-----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, SYUUPDwOsPvzG5R5hvYtpm+t9AIRHNJscKSE0r1C7p5ELYtLG6BsS3F8dSQP/BHq BT8EmIhrb7HiRh0Kpmfs1Q== 0000950149-98-000579.txt : 19980331 0000950149-98-000579.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950149-98-000579 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAW TECHNOLOGIES INC /UT CENTRAL INDEX KEY: 0000882159 STANDARD INDUSTRIAL CLASSIFICATION: GENERAL BUILDING CONTRACTORS - NONRESIDENTIAL BUILDINGS [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: 98579003 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 FOR PERIOD ENDED 12/31/1997 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, 1997 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. DAW TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) UTAH 0-21818 87-0464280 (State or other jurisdiction (Commission File No.) (IRS Employer of incorporation) Identification No.) 2700 SOUTH 900 WEST SALT LAKE CITY, UTAH 84119 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (801) 977-3100 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Class Common Stock, $0.01 Par Value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] 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 March 25, 1998, was approximately $17,449,000. 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 March 26, 1998, the Registrant had 12,407,977 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's definitive Proxy Statement relating to the Annual Meeting of Shareholders scheduled for May 27, 1998 is incorporated by reference in Part III of this report. 2 TABLE OF CONTENTS PART I .................................................................... 1 Item 1. Business .......................................................... 1 Item 2. Properties ........................................................ 7 Item 3. Legal Proceedings ................................................. 8 Item 4. Submission of Matters to a Vote of Security Holders ............... 8 PART II ................................................................... 9 Item 5. Market for Registrant's Common Equity and Related Shareholder Matters ........................................................... 9 Item 6. Selected Financial Data ........................................... 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................. 11 Item 8. Financial Statements and Supplementary Data ....................... 15 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .......................................... 15 PART III .................................................................. 16 Item 10, 11, 12 and 13 .................................................... 16 PART IV. .................................................................. 17 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .. 17 SIGNATURES ................................................................ 19 FINANCIAL STATEMENTS ...................................................... F-1 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 all principal component systems for advanced cleanrooms. The Company is a single-source provider of the entire cleanroom, providing make-up and recirculating air handling systems, ceiling systems, wall systems and floor systems. The Company also 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"). Moreover, because of shorter product life cycles and competitive pressures, semiconductor manufacturers are demanding that new cleanrooms be operational more quickly. The Company believes its advanced systems and integrated solution allow 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. 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 more 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. 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. Because of shorter product life cycles and the need to ramp new products up quickly, manufacturers are demanding that cleanrooms be designed and installed more rapidly. Historically, semiconductor manufacturers have purchased cleanroom component systems and related services from multiple vendors. Under this "traditional" approach, vendors are selected through an iterative process where requests for quotation ("RFQ") are issued, initial designs are prepared, and revised bids are submitted. This evaluation and redesign may occur repeatedly until final vendor selections are made. Following this process, final designs are prepared and the project is initiated. Component systems purchased in this fashion may be installed by the original vendor, or by non-affiliated installers. 1 4 INTEGRATED SOLUTION The Company's integrated solution incorporates design, engineering, manufacturing, 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, since the Company manufactures and installs its own systems. Problems with system integration are minimized, since the Company designs its systems for compatibility. Components for newly-developed systems can be pre-assembled at the factory to test tolerances and new designs prior to installation. 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, avoiding the need for the customer to coordinate the activities of multiple vendors. The Company believes that having one company design, manufacture 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 envelope. 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 other manufacturer's components by a non-affiliated installer. Cost Effectiveness. Having a single vendor responsible for the design, manufacture 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, manufacturing and installing all major cleanroom system components, the Company is able to avoid 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. COMPANY STRATEGY The Company's stated mission is to be the leading worldwide provider of ultraclean manufacturing environments by providing totally integrated system solutions. The Company's strategy for achieving this goal includes the following elements: Expand Market Acceptance of Integrated Solution. The Company believes its integrated solution best addresses semiconductor manufacturers' needs to increase yields and expand or develop fabs as quickly as possible at a lower total cost. A number of leading semiconductor companies have adopted the Company's integrated solution, and the Company is focusing its marketing efforts on encouraging broader market acceptance of this approach. Build Long-Term Customer Relationships with Industry Leaders. The semiconductor industry is highly concentrated, with the top 10 semiconductor manufacturers accounting for approximately 65% of capital expenditures. Most of the Company's revenue is derived from sales to leading semiconductor manufacturers. The Company's marketing strategy is focused on building long-term relationships with the industry leaders, 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 advanced semiconductor manufacturers that most benefit from its integrated approach. Expand Local Service Network. In order to provide timely and efficient local customer service and support, the Company has established project management, design and sales offices near major semiconductor manufacturing centers. By expanding the Company's project management network and locating new offices in major semiconductor manufacturing centers, the Company believes it is in a better position to compete for service contracts. In addition, the Company believes a local service network enables it to strengthen customer relationships, expand sales leads and receive more direct customer feedback. 2 5 Expand International Business. Although the majority of the Company's revenues have been generated from projects in North America, revenues from international operations have increased over the last several years. The Company will continue to seek to increase revenues from international projects by expanding marketing efforts and bidding activities in the Asia/Pacific Rim region and Europe. To support its international expansion strategy, the Company has established design and engineering offices in Hsin-Chu, Taiwan, Livingston, Scotland and Aix-en-Provence, Southern France. 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. 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 allow 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. The Company manufactures all principal component systems which 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, uninterrupted 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 3 6 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 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 light weight precision-extruded aluminum (tolerance + or - .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 4000lb. 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 + or - .032", panel length and width accurate to + or - .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 allows the Company to provide information early on to its manufacturing teams regarding systems needs, which further allows the Company to better plan its systems production schedule and accelerate the delivery of finished product to its customers. Installation and Certification. The Company provides on-site installation, testing and certification services. Cleanroom installation is enhanced and expedited as Company personnel are cross-trained in all aspects of cleanroom construction. This enables them to quickly recognize and correct conflicts which arise during installation. Each cleanroom installation project is headed by a project manager who is responsible for logistics and coordination of the entire cleanroom project. The project manager is the primary contact with the customer during the entire process. 4 7 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 allows them to remove, modify, adapt and re-install wall panels, flooring and other components without shutting down the facility. Since they are generally the personnel who originally installed the cleanroom, they are familiar with the design and layout of the cleanroom and therefore are qualified to expedite layout changes and prevent downtime. Several customers have had Company personnel on-site performing these services for periods longer than one year. The Company's ongoing support program is a key component in the Company's strategy. 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 which are given to the customer. CUSTOMERS The Company's principal 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. In addition, the Company sells component systems and cleanrooms to other manufacturers requiring ultra-clean environments. 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 which accounted for more than 10% each of revenues. Customers that account for a significant amount of revenues in one year, however, do not necessarily remain significant in subsequent years. 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 uses independent sales representatives as well as its direct sales force in the Asia/Pacific Rim region. The Company has design and engineering offices in Livingston, Scotland and Aix-en-Provence, Southern France which serve the European market. In addition the Company has an office in Hsin-Chu, Taiwan, which serves the Asia/Pacific Rim region. 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 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. 5 8 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, be on the cutting edge of new semiconductor technology including the 300mm manufacturing facility, 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 regularly tests new ideas and techniques and measures the performance of new and existing products using a new AMCA-certifiable semi-reverberant testing laboratory adjacent to its manufacturing plant. The Company believes that its significant and growing experience base in designing, installing and servicing cleanrooms and manufacturing cleanroom components is a competitive advantage. The Company incurred approximately $246,000, $282,000 and $255,000 in non-project related research and development costs in 1997, 1996 and 1995, respectively. INTELLECTUAL PROPERTY The Company currently holds seven 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 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 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 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. 6 9 COMPETITION The Company believes it is the largest supplier of integrated cleanroom solutions providing design, engineering, manufacturing, 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 subcontractor rather than as a direct competitor. The Company faces competition from component manufacturers which include CleanPak International and HuntAir for air handlers and ceilings, Clestra for ceilings, Plascore and Unistrut for walls, and Hitachi, Hae Kwang and Tate for aluminum raised flooring. The Company competes with specialized cleanroom integrators, such as Meissner & Wurst, Takasago, and PCI 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 vary 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, 1997, the Company's backlog was $15.7 million compared to $28.3 million at December 31, 1996. 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 366 full-time employees and 4 part-time employees on December 31, 1997, compared to 524 full-time employees and 44 part-time employees on December 31, 1996. 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. 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 12,500 square feet in Mesa, Arizona; Austin, Texas; Santa Clara, California; Hsin-Chu, Taiwan; Livingston, Scotland; and Aix-en-Provence, Southern France with various lease expiration dates ranging from 1998 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. 7 10 ITEM 3. LEGAL PROCEEDINGS From time to time, the Company is subject to routine, non-material 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. 8 11 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, 1997 and 1996, respectively.
HIGH LOW ------- ------- YEAR ENDED DECEMBER 31, 1997: First Quarter $ 3.625 $ 2.500 Second Quarter 3.125 2.094 Third Quarter 2.500 1.750 Fourth Quarter 2.500 1.594 YEAR ENDED DECEMBER 31, 1996: First Quarter $ 6.375 $ 4.375 Second Quarter 7.250 4.500 Third Quarter 5.000 3.437 Fourth Quarter 4.125 2.625
The Company did not pay or declare dividends on its Common Stock during the years ended December 31, 1997, 1996 and 1995. 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 March 26, 1998, the Company had 12,407,977 shares of its Common Stock outstanding, held by 139 shareholders of record, which does not include shareholders whose shares are held in securities position listings. 9 12 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, ----------------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Contract revenue $ 52,541 $112,826 $ 70,635 $ 47,732 $ 30,444 Cost of contracts 47,272 97,364 63,484 39,579 24,703 -------- -------- -------- -------- -------- Gross profit 5,269 15,462 7,151 8,153 5,741 -------- -------- -------- -------- -------- Selling, general and administrative expenses 8,373 10,274 6,333 3,584 4,035 Research and Development 246 282 255 157 126 Depreciation and amortization 431 400 219 156 162 -------- -------- -------- -------- -------- 9,050 10,956 6,807 3,897 4,323 -------- -------- -------- -------- -------- Earnings (loss) from operations (3,781) 4,506 344 4,256 1,418 Other income (expense), net (344) 352 119 359 (154) -------- -------- -------- -------- -------- Earnings (loss) before income taxes (4,125) 4,858 463 4,615 1,264 Income taxes (benefit) . (1,866) 1,548 176 1,753 475 -------- -------- -------- -------- -------- NET EARNINGS (LOSS) $ (2,259) $ 3,310 $ 287 $ 2,862 $ 789 ======== ======== ======== ======== ======== Earnings (loss) per common share Basic $ (0.18) $ 0.27 $ 0.02 $ 0.26 $ 0.09 Diluted $ (0.18) $ 0.27 $ 0.02 $ 0.25 $ 0.08 Weighted-average common and dilutive common equivalent shares outstanding Basic 12,416 12,350 12,148 11,182 8,860 Diluted 12,416 12,393 12,365 11,370 10,171
DECEMBER 31, ----------------------------------------------------------- 1997 1996 1995 1994 1993 ----------------------------------------------------------- BALANCE SHEET DATA: Cash and cash equivalents $ 5,802 $ 3,258 $ 5,885 $ 2,711 $ 886 Working capital 15,248 17,112 15,431 14,155 4,057 Total assets 32,364 49,495 40,072 23,608 16,409 Total liabilities 11,664 26,557 20,663 7,355 10,410 Total shareholders' equity 20,700 22,938 19,409 16,253 5,998
10 13 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 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 which accounted for more than 10% 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 a cyclical downturn that began in 1996. The current industry downturn has resulted in lower capital spending by semiconductor manufacturers during the third and fourth quarters of 1996 and throughout 1997. Management believes the downturn is nearing its end but may continue through the first and second quarters of 1998. How quickly any recovery will take place is still subject to significant uncertainty. The downturn has resulted in fewer contracts available to bid, a significant increase in price competition on contracts that were awarded, and reduced margins on such contracts. During 1997, the Company experienced fewer new contract awards resulting in a decrease in the Company's backlog from $28.3 million at December 31, 1996 to $15.7 million at December 31, 1997. Although the Company has experienced an increase in the contract bidding activity during the third and fourth quarters of 1997 compared to each of the previous four quarters, management believes that the above-described events adversely affected its revenues and results of operations for 1997 and anticipates the industry downturn will continue to adversely affect its revenues and profitability through the first and second quarters of 1998. Although there is uncertainty surrounding the timing of a recovery in the semiconductor industry, management continues to believe that changes taking place in the industry should result in expanded semiconductor industry capital expenditures in the long-term. Delays in the ramp-up of 300mm technology have delayed the expected construction of the whole series of 300mm fabs worldwide. Due, in part, to the lack of 300mm process tools, weaker than expected demand, and the current focus on lowering process geometries from .25m to .18m, the 300mm effort has slowed by at least twelve months. In response to the current downturn, management has taken steps to reduce the Company's cost structure including a reduction in the Company's work force of more than thirty percent during 1997. During 1998, management will monitor the Company's cost structure and take appropriate actions as considered necessary, but continue to develop state of the art cleanroom technology and provide world-class support to the Company's customers. The Company's contract revenue and operating results fluctuate substantially from quarter to quarter depending on such factors as the timing of significant 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 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). The Company generates revenue in three geographic regions; North America, Asia/Pacific Rim and Europe. Contracts in the Asia/Pacific Rim region are generally denominated in United States dollars. 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 this region. 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 collapse of the Korean marketplace in particular, has forced Korean suppliers to look outside their historical business relationships for new markets. 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. 11 14 RESULTS OF OPERATIONS Contract revenue
1997 Change 1996 Change 1995 ---- ------ ---- ------ ---- Contract revenue (thousands) $52,541 (53.4)% $112,826 59.7% $70,635
Contract revenue for 1997 decreased by 53.4% to $52.5 million from $112.8 million in 1996. This decrease is directly related to the downturn in the semiconductor industry as more fully discussed above. The downturn has resulted in fewer contracts being constructed during the year ended December 31, 1997 compared with the year ended December 31, 1996. The decrease in the Company's backlog at December 31, 1997 compared to the backlog at December 31, 1996 is attributed to fewer contracts available to bid. During 1996, contract revenue increased by 59.7% to $112.8 million from $70.6 million in 1995. The increase in revenues is attributable to a large backlog at the beginning of 1996 that resulted in strong contract activity in the first half of 1996 and numerous large contracts that the Company was awarded during the first and second quarters of 1996 that resulted in additional revenue as the contracts progressed during the third and fourth quarters of 1996. North America - Contract revenue for the year ended December 31, 1997 decreased by 54.4% to $34.0 million from $74.4 million for the year ended December 31, 1996. As a percentage of total revenue North America decreased to 64.7% in 1997 compared to 66.0% in 1996. The decrease in contract revenue is attributed to the semiconductor industry downturn resulting in fewer and smaller contracts available during 1997 than in 1996. Contract revenue for the year ended December 31, 1996 increased by 68.6% to $74.4 million from $44.2 million for the year ended December 31, 1995. As a percentage of total revenue North America increased to 66.0% in 1996 compared to 62.5% in 1995. The increase is the result of numerous contracts received in North America. These contracts were larger than the Company had received historically and were completed on schedules that were much faster than the Company had historically been required to perform. Asia/Pacific Rim - Contract revenue for the year ended December 31, 1997 decreased by 42.1% to $9.6 million from $16.6 million for the year ended December 31, 1996. As a percentage of total revenue Asia/Pacific revenue increased to 18.3% in 1997 compared to 14.7% in 1996. The fluctuation is attributed to the worldwide semiconductor industry downturn compounded by the uncertainty of the Asian financial environment. Several large cleanroom projects that were in the bidding process have been delayed indefinitely. The delays in these projects had a major impact on Asia/Pacific revenue during the fourth quarter of 1997. Contract revenue for 1996 decreased by 16.6% to $16.6 million from $19.9 million for the year ended December 31, 1995. As a percentage of total revenue Asia/Pacific decreased to 14.7% in 1996 compared to 28.1% in 1995. Two factors contributed to the decrease in Asia/Pacific revenue. First, during 1995 the Company recognized revenue for two significantly large contracts in Taiwan. These contracts were substantially completed during 1995. Second, the semiconductor industry downturn impacted Taiwan and other Asian countries to the extent that the Company did not have the same opportunity to bid on contracts in 1996 that it had during 1995. Europe - Contract revenue for the year ended December 31, 1997 decreased by 58.8% to $9.0 million from $21.8 million for the year ended December 31, 1996. As a percentage of total revenue European revenue decreased to 17.1% in 1997 compared to 19.3% in 1996. The decrease is attributed to two factors. First, the worldwide semiconductor industry downturn has delayed the investment into the European community by most major semiconductor manufacturers resulting in fewer contracts available during 1997 compared to 1996. Second, during 1996 the Company was involved in an unusually large project in France that generated a significant amount of revenue during 1996 that was not available to the Company during 1997. Contract revenue for 1996 increased by 229.8% to $21.8 million from $6.6 million for the year ended December 31, 1995. As a percentage of total revenue Europe increased to 19.3% in 1996 compared to 9.4% in 1995. The increase is attributed to two contracts of significant size received in early 1996 and substantially completed by the end of the year. 12 15 Gross Profit
1997 Change 1996 Change 1995 ---- ------ ---- ------ ---- Gross profit (thousands) $5,269 (65.9)% $15,462 116.2% $7,151 Percentage of contract revenue 10.0% 13.7% 10.1%
Gross profit for the year ended December 31, 1997 decreased by 65.9% to $5.3 million from $15.5 million for the year ended December 31, 1996. Gross profit decreased as a percentage of revenue to 10.0% for 1997 compared to 13.7% for 1996. The decrease in gross margin is the direct result of the semiconductor industry downturn (see discussion above.) The downturn has resulted in a competitive bidding process, and contracts awarded during 1997 are at margins less than the Company experienced in 1996. In addition, contract sizes through 1997 were significantly smaller. Gross profit for 1996 increased by 116.2% to $15.5 million from $7.2 million in 1995 and increased as a percentage of contract revenue to 13.7% in 1996 from 10.1% in 1995. This increase is the result of: continual improvement in the Company's manufacturing facility creating greater efficiencies and less costs to produce product; and better project management resulting in less problems at the construction sites which allows the Company to install its product with less time and labor expense. Contracts received during 1996 also were generally bid at higher margins than those received during 1995. Also affecting the increase from 1995 to 1996 were significant events during 1995 that contributed to the Company realizing smaller margins during 1995. These events included the Company's continued expansion of manufacturing facilities and a product failure during the second quarter of 1995. The expansion created manufacturing inefficiencies, project delays and overruns resulting in higher than expected cost of contracts during 1995. The product failure was the result of defective motors purchased from a third party vendor and resulted in a one time charge to costs of contracts of approximately $1.5 million. Selling, General and Administrative Expenses
1997 Change 1996 Change 1995 ---- ------ ---- ------ ---- Selling, general and administrative expenses (thousands) $8,373 (18.5)% 10,274 62.2% $6,333 Percentage of contract revenue 15.9% 9.1% 9.0%
Selling, general and administrative expenses for 1997 decreased 18.5% to $8.4 million, from $10.3 million, but increased as a percentage of revenue to 15.9% for the year ended December 31, 1997 compared to 9.1% for the year ended December 31, 1996. The decrease in actual dollars spent on selling, general and administrative expenses in 1997 compared with 1996 is the result a reduction in general and administrative headcount completed during the first and second quarters of 1997. Selling, general and administrative expenses for 1996 increased 62.2% to $10.3 million, or 9.1% of contract revenue, from $6.3 million, or 9.0% of contract revenue, in 1995. The increase in selling, general and administrative expenses is the result of increased sales activity during 1996 compared with 1995 worldwide and a full year of costs associated with the Company's Asia/Pacific office. The Asia/Pacific office was only operational for six months during 1995. Selling, general and administrative expenses as a percentage of contract revenue has remained relatively constant from 1995 to 1996. Research and Development
1997 Change 1996 Change 1995 ---- ------ ---- ------ ---- Research and Development expense (thousands) $246 (12.8)% $282 10.6% $255 Percentage of contract revenue 0.5% 0.2% 0.4%
Research and development expense decreased slightly in actual dollars spent from 1996 to 1997. This decrease was not material. Management believes that the Company will increase its research and development expenses during 1998, both in actual dollars spent and as a percentage of revenue in order to develop innovative products, to be on the cutting edge of the 300 millimeter manufacturing facility technology and to modify existing products to be less expensive to produce and easier to install. Research and development expense increased slightly from 1995 to 1996. This increase was the result of research and development projects that were based on specific customers and contracts. 13 16 Depreciation and Amortization
1997 Change 1996 Change 1995 ---- ------ ---- ------ ---- Depreciation and amortization expense (thousands) $431 7.8% $400 82.6% $219 Percentage of contract revenue 0.8% 0.4% 0.3%
Depreciation and amortization expense during 1997 increased by 7.8% to $431,000, or 0.8% of contract revenue, from $400,000, or 0.4% of contract revenue, in 1996. This increase is the result of a full years depreciation expense on leasehold improvements, furniture, fixtures, computer equipment and software purchased during 1996. Depreciation and amortization expense in 1996 increased by 82.6% to $400,000, or 0.4% of contract revenue, from $219,000, or 0.3% of contract revenue, in 1995. This increase is the result of the purchase of leasehold improvements, furniture, fixtures, computer equipment and software required for the increased sales, marketing and administrative activities during 1996. Other Income (Expense), net
1997 Change 1996 Change 1995 ---- ------ ---- ------ ---- Other income (expense) (thousands) $(344) (197.7)% $352 195.8% $119 Percentage of contract revenue (0.7)% 0.3% 0.2%
Other income (expense) decreased in 1997 to $(344,000) from $352,000 in 1996. The decrease in other income (expense) is the result of foreign currency losses recognized during 1997 resulting from the decline in Taiwan dollars throughout 1997 and a litigation settlement included as part of other income during 1996. Other income (expense) increased in 1996 to $352,000 from $119,000 in 1995. The increase is generally the result of the net effect of an increase in interest expense and a settlement on litigation with a third party vendor for defective motors. Income Taxes (Benefit)
1997 Change 1996 Change 1995 ---- ------ ---- ------ ---- Income taxes expense (benefit) (thousands) $(1,866) (220.5)% $1,548 779.5% $176 Percentage of contract revenue (3.6)% 1.4% 0.2%
The effective tax rate (benefit) for 1997 was approximately (45)% compared to 32% for 1996 and 38% for 1995. The decrease in the effective tax rate from 1996 to 1997 is primarily the result of a tax benefit resulting from the loss before taxes, calculated at the statutory federal rate (see Note I of Notes To Financial Statements). The decrease from 1995 to 1996 was primarily the result of tax benefits the Company was able to utilize during 1996 on foreign sales which were taxed in the Company's foreign sales corporation. LIQUIDITY AND CAPITAL RESOURCES Working capital at December 31, 1997 was $15.2 million compared to $17.1 million at December 31, 1996. This includes cash and cash equivalents of $5.8 million and $3.3 million at December 31, 1997 and 1996 respectively. Receivables, including retentions, (see Note D of Notes to Financial Statements) decreased to $12.5 million at December 31, 1997 compared to $27.4 million at December 31, 1996. This decrease was the result of lower revenues from fewer contracts during 1997 compared to 1996. Days sales outstanding (the ratio between receivables, excluding retention, and average daily revenue taken over the year) decreased to 67 days at December 31, 1997, from 72 days at December 31, 1996. The Company's operations provided $7.9 million of cash during 1997, compared to using $3.4 million of cash in 1996. During 1997, the Company experienced a decrease in receivables of $14.7 million as a result of the decline in revenues and a decrease in accounts payable and accrued expenses of approximately $5.1 million. At December 31, 1997, the Company had a line of credit totaling $8.0 million or the available borrowing base. The Company had $1.2 million in borrowings against the line at December 31, 1997. Amounts drawn under the line bears interest at the bank's prime rate (8.50% at December 31, 1997) and are due no later than June 30, 14 17 1998, with options to renew the agreement on an annual basis. The line is secured by certain domestic accounts receivable and inventory. In addition, at December 31, 1997, the Company maintained a guidance line of credit with a domestic bank used to facilitate the issuance of letters of credit. The facility allows for letters of credit to be issued up to the lesser of $3.0 million or the available borrowing base. No letters of credit were open under this facility at December 31, 1997. The facility expires July 31, 1998, with options to renew the agreement on an annual basis. During 1997, the Company used $349,000 for the purchase of property and equipment. The Company anticipates that its capital expenditures in 1998 for routine additions and replacements of property, plant, and equipment will be approximately $1.3 million. These purchases will be financed through long-term debt or capital leases. Management believes that existing cash balances, borrowings available under the lines of credit, and cash generated from operations will be adequate to meet the Company's anticipated cash requirements through December 31, 1998. However, in the event the Company experiences adverse operating performance or above-anticipated capital expenditure requirements, additional financing may be required. There can be no assurance that such additional financing, if required, would be available on favorable terms if at all. IMPACT OF FUTURE ACCOUNTING PRONOUNCEMENTS None. (See Notes To Financial Statements A-14) FACTORS AFFECTING FUTURE RESULTS The Company's future operations will be impacted by, among other factors, the length and severity of the current economic downturn in the semiconductor industry as more fully discussed above. The length and severity of the current economic downturn in the semiconductor industry remains subject to a high degree of uncertainty. The Company's operations are also subject to additional 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. 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. 15 18 PART III ITEM 10, 11, 12 AND 13 These items are incorporated by reference to the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders scheduled for May 27, 1998. The definitive Proxy Statement will be filed with the Commission not later than 120 days after December 31, 1997, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended. 16 19 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 -- Balance Sheets as of December 31, 1997 and 1996 -- Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995 -- Statements of Shareholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 -- Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 -- Notes to Financial Statements (2) Financial Statement Schedule. The following financial statement schedules for the years ended December 31, 1997, 1996 and 1995 are included herein beginning on page S-1: -- Report of Independent Certified Public Accountants on Schedule -- Schedule II - Valuation and Qualifying Accounts All other schedules have been omitted because the information is not required, or if required the information required therein is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements or notes thereto. (b) Reports on Form 8-K: None. (c) Exhibits: The following exhibits required by Item 601 of Regulation S-K are filed herewith or have been filed previously with the Commission as indicated below: 17 20 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, 1993, 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, 1996, Exhibit 10.1] 10.4 Amendment No. 2 to 1993 Stock Option Plan* [Form 10-K for the year ended December 31, 1996, Exhibit 10.4] 10.5 Revolving Domestic and LC Line of Credit Agreements Filed herewith. 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, 1995, Exhibit 10.5] 10.8 Flanders Shareholder Agreement* [Form 10-KSB for the year ended December 31, 1994, Exhibit No. 10.8] 10.9 Flanders Purchase Option Agreement* [Form 10-KSB for the year ended December 31, 1994, Exhibit No. 10.9] 23.1 Consent of Independent Certified Public Accountants. Filed herewith. 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. 18 21 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 March 26, 1998. 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 March 26, 1998.
SIGNATURE CAPACITY IN WHICH SIGNED - ----------------------------- -------------------------------------------- /s/ Ronald W. Daw Chairman of the Board, President, Chief - ----------------------------- Executive Officer and Director (Principal Ronald W. Daw executive officer) /s/ David R. Grow Executive Vice President, Chief Operating - ----------------------------- Officer, Chief Financial Officer (Principal David R. Grow 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
19 22 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Daw Technologies, Inc. We have audited the accompanying balance sheets of Daw Technologies, Inc. as of December 31, 1997 and 1996, and the related statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 financial position of Daw Technologies, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. GRANT THORNTON LLP Salt Lake City, Utah February 25, 1998 F-1 23 Daw Technologies, Inc. BALANCE SHEETS (in thousands, except share data)
December 31, ----------------- 1997 1996 ------- ------- ASSETS CURRENT ASSETS Cash and cash equivalents............................... $ 5,802 $ 3,258 Contracts receivable, net............................... 12,472 27,394 Costs and estimated earnings in excess of billings on contracts in progress.............................. 3,702 7,169 Inventories............................................. 1,363 1,583 Deferred income taxes................................... 352 318 Other current assets.................................... 2,144 1,996 ------- ------- Total current assets................................ 25,835 41,718 PROPERTY AND EQUIPMENT -- NET, AT COST.................... 6,304 7,693 DEFERRED INCOME TAXES..................................... 135 -- OTHER ASSETS.............................................. 90 84 ------- ------- $32,364 $49,495 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities................ $ 5,700 $10,782 Billings in excess of costs and estimated earnings on contracts in progress..................... 3,005 7,505 Lines of credit......................................... 1,230 5,696 Current portion of long-term obligations................ 652 623 ------- ------- Total current liabilities.......................... 10,587 24,606 LONG-TERM OBLIGATIONS, less current portion............... 1,077 1,730 DEFERRED INCOME TAXES..................................... -- 221 COMMITMENTS AND CONTINGENCIES............................. -- -- SHAREHOLDERS' EQUITY Preferred stock, authorized 10,000,000 shares of $.01 par value; none issued and outstanding........... -- -- Common stock, authorized 50,000,000 shares of $.01 par value; issued and outstanding 12,407,977 shares in 1997 and 12,400,543 shares in 1996.......... 124 124 Additional paid-in capital.............................. 15,209 15,188 Retained earnings....................................... 5,367 7,626 ------- ------- Total shareholders' equity......................... 20,700 22,938 ------- ------- $32,364 $49,495 ======= =======
The accompanying notes are an integral part of these statements. F-2 24 Daw Technologies, Inc. STATEMENTS OF OPERATIONS (in thousands, except share data)
Year ended December 31, ------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Contract revenue $ 52,541 $ 112,826 $ 70,635 Cost of contracts 47,272 97,364 63,484 ----------- ----------- ----------- Gross profit 5,269 15,462 7,151 Operating expenses Selling, general and administrative 8,373 10,274 6,333 Research and development 246 282 255 Depreciation and amortization 431 400 219 ----------- ----------- ----------- 9,050 10,956 6,807 ----------- ----------- ----------- Earnings (loss) from operations (3,781) 4,506 344 Other income (expense) Interest (295) (663) (129) Other income (expense), net (49) 1,015 248 ----------- ----------- ----------- (344) 352 119 ----------- ----------- ----------- Earnings (loss) before income taxes (4,125) 4,858 463 Income taxes (benefit) (1,866) 1,548 176 ----------- ----------- ----------- NET EARNINGS (LOSS) $ (2,259) $ 3,310 $ 287 =========== =========== =========== Earnings (loss) per common share Basic $ (0.18) $ 0.27 0.02 Diluted (0.18) 0.27 0.02 Weighted-average common and dilutive common equivalent shares outstanding Basic 12,415,957 12,350,172 12,147,837 Diluted 12,415,957 12,393,356 12,364,989
The accompanying notes are an integral part of these statements. F-3 25 Daw Technologies, Inc. STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except share data) Years ended December 31, 1997, 1996 and 1995
Addi- tional Common paid-in Retained stock capital earnings Total ------ ------- -------- ------- Balances as of January 1, 1995 $ 117 $12,107 $ 4,029 $16,253 Common stock issued pursuant to exercise of warrants, 400,000 shares 4 1,969 -- 1,973 Common stock issued pursuant to exercise of warrants, 189,000 shares 2 646 -- 648 Tax benefit from exercise of stock options -- 248 -- 248 Net earnings for 1995 -- -- 287 287 ------ ------- ------- ------- Balances as of December 31, 1995 123 14,970 4,316 19,409 Common stock issued pursuant to exercise of 900 warrants and 46,500 options and purchase of 22,889 shares pursuant to employee stock purchase plan 1 195 -- 196 Tax benefit from exercise of stock options -- 23 -- 23 Net earnings for 1996 -- -- 3,310 3,310 ------ ------- ------- ------- Balances as of December 31, 1996 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 of 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 ====== ======= ======= =======
The accompanying notes are an integral part of these statements. F-4 26 Daw Technologies, Inc. STATEMENTS OF CASH FLOWS (in thousands, except share data)
Year ended December 31, --------------------------- 1997 1996 1995 ------- -------- ------- Increase (decrease) in cash and cash equivalents Cash flows from operating activities Net earnings (loss) $(2,259) $ 3,310 $ 287 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities Depreciation and amortization 1,724 1,649 875 (Gain) loss on disposition of property and equipment (7) 6 35 Provision for losses on contracts receivable 180 330 30 Deferred income taxes (benefit) (390) (145) 48 Changes in assets and liabilities Contract receivables 14,742 (13,010) (3,137) Costs and estimated earnings in excess of billings on contracts in progress 3,467 3,761 (5,697) Inventories 220 (105) (303) Other current assets (148) (1,555) 48 Accounts payable and accrued liabilities (5,082) (1,490) 6,092 Billings in excess of costs and estimated earnings on contracts in progress (4,500) 3,806 3,013 Other assets (6) (2) (41) ------- -------- ------- Net cash provided by (used in) operating activities 7,941 (3,445) 1,250 ------- -------- ------- Cash flows from investing activities Payments for purchase of property and equipment (349) (2,929) (4,996) Proceeds from disposition of property and equipment 21 31 -- ------- -------- ------- Net cash used in investing activities (328) (2,898) (4,996) ------- -------- -------
(continued) F-5 27 Daw Technologies, Inc. STATEMENTS OF CASH FLOWS -- CONTINUED (in thousands, except share data)
Year ended December 31, -------------------------------- 1997 1996 1995 -------- -------- -------- Cash flows from financing activities Proceeds from issuance of long-term obligations -- -- 2,791 Net change in lines of credit (4,466) 4,196 1,500 Payments of long-term debt -- -- (92) Payments for purchase and retirement of common stock (63) -- -- Proceeds from issuance of stock 84 219 2,869 Payments on obligations under capital leases (624) (699) (148) ------- ------- ------ Net cash provided by (used in) financing activities (5,069) 3,716 6,920 ------- ------- ------ Net increase (decrease) in cash and cash equivalents 2,544 (2,627) 3,174 Cash and cash equivalents at beginning of year 3,258 5,885 2,711 ------- ------- ------ Cash and cash equivalents at end of year $ 5,802 $ 3,258 $5,885 ======= ======= ====== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for Interest $ 295 $ 663 $ 129 Income taxes 438 1,055 320 NONCASH INVESTING AND FINANCING ACTIVITIES Capital lease obligations of $173 and $2,908 for property and equipment acquisitions were incurred during 1996 and 1995, respectively.
The accompanying notes are an integral part of these statements. F-6 28 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 (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. (the Company) is a supplier of ultra-clean manufacturing environments, or cleanrooms, to the semiconductor industry (operating in one business segment). The Company designs, engineers, manufactures, installs and services all principal component systems for advanced cleanrooms. 2. Method of accounting for long-term contracts The accompanying financial statements have been prepared using the percentage-of-completion method of accounting and, therefore, take into account the costs, estimated earnings and revenue to date on contracts not yet completed. For most contracts, 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 29 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 (in thousands, except share data) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 2. 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. 3. 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. 4. 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. 5. 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 30 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 (in thousands, except share data) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 6. Inventories Inventories consist of raw materials and are stated at the lower of cost or market. Cost is determined principally by the first-in, first-out method. 7. Net earnings (loss) per share Basic earnings (loss) per common share (BEPS) is based on the weighted average number of common shares outstanding during each period. Diluted earnings (loss) per common share are based on shares outstanding (computed as under BEPS) and dilutive potential common shares. Potential common shares included in the dilutive earnings (loss) per share calculation include stock options awarded (Note S). 8. 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. 9. 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 31% (40% in 1996) of receivables are with three different customers. In addition, approximately 42% (41% in 1996) of receivables are due from entities located outside of North America, primarily Europe and Asia. Of the total receivables, approximately 6% are denominated in foreign currencies (13% at December 31, 1996). The Company routinely evaluates the financial strength of its customers and monitors each account to minimize the risk of loss. F-9 31 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 (in thousands, except share data) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 9. 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 aggregate to approximately $229 at December 31, 1997 ($1,412 in 1996). The Company also maintains cash and cash equivalents in foreign accounts. These uninsured balances aggregate to $5,709 at December 31, 1997 ($2,413 in 1996). 10. Retentions Many of the Company's contracts allow retentions, typically 5-10% of the amount billed, to be withheld from each progress payment by the customer until the project reaches substantial completion. 11. 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. 12. 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. 13. Reclassifications Certain reclassifications have been made to the 1996 and 1995 financial statements to conform with the 1997 presentation. F-10 32 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 (in thousands, except share data) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 14. Recently issued accounting pronouncements not yet adopted Comprehensive income In September 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130 requires entities presenting a complete set of financial statements to include details of comprehensive income that arise in the reporting period. Comprehensive income consists of net earnings or loss for the current period and other comprehensive income, which consists of revenue, expenses, gains, and losses that bypass the statement of earnings and are reported directly in a separate component of equity. Other comprehensive income includes, for example, foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investment securities. SFAS 130 requires that components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This statement is effective for fiscal years beginning after December 15, 1997 and requires restatement of prior period financial statements presented for comparative purposes. Disclosure of segments Also in September 1997, the FASB issued Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information." This statement requires an entity to report financial and descriptive information about their reportable operating segments. An operating segment is a component of an entity for which financial information is developed and evaluated by the entity's chief operating decision maker to assess performance and to make decisions about resource allocation. Entities are required to report segment profit or loss, certain specific revenue and expense items and segment assets based on financial information used internally for evaluating performance and allocating resources. This statement is effective for fiscal years beginning after December 15, 1997 and requires restatement of prior period financial statements presented for comparative purposes. Management does not believe that the adoption of SFAS 130 and SFAS 131 will have a material effect on the Company's financial statements. F-11 33 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 (in thousands, except share data) NOTE B - CAPITAL TRANSACTIONS During 1997, the Company received $84 from the issuance of 43,738 shares of common stock. The Company purchased and retired 36,304 shares of common stock. During 1996, the Company received $196 from the issuance of 22,889 shares of common stock, upon the exercise of 46,500 common stock options and the exercise of 900 shares of common stock warrants. 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 2% to 15% (up to $25) of eligible compensation to be withheld for the purchase of stock. Price per share is 85% 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 43,738 shares under the plan in 1997 (22,889 in 1996). NOTE C - INTERNATIONAL OPERATIONS Financial information summarized by geographic area for the years ended December 31, 1997, 1996, and 1995, is as follows.
North 1997 America Europe Asia/Pacific Consolidated ------------------------------------- ------- ------ ------------ ------------ Net revenues - unaffiliated customers $ 33,969 $ 8,983 $ 9,589 $ 52,541 Loss from operations (283) (2,668) (830) (3,781) Identifiable assets 18,655 8,262 5,447 32,364
North 1996 America Europe Asia/Pacific Consolidated ------------------------------------- ------- ------ ------------ ------------ Net revenues - unaffiliated customers $ 74,429 $ 21,828 $ 16,569 $112,826 Earnings (loss) from operations 5,341 (794) (41) 4,506 Identifiable assets 30,202 10,389 8,904 49,495
F-12 34 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 (in thousands, except share data) NOTE C - INTERNATIONAL OPERATIONS - CONTINUED
North 1995 America Europe Asia/Pacific Consolidated - --------------------------------------- ------- ------ ------------ ------------ Net revenues - unaffiliated customers.. $44,156 $6,619 $19,860 $70,635 Earnings (loss) from operations........ (639) 1,455 (472) 344 Identifiable assets.................... 29,865 4,602 5,605 40,072
Foreign currency transaction losses totaling approximately $225 for 1997 are included in other income. Foreign currency transactions for 1996 and 1995 were not significant. NOTE D - CONTRACTS RECEIVABLE Contracts receivable consist of the following:
1997 1996 -------- -------- Current receivables ................... $ 9,666 $22,353 Retentions receivable ................. 3,209 5,417 ------- ------- 12,875 27,770 Less allowance for doubtful accounts .. (403) (376) ------- ------- Contracts receivable .................. $12,472 $27,394 ======= =======
NOTE E - OTHER CURRENT ASSETS Other current assets consist of the following:
1997 1996 ------- ------- Taxes receivable ....................... $1,358 $ -- Prepaid foreign taxes .................. 172 1,120 Miscellaneous receivables and deposits.. 278 552 Prepaid expenses ....................... 336 324 ------ ------ $2,144 $1,996 ====== ======
F-13 35 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 (in thousands, except share data) NOTE F - PROPERTY AND EQUIPMENT Property and equipment and estimated useful lives consist of the following:
Years 1997 1996 ------------ ------- ------- Equipment 5-10 $ 4,150 $ 4,088 Furniture and fixtures 3-5 2,588 2,432 Leasehold improvements life of lease 2,605 2,514 Equipment under capital leases 5-10 4,067 4,067 Vehicles 3-5 317 331 ------- ------- 13,727 13,432 Less accumulated depreciation and amortization including $2,332 and $1,653 for equipment under capital leases at 1997 and 1996, respectively (7,423) (5,739) ------- ------- $ 6,304 $ 7,693 ======= =======
NOTE G - CONTRACTS IN PROGRESS Costs incurred to date and estimated earnings and the related progress billings to date on contracts in progress are as follows:
1997 1996 ------- ------- Total costs and estimated earnings $108,215 $112,396 Progress billings to date 107,518 112,732 -------- -------- $ 697 $ (336) ======== ========
The above are included in the balance sheets under the following captions:
1997 1996 ------- ------- Costs and estimated earnings in excess of billings on contracts in progress $ 3,702 $ 7,169 Billings in excess of costs and estimated earnings on contracts in progress (3,005) (7,505) -------- -------- $ 697 $ (336) ======== ========
F-14 36 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 (in thousands, except share data) NOTE H -- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of the following:
1997 1996 ---- ---- Trade accounts payable $2,729 $ 6,120 Other accrued liabilities 1,515 1,668 Employees salaries, incentive pay, vacation and payroll taxes 1,090 1,808 Reserve for contract estimates and warranties 366 575 Accrued income taxes payable -- 611 ------ ------- $5,700 $10,782 ====== =======
NOTE I -- INCOME TAXES Components of income taxes (benefit) are as follows:
1997 1996 1995 ---- ---- ---- Current Federal $(1,171) $1,288 $111 State (305) 330 17 Foreign -- 75 -- ------- ------ ---- (1,476) 1,693 128 Deferred Federal (379) (119) 42 State (11) (26) 6 ------- ------ ---- (390) (145) 48 ------- ------ ---- Income taxes (benefit) $(1,866) $1,548 $176 ======= ====== ====
F-15 37 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 (in thousands, except share data) NOTE I - INCOME TAXES - CONTINUED The income tax expense (benefit) reconciled to the tax computed at the statutory Federal rate of 34% is as follows:
1997 1996 1995 ------- ------- ------- Tax (benefit) at federal statutory rate $(1,403) $ 1,652 $ 157 Nondeductible expenses 11 41 23 State income taxes, net of federal income tax benefit (234) 234 12 Foreign sales corporation exemption (167) (333) (54) All other (73) (46) 38 ------- ------- ------- $(1,866) $ 1,548 $ 176 ======= ======= =======
Deferred income taxes related to the following:
1997 1996 ----- ----- Current deferred tax assets Allowance for doubtful accounts $ 150 $ 147 Accrued expenses and reserves 202 171 ----- ----- $ 352 $ 318 ===== ===== Long-term deferred tax assets (liabilities) Excess book depreciation and amortization $(226) $(221) Foreign tax credit carryforwards 162 -- Alternative minimum tax credit carryforwards 199 -- ----- ----- $ 135 $(221) ===== =====
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. F-16 38 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 (in thousands, except share data) NOTE J- LINES OF CREDIT During 1997, the Company maintained a revolving line of credit with a domestic bank for the lesser of $8,000 or the available borrowing base. The interest rate is computed at the bank's prime rate (8.50% at December 31, 1997) and requires monthly payments of interest. The Company had $1,230 in borrowings against the line at December 31, 1997 ($4,216 at December 31, 1996) . The line of credit expires June 30, 1998. 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 December 31, 1997, the Company was out of compliance on certain indebtedness covenants for which they obtained a waiver subsequent to year end. Also during 1997, the Company maintained a guidance line of credit with a domestic bank used to facilitate the issuance of letters of credit. The facility allows for letters of credit to be issued up to the lesser of $3,000 or the available borrowing base. The facility expires July 31, 1998. In addition, the facility maintains the same restrictive covenants and collateral requirements as the above mentioned revolving line of credit. No letters of credit were open under this facility at December 31, 1997. In addition, during 1997 and 1996, the Company maintained another revolving line of credit with a domestic bank for $3,500 with a variable rate of interest of prime (8.50% at December 31, 1996). The line matured during 1997, and has not been renewed. The outstanding balance against the line at December 31, 1996 was $1,480. The line was collateralized by certain international receivables and inventories. This line also contained restrictive covenants imposing limitations on purchases or redemptions of capital stock, indebtedness and other matters. NOTE K - LONG-TERM OBLIGATIONS The Company has entered into capital lease obligations with various financial institutions and leasing organizations that carry interest rates ranging from 4% to 11.5%. The leases are collateralized by equipment. Payments approximate $65 monthly including interest. F-17 39 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 (in thousands, except share data) NOTE K - LONG-TERM OBLIGATIONS - CONTINUED 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, 1997. Year ending December 31, 1998 $ 779 1999 632 2000 539 2001 10 ------ Total minimum leases payments 1,960 Less amount representing interest 231 ------ Present value of net minimum lease payments 1,729 Less current portion 652 ------ Long-term portion $1,077 ======
NOTE L - 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, 1997. Year ending December 31, 1998 $1,961 1999 1,724 2000 972 2001 636 2002 583 Thereafter 1,234 ------ $7,110 ======
The building leases provide for payment of property taxes, insurance, and maintenance costs by the Company. Rental expense for operating leases totaled $1,670, $737 and $564 for 1997, 1996 and 1995 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. F-18 40 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 (in thousands, except share data) NOTE M - 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 $176, $184 and $30 for the years ended December 31, 1997, 1996 and 1995, 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 $303, $484 and $263 or 3.9%, 2.3% and 2.0% of gross payroll of covered employees, respectively, for the years ended December 31, 1997, 1996 and 1995. 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. NOTE N - 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 statements. F-19 41 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 (in thousands, except share data) NOTE O - PRIMARY CUSTOMERS The Company has typically had one to three customers in each year which accounted for more than 10% 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:
1997 1996 1995 --------- ------- ------- Company A $ -- $21,371 $ -- Company B 7,241 17,916 -- Company C -- 16,247 -- Company D -- -- 8,654 Company E -- -- 7,883 Company F -- -- 7,624
NOTE P - RELATED PARTY TRANSACTIONS Daw Incorporated is a regional interior specialties contracting company based in Utah. Certain stockholders of Daw Incorporated own more than 50% of the Company's common stock. The Company purchased goods and services from Daw Incorporated totaling $223, $1,118, and $525 in 1997, 1996, and 1995, respectively. Although the Company and Daw Incorporated maintain separate insurance policies, the Company understands that its insurance carriers consider the experience of both Daw Incorporated and the Company in establishing the Company's rate for workers compensation coverage because of the common ownership. This common ownership may also affect the Company's ability to make elections regarding contributions to its 401(k) plan which differ materially from Daw Incorporated's separate plan. Management of the Company does not believe these matters have materially affected the financial condition or results of operations of the Company. A member of the board of directors works for a law firm which provided legal services to the Company approximating $138 and $137 in 1997 and 1996, respectively. F-20 42 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 (in thousands, except share data) NOTE Q - 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, to expire in 1998, 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% 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 2007. Options granted prior to or on October 24, 1996 expire through 2001. The Company granted options to purchase 55,000 shares, 272,000 shares and 255,000 shares in 1997, 1996 and 1995, respectively, of the Company's common stock of which 20,000 shares in 1997, 40,000 shares in 1996 and 30,000 shares in 1995 respectively, were granted to non-employee directors. Additionally, 30,000 shares, 111,500 shares, and 63,500 shares, were granted to executive officers (including officers who are directors), during 1997, 1996, and 1995, respectively. Also, 5,000 shares, 120,500 shares and 161,500 shares in 1997, 1996, and 1995, respectively, were granted to other employees of the Company. On October 24, 1996 all options with an exercise price greater than $3.50 were re-priced to $3.50, which was the market price of the Company stock on that date. F-21 43 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 (in thousands, except share data) NOTE Q - WARRANTS AND OPTIONS - CONTINUED The Company has adopted only the disclosure provisions of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (FAS123). 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 FAS123, the Company's net earnings (loss) and earnings (loss) per share would have been reduced (or increased) to the following pro forma amounts:
1997 1996 1995 --------- ------- ------ Net earnings (loss) As reported $ (2,259) $ 3,310 $ 287 Pro forma (2,458) 2,976 185 Earnings (loss) per share-basic As reported (0.18) 0.27 0.02 Pro forma (0.20) 0.24 0.01 Earnings (loss) per As reported (0.18) 0.27 0.02 share-assuming dilution Pro forma (0.20) 0.24 0.01
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 1997, 1996 and 1995: expected volatility of 53% (56% for 1996 and 1995); risk-free interest rate of 6.05% (6.04% for 1996 and 1995); and expected life of 9.6 years (4.7 for 1996 and 1995). The weighted-average fair value of options granted was $1.60 and $2.19 in 1997 and 1996, 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-22 44 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 (in thousands, except share data) NOTE Q - WARRANTS AND OPTIONS - CONTINUED Changes in the Company's stock options and warrants are as follows:
Weighted- average Stock Exercise exercise Warrants options price price --------- -------- ------------- ---------- Outstanding at January 1, 1995 407,500 526,000 $ 2.50 - 6.63 $ 4.23 Granted -- 255,000 6.25 - 8.58 6.69 Exercised (400,000) (189,000) 2.50 - 5.75 3.44 Canceled or expired -- (54,500) 3.56 - 6.63 5.96 -------- -------- Outstanding at December 31, 1995 7,500 537,500 2.50 - 8.58 5.50 Granted -- 272,000 3.00 - 5.88 3.68 Exercised (900) (46,500) 2.50 - 5.75 2.87 Canceled or expired -- (26,500) 3.56 - 6.63 6.06 -------- -------- Outstanding at December 31, 1996 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 ======== ======== Exercisable at December 31, 1997 -- 535,500 $ 3.00 - 3.50 $ 3.44 ======== ========
The weighted-average remaining contractual life of options outstanding at December 31, 1997 is 4.3 years. F-23 45 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 (in thousands, except share data) NOTE R - QUARTERLY FINANCIAL RESULTS (UNAUDITED) Quarterly financial results for the years ended December 31, 1997, 1996, and 1995 are as follows:
Net earnings Earnings Net (loss) per Contract Gross (loss) from earnings common 1997 revenue profit (loss) operations (loss) share-basic ---------------- -------- ------------- ----------- -------- ----------- 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) ======== ======== ======== ======== ======== 1996 ---------------- First quarter $ 23,383 $ 3,341 $ 986 $ 618 $ 0.05 Second quarter 27,049 3,242 575 654 0.05 Third quarter 30,009 4,478 1,713 1,015 0.08 Fourth quarter 32,385 4,401 1,232 1,023 0.09 -------- -------- -------- -------- -------- $112,826 $ 15,462 $ 4,506 $ 3,310 $ 0.27 ======== ======== ======== ======== ======== 1995 ---------------- First quarter $ 16,803 $ 2,873 $ 1,381 $ 889 $ 0.08 Second quarter 13,948 (591) (2,468) (1,440) (0.12) Third quarter 17,398 2,489 368 242 0.02 Fourth quarter 22,486 2,380 1,063 596 0.04 -------- -------- -------- -------- -------- $ 70,635 $ 7,151 $ 344 $ 287 $ 0.02 ======== ======== ======== ======== ========
F-24 46 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 (in thousands, except share data) NOTE S - EARNINGS (LOSS) PER COMMON SHARE During 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 128, "Earnings per Share". This statement changed the method in which earnings (loss) per share are determined. The new standard requires the computation of basic earnings (loss) per share and earnings (loss) per share assuming dilution (Note A7). Adoption of this statement has been applied retroactively and the 1996 and 1995 earnings per share (EPS) amounts have been recomputed applying the new standard and has not had a material impact on earnings (loss) per share. Options to purchase 693,000 shares of common stock at $1.94 to $3.50 a share were outstanding at December 31, 1997. They were not included in the computation of loss per share because they would have had an anti-dilutive effect on the 1997 loss per share. The following data show the shares used in computing earnings (loss) per common share including dilutive potential common stock:
Year ended December 31, -------------------------------------------- 1997 1996 1995 ---------- ---------- ---------- Common shares outstanding entire period 12,400,543 12,330,254 11,741,254 Net weighted average common shares issued during period 15,414 19,918 406,583 ---------- ---------- ---------- Weighted average number of common shares used in basic EPS 12,415,957 12,350,172 12,147,837 Dilutive effect of stock options -- 40,455 212,356 Dilutive effect of warrants -- 2,729 4,796 ---------- ---------- ---------- Weighted average number of common shares and dilutive potential common shares used in diluted EPS 12,415,957 12,393,356 12,364,989 ========== ========== ==========
F-25 47 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE Board of Directors Daw Technologies, Inc. In connection with our audit of the financial statements of Daw Technologies, Inc. referred to in our report dated February 25, 1998, 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, 1997. 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 February 25, 1998 S-1 48 DAW TECHNOLOGIES, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - -------------------------------------------------------------------------------------------------------------- ADDITIONS - -------------------------------------------------------------------------------------------------------------- (2) (1) CHARGED TO BALANCE AT CHARGED TO OTHER BALANCE AT BEGINNING OF COSTS AND ACCOUNTS DEDUCTIONS - END OF DESCRIPTION PERIOD EXPENSES DESCRIBE WRITE-OFFS PERIOD - -------------------------------------------------------------------------------------------------------------- Allowance for doubtful accounts Year ended December 31, 1997 $ 376 $ 180 $ -- $(153) $ 403 Year ended December 31, 1996 140 330 -- (94) 376 Year ended December 31, 1995 138 30 -- (28) 140 Reserve for contract estimates Year ended December 31, 1997 $ 575 $ 654 $ -- $(863) $ 366 Year ended December 31, 1996 438 940 -- (803) 575 Year ended December 31, 1995 313 513 -- (388) 438
S-2 49 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, 1993, 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, 1996, Exhibit 10.1] 10.4 Amendment No. 2 to 1993 Stock Option Plan* [Form 10-K for the year ended December 31, 1996, Exhibit 10.4] 10.5 Revolving Domestic and LC Line of Credit Agreements Filed herewith. 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, 1995, Exhibit 10.5] 10.8 Flanders Shareholder Agreement* [Form 10-KSB for the year ended December 31, 1994, Exhibit No. 10.8] 10.9 Flanders Purchase Option Agreement* [Form 10-KSB for the year ended December 31, 1994, Exhibit No. 10.9] 23.1 Consent of Independent Certified Public Accountants. Filed herewith. 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. EX-10.5 2 REVOLVING DOMESTIC AND LC LINE OF CREDIT AGREEMENT 1 EXHIBIT 10.5
- ------------------------------------------------------------------------------------------------------------ PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS $8,000,000.00 08-06-1997 2071228480 2071228480 69772 - ------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. BORROWER: DAW TECHNOLOGIES, INC. LENDER: U.S. BANK 2700 SOUTH 900 WEST CORPORATE BANKING SALT LAKE CITY UT 84119 107 SOUTH MAIN STREET SALT LAKE CITY, UT 84111 THIS LOAN AGREEMENT BETWEEN DAW TECHNOLOGIES, INC. ("BORROWER") AND U.S. BANK ("LENDER") IS MADE AND EXECUTED ON THE FOLLOWING TERMS AND CONDITIONS. BORROWER HAS RECEIVED PRIOR COMMERCIAL LOANS FROM LENDER OR HAS APPLIED TO LENDER FOR A COMMERCIAL LOAN OR LOANS AND OTHER FINANCIAL ACCOMMODATIONS, INCLUDING THOSE WHICH MAY BE DESCRIBED ON ANY EXHIBIT OR SCHEDULE ATTACHED TO THIS AGREEMENT. ALL SUCH LOANS AND FINANCIAL ACCOMMODATIONS, TOGETHER WITH ALL FUTURE LOANS AND FINANCIAL ACCOMMODATIONS FROM LENDER TO BORROWER, ARE REFERRED TO IN THIS AGREEMENT INDIVIDUALLY AS THE "LOAN" AND COLLECTIVELY AS THE "LOANS." BORROWER UNDERSTANDS AND AGREES THAT: (A) IN GRANTING, RENEWING, OR EXTENDING ANY LOAN, LENDER IS RELYING UPON BORROWER'S REPRESENTATIONS, WARRANTIES, AND AGREEMENTS, AS SET FORTH IN THIS AGREEMENT; (B) THE GRANTING, RENEWING, OR EXTENDING OF ANY LOAN BY LENDER AT ALL TIMES SHALL BE SUBJECT TO LENDER'S SOLE JUDGMENT AND DISCRETION; AND (C) ALL SUCH LOANS SHALL BE AND SHALL REMAIN SUBJECT TO THE FOLLOWING TERMS AND CONDITIONS OF THIS AGREEMENT. TERM. This Agreement shall be effective as of AUGUST 6, 1997, and shall continue thereafter until all Indebtedness of Borrower to Lender has been performed in full and the parties terminate this Agreement in writing. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. AGREEMENT. The word "Agreement" means this Loan Agreement, as this Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Loan Agreement from time to time. ACCOUNT. The word "Account" means a trade account, account receivable, or other right to payment for goods sold or services rendered owing to Borrower (or to a third party grantor acceptable to Lender). ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity obligated upon an Account. ADVANCE. The word "Advance" means a disbursement of Loan funds under this Agreement. BORROWER. The word "Borrower" means DAW TECHNOLOGIES, INC.. The word "Borrower" also includes, as applicable, all subsidiaries and affiliates of Borrower as provided below in the paragraph titled "Subsidiaries and Affiliates." BORROWING BASE. The words "Borrowing Base" mean, as determined by Lender from time to time, the lesser of (a) $8,000,000.00; or (b) 75.000% of the aggregate amount of Eligible Accounts. BUSINESS DAY. The words "Business Day" mean a day on which commercial banks are open for business in the State of Utah. CERCLA. The word "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. CASH FLOW. The words "Cash Flow" mean net income after taxes, and exclusive of extraordinary gains and income, plus depreciation and amortization. COLLATERAL. The "Collateral" means and includes without limitation all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. The work "Collateral" includes without limitation all collateral described below in the section titled "COLLATERAL." DEBT. The word "Debt" means all of Borrower's liabilities excluding Subordinated Debt. ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean, at any time, all of Borrower's Accounts which contain selling terms and conditions acceptable to Lender. The net amount of any Eligible Account against which Borrower may borrow shall exclude all returns, discounts, credits, and offsets of any nature. Unless otherwise agreed to by Lender in writing, Eligible Accounts do not include: (a) Accounts with respect to which the Account Debtor is an officer, an employee or agent of Borrower. (b) Accounts with respect to which the Account Debtor is a subsidiary of, or affiliated with or related to Borrower or its shareholders, officers, or directors. (c) Accounts with respect to which goods are placed on consignment, guaranteed sale, or other terms by reason of which the payment by the Account Debtor may be conditional. (d) Accounts with respect to which Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower. (e) Accounts which are subject to dispute, counterclaim, or setoff. 2 (f) Accounts with respect to which the goods have not been shipped or delivered, or the services have not been rendered, to the Account Debtor. (g) Accounts with respect to which Lender, in its sole discretion, deems the creditworthiness or financial condition of the Account Debtor to be unsatisfactory. (h) Accounts of any Account Debtor who has filed or has had filed against it a petition in bankruptcy or an application for relief under any provision of any state of federal bankruptcy, insolvency, or debtor-in-relief acts; or who has had appointed a trustee, custodian, or receiver for the assets of such Account Debtor; or who has made an assignment for the benefit of creditors or has become insolvent or fails generally to pay its debts (including its payrolls) as such debts become due. (i) Accounts with respect to which the Account Debtor is the United States government or any department or agency of the United States. (j) Accounts which have not been paid in full within 90 DAYS from the invoice date. The entire balance of any Account of any single Account debtor will be ineligible whenever the portion of the Account which has not been paid within 90 DAYS from the invoice date is in excess of 25.000% of the total amount outstanding on the Account. ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. EVENT OF DEFAULT. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "EVENTS OF DEFAULT." EXPIRATION DATE. The words "Expiration Date" mean the date of termination of Lender's commitment to lend under this Agreement. GRANTOR. The word "Grantor" means and includes without limitation each and all of the persons or entities granting a Security Interest in any Collateral for the Indebtedness, including without limitation all Borrowers granting such a Security Interest. GUARANTOR. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with any Indebtedness. INDEBTEDNESS. The word "Indebtedness" means and includes without limitation all Loans, together with all other obligations, debts and liabilities of Borrower to Lender, or any one or more of them, as well as all claims by Lender against Borrower, or any one or more of them; whether now or hereafter existing, voluntary or involuntary, due or not due, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable individually or jointly with others; whether Borrower may be obligated as a guarantor, surety, or otherwise; whether recovery upon such Indebtedness may be or hereafter may become barred by any statute of limitations; and whether such Indebtedness may be or hereafter may become otherwise unenforceable. LENDER. The word "Lender" means U.S. Bank, its successors and assigns. LINE OF CREDIT. The words "Line of Credit" mean the credit facility described in the Section titled "LINE OF CREDIT" below. LIQUID ASSETS. The words "Liquid Assets" mean Borrower's cash on hand plus Borrower's readily marketable securities. LOAN. The word "Loan" or "Loans" means and includes without limitation any and all commercial loans and financial accommodations from Lender to Borrower, whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. NOTE. The word "Note" means and includes without limitation Borrower's promissory note or notes, if any, evidencing Borrower's Loan obligations in favor of Lender, as well as any substitute, replacement or refinancing note or notes therefor. PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security interests securing Indebtedness owed by Borrower to Lender; (b) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (d) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (f) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower's assets. RELATED DOCUMENTS. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. SECURITY AGREEMENT. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understanding or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. SECURITY INTEREST. the words "Security Interest" mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. SARA. The word "Sara" means the Superfund Amendments and Reauthorization Act of 1986 as now or hereafter amended. SUBORDINATED DEBT. The words "Subordinated Debt" mean indebtedness and liabilities of Borrower which have been subordinated by written agreement to indebtedness owed by Borrower to Lender in form and substance acceptable to Lender. 3 TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's total assets excluding all intangible assets (ie., goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible items, but including leaseholds and leasehold improvements) less total Debt. WORKING CAPITAL. the words "Working Capital" mean Borrower's current assets, excluding prepaid expenses, less Borrower's current liabilities. LINE OF CREDIT Lender agrees to make Advances to Borrower from time to time from the date of this Agreement to the Expiration Date, provided the aggregate amount of such Advances outstanding at any time does not exceed the Borrowing Base. Within the foregoing limits, Borrower may borrow, partially or wholly prepay, and reborrow under this Agreement as follows: CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make any Advance to or for the account of Borrower under this Agreement is subject to the following conditions precedent, with all documents, instruments, opinions, reports, and other items required under this Agreement to be in form and substance satisfactory to Lender: (a) Lender shall have received evidence that this Agreement and all Related Documents have been duly authorized, executed, and delivered by Borrower to Lender. (b) Lender shall have received such opinions of counsel, supplemental opinions, and documents as Lender may request. (c) The security interests in the Collateral shall have been duly authorized, created, and perfected with first lien priority and shall be in full force and effect. (d) All guaranties required by Lender for the Line of Credit shall have been executed by each Guarantor, delivered to Lender, and be in full force and effect. (e) Lender, at it option and for its sole benefit, shall have conducted an audit of Borrower's Accounts, books, records, and operations, and Lender shall be satisfied as to their condition. (f) Borrower shall have paid to Lender all fees, costs, and expenses specified in this Agreement and the Related Documents as are then due and payable, including without limitation the following loan fees: OPERATING LINE: .25% NON-USAGE FEE BASED ON THE UNUSED PORTION OF THE LINE COMMITMENT, ACCRUING MONTHLY AND PAID QUARTERLY IN ARREARS; INDIVIDUAL STANDBY LETTER OF CREDIT FEE: 1.5% PER ANNUM. (g) There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement, and Borrower shall have delivered to Lender the compliance certificate called for in the paragraph below titled "Compliance Certificate." MAKING LOAN ADVANCES. Advances under the Line of Credit may be requested either orally or in writing subject to the limitations set forth below. Lender may, but need not, require that all oral requests be confirmed in writing. Each Advance shall be conclusively deemed to have been made at the request of and for the benefit of Borrower (a) when credited to any deposit account of Borrower maintained with Lender or (b) when advanced in accordance with the instructions of an authorized person. Lender, at its option, may set a cutoff time, after which all requests for Advances will be treated as having been requested on the next succeeding Business Day. MANDATORY LOAN REPAYMENTS. If at any time the aggregate principal amount of the outstanding Advances shall exceed the applicable Borrowing Base, Borrower, immediately upon written or oral notice from Lender, shall pay to Lender an amount equal to the difference between the outstanding principal balance of the Advances and the Borrowing Base. On the Expiration Date, Borrower shall pay to Lender in full the aggregate unpaid principal amount of all Advances then outstanding and all accrued unpaid interest, together with all other applicable fees, costs and charges, if any, not yet paid. LOAN ACCOUNT. Lender shall maintain on its books a record of account in which Lender shall make entries for each Advance and such other debits and credits as shall be appropriate in connection with the credit facility. Lender shall provide Borrower with periodic statements of Borrower's account, which statements shall be considered to be correct and conclusively binding on Borrower unless Borrower notifies Lender to the contrary within thirty (30) days after Borrower's receipt of any such statement which Borrower deems to be incorrect. COLLATERAL. To secure payment of the Line of Credit and performance of all other Loans, obligations and duties owed by Borrower to Lender, Borrower (and others, if required) shall grant to Lender Security Interests in such property and assets as Lender may require (the "Collateral"), including without limitation Borrower's present and future Accounts and general intangibles. Lender's Security Interests in the Collateral shall be continuing liens and shall include the proceeds and products of the Collateral, including without limitation the proceeds of any insurance. With respect to the Collateral, Borrower agrees and represents and warrants to Lender. PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's Security Interests in the Collateral. Upon request of Lender, Borrower will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Borrower will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. Contemporaneous with the execution of this Agreement , Borrower will execute one or more UCC financing statements and any similar statements as may be required by applicable law, and will file such financing statements and all such similar statements in the appropriate location or locations. Borrower hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue any Security Interest. Lender may at any time, and without further authorization from Borrower, file a carbon, photograph, facsimile, or other reproduction of any financing statement for use as a financing statement. Borrower will reimburse Lender for all expenses for the perfection, termination, and the continuation of the perfection of Lender's security interest in the Collateral. Borrower promptly will notify Lender of any change in Borrower's name including any change to the assumed business names of Borrower. Borrower also promptly will notify Lender of any change in Borrower's social Security Number or Employer Identification Number. Borrower further agrees to notify Lender in writing prior to any change in address or location of Borrower's principal governance office or should Borrower merge or consolidate with any other entity. COLLATERAL RECORDS. Borrower does now, and at all times hereafter shall, keep correct and accurate records of the Collateral, all of which records shall be available to Lender or Lender's representative upon demand for inspection and copying at any reasonable time. With respect to the Accounts, borrower agrees to 4 keep and maintain such records as Lender may require, including without limitation information concerning Eligible Accounts and Account balances and agings. The following is an accurate and complete list of all locations at which Borrower keeps or maintains business records concerning Borrower's Accounts: 2700 SOUTH 900 WEST, SALT LAKE CITY, UT 84119. COLLATERAL SCHEDULES. Concurrently with the execution and delivery of this Agreement, Borrower shall execute and deliver to Lender a schedule of Accounts and Eligible Accounts in form and substance satisfactory to the Lender. Thereafter Borrower shall execute and deliver to Lender such supplemental schedules of Eligible Accounts and such other matters and information relating to Borrower's Accounts as Lender may request. Supplemental schedules shall be delivered according to the following schedule: MONTHLY. REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the Accounts, Borrower represents and warrants to Lender: (a) Each Account represented by Borrower to be an Eligible Account for purposes of this Agreement conforms to the requirements of the definition of an Eligible Account; (b) All Account information listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; and (c) Lender, its assigns, or agents shall have the right at any time and at Borrower's expense to inspect, examine, and audit Borrower's records and to confirm with Account Debtors the accuracy of such Accounts. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of Loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists: ORGANIZATION. Borrower is a corporation which is duly organized, validly existing, and in good standing under the laws of the state of Borrower's incorporation and is validly existing and in good standing in all states in which Borrower is doing business. Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engaged or presently proposes to engage. Borrower also is duly qualified as a foreign corporation and is in good standing in all states in which the failure to so qualify would have a material adverse effect on its businesses or financial condition. AUTHORIZATION. The execution, delivery, and performance of this Agreement and all Related documents by Borrower, to the extent to be executed, delivered or performed by Borrower, have been duly authorized by all necessary action by Borrower; do not require the consent or approval of any other person, regulatory authority or governmental body; and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. FINANCIAL INFORMATION. Each financial statement of Borrower supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement required hereunder to be given by Borrower when delivered will constitute, legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. PROPERTIES. Except for Permitted Liens, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years. HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance," "disposal," "release," and "threatened release," as used in this Agreement, shall have the same meanings as set in the "CERCLA," "SARA," the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (a) During the period of Borrower's ownership of the properties, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any hazardous waste or substance by any person on, under, about or from any of the properties. (b) Borrower has no knowledge of, or reason to believe that there has been (i) any use, generation, manufacture, storage, treatment, disposal, release, or threatened release of any hazardous waste or substance on, under, about or from the properties by any prior owners or occupants of any of the properties, or (ii) any actual or threatened litigation or claims of any kind by any person relating to such matter. (c) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the properties shall use, generate, manufacture, store, treat, dispose of, or release any hazardous waste or substance on, under, about or from any of the properties; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation those laws, regulations and ordinances described above. Borrower authorizes Lender and its agents to enter upon the properties to make such inspections and tests as Lender may deem appropriate to determine compliance of the properties with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the properties for hazardous waste and hazardous substances. Borrower hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release occurring prior to Borrower's ownership or interest in the properties, whether or not the same was or should have been known to Borrower. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the Indebtedness and the termination or expiration of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the properties, whether by foreclosure or otherwise. LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. TAXES. To the best of Borrower's knowledge, all tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. 5 LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. BINDING EFFECT. This Agreement, the Note, all Security Agreements directly or indirectly securing repayment of Borrower's Loan and Note and all of the Related Documents are binding upon Borrower as well as upon Borrower's successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for business or commercial related purposes. EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may have any liability complies in all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, (iii) no steps have been taken to terminate any such plan, and (iv) there are no unfunded liabilities other than those previously disclosed to Lender in writing. LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business, or Borrower's Chief executive office, if Borrower has more than one place of business, is located at 2700 SOUTH 900 WEST, SALT LAKE CITY, UT 84119. Unless Borrower has designated otherwise in writing this location is also the office or offices where Borrower keeps its records concerning the Collateral. INFORMATION. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees that Lender, without independent investigation, is relying upon the above representations and warranties in extending Loan Advances to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: LITIGATION. Promptly inform Lender in writing of (a) all material adverse changes in Borrower's financial condition, and (b) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. FINANCIAL RECORDS. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times. ADDITIONAL INFORMATION. Furnish such additional information and statements, lists of assets and liabilities, agings of receivable and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time. FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and ratios: TANGIBLE NET WORTH. Maintain a minimum Tangible Net Worth of not less than $20,000,000.00 NET WORTH RATIO. Maintain a ratio of Total Liabilities to Tangible Net Worth of less than 1.25 TO 1.00. CURRENT RATIO. Maintain a ratio of Current Assets to Current Liabilities in excess of 1.30 TO 1.00. CASH FLOW REQUIREMENTS. Maintain Cash Flow at not less than the following level: BORROWER TO MAINTAIN A DEBT SERVICE COVERAGE OF 1.25X. DEBT SERVICE COVERAGE IS DEFINED AS: NET PROFIT AFTER TAX PLUS DEPRECIATION EXPENSE PLUS INTEREST EXPENSE MINUS STOCK REPURCHASES DIVIDED BY PRIOR PERIOD CURRENT PORTION LONG TERM DEBT PLUS INTEREST EXPENSE. The following provisions shall apply for purposes of determining compliance with the foregoing financial covenants and ratios: CAPITAL EXPENDITURE, CURRENT RATIO, NET WORTH RATIO AND TANGIBLE NET WORTH TO BE MEASURED QUARTERLY BASED ON BORROWER'S QUARTER END; DEBT SERVICE COVERAGE TO BE MEASURED ANNUALLY BASED ON BORROWER'S FISCAL YEAR END. Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. INSURANCE. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to borrower's properties and operations, in form, amounts, coverages and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be canceled or diminished without at least ten (10) days' prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by an act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such loss payable or other endorsements as Lender may require. INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties insured; (e)the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (f) the expiration date of 6 the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. OTHER AGREEMENTS. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. LOAN FEES AND CHARGES. In addition to all other agreed upon fees and charges, pay the following: OPERATING LINE: .25% NON-USAGE FEE BASED ON THE UNUSED PORTION OF THE LINE COMMITMENT, ACCRUING MONTHLY AND PAID QUARTERLY IN ARREARS; INDIVIDUAL STANDBY LETTER OF CREDIT FEE: 1.5% PER ANNUM. LOAN PROCEEDS. Use all Loan proceeds solely for the following specific purposes: LINE OF CREDIT FOR OPERATING PURPOSES AND TO SUPPORT THE ISSUANCE OF STANDBY LETTER OF CREDIT. TAXES, CHARGES AND LIENS. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income or profits. Provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting practices. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income, or profits. PERFORMANCE. Perform and comply with all terms, conditions and provisions set forth in this Agreement and in the Related documents in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement or under any of the Related Documents. OPERATIONS. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. INSPECTION. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender at least annually and at the time of each disbursement of Loan proceeds with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects with all environmental protection federal, state and local laws, statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: CAPITAL EXPENDITURES. Make or contract to make capital expenditures, including leasehold improvements, in any fiscal year in excess of $2,500,000.00 or incur liability for rentals of property (including both real and personal property) in an amount which, together with capital expenditures, shall in any fiscal year exceed such sum. INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (b) except as allowed as a Permitted Lien, sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets, or (c) sell with recourse any of Borrower's accounts, except to Lender. CONTINUITY OF OPERATIONS. (a) Engage in any business activities substantially different than those in which Borrower is presently engaged, (b) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change ownership, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, (c) pay any dividends on Borrower's stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under 7 federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of stock of Borrower, or (d) purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure. LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money or assets, (b) purchase, create or acquire any interest in any other enterprise or entity, or (c) incur any obligation as surety or guarantor other than in the ordinary course of business. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (a) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender; or (e) Lender in good faith deems itself insecure, even though no Event of Default shall have occurred. ACCESS LAWS. Without limiting the generality of any provision of this agreement requiring Borrower to comply with applicable laws, rules and regulations, Borrower agrees that it will at all times comply with applicable laws relating to disabled access including, but not limited to, all applicable titles of the Americans with Disabilities Act of 1990. CONTROLS AND MONITORING. 1. BORROWER TO PROVIDE LENDER WITH ANNUAL CPA AUDITED FINANCIAL STATEMENT ON DAW TECHNOLOGIES, INC. 2. BORROWER TO PROVIDE LENDER WITH QUARTERLY FORM 10-Q STATEMENTS. 3. NO DIVIDENDS WITHOUT PRIOR WRITTEN CONSENT OF THE BANK. 4. BORROWER TO PROVIDE LENDER WITH QUARTERLY COMPLIANCE CERTIFICATE. 5. DOMESTIC LETTERS OF CREDIT UNDER THE LETTER OF CREDIT FACILITY ARE DEDUCTED FROM THE BORROWING BASE. ADVANCES TO BE 50% AGAINST RETENTION AND UNDERBILLINGS LESS OVERBILLINGS WITH A $2,000,000.00 CAP. INVENTORY IS TAKEN AS COLLATERAL BUT IS NOT ADVANCED AGAINST. 6. BORROWER TO PROVIDE LENDER WITH MONTHLY BORROWING BASE CERTIFICATE. RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due on the Loans. OTHER DEFAULTS. Failure of Borrower or any Guarantor to comply with to perform when due any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by or on behalf of Borrower or any Grantor under this Agreement or the Related Documents is false or misleading in any material respect at the time made or furnished or becomes false or misleading at any time thereafter. DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any Security Agreement to create a valid and perfected Security Interest) at any time and for any reason. INSOLVENCY. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower, any credit of any Grantor against any collateral securing the Indebtedness, or by any governmental agency. this includes a garnishment, attachment, or levy on or of any of Borrower's deposit accounts with Lender. EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. 8 ADVERSE CHANGE. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. INSECURITY. Lender, in good faith, deems itself insecure. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make Loan Advances or disbursements), and, at Lender's option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: AMENDMENTS. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing an signed by the party or parties sought to be charged or bound by the alteration or amendment. APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF UTAH. IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF SALT LAKE COUNTY, THE STATE OF UTAH. SUBJECT TO THE PROVISIONS ON ARBITRATION, THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF UTAH. ARBITRATION. LENDER AND BORROWER AGREE THAT ALL DISPUTES, CLAIMS AND CONTROVERSIES BETWEEN THEM, WHETHER INDIVIDUAL, JOINT, OR CLASS IN NATURE, ARISING FROM THIS AGREEMENT OR OTHERWISE, INCLUDING WITHOUT LIMITATION CONTRACT AND TORT DISPUTES, SHALL BE ARBITRATED PURSUANT TO THE RULES OF THE AMERICAN ARBITRATION ASSOCIATION, UPON REQUEST OF EITHER PARTY. No act to take or dispose of any Collateral shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This includes, without limitation, obtaining injunctive relief or a temporary restraining order; invoking a power of sale under any deed of trust or mortgage; obtaining a writ of attachment or imposition of a receiver; or exercising any rights relating to personal property, including taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right, concerning any Collateral, including any claim to rescind, reform, or otherwise modify any agreement relating to the Collateral, shall also be arbitrated, provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of any party. Judgment upon any award rendered by any arbitrator may be entered in any court having jurisdiction. Nothing in this Agreement shall preclude any party from seeking equitable relief from a court of competent jurisdiction. The statute of limitations, estoppel, waiver, laches, and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of an action for these purposes. The Federal Arbitration Act shall apply to the construction, interpretation, and enforcement of this arbitration provision. CAPTION HEADINGS. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under this Agreement shall be joint and several, and all references to Borrower shall mean each and every Borrower. This means that each of the persons signing below is responsible for all obligations in this Agreement. CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loans to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, of potential purchasers, any information or knowledge Lender may have about borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy it may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loans and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loans irrespective of the failure or insolvency of any holder of any interest in the Loans. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender. COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's expenses, including without limitation reasonable attorney's fees, incurred in connection with the preparation, execution, enforcement, modification and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may pay someone else to help collect the Loans and to enforce this Agreement, and Borrower will pay that amount. This includes, subject to any limits under applicable law, Lender's reasonable attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including reasonable attorneys' fees for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. NOTICES. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimile, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower will keep Lender informed at all times of Borrower's current address(es). SEVERABILITY. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. 9 SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any provision of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used herein shall include all subsidiaries and affiliates of Borrower. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any subsidiary or affiliate of Borrower. SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender. SURVIVAL. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. TIME IS OF THE ESSENCE. Time is of the essence in the performance of this Agreement. WAIVER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required, and in all cases such consent may be granted or withheld in the sole discretion of Lender. FINAL AGREEMENT. Borrower understands that this Agreement and the related loan documents are the final expression of the agreement between Lender and Borrower and may not be contradicted by evidence of any alleged oral agreement. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF AUGUST 6, 1997. BORROWER: DAW TECHNOLOGIES, INC. BY:__________________________________________ DAVID R. GROW, CFO/EVP/SECRETARY BY:__________________________________________ RONALD W. DAW, PRESIDENT BY:__________________________________________ WILLIAM SAWAYA, SR. VICE PRESIDENT OF MANUFACTURING LENDER: U.S. BANK BY:__________________________________________ AUTHORIZED OFFICER 10 [U.S. BANK LOGO] CONTINUING AGREEMENT FOR COMMERCIAL LETTERS OF CREDIT DATED AS OF: APPLICANT: Daw Technologies, Inc. CORRESPONDENT BANK: (if applicable) From time to time, any person signing this Agreement as Applicant or Correspondent Bank (either or both, "Applicant") may request U.S. Bank to issue or to request one of its affiliates to issue one or more irrevocable commercial letters of credit (each, a "Credit") substantially in accordance with the terms of any application (each, an "Application") submitted to U.S. Bank by Applicant. In consideration of the issuance by U.S. Bank or an affiliate of U.S. Bank (each such affiliated issuer, an "Other Issuer") of one or more Credits, each Applicant agrees that the following terms shall apply to each Application and each Credit issued by U.S. Bank or any Other Issuer (either or both, "Bank"). 1. OBLIGATIONS a. Applicant promises to pay Bank on demand at U.S. Bank's International Banking Office,Salt Lake City, Utah: i. The amount of each draft or other demand for payment ("draft") drawn under the Credit, provided, however, (a) if the draft is drawn in currency other than United States currency, Applicant shall pay an equivalent amount in United States currency, at Bank's then current selling rate for telecommunications transfer of such other currency to the place the draft is payable, or at Bank's option, in any other currency, place, form and manner acceptable to Bank, and (b) if the draft is a time draft, Applicant shall make such payment without demand sufficiently in advance of its maturity date to enable Bank to arrange for cover to reach the place of payment no later than one business day prior to its maturity. ii. In advance, all commissions at the rate fixed by Bank, and all expenses Bank may pay or incur in connection with the Credit. iii. All taxes, levies, imposts, duties, charges, fees, deductions or withholdings of any nature whatsoever paid or incurred by Bank in connection with this Agreement, the Credit or any related transactions and any liability with respect thereto (including but not limited to interest, penalties and expenses). iv. Interest on all amounts due under this Agreement from the applicable due date until paid at a per annum rate equal to the sum of U.S. Bank's prime rate, as that rate may vary from time to time, plus 5%. Interest shall be calculated on the basis of a 360-day year and the actual number of days elapsed. U.S. Bank's prime rate is the rate which U.S. Bank from time to time establishes as its prime rate and is not, for example, the lowest rate of interest which U.S. Bank collects from any borrower or class of borrowers. b. Without limiting Applicant's obligations to any Other Issuer, but without duplication, Applicant promises to pay to U.S. Bank on demand, at U.S. Bank's International Banking Office in Salt Lake City, Utah, an amount equal to all amounts which U.S. Bank pays or becomes obligated to pay to any Other Issuer with respect to the Credit, whether as a participant in the Credit or otherwise. c. Notwithstanding any other provision of this Agreement, Applicant's obligation to make any payment hereunder to any Other Issuer shall, to the extent of such payment, be satisfied by payment to U.S. Bank as set forth in this Agreement. d. Applicant hereby authorizes U.S. Bank to automatically deduct from its account with U.S. Bank specified on attached Schedule 1, all amounts which become due to Bank under this Agreement. If there are insufficient funds in the account to pay the automatic deduction in full, Bank may allow the account to become overdrawn, or Bank may reverse the automatic deduction. Applicant will pay all fees on the account which result from the automatic deductions, including any overdraft/NSF charges. If for any reason U.S. Bank does not charge the Page 1 of 6 11 account for any amount due, or if an automatic deduction is reversed, the amount due is still owing to Bank as set forth herein. If the account is a Money Market Account, the number of withdrawals from that account is limited as set out in the agreement. U.S. Bank may cancel the automatic deduction at any time in its discretion. 2. CERTAIN WARRANTIES Applicant warrants that the execution, delivery and performance of this Agreement are within its authority and are not in contravention of law, of any terms of any agreement, instrument, order or judgment to which Applicant is a party or by which it or its property may be bound or of any provision of its charter documents or bylaws, and that it has obtained all necessary approvals and consents therefor. 3. THE CREDIT a. U.S. Bank may either issue the Credit or request one of its affiliates to issue the Credit. Bank may sell, assign or participate all or any part of its rights and obligations under this Agreement, the Application and the Credit. Without limiting the foregoing, any Other Issuer may sell a participation in all or any part of its rights and obligations under this Agreement and the Credit to U.S. Bank. b. Bank hereby is authorized to set forth in the Credit the terms appearing on the Application, with such modifications as Bank in its discretion may determine are appropriate or necessary and are not materially inconsistent with such terms. Any such determination shall be binding on Applicant. c. All communications relating to the Credit will be sent at Applicant's risk. Bank shall have no responsibility for any inaccuracy of translation, or any interruption, error or delay in transmission or delivery by mail, telecommunication or any other method. Bank shall not be liable for any error, neglect or default of any of Bank's correspondents. d. Neither Bank nor its correspondents shall be in any way responsible for the performance of any beneficiary's obligations to Applicant or for the form, sufficiency, accuracy, genuineness, authority of person signing, falsification or legal effect, of any document required by the Credit if such document appears in order on its face. Whether the documents conform to the terms of the Credit and whether any demand is timely and in proper form shall be determined by Bank in its sole discretion, which determination shall be final and binding on Applicant. Without limiting the foregoing, if a unit price is not required on documents accompanying the draft(s), Bank may honor draft(s) in any amount(s) not to exceed the amount then available under the Credit. e. Notwithstanding any other term of this Agreement, if Bank at any Applicant's request agrees to indemnify any shipper, including but not limited to any vessel, its owner, operators and agents from any liability, loss or expense incurred in connection with release of any goods covered by the Credit without surrender of the applicable bill of lading or other shipping documents, Applicant hereby (i) authorizes Bank without limitation or condition to either or both pay or accept, as the case may be, any and all drafts presented in connection with such goods; and (ii) agrees to make payment to Bank as specified in Section 1, even though any required documents may be omitted, incorrect, defective or otherwise not in conformity with the terms of the Credit. f. Subject to Section 7b, Bank may at Applicant's request increase the amount of the Credit, extend the time for making and honoring of demands under the Credit and otherwise modify the terms and conditions governing the Credit. As so modified, all provisions of the Credit, and all action taken by Bank or Bank's correspondents in connection therewith, shall be binding upon Applicant. g. Applicant will promptly examine the Credit, any amendments thereto and all information, documents and instruments delivered to Applicant from time to time by Bank and shall notify U.S. Bank within five U.S. Bank banking days after receipt if Applicant claims that Bank has failed to comply with Applicant's instructions or Bank's obligations with respect to the Credit, has wrongfully honored or dishonored any presentation under the Credit or claims any other irregularity. If Applicant does not so notify U.S. Bank within such time period, Applicant shall be conclusively deemed to have waived and shall be precluded from asserting such claim(s). h. Bank may receive, accept or pay as complying with the terms of the Credit, any drafts or other documents, otherwise in order, which appear on their face to be signed by or issued to the administrator, executor, successor or trustee in bankruptcy of or the receiver for any of the property of, or any other person or entity acting as the representative or in the place of, the party in whose name the Credit provides that any drafts or other documents should be drawn or issued. 4. SECURITY AND INSURANCE a. As security for payment of any and all of Applicant's obligations to U.S. Bank and any Other Issuer now or hereafter existing under or in connection with this Agreement, the Credit, or any other indebtedness of Applicant to U.S. Bank and any Other Issuer, Applicant hereby grants to U.S. Bank and any Other Issuer a Page 2 of 6 12 security interest in any and all bills of lading, other documents of title, policies or certificates of insurance, chattel paper and general intangibles accompanying or relative to the Credit or any drafts drawn thereunder, and any and all inventory, goods and other property shipped under, in connection with, or relative to the Credit or any drafts drawn thereunder, together with any and all proceeds and products thereof (the "Collateral"). At any time and from time to time, on demand of Bank, Applicant will assign and deliver to Bank as security for such obligations additional collateral of a type and value satisfactory to Bank or make such cash payments as Bank may require. At Bank's request, Applicant will execute any financing statements and other documents or instruments as Bank may require to perfect the security interests granted or contemplated hereunder and will pay the cost of any filings in connection therewith. b. Applicant shall keep any property described in the Credit covered by insurance satisfactory to Bank, and authorizes Bank to collect and apply the proceeds of any such insurance to any of Applicant's obligations. 5. DEFAULT AND REMEDIES a. Time is of the essence of this Agreement. The occurrence of any of the following shall be an Event of Default hereunder: i. Default in payment or performance of any of Applicant's obligations hereunder or under any promissory note or other agreement between Bank and Applicant; ii. Default under any security documents securing Applicant's obligations hereunder, whether executed by Applicant or any other person; iii. Levy or proceeding against any property of Applicant or any guarantor of Applicant's obligations hereunder ("Guarantor"); iv. Death, dissolution, termination of existence, insolvency or business failure of, appointment of a receiver for any part of the property of, assignment for the benefit of creditors by, commencement of any proceeding under any bankruptcy or insolvency laws by or against, or entry of any judgment against, Applicant or any Guarantor; v. Any warranty, representation or statement made or furnished to Bank by Applicant or any Guarantor proves to have been false in any material respect when made or furnished; vi. Any event which gives the holder of any debt obligation of Applicant or any Guarantor the right to accelerate its maturity, whether or not such right is exercised; vii. Any guaranty of Applicant's obligations hereunder ceases to be, or is asserted by any person not to be, in full force and effect; or viii. Bank, for any reason in good faith, deems itself insecure. b. Upon the occurrence of any Event of Default and at any time thereafter, Bank at its option and in addition to all other rights of Bank under this Agreement, any related agreement and applicable law, may (i) without notice or demand, declare the amount for which the Credit was issued and any other amounts owing hereunder immediately due and payable; and (ii) exercise any and all rights and remedies of a secured party under the Uniform Commercial Code and other applicable law. Any required notice of sale of Collateral shall be deemed reasonable if sent at least 10 days prior to the date of any public sale or the date after which any private sale may be made. 6. CHANGES TO LAWS AND REGULATIONS If any adoption of or change in law or regulation, or in the interpretation or administration thereof by any official authority shall impose on Bank any tax, charge, fee, deduction or withholding of any kind whatsoever, or shall impose or modify any reserve requirements, standards regarding capital adequacy or any other conditions affecting this Agreement or the Credit, and the result of any of the foregoing shall be to increase the cost to Bank of issuing and maintaining the Credit, reduce the amount of any sum receivable by Bank hereunder or reduce the rate of return on Bank's capital, then Applicant shall pay to Bank upon demand such additional amount or amount(s) as Bank may specify to be necessary to compensate Bank for such additional costs incurred or reduction suffered. 7. GENERAL a. Each Application shall be subject to all terms and conditions of this Agreement. b. Notwithstanding any other term hereof, (i) the Credit can be revoked or amended only with the consent of the beneficiary of the Credit, all Applicants (including any Correspondent Bank signing this Agreement), Bank and any confirming bank and (ii) instructions concerning discrepancies must be given by all such Applicants. Page 3 of 6 13 c. If the Account Party on the Application is not an Applicant hereunder, the Account Party shall have no rights against Bank; and Applicant shall deliver to U.S. Bank an agreement satisfactory to Bank executed by the Account Party, providing that Bank without notice to or consent of the Account Party, may deal with Applicant as if Applicant were the named Account Party, and waiving any and all present and future claims and defenses against Bank. d. Applicant shall give U.S. Bank prior written notice of any change of name, address or place of business. Any notice of any nature by Applicant to Bank must be given at U.S. Bank's office where the Application was submitted. e. The singular includes the plural. If Applicant consists of more than one person, the obligations of Applicant hereunder are joint and several and are binding upon any marital community of which any Applicant is a member. This Agreement shall be binding on Applicant's heirs, successors and assigns. f. Notwithstanding the title of any Credit instrument, the rights and obligations of Bank and Applicant with respect to the Credit shall be as set forth herein. g. Except as otherwise provided herein or on the Application, the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce ("UCP") as in effect on the date of issuance of the Credit are fully incorporated herein and shall apply to the Credit. This Agreement and the Credit shall be governed by the internal laws of the State of Utah, United States of America (the "Governing Laws"), except to the extent such laws are inconsistent with the UCP. If the Credit provides that it is governed by laws, regulations or rules other than the Governing Laws (the "Specified Laws"), Applicant agrees not to assert any provisions of the Specified Laws as a defense to any of its obligations hereunder. h. Applicant hereby indemnifies and agrees to hold harmless the Bank, its officers, directors, agents, successors and assigns, from and against any and all liability, claims, demands, losses and expenses (including without limitation legal costs and attorney fees incurred in any appellate proceeding, proceeding under the bankruptcy code or receivership), arising from or in connection with this Agreement, the Credit or any related transaction, unless arising from Bank's gross negligence or willful misconduct. i. Applicant hereby authorizes Bank to issue Credits and amendments thereto based upon, and to otherwise rely on and act in accordance with, any oral or written communication, including but not limited to any electronic communication and any facsimile transmission, reasonably believed by Bank to have been or which purportedly has been, given by one of the authorized persons specified on Schedule 1, even if such communication proves not to have been given by an authorized person. j. Bank's waiver of any right on any occasion or occasions shall not be construed as a bar or waiver of any other right or of such right on any other occasion. Applicant hereby waives and agrees not to assert any defense under any applicable statute of limitations, to the fullest extent permitted by law. In addition to all other rights which Bank may have, Applicant hereby authorizes Bank to set off any and all deposits or other moneys due from Bank at any of its offices against any and all of Applicant's obligations hereunder, whether or not Bank shall have made any demand under this Agreement. k. Without notice to any Applicant and without affecting Bank's rights or Applicant's obligations, Bank may deal in any manner with any person who at any time is liable for, or provides any collateral for, any obligations of Applicant to Bank. Without limiting the foregoing, Bank may impair, release (with or without substitution of new collateral) and fail to perfect a security interest in, any collateral provided by any person; and sue, fail to sue, agree not to sue, release, and settle or compromise with, any person. l. Whether or not litigation or arbitration is commenced, Applicant promises to pay all attorney fees and other costs and expenses incurred by Bank in collecting overdue amounts or construing or enforcing any provision of this Agreement or the Credit, including but not limited to reasonable attorney fees at trial, in any arbitration, appellate proceeding, proceeding under the Bankruptcy code, or receivership, and post-judgment attorney fees incurred in enforcing any judgment. m. Bank's issuance of the Credit shall constitute its Agreement to the terms of this Agreement. n. This Agreement is a continuing agreement and shall remain in effect until terminated, amended or replaced. This Agreement may be terminated by Applicant or U.S. Bank by giving notice of termination to the other and may be amended or replaced by a written agreement signed by Applicant and accepted by U.S. Bank; provided, however that no such termination, amendment or replacement shall alter or affect the undertaking of Applicant or Bank with respect to any Credit issued prior to such termination, amendment or replacement. Page 4 of 6 14 o. Nothing in this Agreement shall be construed as imposing any obligation on Bank to issue any Credit. Each Credit shall be issued by Bank in its sole discretion and at its sole option. p. Any Correspondent Bank signing this Agreement agrees that each Application and Credit and this Agreement are subject to all terms and conditions of the most recent Correspondent Bank Letter of Credit Agreement between U.S. Bank and Correspondent Bank. q. Bank is authorized to record electronically or otherwise any telephone and other oral communications between Bank and Applicant. r. All terms and conditions on the attached Schedule 1, and any replacement Schedule 1 are hereby incorporated herein. Applicant may change the provisions of Schedule 1 by executing and delivering a new Schedule 1 to Bank. s. From time to time, Applicant may submit Applications, applications for amendments to Credits or other communications (each, a "Faxed Document") to Bank by facsimile transmission. With respect to each such facsimile transmission Applicant agrees: (i) each Faxed Document shall be deemed to be an original document and shall be effective for all purposes as if it were an original; (ii) Applicant shall retain the original of any Faxed Document and shall deliver it to Bank upon request; (iii) if Applicant sends Bank a manually signed confirmation of a Faxed Document Bank shall have no duty to compare it to the previously received Faxed Document nor shall it have any liability nor duty to act should the contents of the written confirmation differ therefrom. Any manually signed confirmation of a Faxed Document must be conspicuously marked "Previously transmitted by facsimile." Bank will not be liable for issuance of duplicate letters of credit or amendments thereto that result from Bank's receipt of confirmations not so marked; (iv) Bank cannot effectively determine whether a particular facsimile request is valid. Therefore Applicant shall have sole responsibility for the security of using facsimile transmissions and for any authorized or unauthorized Faxed Document received by Bank, purportedly on behalf of Applicant. 8. ARBITRATION a. Any Bank or Applicant may require that all disputes, claims, counterclaims, and defenses, including those based on or arising from any alleged tort ("Claims") relating in any way to this Agreement, the Credit or any transaction of which this Agreement or the Credit is a part (the "Loan"), be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association and Title 9 of the U.S. Code. All Claims will be subject to the statutes of limitation applicable if they were litigated. This provision is void if the Loan, at the time of the proposed submission to arbitration, is secured by real property located outside of Oregon or Washington, or if the effect of the arbitration procedure (as opposed to any Claims of Applicant) would be to materially impair the Bank's ability to realize on any collateral securing the Loan. b. If arbitration occurs and each party's Claim is less than $100,000, one neutral arbitrator will decide all issues; if any party's Claim is $100,000 or more, three neutral arbitrators will decide all issues. All Arbitrators will be active Utah State Bar members in good standing. All arbitration hearings will be held in Salt Lake City, Utah. In addition to all other powers, the arbitrator(s) shall have the exclusive right to determine all issues of arbitrability. Judgment on any arbitration award may be entered in any court with jurisdiction. c. If any party institutes any judicial proceeding relating to the Loan, such action shall not be a waiver of the right to submit any Claim to arbitration. In addition each has the right before, during, and after any arbitration to exercise any number of the following remedies, in any order or concurrently: (i) setoff; (ii) self-help repossession; (iii) judicial or non-judicial foreclosure against real or personal property collateral; and (iv) provisional remedies, including injunction, appointment of receiver, attachment, claim and delivery and replevin. 9. BY UTAH STATUTE (UCA 25-5-4) THE FOLLOWING DISCLOSURE IS REQUIRED: THIS AGREEMENT IS A FINAL EXPRESSION OF THE AGREEMENT BETWEEN BANK AND APPLICANT AND MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY ALLEGED ORAL AGREEMENT. APPLICANT ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS AGREEMENT APPLICANT: CORRESPONDENT BANK: (IF APPLICABLE) DAW TECHNOLOGIES, INC. __________________________________ _____________________________________ By:_______________________________ By:__________________________________ Page 5 of 6 15 Title:____________________________ Title:_______________________________ FOR BANK USE - SIGNATURE VERIFIED AND AUTHORITY TO SIGN CONFIRMED - -------------------------------------------------------------------------------- U.S. BANK - -------------------------------------------------------------------------------- AUTHORIZED SIGNATURE OFFICER NAME AND NUMBER COMPANY COST CENTER - -------------------------------------------------------------------------------- Page 6 of 6 16 [LOGO] CONTINUING AGREEMENT FOR IRREVOCABLE STANDBY LETTERS OF CREDIT DATED AS OF: APPLICANT: Daw Technologies, Inc. CORRESPONDENT BANK: (if applicable) From time to time, any person signing this Agreement as Applicant or Correspondent Bank (either or both, "Applicant") may request U.S. Bank to issue or to request one of its affiliates to issue one or more irrevocable standby letters of credit (each, a "Credit") substantially in accordance with the terms of any application (each, an "Application") submitted to U. S. Bank by Applicant. In consideration of the issuance by U. S. Bank or an affiliate of U. S. Bank (each such affiliated issuer, an "Other Issuer") of one or more Credits, each Applicant agrees that the following terms shall apply to each Application and each Credit issued by U. S. Bank or any Other Issuer (either or both, "Bank"). 1. OBLIGATIONS a. Applicant promises to pay Bank on demand at U. S. Bank's International Banking Office,Salt Lake City, Utah: i. The amount of each draft or other request for payment ("draft") drawn under the Credit. For amounts payable in United States currency, Applicant agrees to reimburse Bank in United States currency. For amounts payable in other currency, Applicant agrees to reimburse Bank an equivalent amount in United States currency at Bank's then current selling rate for telecommunications transfer of such other currency to the place the draft is payable, or at Bank's option, in any other currency, place, form and manner acceptable to Bank. If Bank so demands, Applicant promises to pay Bank in advance, in United States currency, all sums necessary to put Bank in funds to pay all such drafts whether payable in United States currency or otherwise. ii. Bank's fees, at the per annum rate fixed by Bank, for the period from the date of issuance to the expiry date of the Credit. Such fees shall be payable from time to time, in advance, at such intervals as Bank may require and shall be nonrefundable, whether or not the Credit is drawn upon, reduced in time or amount or otherwise modified. iii. The entire principal amount which has not been drawn under the Credit, to be held by Bank as collateral for any draws. Any such amount which is not applied to reimbursement of draws shall be refunded to Applicant within thirty (30) days after the expiry date of the Credit, with interest at U. S. Bank's lowest savings account rate then in effect. iv. All taxes, levies, imposts, duties, charges, fees, deductions or withholdings of any nature whatsoever paid or incurred by Bank in connection with this Agreement, the Credit or any related transactions, and any liability with respect thereto (including but not limited to interest, penalties and expenses). v. Interest on all amounts due under this Agreement from the applicable due date until paid at a per annum rate equal to the sum of U. S. Bank's prime rate, as that rate may vary from time to time, plus 5%. Interest shall be calculated on the basis of a 360-day year and the actual number of days elapsed. U. S. Bank's prime rate is the rate which U. S. Bank from time to time establishes as its prime rate and is not, for example, the lowest rate of interest which U. S. Bank collects from any borrower or class of borrowers. b. Without limiting Applicant's obligations to any Other Issuer, but without duplication, Applicant promises to pay to U.S. Bank on demand, at U. S. Bank's International Banking Office in Salt Lake City, Utah, an Page 1 of 6 17 amount equal to all amounts which U. S. Bank pays or becomes obligated to pay to any Other Issuer with respect to the Credit, whether as a participant in the Credit or otherwise. c. Notwithstanding any other provision of this Agreement, Applicant's obligation to make any payment hereunder to any Other Issuer shall, to the extent of such payment, be satisfied by payment to U. S. Bank as set forth in this Agreement. d. Applicant hereby authorizes U. S. Bank to automatically deduct from its account with U. S. Bank specified on attached Schedule 1, all amounts which become due to Bank under this Agreement. If there are insufficient funds in the account to pay the automatic deduction in full, Bank may allow the account to become overdrawn, or Bank may reverse the automatic deduction. Applicant will pay all fees on the account which result from the automatic deductions, including any overdraft/NSF charges. If for any reason U. S. Bank does not charge the account for any amount due, or if an automatic deduction is reversed, the amount due is still owing to Bank as set forth herein. If the account is a Money Market Account, the number of withdrawals from that account is limited as set out in the agreement. U. S. Bank may cancel the automatic deduction at any time in its discretion. 2. CERTAIN WARRANTIES Applicant warrants that the execution, delivery and performance of this Agreement are within its authority and are not in contravention of law, of any terms of any agreement, instrument, order or judgment to which Applicant is a party or by which it or its property may be bound or of any provision of its charter documents or bylaws, and that it has obtained all necessary approvals and consents therefor. 3. THE CREDIT a. U. S. Bank may either issue the Credit or request one of its affiliates to issue the Credit. Bank may sell, assign or participate all or any part of its rights and obligations under this Agreement, the Application and the Credit. Without limiting the foregoing, any Other Issuer may sell a participation in all or any part of its rights and obligations under this Agreement and the Credit to U. S. Bank. b. Bank hereby is authorized to set forth in the Credit the terms appearing on the Application, with such modifications as Bank in its discretion may determine are appropriate or necessary and are not materially inconsistent with such terms. Any such determination shall be binding on Applicant. c. All communications relating to the Credit will be sent at Applicant's risk. Bank shall have no responsibility for any inaccuracy of translation, or any error or delay in transmission or delivery by mail, telecommunication or any other method. Bank shall not be liable for any error, neglect or default of any of Bank's correspondents. d. Neither Bank nor its correspondents shall be in any way responsible for the performance of any beneficiary's obligations to Applicant or for the form, sufficiency, accuracy, genuineness, authority of person signing, falsification or legal effect, of any documents required by the Credit if such documents appear in order on their face. Whether the documents conform to the terms of the Credit and whether any demand is timely and in proper form shall be determined by Bank in its sole discretion, which determination shall be final and binding on Applicant. e. Subject to Section 6b, Bank may at Applicant's request increase the amount of the Credit, extend the time for making and honoring of demands under the Credit and otherwise modify the terms and conditions governing the Credit. As so modified, all provisions of the Credit, and all action taken by Bank or Bank's correspondents in connection therewith, shall be binding upon Applicant. f. Applicant will promptly examine the Credit, any amendments thereto and all information, documents and instruments delivered to Applicant from time to time by Bank and shall notify U. S. Bank within five U. S. Bank banking days after receipt if Applicant claims that Bank has failed to comply with Applicant's instructions or Bank's obligations with respect to the Credit, has wrongfully honored or dishonored any presentation under the Credit or claims any other irregularity. If Applicant does not so notify U. S. Bank within such time period, Applicant shall be conclusively deemed to have waived and shall be precluded from asserting such claim(s). g. Bank may receive, accept or pay as complying with the terms of the Credit, any drafts or other documents, otherwise in order, which appear on their face to be signed by or issued to the administrator, executor, successor or trustee in bankruptcy of or the receiver for any of the property of, or any other person or Page 2 of 6 18 entity acting as the representative or in the place of, the party in whose name the Credit provides that any drafts or other documents should be drawn or issued. 4. DEFAULT AND REMEDIES a. Time is of the essence of this Agreement. The occurrence of any of the following shall be an Event of Default hereunder: i. Default in payment or performance of any of Applicant's obligations hereunder or under any promissory note or other agreement between Bank and Applicant; ii. Default under any security documents securing Applicant's obligations hereunder, whether executed by Applicant or any other person; iii. Levy or proceeding against any property of Applicant or any guarantor of Applicant's obligations hereunder ("Guarantor"); iv. Death, dissolution, termination of existence, insolvency or business failure of, appointment of a receiver for any part of the property of, assignment for the benefit of creditors by, commencement of any proceeding under any bankruptcy or insolvency laws by or against, or entry of any judgment against, Applicant or any Guarantor; v. Any warranty, representation or statement made or furnished to Bank by Applicant or any Guarantor proves to have been false in any material respect when made or furnished; vi. Any event which gives the holder of any debt obligation of Applicant or any Guarantor the right to accelerate its maturity, whether or not such right is exercised; vii. Any guaranty of Applicant's obligations hereunder ceases to be, or is asserted by any person not to be, in full force and effect; or viii. Any material adverse change in the financial condition or management of Applicant or any Guarantor, or Bank for any reason in good faith, deems itself insecure. b. Upon the occurrence of any Event of Default and at any time thereafter, Bank at its option and in addition to all other rights of Bank under this Agreement, any related agreement and applicable law, may without notice or demand declare the amount for which the Credit was issued and any other amounts owing hereunder immediately due and payable. 5. CHANGES TO LAWS AND REGULATIONS If any adoption of or change in law or regulation, or in the interpretation or administration thereof by any official authority shall impose on Bank any tax, charge, fee, deduction or withholding of any kind whatsoever, or shall impose or modify any reserve requirements, standards regarding capital adequacy or any other conditions affecting this Agreement or the Credit, and the result of any of the foregoing shall be to increase the cost to Bank of issuing and maintaining the Credit, reduce the amount of any sum receivable by Bank hereunder or reduce the rate of return on Bank's capital, then Applicant shall pay to Bank upon demand such additional amount or amounts as Bank may specify to be necessary to compensate Bank for such additional costs incurred or reduction suffered. 6. GENERAL a. Each Application shall be subject to all terms and conditions of this Agreement. b. Notwithstanding any other term hereof, (i) the Credit can be revoked or amended only with the consent of the beneficiary of the Credit, all Applicants (including any Correspondent Bank signing this Agreement), the Bank issuing the Credit and any confirming bank, and (ii) instructions concerning discrepancies must be given by all such Applicants. c. If the Account Party on the Application is not an Applicant hereunder, the Account Party shall have no rights against Bank; and Applicant shall deliver to U. S. Bank an agreement satisfactory to Bank executed by the Account Party, providing that Bank without notice to or consent of the Account Party, may deal with Applicant as if Applicant were the named Account Party, and waiving any and all present and future claims and defenses against Bank. d. Applicant shall give U. S. Bank prior written notice of any change of name, address or place of business. Any notice of any nature by Applicant to Bank must be given at U. S. Bank's office to which the Application was submitted. e. The singular includes the plural. If Applicant consists of more than one person, the obligations of Applicant hereunder are joint and several and are binding upon any marital community of which any Applicant is a member. This Agreement shall be binding on Applicant's heirs, successors and assigns. Page 3 of 6 19 f. Notwithstanding the title appearing on any Credit instrument, the rights and obligations of Bank and Applicant with respect to the Credit shall be as set forth herein. g. Except as otherwise provided herein or on the Application, the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce ("UCP") as in effect on the date of issuance of the Credit are fully incorporated herein and shall apply to the Credit. This Agreement and the Credit shall be governed by the internal laws of the State of Utah, United States of America (the "Governing Laws"), except to the extent such laws are inconsistent with the UCP. If the Credit provides that it is governed by laws, regulations or rules other than the Governing Laws (the "Specified Laws"), Applicant agrees not to assert any provisions of the Specified Laws as a defense to any of its obligations hereunder. h. Applicant hereby indemnifies and agrees to hold harmless Bank, its officers, directors, agents, successors and assigns, from and against any and all liability, claims, demands, losses and expenses (including without limitation legal costs and attorney fees incurred in any appellate proceeding, proceeding under the bankruptcy code or receivership and post-judgment attorney fees incurred in enforcing any judgment), arising from or in connection with this Agreement, the Credit or any related transaction, unless arising from Bank's gross negligence or willful misconduct. i. Applicant hereby authorizes Bank to issue Credits and amendments thereto based upon, and to otherwise rely on and act in accordance with, any oral or written communication, including but not limited to any electronic communication and any facsimile transmission, reasonably believed by Bank to have been or which purportedly has been, given by one of the authorized persons specified on Schedule 1, even if such communication proves not to have been given by an authorized person. j. Bank's waiver of any right on any occasion or occasions shall not be construed as a bar or waiver of any other right or of such right on any other occasion. Applicant hereby waives and agrees not to assert any defense under any applicable statute of limitations, to the fullest extent permitted by law. In addition to all other rights which Bank may have, Applicant hereby authorizes Bank to set off any and all deposits or other monies due from Bank at any of its offices against any and all of Applicant's obligations hereunder, whether or not Bank shall have made any demand under this Agreement. k. Without notice to any Applicant and without affecting Bank's rights or Applicant's obligations, Bank may deal in any manner with any person who at any time is liable for, or provides any collateral for, any obligations of Applicant to Bank. Without limiting the foregoing, Bank may impair, release (with or without substitution of new collateral) and fail to perfect a security interest in, any collateral provided by any person; and sue, fail to sue, agree not to sue, release, and settle or compromise with, any person. l. Whether or not litigation or arbitration is commenced, Applicant promises to pay all attorney fees and other costs and expenses incurred by Bank in collecting overdue amounts or construing or enforcing any provision of this Agreement or the Credit, including but not limited to reasonable attorney fees at trial, in any arbitration, appellate proceeding, proceeding under the bankruptcy code or receivership and post-judgment attorney fees incurred in enforcing any judgment. m. Bank's issuance of the Credit shall constitute its agreement to the terms of this Agreement. n. This Agreement is a continuing agreement and shall remain in effect until terminated, amended or replaced. This Agreement may be terminated by Applicant or U. S. Bank by giving notice of termination to the other and may be amended or replaced by a written agreement signed by Applicant and accepted by U. S. Bank; provided, however that no such termination, amendment or replacement shall alter or affect the undertaking of Applicant or Bank with respect to any Credit issued prior to such termination, amendment or replacement. o. Nothing in this Agreement shall be construed as imposing any obligation on Bank to issue any Credit. Each Credit shall be issued by Bank in its sole discretion and at its sole option. p. Any Correspondent Bank signing this Agreement agrees that each Application and Credit and this Agreement are subject to all terms and conditions of the most recent Correspondent Bank Letter of Credit Agreement between U. S. Bank and Correspondent Bank. q. Bank is authorized to record electronically or otherwise any telephone and other oral communications between Bank and Applicant. Page 4 of 6 20 r. All terms and conditions on the attached Schedule 1, and any replacement Schedule 1 are hereby incorporated herein. Applicant may change the provisions of Schedule 1 by executing and delivering a new Schedule 1 to U. S. Bank. s. From time to time, Applicant may submit Applications, applications for amendments to Credits or other communications (each, a "Faxed Document") to Bank by facsimile transmission. With respect to each such facsimile transmission Applicant agrees: (i) each Faxed Document shall be deemed to be an original document and shall be effective for all purposes as if it were an original; (ii) Applicant shall retain the original of any Faxed Document and shall deliver it to Bank upon request; (iii) if Applicant sends Bank a manually signed confirmation of a Faxed Document Bank shall have no duty to compare it to the previously received Faxed Document nor shall it have any liability nor duty to act should the contents of the written confirmation differ therefrom. Any manually signed confirmation of a Faxed Document must be conspicuously marked "Previously transmitted by facsimile." Bank will not be liable for issuance of duplicate letters of credit or amendments thereto that result from Bank's receipt of confirmations not so marked; (iv) Bank cannot effectively determine whether a particular facsimile request is valid. Therefore Applicant shall have sole responsibility for the security of using facsimile transmissions and for any authorized or unauthorized Faxed Document received by Bank, purportedly on behalf of Applicant 7. ARBITRATION a. Any Bank or Applicant may require that all disputes, claims, counterclaims, and defenses, including those based on or arising from any alleged tort ("Claims") relating in any way to this Agreement, the Credit or any transaction of which this Agreement or the Credit is a part (the "Loan"), be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association and Title 9 of the U. S. Code. All Claims will be subject to the statues of limitation applicable if they were litigated. This provision is void if the Loan, at the time of the proposed submission to arbitration, is secured by real property located outside of Oregon or Washington, or if the effect of the arbitration procedure (as opposed to any Claims of Applicant) would be to materially impair Bank's ability to realize on any collateral securing the Loan. b. If arbitration occurs and each party's Claim is less than $100,000, one neutral arbitrator will decide all issues; if any party's Claim is $100,000 or more, three neutral arbitrators will decide all issues. All arbitrators will be active Utah State Bar members in good standing. All arbitration hearing will be held in Salt Lake City, Utah. In addition to all other powers, the arbitrator(s) shall have the exclusive right to determine all issues of arbitrability. Judgment on any arbitration award may be entered in any court with jurisdiction. c. If any party institutes any judicial proceeding relating to the Loan, such action shall not be a waiver of the right to submit any Claim to arbitration. In addition, each has the right before, during, and after any arbitration to exercise any number of the following remedies, in any order or concurrently: (i) setoff; (ii) self-help repossession; (iii) judicial or non-judicial foreclosure against real or personal property collateral; and (iv) provisional remedies, including injunction, appointment of receiver, attachment, claim and delivery and replevin. BY UTAH STATUTE (UCA 25-5-4) THE FOLLOWING DISCLOSURE IS REQUIRED: THIS AGREEMENT IS A FINAL EXPRESSION OF THE AGREEMENT BETWEEN BANK AND APPLICANT AND MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY ALLEGED ORAL AGREEMENT. APPLICANT ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS AGREEMENT APPLICANT: CORRESPONDENT BANK: (IF APPLICABLE) DAW TECHNOLOGIES, INC. __________________________________ _____________________________________ By:_______________________________ By:__________________________________ Title:____________________________ Title:_______________________________ Page 5 of 6 21 ----------------------------------------------- FOR BANK USE - SIGNATURE VERIFIED AND AUTHORITY TO SIGN CONFIRMED. ----------------------------------------------- AUTHORIZED SIGNATURE ----------------------------------------------- ----------------------------------------------- OFFICER'S NAME AND NUMBER (PLEASE PRINT) ----------------------------------------------- U.S. BANK ----------------------------------------------- COMPANY COST CENTER ----------------------------------------------- Page 6 of 6 EX-23.1 3 CONSENT OF GRANT THORNTON LLP 1 Exhibit 23.1 CONSENT We have issued our reports dated February 25, 1998 accompanying the financial statements and schedule of Daw Technologies, Inc., incorporated by reference or included in the Annual Report of Daw Technologies, Inc., on Form 10-K for the year ended December 31, 1997. 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). GRANT THORNTON LLP Salt Lake City, Utah March 25, 1998 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1996 AND THE STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997. 1,000 U.S. DOLLARS YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1 5,802 0 12,875 (403) 1,363 25,835 13,727 (7,423) 32,364 10,587 0 0 0 124 20,576 32,364 52,541 52,541 47,272 56,322 49 403 295 (4,125) (1,866) (2,259) 0 0 0 (2,259) (0.18) (0.18)
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