10-K405 1 a2045573z10-k405.txt FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2000 or / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. DAW TECHNOLOGIES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) UTAH 0-21818 87-0464280 ---------------------------- --------------------- ----------------------- (State or other jurisdiction (Commission File No.) (IRS Employer of incorporation) Identification No.) 2700 SOUTH 900 WEST SALT LAKE CITY, UTAH 84119 ------------------------------------------------------------ (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (801) 977-3100 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: TITLE OF CLASS Common Stock, $0.01 Par Value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value of the Common Stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on the NASDAQ National Market System on April 11, 2001, was approximately $11,260,914. Shares of Common Stock held by each officer and director and by each person who may be deemed to be an affiliate have been excluded. As of April 11, 2001, the Registrant had 15,047,176 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Definitive Proxy Statement for its 2001 Annual Meeting of Shareholders, expected to be filed with the Securities and Exchange Commission on or before April 30, 2001 are incorporated by reference into Items 10, 11, 12 and 13 of this Annual Report on Form 10-K. TABLE OF CONTENTS
PART I .................................................................. 1 Item 1. BUSINESS.......................................................... 1 Item 2. PROPERTIES........................................................ 7 Item 3. LEGAL PROCEEDINGS................................................. 7 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 8 PART II .................................................................. 8 Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS............................................. 8 Item 6. SELECTED FINANCIAL DATA........................................... 9 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................... 10 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........ 16 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 16 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................................ 16 PART III .................................................................. 16 Item 10, 11, 12 and 13...................................................... 16 PART IV .................................................................. 17 Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K... 17 SIGNATURES.................................................................. 19 FINANCIAL STATEMENTS........................................................F-1
INFORMATION CONTAINED IN THIS REPORT CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE," OR "CONTINUE," OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT INCLUDE, BUT ARE NOT LIMITED TO, THOSE IDENTIFIED IN THIS REPORT, DESCRIBED FROM TIME TO TIME IN THE COMPANY'S OTHER SECURITIES AND EXCHANGE COMMISSION FILINGS, OR DISCUSSED IN THE COMPANY'S PRESS RELEASES. ACTUAL RESULTS MAY VARY MATERIALLY FROM EXPECTATIONS. PART I ITEM 1. BUSINESS. INTRODUCTION Daw Technologies, Inc. (the "Company") is a leading global supplier of ultra-clean manufacturing environments, or cleanrooms, primarily to semiconductor manufacturers, but also to customers in the disk drive, flat panel display, pharmaceutical, biotechnology and food processing industries. The Company offers an integrated approach to cleanroom installation, meaning that the Company provides all services and products necessary to deliver finished cleanroom facilities to its customers. Specifically, the Company provides architectural engineering and design, manufacturing, installation, construction, project management, testing, certification, tool fit-up, and continuing on-site service and support for cleanrooms. The Company also designs, engineers, manufactures, and services certain principal component systems for advanced cleanrooms. The Company believes its integrated approach to cleanroom design and installation benefits its customers by accelerating the process while providing for simplified project control, single-source performance certification and cost effectiveness. The Company also designs, engineers and manufactures environmentally controlled mini-environments, primarily for use in the semiconductor, pharmaceutical, biotechnology and microelectronics industries. Ultra-clean and controlled environments are critical to a rapidly growing segment of advanced production and manufacturing processes, particularly with respect to semiconductors, various microelectronics products, pharmaceuticals, and biotechnology products. Quality and process yields are highly dependent upon controlling contamination levels and other environmental variables. These variables include particulate and molecular contamination, humidity, gases, vibration, temperature and electro-magnetic fields. To be competitive, advanced manufacturers must meet increasingly stringent standards for cleanliness and environmental control in their fabrication facilities ("fabs"), laboratories and production facilities. The Company markets its cleanrooms and mini-environments through a direct sales force to customers building new fabs or renovating existing facilities, and to suppliers of process and testing tools. The Company has sales offices in Salt Lake City, Austin, and Atlanta in the U.S., and in Scotland and France. The Company's customers include many of the world's leading semiconductor, microelectronics and pharmaceutical manufacturers and capital equipment suppliers. The Company's business is global, with most of its revenue generated in North America and Europe. In prior years the Company also derived material revenue from operations in Asia. However, for a variety of business reasons, at the end of 1999 the Company ceased operations in Asia and sold its Asian assets to a former employee. During the year 2000 the Company has developed a strategy to re-enter the Asian market through the formation of a joint venture with one or more Asian companies, and during the first quarter of 2001, the Company entered into a letter of intent to form such a joint venture. The Company is also in the process of outsourcing some of its component manufacturing to Asian manufacturers and fabricators. In addition to its cleanroom and mini-environment business, the Company also provides high precision contract manufacturing services on an OEM basis for various customers. This includes a broad range of services for a diverse mix of customers. The Company's contract manufacturing services include design and prototyping, fabrication, metal forming, assembly and specialized painting. 1 INDUSTRY BACKGROUND The rapid pace of advances in semiconductor technology has led to shorter product and facility life cycles. To bring new semiconductor products to market more rapidly, manufacturers seek to compress design and construction lead times for new fabs. As feature sizes shrink and as wafer size, chip densities and the number of process steps increase, environmental variables must be stringently controlled. Slight deviations in key environmental parameters, most of which are controlled within the cleanroom, can negatively affect product yields. Achieving higher yields is the motivating force behind many of the progressively more rigorous cleanroom standards for microelectronics fabs. The Company's pharmaceutical and biotechnology customers are also driven to more rigorous standards by ever increasing regulatory requirements. To meet the functional specifications required for these cleanrooms, each part of the cleanroom must meet stringent technical requirements, and all systems must be precisely integrated. In addition to the basic requirements for contamination control, semiconductor cleanrooms must function seamlessly as part of the overall production process. The cleanroom envelope might be viewed as a process tool in the same manner as the lithography tools, deposition tools, etching tools and other equipment inside the cleanroom. Historically, the semiconductor industry has been very cyclical in nature and has seen sudden and dramatic changes in demand for its products. Capital spending by semiconductor manufacturers closely follows the trend in the demand for semiconductors. As semiconductor sales rise or fall, so too does capital spending. To lessen the effects of rapid and sudden cycle changes brought on by changes in the demand for semiconductors, the Company has been diversifying beyond its historic core business of designing and installing cleanrooms to semiconductor manufacturers. The Company's diversification efforts have included (a) diversifying into other markets such as disk drive and flat panel display manufacturing, pharmaceutical research, development and production, microelectronics and biotechnology; (b) diversifying its product mix to include mini-environments and products that may complement the Company's cleanroom technology but that are unrelated to cleanrooms, such as air doors; and (c) diversifying geographically to take advantage of geographic differences in the cyclical nature of the various industries in which the Company is involved. Nevertheless, the semiconductor industry continues to represent the majority of the Company's business, and is expected to continue to be the Company's core business. INTEGRATED SOLUTION The Company offers a fully integrated, or turnkey, approach to cleanroom design and installation. This solution incorporates innovation, proprietary technology, design, engineering, product development, installation, testing, and on-going customer support and services. In contrast to the traditional approach, the Company believes that its integrated cleanroom approach provides customers with greater flexibility and project control by reducing the number of vendors, subcontractors and suppliers and simplifying coordination of the project. The advantages of the Company's integrated solution include: ACCELERATED DESIGN AND INSTALLATION. The integrated approach facilitates improved coordination of the installation process, thus allowing the Company to meet the increasingly demanding schedules for the design and construction of new fabs. Delays from scheduling conflicts are minimized. Problems with system integration are minimized, since the Company designs the system for compatibility. As a single source supplier, the Company can readily adapt to changes in scheduling or design of any cleanroom system. SIMPLIFIED PROJECT CONTROL. The Company's approach offers customers a single point of contact for the cleanroom, reducing the need for the customer to coordinate the activities of multiple vendors. The Company believes that having one company design, engineer and install the entire cleanroom facilitates coordination of the total construction. SINGLE-SOURCE PERFORMANCE GUARANTEE. The Company certifies that the cleanroom will meet the agreed- upon performance specifications. The Company's approach provides the customer a single point of accountability for the entire cleanroom system. Although component manufacturers can design their individual cleanroom components to meet the technical specifications provided by the fab designer, they cannot effectively guarantee the as-built performance of the entire cleanroom after their components have been integrated with components of other manufacturers. 2 COST EFFECTIVENESS. Having a single vendor responsible for the design and installation of the entire cleanroom allows for significant on-site overhead savings over the traditional multi-vendor approach. A portion of these savings result from reduced administrative costs. By designing and installing the cleanroom system, the Company is able to reduce the redundancy that typically occurs with large, complex, multiple supplier projects. In addition, and perhaps most importantly, the Company's customers benefit from increased revenues resulting from bringing a new fab into operation in a shorter time period. COMPANY STRATEGY The Company's stated mission is to provide customer-focused solutions to its customers. The Company's strategy for providing customer-focused solutions includes the following elements: FOCUS ON CUSTOMERS WHO VALUE INTEGRATED, OR TURNKEY, SOLUTIONS. Management believes that the Company's ability to provide a fully integrated turnkey solution to a customer's cleanroom requirements is of great value to customers. The integrated solution approach provides the customer with a great deal of flexibility while simplifying for the customer the process of designing and installing a cleanroom facility. Although the Company provides a full range of separate products and services, the Company intends to continue to focus much of its sales and marketing efforts on those customers who would benefit from a fully integrated or turnkey solution. BUILD LONG-TERM CUSTOMER RELATIONSHIPS. Most of the Company's cleanroom revenue is derived from sales to customers who recognize the quality of products and services provided by the Company, and who recognize the value of an integrated turnkey solutions approach to cleanroom design and installation. The Company's marketing strategy is focused on building long-term relationships with these customers, their architectural and engineering firms, general contractors and other parties involved in the cleanroom project. The Company is also always aggressively moving to expand its base of existing customers. Building on such existing relationships also often results in the Company being asked to provide more products and services to a cleanroom project than it otherwise would be asked to provide, thus increasing the Company's revenue per fab. LOCAL SERVICE NETWORK. The Company has established, and will continue to establish, a physical presence in those parts of the world where such a presence would allow the Company to provide timely and efficient local customer service and support. The Company believes that maintaining such a local service network enables it to strengthen customer relationships, expand sales leads and receive more direct customer feedback. EXPAND INTERNATIONAL BUSINESS. Although the majority of the Company's revenues have been generated from projects in the regions of North America and Europe, the Company believes there are significant opportunities for expansion in other parts of the world, most notably in Asia and the Asian Pacific Rim. The Company has formulated a strategy for the Asian market, and the Company took its first steps toward fulfilling that strategy in the first quarter of 2001 when it entered into a letter of intent to form a joint venture company in China. MAINTAIN TECHNOLOGICAL LEADERSHIP. The Company believes innovation and technological capability is a significant factor in the sale of cleanroom solutions. The Company seeks to develop technologically advanced solutions to its customers' evolving needs. Many major new cleanrooms designed by the Company are customized in some way to meet the manufacturer's needs. This customer-driven innovation allows the Company to regularly improve its systems to respond to evolving industry requirements. In addition, the Company seeks to expand its business through strategic relationships, joint ventures and acquisitions and to extend its business to related industry segments if appropriate. DIVERSIFICATION OF REVENUE BASE. To reduce the Company's dependence on the highly cyclical semiconductor industry, the Company is aggressively diversifying its operations and pursuing multiple revenue sources from new products and industries. The Company is also diversifying its efforts into industries other than semiconductors, such as pharmaceuticals, disk drive and flat panel display manufacturing, food processing, etc. The Company also seeks to obtain more of its revenues from non-cleanroom sources by applying its product and engineering expertise in custom metal fabrication, airflow systems, and other OEM contract manufacturing opportunities. The Company anticipates that contract manufacturing will become a significant division of the Company within a few years. Additionally, the development of new products holds potential for significant revenue and profitability growth. Finally, the Company is diversifying its operations geographically. Specifically, during the last few years the Company has aggressively expanded its European operations, and the Company is implementing a strategy to re-enter the Asian market by forming a joint venture company with one or more Asian companies. 3 CLEANROOM SYSTEMS AND SERVICES The design and installation of cleanroom systems is highly technical. Some of the important measures that must be considered in cleanroom design are: The "room class" which defines the allowed number of particles per cubic foot of air, the number of "air changes" which is the number of times per minute the air in the room is completely replaced and the room "recovery rate" which is the amount of time it takes for the room to become clean following contamination. It is also essential that airflow through the cleanroom is unidirectional, where air flows through all areas in essentially straight vertical paths, avoiding vortices and eddies that could trap particles. For example, a Class 1 cleanroom is a cleanroom that permits on average only one particle larger than a specified size, typically 0.12 micron in size, for every cubic foot of air space. The cleanroom must also be designed to accommodate process-manufacturing equipment including piping and wiring, and permit the movement of materials and personnel without compromising cleanliness. Cleanrooms are designed to also control humidity, gasses, noise, vibrations, temperature, electro-magnetic fields, and other environmental variables. Each component of the cleanroom plays an important role. The cleanroom consists of special high-performance air handling systems, ceiling modules and highly efficient filters, wall partitions, raised-access flooring and state-of-the-art control systems. These systems provide a continuous flow of ultrafiltered air from the ceiling to the floor to flush out particles and other contaminants. Air pressure is also regulated to keep contaminated air out of a cleanroom or to prevent cross contamination. A typical semiconductor production line may include 60,000-150,000 square feet of cleanroom. Cleanrooms are rated according to their "Class," the maximum number of particles greater than 0.12 microns found in any cubic foot of cleanroom space. Most of the Company's contracts involve Class 10,000 or better cleanrooms. COMPONENT SYSTEMS The Company designs and manufactures, or has manufactured for it, all principal component systems that comprise an integrated cleanroom, including air handlers, fan-filter units, filtered ceiling systems, wall systems, and floor systems. These components may be sold either as part of a fully integrated cleanroom or as individual components for integration by non-affiliated installers. Components are manufactured using non-shedding materials to mitigate microscopic particles in the air stream that may have deleterious effects on the cleanroom. CLEANROOM SERVICES As part of its integrated cleanroom solution, the Company provides its customers with the services necessary to integrate the design, installation and ongoing servicing of cleanrooms including: DESIGN AND ENGINEERING. The Company seeks to become involved in cleanroom design at an early stage of the fab design process. The Company has a design team of in-house architects, engineers and designers to provide cleanroom systems which meet customers' specific requirements. The principal component systems of the Company's cleanroom are designed for rapid modification and quick expansion, providing flexibility in cleanroom configuration to meet the changing needs of its customers. Being involved in the design of a new fabrication facility generally allows the Company to provide prompt information to its manufacturing teams regarding systems needs, which further allows the Company to better plan its systems production schedule and accelerate the delivery of finished product to its customers. INSTALLATION AND CERTIFICATION. The Company provides on-site installation, testing and certification services. Cleanroom installation is enhanced and expedited, as Company personnel are cross-trained in all aspects of cleanroom construction. This training process improves the ability of Company personnel to recognize and correct conflicts that arise during installation. Each cleanroom installation project is headed by a project manager who is responsible for logistics and coordination of the entire cleanroom project. The project manager is the primary contact with the customer during the entire process. 4 CONTINUING SERVICE AND SUPPORT. The Company offers its installation customers ongoing service and support at the project site, as well as after-market component sales. Since these services are ongoing, they are not subject to the same cycles to which cleanroom installations are subject. For these reasons, the Company is more aggressively pursuing continuing service and support contracts. Ongoing service personnel working at the project site perform equipment bulkheading, facilitate movement of process equipment and perform facilities maintenance. The Company's support teams have a portable shop on-site, which generally allows them to remove, modify, adapt and re-install wall panels, flooring and other components without shutting down the facility. Since the Company's support team generally consists of the personnel who originally installed the cleanroom, they are generally familiar with the design and layout of the cleanroom and therefore are able to expedite layout changes and minimize downtime. The Company's ongoing support program is a key component in the Company's strategy. Several customers have requested that they have Company personnel on-site performing these services for periods longer than one year following installation. On-site personnel provide the Company with detailed feedback on customers' ongoing design needs. For customers who do not elect to have the Company provide on-site service, the Company provides service and spare parts on demand. Upon completion of a project, the Company's customer support representative develops customer profiles and replacement parts catalogues that are given to the customer. CUSTOMERS The Company's principal cleanroom customers are world class semiconductor manufacturers. The Company has sold its component systems to, and has constructed cleanrooms for, many of the world's leading semiconductor manufacturers. A major component of the Company's strategy is to continue to develop long-term strategic relationships with such companies in order to maximize revenue per fab, while at the same time developing relationships with manufacturers in other related fields. Because of the nature of the Company's business and the size of contracts it enters into with its customers, the Company typically has had one to three customers in each year that account for more than 10% each of revenues. Customers that account for a significant amount of revenues in one year, however, do not necessarily remain significant in subsequent years. In its strategy to diversify into businesses utilizing its core competencies and technologies, a variety of business opportunities may arise for the Company. Because of various factors related to market dynamics, the product and customer mix involved in the Company's diversification strategy may be modified from time to time. SALES AND MARKETING The Company's marketing efforts during 2000 were limited as a direct result of the cost cutting initiatives implemented primarily in 1999. The marketing efforts undertaken by the Company during 2000 were primarily focused on expanding turnkey and flexible approaches to meet customers' cleanroom needs and on building and maintaining long-term strategic relationships. The Company has stressed its integrated or turnkey approach by making sure customers understand that by offering a full array of cleanroom services, the Company is able to provide customers a single point of contact for design, component procurement, installation and ongoing service. The Company sells its products and services utilizing a direct sales force in North America and Europe. The Company has formulated a strategy to re-enter the Asian market by forming a joint venture with one or more Asian companies, and pursuant to that strategy, in the first quarter of 2001, the Company entered into a letter of intent to form a joint venture company to design, sell, manufacture and install cleanroom systems in China and throughout Asia. The joint venture company contemplated in the letter of intent has not yet been formed, and there remain several legal and logistical hurdles to overcome before the venture is formed and the Company begins to derive revenue from the joint venture. Current plans call for the Asian joint venture to be created during the second quarter of 2001, and to begin generating revenue by 2002. The Company has sales offices in Scotland, England and France to serve the European market. The Company also has sales offices located in Salt Lake City, Atlanta and Austin that serve the North American market. In addition, the Company has project site offices throughout the United States and Europe. Sales are generally accomplished by building working relationships with microelectronics manufacturers as well as architectural and engineering firms, industry consultants, construction management companies and general contractors specializing in the industry. 5 Leads for new work are generated from a number of sources, including the Company's in-house salespeople, sales representatives, project managers, and field personnel who are in regular contact with present and prospective customers. The Company also participates in a limited number of industry trade shows. Typically the Company, as well as the rest of the industry, is aware of the size, end use and basic design of major projects during the earliest planning phases. PRODUCT DEVELOPMENT The Company's product development effort focuses on enhancing existing products and developing new products for existing and new markets to meet customer requirements. The Company seeks to develop innovative products and modify existing products to make them less costly to produce and easier to install. This is partially accomplished by analyzing feedback from sales and service personnel on industry needs and developments. The Company believes that its significant experience in designing, installing and servicing cleanrooms and manufacturing cleanroom components is an advantage to the Company in securing new contracts. The Company has also incurred product development expenses related to its effort to diversify its business. INTELLECTUAL PROPERTY The Company currently holds nine United States patents with respect to various aspects of its cleanroom wall systems, floor systems and air handling systems. The patents expire at various times from May 2007 through January 2010. The Company also has one patent application on file with the U.S. Patent and Trademark Office and certain foreign offices. The Company may file patent applications where appropriate to protect its proprietary technologies and to increase the barriers to entry for potential competitors. Although the Company's patents may have value, the Company believes that the success of its business depends more on continued product development and innovation, technical expertise, and know-how of its personnel and other factors. In addition, no assurance can be given that any patents issued to the Company will not be challenged, invalidated or circumvented, or that the rights thereunder will provide competitive advantages to the Company. The Company also relies upon trade secret protection for its confidential and proprietary information. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets or disclose such technology or that the Company can meaningfully protect its trade secrets. MANUFACTURING The Company's Salt Lake City facility manufactures certain of the cleanroom components sold to cleanroom customers. Other cleanroom components designed by the Company, or that bear the Company's name, are manufactured by others under the direction of the Company. The Company continues to actively seek appropriate cost saving opportunities to outsource the manufacture of the Company's cleanroom components, provided that the quality of the final products is not compromised. For example, several state of the art manufacturing facilities in Asia can manufacture high precision products such as the Company's proprietary cleanroom components at a much lower cost than those products can be manufactured in the United States. Outsourcing the manufacture of certain components to such manufacturers results in substantial cost savings to the Company and will help make the Company more competitive in terms of its cleanroom component business. The Company will continue to evaluate opportunities to outsource the manufacture of various of its cleanroom components on a case-by-case basis, and will enter into such outsourcing arrangements when it makes sense financially to do so. In addition to the manufacture of some of the cleanroom components, the Company also offers a broad range of high precision contract manufacturing services to a number of non-cleanroom customers. These services include product design and prototyping, fabrication, metal forming, assembly and specialized painting. 6 COMPETITION The Company is one of the few suppliers of turnkey cleanroom solutions providing the full range of design, engineering, component supply, installation, testing, certification, and ongoing customer support. However, the Company does have substantial competition in each of the various individual aspects of its business. For example, the Company competes with a number of companies providing individual cleanroom components or services, many of which may have significantly greater financial and capital resources than the Company. Where appropriate, the Company attempts to work with these companies as a supplier rather than as a direct competitor. The Company also competes with a handful of specialized cleanroom integrators for installation/on-site management services. The Company believes the principal competitive factors in the cleanroom industry are lead time, price and quality. The order of importance of these factors varies from customer to customer. The Company believes it competes favorably with respect to such factors, although there can be no assurance that it will continue to do so in the future. If the Company experiences success in marketing its integrated turnkey approach, there can be no assurance that its competitors will not duplicate such approach, through acquisitions, affiliations, internal development or otherwise. BACKLOG The Company's backlog consists of future revenue that the Company expects to realize from work to be performed on uncompleted contracts, including new contractual arrangements on which work has not begun. At December 31, 2000, the Company's backlog was $28.3 million, compared to $19.7 million at December 31, 1999. The Company's contracts, however, typically allow the customer to terminate the project at any time. If a customer terminates a project, the Company would typically be entitled to progress payments earned to the date of termination, plus reimbursement of certain costs associated with the contract. Accordingly, the Company's backlog could be reduced if a customer terminates or suspends a contract. EMPLOYEES The Company employed approximately 210 full-time employees and five part-time employees as of December 31, 2000, compared to 260 full-time employees and 42 part-time employees as of December 31, 1999. The Company's employees at its Salt Lake City, Utah facility are not represented by a labor union. The Company believes that its relationship with its employees is good. Where required by local practice or customer contract, the Company utilizes union members for on-site installation. In those instances, the Company has agreed to be bound by collective bargaining agreements and has agreed to contribute to union sponsored pension plans, including multi-employer pension plans. Under the Employee Retirement Income Security Act of 1974, as amended, the Company may be liable to a multi-employer plan upon its withdrawal from the plan for the Company's share of the unfunded liabilities, if any, of the plan. ITEM 2. PROPERTIES. The Company leases approximately 209,000 square feet at its headquarters in Salt Lake City, Utah, of which approximately 175,000 square feet are used for manufacturing and 34,000 square feet are used for administrative functions. The Company's principal offices and manufacturing facility are leased through 2005, with renewal options for four five-year terms. The Company also leases administrative office space totaling approximately 3,200 square feet in Austin, Texas, approximately 2,000 square feet in Livingston, Scotland, and approximately 2,600 square feet in Atlanta, Georgia with various lease expiration dates ranging from 2001 through 2006. The Company believes that its facilities are adequate for its current needs and it could obtain additional space on commercially reasonable terms, if needed. ITEM 3. LEGAL PROCEEDINGS. From time to time, the Company is subject to routine litigation relating to claims made by or against the Company. The Company believes it has made adequate provisions for these matters, and is not aware of any material threatened or outstanding litigation against it. 7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. The Company's Common Stock is listed and traded on the NASDAQ Stock Market (National Market System) under the symbol "DAWK." The following table sets forth, for the periods indicated, the high and low sale prices for the Company's Common Stock, as reported on the NASDAQ Stock Market for the years ended December 31, 2000 and 1999, respectively.
HIGH LOW ------ ------ YEAR ENDED DECEMBER 31, 2000: First Quarter .................... $3.250 $0.625 Second Quarter ................... 2.000 1.125 Third Quarter .................... 1.375 0.875 Fourth Quarter ................... 1.125 0.469 YEAR ENDED DECEMBER 31, 1999: First Quarter .................... $1.969 $1.000 Second Quarter ................... 1.500 1.094 Third Quarter .................... 1.469 0.688 Fourth Quarter ................... 0.813 0.500
The Company did not pay or declare dividends on its Common Stock during the years ended December 31, 2000, 1999 and 1998. The Company currently anticipates that it will retain all available funds to finance its future growth and business expansion. The Company does not presently intend to pay cash dividends in the foreseeable future. Under the terms of the Company's revolving line of credit agreement, the Company has agreed not to pay any dividends during the term of this agreement. As of April 11, 2001, the Company had 15,047,176 shares of its Common Stock outstanding, held by 131 shareholders of record, which does not include shareholders whose shares are held in securities position listings. As of April 11, 2001, the Company also had 416 shares of its Convertible Series A Preferred Stock outstanding, held by five shareholders of record. The Convertible Series A Preferred Stock is convertible into Common Stock at a conversion rate equal to a fraction, the numerator of which is equal to $10,000 plus all accrued dividends (3% per annum), and the denominator of which is equal to the lesser of (a) $1.32 per share and (b) 80% of the average of the five lowest consecutive per share market values during the 25 trading days preceding the conversion date. As of April 11, 2001, the outstanding shares of Series A Preferred Stock were convertible into approximately 9,506,720 shares of Common Stock. RECENT DEVELOPMENT On April 11, 2001 the Company received a Nasdaq Staff Determination indicating that the Company fails to comply with the $1.00 per share minimum bid price requirement for continued listing set forth in Marketplace Rule 4450(a)(5), and that the Company's common stock is, therefore, subject to delisting from the Nasdaq National Market. The Company has appealed the Staff Determination, and has requested an oral hearing before a Nasdaq Listing Qualifications Panel. There can be no assurance that the Panel will grant the Company's request for continued listing. If the Company's common stock is delisted from the Nasdaq National Market, the stock should nevertheless be eligible to be quoted on the OTC Bulletin Board. 8 ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth selected financial data of the Company. The summary financial data in the table is derived from the financial statements of the Company. The data should be read in conjunction with the financial statements, related notes and other financial information included therein (in thousands, except per share data).
YEAR ENDED DECEMBER 31, --------------------------------------------------------------- 2000 1999 1998 1997 1996 ------- ------- ------- ------- -------- STATEMENT OF OPERATIONS DATA: Revenues............................... $52,633 $45,206 $53,078 $52,541 $112,826 Cost of goods sold..................... 43,525 43,576 51,223 47,272 97,364 ------- ------- ------- ------- -------- Gross profit........................... 9,108 1,630 1,855 5,269 15,462 ------- ------- ------- ------- -------- Selling, general and administrative.... 6,068 7,405 6,513 8,373 10,274 Research and development............... - 214 293 246 282 Depreciation and amortization.......... 392 412 563 431 400 Restructuring charges.................. - 1,839 - - - ------- ------- ------- ------- -------- 6,460 9,870 7,369 9,050 10,956 ------- ------- ------- ------- -------- Earnings (loss) from operations........ 2,648 (8,240) (5,514) (3,781) 4,506 Other income (expense), net............ (208) (493) (483) (344) 352 ------- ------- ------- ------- -------- Earnings (loss) before income taxes.... 2,440 (8,733) (5,997) (4,125) 4,858 Income taxes (benefit)................. (1,024) (1,092) (2,075) (1,866) 1,548 ------- ------- ------- ------- -------- NET EARNINGS (LOSS) ................... $ 3,464 $(7,641) $(3,922) $(2,259) $ 3,310 ======= ======= ======= ======= ======== Earnings (loss) per share - basic (1) Earnings (loss) before imputed dividend........................... $ 0.26 $ (0.61) $ (0.32) $ (0.18) $ (0.27) Imputed dividend..................... (0.21) -- -- -- -- ------- ------- ------- ------- -------- Earnings (loss) per share attributable to common shareholders - basic..... $ 0.05 $ (0.61) $ (0.32) (0.18) (0.27) ======= ======= ======= ======= ======== Earnings (loss) per share - diluted Earnings (loss) before imputed dividend........................... $ 0.21 $ (0.61) $ (0.32) $ (0.18) $ (0.27) Imputed dividend..................... (0.16) -- -- -- -- ------- ------- ------- ------- -------- Earnings (loss) per share attributable to common shareholders - diluted... $ 0.05 $ (0.61) $ (0.32) (0.18) (0.27) ======= ======= ======= ======= ======== Weighted-average common and dilutive common equivalent shares outstanding Basic.............................. 13,140 12,502 12,440 12,416 12,350 Diluted............................ 13,471 12,502 12,440 12,416 12,393
(1) For 2000, earnings applicable to common stock includes a one-time noncash imputed dividend to the preferred shareholders in the amount of $2,666 ($0.21 per common share-basic) which decreased the net earnings available to common shareholders from $3,370 ($0.26 per share-basic) to $704 ($0.05 per share-basic). This one-time, noncash charge only decreased the calculated earnings per share amount and had no impact on financial position, net earnings, or cash flows of the Company (see Note S of Notes to Consolidated Financial Statements).
DECEMBER 31, --------------------------------------------------------------- 2000 1999 1998 1997 1996 ------- ------- ------- ------- -------- BALANCE SHEET DATA: Cash and cash equivalents.............. $ 413 $ 296 $ 2,140 $ 5,802 $ 3,258 Working capital........................ 11,344 2,886 10,674 15,248 17,112 Total assets........................... 31,564 26,075 30,841 32,364 49,495 Total liabilities...................... 12,553 15,567 12,714 11,664 26,557 Total shareholders' equity............. 19,011 10,508 18,127 20,700 22,938
9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL The following discussion should be read in conjunction with the financial statements and notes thereto included elsewhere herein. All data in the tables are in thousands, except for percentages and per-share data. The Company's principal line of business is the design, manufacture and installation of cleanroom components and integrated cleanroom systems, primarily for the semiconductor industry. The Company also designs, manufactures and installs cleanroom components and integrated cleanroom systems for other industries, such as the pharmaceutical, flat panel display, disk drive, biotechnology and food processing industries. The Company is a global leader in the cleanroom installation business. In addition, the Company designs and manufactures environmentally controlled "mini-environments," which range in size from the size of a desk to the size of a bus. These mini-environments typically house expensive automation and robotic equipment used in the semiconductor manufacturing process or in pharmaceutical research and development. Finally, the Company offers manufacturing and specialized painting services on a contract basis, primarily to local and regional manufacturers and fabricators. Because the bulk of its business comes from semiconductor manufacturers, the Company's financial performance has historically been closely tied to the performance of the semiconductor industry. During the past twenty years, the semiconductor industry has shown strong growth. For example, worldwide semiconductor revenues increased from approximately $50 billion in 1990 to approximately $195 billion in 2000. Most experts predict that upward growth to continue. However, the semiconductor industry has also been subject to severe cycles from year to year. Just as the semiconductor industry is cyclical in nature, so too has been the business of the Company. DIVERSIFICATION STRATEGY In an effort to ease the impact of the cyclical nature of the semiconductor industry on the Company's business, the Company has recently undertaken a multi-prong diversification strategy. This strategy includes diversification in terms of industry, product and geography. The Company has begun to pursue business opportunities within its core business of cleanroom design, manufacture and installation in industries other than semiconductors. Most of this new business is in the pharmaceutical, disk drive, flat panel display, biotechnology and food processing industries. The diversification into non-semiconductor industries has been particularly successful with respect to the mini-environment portion of the Company's business. In terms of product diversification, the Company continues to pursue manufacturing and non-cleanroom related opportunities, particularly when they are in some way connected to the Company's core cleanroom business. An example of this diversification effort is the Company's recent entry into the air door business. Air doors are used in lieu of conventional swinging and sliding doors to help the store maintain comfort in the front of the store, reduce liability and increase and optimize the traffic flow in and out of the store. The Company's air entrance system was developed by applying its advanced cleanroom air movement and filtration technology resulting in a technically superior air door system. The Company has also formulated a geographic diversification strategy with respect to its cleanroom business. For example, management believes, based on the forecasts of numerous industry experts, that Asia and the Asian Pacific Rim represent very strong future growth areas in terms of the construction of new microelectronics fabs. In years prior to 2000, the Company did a material amount of business in Asia. However, for a variety of business reasons, at the end of 1999 the Company ceased operations in Asia and sold its Asian assets to a former employee. During the year 2000 the Company has developed a strategy to re-enter the Asian market through the formation of a joint venture with one or more Asian companies, and during the first quarter of 2001, the Company entered into a letter of intent to form such a joint venture. It is anticipated that the joint venture company will eventually become a full service provider of design, engineering, manufacturing, installation and project management services for cleanrooms. The joint venture company will service all of Asia and the Asian Pacific Rim, and will act as a springboard for the Company to enter new geographic markets and as a low cost supplier of the Company's cleanroom component parts. 10 The Company has also expanded its manufacturing activities into non-cleanroom industries. The Company provides high precision contract manufacturing services on an OEM basis for various customers. This includes a broad range of services for a diverse mix of customers. The Company's contract manufacturing services include design and prototyping, fabrication, metal forming, assembly and specialized painting. SEMICONDUCTOR INDUSTRY Worldwide sales of semiconductors in the year 2000 were approximately $195 billion, compared to approximately $150 billion in 1999, $125 billion in 1998 and $140 billion in 1997. The Company's financial results for the year 2000 reflect the recovery of the semiconductor industry from its three year downturn. However, it now appears that the semiconductor industry is entering another downturn in capital spending that most experts expect to last until at least the third quarter of 2001. It is unknown how severe or prolonged this latest downturn will be, or whether it will adversely affect the Company's cleanroom installation business. If such a downturn is severe or prolonged, it would most likely result in fewer contracts available for the Company to bid, significant price competition on contracts being awarded, and reduced profit margins on such contracts. Throughout 2000 the Company experienced growth in new contract awards resulting in an increase in the Company's backlog from $19.7 million at December 31, 1999 to $28.3 million at December 31, 2000. The Company's backlog (excluding contract manufacturing) at March 31, 2001 was $18.5 million, compared to $21.1 million on March 31, 2000. The decrease in the backlog at the end of the first quarter of 2001 as compared to the end of the first quarter of 2000, is attributable to a slowdown in capital spending by semiconductor manufacturers and by shorter construction cycles dictated by many of the Company's customers. Although there is uncertainty regarding the condition and prospects of a full recovery in the semiconductor industry in the short term, management continues to believe that changes taking place in the industry should, in the long term, result in expanded semiconductor industry capital expenditures. Delays in the ramp-up of 300mm technology have delayed the expected construction of several 300mm fabs worldwide, although during the fourth quarter of 2000 construction of some of these delayed fabs was initiated. In response to the industry downturn that ended in early 2000, management took aggressive steps to reduce the Company's cost structure, including an approximate 26% cut in wages in 2000 as compared to 1999, which was on top of an approximate 50% cut in wages in 1999 as compared to 1998. Management will continue to closely monitor the Company's cost structure and take appropriate actions as considered necessary, provided that such actions do not adversely affect the Company's ability to continue to develop state-of-the-art cleanroom technology, provide world-class support to the Company's customers, and continue its growth and diversification strategy. THE COMPANY'S RESULTS The Company's revenue and operating results fluctuate substantially from quarter to quarter depending on such factors as the timing of customer orders, the timing of the Company's recognition of revenue and costs, variations in contract mix, changes in customer buying patterns, fluctuations in the semiconductor equipment market, utilization of capacity, manufacturing productivity and efficiency, availability of key components and trends in the economies of the geographical regions in which the Company operates. The Company uses the percentage-of-completion method of accounting for its long-term cleanroom contracts. The Company recognizes revenue in proportion to the costs incurred to date in relation to the total anticipated costs. Revenue recognized may not be the same as progress billings to the customer. Underbillings are reflected in an asset account (costs and estimated earnings in excess of billings on contracts in progress), and overbillings are reflected in a liability account (billings in excess of costs and estimated earnings on contracts in progress). Non-cleanroom revenue is generally recognized when the products are shipped to the customer. The Company currently generates most of its revenue in two geographic regions; North America and Europe. Although risk of fluctuations in currency value does not affect dollar-denominated contracts, changes in the relative value of the dollar could make the Company less competitive in various markets. Contracts to be performed in Europe may be denominated in local currency, and the Company bears the risk of changes in the relative value of the dollar and the local currencies. Devaluation of world currencies against the U.S. dollar has created extreme price competitiveness from Korean, Japanese, and German competitors. The Company has in the past and may in the future attempt to hedge against currency fluctuations on contracts denominated in local currencies. There can be no assurance, however, that such hedging will fully insulate the Company from fluctuations or will not expose the Company to additional risks of loss. 11 The Company's business and operations have not been materially affected by inflation during the periods for which financial information is presented. RESULTS OF OPERATIONS REVENUE FROM OPERATIONS
2000 CHANGE 1999 CHANGE 1998 ------- ------ ------- ------ ------- Cleanrooms and Related Products $40,571 20.2% $33,758 (27.1) $46,298 Other Manufactured Goods 12,062 5.4% 11,448 68.8% 6,780 ------- ------- ------- Total Revenue $52,633 16.4% $45,206 (14.8) $53,078 ======= ====== ======= ====== =======
The Company's total revenue increased 16.4% in 2000 as compared to 1999. This increase in total revenue was partly a result of the recovery of the semiconductor industry during 2000 and partly a result of the Company's diversification strategy. The Company's revenue from cleanrooms and related products increased 20.2% in 2000 to $40.6 million from $33.8 million in 1999. The increase is largely attributable to the semiconductor industry's increase of capital expenditures for new fab facilities in 2000. During 1999, cleanroom contract revenue decreased by 27.1% to $33.8 million from $46.3 million in 1998. This decrease is primarily related to a downturn in the semiconductor industry. Revenue from non-cleanroom products increased to $12.1 million in 2000 from $11.4 million in 1999. During 1999, revenue from other products increased to $11.4 million as compared to $6.8 million in 1998. The increase was attributable to sales of sleeper cabs and the sale of other products that were not offered by the Company in 1998, including products manufactured by the Company as a contract manufacturer for third parties. In July 2000, the Company sold all of its assets used in the manufacture of sleeper cabs that were not used in the Company's other operations, and the Company discontinued the manufacture of such products. NORTH AMERICA - North America cleanroom revenue for the year ended December 31, 2000 increased by 22.3% as compared to the previous year. North America cleanroom revenue in 2000 was $24.4 million, compared to $20 million in 1999. As a percentage of total cleanroom revenue, North America revenue increased to 60.3% in 2000 compared to 59.2% in 1999. The increase in North America cleanroom revenue was primarily related to the semiconductor industry's increase of capital expenditures for new fab facilities in 2000. North America cleanroom revenue for the year ended December 31, 1999 decreased by 15.8% to $20.0 million, from $23.7 million for the year ended December 31, 1998. As a percentage of total revenue, North America revenue increased to 59.2% in 1999 compared to 51.2% in 1998. The decrease in North America cleanroom revenue was the result of fewer contracts received in North America due to the decline in capital spending by the semiconductor industry. EUROPE - European cleanroom revenue for the year ended December 31, 2000 increased by 51.0% over the prior year. European cleanroom revenue for 2000 was $16.1 million, compared to $10.7 million for the year 1999. As a percentage of total cleanroom revenue, European revenue increased to 39.7% in 2000 compared to 31.6% in 1999. Although the worldwide downturn in the semiconductor industry continued in 2000, it did not appear to have affected the Company's European operations to the same extent as it affected the Company's North American operations. European cleanroom revenue for 1999 decreased by 17.6%, to $10.7 million, when compared to the $13.0 million in European cleanroom revenue for 1998. As a percentage of total cleanroom revenue, revenue from the Company's European operations increased to 31.6% in 1999 compared to 28.0% in 1998. As indicated above, the recent downturn in the semiconductor industry does not appear to have affected the Company's operations in Europe as much as it has affected the Company's operations in North America. Additionally, in 1999 the Company was able to win contracts in countries in which it had not contracted business previously. 12 ASIA/PACIFIC RIM - The Company derived no revenue from cleanroom products or services in the Asia/Pacific Rim region for the year ended December 31, 2000. This is in contrast to $3.1 million revenue for the year ended December 31, 1999. The decrease in revenue was directly related to the Company's decision to temporarily cease sales activities in the Asia/Pacific Rim region and the sale of its Asia branch in January 2000. Cleanroom revenue generated in the Asia/Pacific Rim area for the year ended December 31, 1999 decreased by 67.8% from the year ended December 31, 1998. Revenue from that region in 1999 was $3.1 million, compared to $9.6 million for the year 1998. As a percentage of total cleanroom revenue, Asia/Pacific Rim revenue decreased to 9.2% in 1999 compared to 20.3% in 1998. The decrease in revenue and percentage was directly related to a downturn in the semiconductor industry in the Asia/Pacific Rim, an Asian financial downturn, and the Company's decision to pull out of this region. GROSS PROFIT
2000 CHANGE 1999 CHANGE 1998 ------- ------ ------- ------ ------- Gross Profit $9,108 458.8% $1,630 (12.1)% $1,855 Percentage of Revenues 17.3% 3.6% 3.5%
Gross profit for the year ended December 31, 2000 increased by 458.8% to $9.1 million from $1.6 million for the year ended December 31, 1999. Gross profit increased as a percentage of revenue to 17.3% for 2000 compared to 3.6% for 1999. The Company believes the increase in gross margin is primarily the result of increased margins on a larger number of awarded contracts due to installation efficiencies and the Company's decision to outsource the purchase of various cleanroom components where price efficiencies can be realized. Gross profit for 1999 decreased by 12.1%, to $1.6 million, from $1.9 million in 1998, and increased slightly as a percentage of revenue to 3.6% in 1999 from 3.5% in 1998. The decrease in gross profit was the direct result of the substantial reductions in contracts awarded from 1998 to 1999 as the semiconductor industry entered the second year of an industry-wide downturn. As the downturn gained momentum throughout 1999, the Company had fewer contracts to which it could allocate its fixed manufacturing overhead costs the Company had put in place in prior years as a result of anticipated contract awards. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
2000 CHANGE 1999 CHANGE 1998 ------- ------ ------- ------ ------- Selling, General and $6,068 (18.1)% $7,405 13.7% $6,513 Administrative Expenses Percentage of Revenues 11.5% 16.4% 12.3%
Selling, general and administrative expenses for 2000 decreased 18.1% to $6.1 million, from $7.4 million, and decreased as a percentage of revenue to 11.5% for the year ended December 31, 2000 compared to 16.4% for the year ended December 31, 1999. The decrease in selling, general and administrative expenses in 2000 compared with 1999 was primarily the result of a reduction in wages and related costs and other fixed costs. Selling, general and administrative expenses for 1999 increased 13.7% over 1998, from $6.5 million in 1998 to $7.4 million in 1999. As a percentage of revenue, selling, general and administrative expenses increased from 12.3% in 1998 to 16.4% in 1999. RESEARCH AND DEVELOPMENT
2000 CHANGE 1999 CHANGE 1998 ------- ------ ------- ------ ------- Research and Development Expense $0 (100.0)% $214 (27.0)% $293 Percentage of Revenues 0.0% 0.5% 0.6%
13 As part of its cost cutting strategy in 1999 and 2000, the Company temporarily reduced, but did not eliminate, its spending on research and development. However, the Company stopped keeping track of research and development expenses as a separate department. Instead, for fiscal year 2000, research and development costs were typically included as part of each individual project's budget, and are, where possible, passed along to the Company's customers. DEPRECIATION AND AMORTIZATION
2000 CHANGE 1999 CHANGE 1998 ------- ------ ------- ------ ------- Depreciation and $392 (4.9)% $412 (26.8)% $563 Amortization Expense Percentage of Revenues 0.7% 0.9% 1.1%
Depreciation and amortization expense during 2000 decreased by 4.9%, to $392,000, as compared to 1999. This decrease was the result of some leasehold improvements, furniture, fixtures, computer equipment and software becoming fully depreciated in 2000. Depreciation and amortization expense in 1999 decreased by 26.8%, to $412,000, as compared to 1998. This decrease was also the result of leasehold improvements, furniture, fixtures, computer equipment and software becoming fully depreciated in 1999. RESTRUCTURING CHARGES
2000 CHANGE 1999 CHANGE 1998 ------- ------ ------- ------ ------- Restructuring Charges -- 100.0% $1,839 100.0% -- Percentage of Revenues 0.0% 4.1% 0.0%
Restructuring charges in 1999 were largely due to the disposition of the Company's Asia/Pacific office, and the write-down of assets associated with the decision to divest itself of the Company's cleanroom component manufacturing division. The Company announced in 1999 its plans to pursue a foundry strategy for the manufacture of cleanroom components by selling its cleanroom component manufacturing business unit. The Company continues to manufacture component systems on a limited basis. INCOME TAXES (BENEFIT)
2000 CHANGE 1999 CHANGE 1998 ------- ------ ------- ------ ------- Income Taxes (Benefit) $(1,024) (6.2)% $(1,092) (47.4)% $(2,075) Percentage of Revenues 1.9% 2.4% 3.9%
The changes in the effective tax rates for all periods relate primarily to the amount of deferred tax assets recorded and the amount of offsetting valuation allowances provided against such assets. The valuation allowance was decreased by approximately $2.2 million for the year ended December 31, 2000 and increased by approximately $2.2 in 1999 ($0 in 1998). As of December 31, 2000, the Company had net operating loss carry forwards for tax reporting purposes of approximately $10 million expiring in various years through 2019. (See Note J to Consolidated Financial Statements). 14 LIQUIDITY AND CAPITAL RESOURCES Working capital at December 31, 2000 was $11.3 million compared to $2.9 million at December 31, 1999. This included cash and cash equivalents of $413,000 and $296,000 at December 31, 2000 and 1999, respectively. Receivables, including retentions, (see Note D of Notes to Financial Statements) increased to $9.9 million at December 31, 2000 compared to $7.4 million at December 31, 1999. This increase was the result of higher revenues from more contracts during 2000 compared to 1999. Day's sales outstanding (the ratio between receivables, excluding retention, and average daily revenue taken over the year) increased to 70 days at December 31, 2000, from 59 days at December 31, 1999. The Company's operations used $1.8 million of cash during 2000, compared to using $1.4 million of cash in 1999. During 2000, the Company experienced an increase in receivables of $2.4 million as a result of the increase in revenues, an increase in accounts payable and accrued liabilities of approximately of $1.2 million as a result of increased purchases associated with the higher level of revenues, a decrease in inventories of $0.3 million, an increase in costs and estimated earnings in excess of billings on contracts in progress of $3.6 million, and a decrease in billings in excess of costs and estimated earnings on contracts in progress of $0.5 million. During 2000 and 1999, the Company maintained a revolving line of credit with a domestic bank for the lesser of $6 million or the available borrowing base. The interest rate is computed at 14.5 percent and requires monthly payments of interest. The Company had $2.6 million in borrowings against the line at December 31, 2000 (compared to $5.3 million at December 31, 1999). The original expiration date of the line of credit was October 31, 1999, but the expiration date has been extended. The line of credit is collateralized by certain domestic receivables and inventories. The line of credit agreement contains restrictive covenants imposing limitations on payments of cash dividends, purchases or redemptions of capital stock, indebtedness and other matters. At times during 2000 and at December 31, 2000, the Company was not in compliance with certain loan covenants. Subsequent to year-end the Company signed an extension of the line of credit through April 30, 2001, which included a waiver by the lender of the Company's non-compliance with the covenants as of December 31, 2000. The Company is currently reviewing several financing alternatives. During 2000, the Company used $295,000 for the purchase of property and equipment, disposed of equipment valued at $196,000 and realized $526,000 from the sale of net assets. The Company anticipates that its capital expenditures in 2001 for routine additions and replacements of property, and equipment will be less than $250,000. These purchases will be financed through long-term debt or capital leases. During 1999 and 2000 the Company undertook a major cleanroom project in Israel for Intel. The Company began the job before it registered with the appropriate taxing authorities. As a consequence, approximately $1.5 million owed to the Company by the general contractor on the project is being held by the Israeli taxing authorities to cover any possible corporate income tax obligations of the Company arising out of the project. Management of the Company believes that it has no corporate income tax obligations owing to Israel as a result of the project, and that the total amount being withheld by the Israeli taxing authorities should be returned to the Company. The Company has filed with the Israeli taxing authorities a formal request for release of the funds. The taxing authorities have not yet responded to the request. Management believes that existing cash balances, borrowings available under the line of credit and cash generated from operations, will be adequate to meet the Company's anticipated cash requirements through December 31, 2001. However, in the event the Company experiences adverse operating performance, above-anticipated capital expenditure requirements, or is unable to renew or replace its existing line of credit, additional financing may be required. There can be no assurance that such additional financing, if required, would be available on favorable terms, if at all. IMPACT OF FUTURE ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued Statement on Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES in 1998. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in 15 other contracts (collectively referred to as derivatives), and for hedging activities. It requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. For a derivative not designated as a hedging instrument, changes in the fair value of the derivative are recognized in earnings in the period of change. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. In June 2000, SFAS 133 was amended by SFAS 138, which amended or modified certain issues discussed in SFAS 133. SFAS 138 is also effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company does not believe the adoption of SFAS No. 133 and SFAS 138 will have a material effect on the financial position or results of operations of the Company FACTORS AFFECTING FUTURE RESULTS The Company's operations are subject to risks and uncertainties that could result in actual operating results differing materially from anticipated operating results and past operating results and trends. These risks and uncertainties include pricing pressures, cancellations of existing contracts, timing of significant customer orders, increased competition, changes in semiconductor and cleanroom technology, or changes in manufacturing techniques. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to various market risks, including changes in foreign currency exchange rates and interest rate risks. The Company does not currently have any derivatives or other financial instruments for hedging such risks. The Company is exposed to interest rate changes primarily in relation to its revolving credit line debt with a bank. The fair value of the Company's total revolving credit line debt at December 31, 2000 was $2.6 million. Market risk was estimated as the potential decrease (increase) in future earnings and cash flows resulting from a hypothetical 10% increase (decrease) in the Company's estimated weighted average borrowing rate at December 31, 2000. Although most of the interest on the Company's debt is indexed to a market rate, there would be no material effect on the future earnings or cash flows related to the Company's total debt for such a hypothetical change. The Company's financial position is not materially affected by fluctuations in currencies against the U.S. dollar. The Company's sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels of local currency prices, as the preponderance of its foreign sales occur over short periods of time or are denominated in U.S. dollars. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company's financial statements and notes are included herein beginning on page F-1. The supplementary data is included herein immediately following the signature page of this report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There has not been a change of accountants or reporting disagreement on any matter of accounting principle, practice, financial statement disclosure or auditing scope or procedure during the years covered by this report. PART III ITEM 10, 11, 12 AND 13. These items are incorporated by reference to the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders scheduled for May 30, 2001. The definitive Proxy Statement will be filed with the Commission not later than 120 days after December 31, 2000, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended. 16 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents Filed as Part of this Report: (1) FINANCIAL STATEMENTS. The following financial statements are filed with this report beginning on page F-1: -- Report of Independent Certified Public Accountants -- Consolidated Balance Sheets as of December 31, 2000 and 1999 -- Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998 -- Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2000, 1999 and 1998 -- Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 -- Notes to Consolidated Financial Statements (2) FINANCIAL STATEMENT SCHEDULE. The following financial statement schedule for the years ended December 31, 2000, 1999 and 1998 is included herein beginning on page S-1: -- Report of Independent Certified Public Accountants on Schedule -- Schedule II - Valuation and Qualifying Accounts All other schedules have been omitted because the information is not required, or if required the information required therein is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements or notes thereto. (b) Reports on Form 8-K: None. (c) Exhibits: The following exhibits required by Item 601 of Regulation S-K are filed herewith or have been filed previously with the Commission as indicated below: 17
REGULATION S-K EXHIBIT NO. DESCRIPTION SEQUENTIAL PAGE NO. --------------- --------------------------------------- -------------------------------- 3.1 Restated Articles of Incorporation* Form 10-KSB for the year ended December 31, 1994, Exhibit No. 3.1 3.2 Articles of Amendment to Articles of Registration Statement on Incorporation of the Company* Form S-3, File No. 333-38350, filed June 1, 2000, Exhibit 3.1 3.3 Bylaws of the Company* Form 10-KSB for the year ended December 31, 1992, Exhibit No. 3.2 4.1 Form of Warrant issued to purchasers of Form 10-Q for quarter ended Series A Preferred Shares* June 30, 2000, Exhibit 4.3 4.2 Form of Warrant issued to Cardinal Registration Statement on Securities, LLC* Form S-3, File No. 333-38350, filed June 1, 2000, Exhibit 4.4 4.3 Articles of Amendment to Articles of Same as Exhibit 3.2 Incorporation of the Company* 10.1 1993 Stock Option Plan* Form 10-KSB for the year ended December 31, 1993, Exhibit 10.4 10.2 Amendment No. 1 to 1993 Stock Option Plan* Form 10-Q for quarter ended June 30, 1997, Exhibit 10.1 10.3 Amendment No. 2 to 1993 Stock Option Plan* Form 10-K for the year ended December 31, 1997, Exhibit 10.4 10.4 Revolving Domestic Line of Credit Agreement, Form 10-K for the year ended as Amended* December 31, 1999, Exhibit 10.5 10.5 Lease Agreement for Salt Lake City facility* Form 10-KSB for the year ended December 31, 1993, Exhibit 10.6 10.6 Amendment to Lease Agreement* Form 10-K for the year ended December 31, 1996, Exhibit 10.5 10.7 Convertible Preferred Stock Purchase Agreement Registration Statement on Dated April 28, 2000 Form S-3, File No. 333-38350, filed June 1, 2000, Exhibit 10.1 23.1 Consent of Independent Certified Public Accountants. Filed herewith.
------------------------- * These exhibits are incorporated herein by reference. (d) Financial Statement Schedules: See Item 14(a)(2) of this report. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on April 12, 2001. DAW TECHNOLOGIES, INC. By: /s/ Ronald W. Daw ------------------------------------- Ronald W. Daw Co-Chairman of the Board and Chief Executive Officer 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 indicated on April 12, 2001.
SIGNATURE CAPACITY IN WHICH SIGNED -------------------------------------- ----------------------------------------------------- /s/ Ronald W. Daw Co-Chairman of the Board, Chief Executive Officer -------------------------- and Director (Principal executive officer) Ronald W. Daw /s/ B.J. Mendenhall Chief Financial Officer (principal financial officer) -------------------------- B.J. Mendenhall /s/ Kevan A. Blair Controller (principal accounting officer) -------------------------- Kevan A. Blair /s/ Robert G. Chamberlain Co-Chairman of the Board and Director -------------------------- Robert G. Chamberlain /s/ James S. Jardine Director -------------------------- James S. Jardine /s/ Robert J. Frankenberg Director -------------------------- Robert J. Frankenberg /s/ Virginia Gore Giovale Director -------------------------- Virginia Gore Giovale /s/ Robert G. Teresi Director -------------------------- Robert G. Teresi
19 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Daw Technologies, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Daw Technologies, Inc. and Subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Daw Technologies, Inc. and Subsidiaries as of December 31, 2000 and 1999, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ GRANT THORNTON LLP Salt Lake City, Utah February 14, 2001 F-1 Daw Technologies, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (in thousands, except in share data) ASSETS
December 31, ----------------------- 2000 1999 ----------- ----------- CURRENT ASSETS Cash and cash equivalents $ 413 $ 296 Accounts receivable, net 9,878 7,447 Costs and estimated earnings in excess of billings on contracts in progress 8,546 4,994 Inventories, net 1,977 2,612 Deferred income taxes 601 425 Other current assets 2,383 2,569 ----------- ----------- Total current assets 23,798 18,343 PROPERTY AND EQUIPMENT - NET, AT COST 2,404 3,402 DEFERRED INCOME TAXES 4,527 3,364 OTHER ASSETS 835 966 ----------- ----------- $ 31,564 $ 26,075 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Checks written in excess of cash in bank $ 22 $ 248 Accounts payable and accrued liabilities 8,831 8,117 Billings in excess of costs and estimated earnings on contracts in progress 910 1,373 Line of credit 2,603 5,258 Current portion of long-term obligations 88 461 ----------- ----------- Total current liabilities 12,454 15,457 LONG-TERM OBLIGATIONS, less current portion 99 110 COMMITMENTS AND CONTINGENCIES - - SHAREHOLDERS' EQUITY 3% Series A Convertible Preferred stock, authorized 10,000,000 shares of $0.01 par value; 460 shares issued and outstanding in 2000 - - Common stock, authorized 50,000,000 shares of $0.01 par value; issued and outstanding 13,696,071 shares in 2000 and 12,513,114 shares in 1999 137 125 Additional paid-in capital 21,606 16,579 Retained deficit (2,732) (6,196) ----------- ----------- Total shareholders' equity 19,011 10,508 ----------- ----------- $ 31,564 $ 26,075 =========== ===========
The accompanying notes are an integral part of these statements. F-2 Daw Technologies, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except in share data)
Year ended December 31, -------------------------------------------------- 2000 1999 1998 --------------- -------------- -------------- Revenues $ 52,633 $ 45,206 $ 53,078 Cost of goods sold 43,525 43,576 51,223 --------------- -------------- -------------- Gross profit 9,108 1,630 1,855 Operating expenses Selling, general and administrative 6,068 7,405 6,513 Research and development - 214 293 Depreciation and amortization 392 412 563 Restructuring charges - 1,839 - --------------- -------------- -------------- 6,460 9,870 7,369 --------------- -------------- -------------- Earnings (loss) from operations 2,648 (8,240) (5,514) Other income (expense) Gain on sale of net assets 744 - - Interest income 91 130 140 Interest expense (667) (658) (459) Other, net (376) 35 (164) --------------- -------------- -------------- (208) (493) (483) --------------- -------------- -------------- Earnings (loss) before income taxes 2,440 (8,733) (5,997) Income tax benefit (1,024) (1,092) (2,075) --------------- -------------- -------------- NET EARNINGS (LOSS) $ 3,464 $ (7,641) $ (3,922) =============== ============== ============== Earnings (loss) per common share (Note S) Basic $ 0.05 $ (0.61) $ (0.32) Diluted 0.05 (0.61) (0.32) Weighted-average common and dilutive common equivalent shares outstanding Basic 13,140,000 12,501,980 12,440,121 Diluted 13,471,105 12,501,980 12,440,121
The accompanying notes are an integral part of these statements. F-3 Daw Technologies, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended December 31, 2000, 1999 and 1998 (in thousands, except in share data)
Series A Addi- Convertible tional Retained Preferred Common paid-in earnings stock Stock capital (deficit) Total ---------- ----------- ----------- ----------- ---------- Balances as of January 1, 1998 $ - $ 124 $ 15,209 $ 5,367 $ 20,700 Common stock issued pursuant to the purchase of 44,711 shares pursuant to employee stock purchase plan - - 48 - 48 27,023 shares of common stock issued pursuant to the acquisition of another company - 1 1,300 - 1,301 Net loss for 1998 - - - (3,922) (3,922) ---------- ----------- ----------- ----------- ---------- Balances as of December 31, 1998 - 125 16,557 1,445 18,127 Common stock issued pursuant to the purchase of 33,403 shares pursuant to employee stock purchase plan - - 22 - 22 Net loss for 1999 - - - (7,641) (7,641) ---------- ----------- ----------- ----------- ---------- Balances as of December 31, 1999 - 125 16,579 (6,196) 10,508 480 shares of 3% Series A Convertible preferred stock and 472,500 warrants issued in a private placement for cash - - 4,575 - 4,575 Common stock issued pursuant to the purchase of 41,805 shares pursuant to employee stock purchase plan - - 28 - 28 Common stock issued pursuant to the purchase of 301,550 shares issued pursuant to employee stock options - 3 433 - 436 618,439 shares of common stock issued pursuant to the acquisition of another company (Note T) - 6 (6) - - 221,163 shares of common stock issued pursuant to the conversion of 15 shares of preferred stock - 3 (3) - - Net earnings for 2000 - - - 3,464 3,464 ---------- ----------- ----------- ----------- ---------- Balances as of December 31, 2000 $ - $ 137 $ 21,606 $ (2,732) $ 19,011 ========== =========== =========== =========== ==========
The accompanying notes are an integral part of these statements. F-4 Daw Technologies, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, except in share data)
Year ended December 31, ------------------------------------ 2000 1999 1998 ----------- ------------ ----------- Increase (decrease) in cash and cash equivalents Cash flows from operating activities Net earnings (loss) $ 3,464 $ (7,641)$ (3,922) Adjustments to reconcile net earnings (loss) to net cash used in operating activities Depreciation and amortization 1,229 1,724 1,808 Loss on disposition of property and equipment - 147 - Gain on sale of net assets (744) - - Provision for losses on accounts receivable 56 360 100 Provision for contract estimates 352 - - Deferred income taxes (1,339) (1,213) (2,089) Changes in assets and liabilities Accounts receivable (2,487) 1,097 3,468 Costs and estimated earnings in excess of billings on contracts in progress (3,552) 2,552 (3,844) Inventories 270 (1,379) 190 Other current assets 186 (178) (224) Accounts payable and accrued liabilities 1,196 3,368 (1,042) Billings in excess of costs and estimated earnings on contracts in progress (463) (262) (1,370) Other assets - 32 10 ----------- ------------ ----------- Net cash used in operating activities (1,832) (1,394) (6,915) ----------- ------------ ----------- Cash flows from investing activities Payments for purchase of property and equipment (295) (189) (167) Disposition of equipment 196 - - Proceeds from sale of net assets 526 122 - ----------- ------------ ----------- Net cash provided by (used in) investing activities 427 (67) (167) ----------- ------------ -----------
(Continued) F-5 Daw Technologies, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (in thousands, except in share data)
Year ended December 31, ------------------------------------ 2000 1999 1998 ----------- ------------ ----------- Cash flows from financing activities Increase (decrease) in checks written in excess of cash in bank (226) 248 - Net change in line of credit (2,655) 4 4,024 Proceeds from issuance of preferred stock 4,575 - - Proceeds from issuance of common stock 464 22 49 Payments on long-term obligations (636) (657) (653) ----------- ------------ ----------- Net cash provided by (used in) financing activities 1,522 (383) 3,420 ----------- ------------ ----------- Net increase (decrease) in cash and cash equivalents 117 (1,844) (3,662) Cash and cash equivalents at beginning of year 296 2,140 5,802 ----------- ------------ ----------- Cash and cash equivalents at end of year $ 413 $ 296 $ 2,140 =========== ============ =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for Interest $ 667 $ 627 $ 459 Income taxes 49 - 11
NONCASH INVESTING AND FINANCING ACTIVITIES During 2000, the Company sold assets with a net book value of $834 for $526 cash and the buyer assuming $834 of the Company's liabilities. The transaction resulted in a change to the following balance sheet accounts: Cash $ 526 Other assets (15) Inventories (365) Property and equipment (236) Liabilities assumed 834 ----------- Gain on sale of net assets $ (744) ===========
Capital lease obligations of $252 for property and equipment acquisitions were incurred during 2000. (Continued) F-6 Daw Technologies, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (in thousands, except in share data) NONCASH INVESTING AND FINANCING ACTIVITIES - CONTINUED During 1998, the Company issued 27,023 shares of common stock in connection with the acquisition of the net assets of another company (Note T). These transactions resulted in an increase to the following balance sheet accounts: Inventories $ 60 Other current assets 23 Property and equipment 50 Other assets 1,258 Accounts payable (91) ----------- Common stock $ 1,300 ===========
During 2000, the Company completed the acquisition by issuing another 618,439 shares. The accompanying notes are an integral part of these statements. F-7 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 (in thousands, except share data) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows. 1. BUSINESS ACTIVITY Daw Technologies, Inc. and Subsidiaries (the Company) is a supplier of ultra-clean manufacturing environments, or cleanrooms, to the semiconductor industry. The Company designs, engineers, manufactures, installs and services all principal component systems for advanced cleanrooms. The Company also manufactures and sells other products that are manufactured similar to cleanrooms, and provides contract manufacturing services on an OEM basis for various customers. 2. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts and operations of the Company and its wholly owned subsidiaries, Daw Technologies, France, which was organized in 2000, Daw Technologies, Europe Ltd., which was organized in 1999, and Translite Systems, Inc., which was organized in 1999, (inactive). All material intercompany accounts and transactions have been eliminated in consolidation. 3. METHOD OF ACCOUNTING FOR LONG-TERM CONTRACTS Revenue recorded for contracts in the accompanying financial statements are recognized using the percentage-of-completion method and, therefore, takes into account the costs, estimated earnings and revenue to date on contracts not yet completed. The revenue recognized is that portion of the total contract price that cost incurred to date bears to anticipated final total cost, based on current estimates of cost to complete. Revenue from cost-plus-fixed-fee contracts is recognized on the basis of costs incurred during the period plus the fee earned, measured by the cost-to-cost method. Contract costs include all direct and allocable indirect labor, benefits, materials unique to or installed in the project, subcontractor cost allocations, including employee benefits and equipment expense. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is recognized in the financial statements. As long-term contracts extend over one year, revisions in cost and earnings estimates during the course of the work are reflected in the accounting period in which the facts which require the revision become known. Costs attributable to contract claims or disputes are carried in the accompanying balance sheets only when realization is probable. These costs are recorded at the lesser of actual costs incurred or the amount expected to be realized. It is reasonably possible that estimates by management related to contracts can change in the future. F-8 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000, 1999 and 1998 (in thousands, except share data) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 3. METHOD OF ACCOUNTING FOR LONG-TERM CONTRACTS - CONTINUED The current asset, "costs and estimated earnings in excess of billings on contracts in progress," represents revenues recognized in excess of amounts billed (under-billings), and the current liability, "billings in excess of costs and estimated earnings on contracts in progress," represents billings in excess of revenues recognized (over-billings). The amount of revenue recognized is not related to the progress billings to customers. 4. OTHER REVENUE RECOGNITION The Company recognizes revenues on its other product sales and contract manufacturing services when the product is shipped and title passes to the customer. 5. DEPRECIATION AND AMORTIZATION Property and equipment are stated at cost. Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. Leased property under capital leases and leasehold improvements are amortized over the shorter of the lives of the respective leases or over the service lives of the asset. The straight-line method of depreciation is followed for financial reporting purposes. Accelerated methods of depreciation are used for tax purposes. 6. INCOME TAXES The Company utilizes the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. An allowance against deferred tax assets is recorded when it is more likely than not that such tax benefits will not be realized. Research tax credits are recognized as utilized. 7. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments with an original maturity of three months or less when purchased to be cash equivalents. F-9 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000, 1999 and 1998 (in thousands, except share data) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 8. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined principally by the first-in, first-out method. 9. NET EARNINGS (LOSS) PER SHARE Basic Earnings Per Share (EPS) are calculated by dividing earnings (loss) available to common shareholders by the weighted-average number of common shares outstanding during each period. Diluted EPS are similarly calculated, except that the weighted-average number of common shares outstanding includes common shares that may be issued subject to existing rights with dilutive potential. Diluted EPS is not calculated for periods of net loss because to do so would be anti-dilutive. 10. RESEARCH AND DEVELOPMENT COSTS The Company conducts research and development to develop new products or product improvements not directly related to a specific project. Research and development costs have been charged to expense as incurred. 11. CONCENTRATIONS The Company's financial instruments that are exposed to concentration of credit risk consist primarily of cash and cash equivalents and receivables. The Company provides credit according to the terms of the individual project contracts, in the normal course of business, primarily to semi-conductor manufacturers. Approximately 33 percent of receivables are with four customers (49 percent with three customers in 1999). In addition, approximately 43 percent (30 percent in 1999) of receivables are due from entities located outside of North America, primarily Europe. Of the total receivables, approximately 43 percent are denominated in foreign currencies (30 percent at December 31, 1999). The Company routinely evaluates the financial strength of its customers and monitors each account to minimize the risk of loss. F-10 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000, 1999 and 1998 (in thousands, except share data) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 11. CONCENTRATIONS - CONTINUED The Company maintains cash and cash equivalents at several financial institutions. Accounts at each domestic institution are insured by the FDIC up to $100. Uninsured domestic balances were approximately $394 at December 31, 2000. The Company also maintains cash and cash equivalents in foreign accounts. These uninsured balances are approximately $1 at December 31, 2000. 12. RETENTIONS RECEIVABLE Many of the Company's contracts require retentions, typically 5-10 percent of the amount billed, to be withheld from each progress payment by the customer until the project reaches substantial completion. 13. INTANGIBLE ASSETS Intangible assets are amortized on the straight-line method over the estimated useful life or the terms of the respective agreement or patent, whichever is shorter. The original estimated useful lives range from 2-15 years. On an ongoing basis, management reviews the valuation and amortization of intangible assets to determine possible impairment by comparing the carrying value to the undiscounted estimated future cash flows of the related assets and necessary adjustments, if any, are recorded. Amortization of goodwill during 2000 was approximately $113 ($195 in 1999). 14. ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of the Company's cash and cash equivalents, contracts receivable and accounts payable, accrued liabilities and lines of credit approximate their fair values due to their short-term nature. F-11 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000, 1999 and 1998 (in thousands, except share data) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 16. STOCK OPTIONS The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options rather than adopting the alternative fair value accounting provided for under FASB Statement 123, "Accounting for Stock-Based Compensation" (SFAS 123). 17. TRANSLATION OF FOREIGN CURRENCIES The foreign subsidiaries' asset and liability accounts, which are originally recorded in the appropriate local currency, are translated for consolidated financial reporting purposes, into U.S. dollar amounts at period-end exchange rates. Revenue and expense accounts are translated at the weighted-average rates for the period. Foreign currency translation adjustments are accumulated as a component of comprehensive income. For the years ended December 31, 2000 and 1999, the foreign currency translation and accumulated foreign currency translation is immaterial. 18. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued Statement on Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES in 1998. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. For a derivative not designated as a hedging instrument, changes in the fair value of the derivative are recognized in earnings in the period of change. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. In June 2000, SFAS 133 was amended by SFAS 138, which amended or modified certain issues discussed in SFAS 133. SFAS 138 is also effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company does not believe the adoption of SFAS No. 133 and SFAS 138 will have a material effect on the financial position or results of operations of the Company 19. RECLASSIFICATIONS Certain reclassifications have been made to the 1999 and 1998 financial statements to conform with the 2000 presentation. F-12 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000, 1999 and 1998 (in thousands, except share data) NOTE B - CAPITAL TRANSACTIONS During 2000, the Company entered into a Convertible Preferred Stock Purchase Agreement wherein 480 shares of its 3 percent Series A Convertible Preferred stock was sold for an aggregate purchase price of $4,800 resulting in net proceeds received by the Company of $4,575. These shares are convertible to common stock at a conversion rate equal to a fraction, the numerator of which is equal to $10 plus all accrued dividends and the denominator of which is equal to the lesser of (a) $1.32 per share and (b) 80% of the average of the five lowest consecutive per share market values during the 25 trading days preceding the conversion date. This sale of Preferred Stock resulted in a beneficial conversion feature (Note S). In conjunction with the sale of Preferred Stock the Company also issued 472,500 warrants. The net proceeds received by the Company have been allocated to the warrants and Preferred Stock based on their relative fair market values. In December 2000, 15 of these shares were converted into 221,163 shares of common stock. Various employees converted their stock options during 2000. In total, 301,550 shares of common Stock were issued due to stock option conversions. In 1998, the Company issued 27,023 shares of common stock to acquire the net assets of Intelligent Enclosures Corporation and in 2000, the Company completed the acquisition by issuing another 618,439 shares (Note T). The Company purchased and retired 27,023 shares of common stock during 1998. During 1996, the shareholders of the Company approved an employee stock purchase plan. The maximum number of shares of common stock that may be issued under the plan is 750,000 shares. Employees are eligible to participate in the plan upon completion of 90 days employment. Eligible employees may designate from 2 percent to 15 percent (up to $25) of eligible compensation to be withheld for the purchase of stock. Price per share is 85 percent of the lower closing trading price of the stock on the applicable offering commencement date or offering termination date. Offering periods are six months in length beginning on May 1 and November 1 of each year. During 2000, 1999 and 1998, the Company received $41, $22 and $49 from the issuance of 41,805, 33,403 and 44,711 shares of common stock, respectively. F-13 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000, 1999 and 1998 (in thousands, except share data) NOTE C - INTERNATIONAL OPERATIONS Financial information summarized by geographic area for the years ended December 31, 2000, 1999 and 1998, is as follows:
North 2000 America Europe Asia/Pacific Consolidated ------------------------------------- ------------- ------------- -------------- ----------------- Net revenues - unaffiliated customers $ 36,508 $ 16,125 $ - $ 52,633 Earnings from operations 819 1,829 - 2,648 Identifiable assets 17,156 14,408 - 31,564 North 1999 America Europe Asia/Pacific Consolidated ------------------------------------- ------------- ------------- -------------- ----------------- Net revenues - unaffiliated customers $ 31,437 $ 10,676 $ 3,093 $ 45,206 Earnings from operations (6,272) 471 (2,439) (8,240) Identifiable assets 16,801 9,274 - 26,075 North 1998 America Europe Asia/Pacific Consolidated ------------------------------------- ------------- ------------- -------------- ----------------- Net revenues - unaffiliated customers $ 30,507 $ 12,962 $ 9,609 $ 53,078 Loss from operations (4,316) (42) (1,156) (5,514) Identifiable assets 21,352 6,453 3,036 30,841
Foreign currency transaction losses totaling approximately $115 for 2000 ($1 for 1999) are included in other income. Foreign currency transactions for 1998 were not significant. NOTE D - ACCOUNTS RECEIVABLE Accounts receivable consist of the following:
2000 1999 ------------ ----------- Trade accounts receivable $ 434 $ 1,662 Contract receivables 9,630 5,707 Retentions receivable 143 378 ------------ ----------- 10,207 7,747 Less allowance for doubtful accounts 329 300 ------------ ----------- Total $ 9,878 $ 7,447 ============ ===========
F-14 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000, 1999 and 1998 (in thousands, except share data) NOTE E - INVENTORIES Inventories consist of the following:
2000 1999 ------------ ----------- Raw materials $ 2,277 $ 523 Work in process - 2,389 ------------ ----------- 2,277 2,912 Less allowance for obsolescence 300 300 ------------ ----------- Total $ 1,977 $ 2,612 ============ ===========
NOTE F - OTHER CURRENT ASSETS Other current assets consist of the following:
2000 1999 ------------ ----------- Income taxes receivable $ - $ 222 Refundable foreign taxes 2,159 2,185 Prepaid expenses 143 140 Miscellaneous receivables and deposits 81 22 ------------ ----------- Total $ 2,383 $ 2,569 ============ ===========
NOTE G - PROPERTY AND EQUIPMENT Property and equipment and estimated useful lives consist of the following:
Years 2000 1999 ------------- ----------- ------------ Equipment 5-10 $ 1,839 $ 2,093 Furniture and fixtures 3-5 1,331 1,322 Leasehold improvements life of lease 2,592 2,626 Equipment under capital leases 5-10 3,588 3,720 Vehicles 3-5 287 246 ----------- ------------ 9,637 10,007 Less accumulated depreciation and amortization including $3,279 and $3,227 for equipment under capital leases at 2000 and 1999, respectively 7,233 6,605 ----------- ------------ Total $ 2,404 $ 3,402 =========== ============
F-15 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000, 1999 and 1998 (in thousands, except share data) NOTE H - CONTRACTS IN PROGRESS Costs incurred to date and estimated earnings and the related progress billings to date on contracts in progress are as follows:
2000 1999 ------------ ----------- Total costs and estimated earnings $ 42,577 $ 7,437 Progress billings to date 34,941 3,816 ------------ ----------- Total $ 7,636 $ 3,621 ============ ===========
The above are included in the balance sheets under the following captions:
2000 1999 ------------ ----------- Costs and estimated earnings in excess of billings on contracts in progress $ 8,546 $ 4,994 Billings in excess of costs and estimated earnings on contracts in progress (910) (1,373) ------------ ----------- Total $ 7,636 $ 3,621 ============ ===========
NOTE I - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of the following:
2000 1999 ------------ ----------- Trade accounts payable $ 5,402 $ 6,597 Other accrued liabilities 994 265 Employees salaries, incentive pay, vacation and payroll taxes 806 895 Reserve for contract estimates and warranties 753 321 Foreign and U.S. sales taxes 876 39 ------------ ----------- Total $ 8,831 $ 8,117 ============ ===========
F-16 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000, 1999 and 1998 (in thousands, except share data) NOTE J - INCOME TAXES Components of income taxes (benefit) are as follows:
2000 1999 1998 ----------- ----------- ----------- Current Federal $ 243 $ 106 $ 12 State 38 15 2 Foreign 34 - - ----------- ----------- ----------- 315 121 14 Deferred Federal (1,174) (1,511) (1,809) State (165) 298 (280) ----------- ----------- ----------- (1,339) (1,213) (2,089) ----------- ----------- ----------- Income tax benefit $ (1,024) $ (1,092) $ (2,075) =========== =========== ===========
The income tax expense (benefit) reconciled to the tax computed at the statutory Federal rate of 34 percent is as follows:
2000 1999 1998 ----------- ----------- ----------- Tax (benefit) at federal statutory rate $ 829 $ (2,969) $ (2,039) Nondeductible expenses (159) 5 12 State income taxes, net of federal income tax benefit 81 (288) (198) Foreign tax 34 - - Change in valuation allowance (2,187) 2,187 - Adjustment of estimated income tax accruals 378 - - All other, net - (27) 150 ----------- ----------- ----------- Income tax benefit $ (1,024)$ (1,092) $ (2,075) =========== =========== ===========
Deferred income taxes (benefit) related to the following:
2000 1999 ----------- ----------- Current deferred tax assets Allowance for doubtful accounts $ 123 $ 112 Accrued expenses and reserves 478 313 ----------- ----------- Total current $ 601 $ 425 =========== ===========
F-17 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000, 1999 and 1998 (in thousands, except share data) NOTE J - INCOME TAXES - CONTINUED
2000 1999 ----------- ----------- Long-term deferred tax assets (liabilities) Excess book depreciation and amortization $ 303 $ (37) Foreign tax credit carry forwards 197 162 Alternative minimum tax credit carry forwards 280 198 Net operating loss carry forward 3,747 5,228 Valuation allowance - (2,187) ----------- ----------- Total long-term $ 4,527 $ 3,364 =========== ===========
The foreign tax credit carry forward of $197 begins to expire during 2002. Management believes it is more likely than not that the Company will have sufficient foreign and domestic income to utilize the credits before expiration. The valuation allowance was decreased by $2,187 for the year ended December 31, 2000 and increased by $2,187 in 1999 ($0 in 1998). As of December 31, 2000, the Company had net operating loss carry forwards for tax reporting purposes of approximately $10,044 expiring in various years through 2019. NOTE K - LINE OF CREDIT During 2000 and 1999, the Company maintained a revolving line of credit with a domestic bank for the lesser of $6,000 or the available borrowing base. The interest rate is computed at 14.5 percent and requires monthly payments of interest. The Company had $2,603 in borrowings against the line at December 31, 2000 ($5,258 at December 31, 1999). The line of credit originally expired October 31, 1999 but was extended to December 31, 2000. The line of credit is collateralized by certain domestic receivables and inventories. The line of credit agreement contains restrictive covenants imposing limitations on payments of cash dividends, purchases or redemptions of capital stock, indebtedness and other matters. At times during 2000 and at December 31, 2000, the Company was not in compliance with certain indebtedness covenants. Subsequent to year-end the Company signed an extension of the line of credit through April 30, 2001, which included a waiver for the non-compliance with the covenants as of December 31, 2000. The Company is currently reviewing several financing alternatives. F-18 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000, 1999 and 1998 (in thousands, except share data) NOTE L - LONG-TERM OBLIGATIONS The Company has entered into capital leases with various financial institutions and leasing organizations that carry interest rates ranging from 4 percent to 11.5 percent. The leases are collateralized by equipment. Payments approximate $23 monthly including interest. The following is a schedule by year of future minimum lease payments under capital leases, together with the present value of the net lease payments as of December 31, 2000:
Year ending December 31, ------------------------ 2001 $ 103 2002 77 2003 17 2004 7 2005 2 Thereafter - ---------- Total minimum leases payments 206 Less amount representing interest 19 ---------- Present value of net minimum lease payments 187 Less current portion 88 ---------- Long-term portion $ 99 ==========
NOTE M - OPERATING LEASES The Company leases buildings, machinery and equipment under operating leases. The building leases expire in 2001 through 2006. The machinery and equipment leases expire through 2002. The following is a schedule, by year, of future minimum rental payments as of December 31, 2000:
Year ending December 31, ------------------------ 2001 $ 1,267 2002 661 2003 647 2004 633 2005 303 Thereafter 3 -------- $ 3,514 ========
F-19 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000, 1999 and 1998 (in thousands, except share data) NOTE M - OPERATING LEASES - CONTINUED The building leases provide for payment of property taxes, insurance, and maintenance costs by the Company. Rental expense for operating leases totaled $1,376, $2,314 and $2,212 for 2000, 1999 and 1998, respectively. The Company has an option to renew one building lease for four additional five year periods upon expiration of the current term in 2005. NOTE N - BENEFIT PLANS 1. SAVINGS PLAN The Company has established a 401(k) savings plan covering all non-union employees 21 years of age and older. The Company, at its discretion, matches 50 percent of employee contributions up to a maximum matching contribution of 3 percent of the employee's annual salary. Contributions are made at the discretion of the Board of Directors. The Company's contributions to the plan were $117, $147 and $189 for the years ended December 31, 2000, 1999 and 1998, respectively. 2. MULTI-EMPLOYER PENSION PLANS The Company contributes to several multi-employer pension plans for employees covered by collective bargaining agreements. Employees covered by these plans are engaged solely in on-site installation of cleanrooms. These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts. The Company's contributions to the multi-employer pension plans totaled approximately $17, $128 and $269, respectively, for the years ended December 31, 2000, 1999 and 1998. Information with respect to the Company's proportionate share of the excess, if any, of the actuarially computed value of vested benefits over the total pension plans' net assets are not available from the plans' administrators. The Multi-Employer Pension Plan Amendments Act of 1980 (The "Act") significantly increased the pension responsibilities of participating employers. Under the provision of the Act, if the plans terminate or the Company withdraws, the Company could be subject to a withdrawal liability. Management has no intention of undertaking any action which could subject the Company to any withdrawal liability which would have a material effect on the Company's financial condition. F-20 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000, 1999 and 1998 (in thousands, except share data) NOTE O - LEGAL PROCEEDINGS AND CLAIMS The Company is engaged in various lawsuits and claims, either as plaintiff or defendant, in the normal course of business. In the opinion of management, based upon advice of counsel, the ultimate outcome of these lawsuits will not have a material impact on the Company's financial position or results of operations. NOTE P - PRIMARY CUSTOMERS The Company has typically had one to three customers in each year which accounted for more than 10 percent each of revenues; these customers do not necessarily remain significant in subsequent years. These major customers are typically general contractors of fabrication facilities. The Company's major customers and revenue received there from are as follows:
2000 1999 1998 ---------- ---------- ---------- Company A $ 6,461 $ 10,625 $ 6,580 Company B 4,484 4,508 7,912 Company C 8,243 - - Company D - 5,337 -
NOTE Q - RELATED PARTY TRANSACTIONS Daw Incorporated is a regional interior specialties contracting company based in Utah. Certain stockholders of Daw Incorporated own approximately 34 percent of the Company's common stock. The Company purchased goods and services from Daw Incorporated totaling $39, $71, and $447 in 2000, 1999 and 1998, respectively. A member of the board of directors works for a law firm which provided legal services to the Company approximating $125, $19 and $171 in 2000, 1999 and 1998, respectively. F-21 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000, 1999 and 1998 (in thousands, except share data) NOTE R - WARRANTS AND OPTIONS During 1996, the Board of Directors and the shareholders amended the Company's 1993 Stock Option Plan (Plan) to increase the number of shares reserved for issuance by 250,000. In addition, the amendment extended the life of the Plan for one year, and eliminated the limit on the number of options that can be granted in any given year. Also, the amendment limits to 100,000 the number of options that can be granted to any one individual in any given year. The Plan is a non-qualified plan, and the options granted thereunder are non-qualified stock options. Under the amended Plan, 1,250,000 shares of common stock were reserved for issuance upon exercise of options. The Plan provides that options to purchase a maximum of 1,075,000 shares may be granted to eligible employees (including employees who are directors or officers) and options to purchase a maximum of 175,000 shares may be granted to non-employee directors. The exercise price for stock options granted under the Plan may not be less than 100 percent of the fair market value of a share of common stock on the date the option is granted. Options granted under the Plan after October 24, 1996, expire through 2008. Options granted prior to or on October 24, 1996 expire through 2011. The Company granted options to purchase 328,000 shares and 311,500 shares in 2000 and 1998, (none in 1999), respectively, of the Company's common stock. The options were granted to the following:
2000 1999 1998 -------- --------- -------- Directors 55,000 - 20,000 Executive officers, including officers who are directors 105,000 - 60,000 Other employees 168,000 - 231,500 -------- --------- -------- 328,000 - 311,500 ======== ========= ========
On February 24, 1998, certain options with an exercise price greater than $1.40 were adjusted to $1.40, which was the market price of the Company's stock on that date. At that date, vesting was extended by one year for those options adjusted. These adjustments resulted in a new measurement date under Accounting Principles Board Opinion No. 25 and interpretations that existed at that time. F-22 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000, 1999 and 1998 (in thousands, except share data) NOTE R - WARRANTS AND OPTIONS - CONTINUED The Company has adopted only the disclosure provisions of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (FAS 123). Therefore, the Company continues to account for stock based compensation under Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for the stock based compensation been determined based upon the fair value of the awards at the grant date consistent with the methodology prescribed by FAS 123, the Company's net earnings (loss) and earnings (loss) per share would have been changed to the following pro forma amounts:
2000 1999 1998 -------- --------- -------- Net earnings (loss) As reported $ 3,464 $ (7,641) $ (3,922) Pro forma 3,241 (7,815) (4,074) Earnings (loss) per share: Basic As reported 0.26 (0.61) (0.32) Pro forma 0.25 (0.63) (0.33) Diluted As reported 0.21 (0.61) (0.32) Pro forma 0.20 (0.63) (0.33)
These pro forma amounts may not be representative of future disclosures because they do not take into effect pro forma compensation cost related to grants made before 1995. The fair value of these options was estimated at the date of grant using the modified Black-Scholes American option-pricing model with the following weighted-average assumptions for 2000, 1999 and 1998: expected volatility of 144 percent (101 percent for 1999 and 1998); risk-free interest rate of 5.50 percent (5.51 percent for 1999 and 1998); and expected life of 10 years (10 for 1999 and 1998). The weighted-average fair value of options granted was $.93 and $1.17 in 2000 and 1998, respectively. Option pricing models require the input of highly subjective assumptions including the expected stock price volatility. Also, the Company's employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate. Management believes the best input assumptions available were used to value the options and that the resulting option values are reasonable. F-23 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000, 1999 and 1998 (in thousands, except share data) NOTE R - WARRANTS AND OPTIONS - CONTINUED Changes in the Company's stock options and warrants are as follows:
Shares Weighted- ------------------------- Exercise average Stock price exercise price Warrants options per share per share --------- ---------- ------------- -------------- Outstanding at January 1, 1998 - 693,000 $ 1.94 - 3.50 $ 3.32 Granted - 311,500 0.84 - 2.66 2.28 Exercised - - - - Canceled or expired - (135,500) 1.38 - 3.50 3.05 --------- ---------- Outstanding at December 31, 1998 - 869,000 0.84 - 3.50 1.99 Granted - - - - Exercised - - - - Canceled or expired - (127,500) 1.40 - 2.66 1.78 --------- ---------- Outstanding at December 31, 1999 - 741,500 0.84 - 3.50 1.63 Granted 472,500 328,000 0.88 - 1.28 .95 Exercised - (301,550) 1.09 - 2.66 1.46 Canceled or expired - (63,500) 0.94 - 3.50 2.06 --------- ---------- Outstanding at December 31, 2000 472,500 704,450 0.84 - 2.66 1.36 ========= ========== Exercisable at December 31, 2000 472,500 381,450 0.84 - 2.66 1.70 ========= ========== Exercisable at December 31, 1999 - 636,000 0.84 - 3.50 1.99 ========= ========== Exercisable at December 31, 1998 - - - - ========= ==========
A summary of the status of the options outstanding under the Company's stock option plan at December 31, 2000 is presented below:
Outstanding Exercisable ------------------------------------- ------------------------ Weighted- average Weighted- Weighted- remaining average average Number contractual exercise Number exercise Range of exercise prices outstanding life (years) price exercisable price ------------------------ ----------- ------------ --------- ----------- ---------- $ 0.84 - $ 1.25 333,000 9 $0.93 20,000 $0.93 $ 1.26 - $ 1.50 271,450 5 1.39 261,450 1.39 $ 2.51 - $ 2.66 100,000 7 2.66 100,000 2.66 ----------- ----------- $ 0.84 - $ 2.66 704,450 7 1.36 381,450 1.99 =========== ============
F-24 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000, 1999 and 1998 (in thousands, except share data) NOTE S - EARNINGS (LOSS) PER COMMON SHARE The following data show the amounts used in computing net earnings (loss) per common share, including the effect on net earnings (loss) for preferred stock dividends and a beneficial conversion feature associated with preferred stock. The following data also show the weighted average number of shares and rights to acquire shares with dilutive potential. For 2000, earnings applicable to common stock includes a noncash imputed dividend to the preferred shareholders related to the beneficial conversion feature on the 2000 Series A Preferred Stock. The beneficial conversion feature is computed as the difference between the market value of the common stock into which the Series A Preferred Stock can be converted and the value assigned to the Series A Preferred Stock in the private placement. The imputed dividend is a one-time, noncash charge decreasing the net earnings per common share.
Year ended December 31, ----------------------------------- 2000 1999 1998 ------- ------- ------- Net earnings (loss) $ 3,464 $(7,641) $(3,922) Dividends on preferred stock (94) -- -- Imputed dividend from beneficial conversion feature (2,666) -- -- ------- ------- ------- Net earnings (loss) applicable to common stock $ 704 $(7,641) $(3,922) ======= ======= =======
The following data show the shares used in computing earnings (loss) per common share including dilutive potential common stock:
2000 1999 1998 ---------- ---------- ---------- Common shares outstanding during entire period 12,513,114 12,479,711 12,407,977 Net weighted average common shares issued during period 626,886 22,269 32,144 ---------- ---------- ---------- Weighted average number of common shares used in basic EPS 13,140,000 12,501,980 12,440,121 Dilutive effect of stock options 327,129 -- -- Dilutive effect of warrants 3,976 -- -- ---------- ---------- ---------- Weighted average number of common shares and dilutive potential common shares used in diluted EPS 13,471,105 12,501,980 12,440,121 ========== ========== ========== Earnings (loss) per share - basic Earnings (loss) before imputed dividend $ 0.26 $ (0.61) $ (0.32) Imputed dividend (0.21) -- -- ---------- ---------- ---------- Earnings (loss) per share attributable to common shareholders - basic $ 0.05 $ (0.61) $ (0.32) ========== ========== ========== Earnings (loss) per share - diluted Earnings (loss) before imputed dividend $ 0.21 $ (0.61) $ (0.32) Imputed dividend (0.16) -- -- ---------- ---------- ---------- Earnings (loss) per share attributable to common shareholders - diluted $ 0.05 $ (0.61) $ (0.32) ========== ========== ==========
For the year ended December 31, 2000, the assumed conversion of 2,922,000 shares of preferred stock is not included in the computation of diluted EPS because the imputed dividend from the beneficial conversion causes the assumed conversion to be anti-dilutive. In addition, for the years ended December 31, 1999 and 1998, all of the options and warrants that were outstanding, as described in Note R, were not included in the computation of diluted EPS because to do so would have been anti-dilutive. NOTE T - BUSINESS ACQUISITION On April 22, 1998, the first closing date, the Company acquired the net assets of Intelligent Enclosures Corporation. The transaction was accounted for as a purchase and the transaction is to be completed on April 22, 2000, the second closing date. At the first closing date, the Company delivered 27,023 shares of common stock. During 2000, at the second closing date, the Company issued 618,439 additional shares of common stock at $2.06 per share (the average per share closing price for the 20 consecutive trading days prior to the second closing date), which in addition to the original 27,023 shares totaled $1,300. F-25 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000, 1999 and 1998 (in thousands, except share data) NOTE U - SEGMENT INFORMATION The Company has two reportable segments for the year ended December 31, 2000, namely 1) cleanrooms and related products and 2) other manufactured goods. Prior to 1998, the Company operated in one segment. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance of each segment based on earnings or loss from operations. The Companies reportable segments are similar in manufacturing processes and are tracked similarly in the accounting system. The manufacturing process for each segment uses the same manufacturing facilities and overhead is allocated similarly to each segment. It is not practical to determine the total assets per segment and depreciation by segment because each segment uses the same manufacturing facility. Identifiable assets by segment are reported below. The Company allocates certain general and administrative expenses, consisting primarily of facilities expenses, utilities, and manufacturing overhead. Segment information for the cleanrooms and related products and other manufactured goods are as follows:
2000 1999 1998 ------------ ----------- ---------- Revenues Cleanrooms and related products $ 40,571 $ 33,758 $ 46,298 Other manufactured goods 12,062 11,448 6,780 ------------ ----------- ---------- Totals $ 52,633 $ 45,206 $ 53,078 ============ =========== ========== Earnings (loss) from operations Cleanrooms and related products $ 5,789 $ (6,907) $ (6,005) Other manufactured goods (3,141) (1,333) 491 ------------ ----------- ---------- Totals $ 2,648 $ (8,240) $ (5,514) ============ =========== ========== Total assets Cleanrooms and related products $ 22,021 $ 15,640 $ 15,053 Other products 1,712 2,284 1,397 Manufacturing and corporate assets 7,831 8,151 14,391 ------------ ----------- ---------- Totals $ 31,564 $ 26,075 $ 30,841 ============ =========== ==========
F-26 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000, 1999 and 1998 (in thousands, except share data) NOTE V - REVENUES Revenues by country are based on the location of the project for long-term projects and by the location of the customer for other manufactured products and are as follows:
2000 1999 1998 --------- --------- --------- Canada $ 4,844 $ 11,827 $ 6,666 United Kingdom 5,843 7,330 6,692 Peoples Republic of China - 382 7,092 Italy 1,362 - 3,568 Taiwan - 2,711 2,319 Israel 677 3,098 2,058 France 8,243 248 644 All others - - 198 --------- --------- --------- Total export revenues 20,969 25,596 29,237 United States 31,664 19,610 23,841 --------- --------- --------- Total revenues $ 52,633 $ 45,206 $ 53,078 ========= ========= =========
NOTE W - RESTRUCTURING CHARGES During December 1999, in order to reduce costs, the Company implemented a restructuring of its operations which resulted in the Company recording a one-time restructuring charge totaling $1,839. This one-time charge was due to the transfer of ownership of the Company's Asia/Pacific office to a former employee ($796) and the write down of inventory due to the Company's plans to pursue a foundry strategy for the manufacture of cleanroom components ($1,043). F-27 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000, 1999 and 1998 (in thousands, except share data) NOTE X - QUARTERLY FINANCIAL RESULTS (UNAUDITED) Quarterly financial results for the years ended December 31, 2000, 1999 and 1998 are as follows:
Net earnings Earnings Net (loss) per Gross (loss) from earnings common 2000 Revenues profit (loss) operations (loss) share-basic(1) -------------- ---------------- --------------- ------------------ --------------- ----------------- First quarter $ 14,675 $ 1,573 $ 101 $ (34) $ (0.00) Second quarter 15,011 2,760 999 536 (0.17) Third quarter 12,734 2,154 835 658 0.04 Fourth quarter 10,213 2,621 713 2,304 0.17 ---------------- --------------- ------------------ --------------- ----------------- $ 52,633 $ 9,108 $ 2,648 $ 3,464 $ 0.05 ================ =============== ================== =============== ================= 1999 First quarter $ 12,480 $ 1,577 $ (390) $ (316) $ (0.03) Second quarter 9,980 47 (2,019) (1,442) (0.12) Third quarter 12,433 774 (1,018) (1,129) (0.09) Fourth quarter 10,313 (768) (4,813) (4,754) (0.38) ---------------- --------------- ------------------ --------------- ----------------- $ 45,206 $ 1,630 $ (8,240) $ (7,641) $ (0.61) ================ =============== ================== =============== =================
(1) Earnings (loss) per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings (loss) per share amounts do not necessarily equal the total for the year due to rounding. F-28 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE Board of Directors Daw Technologies, Inc. and Subsidiaries In connection with our audit of the financial statements of Daw Technologies, Inc. and Subsidiaries referred to in our report dated February 14, 2001, which is included in the annual report to shareholders and Form 10-K, we have also audited Schedule II - valuation and qualifying accounts for each of the three years in the period ended December 31, 2000. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. /s/ GRANT THORNTON LLP Salt Lake City, Utah February 14, 2001 S-1 DAW TECHNOLOGIES, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ADDITIONS (1) (2) BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COSTS AND OTHER ACCOUNTS DEDUCTIONS - END OF DESCRIPTION PERIOD EXPENSES DESCRIBED WRITE-OFFS PERIOD ----------- ---------- ----------- ------------- ------------ ----------- Allowance for doubtful accounts Year ended December 31, 2000 $ 300 $ 56 $(27) (A) $ - $ 329 Year ended December 31, 1999 615 360 - 675 300 Year ended December 31, 1998 403 100 150 (B) (38) 615 Allowance for contract estimates Year ended December 31, 2000 321 352 80 (A) - 753 Year ended December 31, 1999 666 - - 345 321 Year ended December 31, 1998 366 - 300 (B) - 666 Allowance for inventory obsolescence Year ended December 31, 2000 300 - - - 300 Year ended December 31, 1999 300 - 1,043 (C) 1,043 300 Year ended December 31, 1998 - - 300 (B) - 300 Allowance for contract repayment Year ended December 31, 2000 53 - (53)(A) - - Year ended December 31, 1999 53 - - - 53 Year ended December 31, 1998 803 - (750)(B) - 53 Allowance for deferred taxes Year ended December 31, 2000 2,187 (2,187) - - - Year ended December 31, 1999 - 2,187 - - 2,187
(A) Reclassification 2000 (B) Reclassification 1999 (C) Restructuring charge S-2