-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U7R0HkiiJqD82je7G3/qeC5Cy1xoHk8bvc3PuNShyh0yzhMuCIXgbe01Y+4kskkS /UbGJ9rmSBBAaiXWVmjmdg== 0000950149-00-000855.txt : 20000503 0000950149-00-000855.hdr.sgml : 20000503 ACCESSION NUMBER: 0000950149-00-000855 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000414 DATE AS OF CHANGE: 20000502 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAW TECHNOLOGIES INC /UT CENTRAL INDEX KEY: 0000882159 STANDARD INDUSTRIAL CLASSIFICATION: 1540 IRS NUMBER: 870464280 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21818 FILM NUMBER: 602656 BUSINESS ADDRESS: STREET 1: 2700 S 900 W CITY: SALT LAKE CITY STATE: UT ZIP: 84119 BUSINESS PHONE: 8019773100 MAIL ADDRESS: STREET 2: 2700 SOUTH 900 WEST CITY: SALT LAKE CITY STATE: UT ZIP: 84119 FORMER COMPANY: FORMER CONFORMED NAME: PRIMA ACQUISITIONS INC DATE OF NAME CHANGE: 19600201 10-K 1 ANNUAL REPORT ON FORM 10-K 1 ================================================================================ 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, 1999 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 [ ] No [x] 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. [ ] 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, 2000, was approximately $14,166,439. 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 14, 2000, the Registrant had 12,832,454 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's definitive Proxy Statement relating to the Annual Meeting of Shareholders scheduled for July 28, 2000 is incorporated by reference in Part III of this report. ================================================================================ 2 TABLE OF CONTENTS PART I ........................................................................................ 1 ITEM 1. BUSINESS............................................................................... 1 ITEM 2. PROPERTIES............................................................................. 9 ITEM 3. LEGAL PROCEEDINGS...................................................................... 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................... 9 PART II ....................................................................................... 10 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS................. 10 ITEM 6. SELECTED FINANCIAL DATA............................................................... 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................................................ 12 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ........................... 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................... 19 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............................................................................ 19 PART III....................................................................................... 20 ITEM 10, 11, 12 AND 13......................................................................... 20 PART IV ....................................................................................... 21 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...................... 21 SIGNATURES..................................................................................... 23 FINANCIAL STATEMENTS........................................................................... F-1
3 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 supplier of ultra-clean manufacturing environments, or cleanrooms, to the semiconductor industry. The Company designs, engineers, manufactures, installs and services certain principal component systems for advanced cleanrooms. The Company is a single-source provider of the entire cleanroom system. The Company provides its customers with services to integrate the design, installation and servicing of cleanrooms, including architectural engineering and design, installation, testing, certification, tool fit-up, and continuing on-site service and support. The Company believes its integrated approach enables customers to benefit from accelerated cleanroom design and installation, simplified project control, single-source performance certification and cost effectiveness. Cleanrooms are critical to the semiconductor manufacturing process. Process yields are highly dependent upon controlling contamination levels and other environmental variables. These variables include the number of particles, humidity, gasses, vibration, temperature and electro-magnetic fields. To be competitive, semiconductor manufacturers must meet increasingly stringent standards for cleanliness and environmental control in their fabrication facilities ("fabs"). The Company believes its integrated solution allows it to effectively address the requirements of efficient cleanroom design and installation. The Company markets its cleanrooms through a direct sales force to customers building new fabs or renovating existing facilities. The majority of its business comes from repeat sales to these customers. The Company also provides contract manufacturing services on an OEM basis for various customers. This includes but is not limited to metal fabrication and assembly of a various range of products such as air-entrance systems used in high-volume commercial retail establishments, the application of powder epoxy paint for a variety of products, and sleeper cabs for semi-tractor trailers. The Company also has a division (Intelligent Enclosures) that provides mini-environments and tool enclosure systems for semiconductor capital equipment process-tool suppliers. Tool enclosures and mini-environments control particulates, temperature and humidity, and airborne molecular contamination of the process tool. INDUSTRY BACKGROUND The rapid pace of advances in semiconductor technology has led to shorter semiconductor product and facility life cycles. To bring new semiconductor products to market more rapidly, semiconductor 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. Even slight deviations in key environmental parameters, most of which are controlled within the cleanroom, can negatively affect yields. Achieving higher yields is the motivating force behind many of the progressively more rigorous cleanroom standards for semiconductor fabs. 1 4 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 sale of chips. As chip sales rise, so too does capital spending. From 1988 to 1996, chip sales increased from roughly $50 billion per year to almost $150 billion. In response to this tremendous growth in sales, chip manufacturers increased capital spending in new equipment and fab facilities from around $12 billion to almost $45 billion during the same time period. Since their peak in 1995, chip sales have dropped to around $122 billion in 1998, thus causing a dramatic decrease in capital expenditures by the industry over that period of time. Various industry analysts have reported that in 1999 chip sales increased by 20% over 1998 levels which indicate that the three year downturn may be ending. In addition, analysts predict that chip sales for 2000 may increase by an additional 30 to 40 percent over 1999 chip sales. INTEGRATED SOLUTION The Company's integrated solution incorporates design, engineering, installation, testing, product development 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 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. 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, the Company's customers benefit from increased revenues resulting from bringing a new fab into operation in a shorter time period. 2 5 COMPANY STRATEGY The Company's stated mission is to provide customer-focused solutions to its customers. The Company's strategy for achieving this goal includes the following elements: Focus On Customers Who Accept Integrated Solutions. The Company believes it will be most successful if it targets customers whose purchasing philosophy is consistent with an integrated solutions approach, rather than customers who focus on separate components and services. Build Long-Term Customer Relationships. Most of the Company's cleanroom revenue is derived from sales to customers who recognize the value of an integrated solutions philosophy. The Company's marketing strategy is focused on building long-term relationships with these customers, their architectural and engineering firms and other parties involved in the cleanroom project. By building such relationships, the Company is positioned to work with those customers that most benefit from its integrated approach. Local Service Network. In order to provide timely and efficient local customer service and support, the Company has project management, design and sales offices in Europe and the United States. In addition, the Company believes 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 North America, the Company believes there are significant opportunities for expansion in Europe and Asia. The Company will seek to increase revenues from international projects by expanding marketing efforts and bidding activities in Europe first, and then in Asia in 2001. Information concerning revenues summarized by geographical area is set forth in Note C of the footnotes to the financial statements. Maintain Technological Leadership. The Company believes 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. As a result of the recent downturn in the semiconductor industry, the Company's revenue base from cleanroom sales has been severely impacted by reduced capital spending by semiconductor companies. To reduce the Company's dependence on this highly cyclical industry, the Company has begun to diversify its operations and pursue revenue sources from other products and industries. It is the Company's objective to obtain 40% 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 its new air entrance system for large national retail centers holds for significant revenue and profitability growth. To date, all of the Company's diversification initiatives have utilized existing design and engineering resources as well as manufacturing equipment at its Salt Lake City facility, thus requiring minimal capital resources and more fully utilizing existing equipment and facilities. 3 6 CLEANROOM SYSTEMS AND SERVICES 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. The room is maintained at a slightly higher air pressure than surrounding rooms so leaks, open doors, or other temporary openings cause clean air to escape, rather than allowing contaminated air to enter. Several important measures must be considered in cleanroom design. They 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. The cleanroom must 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 control humidity, gasses, noise, vibrations, temperature, electro-magnetic fields, and other environmental variables. A typical eight-inch wafer production line includes 60,000-150,000 square feet of Class 1 or better 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. Leading edge cleanrooms for advanced semiconductor fabrication are Class 1 or better. Virtually all of the Company's contracts involve Class 100 or better cleanrooms. Component Systems. While the Company has previously announced its plans to pursue a foundry strategy for the manufacture of cleanroom components by selling its cleanroom component manufacturing business unit, it continues to manufacture component systems on a limited basis until a buyer or joint venture partner can be identified. The Company is in discussion with several interested parties. The Company manufactures all principal component systems that comprise an integrated cleanroom, including make-up and recirculating 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 of non-shedding materials to mitigate microscopic particles in the air stream that may have deleterious effects on the cleanroom. The Company's cleanroom component systems include the following: STRATUS(TM) Air Handlers. Stratus(TM) Air Handling Systems deliver quiet, efficient and conditioned prefiltered air to clean manufacturing facilities. The Company manufactures and installs recirculating air handling systems, make-up air handling systems and localized fan filter units. The Company's air handlers are designed to reduce noise, vibration and power consumption and meet stringent standards defined by the industry. The moving elements in a STRATUS(TM) recirculating air handler are balanced to less than 25 milli-inches per second of vibration and meet stringent noise standards. Fan and motor bearings are rated in excess of the industry standards for continuous, uninterupted service. The Company offers digitally controlled systems that instruct the air handler to adapt to changes in temperature, relative humidity, pressure drop and other environmental factors using feedback from an array of specialty sensors. AIR-FRAME(TM) Ceiling Systems. AIR-FRAME(TM) Ceiling Systems are designed to provide ultra-clean air filtration and unidirectional airflow for cleanroom application. Each system fully integrates lighting, ionization and fire suppression into the ceiling modules for single point connection in the field. Modules can be fully welded or stick-built in sizes ranging from 1' x 1' to 10' x 24' and each are capable of supporting air handlers in excess of 4,000lbs. Individual modules can be configured as tunnels or as large ballrooms to form cleanrooms of virtually unlimited size and shape. The Company offers seven different ceiling schemes. Each is tailored to a 4 7 particular cleanroom application to create optimal performance while maintaining absolute flexibility, facilitating rapid modifications to evolving cleanrooms. Precision modules (tolerance +0", -1/8") are custom-made of lightweight precision-extruded aluminum (tolerance "-.003") and finished with a nonshedding baked-on powder coat epoxy. Each module is carefully designed with all appropriate column notches and structural hanging points to match existing field conditions. Each module is taken directly off the powder coat line and placed in an on-site Class 10,000 clean packaging area where they are prewired, prelighted and clean packaged. The Company's lightweight aluminum modules permit installation by two men and yet are strong enough to support a 4000#. hanging load from any point below the grid and a 250 lb. man-rating above the grid. Ceiling modules can be designed with each filter individually ducted or as a pressure plenum. Plenum sides can be closed or open to share airflow with adjacent plenums. Optional filter dampers can be provided for finite airflow control. The Company has developed, tested and refined the Flushlight(TM) and Flow Thru(TM) systems using a sophisticated computer airflow model. The airflow through the grid and light cavity eliminates the vortex created by the grid. A vortex caused by typical cleanroom ceiling systems is a turbulent zone below the ceiling grid members that captures particulate and permits particulate migration throughout the cleanroom. NETWORK(TM) Wall Systems. NetWork(TM) Wall Systems separate cleanrooms into distinct airflow zones. Network(TM) offers five different wall systems: 2" studless self-supporting panels, 1/2" panel on aluminum stud, 1/4" batten panels on steel stud, 1/4" furring panels, and 1 3/4" 3 in 1 wall. The 1 3/4" wall can be: A. 1 3/4" studless, self-supporting panels; B. 1 3/4" panel on aluminum stud; or C. 1/4" panel on aluminum stud all fully compatible with one another. Each of these wall systems has been developed to permit any or all systems to be interfaced together maintaining a uniform appearance. A typical installation might use 1/4" panels furred over existing walls, 2" panels in the large ballroom areas and 1/2" panels on structural studs to support Air-Frame(TM) ceiling modules and Stratus(TM) air handlers. Each panel is constructed of .032" aluminum skins laminated to an aluminum honeycomb core and finished with a nonshedding baked-on powder coat epoxy. Panels are held to strict dimensional and structural tolerances with surface flatness varying less than "-.032", panel length and width accurate to "-.040" and deflection less than L/240 at 5 lbs. per square foot. The panel edge is gasketed to provide a seal between varying cleanroom zones. Their lightweight construction permits ease of installation and field modification for equipment penetrations and bulkheading. Walls are demountable and non-progressive, meaning individual panels may be removed or replaced without affecting surrounding panels. MATRIX(TM) Raised Access Flooring. MATRIX(TM) Raised Access Floors have been designed to meet the exacting air flow, structural and cleanliness requirements of Class 0.1 to Class 1000 cleanrooms. MATRIX(TM) floors provide maximum structural capability utilizing easily removable panels which meet the special material and airflow requirements of cleanrooms. MATRIX(TM) panels are available in a variety of finishes for corrosion resistance and conductivity requirements. The Company recently introduced the Vari-Span structural system, which reduces the number of pedestals needed to support the floor, allowing design freedom for an open waffle slab and frees under-floor space for additional process piping and conduits. 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 semiconductor 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 facilities 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 5 8 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. 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. The Company intends to place further emphasis on service and support contracts in the future. Customers often desire to have rooms modified or to have tools substituted or moved. Ongoing service personnel working at the project site perform equipment bulkheading, facilitate movement of process equipment and perform maintenance. The Company's support teams have a portable aluminum-working 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 prevent 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. On-site personnel provide 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 customer support representative develops customer profiles and spare parts catalogues that are given to the customer. CUSTOMERS The Company's principal cleanroom customers are microelectronics manufacturers. The Company has sold its component systems and cleanrooms to many of the world's leading semiconductor, disk drive, and flat panel display manufacturers. A major component of the Company's strategy is to develop long-term strategic relationships with such manufacturers. 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 accounted for approximately 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 market dynamics factors, the product and customer mix involved in the Company's diversification strategy may change from time to time. As of December 31, 1999, the Company has established one significant customer for its sleeper cabs, the loss of which would have a material adverse effect on that business. SALES AND MARKETING The Company's marketing program is focused on expanding market acceptance of the Company's integrated cleanroom approach and on building long-term strategic relationships. By offering its customers 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 utilizing a direct sales force in North America and Europe. The Company has transferred ownership of its Asia branch to a former employee and does not intend to commence construction on contracts for cleanroom projects in Asia until at least January 2001. The Company has design and engineering offices in Livingston, Scotland that serve the European market. In addition, the Company has project 6 9 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. 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 to meet customer requirements. The Company seeks to develop innovative products and modify existing products to make them less expensive 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 that has resulted in its sleeper cab and commercial air handling products. The Company incurred approximately $214,000, $293,000 and $246,000 in non-project related research and development costs in 1999, 1998 and 1997, respectively. 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. Although the Company's patents may have value, the Company believes that the success of its business depends more on 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 While the Company has previously announced its plans to pursue a foundry strategy for the manufacture of cleanroom components by selling its cleanroom component manufacturing business unit, it continues to manufacture component systems on a limited basis until a buyer or joint venture partner can be identified. The Company is in discussion with several interested parties. The Company's Salt Lake facility processes raw materials received in the form of die-cast panels, extruded aluminum members, sheet metal, honeycomb and various coverings and fasteners. These materials are modified and assembled into pre-fabricated modules through a series of automated and manual steps, which may include cutting, milling, welding, perforating, measuring, assembling and finishing. Each individual module is made in accordance with customized fabrication drawings prepared by the Company's design staff. The Company's components are finished in a dry powder applied and baked hybrid polyester-epoxy coating. After baking, this coating forms a monolithic, non-particulating seal over the surface of the component. This finish is available in many colors and is corrosion resistant. This finish outperforms nickel chrome and other 7 10 finishes by substantial margins in chemical resistance and durability tests. This finish is normally conductive, but can be modified to meet any desired static dissipative or electrical isolation properties. The Company's production staff is divided into self-directed working teams. The team manufacturing components for a project interacts directly with the project manager and the team installing the cleanroom. The close relationship between the Company's manufacturing teams and installation teams allows components to be altered rapidly in response to design changes initiated by the customer's facility management team. The Company believes this relationship and the accountability of the manufacturing team to site personnel enhances the Company's quality control. The Company's installation teams are capable of modifying most components to accommodate last-second changes and still meet specifications for final fit and seal. The Company establishes a small shop at major project sites to support bulkheading, tooling changes and other modifications requested by the customer. COMPETITION The Company believes it is one of the largest supplier's of integrated cleanroom solutions providing design, engineering, component supply, installation, testing, certification, and ongoing customer support. The Company competes with a number of companies providing cleanroom products or services, many of which may have significantly greater financial and capital resources than the Company. The Company competes with architectural and engineering firms for the provision of design and engineering services. Where appropriate, the Company attempts to work with these companies as a supplier rather than as a direct competitor. The Company competes with specialized cleanroom integrators, such as M&W Lander, Takasago, PCI, and others for installation/on-site management services. The Company believes the principal competitive factors in the cleanroom industry are quality, time to completion, reliability, responsiveness for design and installation, product performance and price. The order of importance of these factors varies from year to year. 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 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, 1999, the Company's backlog was $19.7 million, compared to $12.8 million at December 31, 1998. The Company's contracts, however, frequently 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 a contract, and there can be no assurance that a customer will not terminate a contract. EMPLOYEES The Company employed approximately 260 full-time employees and 42 part-time employees as of December 31, 1999, compared to 311 full-time employees and 46 part-time employees as of December 31, 1998. 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 of the plan. 8 11 ITEM 2. PROPERTIES. The Company leases approximately 221,000 square feet in two buildings at its headquarters in Salt Lake City, Utah, of which approximately 163,000 square feet are used for manufacturing, 46,000 square feet are used for administrative functions, and 12,000 square feet are used for testing and research and development. 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 and Livingston, Scotland with various lease expiration dates ranging from 2000 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. 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. 9 12 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, 1999 and 1998, respectively.
HIGH LOW ------ ------ 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 YEAR ENDED DECEMBER 31, 1998: First Quarter ................ $1.906 $1.219 Second Quarter ............... 2.938 1.375 Third Quarter ................ 2.313 1.219 Fourth Quarter ............... 1.219 0.656
The Company did not pay or declare dividends on its Common Stock during the years ended December 31, 1999, 1998 and 1997. 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 14, 2000, the Company had 12,832,454 shares of its Common Stock outstanding, held by 138 shareholders of record, which does not include shareholders whose shares are held in securities position listings. 10 13 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, ------------------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Revenues ............................ $ 45,206 $ 53,078 $ 52,541 $112,826 $ 70,635 Cost of goods sold .................. 43,576 51,223 47,272 97,364 63,484 -------- -------- -------- -------- -------- Gross profit ........................ 1,630 1,855 5,269 15,462 7,151 -------- -------- -------- -------- -------- Selling, general and administrative expenses ............. 7,405 6,513 8,373 10,274 6,333 Research and development ............ 214 293 246 282 255 Depreciation and amortization ....... 412 563 431 400 219 Restructuring charges ............... 1,839 - - - - -------- -------- -------- -------- -------- 9,870 7,369 9,050 10,956 6,807 -------- -------- -------- -------- -------- Earnings (loss) from operations ..... (8,240) (5,514) (3,781) 4,506 344 Other income (expense), net ......... (493) (483) (344) 352 119 -------- -------- -------- -------- -------- Earnings (loss) before income ....... (8,733) (5,997) (4,125) 4,858 463 taxes Income taxes (benefit) .............. (1,092) (2,075) (1,866) 1,548 176 ======== ======== ======== ======== ======== NET EARNINGS (LOSS) ................. $ (7,641) $ (3,922) $ (2,259) $ 3,310 $ 287 ======== ======== ======== ======== ======== Earnings (loss) per common share Basic ........................... $ (0.61) $ (0.32) $ (0.18) $ 0.27 $ 0.02 Diluted ......................... $ (0.61) $ (0.32) $ (0.18) $ 0.27 $ 0.02 Weighted-average common and dilutive common equivalent shares outstanding Basic ........................... 12,502 12,440 12,416 12,350 12,148 Diluted ......................... 12,502 12,440 12,416 12,393 12,365
DECEMBER 31, ----------------------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- BALANCE SHEET DATA: Cash and cash equivalents ......... $ 296 $ 2,140 $ 5,802 $ 3,258 $ 5,885 Working capital ................... 2,886 10,674 15,248 17,112 15,431 Total assets ...................... 26,075 30,841 32,364 49,495 40,072 Total liabilities ................. 15,567 12,714 11,664 26,557 20,633 Total shareholders' equity ........ 10,508 18,127 20,700 22,938 19,409
11 14 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 an integrated systems solution provider of cleanrooms and cleanroom component systems for the semiconductor industry. In recent years, the Company has typically had one to three significant customers, each of whom accounted for approximately 10% or more of the Company's annual revenues; these customers do not necessarily remain significant in subsequent years. The semiconductor industry has been historically cyclical in nature and continues to be adversely affected by the industry downturn that began in the latter part of 1996. Capital spending by semiconductor manufacturers has always closely followed chip sales. As chip sales increased from around $50 billion per year in the late 1980's to a peak of $150 billion in 1995, capital spending on equipment and facilities by the chip manufacturers surged to $45 billion from about $12 billion during the same period of time. As chip sales have declined over the past three years to about $122 billion in 1999, capital spending on new equipment and facilities plunged to less than $30 billion in 1998. Various industry analysts have reported that in 1999 chip sales increased by 20% which indicates that the recent downturn may be ending. In addition, analysts predict that chip sales for 2000 may increase by an additional 30 to 40 percent. The Company's recovery cycle in relation to the award of cleanroom projects lags behind the semiconductor manufacturers' recovery in relation to chip sales. The Company's operating results have been severely impacted by the reduced capital spending of the semiconductor industry during the past three years. While the industry has shown signs of recovery from time to time over the past three years, it has been consistently disappointed by continued declines. Management believes the downturn is nearing its end and the industry is on the road to recovery. The timing or likelihood or any such recovery that will take place is still subject to significant uncertainty. The downturn in 1999 generally resulted in fewer contracts available to bid, a significant increase in price competition on contracts that were awarded, and reduced margins on such contracts. However, beginning in the fourth quarter of 1999, the Company experienced growth in new contract awards resulting in an increase in the Company's backlog from $12.8 million at December 31, 1998 to $19.7 million at December 31, 1999. Additionally, during the first quarter of 2000, the Company has experienced a significant increase in contract bidding and contract awards at significantly higher gross margins than at any time during the three-year industry downturn. Although there is uncertainty regarding the condition and prospects of a full recovery in the semiconductor industry, management continues to believe that changes taking place in the industry should result in expanded semiconductor industry capital expenditures. Delays in the ramp-up of 300mm technology have delayed the expected construction of a whole series of 300mm fabs worldwide, although during the fourth quarter of 1999 construction of some of these delayed fabs was initiated. In response to the current downturn, management has continued to take steps to reduce the Company's cost structure including an approximate 26% cut in wages in 1999 as compared to 1998. Previously, in 1998, the Company reduced its work force by more than fifty percent. During 2000, management will closely monitor the Company's cost structure and take appropriate actions as considered necessary, but will continue to develop state-of-the-art cleanroom technology, provide world-class support to the Company's customers, and continue its diversification strategy. In response to reduced revenue generated by the sale of cleanrooms, the Company has recently undertaken several initiatives to expand its revenue base beyond the semiconductor industry and to reduce its reliance on this historically cyclical business. The Company has developed an air entrance system used by large national retail chains in their new "superstores". Air entrances 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 entrance system. This product also shows great promise of providing increased gross profit over the next two years. Additionally, the Company has entered into several contract manufacturing agreements whereby the Company manufactures products owned and marketed by third parties. During the first quarter of 1998, the Company 12 15 announced its entrance into the transportation industry where it started producing sleeper cabs for heavy-duty trucks. By applying similar wall panel systems technology used in cleanrooms the Company produces a stronger, more durable, and lighter weight product than traditional sleeper cabs. This technology may eventually be applied to other products in the transportation industry. It is the Company's objective to develop and maintain 40% of its revenues from sources outside of the semiconductor industry by applying its product and engineering expertise in custom metal fabrication, airflow systems and panel production to similar type products used in other industries. 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 revenue and cost recognition, 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 generates revenue in two geographic regions; North America and Europe. Although risk of fluctuations in currency value does not affect such 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 manufacturers and integrators of systems. 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. 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
1999 Change 1998 Change 1997 ------- ------- ------- ------- ------- Cleanrooms and Related Products ... $33,758 (27.9)% $46,298 (11.9)% $52,541 Other Products .................... 11,448 68.8 % 6,780 100.0 % - Total Revenue ..................... $45,206 (14.8)% $53,078 1.0% $52,541
Revenue from cleanrooms and related products decreased 27.9% in 1999 to $33.8 million from $46.3 million in 1998. The decrease was due to the continued downturn in the semiconductor industry's capital expenditures for new fab facilities as more fully discussed above. During 1998, cleanroom contract revenue decreased by 11.9% to $46.3 million from $52.5 million in 1997. This decrease is primarily related to the downturn in the semiconductor industry as discussed above. Revenue from other products increased to $11.4 million in 1999 from $6.8 million in 1998. During 1998, revenue from other products was $6.8 million as compared to $0.0 in 1997. The increase is due to the start-up and continuation of new lines of business, including the Company's line of sleeper cabs, contract 13 16 manufacturing, and other product sales that were non-existent in 1997. North America - Cleanroom revenue for the year ended December 31, 1999 decreased by 15.3% to $19.9 million from $23.5 million for the year ended December 31, 1998. As a percentage of total cleanroom revenue, North America revenue increased to 58.9% in 1999 compared to 50.8% in 1998. The decrease in North America contract revenue is primarily related to the continued downturn in the semiconductor industry as more fully discussed above. Revenue from other products of $11.4 million was primarily attributable to sales of sleeper cabs and various contract manufactured products sold only in North America in 1999. Cleanroom revenue for the year ended December 31, 1998 decreased by 25.1% to $23.5 million from $31.4 million for the year ended December 31, 1997. As a percentage of total revenue, North America revenue decreased to 50.8% in 1998 compared to 59.8% in 1997. The decrease is the result of fewer contracts received in North America due to the decline in capital spending by the semiconductor industry. Asia/Pacific Rim - Cleanroom revenue for the year ended December 31, 1999 decreased by 72.4% to $2.7 million from $9.8 million for the year ended December 31, 1998. As a percentage of total cleanroom revenue Asia/Pacific revenue decreased to 8.1% in 1999 compared to 21.2% in 1998. The decrease in revenue and percentage was directly related to the continued downturn in the semiconductor industry in the Asia/Pacific Rim and the Company's decision to pull out of this region. The Company has transferred ownership of its Asia branch to a former employee and does not intend to pursue contracts for cleanroom projects in Asia until January 2001. Cleanroom revenue for December 31, 1998 increased by 2.7% to $9.8 million from $9.5 million for the year ended December 31, 1997. As a percentage of total cleanroom revenue, Asia/Pacific revenue increased to 21.2% in 1998 compared to 18.2% in 1997. The increase in revenue and percentage was primarily due to the award of a significant project in China. The contract was subsequently placed on indefinite suspension due to the uncertainty of the Asian market. Europe - Cleanroom revenue for the year ended December 31, 1999 decreased by 13.8% to $11.2 million from $13.0 million for the year ended December 31, 1998. As a percentage of total cleanroom revenue, European revenue increased to 33.1% in 1999 compared to 28.0% in 1998. Although the worldwide downturn in the semiconductor industry continued in 1999, it does not appear to have affected the European segment as dramatically as the Asian and North American markets. Cleanroom revenue for 1998 increased by 12.0% to $13.0 million from $11.6 million for the year ended December 31, 1997. As a percentage of total cleanroom revenue, Europe revenue increased to 28.0% in 1998 compared to 22.0% in 1997. While the semiconductor industry has experienced a worldwide downturn, it did not appear to have affected the European segment as dramatically as the Asian and North American markets. Additionally, the Company was able to win contracts in new countries that it had not contracted business in previously. 14 17 Gross Profit
1999 Change 1998 Change 1997 -------- -------- -------- -------- -------- Gross profit .............. $ 1,630 (12.1)% $ 1,855 (64.8)% $ 5,269 Percentage of revenues .... 3.6% 3.5% 10.0%
Gross profit for the year ended December 31, 1999 decreased by 12.1% to $1.6 million from $1.9 million for the year ended December 31, 1998. Gross profit increased as a percentage of revenue to 3.6% for 1999 compared to 3.5% for 1998. The Company believes the decrease in gross margin is primarily the result of the semiconductor industry downturn, which generally resulted in fewer contracts available to bid, a significant increase in price competition on contracts that were awarded, and reduced margins on such contracts. The downturn has resulted in fewer contracts awarded and those that were awarded were done so after a highly competitive bidding process placing significant downward pressure on pricing and thus resulting in lower margins. Gross profit for 1998 decreased by 64.8% to $1.9 million from $5.3 million in 1997, and decreased as a percentage of contract revenue to 3.5% in 1998 from 10.0% in 1997. The decrease in gross profit was the direct result of the substantial reductions in contracts awarded from 1997 to 1998 as the semiconductor industry entered its second year of its downturn. As the downturn gained momentum throughout 1998, 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
1999 Change 1998 Change 1997 -------- -------- -------- -------- -------- Selling, general and Administrative expenses ......... $ 7,405 13.7% 6,513 (22.2)% $ 8,373 Percentage of revenues ............ 16.4% 12.3% 15.9%
Selling, general and administrative expenses for 1999 increased 13.7% to $7.4 million, from $6.5 million, and increased as a percentage of revenue to 16.4% for the year ended December 31, 1999 compared to 12.3% for the year ended December 31, 1998. The increase in selling, general and administrative expenses in 1999 compared with 1998 was primarily the result of a difference in the calculation of the manufacturing overhead expense "allocation" to direct cost of goods sold. The Company allocates a portion of its overhead costs associated with the direct manufacture of its products to costs of goods sold. While combined selling, general and administrative expenses for payroll and other overhead expenses decreased by approximately $2.0 million from 1998 to 1999, the overhead "allocation" costs (associated with the direct manufacture of its products to costs of goods sold and then reclassified as direct costs) was approximately $2.9 million more in 1998 than 1999. Selling, general and administrative expenses for 1998 decreased 22.2% to $6.5 million, or 12.3% of contract revenue, from $8.4 million, or 15.9% of revenue, in 1997. The decrease in selling, general and administrative expenses was the result of an aggressive cost reduction program as well as significant headcount reductions completed during the fourth quarter of 1998 during which approximately 300 employees were laid off, thus reducing payroll and related expenses. Research and Development
1999 Change 1998 Change 1997 ------ ------ ------ ------ ------ Research and Development expense ............. $ 214 (27.0)% $ 293 19.1% $ 246 Percentage of revenues ............ 0.5% 0.6% 0.5%
Research and development expense decreased slightly in actual dollars spent from 1998 to 1999. Management believes that the Company will increase its research and development expenses during 2000, both in actual dollars spent and as a percentage of revenue in order to develop innovative products associated with 15 18 cleanrooms and with the Company's efforts to diversify its products. Also, research and development expenses will be increased in the continued effort to modify existing products to be less expensive to produce and easier to install. Research and development expense increased slightly from 1997 to 1998. This increase was the result of more research and development projects associated with the Company's diversification efforts. Depreciation and Amortization
1999 Change 1998 Change 1997 ------ ------ ------ ------ ------ Depreciation and Amortization expense ............ $ 412 (26.8)% $ 563 30.6% $ 431 Percentage of revenues ............ 0.9% 1.1% 0.8%
Depreciation and amortization expense during 1999 decreased by 26.8% to $412,000, or 0.9% of revenue, from $563,000, or 1.1% of revenues, in 1998. This decrease was the result of some leasehold improvements, furniture, fixtures, computer equipment and software becoming fully depreciated in 1999. Depreciation and amortization expense in 1998 increased by 30.6% to $563,000, or 1.1% of revenues, from $431,000, or 0.8% of revenues, in 1997. This increase was the result of a full year depreciation expense on leasehold improvements, furniture, fixtures, computer equipment and software purchased during 1998. Other Income (Expense), net
1999 Change 1998 Change 1997 ------ ------ ------ ------ ------ Other income (expense) ............ $ (493) 2.1% $ (483) 40.4% $ (344) Percentage of revenues ............ 1.1% 0.9% 0.7%
Other income (expense) increased in 1999 to $493,000 from $483,000 in 1998. This modest increase was largely due to an increase in interest expense in 1999 resulting from an increase in the average line of credit rate on the Company's revolving line of credit over 1998. Restructuring charges
1999 Change 1998 Change 1997 -------- -------- -------- -------- -------- Restructuring charges ............. $ 1,839 0.0% - 0.0% - Percentage of revenues ............ 4.1% (0.0)% (0.0)%
Restructuring charges were largely due to the disposition of the Company's Asia/Pacific office, and the write-down of inventory associated with the decision to divest itself of the Company's cleanroom component manufacturing division. The Company has previously announced its plans to pursue a foundry strategy for the manufacture of cleanroom components by selling its cleanroom component manufacturing business unit. It continues to manufacture component systems on a limited basis until a buyer or joint venture partner can be identified. The Company is in discussion with several interested parties. Income Taxes (Benefit)
1999 Change 1998 Change 1997 -------- -------- -------- -------- -------- Income taxes (benefit) ............ $ (1,092) (47.4)% $ (2,075) 11.2% $ (1,866) Percentage of revenues ............ (2.4)% (3.9)% (3.6)%
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. (see Note J of Notes to the Consolidated Financial Statements). 16 19 In addition, the increase from 1997 to 1998 was partially the result of tax benefits the Company was able to utilize from its foreign sales corporation. LIQUIDITY AND CAPITAL RESOURCES Working capital at December 31, 1999 was $2.9 million compared to $10.7 million at December 31, 1998. This included cash and cash equivalents of $296,000 and $2.1 million at December 31, 1999 and 1998 respectively. Receivables, including retentions, (see Note D of Notes to Financial Statements) decreased to $7.4 million at December 31, 1999 compared to $8.9 million at December 31, 1998. This decrease was the result of lower revenues from fewer contracts during 1999 compared to 1998. Day's sales outstanding (the ratio between receivables, excluding retention, and average daily revenue taken over the year) decreased to 66 days at December 31, 1999, from 61 days at December 31, 1998. The Company's operations used $1.4 million of cash during 1999, compared to using $6.9 million of cash in 1998. During 1999, the Company experienced a decrease in receivables of $1.5 million as a result of the decline in revenues, an increase in accounts payable and accrued expenses of approximately of $3.6 million as a result of more restrictive covenants associated with the Company's revolving line of credit, an increase in inventories of $1.4 million, and a decrease in Costs and estimated earnings in excess of billings on contracts in progress of $2.6 million. The Company maintained a revolving line of credit with a domestic bank for the lesser of $6.0 million or the available borrowing base for the period ended December 31, 1999 and $6.0 million for the period ended December 31, 1998. The interest rate is computed at the bank's prime rate plus 5% (13.5 percent at December 31, 1999) and requires monthly payments of interest. Subsequent to year end the bank lowered its interest rate computation to the bank's prime rate plus 3%, but has informed the Company that it will restore the rate to prime plus 5% again as of May 31, 2000. The line of credit expired June 30, 1999 and was extended to August 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 1999 and at December 31, 1999, the Company was out of compliance on certain indebtedness covenants. Subsequent to year end, the Company signed an extension of the line of credit through August 31, 2000 which included a waiver for the non-compliance with the covenants as of December 31, 1999. The Company is currently reviewing several financing alternatives. During 1999, the Company used $189,000 for the purchase of property and equipment and realized $122,000 from the sale of property and equipment. The Company anticipates that its capital expenditures in 1999 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. Management believes that existing cash balances, borrowings available under the line of credit, cash generated from operations, and proceeds from a scheduled $5.0 million private equity placement will be adequate to meet the Company's anticipated cash requirements through December 31, 1999. However, in the event the Company experiences adverse operating performance, above-anticipated capital expenditure requirements, or is unable to complete the private equity placement or to renew 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. 17 20 YEAR 2000 ISSUES In 1998 and 1999 the Company developed a comprehensive plan to address year 2000 issues. The areas of focus were as follows: i) the Company's information technology systems; ii) the Company's non-information technology systems (i.e. machinery, equipment and devices which utilize built in or embedded technology); and iii) third party suppliers and customers. During the first quarter of 2000 the Company did not suffer any negative effects from the advent of the year 2000 regarding the Company's information technology system, non-information technology systems or third party suppliers and customers. No assurance can be given that the Company will not be materially adversely affected by future year 2000 issues. IMPACT OF FUTURE ACCOUNTING PRONOUNCEMENTS None. 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, and changes in semiconductor and cleanroom technology. 18 21 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. Market risk is the potential loss arising from adverse change in market rates and prices, such as foreign currency exchange and interest rates. For the Company, these exposures are primarily related to the sale of product to foreign customers and changes in interest rates. The Company does not have any derivatives or other financial instruments for trading or speculative purposes. 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, 1999 was $5.3 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, 1999. 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, since assets held outside the United States are negligible. 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 been no Form 8-K filed reporting a change of accountants or reporting disagreements on any matter of accounting principle, practice, financial statement disclosure or auditing scope or procedure during the years covered by this report. 19 22 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 July 28, 2000. The definitive Proxy Statement will be filed with the Commission not later than 120 days after December 31, 1999, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended. 20 23 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, 1999 and 1998 -- Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997 -- Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 -- Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 -- Notes to Consolidated Financial Statements (2) Financial Statement Schedule. The following financial statement schedule for the years ended December 31, 1999, 1998 and 1997 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: 21 24 EXHIBIT INDEX
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 Bylaws of the Company* Form 10-KSB for the year ended December 31, 1992, Exhibit No. 3.2 10.1 Agreement and Plan of Merger* Form 8-K dated October 1992, Exhibit 10.1 10.2 1993 Stock Option Plan* Form 10-KSB for the year ended December 31, 1993, Exhibit 10.4 10.3 Amendment No. 1 to 1993 Stock Option Plan* Form 10-Q for quarter ended June 30, 1997, Exhibit 10.1 10.4 Amendment No. 2 to 1993 Stock Option Plan* Form 10-K for the year ended December 31, 1997, Exhibit 10.4 10.5 Revolving Domestic Line of Credit Agreement Filed herewith. as Amended by the Fifth Extension Agreement 10.6 Lease Agreement for Salt Lake City facility* Form 10-KSB for the year ended December 31, 1993, Exhibit 10.6 10.7 Amendment to Lease Agreement* Form 10-K for the year ended December 31, 1996, Exhibit 10.5 21 Subsidiaries of the Registrant Filed herewith. 23.1 Consent of Independent Certified Public Filed herewith. Accountants. 27 Financial Data Schedule Filed herewith.
- - ------------------------- * These exhibits are incorporated herein by reference. (d) Financial Statement Schedules: See Item 14(a)(2) of this report. 22 25 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 14, 2000. DAW TECHNOLOGIES, INC. By: /s/ Ronald W. Daw -------------------------------------- Ronald W. Daw Chairman of the Board, President 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 14, 2000.
SIGNATURE CAPACITY IN WHICH SIGNED --------- ------------------------ /s/ Ronald W. Daw Chairman of the Board, President, Chief - - ------------------------------- Executive Officer, Director and Acting Ronald W. Daw Chief Financial Officer (Principal executive officer and Acting Principal financial and accounting officer) /s/ Robert G. Chamberlain Director - - ------------------------------- Robert G. Chamberlain /s/ Charles L. Bates, Jr. Director - - ------------------------------- Charles L. Bates, Jr. /s/ James S. Jardine Director - - ------------------------------- James S. Jardine /s/ Robert J. Frankenberg Director - - ------------------------------- Robert J. Frankenberg /s/ Ginger Gore-Giovale Director - - ------------------------------- Ginger Gore-Giovale
23 26 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, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. 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 generally accepted auditing standards. 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, 1999 and 1998, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ Grant Thornton LLP Salt Lake City, Utah April 7, 2000 F-1 27 Daw Technologies, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (in thousands, except share data) Assets
December 31, ----------------- 1999 1998 -------- ------- CURRENT ASSETS Cash and cash equivalents $ 296 $ 2,140 Accounts receivable, net 7,447 8,904 Costs and estimated earnings in excess of billings on contracts in progress 4,994 7,546 Inventories, net 2,612 1,233 Deferred income taxes 425 655 Other current assets 2,569 2,391 -------- ------- Total current assets 18,343 22,869 PROPERTY AND EQUIPMENT - NET, AT COST 3,402 4,859 DEFERRED INCOME TAXES 3,364 1,921 OTHER ASSETS 966 1,192 -------- ------- $ 26,075 $ 30,841 ======== ======= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Checks written in excess of cash in bank $ 248 $ - Accounts payable and accrued liabilities 8,117 4,749 Billings in excess of costs and estimated earnings on contracts in progress 1,373 1,635 Lines of credit 5,258 5,254 Current portion of long-term obligations 461 557 -------- ------- Total current liabilities 15,457 12,195 LONG-TERM OBLIGATIONS, less current portion 110 519 COMMITMENTS AND CONTINGENCIES - - SHAREHOLDERS' EQUITY Preferred stock, authorized 10,000,000 shares of $0.01 par value; none issued and outstanding - - Common stock, authorized 50,000,000 shares of $0.01 par value; issued and outstanding 12,513,114 shares in 1999 and 12,479,711 shares in 1998 125 125 Additional paid-in capital 16,579 16,557 Retained earnings (deficit) (6,196) 1,445 -------- ------- Total shareholders' equity 10,508 18,127 -------- ------- $ 26,075 $ 30,841 ======== =======
The accompanying notes are an integral part of these statements. F-2 28 Daw Technologies, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share data)
Year ended December 31, ---------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Revenues $ 45,206 $ 53,078 $ 52,541 Cost of goods sold 43,576 51,223 47,272 ------------ ------------ ------------ Gross profit 1,630 1,855 5,269 Operating expenses Selling, general and administrative 7,405 6,513 8,373 Research and development 214 293 246 Depreciation and amortization 412 563 431 Restructuring charges 1,839 - - ------------ ------------ ------------ 9,870 7,369 9,050 ------------ ------------ ------------ Loss from operations (8,240) (5,514) (3,781) Other income (expense) Interest (658) (459) (295) Other, net 165 (24) (49) ------------ ------------ ------------ (493) (483) (344) ------------ ------------ ------------ Loss before income taxes (8,733) (5,997) (4,125) Income taxes (benefit) (1,092) (2,075) (1,866) ------------ ------------ ------------ Net LOSS $ (7,641) $ (3,922) $ (2,259) ============ ============ ============ Loss per common share Basic $ (0.61) $ (0.32) $ (0.18) Diluted (0.61) (0.32) (0.18) Weighted-average common and dilutive common equivalent shares outstanding Basic 12,501,980 12,440,121 12,415,957 Diluted 12,501,980 12,440,121 12,415,957
The accompanying notes are an integral part of these statements. F-3 29 Daw Technologies, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except share data) Years ended December 31, 1999, 1998 and 1997
Addi- tional Retained Common paid-in earnings stock capital (deficit) Total --------- -------- --------- --------- Balances as of January 1, 1997 $ 124 $ 15,188 $ 7,626 $ 22,938 Common stock issued pursuant to the purchase of 43,738 shares pursuant to employee stock purchase plan - 84 - 84 Common stock purchased and retired - 36,304 shares - (63) - (63) Net loss for 1997 - - (2,259) (2,259) --------- -------- --------- --------- Balances as of December 31, 1997 124 15,209 5,367 20,700 Common stock issued pursuant to the purchase of 44,711 shares pursuant to employee stock purchase plan and 27,023 shares issued pursuant to the acquisition of another company 1 1,348 - 1,349 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 ========= ======== ========= =========
The accompanying notes are an integral part of these statements. F-4 30 Daw Technologies, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, except share data)
Year ended December 31, ---------------------------- 1999 1998 1997 -------- -------- -------- Increase (decrease) in cash and cash equivalents Cash flows from operating activities Net loss $ (7,641) $ (3,922) $ (2,259) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Depreciation and amortization 1,724 1,808 1,724 (Gain) loss on disposition of property and equipment 147 - (7) Provision for losses on accounts receivable 360 100 180 Deferred income taxes (1,213) (2,089) (390) Changes in assets and liabilities Account receivables 1,097 3,468 14,742 Costs and estimated earnings in excess of billings on contracts in progress 2,552 (3,844) 3,467 Inventories (1,379) 190 220 Other current assets (178) (224) (148) Accounts payable and accrued liabilities 3,368 (1,042) (5,082) Billings in excess of costs and estimated earnings on contracts in progress (262) (1,370) (4,500) Other assets 31 10 (6) -------- -------- -------- Net cash provided by (used in) operating activities (1,394) (6,915) 7,941 -------- -------- -------- Cash flows from investing activities Payments for purchase of property and equipment (189) (167) (349) Proceeds from disposition of property and equipment 122 - 21 -------- -------- -------- Net cash used in investing activities (67) (167) (328) -------- -------- --------
(continued) F-5 31 Daw Technologies, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (in thousands, except share data)
Year ended December 31, ----------------------------- 1999 1998 1997 -------- -------- ------- Cash flows from financing activities Increase in checks written in excess of cash in bank 248 - - Net change in lines of credit 4 4,024 (4,466) Payments for purchase and retirement of common stock - - (63) Proceeds from issuance of stock 22 49 84 Payments on long-term obligations (657) (653) (624) -------- -------- ------- Net cash provided by (used in) financing activities (383) 3,420 (5,069) -------- -------- ------- Net increase (decrease) in cash and cash equivalents (1,844) (3,662) 2,544 Cash and cash equivalents at beginning of year 2,140 5,802 3,258 -------- -------- ------- Cash and cash equivalents at end of year $ 296 $ 2,140 $ 5,802 ======== ======== ======= Supplemental disclosures of cash flow information Cash paid during the year for Interest $ 627 $ 459 $ 295 Income taxes - 11 438
Noncash investing and financing activities 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). This transaction 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 ========
Capital lease obligations of $152 for property and equipment acquisitions were incurred during 1999. The accompanying notes are an integral part of these statements. F-6 32 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (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, Europe Ltd., which was organized in June 1999, and Translite Systems, Inc., which was organized in October 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 is recognized using the percentage-of-completion method and, therefore, take 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-7 33 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (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-8 34 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (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 The Company follows the provisions of Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS No. 128). SFAS No. 128 requires the presentation of basic and diluted EPS. Basic 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. 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 49 percent (41 percent in 1998) of receivables are with three different customers. In addition, approximately 30 percent (25 percent in 1998) of receivables are due from entities located outside of North America, primarily Europe and Asia. Of the total receivables, approximately 30 percent are denominated in foreign currencies (5 percent at December 31, 1998). The Company routinely evaluates the financial strength of its customers and monitors each account to minimize the risk of loss. F-9 35 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (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 $2,125 at December 31, 1998 (none in 1999). The Company also maintains cash and cash equivalents in foreign accounts. These uninsured balances are approximately $288 at December 31, 1999 ($1,494 in 1998). 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. 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-10 36 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (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. Reclassifications Certain reclassifications have been made to the 1998 and 1997 financial statements to conform with the 1999 presentation. NOTE B - CAPITAL TRANSACTIONS During 1999, 1998 and 1997, the Company received $22, $49 and $84 from the issuance of 33,403, 44,711 and 43,738 shares of common stock, respectively. In 1998, the Company also issued 27,023 shares of common stock to acquire the net assets of Intelligent Enclosures Corporation (Note T). The Company purchased and retired 36,304 shares of common stock during 1997. 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 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. Employees purchased 33,403, 44,711 and 43,738 shares under the plan in 1999, 1998 and 1997, respectively. F-11 37 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (in thousands, except share data) NOTE C - INTERNATIONAL OPERATIONS Financial information summarized by geographic area for the years ended December 31, 1999, 1998 and 1997, is as follows:
North 1999 America Europe Asia/Pacific Consolidated ------------------------------------- --------- --------- ----------- ------------ Net revenues - unaffiliated customers $ 31,437 $ 11,058 $ 2,711 $ 45,206 Loss 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 $ 12,965 $ 9,606 $ 53,078 Loss from operations (4,316) (42) (1,156) (5,514) Identifiable assets 21,352 6,453 3,036 30,841
North 1997 America Europe Asia/Pacific Consolidated ------------------------------------- --------- --------- ----------- ------------ Net revenues - unaffiliated customers $ 31,413 $ 11,574 $ 9,554 $ 52,541 Loss from operations (283) (2,668) (830) (3,781) Identifiable assets 18,655 8,262 5,447 32,364
Foreign currency transaction losses totaling approximately $1 for 1999 ($203 for 1998) are included in other income. Foreign currency transactions for 1997 were not significant. NOTE D - ACCOUNTS RECEIVABLE Accounts receivable consist of the following:
1999 1998 -------- ------- Trade accounts receivable $ 1,662 $ 1,397 Contract receivables 5,707 7,140 Retentions receivable 378 982 -------- ------- 7,747 9,519 Less allowance for doubtful accounts 300 615 -------- ------- Accounts receivable $ 7,447 $ 8,904 ======== =======
F-12 38 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (in thousands, except share data) NOTE E - INVENTORIES Inventories consist of the following:
1999 1998 -------- -------- Raw materials $ 523 $ 1,533 Work in process 2,389 - -------- -------- 2,912 1,533 Less allowance for obsolescence 300 300 -------- -------- Total $ 2,612 $ 1,233 ======== ========
NOTE F - OTHER CURRENT ASSETS Other current assets consist of the following:
1999 1998 -------- -------- Income taxes receivable $ 222 $ 360 Refundable foreign taxes 2,185 1,666 Miscellaneous receivables and deposits 22 188 Prepaid expenses 140 177 -------- -------- $ 2,569 $ 2,391 ======== ========
NOTE G - PROPERTY AND EQUIPMENT Property and equipment and estimated useful lives consist of the following:
Years 1999 1998 ------------- -------- -------- Equipment 5-10 $ 2,093 $ 4,221 Furniture and fixtures 3-5 1,322 2,734 Leasehold improvements life of lease 2,626 2,605 Equipment under capital leases 5-10 3,720 4,067 Vehicles 3-5 246 317 -------- -------- 10,007 13,944 Less accumulated depreciation and amortization including $3,227 and $3,002 for equipment under capital leases at 1999 and 1998, respectively 6,605 9,085 -------- -------- $ 3,402 $ 4,859 ======== ========
F-13 39 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (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:
1999 1998 -------- -------- Total costs and estimated earnings $ 7,437 $ 118,265 Progress billings to date 3,816 112,354 -------- -------- $ 3,621 $ 5,911 ======== ========
The above are included in the balance sheets under the following captions:
1999 1998 -------- -------- Costs and estimated earnings in excess of billings on contracts in progress $ 4,994 $ 7,546 Billings in excess of costs and estimated earnings on contracts in progress (1,373) (1,635) -------- -------- $ 3,621 $ 5,911 ======== ========
NOTE I - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of the following:
1999 1998 ------- ------- Trade accounts payable $ 6,597 $ 2,847 Other accrued liabilities 304 219 Employees salaries, incentive pay, vacation and payroll taxes 895 1,017 Reserve for contract estimates and warranties 321 666 ------- ------- $ 8,117 $ 4,749 ======= =======
F-14 40 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (in thousands, except share data) NOTE J - INCOME TAXES Components of income taxes (benefit) are as follows:
1999 1998 1997 ------- -------- ------- Current Federal $ 106 $ 12 $(1,171) State 16 2 (305) Foreign - - - ------- -------- ------- 122 14 (1,476) Deferred Federal (1,511) (1,809) (379) State 297 (280) (11) ------- -------- ------- (1,214) (2,089) (390) ------- -------- ------- Income taxes (benefit) $(1,092) $(2,075) $(1,866) ======= ======== =======
The income tax expense (benefit) reconciled to the tax computed at the statutory Federal rate of 34 percent is as follows:
1999 1998 1997 ------- -------- ------- Tax (benefit) at federal statutory rate $(2,969) $(2,039) $(1,403) Nondeductible expenses 5 12 11 State income taxes, net of federal income tax benefit (288) (198) (234) Foreign sales corporation exemption - - (167) Change in valuation allowance 2,187 - - All other, net (27) 150 (73) ------- -------- ------- $(1,092) $(2,075) $(1,866) ======= ======== =======
Deferred income taxes related to the following:
1999 1998 ------- -------- Current deferred tax assets Allowance for doubtful accounts $ 112 $ 230 Accrued expenses and reserves 313 425 ------- -------- $ 425 $ 655 ======= ========
F-15 41 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (in thousands, except share data) NOTE J - INCOME TAXES - CONTINUED
1999 1998 ------- -------- Long-term deferred tax assets (liabilities) Excess book depreciation and amortization $ (37) $ (79) Foreign tax credit carryforwards 162 162 Alternative minimum tax credit carryforwards 198 199 Net operating loss carryforward 5,228 1,639 Valuation allowance (2,187) - ------- -------- $ 3,364 $ 1,921 ======= ========
The foreign tax credit carry forward of $162 expires during 2001. 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 Company has sustained net operating losses in each of the periods presented. As of December 31, 1999, the Company had net operating loss carryforwards for tax reporting purposes of approximately $14,016 expiring in various years through 2019. Since realization of these net operating loss carryforwards is uncertain a valuation allowance has been recorded to reduce the net deferred tax asset to an amount which management believes is more likely than not to be utilized. The increase in the valuation allowance was $2,187 for the year ended December 31, 1999 and $0 for 1998 and 1997. NOTE K - LINES OF CREDIT During 1999 and 1998, 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 13 percent and requires monthly payments of interest. The Company had $5,258 in borrowings against the line at December 31, 1999 ($5,254 at December 31, 1998). The line of credit expired October 31, 1999 and was extended to December 31, 1999. 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 1999 and at December 31, 1999, the Company was out of compliance on certain indebtedness covenants. Subsequent to year end the Company signed an extension of the line of credit through August 31, 2000 which included a waiver for the non-compliance with the covenants as of December 31, 1999. The Company is currently reviewing several financing alternatives. F-16 42 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (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 $44 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, 1999: Year ending December 31, 2000 $ 499 2001 55 2002 32 2003 19 2004 18 ------- Total minimum leases payments 623 Less amount representing interest 52 ------- Present value of net minimum lease payments 571 Less current portion 461 ------- Long-term portion $ 110 =======
NOTE M - OPERATING LEASES The Company leases buildings, machinery and equipment under operating leases. The building leases expire in 2000 and 2005. The machinery and equipment leases expire through 2000. The following is a schedule, by year, of future minimum rental payments as of December 31, 1999: Year ending December 31, 2000 $ 1,372 2001 734 2002 647 2003 633 ------- 2004 633 Thereafter 303 ------- $ 4,322 =======
F-17 43 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (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 $2,314, $2,212 and $1,670 for 1999, 1998 and 1997, 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 $147, $189 and $176 for the years ended December 31, 1999, 1998 and 1997, 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 $128, $269 and $303, respectively, for the years ended December 31, 1999, 1998 and 1997. 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 is 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-18 44 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (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 therefrom are as follows:
1999 1998 1997 ------- ------- ------- Company A $10,625 $ 6,580 $ - Company B 5,337 - - Company C 4,508 7,912 - Company D - - 7,241
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 $71, $447, and $223 in 1999, 1998 and 1997, respectively. A member of the board of directors works for a law firm which provided legal services to the Company approximating $19, $171 and $138 in 1999, 1998 and 1997, respectively. F-19 45 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (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 311,500 shares and 55,000 shares in 1998 and 1997, (none in 1999), respectively, of the Company's common stock. The options were granted to the following:
1999 1998 1997 --------- -------- --------- Directors - 20,000 20,000 Executive officers, including officers who are directors - 60,000 30,000 Other employees - 231,500 5,000 --------- -------- --------- - 311,500 55,000 ========= ======== =========
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 interpretations to Accounting Principles Board Opinion No. 25. F-20 46 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (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 loss and loss per share would have been increased to the following pro forma amounts:
1999 1998 1997 ------- ------ ------- Net loss As reported $(7,641) $(3,922) $(2,259) Pro forma (7,815) (4,074) (2,458) Loss per share-basic As reported (0.61) (0.32) (0.18) Pro forma (0.63) (0.33) (0.20) Loss per share-diluted As reported (0.61) (0.32) (0.18) Pro forma (0.63) (0.33) (0.20)
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 1999, 1998 and 1997: expected volatility of 101 percent (53 percent for 1998 and 1997); risk-free interest rate of 5.51 percent (6.05 percent for 1998 and 1997); and expected life of 10 years (9.6 for 1997 and 1996). The weighted-average fair value of options granted was $1.17 and $1.60 in 1998 and 1997, 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-21 47 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (in thousands, except share data) NOTE R - WARRANTS AND OPTIONS - CONTINUED Changes in the Company's stock options and warrants are as follows:
Weighted- Shares average ------------------------ Exercise exercise Stock price price Warrants options per share per share ----------- ---------- ------------- ----------- Outstanding at January 1, 1997 6,600 736,500 $ 2.50 - 3.50 $ 3.41 Granted - 55,000 1.94 - 3.00 2.24 Exercised - - - - Canceled or expired (6,600) (98,500) 2.50 - 3.50 3.30 ----------- ---------- Outstanding at December 31, 1997 - 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 2.03 =========== ========== Exercisable at December 31, 1999 - 636,000 0.84 - 3.50 1.99 =========== ========== Exercisable at December 31, 1998 - - - - =========== ========== Exercisable at December 31, 1997 - 535,500 3.00 - 3.50 3.44 =========== ==========
A summary of the status of the options outstanding under the Company's stock option plan at December 31, 1999 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 40,000 8.82 $ 0.97 30,000 $ 0.92 $ 1.26 - $ 1.50 391,000 5.94 1.40 370,750 1.40 $ 1.51 - $ 2.00 - - - - - $ 2.01 - $ 2.50 20,000 7.89 2.22 20,000 2.22 $ 2.51 - $ 3.00 150,500 8.41 2.66 75,250 2.66 $ 3.00 - $ 3.50 140,000 5.94 3.41 140,000 3.41 ---------- --------- $ 0.84 - $ 3.50 741,500 6.65 2.03 636,000 1.99 ========== =========
F-22 48 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (in thousands, except share data) NOTE S - EARNINGS (LOSS) PER COMMON SHARE The following data show the shares used in computing earnings (loss) per common share including dilutive potential common stock:
1999 1998 1997 ----------- ----------- ----------- Common shares outstanding entire period 12,479,711 12,407,977 12,400,543 Net weighted average common shares issued during period 22,269 32,144 15,414 ----------- ----------- ----------- Weighted average number of common shares used in basic EPS 12,501,980 12,440,121 12,415,957 Dilutive effect of stock options - - - Dilutive effect of warrants - - - ----------- ----------- ----------- Weighted average number of common shares and dilutive potential common shares used in diluted EPS 12,501,980 12,440,121 12,415,957 =========== =========== ===========
For the years ended December 31, 1999, 1998 and 1997, 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. At the second closing date, the Company will issue additional shares of common stock at 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 will equal $1,300. F-23 49 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (in thousands, except share data) NOTE U - SEGMENT INFORMATION The Company has two reportable segments for the year ended December 31, 1999, 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:
1999 1998 1997 --------- --------- --------- Revenues Cleanrooms and related products $ 33,758 $ 46,298 $ 52,541 Other products 11,448 6,780 - --------- --------- --------- Totals $ 45,206 $ 53,078 $ 52,541 ========= ========= ========= Operating profit (loss) Cleanrooms and related products $ (6,907) $ (6,005) $ (3,781) Other products (1,333) 491 - --------- --------- --------- Totals $ (8,240) $ (5,514) $ (3,781) ========= ========= ========= Total assets Cleanrooms and related products $ 15,640 $ 15,053 $ 16,174 Other products 2,284 1,397 - Manufacturing and corporate assets 8,151 14,391 16,190 --------- --------- --------- Totals $ 26,075 $ 30,841 $ 32,364 ========= ========= =========
F-24 50 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (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:
1999 1998 1997 --------- -------- --------- Canada $ 11,827 $ 6,666 $ - United Kingdom 7,330 6,692 2,068 Peoples Republic of China 382 7,092 2,389 Italy - 3,568 - Taiwan 2,711 2,319 3,910 Malaysia - - 2,669 Israel 3,098 2,058 4,449 France 248 644 4,999 All others - 198 644 --------- -------- --------- Total export revenues 25,596 29,237 21,128 United States 19,610 23,841 31,413 --------- -------- --------- Total revenues $ 45,206 $ 53,078 $ 52,541 ========= ======== =========
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 resulted from the disposition of the Company's Asia/Pacific office ($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-25 51 Daw Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 (in thousands, except share data) NOTE X - QUARTERLY FINANCIAL RESULTS (UNAUDITED) Quarterly financial results for the years ended December 31, 1999, 1998 and 1997 are as follows:
Net loss per Gross Loss from Net common 1999 Revenues profit (loss) operations loss share-basic ------------------- ------------ ------------- ------------- ----------- ---------- 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) ============ =========== ============= =========== ========== 1998 ------------------- First quarter $ 11,441 $ 486 $ (1,298) $ (831) $ (0.07) Second quarter 12,888 (1,768) (3,719) (2,403) (0.19) Third quarter 14,332 952 (878) (748) (0.06) Fourth quarter 14,417 2,185 381 60 - ------------ ----------- ------------- ----------- ---------- $ 53,078 $ 1,855 $ (5,514) $ (3,922) $ (0.32) ============ =========== ============= =========== ========== 1997 ------------------- First quarter $ 16,795 $ 2,583 $ 327 $ 182 $ 0.02 Second quarter 16,463 2,398 97 15 - Third quarter 11,453 2,036 46 48 - Fourth quarter 7,830 (1,748) (4,251) (2,504) (0.20) ------------ ----------- ------------- ----------- ---------- $ 52,541 $ 5,269 $ (3,781) $ (2,259) $ (0.18) ============ =========== ============= =========== ==========
F-26 52 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 April 7, 2000, 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, 1999. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON LLP Salt Lake City, Utah April 7, 2000 S-1 53 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 DESCRIBE WRITE-OFFS PERIOD ----------- ------ -------- -------- ---------- ------ Allowance for doubtful accounts Year ended December 31, 1999 $615 $360 $ - $ 675 $300 Year ended December 31, 1998 403 100 150 (A) (38) 615 Year ended December 31, 1997 376 180 - (153) 403 Allowance for contract estimates Year ended December 31, 1999 $666 $ - $ - $ 345 $321 Year ended December 31, 1998 366 - 300 (A) - 666 Year ended December 31, 1997 575 654 - (863) 366 Allowance for inventory obsolescence Year ended December 31, 1999 $300 $ - $1,043 (B) $1,043 $300 Year ended December 31, 1998 - - 300 (A) - 300 Year ended December 31, 1997 - - - - - Allowance for contract repayment Year ended December 31, 1999 $ 53 $ - $ - $ - $ 53 Year ended December 31, 1998 803 - (750) (A) - 53 Year ended December 31, 1997 803 - - - 803
(A) Reclassification (B) Restructuring charge S-2 EX-10.5 2 EXHIBIT 10.5 1 EXHIBIT 10.5 REVOLVING DOMESTIC LINE OF CREDIT AGREEMENT AMENDED BY THE FIFTH EXTENTION AGREEMENT FIFTH LOAN EXTENSION AGREEMENT - U.S. BANK This Fifth Loan Extension Agreement (the "Fifth Amendment") is entered into on March 10, 2000, between U.S. BANK NATIONAL ASSOCIATION ("U.S. Bank") and DAW TECHNOLOGIES, INC. ("Daw"). RECITALS A. On or about April 17, 1998, Daw and U.S. Bank entered into a loan agreement. The loan agreement was modified and amended by the terms of a modification and forbearance agreement dated September 10, 1998, a second modification and forbearance agreement dated October 10, 1998, a loan extension agreement dated November 18, 1998, a second loan extension agreement dated February 26, 1999, a third loan extension agreement (which was set forth in a letter from U.S. Bank to Daw) dated June 10, 1999, and a fourth loan extension agreement dated on or about September 29, 1999. The above-described loan agreement, as amended, is referred to herein as the "Loan Agreement." B. Pursuant to the terms of the Loan Agreement, U.S. Bank provides a revolving credit facility to Daw. Capitalized terms used in this Fifth Amendment that are not defined herein shall have the meanings assigned to those terms in the Loan Agreement. C. Daw is obligated to U.S. Bank pursuant to a promissory note dated August 6, 1997, in the principal amount of $8,000,000 (which note, as amended, is referred to herein as the "Note"). As of March 7, 2000, Daw owes U.S. Bank the principal amount of $5,112,965.64, accrued interest of $115,384.17, and late charges of $11,006.48 pursuant to the Note. D. Interest continues to accrue on Daw's obligations to U.S. Bank pursuant to the Note on and after March 7, 2000. In addition, Daw is obligated to reimburse U.S. Bank (or pay directly if requested to do so by U.S. Bank) for fees and costs incurred by U.S. Bank in connection with its banking relationship with Daw, including reasonable attorney fees. E. The debts and obligations of Daw to U.S. Bank pursuant to the Loan Agreement and the Note are referred to below collectively as the "Indebtedness." F. The Indebtedness is secured by security interests and liens in, among other things, all of Daw's existing and after-acquired accounts, chattel paper, contract rights, equipment, fixtures, general intangibles, and inventory (and the products and proceeds of all of those assets). The security agreements executed by Daw that grant the security interests and liens described in the preceding sentence are referred to below as the "Security Agreements." -1- 2 The personal property of Daw in which security interests and liens have been granted in favor of U.S. Bank pursuant to the Security Agreements is referred to below as the "Collateral." G. The Loan Agreement, the Note, the Security Agreements, and the other documents executed by Daw in favor of U.S. Bank are referred to herein as the "Loan Documents." H. The credit commitment extended by U.S. Bank to Daw pursuant to the Loan Agreement has expired. Furthermore, the amount owed by Daw pursuant to the Loan Agreement and the Note exceeds the Borrowing Base. As a result, Daw is not entitled to any additional credit under the credit facility governed by the Loan Agreement. Notwithstanding the foregoing, U.S. Bank in its discretion has made certain advances to Daw following the expiration of the revolving credit facility governed by the Loan Agreement. I. Daw has asked U.S. Bank to extend the maturity date of the revolving credit facility provided by U.S. Bank to Daw and to continue to make credit available to Daw thereunder. U.S. Bank is willing to do so, subject to the terms and conditions set forth in this Fifth Amendment. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties agree as follows: TERMS AND CONDITIONS SECTION I AVAILABILITY OF CREDIT 1.1 Acknowledgment of Amounts Owed. Daw hereby acknowledges and agrees that the amounts of principal and interest specified in Recital C above with respect to the Note are payable to U.S. Bank without offset, defense, counterclaim, or claim of recoupment. In addition, Daw acknowledges its obligation to pay U.S. Bank the amounts referred to in Recital D to this Fifth Amendment. 1.2 Maximum Amount of Credit Available. From the effective date of this Fifth Amendment through and including March 18, 2000, the maximum amount of credit available to Daw pursuant to the revolving credit facility evidenced by the Note shall be the lesser of (a) $5,500,000, or (b) the Borrowing Base (as that term is defined in the Loan Agreement before the modifications and amendments to the definition of that term effected by this Fifth Amendment) plus $1,400,000. From March 19, 2000, through and including August 31, 2000, the maximum amount of credit available to Daw pursuant to the revolving credit facility evidenced by the Note shall be the lesser of (x) $5,000,000, or (y) the Borrowing Base (as defined in the following paragraph of this Fifth Amendment). It is the contemplation of Daw and U.S. Bank that in order for Daw to be in compliance with the terms and conditions of the preceding sentence as of March 19, 2000, Daw either will have to have procured the Credit Insurance Policy (as defined in paragraph 1.3 below) and be in a position to borrow against Eligible Insured Foreign Accounts (as defined in paragraph 1.3 below), or shall use a portion of an equity capital contribution recently obtained by means of a private placement of securities of -2- 3 Daw to pay down the amount owed pursuant to the Note to the level of the Borrowing Base. Daw hereby acknowledges and agrees that on or before March 19, 2000, Daw shall take one of the actions described in the preceding sentence to insure that as of such date (and thereafter) the amount owed pursuant to the Note does not exceed the lesser of the amounts described in the second sentence of this paragraph. If at any time the amount outstanding pursuant to the Note exceeds the maximum amount of credit available to Daw at the time in question, Daw within three business days shall pay U.S. Bank an amount equal to such excess (and Daw's failure to make such payment shall constitute an Event of Default under Section 5.1(a) of this Fifth Amendment). 1.3 New Definition of the Borrowing Base. Following the date of this Fifth Amendment, except as specified in the first sentence of paragraph 1.2 above, the term "Borrowing Base," as used herein and in the Loan Agreement shall mean the sum of 75 percent of Eligible Domestic Accounts and 90 percent of Eligible Insured Foreign Accounts. As used in this Fifth Amendment, the terms "Eligible Domestic Accounts" and "Eligible Insured Foreign Accounts" have the following meanings: "Eligible Domestic Accounts" means all Eligible Accounts of Daw, Intelligent Enclosures, Inc., Translite Systems, Inc., Daw Technologies Contract Mfg. Services, Inc., Daw Technologies Europe, Ltd., or Daw Construction Services, Inc. (which entities other than Daw are referred to herein as the "Guarantors") with respect to which (a) the Account Debtor is a resident of the United States, or an entity incorporated or otherwise organized under the laws of a state in the United States, (b) the account arises out of goods sold or services performed by Daw or one of the Guarantors in the United States, and (c) the goods sold or services performed are delivered or provided to the Account Debtor in the United States. "Eligible Insured Foreign Accounts" means (a) Eligible Accounts of Daw or the Guarantors with respect to which the Account Debtor is not a resident of the United States or an entity incorporated under the laws of a state in the United States, to the extent that such accounts are covered by and insured under the Credit Insurance Policy (as defined below). Notwithstanding anything in this Fifth Amendment to the contrary, an account receivable that initially was an Eligible Insured Foreign Account shall not cease to be an Eligible Insured Foreign Account because it was not timely paid by the Account Debtor, provided that (a) the Account Debtor does not dispute its obligation to pay the account in question and (b) Daw (or the Guarantor, as applicable) (i) has timely complied with all provisions of the Credit Insurance Policy regarding proof of loss (including any requirements involving making demand for payment on the Account Debtor and submitting proof of loss to the insurer), (ii) has complied with the provisions of paragraph 1.11 of this Fifth Amendment (if such -3- 4 provisions are applicable to the account or accounts in question), and (iii) has made a claim under the Credit Insurance Policy with respect to the account in question before the deadline under the Credit Insurance Policy for filing a claim of loss with respect to the full amount of the account. As used herein, the term "Credit Insurance Policy" means a policy of insurance obtained by Daw, which must be in a form satisfactory to U.S. Bank and issued by an insurer satisfactory to U.S. Bank in its good faith discretion, insuring the payment of accounts receivable of Daw or the Guarantors with respect to which the Account Debtor is not a resident of the United States, or an entity incorporated or otherwise organized under the laws of a state in the United States. The Credit Insurance Policy shall name U.S. Bank as an additional insured or additional loss payee. 1.4 Amendment of Definition of Eligible Accounts. The definition of the term "Eligible Accounts" in the Loan Agreement hereby is modified and amended to add the following items to the list of matters that are not Eligible Accounts: (l) Accounts receivable from Western Star to the extent that Western Star has provided operating financing to Daw or has made any other loan or capital contribution to Daw that would give Western Star a right of offset against Daw. (m) Deposits paid by customers of Daw for goods or services to be provided by Daw. (n) Retainage. (o) Prebillings. (p) Progress billings in excess of the amount permitted by the terms of the applicable contract. (q) Earned but unbilled revenue. (r) Claims by Daw for work beyond the scope of the original contract for which no change order has been issued and approved by the other party to the contract in question. 1.5 Loan Extension Fee. Prior to or contemporaneously with the execution of this Fifth Amendment, Daw shall pay U.S. Bank a loan extension fee of $30,000. 1.6 Applicable Interest Rate. On or after the date of this Fifth Amendment, the interest rate charged on the principal amount outstanding pursuant to the Note shall be U.S. Bank's Prime Rate (as defined below) plus 3 percent per annum (fully floating). As used in this Fifth Amendment, the term "Prime Rate" means the rate of interest that U.S. Bank from time to -4- 5 time establishes as its prime rate or reference rate. The Prime Rate is not necessarily the lowest rate of interest that U.S. Bank collects from any borrower, or class of borrowers. 1.7 Amendment of the Note. Contemporaneously with the execution of this Fifth Amendment, Daw shall execute and deliver to U.S. Bank a document in form and content satisfactory to U.S. Bank amending the Note (the "Note Amendment Agreement") to reflect the revised maturity date thereof and the new interest rate thereon. Following the execution of this Fifth Amendment and the Note Amendment Agreement by Daw, references in the Loan Agreement to the Note shall mean the Note, as amended by the Note Amendment Agreement. 1.8 Information Regarding Credit Insurance Policy. Daw hereby agrees that it promptly shall provide U.S. Bank with a copy of the Credit Insurance Policy, all endorsements, riders, schedules, and exhibits to that policy, all modifications or amendments of the Credit Insurance Policy, and all notices received by Daw from the insurer under the Credit Insurance Policy. In addition, Daw immediately shall notify U.S. Bank in writing of the receipt by Daw of any communication from the insurer under the Credit Insurance Policy informing Daw of the insurer's intention to terminate or cancel the Credit Insurance Policy. Daw shall obtain the agreement (in writing) of the insurer under the Credit Insurance Policy to give U.S. Bank at least 30 days' prior written notice of the insurer's intended termination, cancellation, or material modification of the Credit Insurance Policy. Daw hereby acknowledges and agrees that if Daw fails to timely pay the policy premium with respect to the Credit Insurance Policy, U.S. Bank may (but shall not be required to) pay such premium and the amount paid by U.S. Bank shall become part of the Indebtedness. 1.9 Information Regarding Foreign Accounts. Daw hereby agrees that it promptly shall deliver to the insurer under the Credit Insurance Policy or to U.S. Bank all information requested by such insurer, or by U.S. Bank, as the case may be, regarding Daw's (and the Guarantors') foreign accounts receivable, or such other matters identified by the insurer or U.S. Bank in relation to Daw's (or the Guarantors') foreign accounts or the insurance thereof. 1.10 Assignment of Rights Under the Credit Insurance Policy. Daw hereby assigns to U.S. Bank as security for the Indebtedness all of Daw's rights under the Credit Insurance Policy (including, but not limited to, its right to receive any payments thereunder). Prior to the inclusion of Eligible Insured Foreign Accounts in the Borrowing Base, Daw shall deliver to U.S. Bank written evidence satisfactory to U.S. Bank that the insurer under the Credit Insurance Policy has been notified of the assignment effected by the preceding sentence of this Agreement and acknowledges that assignment. The assignment described in the two preceding sentences shall extend to rights (if any) of the Guarantors under the Credit Insurance Policy and Daw shall cause the Guarantors to promptly take reasonable steps to effect the assignment of their rights (if any) under the Credit Insurance Policy to U.S. Bank. 1.11 Claim Procedure. Daw acknowledges that U.S. Bank's agreement to make Advances available to Daw based upon Eligible Insured Foreign Accounts is conditioned upon Daw obtaining credit insurance with respect to Eligible Insured Foreign Accounts. Furthermore, Daw acknowledges that U.S. Bank is not prepared to extend credit to Daw secured by Eligible Accounts other than Eligible Domestic Accounts unless such other accounts are insured under the Credit Insurance Policy and Daw (or a Guarantor, as applicable) takes all steps required by that policy to recover payment from the insurer with respect to Eligible Insured Foreign -5- 6 Accounts that are not paid by the Account Debtor. In that regard, Daw recognizes that U.S. Bank expects Daw (or a Guarantor, as applicable) to strictly and timely comply with all provisions of the Credit Insurance Policy related to filing claims under the policy, providing proof of loss under the policy, and notifying account debtors of their defaults as required by the Credit Insurance Policy and Daw hereby agrees to timely comply (or cause the Guarantors to timely comply) with all such provisions of the Credit Insurance Policy. Daw hereby irrevocably appoints U.S. Bank as Daw's true and lawful attorney (such appointment being coupled with an interest), with full power of substitution, in the name of Daw, to take any and all steps or actions required by the Credit Insurance Policy to timely and appropriately assert a claim under that policy, subject to the conditions specified in this Agreement. Daw hereby agrees that if Daw has not submitted (or caused the Guarantors to submit) a claim with respect to a past-due Eligible Insured Foreign Account within 60 days of the deadline for submitting a claim under the Credit Insurance Policy for full payment of the account in question, Daw shall deliver to U.S. Bank a completed claim form with respect to the account in question (which claim form shall be in form and content satisfactory to the insurer under the Credit Insurance Policy and shall be accompanied by any and all materials required by the insurer to establish proof of loss). At the same time, Daw shall notify U.S. Bank in writing whether Daw intends to make a claim (or cause the Guarantor in question to make a claim) under the Credit Insurance Policy with respect to the account in question. If Daw informs U.S. Bank that Daw does not intend to make a claim under the Credit Insurance Policy with respect to an account (or cause the Guarantor in question to make a claim), the account in question shall cease to be an Eligible Insured Foreign Account and Daw within three business days shall pay U.S. Bank the amount by which Daw's obligation under the Note exceeds the Borrowing Base (exclusive of the account in question) (and Daw's failure to make such payment shall constitute an Event of Default under paragraph 5.1(a) of this Fifth Amendment). Furthermore, if Daw fails to timely provide the notice and the claim form specified above, or if Daw has not taken (or caused the Guarantor in question to take) any action that U.S. Bank reasonably believes is a condition precedent under the Credit Insurance Policy to receive payment in full under that policy of a claim with respect to an account included in the Borrowing Base, and if Daw fails to provide the notice and claim form (or take action with respect to a claim under the Credit Insurance Policy, as applicable) within three business days of U.S. Bank giving Daw written notice of such failure or inaction, then the account in question shall cease to be an Eligible Insured Foreign Account and Daw shall have three business days to pay U.S. Bank an amount equal to the amount by which the indebtedness under the Note exceeds the Borrowing Base following the removal of that account from the Borrowing Base (and Daw's failure to make such payment shall constitute an Event of Default under paragraph 5.1(a) of this Fifth Amendment). If Daw fails to make the payment required by either of the two preceding sentences following the removal of an account from the Borrowing Base, U.S. Bank may use the power of attorney granted in this paragraph to take any and all steps or actions U.S. Bank reasonably believes are necessary to cause a claim to be made under the Credit Insurance Policy for payment in full of the account in question (which actions that may be taken by U.S. Bank include, but are not limited to, providing notice of default to the Account Debtor, providing proof of loss to the insurer under the Credit Insurance Policy, or asserting a claim for payment under the policy with respect to the account in question). Notwithstanding the power of attorney granted herein, U.S. Bank shall have no obligation to take any action on behalf of Daw or any of the Guarantors under or with respect to the Credit Insurance Policy. -6- 7 1.12 New Maturity Date of the Revolving Credit Facility. Subject to the terms of this Fifth Amendment, U.S. Bank hereby agrees to continue to make Advances available to Daw through August 31, 2000, in accordance with the terms of the Loan Agreement (as modified hereby). In that regard, the maturity date of the Note and revolving credit facility governed by the Loan Agreement hereby are extended to August 31, 2000. SECTION II CONDITIONS PRECEDENT 2.1 Conditions Precedent. This Fifth Amendment, and U.S. Bank's agreement to extend and modify the revolving credit facility U.S. Bank makes available to Daw on the basis set forth in this Fifth Amendment, shall not be effective until all of the following events occur: (a) Execution of the Fifth Amendment. Daw executes this Fifth Amendment and delivers it to U.S. Bank; (b) Execution of the Note Amendment Agreement. Daw executes the Note Amendment Agreement and delivers it to U.S. Bank; (c) Payment of Attorney Fees. Daw pays U.S. Bank $1,250 for attorney fees related to the negotiation and preparation of this Fifth Amendment; (d) Payment of Loan Fees. Daw pays U.S. Bank $30,000 with respect to the loan fees owed pursuant to paragraph 1.5 of this Fifth Amendment; and (e) Execution of the Guaranty, the Guarantors' Security Agreement, and the Guarantors' Financing Statements. The Guarantors shall execute and deliver to U.S. Bank the Guaranty, the Guarantors' Security Agreement, and the Guarantors' Financing Statements (as those terms are defined in paragraph 3.2 of this Fifth Amendment). If all of the above-described conditions precedent are not satisfied by March 13, 2000, this Fifth Amendment shall not be effective and the parties' rights and obligations shall continue to be governed by the Loan Documents. SECTION III COLLATERAL FOR THE INDEBTEDNESS 3.1 Continued Validity of the Security Agreements Previously Executed by Daw. Daw hereby expressly reaffirms and acknowledges the validity of the Security Agreements, the accuracy of the information contained in those documents, and its grant of security interests and liens in favor of U.S. Bank in the Collateral. Daw acknowledges and agrees that the Security Agreements, and the security interests and liens created by those agreements, secure payment of the Indebtedness. Furthermore, Daw acknowledges and agrees that the Security Agreements, and the security interests and liens created thereby, shall continue in full force and effect after the execution of this Fifth Amendment. -7- 8 3.2 The Guaranty, the Guarantors' Security Agreement, and the Guarantors' Financing Statements. Prior to or contemporaneously with the execution of this Fifth Amendment, the Guarantors shall execute and deliver to U.S. Bank a guaranty (the "Guaranty") in form and content satisfactory to U.S. Bank whereby the Guarantors guarantee payment of the Indebtedness and performance of all of Daw's obligations under the Loan Documents. At the same time, the Guarantors shall execute and deliver to U.S. Bank a security agreement (the "Guarantors' Security Agreement") in form and content satisfactory to U.S. Bank whereby the Guarantors grant a security interest in all of their personal property to secure their obligations under the Guaranty and Daw's obligations under the Loan Documents. In addition, the Guarantors shall execute financing statements (the "Guarantors' Financing Statements") in form and content satisfactory to U.S. Bank with respect to the assets described in the Guarantors' Security Agreements. Following execution of the Guarantors' Security Agreement, references herein and in the Loan Agreement to the Collateral shall include the assets of the Guarantors described in the Guarantors' Security Agreement. 3.3 Additional Financing Statements; Other Documents. Daw hereby agrees that until the Indebtedness has been paid in full, Daw promptly shall execute and deliver to U.S. Bank (and shall cause the Guarantors to execute and deliver to U.S. Bank) all documents deemed necessary or desirable by U.S. Bank to evidence, perfect, or continue U.S. Bank's security interests or liens in the Collateral. Among other things, if requested to do so by U.S. Bank, Daw shall cause each of the Guarantors to sign separate guaranties and security agreements in favor of U.S. Bank in form and content substantially similar to the Guaranty and the Guarantors' Security Agreements. The failure of any Guarantor to sign and return any such document to U.S Bank within ten days of the date U.S. Bank delivers the document to Daw shall constitute an Event of Default hereunder. SECTION IV MISCELLANEOUS PROVISIONS 4.1 Daw's Commitment to Locate a New Lender. The parties to this Fifth Amendment desire to discontinue their banking relationship not later than August 31, 2000 (when the Note matures). Daw hereby represents and warrants that it will use its best reasonable efforts to locate a new lender and replace U.S. Bank as soon as possible (and in any event not later than August 31, 2000). In that regard, Daw hereby agrees that by May 31, 2000, Daw shall deliver to U.S. Bank a written commitment from another lender that demonstrates to U.S. Bank's reasonable satisfaction that Daw will be able to obtain a new loan or loans sufficient to enable Daw to repay in full its obligations to U.S. Bank pursuant to the Note by August 31, 2000. If Daw fails to comply with the provisions of the preceding sentence, then as of June 1, 2000, the interest rate charged by U.S. Bank on the principal amount outstanding under the Note shall increase to the Prime Rate plus 5 percent per annum and Daw shall pay U.S. Bank a $10,000 fee (which U.S. Bank hereby is authorized to deduct from any account maintained by Daw with U.S. Bank without notice to Daw). 4.2 No Agreement to Lend Additional Sums. Daw acknowledges and agrees that, except as specified in the Loan Agreement (as modified and amended by this Fifth Amendment), U.S. Bank has made no commitment to extend credit or to lend funds to Daw and that U.S. Bank has no obligation to do so. Daw acknowledges and agrees that this means, among -8- 9 other things, that U.S. Bank is not obligated to provide Daw a domestic line of credit once contemplated by the parties hereto, or the foreign accounts receivable credit facility guaranteed by the ExIm Bank previously discussed by U.S. Bank and Daw. 4.3 Expenses of U.S. Bank. Daw shall reimburse U.S. Bank for all expenses incurred by U.S. Bank, including, but not limited to, collateral appraisals, collateral examination and inspection costs, and the reasonable fees and expenses of legal counsel for U.S. Bank in connection with the analysis of the existing banking relationship between Daw and U.S. Bank, the preparation, negotiation, closing, administration, amendment, modification, and enforcement of this Fifth Amendment, or the agreement evidenced hereby; the preservation, protection, or disposition of the Collateral (or U.S. Bank's security interests therein); or as required by applicable law, rules, policies, and regulations. The amounts owed by Daw pursuant to the preceding sentence of this Fifth Amendment are part of the Indebtedness and shall be paid by Daw within ten days of the date U.S. Bank provides Daw with written notice requesting payment of such costs and expenses, or on August 31, 2000, whichever occurs first. 4.4 Release of Claims. Daw hereby releases and forever discharges U.S. Bank and U.S. Bank's agents, principals, successors, assigns, employees, officers, directors, and attorneys, and each of them, of and from any and all claims, demands, damages, suits, rights, defenses, offsets, or causes of action of every kind and nature that Daw has or may have as of the date it executes this Fifth Amendment, whether known or unknown, contingent or matured, foreseen or unforeseen, asserted or unasserted, including, but not limited to, all claims for compensatory, general, special, consequential, incidental, and punitive damages, attorney fees, and equitable relief, other than U.S. Bank's obligations under this Fifth Amendment and the Loan Agreement (as modified hereby) arising on and after the date hereof. 4.5 Waiver of Existing Defaults. Daw hereby acknowledges and agrees that it is in default with respect to various terms and conditions of the Loan Agreement, including the provision specifying that the amount owed by Daw pursuant to the Note shall not exceed the amount of the Borrowing Base and the fact that the Note matured prior to the date of this Fifth Amendment and was not repaid by Daw as agreed. Daw's existing defaults under the Loan Agreement are referred to in this Fifth Amendment as the "Existing Defaults." At the time this Fifth Amendment becomes effective, U.S. Bank shall waive the Existing Defaults. 4.6 Cash Collateral Account. Daw acknowledges the existence of the Cash Collateral Account at U.S. Bank in connection with the parties' banking relationship. Daw hereby represents and warrants that, except as specified in the following sentence, until the Note is paid in full and U.S. Bank has no further commitment to lend to Daw, Daw shall deposit (or cause to be deposited) all proceeds of all of the Collateral into the Cash Collateral Account for application to Daw's obligations pursuant to the Note. Notwithstanding the foregoing, Daw and the Guarantors shall not be required to deposit proceeds of their foreign accounts receivable into the Cash Collateral Account at any time that Eligible Insured Foreign Accounts are not included in the Borrowing Base. 4.7 Financial Information. Daw will deliver to U.S. Bank the statements, reports, and other information listed below: -9- 10 (a) Annual Audited Statement. As soon as available and in any event by June 30, 2000, the consolidated balance sheet of Daw as of the end of its 1999 fiscal year and the related statements of income and retained earnings and statement of changes in financial position of Daw for such year, accompanied by the audit report thereon by independent certified public accountants selected by Daw and reasonably satisfactory to U.S. Bank (which reports shall be prepared in accordance with generally accepted accounting principles consistently applied and shall not be qualified by reason of restricted or limited examination of any material portion of Daw's records and shall contain no disclaimer of opinion or adverse opinion except such as U.S. Bank in its sole discretion determines to be immaterial; (b) Monthly Financial Statement and Certificate. As soon as available and in any event within 25 days after the end of each month, the unaudited balance sheet and statement of income and retained earnings of Daw as of the end of such month (and for the period from the start of the fiscal year to the end of such month) accompanied by a certificate of an authorized officer of Daw that such unaudited balance sheet and statement of income and retained earnings present fairly the financial position and the results of operations of Daw as of the end of and for such month and that since the fiscal year-end report referred to in clause (a) there has been no material adverse change in the financial condition or operations of Daw as shown on the balance sheet as of said date; (c) Monthly Report Regarding Accounts Receivable. Within 25 days after the end of each month, a report with respect to Daw's accounts receivable (foreign and domestic) as of the last day of the preceding month, which reports shall be in a form reasonably satisfactory to U.S. Bank; (d) Monthly Report Regarding Work in Progress. Within 25 days of the end of each month, a report with respect to Daw's work in progress as of the end of the preceding month, which reports shall be in a form reasonably satisfactory to U.S. Bank; (e) Monthly Borrowing Certificate. Within 25 days after the end of each month, a written report identifying Daw's Eligible Domestic Accounts and Eligible Insured Foreign Accounts as of the end of the prior month, all reconciled to Daw's balance sheet as of the end of the month in question; (f) Monthly Report Regarding Accounts Payable. Within 25 days after the end of each month, a report with respect to Daw's accounts payable as of the end of the preceding month, which reports shall provide reasonable detail regarding the aging of such accounts payable and shall otherwise be in a form reasonably satisfactory to U.S. Bank; (g) Monthly Report Regarding Refinancing Efforts. Within 25 days after the end of each month, a written report in a form reasonably satisfactory to U.S. Bank identifying in reasonable detail the status as of the end of the preceding month of Daw's efforts to locate a new lender or lenders to replace U.S. Bank; (h) Shareholder Reports. As soon as available (and within 45 days of the end of each calendar quarter for Form 10Q's and within 180 days of the end of each fiscal -10- 11 year for Form 10K's), all reports sent by Daw to its shareholders and all quarterly and annual reports filed by Daw with the Securities and Exchange Commission and each other governmental authority having jurisdiction over Daw; (i) Tax Returns. As soon as available (and not more than 30 days after filing), Daw's federal income tax returns for 1998 and 1999; and (j) Other Information. All other statements, reports, and other information as U.S. Bank reasonably may request concerning the financial condition and business affairs of Daw. If Daw does not timely provide U.S. Bank the information required pursuant to any or all of subparagraphs 4.7(a), 4.7(h), or 4.7(i), Daw shall pay U.S. Bank a late reporting fee of $1,000 per each report not timely provided to U.S. Bank. If Daw does not provide each of the reports specified in subparagraphs 4.7(b) through 4.7(g) each month, Daw shall pay U.S. Bank a late reporting fee of $1,000 for each month in which all of the reports are not timely delivered to U.S. Bank. Daw hereby authorizes U.S. Bank to deduct such fees from any account maintained by Daw with U.S. Bank without notice to Daw. 4.8 Capital Expenditures. Daw shall not make capital expenditures (including expenditures with respect to capital leases) that in the aggregate exceed the sum of $250,000 during the period from March 1, 2000, through August 31, 2000 (provided, however, that amounts paid by Daw in respect of its real property lease obligations shall not be included in the foregoing limitation). SECTION V DEFAULT AND REMEDIES 5.1 Events of Default. The occurrence of any of the following events ("Event(s) of Default") shall constitute a default by Daw under this Fifth Amendment and the Loan Documents: (a) Failure to Pay. Daw fails to pay any amount owed to U.S. Bank pursuant to the Note when such amount is due and such failure shall continue for three business days following written notice from U.S. Bank; (b) Failure to Pay Attorney Fees and Costs. Daw fails to pay U.S. Bank's attorney fees, costs, and expenses as required by paragraph 4.3 of this Fifth Amendment and such failure shall continue for three business days following written notice from U.S. Bank; (c) Failure to Comply with Other Obligations. Daw fails to comply with any other covenant, agreement, term, or condition imposed upon Daw by this Fifth Amendment, the Loan Documents, or any other agreement between Daw and U.S. Bank (or among Daw, U.S. Bank, and any third party or parties), including, but not limited to, Daw's obligation under the third sentence of paragraph 4.1 to deliver a lending -11- 12 commitment letter to U.S. Bank by May 31, 2000, and does not remedy or cure such failure within ten days following written notice from U.S. Bank of such failure; (d) Diminution in the Value of the Collateral. A material diminution in the value of all or any material portion of the Collateral; (e) Incorrect or Misleading Statement. Any material statement, representation, or warranty made by Daw in this Fifth Amendment, or in any oral or written statement furnished to U.S. Bank, whether prior to, contemporaneously with, or subsequent to the delivery of this Fifth Amendment, proves to have been incorrect or misleading in any material respect when made; or (f) Receivership/Bankruptcy. A receiver or trustee is appointed for Daw, or for any substantial part of its assets, or any bankruptcy case is instituted by or with respect to Daw. 5.2 Acceleration. At the option of U.S. Bank, upon the occurrence of any Event of Default, the Indebtedness immediately shall be due and payable and U.S. Bank shall have no obligation to extend any further credit to Daw. 5.3 Remedies. Following the occurrence of an Event of Default, U.S. Bank immediately and without notice to Daw may exercise any or all of its rights and remedies under the Loan Documents and applicable law, all of which rights and remedies are cumulative. SECTION VI GENERAL TERMS 6.1 Assignment. U.S. Bank reserves the right to transfer or assign, without notice to or consent by Daw, any or all of the powers, rights, title, and interests held by U.S. Bank under this Fifth Amendment, the Loan Documents, or any other agreements between the parties to this Fifth Amendment (or among those parties and any third party or parties). Those agreements may not be assigned by Daw by operation of law, or otherwise, without U.S. Bank's prior, written consent, and any such attempted assignment shall be void and entirely without effect. 6.2 Captions. Any captions for the sections of this Fifth Amendment are for convenience only and do not control or affect the meaning or construction of any of the provisions of this Fifth Amendment. 6.3 Severability. If any term, condition, or provision of this Fifth Amendment, or any other document or instrument referred to in this Fifth Amendment, is held invalid for any reason, such offending term, condition, or provision shall be stricken therefrom, and the remainder of this Fifth Amendment shall not be affected thereby. 6.4 Status of Loan Documents; Amendments. The Loan Documents may be amended or modified only by a written agreement signed by an authorized representative of Daw -12- 13 and an authorized representative of U.S. Bank that by its terms expressly supersedes, modifies, amends, or alters those documents. 6.5 Continued Effectiveness of the Loan Documents. The Loan Documents remain in full force and effect and are binding and enforceable in accordance with their terms (as modified hereby and by the Note Amendment Agreement). Following the execution of this agreement, references in the Loan Agreement to the "Agreement" mean the Loan Agreement, as amended hereby. 6.6 Negotiated Agreement. This Fifth Amendment is a negotiated agreement. In the event of any ambiguity in this Fifth Amendment, such ambiguity shall not be subject to a rule of contract interpretation that would cause the ambiguity to be construed against either of the parties to this Fifth Amendment. 6.7 Voluntary and Entire Agreement. The only consideration for the execution of this Fifth Amendment is the consideration expressly recited herein. This Fifth Amendment and the other agreements and instruments referred to in this Fifth Amendment set forth and constitute the entire agreement among the parties hereto with respect to the subject matter of this Fifth Amendment. No oral promise or agreement of any kind or nature, other than those that have been reduced to writing and set forth herein, has been made among U.S. Bank and Daw. Daw acknowledges that it has been, or has had the opportunity to be, represented by legal counsel in connection with the negotiation and execution of this Fifth Amendment and the other agreements and instruments referred to in this Fifth Amendment. Daw fully understands the meaning and intent of this Fifth Amendment and voluntarily executed this Fifth Amendment and the other agreements and instruments referred to in this Fifth Amendment. 6.8 Construction and Conflict with Other Agreements. In the event of any conflict between the terms of this Fifth Amendment and the terms of any other agreements or instruments referred to in this Fifth Amendment, the terms of this Fifth Amendment shall control. 6.9 Waivers. No waiver of any provision of this Fifth Amendment, the Loan Documents, or any other agreement between the parties hereto, nor consent to any failure by Daw to comply with such provisions, shall be effective unless the same shall be in writing and signed by U.S. Bank, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 6.10 Applicable Law. Notwithstanding anything in the Loan Documents to the contrary, the Loan Documents, this Fifth Amendment, and any other instruments or agreements required or contemplated hereunder shall be governed by, and construed under, the laws of the state of Oregon without regard to principles of conflicts of law. 6.11 Venue. Daw submits to the jurisdiction of any state or federal court sitting in Portland, Oregon, in relation to any controversy or dispute between the parties under the Loan Documents and hereby waives any claim that such forum is not convenient, or that another forum is more convenient. -13- 14 6.12 STATUTORY NOTICES. UNDER OREGON LAW, MOST AGREEMENTS, PROMISES, AND COMMITMENTS MADE BY U.S. BANK CONCERNING LOANS AND OTHER CREDIT EXTENSIONS THAT ARE NOT FOR PERSONAL, FAMILY, OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION, AND BE SIGNED BY U.S. BANK TO BE ENFORCEABLE. BY UTAH STATUTE (UCA 25-5-4) THE FOLLOWING DISCLOSURE IS REQUIRED: THIS FIFTH AMENDMENT IS A FINAL EXPRESSION OF THE AGREEMENT BETWEEN U.S. BANK AND DAW AND MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY ALLEGED ORAL AGREEMENT. DAW -14- 15 ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS FIFTH AMENDMENT. U.S. BANK NATIONAL ASSOCIATION DAW TECHNOLOGIES, INC. By By ------------------------------- ------------------------------- Betty J. Kinoshita Ronald W. Daw Vice President President By ------------------------------- Michael J. Schifsky Executive Vice President and Chief Financial Officer -15- EX-21 3 EXHIBIT 21 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
NAME JURISDICTION - - ---- ------------ Translite Systems, Inc. State of Utah, U.S.A. Daw Technologies, Europe LTD United Kingdom
EX-23.1 4 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT We have issued our reports dated April 7, 2000 accompanying the financial statements and schedule of Daw Technologies, Inc., included in the Annual Report of Daw Technologies, Inc., on Form 10-K for the year ended December 31, 1999. We hereby consent to the incorporation by reference of said reports in the Registration Statements of Daw Technologies, Inc., on Forms S-3 (File No. 33-73292 effective January 3, 1994, File No. 33-84224 effective March 20, 1995, File No. 33-93656 effective June 30, 1995 and file No. 333-05541 effective July 15, 1996) and on Forms S-8 (File No. 33-93206 effective June 7, 1995 and File No. 333-03930 effective April 23, 1996). /s/ GRANT THORNTON LLP Salt Lake City, Utah April 7, 2000 EX-27 5 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND DECEMBER 31, 1998 AND THE CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE 12 MONTHS ENDED DECEMBER 31, 1999, 1998 AND 1999. 1,000 U.S. DOLLARS YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1 296 0 7,747 (300) 2,612 18,343 10,007 (6,605) 26,075 15,457 0 0 0 125 10,383 26,075 45,206 45,206 43,576 53,446 165 360 658 (8,733) (1,092) (7,641) 0 0 0 (7,641) (0.61) (0.61)
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