Annual Report — Small Business — Form 10-KSB Filing Table of Contents
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Issuer's
telephone number, including area code: (480) 892-7020
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01
per share
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. o
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
x Yes o No
Check
if
disclosure of delinquent filers in response to Item 405 of Regulation S-B is
not
contained in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to
this Form 10-KSB. o
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act): o Yes x No
The
issuer's total revenues for the fiscal year ended December 31, 2006 were
$7,090,982.
As
of
April 11, 2007, there were 26,234,653 outstanding shares of the issuer's common
stock, par value $0.001 per share ("Common Stock"), which is the only class
of
common stock of the issuer. As of April 11, 2007, the aggregate market value
of
the shares of Common Stock held by non-affiliates of the issuer, computed based
on the closing bid price of the Common Stock as quoted on the OTC Bulletin
Board, was approximately $161,414.
Transitional
Small Business Disclosure Format: o Yes
x No
TABLE
OF CONTENTS
Page
PART
I
1
Item
1.
Description
of Business
1
Item
2.
Property
9
Item
3.
Legal
Proceedings
9
Item
4.
Submission
of Matters to a Vote of Security Holders
10
PART
II
10
Item
5.
Market
for Common Equity and Related Stockholder Matters
10
Item
6.
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
11
Item
7.
Financial
Statements
29
Item
8.
Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure
29
Item
8A.
Controls
and Procedures
29
Item
8B.
Other
Information
30
PART
III
30
Item
9.
Directors
and Executive Officers; Corporatate Governance; Compliance with Section
16(a) of the Exchange Act
30
Item
10.
Executive
Compensation
32
Item
11.
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
35
Item
12.
Certain
Relationships and Related Transactions, and Director
Independence
36
Item
13.
Exhibits,
Financial Statements and Reports on Form 8-K
36
Item
14.
Principal
Accountant Fees And Services
37
CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES
F-1
Report
of Independent Auditors
F-1
PART
I
ITEM
1.
DESCRIPTION
OF
BUSINESS
Unless
the context otherwise requires, "DND", "Company", "we", "us" and "our" refer
to
DND Technologies, Inc., and its subsidiary, Aspect Systems, Inc.,
combined.
Overview
DND
Technologies, Inc., a Nevada corporation,
began
operations under the name “DND Technologies, Inc.” on August 2, 2002, following
the merger of a wholly owned subsidiary of Zurickirch Corp., a Nevada
corporation,
with
Aspect Systems, Inc., an Arizona corporation incorporated in 1990 then named
“Aspect Semiquip International, Inc.” (“ASI”).
Following the merger, ASI became a wholly owned subsidiary of DND. Zurickirch
was incorporated in Nevada on May 9, 1997 as “Weston Caribbean Corp”. On March9, 2000, its name was changed to “Zurickirch Acquisitions, Inc.” and on April17, 2000, its name was changed to Zurickirch Corp. Prior
to
the merger, Zurickirch began initial marketing studies for its planned business,
which was to sell specialty health and nutritional products. Zurickirch was
unsuccessful in launching this business, and began seeking possible merger
candidates by the end of 2001. The purpose of the merger was to allow DND access
to the public capital markets and to allow Zurickirch to preserve some
shareholder value following the failure of its proposed business.
DND,
through ASI, provides capital equipment to the semiconductor industry for use
in
the manufacture of microchip technology, and is a manufacturer and supplier
of
parts and contract services to the semiconductor industry. In March of 2001,
ASI
acquired Semiquip, Inc. Semiquip, based in Texas, was a supplier of
reconditioned assemblies, and a provider of service programs specific to major
semiconductor fabrication equipment used in the manufacture of computer chips
and other semiconductor devices.
Aspect
Systems, Inc., a wholly-owned subsidiary of DND Technologies, Inc. is
a
global provider of specialized equipment, parts and support services to the
semiconductor industry. ASI is the original equipment manufacturer of Advanced
AutoEtch
equipment previously designed and manufactured by Lam Research. Through
exclusive license agreements negotiated with Axcelis Technologies, ASI has
also
become the original equipment manufacturer of plasma etch and strip products
manufactured on the ASI MX-1 and ASI MX-10, and the Arista and Arista Dual
platforms. Additionally, ASI offers new
and
refurbished support products including a
wide
array
of
sub-assemblies, both consumable and non-consumable repair and process related
parts, and remanufactured
temperature control units that
are
designed to maintain critical operating temperatures for the plasma systems.
Engineering and training services are also made available to its international
customer base. The most significant portion of ASI revenue, however, is derived
from the marketing and sale of remanufactured Rainbow and TCP plasma etch
systems and the ASI MX and Arista system products. ASI has a website located
at
www.aspectsys.com.
Information on this website is not a part of this report.
Semiconductor
Industry Background
Semiconductor
chips, also known as integrated circuits, are used in personal computers,
telecommunication equipment, digital consumer electronics, wireless
communication products and other applications. Types of semiconductor chips
include memory chips (which store and retrieve information), microprocessors
(general purpose logic devices programmable to take instructions from software)
and "system on chip" devices (which have both logic and memory features). Most
semiconductor chips are built on wafers of silicon that may be as much as twelve
inches in diameter. Each semiconductor chip is made up of millions of tiny
transistors or "switches" to control the functions of the device. The
transistors are created by forming electrically active regions beneath the
silicon surface to inhibit or prohibit electrical current flow. Later, metal
interconnections are formed on top of the silicon that connects the transistor
components together.
1
Semiconductor
chip manufacturers utilize many different types of process tools in the making
of integrated circuits. There are over 300 process steps utilizing over 50
different types of process tools required in the making of a single device
like
a microprocessor. Semiconductor chip manufacturers seek efficiency improvements
through increased throughput, equipment utilization and higher manufacturing
yields. Capacity is added by increasing the amount of manufacturing equipment
in
existing fabrication facilities and by constructing new fabrication facilities.
During the period from early 1999 through 2000, semiconductor manufacturers
met
the increased demand for chips mostly by building new fabrication facilities,
and by making additional equipment purchases to expand existing fabrication
facilities. The significant number of new and expanded fabrication facilities
coupled with the severe downturn in demand for electronic devices from 2001
through most of 2003, had a severe adverse impact on the semiconductor industry
and on suppliers to the semiconductor industry. According to Gartner Dataquest,
a firm that studies business trends in the chip industry, beginning in late
2003, demand for semiconductor chips began to revive, which led to increases
in
capital expenditures during 2004 and 2005, and continuing into 2006.
Over
the
past twenty years, the semiconductor industry has grown rapidly as a result
of
increasing demand for personal computers, the expansion of the Internet and
the
telecommunications industry, and the emergence of new applications in consumer
electronics. More recently, growth has slowed, and there are signs that the
industry may be beginning to mature. While unit demand for semiconductor devices
continues to rise, the average selling prices are declining. There is increasing
pressure on chipmakers to reduce manufacturing costs while increasing the value
of their products at the same time. The semiconductor industry has also been
cyclical in nature over its history, with periods of rapid expansion followed
by
periods of over-capacity.
Several
technological trends characterize semiconductor manufacturing. Perhaps the
most
prominent of these trends is increasing density. Moore's Law, first postulated
in the mid-1960s and still accurate 40 years later, states that the density
of circuitry on an individual semiconductor chip doubles approximately every
18 months. Today's advanced devices are being manufactured with line widths
as small as 0.13 micron and with up to eight layers of interconnect circuitry.
By increasing circuit density, manufacturers can pack more electronic components
on a chip and thereby provide higher performance and value. The next generation
of chips will likely see line widths as small as 90 nanometer (0.09 micron)
and
below, requiring even more sophisticated interconnect wiring to keep pace.
Another
trend worth noting is the transition to copper wiring in place of aluminum
as
the primary conductive material in semiconductor devices. Copper has a lower
electrical resistance value than aluminum, and this provides a number of
performance advantages. Because of the superior properties of copper, a chip
made with copper may need only half as many metal layers as one made with
aluminum. This provides a significant reduction in manufacturing cost. In
addition, copper wiring produces a significant improvement in device performance
and a significant reduction in power requirements as compared to aluminum.
A
similar
transition is underway to low-k dielectric insulators, which are replacing
traditional silicon oxide films. Low-k dielectrics are better at limiting the
capacitance that occurs between metal lines in a device. This quality is
important to the goal of smaller line widths and increasing component density.
However, low-k materials are also less stable than silicon oxide, and this
poses
a host of new challenges to the semiconductor industry in pursuing its goals
of
increased circuit density and, at the same time, lower cost of manufacture
and
higher performance and value of the manufactured product.
Periodically,
and historically every seven or eight years, the semiconductor industry adopts
a
larger silicon wafer size to achieve lower manufacturing costs. Semiconductor
manufacturers can produce more chips on a larger wafer, thus reducing the
overall manufacturing cost per chip. The majority of wafer fabrication
facilities today are using wafers with a diameter of 200 mm (8 inches). New
manufacturing equipment is required to handle 300 mm (12 inches) wafers if
a
facility wants to make the transition to these larger wafers. We currently
supply equipment for the 100 mm to 200 mm markets but management intends to
offer equipment for processing 300 mm wafers when feasible. The customer base
for semiconductor manufacturing equipment is also changing. Given the magnitude
of the investment needed to build a new wafer fabrication facility (often
referred to as a "fab"), which today exceeds $1 billion and can be as high
as $3
billion or more for a new 300 mm fab, contract semiconductor manufacturers,
or
foundries, have emerged. Foundries provide out-sourced manufacturing of chips
for chip designers and device manufacturers who may use foundries for all or
part of their chip manufacturing requirements. Foundries, which are
predominantly located in Taiwan and Singapore, have become significant
purchasers of semiconductor manufacturing equipment. New foundries are being
built in China to compete with Taiwan and Singapore as more chip production
is
being outsourced. China is predicted to be one of the fastest growing regions
for semiconductor manufacturing. According to Gartner Dataquest, the high cost
of building a new fab has prompted many companies to seek refurbished equipment,
which we include in our product offerings, rather than always purchasing new
(and significantly more expensive) equipment.
2
Chip
Industry
Most
chips are built on a silicon wafer base and include a variety of circuit
components, such as transistors and other devices, that are connected by
multiple layers of wiring (interconnects). As the density of the circuit
components is increased to enable greater computing power in the same or smaller
area, the complexity of building the chip also increases, necessitating the
formation of smaller structures and more intricate wiring schemes. To build
a
chip, the transistors, capacitors and other circuit components are first created
on the surface of the wafer by performing a series of processes to deposit
and
remove selected film layers. Similar processes are then used to build the layers
of wiring structures on the wafer. A typical, simplified process sequence for
building the wiring portion of copper-based chips involves initially depositing
a dielectric film layer onto the base layer of circuit components using a
chemical vapor deposition (CVD) system. An etch system is then used to create
openings and patterns in the dielectric layer. This etch process defines line
widths and other microscopic features on integrated circuits, with plasma
etching utilizing ions and neutral species that react with exposed portions
of
the wafer surface to remove dielectric, metal or polysilicon material and
produce the finely delineated features and patterns of an integrated circuit.
These etch processes are repeated numerous times during the wafer fabrication
cycle and are required to manufacture every type of semiconductor device
produced today. We sell and service a variety of plasma products that are used
to accomplish the goals of these processes.
Residue
is then removed through a process called "dry strip" or "ashing." We sell and
service certain machines that perform the dry strip process. To form the metal
wiring, openings and patterns etched in the dielectric layer are subsequently
filled with conducting material using physical vapor deposition (PVD) and/or
electroplating technologies. A chemical mechanical polishing (CMP) step then
polishes the wafer to maintain a flat surface for future processing. Additional
deposition, etch and CMP steps are then performed to build up the layers of
wiring needed to complete the interconnection of the circuit elements to form
the chip. Advanced chip designs require about 500 steps involving these and
other processes to complete the manufacturing of the wafer.
Our
Operating Subsidiary
Organized
in 1990, our operating subsidiary, ASI, manufactures markets and services
semiconductor wafer fabrication equipment for the worldwide semiconductor
industry. Customers for ASI's products include semiconductor integrated circuit
(or chip) factories or foundries, which either use the chips they manufacture
in
their own products or sell them to other companies for use in advanced
electronic components.
3
Our
Market Niche and Growth Strategy
ASI
provides new and used equipment, parts and engineering services to the
semiconductor industry. The semiconductor industry itself has historically
been
highly cyclical and capital intensive. Many semiconductor manufacturers are
now
choosing to meet increased production demands by upgrading, refurbishing or
reconfiguring their existing equipment, or by purchasing rebuilt and
reconfigured current generation products rather than buying new state-of-the-art
equipment, which is substantially more costly, and oftentimes unnecessary to
the
attainment of their immediate goals. As the cost of new equipment continues
to
rise, management believes this will cause an increase in the demand for our
refurbished equipment and services.
In
November 2002, through a licensing agreement with Lam, ASI was granted OEM
rights to manufacture and support the Lam AutoEtch and Drytek plasma etch
products, adding additional sales and market share potential to the AutoEtch
refurbishing and after market support business upon which ASI had been founded.
On June 25, 2004, the Company signed an amendment to the November 2002 Asset
Purchase and License Agreement with Lam Research in an attempt to resolve
certain contract issues between the two parties. This amendment, among other
things, restructured the terms of the payment for the inventory purchases made
as a part of the original agreement. On March 6, 2006, ASI received a
termination notice from Lam. During
the second quarter of 2006, the Company filed a lawsuit against Lam as a result
of long-standing contract disputes between Aspect and Lam.Management
is convinced that the complaint is justified, and that the Company
has suffered substantial damages. The lawsuit has been removed to
federal court and a trial date set in December 2007.
The
Company’s going concern issue and pending litigation with Lam have impacted our
sales, as certain of our customers are now reluctant to order systems from
us,
believing that there is a risk that any deposit may be lost if we are unable
to
continue operations. This circumstance greatly hampers our ability to capitalize
on the opportunities of a growing market. As of August 1, 2006, the Company
has
not been permitted by Lam to order parts from it.
In
December 2003, through a similar and exclusive licensing agreement with Axcelis
Technologies, Inc., ASI gained OEM rights to manufacture and support plasma
etch
and strip products manufactured on the ASI MX-1 and ASI MX-10 (formerly Matrix
System One and Ten) platforms. ASI is now accepting orders for both new and
refurbished ASI MX-1 and ASI MX-10 products manufactured to original
manufacturer specifications. 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 the
Arista and Arista Dual (formerly Matrix Bobcat and Cheetah) platforms.
We
intend
to continue the expansion of our market share through aggressive promotion
of
our products and services, and by entering into contracts with other OEMs to
acquire manufacturing rights to their legacy products.
Our
Products and Product Licensing Agreements
Through
product development, and evolution of no longer protected technology, ASI has
become the original equipment provider of the Advanced AutoEtch, (formerly
manufactured by Lam Research). Through licensing agreements negotiated with
Axcelis, ASI has also become the original equipment manufacturer of plasma
etch
and strip products manufactured on the ASI MX-1 and ASI MX-10 (formerly Matrix
System One and Ten), and the Arista and Arista Dual (formerly Matrix Bobcat
and
Cheetah) platforms, which collectively accounted for approximately 50% of our
revenue in 2006. ASI also offers new and refurbished support products including
a wide array of sub-assemblies, both consumable and non-consumable repair and
process related parts, and remanufactured temperature control units that are
designed to maintain critical operating temperatures for the plasma systems,
which accounted for approximately 49% of our revenue in 2006. Engineering and
training services are also made available to its international customer base,
and accounted for approximately 1% of revenue in 2006.
4
An
Asset
Sale and License Agreement with Lam dated November 8, 2002 (the “Lam
Agreement”), granted additional market access, and certain additional rights to
manufacture and support the AutoEtch and Drytek plasma etch products, adding
sales and market share potential to the AutoEtch refurbishing and after market
support business upon which ASI had been founded. In June 2004, we signed an
amendment to the Lam Agreement, which, among other things, restructured
inventory payment terms,
and
required us to make a monthly payment of $28,220 until January 1, 2007 and
a
monthly payment of $9,404 until January 1, 2006 as payment for past purchases
under the Lam Agreement. To date,
we have
purchased approximately $2.2
million
of parts under the Lam Agreement. Under the terms of the Agreement, we are
also
required to pay approximately $5.3 million as a royalty for the licensed
intellectual property.
The
royalty payment is $56,000 per month and the final payment is due March 15,2011. To date, we have paid $1.7 million of the royalty fee. On March 6, 2006,
ASI received a termination notice from Lam. With the termination of the Lam
Agreement, our rights to use licensed intellectual property also terminated,
however, management believes that as the term of the patents underlying the
licensed intellectual property expired several years ago, the Company does
not
need a license to use this intellectual property. During
the second quarter of 2006, the Company filed a lawsuit against Lam as a result
of the long-standing contract disputes between Aspect and Lam.Management
is convinced that the complaint is justified, and that the Company
has suffered substantial damages. The lawsuit was removed to federal
court and a trial date set in December 2007.The
Company’s going concern issue and pending litigation with Lam have impacted our
sales, as certain of our customers are now reluctant to order systems from
us,
believing that there is a risk that any deposit may be lost if we are unable
to
continue operations. This circumstance greatly hampers our ability to capitalize
on the opportunities of a growing market. As of August 1, 2006, the Company
has
not been permitted to order parts from Lam.
We
entered the dry strip product market through our License Agreement with Axcelis
(the
"Axcelis Agreement")in
November 2003. This Agreement granted us an exclusive license to certain
patents
and trade secrets of Axcelis to
manufacture, use, sell, maintain and service ASI MX-1 and ASI MX-10 dry strip
semiconductor manufacturing equipment. The agreement provides
for a
one-time license 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 (from
10% down to 2%) on related sales over a calendar
schedule
that
ends December 31, 2010. Our total liability on this agreement as of December31,2006 is approximately $2.4 million.
On
August2, 2004, the Company entered into an additional agreement with Axcelis,
acquiring an exclusive license to certain
patents and trade secrets of Axcelis that we use tomanufacture,
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. under
the
trade names of “Bobcat” and “Cheetah”. 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 (from 10% down to 2%) on related sales over
a
calendar
schedule
that
ends December 31, 2011. Our
total
liability on this agreement as of December 31, 2006 is approximately
$179,000.
The
Axcelis Agreements have allowed us to provide additional products to sell,
access to a broader area of the market, and were also a significant factor
in
our revenue performance in 2006. Sales under the Lam Agreement generated only
nominal revenue in 2006. These agreements have significantly impacted our
liquidity through the required payments, although, in the case of the Axcelis
Agreements, required payments are a percentage of sales of licensed products
and
thus do not impact our liquidity to the extent of the Lam payments.
5
As
part
of the chip creation process, a light sensitive, polymer-based liquid, called
photoresist, is spread in a uniformly thin film on the wafer in a pattern
creating a “stencil” effect. Photostabilization uses ultraviolet light to
harden, or cure, the photoresist so that it is more effective in maintaining
the
desired pattern during the subsequent implant processes and etch steps (in
which
the top layer of the surface of the wafer not covered by photoresist is
removed). After these steps, the photoresist is no longer necessary and must
be
removed. The primary means of removing photoresist and residue is a process
called dry strip or ashing. Our dry strip machines, also called ashers, use
microwave and rf energy to turn process gases into plasma, which then acts
to
clean the surface of the wafer by removing the photoresist and unwanted residue.
Our dry
strip
products,
licensed from Axcelis,
provide
a cost effective alternative to purchasing the latest generation equipment
to
perform this step in the chip creation process.
In
2002,
ASI began manufacturing a proprietary product known as the "Nitrogen Clean
System" ("NCS"), which provides superior cleaning of wafer fabrication equipment
as compared to existing high efficiency particulate arresting ("HEPA")
filtration devices. One of our customers, Texas Instruments, field-tested our
NCS against competing models and elected to purchase our NCS. The superior
cleaning ability of the NCS reduces contamination of wafers and increases the
yield obtained from each wafer. This equipment provides in situ continuous
cleaning of the reaction chamber that reduces particulates thereby greatly
extending the uptime between required equipment cleaning cycles. The NCS is
adaptable to work with etch or chemical vapor deposition equipment producing
any
wafer size. We sold and installed our first NCS in 2002, and, as of March 29,2007, we had approximately 16 installed units, Eleven of these were installed
at
Texas Instruments, two at Micron/Japan and 3 at ST Microelectronics. We
completed a lengthy qualification trial of our NCS in 2005 with an overseas
customer and received a purchase order for 4 more units. However, we did
not receive any new purchase orders for NCS systems in 2006. We
believe that the NCS provides further diversification of our business, providing
a proprietary product to the semiconductor market.
Research
and Development Activities
Our
R&D expenditures were $211,532 during the 2006 fiscal year, and $166,923
during the 2005 fiscal year. These expenditures were targeted at continued
development of our NCS application, and enhancements to our existing products.
R&D expenditures increased in 2006 due to payroll and benefits and an
increase in product development costs.
The
market for semiconductor capital equipment is characterized by rapid
technological change and product innovation. Historically, we have advanced
our
technical capability through constant evolutionary improvement of our products,
and through the benefits gained from relationships with companies like Lam
and
Axcelis. The combination of these factors allow us to obtain the benefits of
newer technologies without having to invest substantial portions of our revenue
into R&D activities.
Patents
and Trademarks
We
intend
to evaluate any technology we develop on a case-by-case basis and pursue legal
protection for our technology through patent and trade secret protection where
we believe the benefits of such protection outweigh the associated costs.
Equipment produced through our outsourcing contracts with companies such as
Lam
and Axcelis is covered by whatever OEM patent protection is afforded us via
license agreements. Our registered United States patents, which are owned by
our
subsidiary, Aspect Systems, Inc., jointly with Air Products and Chemicals,
Inc.,
are: "Partial clean fluorine thermal cleaning process," Pat. No. 5,868,852
granted on February 9, 1999 with a term ending in February of 2017, and
"Diluted nitrogen trifluoride thermal cleaning process", Pat. No. 5,714,011
granted on February 3, 1998 with a term ending in February of 2015. Our
management believes that certain aspects of our proprietary technologies are
no
longer fully protected by our patents. Our subsidiary, ASI, owns the following
registered trademark: "ASI Aspect Systems, Inc." We believe that this trademark
is known and recognized within our market and is valuable to our business.
We
intend to vigorously enforce all violations of our trademark as we believe
the
goodwill associated with it is important to the development of our business.
6
Manufacturing
Our
manufacturing operation is capable of, and routinely builds, new systems, or
rebuilds/reconfigures complete plasma systems, for the markets that we serve.
Most of the assembly and testing of our products is conducted in cleanroom
environments. Prior to shipping a completed system, customer representatives
may
perform acceptance tests at our facility. After passing these acceptance tests,
the system is vacuum-bagged in a cleanroom environment and prepared for
shipment.
Certain
of the components and subassemblies included in our products are obtained from
a
single supplier or a limited group of suppliers. We believe that alternative
sources could be obtained and qualified to supply these products. Nevertheless,
a prolonged inability to obtain certain components could have an adverse
short-term effect on our operating results and could unfavorably impact our
customer relationships.
Distribution
Methods
We
sell
new and refurbished equipment and aftermarket support, which includes spare
parts sales and technical contract services. In fiscal year 2006, spare parts
and technical services accounted for approximately 46% of our total sales.
Our
revenues in 2006 were derived from sales in both the US and overseas, with
overseas sales accounting for approximately 33% of total revenues. In the U.S.,
we market and sell our products and services directly over the phone, by mail
and fax, through in-person sales calls to potential customers, and at trade
shows. The number of potential customers is limited, as we only sell to
manufacturers of computer chips, and thus we have the resources to handle
marketing internally. Our overseas marketing is conducted through marketing
representatives in Europe and Asia that stock spare parts, employ technicians,
and call on computer chip manufacturers in their area.
Sales
of
equipment are handled similarly, but are supplemented by independent sales
representatives in the U.S. who visit potential customers to market out
products, along with other manufacturers' non-competing product
lines.
Marketing,
Sales and Service
Our
marketing and sales efforts are focused on building long-term relationships
with
our customers. These efforts are supported by a team of product marketing
professionals, direct sales personnel as well as equipment and process engineers
that work closely with individual customers to develop solutions to their
processing needs. After-sales support is an essential element of our marketing
and sales programs. We maintain ongoing support relationships with our customers
and have a network of field service personnel in place throughout the United
States. We believe that comprehensive support programs and close working
relationships with customers are essential to maintaining our competitiveness
in
the marketplace.
Suppliers
and Customers
Our
major
supplier in 2005 was Lam, which accounted for approximately 21% of our inventory
purchases in 2005. In 2006 this amount decreased to 5%. We have no single
significant suppliers, and are able to change nearly all of our
suppliers, or acquire nearly all of the needed supplies and parts that are
intricate to our business from many sources. Our customers include many of
the
world's leading semiconductor manufacturers including Intel, Texas Instruments,
ST Micro, Motorola, National Semiconductor, and On-Semi. In 2006, the Company
had one customer, RF Micro Devices, accounting for more than 10% of total
revenue. In 2005, revenue from Taiwan Semiconductor Manufacturing Company and
QualCom accounted for 14.7% and 13.5%, respectively, of total revenue. Although
we do not have formal contracts with our customers, all our parts and systems
sales are covered by customer purchase orders. A material reduction in orders
from several of our larger customers, due to market or business conditions
in
the semiconductor industry, could adversely affect our results of operations
and
projected financial condition. Our business depends upon the capital
expenditures of semiconductor manufacturers, which in turn depend on the current
and anticipated market demand for integrated circuits and products utilizing
integrated circuits. During 2001 and 2002, the semiconductor industry
experienced a marked decline in demand, but the industry began to increase
capital expenditures in 2003 and 2004, a trend that has continued through 2006
as the economy began to improve, although capital expenditures remained lower
than levels in the 1990s.
7
Acquisition
Strategy
An
important element of our management strategy is to review acquisition prospects
that would complement our existing products, augment our market coverage and
distribution ability, or enhance our technological capabilities. As a result,
we
may make acquisitions of complementary companies, products or technologies,
or
we may reduce or dispose of certain product lines or technologies that no longer
fit our long-term strategies.
Competition
The
global semiconductor equipment industry is highly competitive and is
characterized by increasingly rapid technological advancements and demanding
worldwide service requirements. The Company’s ability to compete depends on its
ability to commercialize its technology and continually improve its products,
processes and services, as well as its ability to market new products that
meet
constantly evolving customer requirements. Significant competitive factors
for
succeeding in the semiconductor manufacturing equipment market include the
equipment's technical capability, productivity and cost-effectiveness, overall
reliability, ease of use and maintenance, contamination and defect control,
and
the level of technical service and support provided by the vendor. The
importance of each of these factors varies depending on the specific customer's
needs and criteria, including considerations such as the customer's process
application, product requirements, timing of the purchase and particular
circumstances of the purchasing decision. The pace of technological change
is
rapid, with customers continually moving to smaller critical dimensions, larger
wafer sizes, and adopting new materials for use in semiconductor manufacturing.
When funds are restricted, many customers will choose to repair existing
equipment or to acquire refurbished tool sets, rather than purchasing the latest
generation equipment. Sometimes, existing technology can be adapted to the
new
requirements; however, these requirements sometimes create the need for an
entirely new technical approach. The rapid pace of technological change
continually creates opportunities for existing competitors and start-ups, and
can quickly diminish the value of existing technologies.
Competition
exists for each of the Company’s products, and competitors range from small
companies that compete with a single product to companies with a large and
diverse line of semiconductor processing products. Competitors in a given
technology tend to have different degrees of market presence in the various
regional markets. Management believes that the Company is a strong competitor
and that its competitive position is based on the ability of its products and
services to continue to address customer requirements on a cost effective basis
and provide services in a timely manner.
8
Government
and Environmental Regulations
Other
than minimal environmental regulation, we are not subject to governmental
regulation of our business. We are currently not aware of any pending notices
of
violation, fines, lawsuits or investigations arising from environmental matters
that would have any material effect on our business. As we do no manufacturing,
only assembly, of our products, we are subject to a minimal number of
governmental regulations related to the management of hazardous materials,
including disposal of certain fluids and gases as part of the assembly process.
We believe that we are in compliance with these regulations and that we have
obtained all necessary environmental permits to conduct our business. We
currently have arrangements with local and state authorities that permit us
to
dispose of these fluids and gases at minimal cost. Nevertheless, the failure
to
comply with present or future regulations could result in fines being imposed
on
us, suspension of production, and cessation of our operations or reduction
in
our customers' acceptance of our products. These regulations could require
us to
alter our current operations, to acquire significant equipment or to incur
substantial other expenses to comply with environmental regulations. Our failure
to control the use, sale, transport or disposal of hazardous substances could
subject us to future liabilities.
Employees
DND
currently has two employees, our CEO and CFO. ASI had a significant lay-off
in
September 2006 and coupled with resignations lost 36 employees or over half
of its workforce during 2006. ASI had approximately 24 full-time employees
as of December 31, 2006.
ITEM
2.
DESCRIPTION
OF
PROPERTY
DND,
through its subsidiary ASI, currently leases its principal Arizona facility,
located at 375 East Elliot Road, Chandler, Arizona85225. This facility consists
of 23,264 square feet of office and warehouse space on a lease from Teachers
Insurance and Annuity Corporation, a New York corporation that runs through
November 30, 2007. ASI also leases a smaller facility in Richardson, Texas
located at 650 International Parkway, Suite 180. The facility consists of 19,855
square feet on a lease from TMT Richardson Business Center, Inc., a Delaware
corporation, that runs through November 30, 2008. Rental payments for both
facilities for the year ended December 31, 2006 were approximately
$405,000.The
Company is not affiliated with any of its lessors. The Company's management
believes that all facilities occupied by the Company are adequate for present
requirements, and that the Company's current equipment is in good condition
and
is suitable for the operations involved.
ITEM
3.
LEGAL
PROCEEDINGS
On
March6, 2006, ASI received a termination notice from Lam for ASI's agreements with
Lam described above. During the second quarter of 2006, the Company filed a
lawsuit against Lam in Arizona Superior Court, Maricopa County, as a result
of
long-standing contract disputes between Aspect and Lam. In the complaint, the
Company has alleged breach of the agreements by providing parts that were
inactive, obsolete, non-moving for years, excessive and otherwise worthless
and
various misrepresentations by Lam as to the parts to be provided, among other
claims. Management is convinced that the complaint is justified, and that the
Company has suffered substantial damages. Shortly after the filing of the
complaint, the lawsuit was removed to the U.S. District Court for the District
of Arizona. Discovery has begun in the case and a trial date of December 14,2007 has been set. Management believes that Lam is in breach of this agreement,
and as a result is seeking to write off the remaining amounts owed to Lam.
If
the Company is able to write off all or a significant portion of the
approximately $3.6 million due under the agreement, management believes our
liquidity would improve. However, there is no assurance that we will be
successful in the litigation, or that we will be ultimately able to write off
all or part of the associated debt.
9
On
April6, 2007, a complaint was filed against Aspect Systems, Inc. in the approximate
amount of $31,000 (plus interest and attorney’s fees) by an ASI sales
representative for commissions related to sales made between November 1, 2003
through 2006 in the amount of approximately $628,000. Payment of these
commissions is expected to be made over the next few months and ASI intends
to
terminate its contract with this sales representative shortly.
ITEM
4.
SUBMISSION
OF MATTERS
TO A VOTE
OF SECURITY
HOLDERS
None.
PART
II
ITEM
5.
MARKET
FOR COMMON
EQUITY
AND
RELATED
STOCKHOLDER
MATTERS
DND
had
26,234,653 shares of common stock outstanding as of April 11, 2007.
On
the
date of this report, our common stock was traded on the National Association
of
Securities Dealers Automated Quotation System Over the Counter Bulletin Board
("OTCBB") under the symbol "DNDT.OB." There is limited trading activity in
our securities, and there can be no assurance a regular trading market for
our
common stock will be sustained. We began trading on the OTCBB on
December 15, 2001. There was no trading activity in our stock from
December 15, 2001 until May of 2002. The following table sets forth, for
the periods indicated, the bid price range of our common stock.
Period
Low
High
Fourth
Quarter 2006
$
0.01
$
0.02
Third
Quarter 2006
$
0.01
$
0.03
Second
Quarter 2006
$
0.02
$
0.035
First
Quarter 2006
$
0.036
$
0.05
Fourth
Quarter 2005
$
0.04
$
0.14
Third
Quarter 2005
$
0.12
$
0.21
Second
Quarter 2005
$
0.21
$
0.40
First
Quarter 2005
$
0.15
$
0.32
Such
market quotations reflect the high and low bid prices as reported by the OTCBB.
The quotations reflect inter-dealer prices, without retail mark-up, markdown
or
commissions and may not necessarily represent actual transactions. There is
an
absence of an established trading marking for the Company's common stock, as
the
market is limited, sporadic and highly volatile, which may affect the prices
listed above.
Number
of Shareholders
The
number of beneficial shareholders of record of the Common Stock of the Company
as of the close of business on April 11, 2007 was approximately 43.
Dividend
Policy
To
date,
the Company has paid no cash dividends on its Common Stock, and does not expect
to pay cash dividends in the near term. The Company intends to retain future
earnings to provide funds for operation and growth of its business.
10
Disclosure
of Equity Compensation Plans
The
Company maintains the 2003 Stock Option Plan (the "Option Plan") and the 2005
Stock Option Plan (the “2005 Plan”), pursuant to which it may grant equity
awards to eligible persons. The Option Plan and 2005 Plan allow the Board of
Directors to grant options to purchase up to 5,000,000 and 3,000,000 shares
of
common stock, respectively, to employees, officers, directors, consultants
and
advisors of the Company. As of December 31, 2006, options to purchase 4,515,883
shares had been granted under the Option Plan, none of these granted options
were exercised during 2006, and 1,161,369of
these
granted options were cancelled and expired during 2006. As of December 31,2006,
no options had been granted under the 2005 Plan.
Plan
Category
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights (#)
Weighted-average
exercise price of outstanding options, warrants and rights
($)
Number
of securities remaining available for future issuance under equity
compensation plans
Equity
compensation plans approved by shareholders
4,325,883
$
0.07
3,484,117
Equity
compensation plans not approved by shareholders
N/A
N/A
N/A
Total
4,325,883
$
0.07
3,484,117
Recent
Sales of Unregistered Securities
None.
ITEM
6.
MANAGEMENT'S
DISCUSSION
AND ANALYSIS
OF FINANCIAL
CONDITION
AND
RESULTS
OF OPERATIONS
Aspect
Systems, Inc., a wholly-owned subsidiary of DND Technologies, Inc. is
a
global provider of specialized equipment, parts and support services to the
semiconductor industry. ASI is the original equipment manufacturer of Advanced
AutoEtch
equipment previously designed and manufactured by Lam Research. Through
exclusive license agreements negotiated with Axcelis Technologies, ASI has
also
become the original equipment manufacturer of plasma etch and strip products
manufactured on the ASI MX-1 and ASI MX-10 (formerly Matrix System One and
Ten),
and the Arista and Arista Dual (formerly Matrix Bobcat and Cheetah) platforms.
Additionally, ASI offers new
and
refurbished support products including a
wide
array
of
sub-assemblies, both consumable and non-consumable repair and process related
parts, and remanufactured
temperature control units that
are
designed to maintain critical operating temperatures for the plasma systems.
Engineering and training services are also made available to its international
customer base. The most significant portion of ASI revenue, however, is normally
derived from the marketing and sale of remanufactured Rainbow and TCP plasma
etch systems and the ASI MX and Arista system products. ASI has a website
located at www.aspectsys.com.
Information on this website is not a part of this report.
Even
though our cash flow problems caused by significant indebtedness have hampered
our ability to meet sales demands, we have observed a significant increase
in
market demand for our subsidiary's products during the past two years. The
global expansion of chip production companies into emerging parts of the world
with lower labor costs, particularly China, has caused all semiconductor
companies to examine more closely how to reduce costs, including through the
extended use of tool sets. This shift toward ways to reduce costs has lent
itself to, and our management believes it will continue to lend itself to,
increasing demand for the products of companies such as ASI. In 2004 we achieved
record revenues, and management believes we could have matched, or exceeded,
these revenues in 2005 and into 2006 if our cash flow difficulties had not
limited our ability to produce our products. Nevertheless we expect demand
for
our products to grow unless a significant and prolonged downturn occurs in
the
semiconductor industry in the future. Our backlog of orders as of December31,2006 was approximately $1.3 million.
11
As
we
experience increased system sales, which normally require large up-front
payments, we strive to manage our cash flow in order to meet the demands of
custom orders, our debt obligations and expense commitments. Our plan of
continuously improving our production and reporting systems will aid in this
effort. With expanding revenue comes the related problem of attaining sufficient
cash flow to purchase the required parts to assemble our systems. Our business
periodically faces significant ongoing cash flow issues particularly when we
receive substantial orders because of the amount of time between our purchase
of
parts, assembly and delivery of products and payment for those products. When
equipment orders are postponed or payment from customers is delayed, we are
forced to defer repayment of obligations to creditors or service providers
and
forego additional sales opportunities. We
continue to pursue various financing alternatives but have not been successful
in obtaining badly needed capital. As a result, our cash flow shortage has
caused us to suffer significant shipping delays and loss of revenues from orders
we could not fill on a timely basis.
Management's
discussion and analysis of financial condition and results of operations are
based upon the Company's financial statements. These statements have been
prepared in accordance with accounting principles generally accepted in the
United States. 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 five 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
consolidated financial statements are presented on the basis that the Company
is
a going concern. Going concern contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business over a reasonable
length of time. The Company has incurred a loss of approximately $1,893,000
through December 31, 2006 with sales down approximately 48% from the prior
period, has negative working capital of approximately $8,600,000, and is in
default on its payments on the majority of its term debt. In addition, during
the year ended December 31, 2006, the Company received a notice of termination
of its license agreement with Lam. Earlier, Lam entered the refurbishing market
directly, which has had some impact on the Company’s revenue. Our most
significant cause of revenue reduction during this year, however, has resulted
from the action which was taken by the Company against Lam.
During
the second quarter of 2006, the Company filed a lawsuit against Lam as a result
of long-standing contract disputes between Aspect and Lam.Management
is convinced that the complaint
is justified, and that
the
Company has suffered substantial damages. The lawsuit
was removed to federal court and a trial date set in December 2007. The
Company's going concern issue and pending litigation with Lam have impacted
our
sales, as certain of our customers are now reluctant to order systems from
us,
believing that there is a risk that any deposit may be lost if we are unable
to
continue operations. This circumstance greatly hampers our ability to capitalize
on the opportunities of a growing market. These factors raise substantial doubt
as to the Company’s ability to continue as a going concern.
12
Management’s
plans to eliminate the going concern situation include, but are not limited
to,
the renegotiation of payment terms on the Axcelis debt, improved cash flow
management, aggressive cost reductions, and the creation of additional sales
and
profits across its product lines. In addition, management believes that it
will
be able to significantly reduce, or eliminate, its payables to Lam based on
the
outcome of the pending litigation, but there is no assurance that this will
occur.
2.Inventory
Inventory
is valued at the lower of cost or market. Cost includes raw materials, freight,
labor and manufacturing overhead. Inventory with no sales or usage within the
prior 12 months and inventory on hand, in excess of a 12-month supply, is
considered excessive and slow-moving and, accordingly, fully reserved. We review
our inventory reserves on a quarterly basis and adjust them for the full
carrying value of obsolete, excessive and slow-moving inventory.
3.License
Agreements
The
Company has license agreements, which are being amortized using the
straight-line method over the life of the contracts with Axcelis Technologies,
Inc. ("Axcelis") (7 years).
4.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.
104,
"Revenue Recognition," ("SAB 104"). 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.
5.Impairment
of Long-Lived Assets
The
Company continually reviews the recoverability of the carrying value of
long-lived assets using the methodology prescribed in Statement of Financial
Accounting Standards (SFAS) 144, "Accounting for the Impairment and Disposal
of
Long-Lived Assets."The Company also reviews long-lived assets and the related
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable. Upon
such an occurrence, recoverability of these assets is determined by comparing
the forecasted undiscounted net cash flows to which the assets relate, to the
carrying amount. If the asset is determined to be unable to recover its carrying
value, then intangible assets, if any, are written down first, followed by
the
other long-lived assets to fair value. Fair value is determined based on
discounted cash flows, appraised values or management's estimates, depending
on
the nature of the assets. No impairment was recognized in the year ended
December 31, 2006.
Sales
and marketing, including licensing
fees, royalties and commissions
1,539,905
2,514,769
(974,864
)
General
and administrative
1,333,280
1,814,614
(481,334
)
Impairment
of license agreement
0
2,705,013
(2,705,013
)
Loan
fee expense
0
295,094
(295,094
)
Total
Operating Expenses
8,596,854
17,868,187
(9,271,333
)
Income
(Loss) from Operations
(1,505,872
)
(4,114,462
)
2,608,590
Other
Income (Expense):
Gain
on sale of assets
29,046
0
29,046
Gain
on settlement of debt
0
17,500
(17,500
)
Interest
Expense
(415,224
)
(462,600
)
47,376
Income
(Loss) Before Income Tax Expense
(1,892,050
)
(4,559,562
)
2,667,512
Income
Tax Expense
800
800
0
Net
Income (Loss)
$
(1,892,850
)
$
(4,560,362
)
$
2,667,512
Net
Income (Loss) Per Share
Basic
and diluted
(0.07
)
(0.18
)
0.11
14
Results
of Operations
Our
revenue decrease of $6,662,743, or 48%, to $7,090,982 in the year ended December31, 2006 from $13,753,725 in the year ended December 31, 2005, was primarily
due
to a decrease in systems/chiller sales of $5,325,829 and a decrease in the
parts, assemblies, and consumables category of $1,304,410. System sales are
down
due to 2006 having nine less system sales than 2005 and a change in the product
mix which resulted in a lower per unit sales price during 2006. The reduction
in
the number of systems sold was due to a combination of our inability to take
new
orders due to cash flow problems and delays in filling orders. The decrease
in
parts, assemblies, and consumables sales is primarily due to our tight cash
flow
situation and the increased funding needs for system sales. For example, we
have
had to defer some parts, assemblies, and consumables purchases, and therefore
the related sales, to future periods. Our sales break down by segment is as
follows:
Our
cost
of revenues decreased $4,799,326 or 47% to $5,313,598 in the year ended December31, 2006 from $10,112,924 in the year ended December 31, 2005. This decrease
is
directly related to the 48% decrease in total revenue for the year ended
December 31, 2006. Our cost of revenues as a percentage of revenues for the
year
ended December 31, 2006, and December 31, 2005, was 74% in both years.
Reserve
for Slow Moving and Obsolete Inventory
Our
reserve for slow moving and obsolete inventory is the change in our analysis
of
the need for a slow moving and obsolete inventory reserve. Based on our analysis
in the year ended December 31, 2006, we recorded a $198,539 increase to the
reserve due to an analysis of inventory items. In the year ended December 31,2005, we recorded a $258,850 increase in our reserve.
Research
and Development
Research
and development costs increased $44,609 or 27%, to $211,532 in the year ended
December 31, 2006 from $166,923 in the year ended December 31, 2005. The
increase is primarily related to increases in payroll and employee benefits
in
the amount of $39,791 and an increase of $28,975 related to product development.
These increases were offset by a $20,110 decrease in product development expense
on the NCS (Nitrogen Clean System) product line. We
normally do not incur significant research and development expenses.
Sales
and Marketing
Sales
and
marketing costs decreased $974,864 to $1,539,905 in the year ended December31,2006 from $2,514,769 in the year ended December 31, 2005. This decrease is
due
to: a) the decrease in our commission expenses of $254,702 or 58% to $181,530
during the year ended December 31, 2006 from $436,233 during the year ended
December 31, 2005 which is a direct result of our reduced sales as mentioned
above, b) a decrease in payroll and employee benefits in the amount of $143,185
or 29% to $351,169 during the year ended December 31, 2006 from $494,354 during
the year ended December 31, 2005 as headcount decreased, and c) a decrease
of
$523,551 in the Lam royalty expense during the year ended December 31, 2006
from
$523,551 at the end of year 2005 to -0- in the year ended December 31, 2006
which was due to the impairment and write-off of this asset at the end of
2005.
15
General
and Administrative
Year
Ended
12/31/2006
12/31/2005
Increase
(Decrease)
General
and Administrative
Salaries
and wages
$
619,744
$
1,093,716
$
(473,972
)
Professional
fees
283,736
198,467
85,269
Occupancy
Expense, less amount allocated to Cost of Revenue
186,128
193,978
(7,850
)
Depreciation,
less amount allocated to Cost of Revenue
8,975
114,761
(105,786
)
Other
general and administrative expenses
234,697
213,692
21,005
Total
General and Administrative
$
1,333,280
$
1,814,614
$
(481,334
)
Salaries
and wages decreased $473,972 or 43% to $619,744 in the year ended December31,2006 as compared to $1,093,716 in the year ended December 31, 2005. This
decrease is primarily the result of a decrease in general and administrative
headcount and management’s decision to not immediately replace the employees.
Professional
fees increased $85,269 or 43%, to $283,736 in the year ended December 31, 2006
from $198,467 in the year ended December 31, 2005, primarily due to increased
litigation costs associated with the Lam lawsuit ($63,000) and a $20,000
increase in other consulting fees.
Depreciation
expense decreased in the year ending December 31, 2006 primarily due to certain
assets becoming fully depreciated and/or retired.
Occupancy
expense represents our costs to lease, occupy, and maintain our leased
facilities in Arizona and Texas. These costs, which consist primarily of
rent, repair and maintenance, utilities, security, insurance and janitorial
services, are allocated between cost of revenue and operating expenses based
upon the square footage utilized by each category.
Other
general and administrative expenses increased $21,005 or 10%, to $234,697 in
the
year ended December 31, 2006 from $213,692 in the year ended December 31, 2005.
The increased expenses are primarily attributable to increased expenses related
to franchise tax penalty expense ($26,412) and finance charges ($17,081). These
increases were partially offset by the reduced expenses related to travel and
entertainment ($22,819).
Impairment
of License Agreement
In
December 2005, we determined our license agreement with Lam Research Corporation
(“Lam”) to be fully impaired and recognized a $2,705,013 impairment charge. This
impairment is due to our strained relations
as a
result of the long-standing contract disputes between Aspect and
Lam. On
March6, 2006, ASI received a contract termination notice from Lam, and during
the second quarter of 2006, the Company filed a lawsuit against
Lam.
16
Loan
Fees Expense
We
incurred $295,094 during 2005 in fees associated with obtaining debt. This
included 1,190,478 shares of our common stock valued at $250,000 issued in
the
second quarter of 2005 in connection with a Standby Equity Distribution
Agreement (SEDA) with Cornell Capital Partners, LP. The amount was initially
capitalized in our financial statements, but during the fourth quarter of 2005,
it became apparent that the SEDA agreement was not going to be finalized and,
accordingly, we expensed the fee.
Gain
on Disposal of Assets
During
the year ended December 31, 2006, we sold assets from our Texas location that
were no longer necessary to our day to day operations. These assets were fully
depreciated, therefore the cash received during the sale of $29,046 represents
a
gain on sale.
Gain
on Settlement of Debt
In
February 2005, we issued 100,000 shares of common stock for payment of
approximately $15,000 of legal services received during the year ended December31, 2004. During June 2004, the Board of Directors negotiated with a law firm
to
obtain their acceptance of 100,000 shares as payment in full for this debt.
On
July 6, 2004, the Board of Directors formalized the resolution to issue these
shares which at that time had an aggregate fair value of $20,500; as such we
recorded the shares at the full market value and a $5,500 loss on settlement
of
debt. This loss was offset by a $23,000 gain resulting from the forgiveness
of
accrued interest expense after we made the final $100,000 payment on an
unsecured note payable.
Interest
Expense
Interest
expense for the year ended December 31, 2006 ($415,224) has decreased over
the
comparable period of 2005 ($462,600) by $47,376 due primarily to the repayment
of certain loans.
Net
Income (Loss)
As
a
result of the foregoing, we had a net loss of $1,892,850 for the year ended
December 31, 2006, compared to a net loss of $4,560,362 for the year ended
December 31, 2005.
Capital
Resources
Year
Ended
Working
Capital
12/31/2006
12/31/2005
Favorable
(Unfavorable)
Current
Assets
$
818,938
$
3,736,104
$
(2,917,166
)
Current
Liabilities
(9,447,326
)
(10,555,434
)
1,108,108
Deficit
Working Capital
$
(8,628,388
)
$
(6,819,330
)
$
(1,809,058
)
Long-term
Debt
$
(11,211
)
$
(26,544
)
$
15,333
Stockholders'
(Deficit)
$
(8,430,701
)
$
(6,557,471
)
$
(1,873,230
)
17
During
the year ended December 31, 2006 and 2005, we were in default of our payment
terms on the majority of our term debt. As a result, the approximately $2.5
million of term debt due beyond twelve months was classified as a current
liability in the consolidated balance sheet.
Included
in current liabilities is a total of $2,598,523 that is owed to Axcelis for
license and royalty fees. Also included in current liabilities is a total
of $3,555,317 in inventory payments and license and royalty fees owed to Lam.
Of
this amount, approximately $1,282,000 was past due as of December 31, 2006,
and
the remainder is future payments which are classified as current due to these
past due payments. Although
our current tight cash flow has prevented these payments from being made, we
have assured Axcelis that our delinquent payments will be made as soon as
possible and management has no reason to believe as of the date of this filing
that Axcelis will terminate any of its agreements with the Company. However,
on
March 6, 2006, ASI received a termination notice from Lam. During
the second quarter of 2006, the Company filed a lawsuit against Lam as a result
of long-standing contract disputes between Aspect and Lam.Management
is confident that the complaint
is justified, and that
the
Company has suffered substantial damages. The
lawsuit has been removed to federal court and a trial date has been set for
December 2007.
On
May 1,2006, we received an agreement from Cornell Capital to extend the repayment
terms of their bridge loan agreement. Under the new agreement, we are required
to make 12 monthly payments, commencing May 1, 2006, in the amount of $12,500
to
Cornell and a final balloon payment in the amount of $204,107 on May 1, 2007.
We
have not made certain of these required payments, and management intends to
attempt to make the past due payments over the next few months, but does not
anticipate being able to make the balloon payment due on May 1, 2007. Management
will attempt to renegotiate the terms of the balloon payment with Cornell
Capital, but there can be no assurance that we will be successful in doing
so.
The
Company's term loan dated May 14, 2004 to Merrill Lynch was renegotiated as
a
forbearance agreement during July 2006. Under the new agreement, the Company
is
required to make monthly payments, commencing August 1, 2006, in the amount
of
$24,958 plus interest (at prime + 4%), and a final balloon payment is due April30, 2007. The loan continues to be secured by a first lien on the Company's
total assets ($1,027,836 as of December 31, 2006) and has been guaranteed by
Doug Dixon, Chairman and CEO, and the Company. We are currently in default
on
our agreement with Merrill Lynch and are seeking to negotiate an amendment
to
our forbearance agreement to extend our payment deadlines but we may not be
successful in doing so.
Statements
of Cash Flows Select Information
Year
Ended
12/31/2006
12/31/2005
Net
Cash Provided (Used) By:
Operating
Activities
$
288,786
$
(172,764
)
Investing
Activities
29,046
(21,242
)
Financing
Activities
(703,924
)
269,816
Operating
Activities
For
the
year ended December 31, 2006, cash provided by operating activities of $288,786
was primarily attributed to net loss from operations of $(1,892,850) offset
by a
decrease in accounts receivable of $980,114 and a decrease in inventories of
$1,274,646. These decreases were partially offset by a decrease in accounts
payable and accrued expenses of $11,785, a decrease in deposits from customers
of $317,419 and a decrease in the amounts due to related parties of
$170,475.
18
For
the
year ended December 31, 2005, cash used by operating activities of $172,764
was
primarily attributed to a decrease in accounts receivable in the amount of
$1,003,608 as well as an $892,623 decrease in inventories. These amounts were
offset by our net loss of $4,560,362, our decrease in customer deposits, prepaid
expenses and other assets in the amount of $670,147 and $44,252, respectively,
and a reduction in our accounts payable and accrued expenses of $742,945. During
the year ended December 31, 2005 our non-cash reconciling items included our
issuance of common stock in payment of $250,000 of loan fees, an increase in
our
provision for slow moving and obsolete inventories by $258,850 and depreciation
and amortization expense of $172,409 and 553,062, respectively and the
impairment of the license agreement in the amount of $2,705,013.
Investing
Activities
During
the year ended December 31, 2006, we sold assets from our Texas location that
were no longer necessary to our day-to-day operations and recorded a gain of
$29,046 from the sale.
During
the year ended December 31, 2005 cash was used by investing activities for
purchases of equipment in the amount of $21,242.
We
currently have no material commitments for capital expenditures.
Financing
Activities
Financing
activities in the year ended December 31, 2006 used $703,924 in cash flows
as
compared to a provision of $269,816 in the year ended December 31, 2005.
During
the year ended December 31, 2006, we received $80,000 from the issuance of
debt
to a related party and made principal payments in the amount of $600,174 and
$183,750 on our long-term debt and related party debt,
respectively.
In
the
year ended December 31, 2005, we received $34,750 as the result of the exercise
of options as well as $525,000 from the proceeds of new debt issuances and
$125,000 from the proceeds of new debt issuance with a related party. During
the
year ended December 31, 2005, these receipts and proceeds were offset by our
repayment of long-term debt in the amount of $393,684 and our repayment of
debt
to a related party in the amount of $21,250.
Liquidity
and Capital Resources
To
date,
we have financed our business with cash from our operating activities, a bank
line of credit that has been restructured into a term loan, a loan for $200,000
(which was repaid in March 2005), two additional term loans totaling $525,000
(of which one for $225,000 was paid in January 2006 and as of December 31,2006,
$87,500 has been paid on the other), a $125,000 loan from a related party (which
was repaid in July 2006) and three loans totaling $80,000 from a related party
(all were taken and repaid in 2006). The Company's term loan dated May 14,2004
to Merrill Lynch had a balance of $579,326 as of December 31, 2006, and was
renegotiated as a forbearance agreement during July 2006. Under the new
agreement, the Company is required to make monthly payments, commencing August1, 2006, in the amount of $24,958 plus interest (at prime + 4%), and a final
balloon payment is due April 30, 2007. The loan continues to be secured by
a
first lien on the Company's total assets ($1,027,836 as of December 31, 2006)
and has been guaranteed by Doug Dixon, Chairman and CEO, and the Company. We
are
currently in default of our agreement with Merrill Lynch and will be working
to
attempt to renegotiate our final balloon payment.
19
On
November 8, 2002, we entered into a non-exclusive license for several of Lam’s
patents and other intellectual property, which was later amended on June 25,2004. The Company and Lam are in mutual default on this agreement and no
payments have been made to Lam since 2005.
In
November 2003, we entered into an agreement with Axcelis and acquired an
exclusive license to all future manufacturing, sales, service, and parts support
for certain dry strip semiconductor manufacturing equipment now marketed under
the trade names MX-1 and MX-10 (formerly Matrix System One and System Ten).
This
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 license
fee has been paid. Of the $2,750,000 license fee, approximately $1,905,000
has
been expensed and $1,602,000 of the expensed amount remains to be paid. This
agreement also calls for a royalty fee to be paid on all related sales through
December 31, 2010 on a declining calendar schedule from 10% to 2%; the balance
to be paid on this is approximately $817,000.
On
August2, 2004, we entered into an additional agreement with Axcelis 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 now marketed under the ASI trade name Arista and Arista Dual
(formerly Matrix Bobcat and Cheetah). This 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.
Of
the $750,000 license fee, approximately $115,800 has been expensed and the
full
amount remains to be paid.This
agreement also calls for a royalty fee to be paid on all related sales through
December 31, 2011 on a declining calendar schedule from 10% down to 2%; the
balance to be paid on this is approximately $63,000.
As
of
December 31, 2006, we continued to remain past due on certain payments to both
Lam and Axcelis. Past due payments to Lam totaled approximately $1,282,000
as of
December 31, 2006, and past due payments to Axcelis totaled approximately
$1,856,000 on that date. Although our current tight cash flow has prevented
these payments from being made, we have assured Axcelis that our delinquent
payments will be made as soon as possible and management has no reason to
believe as of the date of this filing that Axcelis will terminate any of its
agreements with the Company. The Company is in litigation with Lam and
management believes that Lam is in breach of its non-exclusive license
agreement, and as a result, is seeking to write off the remaining amounts owed
to Lam. If the Company is able to write off all or a significant portion of
the
approximately $3.6 million due under this Agreement, our liquidity would
improve. However, there is no assurance that we will be successful in the
litigation, or that we will be ultimately able to write off all or part of
the
associated debt. On August 1, 2006, Lam notified ASI by letter that it would
no
longer sell spare parts to ASI due to the pending litigation. Management
believes that the impact of this will be minimal, as most spare parts can be
obtained from sources other than Lam, but there are a few spare parts that
can
only be obtained from Lam.
On
July22, 2005, we entered into a promissory note with Cornell Capital for $300,000.
The loan originally called for interest to accrue at 12% with payments in the
amount of $20,000 to be made weekly beginning October 21, 2005 with the final
payment of $34,121 due on January 27, 2006. On May 1, 2006, we received an
agreement from Cornell to extend the repayment terms of the bridge loan
agreement. Under the new agreement, we are required to make 12 monthly payments,
commencing May 1, 2006, in the amount of $12,500 to Cornell and a final balloon
payment in the amount of $204,107 on May 1, 2007. We
have
not made certain of these required payments, and management intends to
attempt to make the past due payments over the next few months, but does not
anticipate being able to make the balloon payment due on May 1, 2007. Management
will attempt to renegotiate the terms of the balloon payment with Cornell
Capital, but there can be no assurance that we will be successful in doing
so.
20
On
August24, 2005 we entered into a promissory note with our Chief Executive Officer,
Mr.
Dixon, and received $125,000. The loan had an interest fee of $12,500, was
due
October 24, 2005 and was secured by a lien on the inventories and accounts
receivable of ASI that was subordinate to the lien held by Merrill Lynch. This
note was repaid in July 2006.
On
August25, 2005 we entered into a promissory note with an individual and received
$225,000. The loan had an interest fee of $22,500 and was due October 24, 2005.
The note was secured by 3,000,000 shares of our common stock, owned by our
Chief
Executive Officer, Mr. Dixon. This note was repaid in January 2006.
On
February 1, 2006, the Company received $10,000 from one of the Company’s
employees under a promissory note. The note called for interest in the amount
of
$1,000 and the principal balance, to be due no later than March 31, 2006. This
note was repaid March 17, 2006.
On
April25, 2006, the Company received $40,000 from one of the Company’s employees under
a promissory note. The note called for interest in the amount of $4,000 and
the
principal balance, to be due no later than July 25, 2006. This note was repaid
in August 2006.
The
Company's current tight cash flow and our lawsuit filed against Lam have
prevented us from making required payments on the majority of our debt. As
of
December 31, 2006, the majority of this debt is comprised of approximately
$3,600,000 owed to Lam and $2,600,000 owed to Axcelis.
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. As of December 31, 2006, we had $6,206 in cash on
hand. Our amount of cash on hand can vary significantly from
day-to-day due to the nature of our business, which consists of significant
cash
expenditures to purchase the parts and components needed to assemble the systems
that comprise the majority of our revenues and an often significant delay
between these expenditures and payment from our customers for the systems,
which
does not occur until after delivery. As a result, we manage our cash flow
closely to meet our required production shipping dates, debt obligations and
expense commitments, and will continue to do so until we have either established
a cash reserve large enough to self finance the cost of producing systems in
advance of receiving any payments or have outside financing to accomplish the
same result. Our debt obligations remain a priority in our cash flow planning,
and we do not have plans or commitments for significant capital expenditures
in
the near future.
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 include, among others,
the Risk Factors below.
21
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 common stock. 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.
If
any of the following risks actually occur, our business could be harmed.
We
Are In Litigation With Lam
On
March6, 2006, ASI received a termination notice from Lam. As of April 13, 2007,
we
were past due on certain payments to Lam under our license agreement with them.
Past due payments to Lam totaled $1,282,000 as of December 31, 2006. During
the
second quarter of 2006, the Company filed a lawsuit against Lam as a result
of
long-standing contract disputes between Aspect and Lam. Management is convinced
that the complaint is justified, and that the Company has suffered substantial
damages. The lawsuit has been removed to federal court and a trial date has
been
set in December 2007. Management believes that Lam is in breach of this
agreement, and as a result is seeking to write off the remaining amounts owed
to
Lam. If the Company is able to write off all or a significant portion of the
approximately $3.6 million due under the agreement, management believes that
our
liquidity would improve. However, there is no assurance that we will be
successful in the litigation, or that we will be ultimately able to write off
all or part of the associated debt.
Our
Dispute With Lam Has Hurt Sales
On
August1, 2006, management was notified that Lam would no longer sell spare parts
to
the Company due to the pending litigation. Earlier, Lam entered the refurbishing
market directly. These actions have had some impact on the Company’s revenue.
Our most significant cause of revenue reduction during this year, however,
resulted from the litigation undertaken by the Company against Lam. The
Company’s going concern issue and pending litigation with Lam have impacted our
sales, as certain of our customers are now reluctant to order systems from
us,
believing that there is a risk that any deposit may be lost if we are unable
to
continue operations. This circumstance greatly hampers our ability to capitalize
on the opportunities of a growing market. The Company’s failure to remain an
approved Lam reseller coupled with its ongoing litigation with Lam has hurt
sales dramatically contributing to a large decrease in revenues.
22
We
Are Past Due On Certain Payments To Axcelis For License And Royalty Fees
We
are
past due on certain payments to Axcelis totaling approximately $1.85 million
for
license and royalty fees as of December 31, 2006. While management believes
the
license is beneficial to both parties and Axcelis has to date been willing
to
provide us with additional time to make these payments, Axcelis could terminate
our license agreements with it upon ninety days written notice, although we
would have the ninety day notice period in which to make the past due payments
and avoid termination. Management is exploring payment options, but it is
unlikely it could become current on its obligations to Axcelis within a 90
day
period.
This
delinquency is now over two years old.
We
Are In Default On Our Term Loan With Merrill Lynch, Which Is Secured
By A First Lien On All Of Our Assets
We
have a
term loan, with a principal balance of approximately $579,326 at December 31,2006, with Merrill Lynch Business Financial Services, Inc. that is secured
by a
first lien on our total assets, which were equal to approximately $1,027,836
at
December 31, 2006. Payments in the monthly amount of $24,958 were due commencing
August 1, 2006 with a final balloon on April 30, 2007. We are in default on
this
term loan and Merrill Lynch could foreclose on certain of our assets making
it
difficult to continue our operations without restructuring our business.
Management believes it is more likely that repayment terms will be renegotiated
than foreclosure on assets which may be difficult to liquidate in a timely
manner.
If
We Fail To Maintain An Effective System Of Internal Controls, We May Not Be
Able
To Accurately Report Our Financial Results Or Prevent Fraud
Effective
internal controls are necessary for us to provide reliable financial reports
and
effectively prevent fraud. We have discovered, and may in the future discover,
areas of our internal controls that need improvement. By letter dated May 10,2005, our external auditors brought to our attention a need to increase
segregation of critical accounting duties, improve oversight of the financial
accounting and reporting process by our principal accounting officer, establish
a documented system of internal controls and ensure consistency in the
application of standard costs. Since May 2005, we have begun taking action
to
remediate and improve our internal controls. We believed that these efforts
would strengthen our internal controls and address the concerns of our auditors.
However, management has identified certain significant deficiencies with respect
to inadequate reconciliation of certain financial statement accounts and lack
of
sufficient review of these accounts and related journal entries. The Company
is
addressing staffing levels and its reconciliation and review process and making
recommendations to the Board in the second quarter of 2007. Any failure to
implement required new or improved controls, or difficulties encountered in
their implementation, could cause us to fail to meet our reporting obligations.
Inferior internal controls could also cause investors to lose confidence in
our
reported financial information, which could have a negative effect on the
trading price of our stock.
Future
Sales By Cornell Capital Partners And Its Affiliates May Adversely Affect Our
Stock Price
Sales
of
the 1,190,478 shares of our common stock held by Cornell Capital Partners and
its affiliates in the public market during 2006 and 2007 could lower the market
price of our common stock. Sales may also make it more difficult for use to
sell
equity securities or equity-related securities in the future at a time and
price
that our management deems acceptable or at all.
Cyclical
Downturns Are Prevalent In The Semiconductor Industry And May Adversely Affect
Our Future Sales And Operating Results
Our
business depends predominantly on the capital expenditures of semiconductor
manufacturers, which in turn depend on current and anticipated market demand
for
integrated circuits and the products that use them. The semiconductor industry
has historically been very cyclical and has experienced periodic downturns
that
have had a material adverse effect on the demand for semiconductor processing
equipment, including the
etch
and strip equipment
that we market. However,
during
downturns, our replacement parts are generally in higher demand, due to the
cost
effectiveness of repairing existing equipment instead of buying new equipment.
23
During
periods of reduced and declining demand, we must be able to quickly and
effectively align our costs with prevailing market conditions, as well as
motivate and retain key employees. In particular, our inventory levels during
periods of reduced demand have at times reached higher-than-necessary levels
relative to the current levels of production demand. During periods of rapid
growth, we must be able to acquire and develop sufficient capacity to meet
customer demand, and hire and assimilate a sufficient number of qualified
people. We cannot give assurances that our future sales will
not
decline
if
downturns or slowdowns in the rate of capital investment in the semiconductor
industry occur in the future.
The
Semiconductor Industry Is Intensely Competitive And Capital-Intensive And We
May
Not Be Able To Compete Effectively In Markets Where Our Competitors Have More
Resources
We
face
substantial competition in the industry, both from potential new entrants into
the market and established competitors. Some of these companies may have greater
financial, marketing, technical or other resources than we do, as well as
broader product lines, greater customer service capabilities, or larger and
more
established sales organizations and customer bases. Remaining competitive in
the
market depends in part upon our ability to offer desired
systems
and services,
at
competitive prices on a timely basis.
Lam
has
endorsed certain of our competitors as a result of our litigation with it and
we
believe our competition will increase as these new competitors gain credibility
in the market.
Our
customers must incur substantial expenditures to install and integrate capital
equipment into their semiconductor production lines. Once a manufacturer has
selected another vendor's capital equipment, the manufacturer is generally
reliant upon that equipment vendor for the specific production line application
in question. Accordingly, we may experience difficulty in selling a product
to a
particular customer for a significant period of time when that customer has
selected a system from a manufacturer we do not have a relationship with. In
addition, sales of our systems depend in significant part upon a prospective
customer's decision to increase manufacturing capacity, which typically involves
a significant capital commitment. From time to time, we have experienced delays
in finalizing system sales following initial system qualification. Due to these
and other factors, our systems may have a lengthy sales cycle, during which
we
may expend substantial funds and management effort.
The
Semiconductor Industry Is Based On Rapidly Changing Technology,
And
We Rely Primarily On Our Licensors To Develop Products Our Customers Find
Satisfactory
We
rely
heavily on the development of new and improved products by companies
such as
Axcelis
from
which we obtain systems and parts, and we seek to maintain close relationships
with our customers in order to remain responsive to their product needs. In
addition, we engage in development and improvement of the products we
manufacture. As is typical in the semiconductor capital equipment market, we
have experienced delays from time to time in the introduction of and certain
technical difficulties with certain of our products and product
enhancements.
Our
success in acquiring or developing and then selling systems depends upon a
variety of factors. These include product selection, timely and efficient
completion of product design and development, timely and efficient
implementation of assembly processes, product performance in the field, and
effective sales and marketing. There can be no assurance that we will be
successful in selecting, developing, acquiring, and marketing new products,
or
in enhancing our existing products. In addition, we could incur substantial
unanticipated costs to ensure the functionality and reliability of our future
product introductions early in their product life cycles. If new products have
reliability or quality problems, reduced orders, or higher manufacturing costs,
then delays in collecting accounts receivable and additional service and
warranty expenses may result. Any of these events could materially adversely
affect our business, financial condition or results of operations.
24
We
Are Subject To Risks Relating To Product Concentration And Lack Of Product
Revenue Diversification Which May Adversely Affect Our Business And Operating
Results
We
derive
a substantial percentage of our revenues (approximately
50% in 2006) from our etch and strip products, which consist of approximately
20
different models,
and we
expect these products to continue to account for a large percentage of our
revenues in the near term. Continued market acceptance of our primary products
is, therefore, critical to our future success. Because
of this product concentration, a
decline
in demand for even a limited number of our products that
is
not offset by increasing demand for other
products
or our
inability to rely on revenues derived from unrelated operations
would
likely result in a decline in our revenues and operating results.
We
May Experience Supply Shortages Which Would Adversely Affect Our Ability To
Meet
Customer Demands
We
use
numerous suppliers to obtain parts, components, sub-assemblies and final
products. Although we make reasonable efforts to ensure that such parts are
available from multiple suppliers, certain key parts (including
proprietary software for our etch products that is only available from Lam
and
certain robots that are available only from a limited number of suppliers)
may
only
be obtained from a single or limited source. Certain
suppliers, from which we obtain parts that are available from other sources,
are
thinly
capitalized, independent companies that generate significant portions of their
business from us and a small group of other companies in the semiconductor
industry. We seek to reduce our dependence on the limited group of sources.
However, disruption or termination of certain of those suppliers could occur
and
certain of our competitors,
have
experienced supply shortages in the past. Such disruptions could have an adverse
effect on our operations. A prolonged inability to obtain certain parts could
have a material adverse effect on our business, financial condition or results
of operations
because
of an
inability to meet customer demands on time. As of August 1, 2006, we are no
longer able to acquire parts from Lam some of which we cannot obtain elsewhere.
We
Are Subject To Risks Relating To Lengthy Sales Cycles, Which May
Require
The Expenditure Of
Substantial Funds and Management Effort
Our
customers must incur substantial expenditures to install and integrate capital
equipment into their semiconductor production lines. Once a manufacturer has
selected another vendor’s capital equipment, the manufacturer is generally
reliant upon that equipment vendor for the specific production line application
in question. Accordingly, we may experience difficulty in selling a product
to a
particular customer for a significant period of time when that customer has
selected a system from a manufacturer with whom we do not have a relationship.
In addition, sales of our systems depend in significant part upon a prospective
customer’s decision to increase manufacturing capacity which typically involves
a significant capital commitment. From time to time, we have experienced delays
in finalizing system sales following initial system qualification. Due to these
and other factors, our systems may have a lengthy sales cycle, during which
we
may expend substantial funds and management effort.
We
Are Exposed To The Risks Of Operating A Global Business; As A Result, Our
Business May Be Adversely Affected By Global Political And Economic
Instability
In
2006,
approximately 33% of our revenues resulted from sales outside the U.S., with
an
increasing percentage of sales to customers headquartered in Asia. Managing
our
global operations presents challenges, including periodic regional economic
downturns, trade balance issues, varying business conditions and demands,
political instability, variations in enforcement of intellectual property and
contract rights in different jurisdictions, differences in the ability to
develop relationships with suppliers and other local businesses, changes in
U.S.
and international laws and regulations, including U.S. export restrictions,
fluctuations in interest and currency exchange rates, the ability to provide
sufficient levels of technical support in different locations, cultural
differences, shipping delays, and terrorist acts or acts of war, among other
risks. Many of these challenges are present in China, which we believe
represents a large potential market for semiconductor equipment and where we
anticipate opportunity for growth. Global uncertainties with respect to: (i)
economic growth rates in various countries; (ii) the sustainability of demand
for electronics products; (iii) capital spending by semiconductor manufacturers;
(iv) price weakness for certain semiconductor devices; and (v) political
instability in regions where we have operations, such as Asia, may also affect
our business, financial condition and results of operations.
25
We
Are Exposed To Risks As A Result Of Ongoing Changes In The Semiconductor
Industry Which May Adversely Affect Our Ability To Operate
Successfully
Ongoing
changes in the semiconductor industry, including more complex technology
requirements, the growth in Asia, increasing pressure on semiconductor
manufacturers to allocate resources to activities that enhance their competitive
advantage, the increasing significance of consumer electronics as a driver
for
demand for semiconductors and the related focus on lower costs, have
in- turn
resulted in the increasing importance of spare parts and service as a growing
percentage of semiconductor equipment suppliers’ business. These changes are
also requiring semiconductor manufacturing equipment suppliers to provide
increasing levels of process integration support. If we do not successfully
manage the risks resulting from these changes in the semiconductor industry,
our
revenues
could decline and our business,
financial condition and results of operations could be materially and adversely
affected.
We
Operate In An
Industry
With A Highly
Concentrated Customer Base And
Therefore The Loss Of Several Customers May Cause A Significant Decline In
Revenues
The
semiconductor industry has a highly concentrated customer base. There
are
only about 200 semiconductor device
manufacturers in the industry, and only about 15% of those manufacturers will
be
purchasing equipment at any given time. In
2006,
one customer accounted for 10% or more of our total revenue, and historically
orders
from a
relatively limited number of semiconductor manufacturers have accounted for,
and
in
future
periods likely
will account
for, a substantial portion of our net sales, which may lead customers to demand
pricing and other terms less favorable to us. If current customers delay, cancel
or do not place orders, we may not be able to replace these orders with new
orders
due to
the limited number of customers available in the industry.
As our
products are configured to customer specifications, changing, rescheduling
or
canceling orders may result in significant and often non-recoverable costs.
The
resulting fluctuations in the amount of or terms for orders could have a
material adverse effect on our working
capital, cash flow and ultimately revenues and profitability.
Our
Auditors Have Expressed Doubt About Our Ability To Continue As A Going
Concern
Our
ability to continue as a going concern is an issue raised as a result of the
Company’s operating loss in the year ended December 31, 2006, its negative
working capital of over $8 million, and its default on payments on the majority
of its term debt. We continue to experience net operating losses. Our ability
to
continue as a going concern is subject to our ability to negotiate extended
payment terms for our term debt, generate a profit, and obtain necessary funding
from outside sources, including obtaining additional funding from the sale
of
our securities, increasing sales or obtaining loans and grants from various
financial institutions where possible. The going concern issue increases the
difficulty in meeting such goals and there can be no assurances that such
methods will prove successful.
Our
Ability To Raise Additional Financing Is Uncertain Which May Adversely Impact
Our Ability
To Continue And Expand Business
Operations
We
currently anticipate that our available cash resources combined with our
anticipated revenues will meet any working
capital needs, but not repayment of debt, through
the quarter ended June 30, 2007.
However,
we face repayment obligations of approximately $9.4
million
during 2007,
which includes all liabilities.
Our
projected revenues will not permit us to repay our obligations. Although we
have
been actively searching for available capital, we do not have any current
arrangements for additional outside sources of financing and we cannot provide
any assurance that such financing will be available.
26
Our
Common Stock Is Deemed To Be “Penny Stock,” Which May Make It More Difficult For
Investors To Sell Their Shares Due To Suitability
Requirements
Our
common stock is deemed to be “penny stock” as that term is defined in Rule
3a51-1 promulgated under the Securities Exchange Act of 1934, as amended. These
requirements may reduce the potential market for our common stock by reducing
the number of potential investors. This may make it more difficult for investors
in our common stock to sell shares to third parties or to otherwise dispose
of
them. This could cause our stock price to decline. Penny stocks are
stock:
·
With
a price of less than $5.00 per
share;
·
That
are not traded on a “recognized” national exchange;
·
Whose
prices are not quoted on the NASDAQ automated quotation system (NASDAQ
listed stock must still have a price of not less than $5.00 per share);
or
·
In
issuers with net tangible assets less than $2 million (if the issuer
has
been in continuous operation for at least three years) or $5 million
(if
in continuous operation for less than three years), or with average
revenues of less than $6 million for the last three years.
Broker/dealers
dealing in penny stocks are required to provide potential investors with a
document disclosing the risks of penny stocks. Moreover, broker/dealers are
required to determine whether an investment in a penny stock is a suitable
investment for a prospective investor.
Our
Common Stock May Be Affected By Limited Trading Volume And May Fluctuate
Significantly, Which May Affect Our Shareholders’ Ability To Sell Shares Of Our
Common Stock
Currently,
only a limited trading market exists for DND common stock. Our common stock
trades on the Over-the-Counter (“OTC”) Bulletin Board under the symbol
“DNDT.OB.” The Over-the-Counter (“OTC”) Bulletin Board is a limited market and
subject to substantial restrictions and limitations in comparison to the NASDAQ
system. Any broker/dealer that makes a market in our stock or other person
that
buys or sells our stock could have a significant influence over its price at
any
given time. We cannot assure our shareholders that a market for our stock will
be sustained. There is no assurance that our shares will have any greater
liquidity than shares that do not trade on a public market. Our common stock
has
experienced, and is likely to experience in the future, significant price and
volume fluctuations, which could adversely affect the market price of our common
stock without regard to our operating performance. In addition, we believe
that
factors such as quarterly fluctuations in our financial results and changes
in
the overall economy or the condition of the financial markets could cause the
price of our common stock to fluctuate substantially. These fluctuations may
also cause short sellers to enter the market from time to time in the belief
that we will have poor results in the future. We cannot predict the actions
of
market participants and, therefore, can offer no assurances that the market
for
our stock will be stable or appreciate over time. These factors may negatively
impact our shareholders’ ability to sell shares of our common
stock.
We
Are Subject To Price Volatility Due To Our Operations Materially Fluctuating;
As
A Result, Any Quarter-To-Quarter Comparisons In Our Financial Statements May
Not
Be Meaningful
As
a
result of the evolving nature of the markets,
consisting of sales of our products and services to
semiconductor manufacturers
in the
U.S., Europe and Asia,
in which
we compete, as well as the current nature of the public markets and our current
financial condition, we believe that our operating results may fluctuate
materially, as a result of which quarter-to-quarter comparisons of our results
of operations may not be meaningful. If in some future quarter, whether as
a
result of such a fluctuation or otherwise, our results of operations fall below
the expectations of securities analysts and investors, the trading price of
our
common stock would likely be materially and adversely affected. You should
not
rely on our results of any interim period as an indication of our future
performance. Additionally, our quarterly results of operations may fluctuate
significantly in the future as a result of a variety of factors
as
described in this “Risk Factors” section,
many of
which are outside our control.
27
We
Could Fail To Attract or Retain Key Personnel
And Will Be Harmed If Any Or All Of Them Leave
Our
success largely depends on the efforts and abilities of key executives and
consultants, particularly
Mr.
Douglas Dixon, our Chief Executive Officer,
and Mr.
Dennis Key, our Chief Financial Officer and Chief Executive Officer of
ASI.
The
loss of the services of Mr. Dixon and Mr. Key could materially harm our business
because of their
relationships within the semiconductor industry and in particular with Lam
(where Mr. Dixon and Mr. Key were previously employed) and because of
the
cost
and time necessary to locate
and
train a replacement
who may
not be able to continue these relationships within the semiconductor
industry.
Such a
loss would also divert management attention away from operational
issues.
Our
CEO, Douglas Dixon, is gradually decreasing his involvement with the Company
in
anticipation of retirement. We anticipate that Mr. Dixon's relationships within
the semiconductor industry will be continued by Mr. Key.
Environmental,
Health And Safety Laws May Restrict Our Operations
We
are
subject to local laws and regulations in various regions in which we operate,
including the European Union ("EU"). In particular, two current EU directives
may have a material impact on our business. The first is the Restriction of
Certain Hazardous Substances Directive ("RoHS"), which restricts the
distribution of certain substances, including lead, within the EU and is
effective July 1, 2006. In addition to eliminating and/or reducing the level
of
specified hazardous materials from our products, we will also be required to
maintain and publish a detailed list of all chemical substances in our products.
We are starting to see requests from our customers, including some of our major
customers, for RoHS-compliant products. We are in the process of compiling
RoHS-compliant information on our products as well as procuring RoHS-compliant
material and information from our suppliers.
The
second directive is the Waste Electrical and Electronic Equipment Directive
("WEEE"), which was effective August 13, 2005 in certain jurisdictions and
requires covered manufacturers or importers to recycle or dispose of all
products manufactured or imported into the EU by a party which is subject to
the
directive at its own expense at the end of the products' useful lives. It is
our
current position and interpretation of the WEEE directive that our products
are
not directly covered by or such as to require to our direct compliance with
the
directive. We believe our end customers bear the responsibility for WEEE
directive compliance for the products and/or systems in which our products
are
components.
There
are
certain risks we face in complying with, or seeking to conduct our business
in
connection with, the RoHS and WEEE directives, which include but are not limited
to the following:
*
For
RoHS
*
We may
be unable to procure appropriate RoHS-compliant material in sufficient quantity
and quality and/or may be unable to incorporate it into our manufacturing
processes without compromising quality and/or impacting our cost
structure;
*
We may
not be able to sell non-compliant product into the EU or to any customer whose
end product will be sold into the EU, which may result in reduced
sales;
28
*
We may
face additional excess and obsolete inventory risk related to non-compliant
inventory that we may continue to hold for which there is reduced demand and
that we may need to write down.
*
For
WEEE
*
We may
be determined by applicable national regulatory agencies which implement the
WEEE directive that certain of our products are directly covered under the
WEEE
directive, making us directly responsible for WEEE compliance for such
products.
*
Our
customers may refuse to agree to contractual language which allocates and
assigns WEEE responsibility, or demand that we undertake WEEE responsibilities
independent of regulatory interpretation.
We
are
unable to estimate at this time the cost of compliance, if any, with either
EU
directive. Compliance and non-compliance with these laws may have a material
adverse impact on our net sales and operating results.
ITEM
7.
FINANCIAL
STATEMENTS
The
information required by this Item is submitted as a separate section of this
Form 10-KSB. See Item 13.
ITEM
8.
CHANGES
IN
AND
DISAGREEMENTS
WITH
ACCOUNTANTS
ON ACCOUNTING
AND
FINANCIAL
DISCLOSURE
None.
ITEM
8A.
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 prior to the filing date of this report. Based on
that evaluation, our principal executive officer and our principal financial
officer concluded that our disclosure controls and procedures were not effective
to ensure that information required to be disclosed in reports filed or
submitted under the Exchange Act is accumulated and communicated to the
Company’s management, including its chief executive and principal financial
officer, as appropriate to allow timely decisions regarding required disclosure.
Although the evaluation did not detect any material weaknesses in the Company’s
system of internal accounting controls over financial reporting, management
identified certain significant deficiencies with respect to inadequate
reconciliation of certain financial statement accounts and a lack of sufficient
review of those accounts and related journal entries. The Company is addressing
its staffing levels and its reconciliation and review process and will make
recommendations to the Board in the second quarter of 2007.
Notwithstanding
management’s assessment that our internal control over financial reporting
was ineffective as of December 31, 2006 and the significant deficiencies
described above, management believes that the financial statements included
in
this Annual Report on Form 10-KSB correctly present our financial
condition, results of operations and cash flows for the fiscal years covered
thereby in all material respects.
29
(b) 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. However, as disclosed
in
our Form 10-QSB filed on May 16, 2006, our management received a letter from
the
Company's independent auditors on May 10, 2006 that identified certain
weaknesses in our internal control over financial reporting to address primarily
four issues: 1) Our subsidiary’s Vice President of Operations is now reviewing
all standard unit cost changes to prevent adjustments to the valuation of
inventory items without proper approval. In addition, with the transfer of
Texas
accounting transactions to Arizona, the software package which allowed negative
inventory balances to occur in the past has been discontinued. 2) Due to our
limited accounting headcount, which is sometimes typical of smaller companies,
and which impacts our ability to segregate duties to some degree, we will
continue to monitor our financial data very closely through the use of various
trended subsidiary reports, statements, and a detailed and departmentalized
chart of accounts to ensure all transactions are properly recorded. 3) Although
our commission accrual process remains the same, increased emphasis will be
placed on the review of the existing systems group gross profit report which
details commission expense by system. 4) Upper management will increase their
communication of any unusual transactions and subsequent events to the personnel
responsible for financial accounting and disclosure to ensure the proper
accounting and disclosure on a timely basis.
Beginning
with the Company’s first fiscal year ending after December 15, 2007,
Section 404 of the Sarbanes-Oxley Act of 2002 will require us to include
management's report on our internal control over financial reporting in our
Annual Report on Form 10-K. The internal control report must contain
(1) a statement of management's responsibility for establishing and
maintaining adequate internal control over our financial reporting, (2) a
statement identifying the framework used by management to conduct the required
evaluation of the effectiveness of our internal control over financial
reporting, and (3) management's assessment of the effectiveness of our
internal control over financial reporting as of the end of our most recent
fiscal year, including a statement as to whether or not our internal control
over financial reporting is effective. For the year ended December 31, 2008,
a statement that our registered independent public accounting firm has
issued an attestation report on management's assessment of our internal control
over financial reporting will be required.
In
order
to achieve compliance with Section 404 within the prescribed period,
management is planning to commence a Section 404 compliance project to
assess the adequacy of our internal control over financial reporting, remediate
any control deficiencies that may be identified, validate through testing that
controls are functioning as documented, and implement a continuous reporting
and
improvement process for internal control over financial reporting. At this
time,
management is assessing the proper parameters of a Section 404 compliance
project in light of emerging guidance from the SEC on such
parameters.
ITEM
8B.
OTHER
INFORMATION
There
were no items required to be disclosed in a report on Form 8-K during the fourth
quarter of the fiscal year ended December 31, 2006.
PART
III
ITEM
9.
DIRECTORS
AND EXECUTIVE
OFFICERS;
CORPORATE
GOVERNANCE;
COMPLIANCE
WITH
SECTION
16(A)
OF
THE EXCHANGE
ACT
The
following table sets forth the names and positions of our executive officers
and
directors. Our directors are elected at our annual meeting of stockholders
and
serve for one year or until successors are elected and qualify. Our Board of
Directors appoints our officers, and their terms of office are at the discretion
of the Board of Directors, except to the extent governed by an employment
contract. There
is
no family relationship between any of our executive officers and directors.
30
As
of April11,2007,
our
directors and executive officers, their age, positions and the dates of their
initial election or appointment as directors or executive officers are as
follows:
Name
Age
Position
Tenure
Douglas
N. Dixon
64
CEO,
President, and Chairman
Since
August 2002.
G.
Dennis Key*
64
CFO,
Secretary and Director
Since
August 2003.
Lowell
W. Giffhorn*
60
Director,
Chair of Audit Committee
Since
August 2002.
Ronny
Baker
61
Controller
Since
August 2002.
*
Directors
currently serving as members of the Company's Audit
Committee.
Douglas
N. Dixon
has been
the CEO/President and Chairman of DND since the Company’s formation, and was a
co-founder of ASI. Mr. Dixon's experience in the semiconductor capital
equipment industry goes back to 1966 when he started with Fairchild
Semiconductor. Later, Mr. Dixon was employee number 25 at Applied Materials
(today AMAT is the largest supplier of "chip-gear" in the world) and went on
to
be a co-founder of Gemini Research, a chip-gear firm that was acquired by Lam
Research in 1988. Mr. Dixon stayed on with Lam for two years in sales
management before leaving in 1990 to co-found ASI. Mr. Dixon is a US Navy
Veteran having served with a flight squadron on the aircraft carrier USS Hancock
while stationed near Asia in the 1960s.
G.
Dennis Key
is the
CFO of DND, and the President/CFO/CEO of ASI. Prior to January 1, 2004, Mr.
Key
served as the President of the Texas Division of Aspect Semiquip International,
and then since July of 2003, as President of Aspect Systems, Inc. He served
as
the Vice President, Worldwide Sales and Field Operations for Lam Research,
Inc.
from 1992 to 1996. Mr. Key was also previously employed as Vice-President,
Sales
and Marketing of Varian Corporation 1997 to 1998, and in a consulting role
as
Vice-President, Business Development for GlobiTech, Inc. from 2000-2002. Mr.
Key
began serving as a director of DND in August of 2003, began serving as Secretary
of DND in January of 2004 and began serving as DND’s CFO in November of
2003.
Lowell
W. Giffhorn
since
October 2005, Mr. Giffhorn has served as the Chief Financial Officer and since
December 2005, as a member of the Board of Directors of Brendan Technologies,
Inc., a publicly held developer and marketer of computational analytical
software products for the laboratory testing industry. Since July 2005, Mr.
Giffhorn also serves as the Chief Financial Officer of Imagenetix, Inc., a
publicly held nutritional supplement company. Mr. Giffhorn was the Chief
Financial Officer from May 1997 to June 2005 and was a member of the Board
of
Directors from 1998 to April 2006 for Patriot Scientific Corp., a publicly
held
microprocessor and intellectual property company. From June 1992 to August
1996
and from September 1987 to June 1990 he was the CFO of Sym-Tek Systems, Inc.
and
Vice President of Finance for its successor, Sym-Tek, Inc., a publicly traded
supplier of capital equipment to the semiconductor industry. Mr. Giffhorn
obtained a M.B.A. degree from National University in 1976 and he obtained a
B.S.
in Accountancy from the University of Illinois in 1969.
Ronny
Baker
has
served as Controller of ASI since October of 2001, and as Controller of DND
since September, 2002. Prior to October of 2001, Mr. Baker held accounting
positions with ASI and Semiquip, Inc. beginning in October of 2000. From June
1999 to June 2001, Mr. Baker was Controller of Dallas Hospitality Co. which
managed a conference center and cafeteria in an office tower in Dallas. From
1978 to 1998 and from 1972 to 1978, Mr. Baker held various accounting
positions with Southland Corp and Monsanto Chemical respectively. Mr. Baker
also served in the U.S. Air Force from 1968 to 1972.
31
There
have been no material changes to the procedures by which our shareholders may
recommend nominees to the Board of Directors during our last fiscal year.
Committees
of the Board of Directors
Our
Board
has a standing Audit Committee and previously had a standing Compensation
Committee. The entire Board now serves as the Compensation Committee.
Audit
Committee.The
Audit
Committee is responsible for assisting the Board of Directors in monitoring
and
oversight of (1) the integrity of the Company's financial statements and its
systems of internal accounting and financial controls and (2) the independence
and performance of the Company's independent auditors. The Audit Committee,
which met four times during 2006, is composed of one employee director and
one
other director, who was determined by the Board to be an independent director.
During 2006, the Audit Committee consisted of Mr. Giffhorn (Chairman) and
Mr. Key.
The
Board
of Directors has determined that Mr. Giffhorn is an audit committee
financial expert as defined in Item 401 of Regulation S-B promulgated by the
Securities and Exchange Commission. The Board's conclusions regarding the
qualifications of Mr. Giffhorn as an audit committee financial expert were
based on his service as a chief financial officer of a public company and his
degrees in accounting and business administration.
Code
of Ethics
DND
has
set forth its policy on ethical behavior in a document called "Code of Business
Conduct and Ethics." This policy applies to the members of our Board of
Directors and all employees, including (but not limited to) our principal
executive officer, principal financial officer, principal accounting officer
or
controller and persons performing similar functions. This policy comprises
written standards that are reasonably designed to deter wrongdoing and to
promote the behavior described in Item 406 of Regulation S-B promulgated by
the Securities and Exchange Commission. No waivers of the Code were granted
in
2006.
Section
16(a) of the Exchange Act requires the Company's directors, executive officers
and persons who own more than 10% of the Company's Stock (collectively,
"Reporting Persons") to file with the SEC initial reports of ownership and
changes in ownership of the Company's Common Stock. Reporting Persons are
required by SEC regulations to furnish the Company with copies of all Section
16(a) reports they file. To the Company's knowledge, based solely on its review
of the copies of such reports received or written representations from certain
Reporting Persons that no other reports were required, the Company believes
that
during its fiscal year ended December 31, 2006, all Reporting Persons complied
with all applicable filing requirements, except as follows: Lowell Giffhorn
(two
Form 4s); Dennis Key (one Form 4); and Doug Dixon (one Form 4).
ITEM
10.
EXECUTIVE
COMPENSATION
Summary
of Cash and Certain Other Compensation
The
following table provides certain summary information concerning the compensation
earned by the Company's Chief Executive Officer and each of the Company's other
most highly compensated executive officers, for services rendered in all
capacities to the Company and its subsidiaries for the fiscal years ended
December 31, 2004, 2005, and 2006. No
executive officers of the Company or its subsidiary, other than those included
below, received compensation in excess of $100,000 during the fiscal year ended
December 31, 2006. The
following information includes the dollar value of base salaries, bonus awards,
stock options granted and certain other compensation, if any, whether paid
or
deferred. The listed individuals shall be hereinafter referred to as the "Named
Officers."
32
SUMMARY
COMPENSATION TABLE
Name
and Principal Position
Year
Salary
($)
Bonus
($)
Option
Awards
($)
All
Other Compen-sation
($)
Total
($)
Douglas
N. Dixon (CEO)
(1)
2006
150,000
0
5,250
16,340
(2)
171,590
2005
150,000
24,068
0
14,165
(3)
188,233
2004
150,000
0
0
15,745
(4)
165,745
G.
Dennis Key (CFO; CEO and CFO of ASI)
2006
150,000
0
5,250
16,340
(2)
171,590
2005
150,000
37,500
0
14,165
(3)
201,665
2004
150,000
0
0
15,745
(4)
165,745
(1)
Effective
January 1, 2004, Mr. Dixon resigned as CEO of Aspect Systems, Inc,
the
Company's subsidiary. He remains CEO of the
Company.
(2)
Represents
$9,740 for insurance premiums and $6,600 for automobile allowance.
(3)
Represents
$7,565 for insurance premiums and $6,600 for automobile allowance.
(4)
Represents
$9,145 for insurance premiums and $6,600 for automobile
allowance.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
Option
Awards
Stock
Awards
Name
Number
of Securities Underlying Unexercised Options Exercisable
(#)
Number
of Securities Underlying Unexercised Options Unexercisable
(#)
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
(#)
Option
Exercise Price
($)
Option
Expiration Date
Number
of Shares that Have Not Vested (#)
Market
Value of Shares that Have Not Vested
($)
Equity
Incentive Plan Awards: Number of Unearned Shares That Have Not
Vested
(#)
Equity
Incentive Plan Awards: Market Value of Unearned Shares That Have
Not
Vested ($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
Douglas
N. Dixon
375,000
NA
NA
$
.06
8/11/13
NA
$
-
NA
$
-
150,000
NA
NA
$
.035
1/28/16
NA
$
-
NA
$
-
G.
Dennis Key
1,050,000
NA
NA
$
.06
8/11/13
NA
$
-
NA
$
-
150,000
NA
NA
$
.035
1/28/16
NA
$
-
NA
$
-
33
Employment
Agreements and Termination of Employment
DND
has
entered into an employment agreement with its CFO, G. Dennis Key, dated July1,2003. The agreement with Mr. Key provides for Mr. Key's employment as President
and CEO of ASI, and also provides for Mr. Key's appointment to the Board of
Directors of both the Company and ASI. This agreement is terminable by Mr.
Key
with cause only upon 30 days written notice, and by the Company with cause
only
upon 14 days written notice. Under the agreement, Mr. Key receives an
annual base salary equal to $150,000, and receives certain benefits and bonuses
as described in the agreement.
Pursuant
to a separate agreement, Mr. Key has an option to acquire 4,933,333 out of
the DND shares owed by Mr. Dixon. The exercise price of such options is $1
per
share. On September 1, 2005, ASI entered into a consulting agreement with Mr.
Dixon that terminates on November 30, 2006. The consulting services being
provided include various sales and marketing services valued at $24,100.
Director
Compensation
Members
of the Board of Directors do not generally receive any cash compensation for
their service as Directors but Mr. Giffhorn was awarded stock options in 2005
and 2006 as compensation for Board service. All expenses incurred by directors
for meeting attendance or out of pocket expenses connected directly with their
Board representation are reimbursed by DND.
Director
liability insurance may be provided to all members of the Board of Directors.
DND has not yet obtained such insurance and is currently checking into specifics
for available cost and coverage. A specific time frame to obtain the insurance
has not been set. No differentiation is made in the compensation of "outside
directors" and those employees of DND serving in that capacity.
Director
Compensation
Name
Fees
Earned
or
Paid
in
Cash
($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive
Plan
Compensation
($)
Nonqualified
Deferred Compensation Earnings
($)
All
Other
Compensation
($)
Total
($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Douglas
N. Dixon (1)
$
0
$
0
$
0
$
0
$
0
$
0
$
0
G.
Dennis Key (1)
-
-
0
-
-
-
0
Lowell
Giffhorn
-
-
5,250
(2)
-
-
-
5,250
(1)
Mr.
Dixon and Mr. Key did not receive any compensation for their service
as
directors during our fiscal year ended December 31, 2006. All compensation
received for their service as officers of the Company are reflected
in the
Summary Compensation Table above.
(2)
As
of December 31, 2006, Mr. Giffhorn held options to purchase 250,000
shares
of our common stock.
34
ITEM
11.
SECURITY
OWNERSHIP
OF CERTAIN
BENEFICIAL
OWNERS
AND MANAGEMENT
AND RELATED
STOCKHOLDER
MATTERS
As
of
April 11, 2007, there were 26,234,653 common shares outstanding. The following
tabulates holdings of shares of DND by each person who, subject to the above,
as
of April 11, 2007, holds of record or is known by management to own beneficially
more than 5.0% of the common shares and, in addition, by all directors and
officers of DND individually and as a group.
Douglas
Dixon, Chairman of the Board, Chief Executive Officer and
President
14,025,000
675,000
14,700,000
54.6
%
G.
Dennis Key, Chief Financial Officer and Director
1,100,000
6,283,333
(3)
7,383,333
22.7
%
Lowell
Giffhorn, Director
260,000
400,000
660,000
2.5
%
Ronny
Baker, Controller
10,000
100,000
110,000
*
All
Officers and Directors
as
a group (4 persons)
15,395,000
2,525,000
17,920,000
62.3
%
*
Less
than one percent of the outstanding Common
Stock.
(1)
Except
as otherwise noted, the address for each of these individuals is
c/o DND
Technologies, Inc., 375 E. Elliot Road, Bldg. 6, Chandler, Arizona85225.
(2)
Percentage
ownership is based on 26,234,653 shares of Common Stock outstanding
on
April 11, 2007. Shares of Common Stock subject to stock options which
are
currently exercisable or will become exercisable within 60 days after
April 11, 2007 are deemed outstanding for computing the percentage
ownership of the person or group holding such options, but are not
deemed
outstanding for computing the percentage ownership of any other person
or
group.
(3)
In
addition to options to purchase 1,200,000 shares granted to him under
the
2003 Option Plan, Mr. Key has an immediately exercisable option to
acquire
4,933,333 shares out of the DND shares owed by Mr. Dixon. The exercise
price of such options is $1 per share. These 4,933,333 shares are
included
in both Mr. Dixon’s and Mr. Key’s number and percent of common stock
beneficiary owned, but are only included once in the calculation
of common
stock beneficially owned by all officers and directors as a group.
35
ITEM
12.
CERTAIN
RELATIONSHIPS
AND RELATED
TRANSACTIONS,
AND
DIRECTOR
INDEPENDENCE
On
December 31, 1997 and March 6, 1998, the Company borrowed a total of $120,000
from Douglas Dixon through two promissory notes. These notes are unsecured
and
were due on December 31, 1998. The notes have not been repaid and are accruing
interest at 7%, compounded daily, with accrued interest totaling approximately
$69,000 at December 31, 2006. The notes are payable on demand, and, while it
is
unlikely that Mr. Dixon will require payment in the foreseeable future, if
he
were to do so, the Company may have difficulty repaying the notes immediately.
On August 24, 2005, the Company borrowed $125,000 from Mr. Dixon through a
promissory note, which was repaid during 2006. During the past two years, no
other amounts have been loaned to DND by officers, directors or major
shareholders of the Company.
Using
the
standards of the NASDAQ Capital Market, which listing standards are not
applicable to the Company, the Company's Board has determined that only Mr.
Giffhorn would qualify under such standards as an independent director. Mr.
Giffhorn would meet the NASDAQ Capital Market listing standards for independence
both as a director and as a member of the Audit Committee. No other directors
would be independent. The Company did not consider any relationship or
transaction between itself and Mr. Giffhorn not already disclosed in this report
in making this determination.
ITEM
13.
EXHIBITS,
FINANCIAL
STATEMENTS
AND REPORTS
ON FORM 8-K
(a)
The
following documents are filed as part of this
report:
Exhibits
included or incorporated herein: See Exhibit Index.
36
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of
DND
Technologies, Inc.:
We
have
audited the accompanying consolidated balance sheet of DND Technologies,
Inc.
(the “Company”) as of December 31, 2006 and the related consolidated statements
of operations, stockholders’ equity, and cash flows for the years ended December31, 2006 and 2005. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the accompanying consolidated financial statements present fairly,
in
all material respects, the financial position of the Company as of December31,2006, and the results of its operations and its cash flows for the years
ended
December 31, 2006 and 2005 in conformity with accounting principles generally
accepted in the United States.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in the notes to
the
financial statements, the Company has incurred a loss of approximately
$1,893,000 in the current year, has negative working capital of approximately
$8,600,000, and is in default on the majority of its term debt. These matters
raise substantial doubt about the Company’s ability to continue as a going
concern. Management’s plans concerning these matters are also described in the
notes to the consolidated financial statements. The consolidated financial
statements do not include adjustments that might result from the outcome
of this
uncertainty.
Nature
of Business and History of Company
- DND
Technologies, Inc. (the "Company") 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
Advanced AutoEtch, Rainbow, and TCP plasma etch systems, plus a variety of
plasma etch and strip products manufactured on the ASI MX-1 and ASI MX-10
platforms (formerly Matrix System One and Ten), and the Arista and Arista
Dual
platforms (formerly Matrix Bobcat and Cheetah). Elements of support include
spare
parts
and
assemblies, and various engineering services.
Basis
of Presentation andPrinciples
of Consolidation
- 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 a loss of approximately $1,893,000
for
the year ended December 31, 2006 and a loss of approximately $4,560,000 (which
includes a $2,705,013 charge for impairment of the Lam license agreement)
in the
year ended December 31, 2005. Revenues for the year ended December 31, 2006
are
down approximately 48% from the prior year; the Company has negative working
capital of approximately $8,600,000, and is in default on the majority of
its
term debt. In addition, on March 6, 2006, the Company received a notice of
termination of its license agreement with Lam Research Corporation (“Lam”). The
termination of the license agreement is currently troublesome but not expected
to have long term material impact on sales. The parts purchased pursuant
to the
Lam Agreement are not typically purchased from Lam, but from certain of the
Company's other vendors. The parts that the Company historically purchased
directly from Lam are for the support of Rainbow and TCP products, which
were
not covered by the Lam Agreement. Earlier, Lam entered the refurbishing market
directly, which has had some impact on the Company’s revenue. The Company’s most
significant cause of revenue reduction during this year, however, is defined
by
the action which was taken by the Company against Lam. During
the second quarter of 2006, the Company filed a lawsuit against Lam as a
result
of long-standing contract disputes between Aspect and Lam.Management
is confident that the complaint
is justified, and that
the
Company has suffered substantial damages. Recently,
the lawsuit was removed to federal court and Lam has filed a motion to dismiss,
challenging the adequacy of the non-contract causes of action. The Company
is
vigorously opposing the motion to dismiss. The
Company’s going concern issue and pending litigation with Lam have impacted the
Company’s sales, as certain of the Company’s customers are now reluctant to
order systems, believing that there is a risk that any deposit may be lost
if
the Company is unable to continue operations. This circumstance greatly hampers
the Company’s ability to capitalize on the opportunities of a growing market.
The Company and Lam are currently in discussions to seek an amicable resolution
of the mutual defaults that have occurred under both the original and the
amended agreement, although management cannot be certain that these discussions
will result in a favorable resolution. These factors raise substantial doubt
as
to the Company’s ability to continue as a going concern. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts
and
classification of liabilities that might be necessary should the Company
be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to
meet
its obligations on a timely basis, to obtain additional financing or refinancing
as may be required, settlement of the Lam lawsuit in favorable terms to the
Company, and ultimately to attain profitable operations.
F-7
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, which are classified as “Deposits from customers” in the accompanying
balance sheet.
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, 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 material, labor and manufacturing
overhead. Inventory with no sales or usage within the prior 12 months and
inventory in excess of a 12 month supply, is considered excessive and
slow-moving and, accordingly, fully reserved (see Note 3). The reserves are
evaluated on a quarterly basis and adjusted for the full carrying value of
obsolete, excessive and slow-moving inventory.
License
Agreements
- The
Company has license agreements, which are being amortized using the
straight-line method over the life of the contracts with Axcelis Technologies,
Inc. (“Axcelis”) (7 years). See Note 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
assets
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 and capital leases
Term
of lease
Machinery
and equipment
7
Years
Laboratory
tools
7
Years
Software
3
Years
F-8
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 loss in the year ended December31, 2006. However, due to the termination of the Lam agreement (see Note
5), the
Company recognized an impairment loss for the unamortized value as of December31, 2005 ($2.7 million) of its Lam license agreement.
Product
Warranty Provision
- ASI
provides a warranty provision on sales of its systems to cover anticipated
repairs and/or replacement. This warranty ranges from ninety days to twelve
months from date of acceptance and varies in amount accrued per
system.
A
summary
of the warranty liability is as follows:
Preferred
Stock
- The
Company has approved the creation of a Preferred Stock. As of this date,
no
terms or rights attributable to this stock have been created.
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.
104,
“Revenue Recognition in Financial Statements,” (SAB 104). 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 and completed.
Shipping
and Handling Costs
- The
Company’s policy is to classify shipping and handling costs as part of cost of
goods sold in the statement of operations.
Advertising
- The
Company expenses all advertising as incurred. For the years ended December31,2006 and 2005, the Company charged to operations $0 and $576,
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
the taxable income and pretax financial income and between the tax basis
of
assets and liabilities and their reported amounts in the financial statements.
Deferred tax assets and liabilities are included in the financial statements
at
currently enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled
as
prescribed in FASB Statement No. 109, “Accounting for Income Taxes”. As changes
in tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
F-9
Net
Income (Loss) Per Share - Basic
income (loss) per common share is computed by dividing net income available
to
common stockholders by the weighted-average number of common shares outstanding
during the period. Diluted income per common share is computed by dividing
net
income available to common stockholders by the weighted-average number of
common
shares outstanding plus an assumed increase in common shares outstanding
for
potentially dilutive securities, which consist of options. Potentially dilutive
shares are excluded from the computation in loss periods, as their effect
would
be anti-dilutive. The dilutive effect of options to acquire common stock
is
measured using the treasury stock method. The
dilutive effect of potentially issuable securities was 4,325,883 shares and
2,198,677 shares for the years ended December 31, 2006 and 2005,
respectively.
Concentration
of Risk
-
Financial instruments which potentially subject the Company to concentrations
of
credit risk consist principally of cash and trade accounts receivable.
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 December 31, 2006, the Company had three customers
whose balances exceeded 10% of gross accounts receivable, 27%, 11% and 10%,
respectively.
Significant
Customers - For
the
year ended December 31, 2006, the Company had one customer whose revenues
exceeded 10% of total revenues (14%). For the year ended December 31, 2005,
the
Company had two customers whose revenues exceeded 10% of total revenues (15%
and
13%). Revenues in 2006 and 2005 outside the United States include Europe
15% and 5%, and Asia 18% and 29%, respectively.
Significant
Suppliers
- For
the year ended December 31, 2006 and 2005, approximately 5% and 21%,
respectively, of gross inventory purchases were purchased from Lam Research
Corporation (“Lam”). On March 6, 2006, the Company received a notice of
termination of its license agreement with Lam. However, the parts purchased
pursuant to the Lam Agreement are not typically purchased from Lam, but from
certain of the Company's other vendors. The parts that the Company historically
has purchased directly from Lam are for the support of Rainbow and TCP products,
which were not covered by the Lam Agreement.
Use
of Estimates
- The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make certain estimates and assumptions that affect the reported
amounts and timing of revenues and expenses, the reported amounts and
classification of assets and liabilities, and disclosures of contingent assets
and liabilities. These estimates and assumptions are based on the Company’s
historical results as well as management’s future expectations. The Company’s
actual results could vary materially from management’s estimates and
assumptions.
Disclosure
About Fair Value of Financial Instruments
- The
Company estimates that the fair value of all financial instruments as of
December 31, 2006, as defined by 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.
F-10
Stock
Based Compensation -
Effective January 1, 2006, the Company adopted SFAS No. 123(R),
“Share-Based Payment: An Amendment of FASB Statements No. 123 and 95” using
the modified prospective method. Under this method, compensation cost is
recognized on or after the effective date for the portion of outstanding
awards,
for which the requisite service has not yet been rendered, based on the grant
date fair value of those awards. Prior to January 1, 2006, the Company
accounted for employee stock options using the intrinsic value method in
accordance with Accounting Principles Board (“APB”) Opinion No. 25 (“APB
No. 25”), “Accounting for Stock Issued to Employees,” and adopted the
disclosure only alternative of SFAS No. 123. For stock-based awards issued
on or after January 1, 2006, the Company recognizes the compensation cost
on a straight-line basis over the requisite service period for the entire
award.
Measurement and attribution of compensation cost for awards that are unvested
as
of the effective date of SFAS No. 123(R) are based on the same
estimate of the grant-date or modification-date fair value and the same
attribution method used under SFAS No. 123.
On
November 10, 2005, the Financial Accounting Standards Board (“FASB”) issued
FASB Staff Position No. FAS 123(R)-3 “Transition Election Related to
Accounting for Tax Effects of Share-Based Payment Awards.”The Company has
elected to adopt the alternative transition method provided in the FASB Staff
Position for calculating the tax effects of stock-based compensation pursuant
to
SFAS 123(R). The alternative transition method includes simplified methods
to
establish the beginning balance of the additional paid-in capital pool (“APIC
pool”) related to the tax effects of employee stock-based compensation, and to
determine the subsequent impact on the APIC pool and Consolidated Statements
of
Cash Flows of the tax effects of employee stock-based compensation awards
that
are outstanding upon adoption of SFAS 123(R). As the Company is currently
in a
net operating loss position and has placed valuation allowances on its net
deferred tax assets, there is no net impact on the Company’s APIC pool related
to stock-based compensation for the year ended December 31,2006.
Had
the
compensation costs for the Company’s options been determined based on the fair
value at the grant date, rather than the intrinsic-value-method, the proforma
amounts would be as follows. Included in the proforma stock-based compensation
expense for the year ended December 31, 2005 in the table below is the expense
associated with the Company’s decision to accelerate all of its stock options
during the year ended December 31, 2005. The Company believes that no further
compensation expense will be required in future periods associated with the
affected options.
The
pro
forma amount for the year ended December 31, 2005 does not include a tax
benefit on the stock compensation due to the deferred income tax valuation
allowance recorded by the Company in the period.
Net
income (loss):
As
reported
$
(4,560,362
)
Proforma
$
(4,700,442
)
Net
Income per common stock share:
Basic
and diluted:
As
reported
$
(.18
)
Proforma
$
(.19
)
The
Company estimated the fair value of each stock option at the grant date using
the Black-Scholes option pricing model based on the following
assumptions:
Weighted-average
estimated values of options granted
$
0.0327
$
0.16
F-11
Recently
Issued Accounting Pronouncements
-
In
February 2007, the FASB issued SFAS No. 159, which permits entities to choose
to
measure many financial instruments and certain other items at fair value.
SFAS
No. 159 also includes an amendment to SFAS No. 115, “Accounting for Certain
Investments in Debt and Equity Securities” which applies to all entities with
available-for-sale and trading securities. This Statement is effective as
of the
beginning of an entity’s first fiscal year that begins after November 15, 2007.
The Company is assessing the impact of SFAS No. 159 and has not determined
whether it will have a material impact on the Company’s results of operations or
financial position.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.” The Statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements, and does not require any new fair
value measurements. This Statement applies under other accounting pronouncements
that require or permit fair value measurements. The Statement is effective
for
the fiscal years beginning after November 15, 2007. The Company is
assessing SFAS No. 157 and has not determined the impact the adoption of
SFAS No. 157 will have its results of operations or financial
position.
In
June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”
(FIN 48). The interpretation clarifies the accounting for uncertainty in
income
taxes recognized in a company’s financial statements in accordance with SFAS
No. 109, “Accounting for Income Taxes.” Specifically, the pronouncement
prescribes a recognition threshold and a measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected
to be
taken in a tax return. The interpretation also provides guidance on the related
de-recognition, classification, interest and penalties, accounting for interim
periods, disclosure and transition of uncertain tax positions. The
interpretation is effective for fiscal years beginning after December 15,2006. The Company is assessing FIN 48 and has not determined the impact that
the
adoption of FIN 48 will have on its consolidated financial
statements.
Reclassifications
-
Certain 2005 amounts have been reclassified to conform to 2006
presentations.
2. ACCOUNTS
RECEIVABLE
A
summary
of accounts receivable and allowance for doubtful accounts is as
follows:
Accounts
receivable
$
490,373
Allowance
for doubtful accounts
(27,066
)
Net
accounts receivable
$
463,307
F-12
3. INVENTORIES
A
summary
of inventories and allowance for obsolescence is as follows:
Property
and equipment and accumulated depreciation at December 31, 2006 consist
of:
Office
furniture, fixtures and equipment
$
364,981
Leasehold
improvements
444,669
Machinery
and equipment
288,601
Laboratory
tools
35,843
Software
10,000
1,144,094
Less
accumulated depreciation
(1,040,941
)
Total
property and equipment
$
103,153
5. LICENSE
AGREEMENT AND PAYABLES, LAM RESEARCH CORPORATION
The
Company is currently in default on its payments due to Lam Research Corporation
(“Lam”); accordingly, the full amount has been classified as a current liability
in the consolidated balance sheet. On March 6, 2006, the Company was notified
that Lam had terminated the agreement. During
the second quarter of 2006, the Company filed a lawsuit against Lam as a
result
of long-standing contract disputes between Aspect and Lam.Management
is convinced that the complaint is justified, and that the Company
has suffered substantial damages. Recently, the lawsuit was removed
to federal court and Lam has filed a motion to dismiss, challenging the adequacy
of the non-contract causes of action. The Company is vigorously opposing
the
motion to dismiss.
The
Company’s going concern issue and pending litigation with Lam have impacted the
Company’s sales, as certain of the Company’s customers are now reluctant to
order systems from the Company, believing that there is a risk that any deposit
may be lost if the Company is unable to continue operations. This circumstance
greatly hampers the Company’s ability to capitalize on the opportunities of a
growing market. The Company and Lam are currently in discussions to seek
an
amicable resolution of the mutual defaults that have occurred under both
the
original and the amended agreement, although management cannot be certain
that
these discussions will result in a favorable resolution. As a result, the
Company recognized a full impairment of the license agreement in the amount
of
$2,705,013 at December 31, 2005.
F-13
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 now marketed
under
the ASI trade names MX-1 and MX-10 (formerly Matrix 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 (from 10% down to 2%) on related sales
through December 31, 2010.
In
August
2004, the Company entered into an additional agreement with Axcelis acquiring
an
exclusive license to manufacture, sell and provide services and parts support
for certain reactive ion etch semiconductor manufacturing equipment for wafer
sized up to 200mm now marketed under the ASI trade name Arista and Arista
Dual
(formerly Matrix Bobcat and Cheetah). 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 (from 10% down to 2%) on related sales over
a
period of time that ends December 31, 2011.
Estimated
amortization of the prepaid license fee is as follows:
The
license and royalty payable at December 31, 2006 consisted of the
following:
License
payable
$
1,718,346
Royalty
payable
880,177
Total
license and royalty payable
2,598,523
The
Company is currently in default on its payments; accordingly, the full amount
has been classified as a current liability in the consolidated balance sheet.
7. NOTES
PAYABLE
The
Company's term loan dated May 14, 2004 to Merrill Lynch was renegotiated
during July 2006. Under the new agreement, the Company is required
to make
monthly payments, commencing August 1, 2006, in the amount of $24,958
plus
interest (at prime + 4%), and a final balloon payment is due April30,2007. The loan continues to be secured by a first lien on the Company's
total assets ($1,027,836 as of December 31, 2006) and has been
guaranteed
by Doug Dixon, Chairman and CEO, and the Company. The Company is
currently
in default on its agreement.
$
579,326
On
July 22, 2005the Company entered into a Bridge Loan Agreement
with
Cornell Capital Partners LP (“Cornell”). The loan calls for interest at
12%. On May 1, 2006 the loan was renegotiated, under the new agreement,
the Company is required to make 12 monthly payments, commencing
May 1,2006, in the amount of $12,500 to Cornell and a final balloon payment
in
the amount of $204,107 on May 1, 2007.
212,500
Unsecured
demand note due to an individual with interest accruing at
7%
289,350
Total
$
1,081,176
F-14
8. CAPITAL
LEASE PAYABLE
The
Company leases various assets under capital leases. The leases require thirteen
to sixty monthly payments that vary from $286 to $785, including interest
at 6%
to 15%. The leases mature at various dates through November 2008. The assets
have an original cost of $52,373 and a net book value of $28,356 at December31,2006.
Future
minimum lease payments under the leases at December 31, 2006 are as
follows:
A
summary
of accounts payable and accrued expenses is as follows:
Trade
accounts payable
$
681,913
Accrued
commissions
120,976
Accrued
payroll
192,708
Product
warranty provision
252,333
Accrued
interest
545,770
Sales
and state income taxes payable
12,272
Total
Accounts Payable and Accrued Expenses
$
1,805,972
F-15
10. RELATED
PARTY TRANSACTIONS
Amounts
Due to Related Party
The
Company has the following amounts due to its Chairman and CEO at December31,2006:
Notes
payable at 7.0%
$
120,000
Accrued
interest on notes payable
68,921
Accrued
salaries
87,881
Total
Amount Due To Related Party
$
276,802
11. INCOME
TAXES
Provision
(Benefit)
The
provision for income taxes for the year ended December 31, 2006 and 2005
represents primarily California franchise taxes and consists of the
following:
2006
2005
Current
$
800
$
800
Deferred
$
0
$
0
The
Company’s income tax (benefit) provision differs from the amount computed by
applying the Federal statutory rate to (loss) income before (benefit from)
provision for income taxes. Reconciliation to the statutory federal income
tax
rate is as follows for the years ended December 31, 2006 and 2005.
In
assessing the realizability of deferred tax assets, management considers
whether
it is more likely than not that some portion or the entire deferred tax asset
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.
The
Company has the following net operating loss carryforwards:
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 2008, respectively. Rent expense for the years ended December 31,2006
and 2005 was $404,966 and $428,341, respectively.
Future
minimum lease payments on the real estate leases are as follows:
In
February 2005, the Company issued 100,000 shares of common stock for payment
of
approximately $15,000 of legal services received during the year ended December31, 2004. These shares had an aggregate fair value of $20,500; as such the
Company recorded the shares at the full market value and a $5,500 loss on
settlement of debt. This loss was offset by a $23,000 gain resulting from
the
forgiveness of accrued interest expense after the Company made the final
$100,000 payment on an unsecured note payable.
F-17
14. EMPLOYEE
STOCK OPTIONS
On
August11, 2003, the Board of Directors and stockholders approved the DND Technologies,
Inc. 2003 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. As
of
December 31, 2005 all vesting periods have been accelerated and all options
are
fully vested.
On
June15, 2005, the Board of Directors and stockholders approved the DND Technologies,
Inc. 2005 Stock Option Plan, which permits the Board of Directors to grant,
for
a ten year period, options to purchase up to 3,000,000 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. The Company has not issued any options from this
plan.
During
the years ended December 31, 2006 and 2005, the Company recognized $19,620
and
$0 of expense in the income statement for options issued to
non-employees.
For
the
years ended December 31, 2006 and 2005, the total options available for
exercise, the weighted average exercise price, and the fair value of stock
options was as follows:
2006
2005
Total
options available for exercise
4,325,883
4,045,466
Weighted
average exercise price
$
.07
$
.06
Fair
value of options
$
200,247
$
224,233
Included
in the total options available for exercise are 971,369 and 129,583 options
that
were cancelled at December 31, 2006 and 2005, respectively, but can be exercised
for a period of six months after cancellation.
F-18
A
summary
of the option activity for the years ended December 31, 2006 and 2005, pursuant
to the terms of the DND Technologies, Inc. 2003 Stock Option Plan is as
follows:
2006
2005
Weighted
Average
Weighted
Average
Options
outstanding at beginning of the year
3,915,883
$
.05
4,234,226
$
.06
Granted
600,000
$
.035
635,000
$
.16
Exercised
-
-
(579,175
)
$
.06
Cancelled
and expired
(1,161,369
)
$
.02
(374,168
)
$
.07
Options
outstanding at end of the year
3,354,514
3,915,883
Information
regarding stock options outstanding as of December 31, 2006 is as
follows:
Price
$
.07
Weighted
average exercise price
$
.07
Weighted
average remaining contractual life
7
years 2 months
15. 401(k)
PLAN
In
January 2005, the Company sponsored a qualified defined contribution benefit
plan covering substantially all employees. Under this plan, employees may
contribute a percentage of their annual compensation to the plan up to certain
maximums, as defined by the plan and by the Internal Revenue Service (“IRS”).
Currently, the Company matches a percentage of employee contributions in
cash.
During the years ended December 31, 2006 and 2005, the Company made
contributions in the amount of $49,671 and
$43,443,
respectively. Also during the years ended December 31, 2006 and 2005, the
Company incurred administrative costs associated with the plan in the amount
of
$0 and $0, respectively.
16. MANAGEMENT
PLANS
The
consolidated financial statements do not include any adjustments relating
to the
recoverability and classification of recorded asset amounts or the amounts
and
classification of liabilities that might be necessary should the Company
be
unable to continue as a going concern. The Company’s continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to
meet
its obligations on a timely basis, to obtain additional financing or refinancing
as may be required, and ultimately to attain profitable operations.
Management’s
plan to eliminate the going concern situation include, but are not limited
to,
the renegotiation of payment terms on the Axcelis payable, improved cash
flow
management, aggressive cost reductions, settlement of the Lam lawsuit in
favorable terms to the Company, and the creation of additional sales and
profits
across its product lines.
17. SUBSEQUENT
EVENTS (UNAUDITED)
On
January 27, 2007, the Company’s Board of Directors approved the issuance of
150,000 shares of common stock to each of the board members for their continued
service.
F-19
During
March 2007, the Company fell in default on its payments to Cornell
Capital.
During
March 2007, the Company made the necessary payments to bring the loan with
Merrill Lynch current. However, the Company is still in default of certain
provisions of the loan. Merrill Lynch has not made any demand for remediation
of
the defaulted provisions and no demand for payment has occurred.
During
April 2007, the Company received notice that its President, Mr. Dennis Key,
is
required to appear in a lawsuit involving one of the Company’s sales
representatives, Mr. Sam Wanger.
F-20
(b)
Reports
on Form 8-K:
None.
ITEM
14.
PRINCIPAL
ACCOUNTANT
FEES
AND SERVICES
The
following table presents fees for professional services rendered by Farber
Hass
Hurley & McEwen LLP for the audit of the Company's annual consolidated
financial statements for fiscal 2006 and 2005, and fees billed for other
services rendered by Farber Hass Hurley & McEwen LLP:
2006
2005
Audit
Fees
$
60,000
$
83,282
Audit
related fees
$
29,175
$
2,245
Tax
Fees
$
5,500
$
-0-
All
other fees
$
-0-
$
-0-
Total
Fees
$
94,675
$
85,527
The
audit
committee pre-approves all auditing and permitted non-audit services to be
performed for the Company by its independent auditor, including the fees and
terms of those services.
37
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DND
TECHNOLOGIES, INC.,
a
Nevada corporation
By:
/s/
Douglas N. Dixon
Douglas
N. Dixon
Chief
Executive Officer and Director
POWER
OF ATTORNEY
KNOW
ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Douglas N. Dixon, his/her attorney-in-fact, with the
power of substitution, for him/her in any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file the same, with Exhibits
thereto and other documents in connection therewith with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorney-in-fact, or substitute or substitutes may do or cause to be done by
virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
Standby
Equity Distribution Agreement, dated June 17, 2005, by and between
Cornell
Capital Partners, LP and DND Technologies, Inc.
Incorporated
by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K
as filed with the Securities and Exchange Commission on July 7,2005
10.17
Registration
Rights Agreement, dated June 17, 2005, by and between Cornell Capital
Partners, LP and DND Technologies, Inc.
Incorporated
by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K
as filed with the Securities and Exchange Commission on July 7,2005
10.18
Placement
Agent Agreement, dated June 17, 2005, by and between Cornell Capital
Partners, LP and DND Technologies, Inc.
Incorporated
by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K
as filed with the Securities and Exchange Commission on July 7,2005
10.19
Escrow
Agreement, dated June 17, 2005, by and among DND Technologies Inc.,
Cornell Capital Partners, LP and David Gonzalez, Esq.
Incorporated
by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K
as filed with the Securities and Exchange Commission on July 7,2005
40
Exhibit
No.
Description
Location
10.20
Promissory
Note, dated July 23, 2005, by and between DND Technologies, Inc.
and
Cornell Capital Partners, LP
Forbearance
Agreement, dated July 17, 2006 by and among Merrill Lynch Business
Financial Services, Inc., the Company, Aspect Systems, Inc. and Douglas
N.
Dixon
Letter
Agreement dated March 14, 2007 by and among Merrill Lynch Business
Financial Services, Inc., the Company, Aspect Systems, Inc. and Douglas
N.
Dixon.
