== ========== ========== ==========
Diluted 26,340,986 22,000,000 26,340,986 22,000,000
========== ========== ========== ==========
See accompanying notes.
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7
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 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 1,055,897 1,055,897
--------- --------- ----------- --------- ----------- ----------- -----------
BALANCE,
JUNE 30, 2004 1,100,000 $ 55,000 23,000,000 $ 23,000 $ 1,957,160 $(4,569,644) $(2,534,484)
========= ========= =========== ========= =========== =========== ===========
See accompanying notes.
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8
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,055,897 $ (33,309)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation 89,469 93,403
Amortization 272,490 218,145
Provision for slow moving and
obsolete inventories (1,027,997) 66,202
Loss on disposal of fixed asset 2,349 0
Settlement of lawsuit 140,000 0
Changes in operating assets
and liabilities:
Accounts receivable (450,350) (755,142)
Other receivables 0 (10,155)
Inventories (440,845) (914,548)
Prepaid expenses and other assets (140,071) (34,920)
Accounts payable and accrued expenses 214,858 1,187,914
Deposits from customers 821,549 0
Accrued expenses and amounts due
to related parties 23,109 515,910
----------- -----------
Net cash provided by operating activities 560,458 333,500
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment (21,356) 0
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayment on line of credit (4,963) 0
Principal payments on long-term debt (298,839) (308,951)
----------- -----------
Net cash used by financing
activities (303,802) (308,951)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALANTS 235,300 24,549
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 157,801 199,880
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 393,101 $ 224,429
=========== ===========
(Continued)
9
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
2004 2003
---- ----
SUPPLEMENTARY DISCLOSURE
OF CASH FLOW INFORMATION:
Cash paid for interest $169,494 $215,564
======== ========
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
======== ========
Settlement of lawsuit $140,000 $ 0
======== ========
Reduction of accounts payable,
Lam Research Corporation $952,239 $ 0
======== ========
See accompanying notes.
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10
DND TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 six months ended June
30, 2004, are not necessarily indicative of the results that may be
expected for the year ended December 31, 2004. Accordingly, your 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 a variety of plasma etch and strip products manufactured on
the Matrix System One and Ten platforms. Elements of support include spare
parts and assemblies, and various engineering services.
11
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. Our
repayment terms for parts sales are net 30 days. System sales terms vary
and ASI does require advance payments on certain orders of large systems.
Interest is not accrued on overdue accounts receivables.
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.
12
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 5 and 6).
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 six months ended June 30,
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.
13
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
six months ended June 30, 2004 and 2003, the Company charged to operations
$0 and $3,300, 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 June 30, 2004,
approximately $446,846 represents deposits in excess of Federally insured
limits.
14
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 June 30,
2004, the Company had one customer whose balance was 9% of net accounts
receivable.
Significant Customers - For the six months ended June 30, 2004 and 2003,
the Company had one customer and two customers, respectively, whose
revenues exceeded 10% of total revenues (2004 - 11%; 2003 - 22% and 19%).
Revenues in 2004 outside the United States included Europe (17%) and Asia
(8%).
Significant Suppliers - For the six months ended June 30, 2004,
approximately 23% 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 June 30,
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 2003, the FASB issued a revision to FIN 46 ("FIN46R") to clarify
some of the provisions of FIN 46. The Company currently has no
15
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 June 30, 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 $1,537,911
Allowance for doubtful accounts 34,000
----------
Net accounts receivable $1,503,911
==========
At June 30, 2004, $67,135 of the Company's accounts receivable balances
were over 90 days past due.
Allowance For Doubtful Accounts:
Balance, January 1, 2004 $34,000
Additions for the year 0
Collection of accounts previously written off 0
-------
Balance, June 30, 2004 $34,000
=======
16
3. INVENTORIES
The inventories are comprised of the following:
Parts and materials $ 3,764,773
Work-in-process 841,155
Allowance for obsolescence (3,050,464)
-----------
$ 1,555,464
===========
4. PROPERTY AND EQUIPMENT
Property and equipment and accumulated depreciation at June 30, 2004
consist of:
Office, furniture, fixtures and equipment $ 354,344
Leasehold improvements 440,151
Machinery and equipment 323,938
Laboratory tools 25,833
----------
1,144,266
Less accumulated depreciation 802,754
----------
Total property and equipment $ 341,512
==========
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
==========
17
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
========== ==========
6. LICENSE AND ROYALTY PAYABLE, AXCELIS TECHNOLOGIES, INC.
In November 2003, the Company entered into an agreement with Axcelis
Technologies, 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 one time 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 declining 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 June 30, 2004 consisted of the
following:
License payable $143,514
Royalty payable 79,730
--------
Total License and Royalty Payable $223,244
========
7. NOTE PAYABLE, MERRILL LYNCH
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
18
outstanding balance of the line of credit and the existing term loan into
a new term loan. On June 18, 2004, the Order regarding Joint Stipulation
to Dismiss with Prejudice was filed in the US District Court of Arizona.
The term loan bears interest at 2.00% plus the Prime Rate as published in
the Wall Street Journal per annum. The loan is due December 2005 with
amortized payments over 45 months and a balloon payment due at maturity.
The loan also required a loan fee of $11,450. The loan is secured by a
first lien on the Company's accounts receivable and inventories and has
been guaranteed by Doug Dixon and the Company.
Estimated amortization of the loan fee is as follows:
December 31, 2004 $ 3,368
December 31, 2005 8,082
-------
$11,450
=======
Future minimum payments under the term loan are as follows:
Total Principal
Payments Portion
-------- -------
December 31, 2004 $ 327,807 $ 270,402
December 31, 2005 860,392 835,789
---------- ----------
$1,188,199 $1,106,191
========== ==========
8. NOTES PAYABLE, OTHER
A note payable, bearing interest at 12% was due $200,000
in 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).
Legal representatives of the Cartier estate have
agreed to accept two equal payments of $100,000
each, payable on September 30, 2004 and December
31, 2004.
Various unsecured demand notes due to an individual
with interest accruing at 7% 289,350
--------
Total (all current) $489,350
========
9. CAPITAL LEASES PAYABLE
19
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 $ 13,558
December 31, 2005 21,642
December 31, 2006 7,008
Thereafter 11,704
--------
Total 53,912
Less amount representing interest (8,031)
--------
Present value of future minimum lease payments 45,881
Less current portion (21,960)
--------
Long-term portion $ 23,921
========
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 an expense of the
entire settlement payable to the employee, $140,000. 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
On June 25, 2004, the Company signed an amendment to the November 2002
Asset Purchase and License Agreement with Lam Research Corporation that
calls for payments of the inventory purchase (See Note 5) to be paid as
follows:
The spares inventory payment plan calls for $871,596
30 monthly installment payments of $28,220 beginning
August 1, 2004 and ending January 1, 2007 with an
additional payment of $90,000 due by September 30,
2004. Additional inventory transfers of $65,000
are scheduled to take place in August 2004 and will
be added to this outstanding balance for a
20
total of $936,596.
The product group inventory payment plan calls for 169,274
18 monthly installments of $9,404 beginning August 1, ----------
2004 and ending January 1, 2006.
Total $1,040,870
==========
Future minimum payments per the agreement are as follows:
December 31, 2004 $ 278,120
December 31, 2005 451,487
December 31, 2006 311,263
----------
$1,040,870
==========
12. AMOUNTS DUE TO RELATED PARTIES
The due to related parties at June 30, 2004 consists of the following:
Notes payable to Chairman of Company at 7.0% $120,000
Accrued interest on notes payable 38,646
Accrued officer's salaries 280,160
--------
Total Amount Due To Related Parties $438,806
========
13. INCOME TAXES
Provision (Benefit)
The provision for income taxes for the six months ended June 30, 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 June 30, 2004:
Net operating loss carryforwards $ 719,300
Timing difference for expense deductions 53,200
-----------
772,500
Less valuation allowance (772,500)
-----------
Net deferred tax assets $ 0
===========
Summary of valuation allowance:
Balance, January 1, 2004 $ 1,083,000
Reduction for the six months ended June 30, 2004 (310,500)
-----------
Balance, June 30, 2004 $ 772,500
===========
21
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, 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 June 30, 2004 (1,148,133) (134,299) (1,282,432)
---------- ---------- ----------
$3,596,370 $ 0 $3,596,370
========== ========== ==========
$360,063 of DND Technology, Inc.'s loss can only be used to offset income
derived by that company.
15. COMMITMENTS AND CONTINGENCIES
Warranty Reserve
22
A summary of warranty reserve is as follows:
Balance, January 1, 2004 $ 46,622
Additions for the period 201,000
Warranty expenses applied to reserve 33,478
Reduction of reserve for expired warranties 27,960
--------
Balance, June 30, 2004 $186,184
========
Real Estate Leases
The Company leases its Arizona and Texas facilities under operating leases
which require monthly payments of $14,424 and $9,762 and 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
==========
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
23
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.
A summary of the option activity for the six months ended June 30, 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 165,000 $ .06
---------
Options outstanding at June 30, 2004 4,609,226
=========
4,204,226 shares are exercisable at June 30, 2004.
Information regarding stock options outstanding as of June 30, 2004 is as
follows:
Price $.06
Weighted average exercise price $.06
Weighted average remaining contractual life 9 years, 1 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:
24
Net income:
As reported $1,055,899
Proforma $1,045,220
Net Income per common stock share:
Basic:
As reported $.05
Proforma $.05
Diluted:
As reported $.04
Proforma $.04
17. MANAGEMENT PLANS IN REGARDS TO GOING CONCERN
Management's plans include, but are not limited to, final execution of the
negotiated long-term payment plan for the Merrill Lynch line of credit,
increasing revenue by continuing to expand the legacy product lines,
obtaining additional equity or debt financing from investors, and
increasing revenue by capturing greater market share through aggressive
sales efforts.
18. SUBSEQUENT EVENT
On August 2, 2004, the Company entered into an additional agreement with
Axcelis Technologies, Inc. acquiring an exclusive license to manufacture,
sell and provide services and parts support for certain reactive ion etch
semiconductor manufacturing equipment for wafer sizes up to 200mm formerly
marketed by Matrix Integrated Systems, Inc., and Axcelis Technologies,
Inc. under the trade names of "Bobcat 209" or "Cheetah" (limited to such
equipment that includes at least one reactive ion etch chamber). The
agreement provides for a quarterly payment equal to 18% of net revenues
from the sale of this product by the company, beginning with the fourth
quarter of 2004 and ending December 31, 2011, or until $750,000 (the
license fee) has been paid, whichever occurs first, and payment of a
declining royalty on related sales from 10% down to 2% over a period of
time that ends December 31, 2011.
25
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 and provider of
after-market support of semiconductor manufacturing equipment which currently
includes Lam AutoEtch, Rainbow, and TCP plasma etch systems, and plasma etch and
strip 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 stockholder's deficit. 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. Obtain additional equity or debt financing from investors.
2. Increase revenue by capturing greater market share through
aggressive sales efforts in a recovering market economy.
3. Expand the ASI product base by obtaining rights to other
legacy products, thereby increasing revenue.
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.
26
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 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
The Company accounts for stock-based compensation under APB Opinion No.
25, under which no compensation expense has been recognized for stock options.
27
Selected Financial Information
Three Months Ended
6/30/2004 6/30/2003 Increase
--------- --------- --------
(Unaudited) (Unaudited) (Decrease)
----------- ----------- ----------
Statements of Operations
Total Revenue $ 3,737,534 $ 2,454,668 $ 1,282,866
----------- ----------- -----------
Cost of Revenue:
Costs of revenues 2,526,313 1,588,759 937,554
Reserve for slow moving and
Obsolete inventory (800,668) (49,232) (751,436)
----------- ----------- -----------
Total Cost of Revenues 1,725,645 1,539,527 186,118
----------- ----------- -----------
Percentage of Sales 46% 63%
Gross Profit 2,011,889 15,141 1,096,748
----------- ----------- -----------
Percentage of Sales 54% 37%
Operating Expenses:
Research and development 16,656 13,987 2,669
Sales and marketing 551,328 257,210 294,118
General and administrative 566,056 450,168 115,888
----------- ----------- -----------
Total Operating Expenses 1,134,040 721,365 412,675
----------- ----------- -----------
Income (Loss) from Operations 877,849 93,776 684,073
----------- ----------- -----------
Other Income (Expense):
Interest Expense (84,333) (112,166) 27,833
Other Income 0 (223) 223
----------- ----------- -----------
Total Other Income (Expense) (84,333) (112,389) 28,056
----------- ----------- -----------
Income (Loss) Before Income Tax Expense 793,516 81,387 712,129
Income Tax Expense 0 2,932 (2,932)
----------- ----------- -----------
Net Income (Loss) $ 793,516 $ 78,455 $ 715,061
=========== =========== ===========
Net (Loss) Per Share
Basic .03 .01 .02
Diluted .03 .01 .02
Results of Operations
Three Months Ended June 30, 2004 Compared To Three Months Ended June 30, 2003.
Revenues
Our revenue increase of $1,282,866, or 52%, was due to an increase in
sales from customers who are purchasing additional capital equipment capacity to
meet the demands of a recovering economy. Our sales increase by segment is as
follows:
June 30, 2004 June 30, 2003 Increase
(Unaudited) (Unaudited) (Decrease)
------------- ------------- ------------
Systems and chillers $ 2,074,235 $ 900,963 $ 1,173,272
Parts, assemblies
and consumables 1,619,561 1,393,612 225,949
Field service and training 43,738 160,093 (116,355)
------------ ------------ ------------
$ 3,737,534 $ 2,454,668 $ 1,282,866
============ ============ ============
28
Cost of Revenues - Recurring Operations
Our cost of revenues for recurring operations increased $937,554 or 59%.
This increase is primarily the result of costs associated with increased
revenues in 2004. Our cost of revenues as a percentage of revenues increased
from 64% in 2003 to 67% in 2004. This increase in percentage is primarily due to
lower than expected margins earned on the sale of certain customized systems as
a consequence of planning inefficiencies and higher than expected cost for parts
and system cores that were required to meet aggressive delivery schedule demands
from our customers. We expect to reduce costs through better planning and
improved cost projections on customized systems.
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. Based on our
analysis in the second quarter of 2004, we recorded a $962,758 decrease in our
reserve primarily as a result of signing an amendment to the November 2002 Lam
Asset Purchase and License Agreement and re-valuing the corresponding inventory.
This amount was offset by a $162,090 increase to the reserve due to an analysis
of all other inventory items. Thus the net change was a decrease of $800,668.
Research and Development
Research and development costs increased $2,669 or 19% in the three months
ended June 30, 2004. The increase is related to a $2,000 increase in payroll and
employee benefits. We normally do not incur significant research and development
expenses.
Sales and Marketing
Sales and marketing costs increased $294,118 or 114% in the three months
ended June 30, 2004. The increase is primarily related to the Axcelis license
and royalties of $166,000 which began in December 2003 and commissions of
$109,000 which are increasing with the increase in system sales.
General and Administrative
Three Months Ended
6/30/2004 6/30/2003 Increase
--------- --------- --------
(Unaudited) (Unaudited) (Decrease)
----------- ----------- ----------
General and Administrative
Salaries and wages $ 225,972 $ 150,529 $ 75,443
Professional fees 101,961 136,422 (34,461)
Rent, less amount allocated to Cost of Revenue 45,859 44,656 1,203
Other general and administrative expenses 192,264 118,561 73,703
------------ ------------ ------------
Total General and Administrative $ 566,056 $ 450,168 $ 115,888
============ ============ ============
Salaries and wages increased approximately $75,443 or 50% in the three
months ended June 30, 2004 as compared to the three months ended June 30, 2003.
This increase resulted from the hiring of two new employees of $26,000; pay
reductions for certain managerial personnel not applicable to fiscal 2004 as
they were in fiscal 2003 of $18,000; and general pay increases and adjustments
to the payroll accrual of $31,000.
Professional fees decreased in 2004 in the amount of $34,461 primarily due
to the integration of our accounting and inventory/production control systems
that was completed in the first quarter of 2003, which cost $22,000. Consulting
related to financing activities decreased by $33,000 and other consulting
decreased by $15,000. These decreases were offset by increased legal expenses of
$28,000 related to litigation ultimately settled by the Company.
29
Net Income
We had net income of $793,516 for the three months ended June 30, 2004,
compared to net income of $78,455 for the three months ended June 30, 2003. The
substantial increase in net income is primarily the result of a $800,668 net
decrease in our reserve for slow moving and obsolete inventory, plus the
additional gross profit dollars realized from increased sales, which was offset
by increases in commissions and royalties.
Selected Financial Information
Six Months Ended
6/30/2004 6/30/2003 Increase
--------- --------- --------
(Unaudited) (Unaudited) (Decrease)
----------- ----------- ----------
Statements of Operations
Total Revenue $ 7,028,309 $ 4,151,638 $ 2,876,671
----------- ----------- -----------
Cost of Revenue:
Costs of revenues 4,456,468 2,645,233 1,811,235
Reserve for slow moving and
Obsolete inventory (800,668) (66,202) (734,466)
----------- ----------- -----------
Total Cost of Revenues 3,655,800 2,579,031 1,076,769
----------- ----------- -----------
Percentage of Sales 52% 62%
Gross Profit 3,372,509 1,572,607 1,799,902
----------- ----------- -----------
Percentage of Sales 48% 38%
Operating Expenses:
Research and development 31,843 30,108 1,735
Sales and marketing 967,860 493,872 473,988
General and administrative 997,653 879,515 118,138
----------- ----------- -----------
Total Operating Expenses 1,997,356 1,403,495 593,861
----------- ----------- -----------
Income (Loss) from Operations 1,375,153 169,112 1,206,041
----------- ----------- -----------
Other Income (Expense):
Interest Expense (178,456) (202,421) 23,965
Lawsuit Settlement (140,000) 0 (140,000)
----------- ----------- -----------
Total Other Income (Expense) (318,456) (202,421) (116,035)
----------- ----------- -----------
Income (Loss) Before Income Tax Expense 1,056,697 (33,309) 1,090,006
Income Tax Expense (Benefit) 800 0 800
----------- ----------- -----------
Net Income (Loss) $ 1,055,897 $ (33,309) $ 1,089,206
=========== =========== ===========
Net (Loss) Per Share
Basic .05 (.01) .06
Diluted .04 (.01) .05
Results of Operations
Six Months Ended June 30, 2004 Compared To Six Months Ended June 30, 2003.
Our revenue increase of $2,876,671, or 69%, was due to an increase in
sales from customers who are purchasing additional capital equipment capacity to
meet the demands of a recovering economy. Our sales increase by segment is as
follows:
30
June 30, 2004 June 30, 2003 Increase
(Unaudited) (Unaudited) (Decrease)
------------- ------------- ------------
Systems and chillers $ 3,808,101 $ 1,043,464 $ 2,764,637
Parts, assemblies
and consumables 3,126,785 2,904,790 221,995
Field service and training 93,423 203,384 (109,961)
----------- ----------- -----------
$ 7,028,309 $ 4,151,638 $ 2,876,671
=========== =========== ===========
Cost of Revenues - Recurring Operations
Our cost of revenues for recurring operations increased $1,811,235 or 68%.
This increase is directly related to the 69% increase in total revenue for the
six months ended June 30, 2004. Our cost of revenues as a percentage of revenues
for the six months ended June 30, 2004 was 63.4% as compared to 63.7% for the
six months ended June 30, 2003.
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. Based on our
analysis in the second quarter of 2004, we recorded a $962,758 decrease in our
reserve primarily as a result of signing an amendment to the November 2002 Lam
Asset Purchase and License Agreement and re-valuing the corresponding inventory.
This amount was offset by $162,090 increase to the reserve due to an analysis of
all other inventory items. Thus the net change was a decrease of $800,668.
Research and Development
Research and development costs increased $1,735 or 6% in the six months
ended June 30, 2004. The increase primarily related to a $2,700 increase in
payroll/benefits. We normally do not incur significant research and development
expenses.
Sales and Marketing
Sales and marketing costs increased $473,988 or 96% in the six months
ended June 30, 2004. The increase is primarily related to the Axcelis license
and royalties of $234,000 which began in December 2003 and commissions of
$195,000 which are increasing with the increase in system sales.
General and Administrative
Six Months Ended
6/30/2004 6/30/2003 Increase
--------- --------- --------
(Unaudited) (Unaudited) (Decrease)
----------- ----------- ----------
General and Administrative
Salaries and wages $ 396,556 $ 310,236 $ 86,320
Professional fees 183,076 240,315 (57,239)
Rent, less amount allocated to Cost of Revenue 104,632 89,992 14,640
Other general and administrative expenses 313,389 238,972 74,417
------------ ------------ ------------
Total General and Administrative $ 997,653 $ 879,515 $ 118,138
============ ============ ============
Salaries and wages increased approximately $86,320 or 28% in the six
months ended June 30, 2004 as compared to the six months ended June 30, 2003.
This increase is primarily the result of the hiring of additional employees in
fiscal 2004 of $48,000; pay reductions for selected managerial personnel not
applicable to fiscal 2004 as they were in fiscal 2003 of $36,000; general pay
increases and adjustments to the payroll accrual of $31,000; and a decrease for
the loss of one employee in 2004 of ($24,000).
31
Professional fees decreased in 2004 in the amount of $57,239 primarily due
to the integration of our accounting and inventory/production control systems
that was completed in the first quarter of 2003, which cost $32,000; a decrease
in accounting fees of $22,000 due to our improvements in delivering financial
information to our outside independent auditor thus decreasing our reliance on
outside consultants; a decrease of $52,000 in consulting fees, with $33,000
coming from non-recurring fiscal 2003 expenses and $15,000 from a credit taken
in fiscal 2004 to reverse a September 2003 accrual no longer needed. These
decreases were offset by increased legal fees of $42,000 related to litigation
ultimately settled by the Company.
Other general and administrative expenses increased $74,417. The increased
expenses are attributable to travel costs of $28,000 incurred in 2004 for our
new CEO to work in both our Arizona and Texas locations, and the purchase of
supplies and delayed maintenance of our facilities (due to our cash flow
problems in 2003) amounting to $45,000.
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 net income of $1,055,897 for the six months ended June 30, 2004,
compared to a net loss of $33,309 for the six months ended June 30, 2003. The
large increase in net income is primarily the result of a $800,668 decrease in
our reserve for slow moving and obsolete inventory, plus improved operating
efficiencies achieved through a higher level of business activity, offset by an
increase in commissions and royalties due to the increased sales for the six
months ended June 30, 2004.
Capital Resources
Six Months Ended
----------------
Working Capital 6/30/2004 6/30/2003 Increase
- --------------- --------- --------- --------
(Unaudited) (Unaudited) (Decrease)
----------- ----------- ----------
Current Assets $ 3,637,177 $ 5,296,606 $(1,659,429)
Current Liabilities (5,504,696) (6,889,214) 1,384,518
----------- ----------- -----------
Deficit Working Capital $(1,867,519) $(1,592,608) $ (274,911)
=========== =========== ===========
Long-term Debt $(4,668,132) $(3,805,557) $ (862,575)
=========== =========== ===========
Stockholders' (Deficit) $(2,534,484) $ (942,431) $ 1,592,053
=========== =========== ===========
Statements of Cash Flows Select Information
Six Months Ended
6/30/2004 6/30/2003
--------- ---------
(Unaudited) (Unaudited)
----------- -----------
Net Cash Provided (Used) By:
Operating Activities $ 560,458 $ 333,500
Investing Activities $ (21,356) $ 0
Financing Activities $ (303,802) $ (308,951)
Operating Activities
For the six months ended June 30, 2004, cash provided by operating
activities of $560,458 was primarily attributed to an increase in income from
operations, net of non-cash items, totaling $532,208 and an increase in accounts
payable and accrued expenses of $214,858 and an increase in deposits from
customers in the amount of $821,549, which also relate to our increase in
overall activity. These increases were partially offset by an increase in
32
accounts receivable of $450,350, and an increase in inventories of $440,845. The
increase in accounts receivable relates principally to the increased sales in
the second quarter of 2004. The increase in inventories relates to our increased
production relating to our increased sales and backlog during the same quarter.
For the six months ended June 30, 2003, cash provided by operating
activities of $333,500 was primarily due to an increase in income from
operations, net of non-cash items, totaling $344,441 and an increase in accounts
payable and accrued expenses of $1,187,914 and an increase in accrued expenses
and amounts due to related parties of $515,910, which related directly to our
cash flow problems during this period which forced us to delay payments. These
increases were partially offset by the increase in accounts receivable of
$755,142 relating to increased sales in the second quarter and increase in
inventories of $914,548, which related to additional shipments received from
Lam.
Investing Activities
During the six months ended June 30, 2004, cash was used by investing
activities for minor purchases of equipment. No cash was used or provided by
investing activities in the six months ended June 30, 2003.
The Company currently has no material commitments for capital
expenditures.
Financing Activities
Financing activities in the six months ended June 30, 2004 used $298,839
as compared to $308,951 in the six months ended June 30, 2003 for the repayment
of long-term debt. In the six months ended June 30, 2004 we also experienced a
net repayment on our line of credit in the amount of $4,963.
We have $2,538,528 and $4,668,132 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 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 operating losses we
experienced in 2002 and 2003. We attribute these 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 the first six months of 2004, we are now
experiencing improved liquidity with the sale of a greater number of products,
and the related significant increase in customer deposits.
To date, we have financed our business 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 were 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. Interest of $24,000 has now been paid,
and the Cartier estate has agreed to accept two equal payments of $100,000 each
on September 30 and December 31 of 2004.
Our bank line of credit with Merrill Lynch Business Financial Services,
Inc. matured on April 1, 2002. Interest accrued at Libor plus 2.75% or an
effective rate of 5.84% at June 30, 2004. The note is secured by a first lien on
our accounts receivable and inventories that amounted to approximately
$3,059,000 at June 30, 2004 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 it 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 an estimated balance of $1,145,000, requires payments for
a term of 17 months at an interest rate of two percent (2%) plus the prime rate
with principal amortized over a 45 month period 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
33
final execution by the parties but management has no reason to believe that the
settlement agreement will not be executed.
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 term as a fee for the licensed
intellectual property.
On June 25, 2004, the Company signed an amendment to the November 2002
Asset Purchase and License Agreement with Lam Research, which, among other
things, restructured the terms of payment for the inventory purchases made as a
part of the original agreement. Under the new terms, the Company will pay a
revised balance of $871,596 for the original inventory purchases in 30 equal
installment payments of $28,220, beginning August 1, 2004 and ending January 1,
2007, with an additional payment of $90,000 due by September 30, 2004.
Additional inventory transfers of $65,000 are scheduled to take place in August
2004, and will be added to this outstanding balance for a total of $936,596.
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 an expense of the entire settlement
payable to the employee of $140,000. Payments in the amount of $10,000 per month
begin September 1, 2004 and continue until October 1, 2005, without interest.
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 provided 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 then payment of a
declining royalty on related sales from 10% down to 2% over a period of time
that ends December 31, 2010.
On August 2, 2004, the Company entered into an additional agreement with
Axcelis Technologies, Inc., acquiring an exclusive license to manufacture, sell
and provide services and parts support for certain reactive ion etch
semiconductor manufacturing equipment for wafer sizes up to 200mm formerly
marketed by Matrix Integrated Systems, Inc. and Axcelis Technologies, Inc. under
the trade names of "Bobcat 209" and "Cheetah" (limited to such equipment that
includes at least one reactive ion etch chamber). The agreement provides for a
quarterly payment equal to 18% of net revenues from the sale of this product by
the Company, beginning with the fourth quarter of 2004 and ending December 31,
2011, or until $750,000 (the license fee) has been paid, whichever occurs first,
and payment of a declining royalty on related sales from 10% down to 2% over a
period of time that ends December 31, 2011.
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 maintaining sufficient gross profit margins to service our
substantial indebtedness.
Our current obligations consist of a total of $200,000 due by the end of
December 2004 to the Cartier estate, approximately $1.1 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, maintain profit margins, expand our product base and obtain additional
financing, we cannot be certain that we will meet these obligations.
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.
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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 publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
Risk Factors
You should consider the following discussion of risks as well as other
information regarding our operations. The risks and uncertainties described
below are not the only ones. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may impair our business
operations.
o We depend on Douglas Dixon, our CEO of DND, 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 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 uncertainty about out
ability to continue as a going concern, which may hinder our ability
to obtain future financing.
o Our substantial increase in gross profit primarily occurred as a
result of the decrease in our reserve for obsolete inventory and is
unlikely to continue at the same magnitude in the third and fourth
quarters.
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 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
35
and our principal financial officer concluded that the design and operation of
our disclosure controls and 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 have been no changes in our internal control over
financial reporting identified in connection with the evaluation that occurred
during the last fiscal quarter that have materially affected, or that are
reasonably likely to materially affect, our internal control over financial
reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Settlement Agreement with Merrill Lynch, which was disclosed in our
Form 10-QSB for the quarter ended March 31, 2004, still remains subject to final
execution by the parties. The Company has anticipated signing since June 2004
but is still awaiting execution by Merrill Lynch.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.10 License Agreement, dated August 2, 2004, between Aspect
Systems, Inc. and Axcelis Technologies, Inc.
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 May 28, 2004, we filed two Current Reports on Form 8-K - one of
the reports announced the appointment of G. Dennis Key as Aspect
Systems, Inc.'s CEO and the second report announced our operating
results for the first quarter of 2004.
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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: August 16, 2004
DND TECHNOLOGIES, INC., a Nevada corporation
By: /s/ Douglas N. Dixon
--------------------------------------------
Douglas N. Dixon, CEO and Director
38