-----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, OOmw5S7BDEUVlvVP3+yCu+Y8/H+8Gp/t3Nt/rlDNtZDBUS2/ChgyxUwGg/6ohQC4 uMKJlGIN0Oxn00njDKO9iw== 0000950149-99-000615.txt : 19990403 0000950149-99-000615.hdr.sgml : 19990403 ACCESSION NUMBER: 0000950149-99-000615 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 99583729 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 FORM 10-K DATED 12/31/1998 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, 1998 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, 1999, was approximately $16,554,533. 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 31, 1999, the Registrant had 12,479,711 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's definitive Proxy Statement relating to the Annual Meeting of Shareholders scheduled for June 1, 1999 is incorporated by reference in Part III of this report. ================================================================================ 2 TABLE OF CONTENTS
PART I .................................................................................... 1 Item 1. Business........................................................................... 1 Item 2. Properties......................................................................... 8 Item 3. Legal Proceedings.................................................................. 9 Item 4. Submission of Matters to a Vote of Security Holders................................ 9 PART II ................................................................................... 10 Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.............. 10 Item 6. Selected Financial Data............................................................ 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................................... 12 Item 8. Financial Statements and Supplementary Data........................................ 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................................................................... 19 PART III................................................................................... 20 Item 10, 11, 12 and 13..................................................................... 20 PART IV ................................................................................... 21 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8BK .................. 21 SIGNATURES................................................................................. 23 FINANCIAL STATEMENTS....................................................................... F-1
3 Information contained in this Report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, 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 1 4 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. Historically, the semiconductor industry has been very cyclical in nature and has seen sudden and dramatic changes in demand for its products. Capital spending by semiconductor manufacturers closely follows the trend in the sale of chips. As chip sales rise, so too does capital spending. From 1988 to 1996, chip sales increased from roughly $50 billion per year to almost $150 billion. In response to this tremendous growth in sales, chip manufacturers increased capital spending in new equipment and fab facilities from around $12 billion to almost $45 billion during the same time period. Since their peak in 1995 chip sales have dropped to around $122 billion in 1998, thus causing a dramatic decrease in capital expenditures by the industry over that period of time. 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: 2 5 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. 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. Diversification of Revenue Base. As a result of the past three year down turn in the semiconductor industry, the Company's revenue base from cleanroom sales has been severely impacted by reduced capital spending by semiconductor companies. To counter this drop in sales and reduce the Company's dependence on this highly cyclical industry, the Company has recently begun to diversify its operations and secure revenue sources from other products and industries. It is the Company's objective to obtain 40% of its revenues from non-cleanroom sources by applying its product and engineering expertise in custom metal fabrication, airflow systems, and high tech panel production to similar type products used by other businesses in other industries. During the first quarter of 1998, the Company announced its entrance to the transportation industry where it is now producing sleeper cabs for heavy-duty trucks. By applying similar wall panel systems technology used in cleanrooms, the Company is able to produce a stronger and lighter weight product than conventional sleeper cabs used by truck manufacturers. The Company anticipates this will become a significant division of the Company within a few years. Additionally, the Company has announced its entrance into the commercial and industrial air handling industry, and the development of its new air entrance system for large national retail centers. The Company has also recently entered into various contract manufacturing agreements whereby the Company manufactures products owned and marketed by third parties. To date, all of the Company's diversification initiatives have utilized existing design and engineering resources as well as manufacturing equipment at its Salt Lake City facility, thus requiring minimal capital resources and more fully utilizing existing equipment and facilities. 3 6 CLEANROOM SYSTEMS AND SERVICES Each component of the cleanroom plays an important role. The cleanroom consists of special high-performance air handling systems, ceiling modules and highly efficient filters, wall partitions, raised-access flooring and state of the art control systems. These systems provide a continuous flow of ultrafiltered air from the ceiling to the floor to flush out particles and other contaminants. The room is maintained at a slightly higher air pressure than surrounding rooms so leaks, open doors, or other temporary openings cause clean air to escape, rather than 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(R) Air Handlers. Stratus(R) 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(R) 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 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 +/- .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. 4 7 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(R) 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(R) air handlers. Each panel is constructed of .032" aluminum skins laminated to an aluminum honeycomb core and finished with a nonshedding baked-on powder coat epoxy. Panels are held to strict dimensional and structural tolerances with surface flatness varying less than +/- .032", panel length and width accurate to +/- .040" and deflection less than L/240 at 5 lbs. per square foot. The panel edge is gasketed to provide a seal between varying cleanroom zones. Their lightweight construction permits ease of installation and field modification for equipment penetrations and bulkheading. Walls are demountable and non-progressive, meaning individual panels may be removed or replaced without affecting surrounding panels. MATRIX(R) 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(R) floors provide maximum structural capability utilizing easily removable panels which meet the special material and airflow requirements of cleanrooms. MATRIX(R) 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. Continuing Service and Support. The Company offers its installation customers ongoing service 5 8 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. In its strategy to diversify into businesses utilizing its core competencies and technologies, the Company has established one significant customer for its sleeper cabs, the loss of which would have a material adverse effect on that business. SALES AND MARKETING The Company's marketing program is focused on expanding market acceptance of the Company's integrated cleanroom approach and on building long term strategic relationships. By offering its customers a full array of cleanroom services, the Company is able to provide customers a single point of contact for design, component procurement, installation and ongoing service. The Company sells its products utilizing a direct sales force in North America and Europe. The Company 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. 6 9 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 has also incurred product development expenses related to its effort to diversify its business which has resulted in its sleeper cab and commercial air handling products. The Company incurred approximately $293,000, $246,000 and $282,000 in non-project related research and development costs in 1998, 1997 and 1996, 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. 7 10 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, 1998, the Company's backlog was $12.8 million compared to $15.7 million at December 31, 1997. 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 311 full-time employees and 46 part-time employees on December 31, 1998, compared to 366 full-time employees and 4 part-time employees on December 31, 1997. 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 9,100 square feet in Austin, Texas; Hsin-Chu, Taiwan; Livingston, Scotland; and Aix-en-Provence, Southern France with various lease expiration 8 11 dates ranging from 2000 through 2006. The Company believes that its facilities are adequate for its current needs and it could obtain additional space on commercially reasonable terms, if needed. ITEM 3. LEGAL PROCEEDINGS. From time to time, the Company is subject to routine, 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. 9 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. The Company's Common Stock is listed and traded on the NASDAQ Stock Market (National Market System) under the symbol "DAWK." The following table sets forth, for the periods indicated, the high and low sale prices for the Company's Common Stock, as reported on the NASDAQ Stock Market for the years ended December 31, 1998 and 1997, respectively.
HIGH LOW ------ ------ YEAR ENDED DECEMBER 31, 1998: First Quarter ........................ $1.906 $1.219 Second Quarter ....................... 2.938 1.375 Third Quarter ........................ 2.313 1.219 Fourth Quarter ....................... 1.219 0.656 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
The Company did not pay or declare dividends on its Common Stock during the years ended December 31, 1998, 1997 and 1996. 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 30, 1999, the Company had 12,479,711 shares of its Common Stock outstanding, held by 132 shareholders of record, which does not include shareholders whose shares are held in securities position listings. 10 13 ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth selected financial data of the Company. The summary financial data in the table is derived from the financial statements of the Company. The data should be read in conjunction with the financial statements, related notes and other financial information included therein (in thousands, except per share data).
YEAR ENDED DECEMBER 31, ------------------------------------------------------- 1998 1997 1996 1995 1994 --------- ---------- ---------- ----------- ----------- STATEMENT OF OPERATIONS DATA: Revenues......................... $ 53,078 $ 52,541 $ 112,826 $ 70,635 $ 47,732 Cost of goods sold............... 51,223 47,272 97,364 63,484 39,579 --------- ---------- ---------- ----------- ----------- Gross profit..................... 1,855 5,269 15,462 7,151 8,153 --------- ---------- ---------- ----------- ----------- Selling, general and administrative expenses.......... 6,513 8,373 10,274 6,333 3,584 Research and development......... 293 246 282 255 157 Depreciation and amortization.... 563 431 400 219 156 --------- ---------- ---------- ----------- ----------- 7,369 9,050 10,956 6,807 3,897 --------- ---------- ---------- ----------- ----------- Earnings (loss) from operations.. (5,514) (3,781) 4,506 344 4,256 Other income (expense), net...... (483) (344) 352 119 359 --------- ---------- ---------- ----------- ----------- Earnings (loss) before income (5,997) (4,125) 4,858 463 4,615 taxes............................ Income taxes (benefit)........... (2,075) (1,866) 1,548 176 1,753 ========= ========== ========== =========== =========== NET EARNINGS (LOSS) ............. $ (3,922) $ (2,259) $ 3,310 $ 287 $ 2,862 ========= ========== ========== =========== =========== Earnings (loss) per common share Basic........................ $ (0.32) $(0.18) $0.27 $0.02 $0.26 Diluted...................... $ (0.32) $(0.18) $0.27 $0.02 $0.25 Weighted-average common and dilutive common equivalent shares outstanding Basic........................ 12,440 12,416 12,350 12,148 11,182 Diluted...................... 12,440 12,416 12,393 12,365 11,370
DECEMBER 31, ------------------------------------------------ 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- BALANCE SHEET DATA: Cash and cash equivalents $ 2,140 $ 5,802 $ 3,258 $ 5,885 $2,7111 Working capital .......... 10,674 15,248 17,112 15,431 14,1555 Total assets ............. 30,841 32,364 49,495 40,072 23,6088 Total liabilities ........ 12,714 11,664 26,557 20,633 7,3555 Total shareholders' equity 18,127 20,700 22,938 19,409 16,253
11 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL The following discussion should be read in conjunction with the financial statements and notes thereto included elsewhere herein. All data in the tables are in thousands, except for percentages and per-share data. The Company's principal line of business is an integrated systems solution provider of cleanrooms and cleanroom component systems for the semiconductor industry. In recent years, the Company has typically had one to three significant customers, each of 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 the industry downturn that began in the latter part of 1996. Capital spending by semiconductor manufacturers has always closely followed chip sales. As chip sales increased from around $50 billion per year in the late 1980's to a peak of $150 billion in 1995, capital spending on equipment and facilities by the chip manufactures surged to $45 billion from about $12 billion during the same period of time. As chip sales have declined over the past three years to about $122 billion in 1998, capital spending on new equipment and facilities plunged to less than $30 billion in 1998. The Company's operating results have been severely impacted by the reduced capital spending of the semiconductor industry. While the industry has shown several signs of recovery over the past two years, it has been consistently disappointed by continued declines. Management believes the downturn is nearing its end but may continue through the first and second quarters of 1999. 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 1998, the Company experienced fewer new contract awards resulting in a decrease in the Company's backlog from $15.7 million at December 31, 1997 to $12.8 million at December 31, 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 a 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 appears to have been delayed indefinitely. 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 fifty percent during the fourth quarter of 1998. During 1999, management will closely monitor the Company's cost structure and take appropriate actions as considered necessary, but will continue to develop state of the art cleanroom technology and provide world-class support to the Company's customers. In response to reduced revenue generated by the sale of cleanrooms, the Company has recently undertaken several initiatives to expand its revenue base beyond the semiconductor industry and to reduce its reliance on this historically cyclical business. During the first quarter of 1998, the Company announced its entrance into the transportation industry where it is producing sleeper cabs for heavy-duty trucks. By applying similar wall panel systems technology used in cleanrooms the Company produces a stronger, more durable, and lighter weight product than traditional sleeper cabs. During 1998, this new product accounted for almost 13% of total revenues and is expected to make an even greater contribution in 1999. Additionally, the Company has developed a line of commercial and industrial air handling systems for the commercial construction industry. While development was begun during 1998 significant interest has been shown by the market in this product. The Company has also developed an air door system used by large national retail chains in their new "superstores". The air entrance is a recirculating air handling system using an overhead plenum to deliver high volume low velocity airflow across the open doorway, thus eliminating the need for physical doors. This product also shows great promise of providing significant gross profit over the next two years. Additionally, the Company has entered into several contract manufacturing agreements whereby the Company manufactures products owned and marketed by third parties. It is the Company's objective to develop and maintain 40% of its revenues from sources outside of the semiconductor industry by applying its product and engineering expertise in custom metal fabrication, airflow systems and panel production to similar type products used in other industries. 12 15 The Company's 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. RESULTS OF OPERATIONS Revenue from operations
1998 Change 1997 Change 1996 ---- ------ ---- ------ ---- Cleanrooms and Related Products $ 46,298 11.9 % $ 52,541 (53.4)% $112,826 Other Products ................ 6,789 100.0% -- -- -- Total Revenue ................. $ 53,078 1.0% $ 52,541 -- $112,826
Revenue from cleanrooms and related products decreased 11.9% in 1998 to $46.3 million from $52.5 million in 1997. The decrease was due to the continued downturn in the semiconductor industry's capital expenditures for new equipment and fab facilities as more fully discussed above. During 1997, contract revenue decreased by 53.4% to $52.5 million from $112.8 million in 1996. This decrease is directly related to the beginning of the sudden and dramatic downturn in the semiconductor industry as more fully discussed above. Revenue from other products increased to $6.8 million in 1998 from $0.0 in 1997. The increase is due to the start-up of new lines of business including the Company's new line of sleeper cabs, contract manufacturing, and other product sales that were non-existent in 1997. North America - Cleanroom revenue for the year ended December 31, 1998 decreased by 25.2% to $23.5 million from $31.4 million for the year ended December 31, 1997. As a percentage of total cleanroom revenue, North America decreased to 50.8% in 1998 compared to 59.8% in 1997. The decrease in contract revenue is attributed to the semiconductor industry downturn resulting in fewer and smaller contracts available during 1998 than in 1997. 13 16 Revenue from other products of $6.8 million was primarily attributable to sales of sleeper cabs sold only in North America in 1998. Cleanroom revenue for the year ended December 31, 1997 decreased by 57.8% to $31.4 million from $74.4 million for the year ended December 31, 1996. As a percentage of total revenue North America decreased to 59.8% in 1997 compared to 66.0% in 1996. The decrease is the result of fewer contracts received in North America due to the precipitous decline in capital spending by the semiconductor industry. Asia/Pacific Rim - Cleanroom revenue for the year ended December 31, 1998 increased by 2.7% to $9.8 million from $9.6 million for the year ended December 31, 1997. As a percentage of total cleanroom revenue Asia/Pacific revenue increased to 21.2% in 1998 compared to 18.2% in 1997. The increase in revenue and percentage was due to the award of a significant project in China. The contract was subsequently placed on indefinite suspension due to the uncertainty of the Asian market. Cleanroom revenue for 1997 decreased by 38.9% to $9.6 million from $15.6 million for the year ended December 31, 1996. As a percentage of total cleanroom revenue Asia/Pacific increased to 20.6% in 1997 compared to 13.9% in 1996. Two factors contributed to the decrease in Asia/Pacific revenue. First, during 1996 the Company recognized revenue for two significantly large contracts in Taiwan. These contracts were substantially completed during 1996. 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 1997 that it had during 1996. Europe - Cleanroom revenue for the year ended December 31, 1998 increased by 12.0% to $13.0 million from $11.6 million for the year ended December 31, 1997. As a percentage of total cleanroom revenue European revenue increased to 28.0% in 1998 compared to 22.0% in 1997. While the semiconductor industry has experienced a worldwide downturn, it has not appeared to have affected the European segment as dramatically as the Asian and North American markets. Additionally, the Company has been able to win contracts in new countries that it has not done business in previously. Cleanroom revenue for 1997 decreased by 49.1% to $11.6 million from $22.8 million for the year ended December 31, 1996. As a percentage of total cleanroom revenue Europe increased to 22.0% in 1997 compared to 20.2% in 1996. The decrease in volume 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. Gross Profit
1998 Change 1997 Change 1996 ---- ------ ---- ------ ---- Gross profit $1,855 (64.8)% $5,269 (65.9)% $15,462 Percentage of revenues 3.5% 10.0% 13.7%
Gross profit for the year ended December 31, 1998 decreased by 64.8% to $1.9 million from $5.3 million for the year ended December 31, 1997. Gross profit decreased as a percentage of revenue to 3.5% for 1998 compared to 10.0% for 1997. The decrease in gross margin is the direct result of the semiconductor industry downturn. The downturn has resulted in fewer contracts awarded and those that were awarded were done so after a highly competitive bidding process placing significant downward pressure on pricing and thus resulting in lower margins. Gross profit for 1997 increased by 65.9% to $5.3 million from $15.5 million in 1996 and decreased as a percentage of contract revenue to 10.0% in 1997 from 13.7% in 1996. The decrease in gross profit was the direct result of the massive reductions in contracts awarded form 1996 to 1997 as the semiconductor industry entered its first full year of its downturn. During 1996 the Company geared up and increased its production capacity in 14 17 anticipation of continued significant increases in demand for its products. As the downturn gained momentum throughout 1997, the Company had fewer contracts to which it could allocate its increased fixed manufacturing overhead costs. Additionally, the contracts that were awarded were done so at lower margins. Selling, General and Administrative Expenses
1998 Change 1997 Change 1996 ---- ------ ---- ------ ---- Selling, general and administrative expenses $6,513 (22.2)% 8,373 (18.5)% $10,274 Percentage of revenues 12.3% 15.9% 9.1%
Selling, general and administrative expenses for 1998 decreased 22.2% to $6.5 million, from $8.4 million, and decreased as a percentage of revenue to 12.3% for the year ended December 31, 1998 compared to 15.9% for the year ended December 31, 1997. The decrease in selling, general and administrative expenses in 1998 compared with 1997 was the result of an aggressive cost reduction program as well as significant headcount reductions completed during the fourth quarter of 1998 where approximately 300 employees were laid off, thus reducing payroll and related expenses in excess of $5.5 million. Selling, general and administrative expenses for 1997 decreased 18.5% to $8.4 million, or 15.9% of contract revenue, from $10.3 million, or 9.1% of revenue, in 1996. The decrease in selling, general and administrative expenses was the result of a reduction in general and administrative headcount during the first and second quarters of 1997 in response to the significant reduction in cleanroom activity during the first half of 1997. Research and Development
1998 Change 1997 Change 1996 ---- ------ ---- ------ ---- Research and Development expense $293 19.1% $246 (12.8)% $282 Percentage of revenues 0.6% 0.5% 0.2%
Research and development expense increased slightly in actual dollars spent from 1997 to 1998. This increase was not material. Management believes that the Company will increase its research and development expenses during 1999, 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 300mm manufacturing facility technology and to modify existing products to be less expensive to produce and easier to install. Research and development expense decreased slightly from 1996 to 1997. This decrease was the result of fewer research and development projects that were based on specific customers and contracts. Depreciation and Amortization
1998 Change 1997 Change 1996 ---- ------ ---- ------ ---- Depreciation and amortization expense $563 30.6% $431 7.8% $400 Percentage of revenues 1.1% 0.8% 0.4%
Depreciation and amortization expense during 1998 increased by 30.6% to $563,000, or 1.1% of revenue, from $431,000, or 0.8% of revenues, in 1997. This increase was the result of a full years depreciation expense on leasehold improvements, furniture, fixtures, computer equipment and software purchased during 1997. Depreciation and amortization expense in 1997 increased by 7.8% to $431,000, or 0.8% of revenues, from $400,000, or 0.4% of revenues, in 1996. This increase was the result of the purchase of leasehold improvements, furniture, fixtures, computer equipment and software required for the increased sales, marketing and administrative activities during 1997. 15 18 Other Income (Expense), net
1998 Change 1997 Change 1996 ---- ------ ---- ------ ---- Other income (expense) $(483) (40.4)% $(344) (197.7)% $352 Percentage of revenues (0.9)% (0.7)% 0.3%
Other income (expense) increased in 1998 to $(483,000) from $(344,000) in 1997. This increase was largely due to an increase in interest expense in 1998 resulting from an increase in the average outstanding balance on the Company's revolving line of credit over 1997 Other income (expense) decreased in 1997 to $(344,000) from $352,000 in 1996. The decrease was the result of foreign currency losses recognized during 1997 from the decline in Taiwan dollars throughout 1997 and a litigation settlement included as part of other income during 1996. Income Taxes (Benefit)
1998 Change 1997 Change 1996 ---- ------ ---- ------ ---- Income taxes (benefit) $(2,075) 11.2% $(1,866) (220.5)% $1,548 Percentage of revenues (3.9)% (3.6)% 1.4%
The effective tax rate (benefit) for 1998 was approximately (35)% compared to (45)% for 1997 and 32% for 1996. The decrease in the effective tax rate from 1997 to 1998 was 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 1996 to 1997 was primarily the result of tax benefits the Company was able to utilize during 1997 on foreign sales which were taxed in the Company's foreign sales corporation. LIQUIDITY AND CAPITAL RESOURCES Working capital at December 31, 1998 was $10.7 million compared to $15.2 million at December 31, 1997. This included cash and cash equivalents of $2.1 million and $5.8 million at December 31, 1998 and 1997 respectively. Receivables, including retentions, (see Note D of Notes to Financial Statements) decreased to $8.9 million at December 31, 1998 compared to $12.5 million at December 31, 1997. This decrease was the result of lower revenues from fewer contracts during 1998 compared to 1997. Days sales outstanding (the ratio between receivables, excluding retention, and average daily revenue taken over the year) decreased to 61 days at December 31, 1998, from 87 days at December 31, 1997. The Company's operations used $6.9 million of cash during 1998, compared to providing $7.9 million of cash in 1997. During 1998, the Company experienced a decrease in receivables of $3.5 million as a result of the decline in revenues and a decrease in accounts payable and accrued expenses of approximately $1 million. The Company maintained a revolving line of credit with a domestic bank for the lesser of $6 million or the available borrowing base for the period ended December 31, 1998 and $8 million for the period ended December 31, 1997. The interest rate is computed at the bank's prime rate (8.75 percent at December 31, 1998) and requires monthly payments of interest. The line of credit expired June 30, 1998 and was extended to December 31, 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, 1998, the Company was out of compliance on certain indebtedness covenants for which they signed a forbearance agreement with the lender where the lender has agreed to forbear exercise of its remedies against the Company. Subsequent to year end the Company signed an extension of the line of credit through March 31, 1999. The Company is currently reviewing several financing alternatives. 16 19 During 1998, the Company used $167,000 for the purchase of property and equipment. The Company anticipates that its capital expenditures in 1998 for routine additions and replacements of property, and equipment will be less than $250,000. These purchases will be financed through long-term debt or capital leases. Management believes that existing cash balances, borrowings available under the line of credit, 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, above-anticipated capital expenditure requirements, or is unable to renew its existing line of credit, additional financing may be required. There can be no assurance that such additional financing, if required, would be available on favorable terms if at all. YEAR 2000 ISSUES The Company has developed a comprehensive plan to address year 2000 issues. The areas of focus are as follows: i) the Company's information technology systems; ii) the Company's non-information technology systems (i.e. machinery, equipment and devices which utilize built in or embedded technology); and iii) third party suppliers and customers. The Company is undertaking its year 2000 review in the following phases: awareness (education and potential impact of year 2000 issue), identification (identifying processes or systems which are exposed to the year 2000 issue), assessment (identifying the potential impact of year 2000 on the equipment, processes and systems identified during the previous phase), testing and verification (testing to determine if an item is compliant or the degree to which it is not), and implementation (carrying out necessary remedial efforts to address year 2000 readiness, including validation of upgrades, patches or other year 2000 fixes). During 1998, the Company completed the installation of Oracle application software, a comprehensive enterprise-wide business system. This system affects nearly every aspect of the Company's operations, including: financial accounting, purchasing and accounts payable, raw material inventory control, production planning and scheduling, and invoicing and accounts receivable. All Oracle application software utilized by the Company is fully year 2000 compliant. In conjunction with the installation of the Oracle software, the Company installed new HP computer hardware to run the application software. While the HP hardware is not yet fully year 2000 compliant, the Company has in its possession the necessary software to make the hardware's operating systems fully year 2000 compliant and will so by late spring. The Company expects to test these hardware, operating systems and software applications in early 1999 to confirm year 2000 readiness. The Company has identified other hardware, operating systems and software applications used in its process control and other information systems and is in the process of obtaining year 2000 compliance information from the providers of such hardware, operating systems and applications software. The Company expects to work with vendors to test the year 2000 readiness of such hardware, operating systems and software application systems. The Company has no internally developed software applications. The Company has substantially completed inventorying its non-information technology systems and is assessing the year 2000 issues to determine appropriate testing and remediation. The Company has completed its assessment of its major non-information technology systems and is currently implementing patches to make all such systems fully year 2000 compliant. The Company has significant relationships with various third parties, and the failure of any of these third parties to achieve year 2000 compliance could have a material adverse impact on the Company. The Company expects to survey each major third party supplier to confirm their year 2000 readiness. This review process will continue into the second quarter of 1999. The Company is in the process of preparing contingency plans for critical areas to address year 2000 failures if remedial efforts are not fully successful. The Company's contingency plans are expected to target the Company's most reasonably likely worst case scenarios. The Company's contingency plans will be based in part on the results of third-party supplier surveys and thus are not fully developed at this time. Completion of initial contingency plans is targeted for the summer of 1999. 17 20 No assurance can be given that the Company will not be materially adversely affected by year 2000 issues. The Company may experience material unanticipated problems and costs caused by undetected errors or defects in its information and non-information technology systems. In addition, the failure of third-parties to timely address their year 2000 issues could have a material adverse impact on the Company's business, operations, and financial condition. The installation of the Oracle application software and related hardware and operating systems was done to improve information processing capabilities and efficiencies and was done irrespective of the year 2000 issue. The Company regularly upgrades its computer hardware and software components on a regular basis and believes it will not incur any additional material expense to modify its systems due to the year 2000 issue. The foregoing discussion of the Company's year 2000 readiness includes forward-looking statements, including estimates of the timeframes and costs for addressing this issue and is based on management's current estimates which were derived using numerous assumptions. There can be no assurance that these estimates will be achieved, and actual events and results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability of personnel with required remediation skill, the ability of the Company to identify and correct or replace all relevant computer code and the success of third parties with whom the Company does business in addressing their year 2000 issues. IMPACT OF FUTURE ACCOUNTING PRONOUNCEMENTS None. 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. 18 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company's financial statements and notes are included herein beginning on page F-1. The supplementary data is included herein immediately following the signature page of this report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There has been no Form 8-K filed reporting a change of accountants or reporting disagreements on any matter of accounting principle, practice, financial statement disclosure or auditing scope or procedure during the years covered by this report. 19 22 PART III ITEM 10, 11, 12 AND 13. These items are incorporated by reference to the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders scheduled for June 1, 1999. The definitive Proxy Statement will be filed with the Commission not later than 120 days after December 31, 1998, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended. 20 23 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents Filed as Part of this Report: (1) Financial Statements. The following financial statements are filed with this report beginning on page F-1: - Report of Independent Certified Public Accountants - Balance Sheets as of December 31, 1998 and 1997 - Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996 - Statements of Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 - Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 - Notes to Financial Statements (2) Financial Statement Schedule. The following financial statement schedules for the years ended December 31, 1998, 1997 and 1996 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: 21 24 EXHIBIT INDEX
REGULATION S-K EXHIBIT NO. DESCRIPTION SEQUENTIAL PAGE NO. - ------------ ------------------------------------------------- ------------------------- 3.1 Restated Articles of Incorporation* [Form 10-KSB for the year ended December 31, 1994, Exhibit No. 3.1] 3.2 Bylaws of the Company* [Form 10-KSB for the year ended December 31, 1992, Exhibit No. 3.2] 10.1 Agreement and Plan of Merger* [Form 8-K dated October 1992, Exhibit 10.1] 10.2 1993 Stock Option Plan* [Form 10-KSB for the year ended December 31, 1993, Exhibit 10.4] 10.3 Amendment No. 1 to 1993 Stock Option Plan* [Form 10-Q for quarter ended June 30, 1997, Exhibit 10.1] 10.4 Amendment No. 2 to 1993 Stock Option Plan* [Form 10-K for the year ended December 31, 1997, Exhibit 10.4] 10.5 Revolving Domestic Line of Credit Agreement Filed herewith. as Amended by the Second Extension Agreement 10.6 Lease Agreement for Salt Lake City facility* [Form 10-KSB for the year ended December 31, 1993, Exhibit 10.6] 10.7 Amendment to Lease Agreement* [Form 10-K for the year ended December 31, 1996, Exhibit 10.5] 23.1 Consent of Independent Certified Public Filed herewith. Accountants. 27 Financial Data Schedule Filed herewith.
- ------------------------- * These exhibits are incorporated herein by reference. (d) Financial Statement Schedules: See Item 14(a)(2) of this report. 22 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 31, 1999. 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 31, 1999.
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/ Michael J. Schifsky Senior Vice President, Chief Financial - ------------------------------------- Officer (Principal financial and Michael J. Schifsky 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
23 26 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, 1998 and 1997, and the related statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Grant Thornton LLP Salt Lake City, Utah February 26, 1999 F-1 27 Daw Technologies, Inc. BALANCE SHEETS (in thousands, except share data) ASSETS
December 31, -------------------- 1998 1997 ------- ------- CURRENT ASSETS Cash and cash equivalents $ 2,140 $ 5,802 Accounts receivable, net 8,904 12,472 Costs and estimated earnings in excess of billings on contracts in progress 7,546 3,702 Inventories, net 1,233 1,363 Deferred income taxes 655 352 Other current assets 2,391 2,144 ------- ------- Total current assets 22,869 25,835 PROPERTY AND EQUIPMENT - NET, AT COST 4,859 6,304 DEFERRED INCOME TAXES 1,921 135 OTHER ASSETS 1,192 90 ------- ------- $30,841 $32,364 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable and accrued liabilities $ 4,749 $ 5,700 Billings in excess of costs and estimated earnings on contracts in progress 1,635 3,005 Lines of credit 5,254 1,230 Current portion of long-term obligations 557 652 ------- ------- Total current liabilities 12,195 10,587 LONG-TERM OBLIGATIONS, less current portion 519 1,077 COMMITMENTS AND CONTINGENCIES -- -- SHAREHOLDERS' EQUITY Preferred stock, authorized 10,000,000 shares of $0.01 par value; none issued and outstanding -- -- Common stock, authorized 50,000,000 shares of $0.01 par value; issued and outstanding 12,479,711 shares in 1998 and 12,407,977 shares in 1997 125 124 Additional paid-in capital 16,557 15,209 Retained earnings 1,445 5,367 ------- ------- Total shareholders' equity 18,127 20,700 ------- ------- $30,841 $32,364 ======= =======
The accompanying notes are an integral part of these statements. F-2 28 Daw Technologies, Inc. STATEMENTS OF OPERATIONS (in thousands, except share data)
Year ended December 31, -------------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Revenues $ 53,078 $ 52,541 $ 112,826 Cost of goods sold 51,223 47,272 97,364 ------------ ------------ ------------ Gross profit 1,855 5,269 15,462 Operating expenses Selling, general and administrative 6,513 8,373 10,274 Research and development 293 246 282 Depreciation and amortization 563 431 400 ------------ ------------ ------------ 7,369 9,050 10,956 ------------ ------------ ------------ Earnings (loss) from operations (5,514) (3,781) 4,506 Other income (expense) Interest (459) (295) (663) Other, net (24) (49) 1,015 ------------ ------------ ------------ (483) (344) 352 ------------ ------------ ------------ Earnings (loss) before income taxes (5,997) (4,125) 4,858 Income taxes (benefit) (2,075) (1,866) 1,548 ------------ ------------ ------------ NET EARNINGS (LOSS) $ (3,922) $ (2,259) $ 3,310 ============ ============ ============ Earnings (loss) per common share Basic $ (0.32) $ (0.18) $ 0.27 Diluted (0.32) (0.18) 0.27 Weighted-average common and dilutive common equivalent shares outstanding Basic 12,440,121 12,415,957 12,350,172 Diluted 12,440,121 12,415,957 12,393,356
The accompanying notes are an integral part of these statements. F-3 29 Daw Technologies, Inc. STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except share data) Years ended December 31, 1998, 1997 and 1996
Addi- tional Common paid-in Retained stock capital earnings Total -------- -------- -------- -------- Balances as of January 1, 1996 $ 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 Common stock issued pursuant to the purchase of 44,711 shares pursuant to employee stock purchase plan and 27,023 shares issued pursuant to the acquisition of another company 1 1,348 -- 1,349 Net loss for 1998 -- -- (3,922) (3,922) -------- -------- -------- -------- Balances as of December 31, 1998 $ 125 $ 16,557 $ 1,445 $ 18,127 ======== ======== ======== ========
The accompanying notes are an integral part of these statements. F-4 30 Daw Technologies, Inc. STATEMENTS OF CASH FLOWS (in thousands, except share data)
Year ended December 31, -------------------------------------- 1998 1997 1996 -------- -------- -------- Increase (decrease) in cash and cash equivalents Cash flows from operating activities Net earnings (loss) $ (3,922) $ (2,259) $ 3,310 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities Depreciation and amortization 1,808 1,724 1,649 (Gain) loss on disposition of property and equipment -- (7) 6 Provision for losses on accounts receivable 100 180 330 Deferred income taxes (2,089) (390) (145) Changes in assets and liabilities Account receivables 3,468 14,742 (13,010) Costs and estimated earnings in excess of billings on contracts in progress (3,844) 3,467 3,761 Inventories 190 220 (105) Other current assets (224) (148) (1,555) Accounts payable and accrued liabilities (1,042) (5,082) (1,490) Billings in excess of costs and estimated earnings on contracts in progress (1,370) (4,500) 3,806 Other assets 10 (6) (2) -------- -------- -------- Net cash provided by (used in) operating activities (6,915) 7,941 (3,445) -------- -------- -------- Cash flows from investing activities Payments for purchase of property and equipment (167) (349) (2,929) Proceeds from disposition of property and equipment -- 21 31 -------- -------- -------- Net cash used in investing activities (167) (328) (2,898) -------- -------- --------
(continued) F-5 31 Daw Technologies, Inc. STATEMENTS OF CASH FLOWS - CONTINUED (in thousands, except share data)
Year ended December 31, ----------------------------------- 1998 1997 1996 ------- ------- ------- Cash flows from financing activities Net change in lines of credit 4,024 (4,466) 4,196 Payments for purchase and retirement of common stock -- (63) -- Proceeds from issuance of stock 49 84 219 Payments on obligations under long-term obligations (653) (624) (699) ------- ------- ------- Net cash provided by (used in) financing activities 3,420 (5,069) 3,716 ------- ------- ------- Net increase (decrease) in cash and cash equivalents (3,662) 2,544 (2,627) Cash and cash equivalents at beginning of year 5,802 3,258 5,885 ------- ------- ------- Cash and cash equivalents at end of year $ 2,140 $ 5,802 $ 3,258 ======= ======= ======= Supplemental disclosures of cash flow information Cash paid during the year for Interest $ 459 $ 295 $ 663 Income taxes 11 438 1,055
Noncash investing and financing activities During 1998, the Company issued 27,023 shares of common stock in connection with the acquisition of the net assets of another company (Note S). This transaction resulted in an increase to the following balance sheet accounts: Inventories $ 60 Other current assets 23 Property and equipment 50 Other assets 1,258 Accounts payable (91) Common stock (1) Additional paid-in capital (1,299) ----------- $ - ===========
Capital lease obligations of $173 for property and equipment acquisitions were incurred during 1996. The accompanying notes are an integral part of these statements. F-6 32 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (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. The Company designs, engineers, manufactures, installs and services all principal component systems for advanced cleanrooms. The Company also manufactures and sells other products that are manufactured similar to cleanrooms. 2. Method of accounting for long-term contracts Revenue recorded for contracts in the accompanying financial statements is recognized using the percentage-of-completion method and, therefore, take into account the costs, estimated earnings and revenue to date on contracts not yet completed. The revenue recognized is that portion of the total contract price that cost incurred to date bears to anticipated final total cost, based on current estimates of cost to complete. Revenue from cost-plus-fixed-fee contracts is recognized on the basis of costs incurred during the period plus the fee earned, measured by the cost-to-cost method. Contract costs include all direct and allocable indirect labor, benefits, materials unique to or installed in the project, subcontractor cost allocations, including employee benefits and equipment expense. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is recognized in the financial statements. As long-term contracts extend over one year, revisions in cost and earnings estimates during the course of the work are reflected in the accounting period in which the facts which require the revision become known. Costs attributable to contract claims or disputes are carried in the accompanying balance sheets only when realization is probable. These costs are recorded at the lesser of actual costs incurred or the amount expected to be realized. It is reasonably possible that estimates by management related to contracts can change in the future. 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. F-7 33 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (in thousands, except share data) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 3. Other revenue recognition The Company recognizes revenues on its other product sales when the product is shipped and title passes to the customer. 4. 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. 5. 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. 6. 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. 7. 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. F-8 34 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (in thousands, except share data) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 8. 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. 9. 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. 10. 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 41 percent (31 percent in 1997) of receivables are with three different customers. In addition, approximately 25 percent (42 percent in 1997) of receivables are due from entities located outside of North America, primarily Europe and Asia. Of the total receivables, approximately 5 percent are denominated in foreign currencies (6 percent at December 31, 1997). The Company routinely evaluates the financial strength of its customers and monitors each account to minimize the risk of loss. 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 are approximately $2,125 at December 31, 1998 ($229 in 1997). The Company also maintains cash and cash equivalents in foreign accounts. These uninsured balances are approximately $1,494 at December 31, 1998 ($5,709 in 1997). F-9 35 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (in thousands, except share data) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 11. Retentions receivable Many of the Company's contracts require retentions, typically 5-10 percent of the amount billed, to be withheld from each progress payment by the customer until the project reaches substantial completion. 12. Intangible assets Intangible assets are amortized on the straight-line method over the useful life or the terms of the respective agreement or patent, whichever is shorter. The original estimated useful lives range from 2-15 years. On an ongoing basis, management reviews the valuation and amortization of intangible assets to determine possible impairment by comparing the carrying value to the undiscounted estimated future cash flows of the related assets and necessary adjustments, if any, are recorded. 13. 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. 14. Fair value of financial instruments The carrying value of the Company's cash and cash equivalents, contracts receivable and accounts payable, accrued liabilities and lines of credit approximate their fair values due to their short-term nature. 15. Reclassifications Certain reclassifications have been made to the 1997 and 1996 financial statements to conform with the 1998 presentation. F-10 36 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (in thousands, except share data) NOTE B - CAPITAL TRANSACTIONS During 1998, the Company received $49 from the issuance of 44,711 shares of common stock. The Company also issued 27,023 shares of common stock to acquire the net assets of Intelligent Enclosures Corporation (Note S). 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 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 percent to 15 percent (up to $25) of eligible compensation to be withheld for the purchase of stock. Price per share is 85 percent of the lower closing trading price of the stock on the applicable offering commencement date or offering termination date. Offering periods are six months in length beginning on May 1 and November 1 of each year. Employees purchased 44,711, 43,738 and 22,889 shares under the plan in 1998, 1997 and 1996, respectively. NOTE C - INTERNATIONAL OPERATIONS Financial information summarized by geographic area for the years ended December 31, 1998, 1997, and 1996, is as follows.
1998 North America Europe Asia/Pacific Consolidated --------------------------------------- --------------- --------------- ----------------- ------------------- Net revenues - unaffiliated customers $ 30,507 $ 12,965 $ 9,606 $ 53,078 Loss from operations (4,316) (42) (1,156) (5,514) Identifiable assets 21,352 6,453 3,036 30,841 1998 North America Europe Asia/Pacific Consolidated --------------------------------------- --------------- --------------- ----------------- ------------------- Net revenues - unaffiliated customers $ 31,413 $ 11,574 $ 9,554 $ 52,541 Loss from operations (283) (2,668) (830) (3,781) Identifiable assets 18,655 8,262 5,447 32,364 1998 North America Europe Asia/Pacific Consolidated --------------------------------------- --------------- --------------- ----------------- ------------------- Net revenues - unaffiliated customers $ 74,429 $ 22,764 $ 15,633 $ 112,826 Earnings (loss) from operations 5,341 (794) (41) 4,506 Identifiable assets 30,202 10,389 8,904 49,495
F-11 37 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (in thousands, except share data) NOTE C - INTERNATIONAL OPERATIONS - CONTINUED Foreign currency transaction losses totaling approximately $203 for 1998 ($225 for 1997) are included in other income. Foreign currency transactions for 1996 were not significant. NOTE D - ACCOUNTS RECEIVABLE Accounts receivable consist of the following:
1998 1997 -------- -------- Trade accounts receivable $ 1,397 $ -- Contract receivables 7,140 9,666 Retentions receivable 982 3,209 -------- -------- 9,519 12,875 Less allowance for doubtful accounts (615) (403) -------- -------- Accounts receivable $ 8,904 $ 12,472 ======== ========
NOTE E - OTHER CURRENT ASSETS Other current assets consist of the following:
1998 1997 ------ ------ Income taxes receivable $ 360 $1,358 Refundable foreign taxes 1,666 172 Miscellaneous receivables and deposits 188 278 Prepaid expenses 177 336 ------ ------ $2,391 $2,144 ====== ======
F-12 38 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (in thousands, except share data) NOTE F - PROPERTY AND EQUIPMENT Property and equipment and estimated useful lives consist of the following:
Years 1998 1997 ------------- -------- -------- Equipment 5-10 $ 4,221 $ 4,150 Furniture and fixtures 3-5 2,734 2,588 Leasehold improvements life of lease 2,605 2,605 Equipment under capital leases 5-10 4,067 4,067 Vehicles 3-5 317 317 -------- -------- 13,944 13,727 Less accumulated depreciation and amortization including $3,002 and $2,332 for equipment under capital leases at 1998 and 1997, respectively (9,085) (7,423) -------- -------- $ 4,859 $ 6,304 ======== ========
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:
1998 1997 -------- -------- Total costs and estimated earnings $118,265 $108,215 Progress billings to date 112,354 107,518 -------- -------- $ 5,911 $ 697 ======== ========
The above are included in the balance sheets under the following captions:
1998 1997 ------- ------- Costs and estimated earnings in excess of billings on contracts in progress $ 7,546 $ 3,702 Billings in excess of costs and estimated earnings on contracts in progress (1,635) (3,005) ------- ------- $ 5,911 $ 697 ======= =======
F-13 39 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (in thousands, except share data) NOTE H - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of the following:
1998 1997 ------ ------ Trade accounts payable $2,847 $2,729 Other accrued liabilities 219 1,340 Employees salaries, incentive pay, vacation and payroll taxes 1,017 1,265 Reserve for contract estimates and warranties 666 366 ------ ------ $4,749 $5,700 ====== ======
NOTE I - INCOME TAXES Components of income taxes (benefit) are as follows:
1998 1997 1996 ------- ------- ------- Current Federal $ 12 $(1,171) $ 1,288 State 2 (305) 330 Foreign -- -- 75 ------- ------- ------- 14 (1,476) 1,693 Deferred Federal (1,809) (379) (119) State (280) (11) (26) ------- ------- ------- (2,089) (390) (145) ------- ------- ------- Income taxes (benefit) $(2,075) $(1,866) $ 1,548 ======= ======= =======
F-14 40 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (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 percent is as follows:
1998 1997 1996 ------- ------- ------- Tax (benefit) at federal statutory rate $(2,039) $(1,403) $ 1,652 Nondeductible expenses 12 11 41 State income taxes, net of federal income tax benefit (198) (234) 234 Foreign sales corporation exemption -- (167) (333) All other 150 (73) (46) ------- ------- ------- $(2,075) $(1,866) $ 1,548 ======= ======= =======
Deferred income taxes related to the following:
1998 1997 ------- ------- Current deferred tax assets Allowance for doubtful accounts $ 230 $ 150 Accrued expenses and reserves 425 202 ------- ------- $ 655 $ 352 ======= ======= Long-term deferred tax assets (liabilities) Excess book depreciation and amortization $ (79) $ (226) Foreign tax credit carryforwards 162 162 Alternative minimum tax credit carryforwards 199 199 Net operating loss carryforward 1,639 -- ------- ------- $ 1,921 $ 135 ======= =======
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-15 41 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (in thousands, except share data) NOTE I - INCOME TAXES - CONTINUED The Company sustained a net operating loss for tax reporting purposes of $4,533 in 1998. Management believes that it is more likely than not that the Company will have sufficient income to utilize the net operating loss carryforward before it expires in 2018. NOTE J - LINES OF CREDIT During 1998 and 1997, the Company maintained a revolving line of credit with a domestic bank for the lesser of $6,000 ($8,000 during 1997) or the available borrowing base. The interest rate is computed at the bank's prime rate plus 1.0 percent (8.75 percent at December 31, 1998) and requires monthly payments of interest. The Company had $5,254 in borrowings against the line at December 31, 1998 ($1,230 at December 31, 1997). The line of credit expired June 30, 1998 and was extended to December 31, 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, 1998, the Company was out of compliance on certain indebtedness covenants for which they signed a forbearance agreement with the lender where the lender has agreed to forbear exercise of its remedies against the Company. Subsequent to year end the Company signed an extension of the line of credit through March 31, 1999. The Company is currently reviewing several financing alternatives. NOTE K - LONG-TERM OBLIGATIONS The Company has entered into capital leases with various financial institutions and leasing organizations that carry interest rates ranging from 4 percent to 11.5 percent. The leases are collateralized by equipment. Payments approximate $65 monthly including interest. F-16 42 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (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, 1998:
Year ending December 31, ------------------------ 1999 $ 632 2000 539 2001 10 ----------- Total minimum leases payments 1,181 Less amount representing interest 105 ----------- Present value of net minimum lease payments 1,076 Less current portion 557 ----------- Long-term portion $ 519 ===========
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, 1998:
Year ending December 31, ------------------------ 1999 $ 1,778 2000 989 2001 640 2002 583 2003 583 Thereafter 651 ----------- $ 5,224 ===========
F-17 43 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (in thousands, except share data) NOTE L - OPERATING LEASES - CONTINUED The building leases provide for payment of property taxes, insurance, and maintenance costs by the Company. Rental expense for operating leases totaled $2,212, $1,670 and $737 for 1998, 1997 and 1996 respectively. The Company has an option to renew one building lease for four additional five year periods upon expiration of the current term in 2005. NOTE 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 $189, $176 and $184 for the years ended December 31, 1998, 1997 and 1996, 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 $269, $303 and $484, respectively, for the years ended December 31, 1998, 1997 and 1996. Information with respect to the Company's proportionate share of the excess, if any, of the actuarially computed value of vested benefits over the total pension plans' net assets is not available from the plans' administrators. The Multi-Employer Pension Plan Amendments Act of 1980 (The "Act") significantly increased the pension responsibilities of participating employers. Under the provision of the Act, if the plans terminate or the Company withdraws, the Company could be subject to a withdrawal liability. Management has no intention of undertaking any action which could subject the Company to any withdrawal liability which would have a material effect on the Company's financial condition. F-18 44 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (in thousands, except share data) 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 position or results of operations. NOTE O - PRIMARY CUSTOMERS The Company has typically had one to three customers in each year which accounted for more than 10 percent each of revenues; these customers do not necessarily remain significant in subsequent years. These major customers are typically general contractors of fabrication facilities. The Company's major customers and revenue received therefrom are as follows:
1998 1997 1996 ------- ----------- ------- Company A $ 7,912 $ -- $ -- Company B 6,580 -- -- Company C -- 7,241 -- Company D -- -- 21,371 Company E -- -- 17,916 Company F -- -- 16,247
NOTE P - RELATED PARTY TRANSACTIONS Daw Incorporated is a regional interior specialties contracting company based in Utah. Certain stockholders of Daw Incorporated own approximately 34 percent of the Company's common stock. The Company purchased goods and services from Daw Incorporated totaling $447, $223, and $1,118 in 1998, 1997, and 1996, respectively. A member of the board of directors works for a law firm which provided legal services to the Company approximating $171, $138 and $137 in 1998, 1997 and 1996, respectively. F-19 45 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (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, and eliminated the limit on the number of options that can be granted in any given year. Also, the amendment limits to 100,000 the number of options that can be granted to any one individual in any given year. The Plan is a non-qualified plan, and the options granted thereunder are non-qualified stock options. Under the amended Plan, 1,250,000 shares of common stock were reserved for issuance upon exercise of options. The Plan provides that options to purchase a maximum of 1,075,000 shares may be granted to eligible employees (including employees who are directors or officers) and options to purchase a maximum of 175,000 shares may be granted to non-employee directors. The exercise price for stock options granted under the Plan may not be less than 100 percent of the fair market value of a share of common stock on the date the option is granted. Options granted under the Plan after October 24, 1996 expire through 2008. Options granted prior to or on October 24, 1996 expire through 2011. The Company granted options to purchase 311,500 shares, 55,000 shares and 272,000 shares in 1998, 1997, and 1996, respectively, of the Company's common stock. The options were granted to the following:
1998 1997 1996 ------- ------- ------- Directors 20,000 20,000 40,000 Executive officers, including officers who are directors 60,000 30,000 111,500 Other employees 231,500 5,000 120,500 ------- ------- ------- 311,500 55,000 272,000 ======= ======= =======
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. On February 24, 1998, all options with an exercise price greater than $1.40 were re-priced to $1.40, which was the market price of the Company stock on that date. At that date, vesting was increased by one year for those stocks repriced. F-20 46 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (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:
1998 1997 1996 --------- --------- --------- Net earnings (loss) As reported $ (3,922) $ (2,259) $ 3,310 Pro forma (4,074) (2,458) 2,976 Earnings (loss) per share-basic As reported (0.32) (0.18) 0.27 Pro forma (0.33) (0.20) 0.24 Earnings (loss) per share-assuming dilution As reported (0.32) (0.18) 0.27 Pro forma (0.33) (0.20) 0.24
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 1998, 1997 and 1996: expected volatility of 101 percent (53 percent for 1997 and 1996); risk-free interest rate of 5.51 percent (6.05 percent for 1997 and 1996); and expected life of 10 years (9.6 for 1997 and 1996). The weighted-average fair value of options granted was $1.17 and $1.60 in 1998 and 1997, respectively. Option pricing models require the input of highly subjective assumptions including the expected stock price volatility. Also, the Company's employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate. Management believes the best input assumptions available were used to value the options and that the resulting option values are reasonable. F-21 47 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (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, 1996 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 Granted -- 311,500 0.84 - 2.66 2.28 Exercised -- -- -- -- Canceled or expired -- (135,500) 1.38 - 3.50 3.05 -------- -------- Outstanding at December 31, 1998 -- 869,000 0.84 - 2.66 1.66 ======== ======== Exercisable at December 31, 1998 -- -- $ -- $ -- ======== ========
A summary of the status of the options outstanding under the Company's stock option plan at December 31, 1998 is presented below:
Weighted- average Weighted- Weighted- remaining average average Number contractual life exercise Number exercise Range of exercise prices outstanding (years) price exercisable price --------------- ---------------- ------------- -------------- ---------- $ 0.84 - $ 1.25 40,000 5.82 $ 0.97 - $ - $ 1.26 - $ 1.50 628,500 2.98 1.40 - - $ 1.51 - $ 2.00 11,000 5.67 1.97 - - $ 2.01 - $ 2.66 189,500 5.41 2.66 - - --------------- ------------- $ 0.84 - $ 2.66 869,000 3.68 $ 1.66 - $ - =============== =============
F-22 48 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (in thousands, except share data) NOTE R - EARNINGS (LOSS) PER COMMON SHARE Options to purchase 869,000 shares of common stock (693,000 in 1997) at $0.84 to $2.66 ($1.94 to $3.00 in 1997) per share were outstanding at December 31, 1998. They were not included in the computation of loss per share because they would have had an anti-dilutive effect on the 1998 and 1997 loss per share. The following data show the shares used in computing earnings (loss) per common share including dilutive potential common stock:
1998 1997 1996 ---------- ---------- ---------- Common shares outstanding entire period 12,407,977 12,400,543 12,330,254 Net weighted average common shares issued during period 32,144 15,414 19,918 ---------- ---------- ---------- Weighted average number of common shares used in basic EPS 12,440,121 12,415,957 12,350,172 Dilutive effect of stock options -- -- 40,455 Dilutive effect of warrants -- -- 2,729 ---------- ---------- ---------- Weighted average number of common shares and dilutive potential common shares used in diluted EPS 12,440,121 12,415,957 12,393,356 ========== ========== ==========
NOTE S - BUSINESS ACQUISITION On April 22, 1998, the first closing date, the Company acquired the net assets of Intelligent Enclosures Corporation. The transaction was accounted for as a purchase and the transaction is to be completed on April 22, 2000, the second closing date. At the first closing date, the Company delivered 27,023 shares of common stock. At the second closing date, the Company will issue additional shares of common stock at the average per share closing price for the 20 consecutive trading days prior to the second closing date, which in addition to the original 27,023 shares will equal $1,300. F-23 49 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (in thousands, except share data) NOTE T - SEGMENT INFORMATION The Company has two reportable segments for the year ended December 31, 1998, namely 1) cleanrooms and related products and 2) other manufactured goods. Prior to 1998, the Company operated in one segment. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance of each segment based on earnings or loss from operations. The Companies reportable segments are similar in manufacturing processes and are tracked similarly in the accounting system. The manufacturing process for each segment uses the same manufacturing facilities and overhead is allocated similarly to each segment. It is not practical to determine the total assets per segment and depreciation by segment because each segment uses the same manufacturing facility. Identifiable assets by segment are reported below. The Company allocates certain general and administrative expenses, consisting primarily of facilities expenses, utilities, and manufacturing overhead. Segment information for the cleanrooms and related products and other manufactured goods are as follows:
1998 1997 1996 ------------- ------------- -------------- Revenues Cleanrooms and related products $ 46,298 $ 52,541 $ 112,826 Other products 6,780 - - ------------- ------------- -------------- Totals $ 53,078 $ 52,541 $ 112,826 ============= ============= ============== Operating profit (loss) Cleanrooms and related products $ (6,005) $ (3,781) $ 4,506 Other products 491 - - ------------- ------------- -------------- Totals $ (5,514) $ (3,781) $ 4,506 ============= ============= ============== Total assets Cleanrooms and related products $ 15,053 16,174 Other products 1,397 - Manufacturing and corporate assets 14,391 16,190 ------------- ------------- Totals $ 30,841 $ 32,364 ============= =============
F-24 50 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (in thousands, except share data) NOTE U - REVENUES Revenues by country are based on the location of the project for long-term projects and by the location of the customer for other manufactured products and are as follows:
1998 1997 1996 -------------- -------------- ------------- Canada $ 6,666 $ - $ - United Kingdom 6,692 2,068 7,730 Peoples Republic of China 7,092 2,389 6,193 Italy 3,568 - 250 Taiwan 2,319 3,910 8,636 Malaysia - 2,669 - Israel 2,058 4,449 937 France 644 4,999 13,847 All others 198 644 804 -------------- -------------- ------------- Total export revenues 29,237 21,128 38,397 -------------- -------------- ------------- United States 23,841 31,413 74,429 -------------- -------------- ------------- Total revenues $ 53,078 $ 52,541 $ 112,826 ============== ============== =============
F-25 51 Daw Technologies, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (in thousands, except share data) NOTE V - QUARTERLY FINANCIAL RESULTS (UNAUDITED) Quarterly financial results for the years ended December 31, 1998, 1997, and 1996 are as follows:
Net earnings Earnings Net (loss) per Gross (loss) from earnings common 1998 Revenues profit (loss) operations (loss) share-basic ----------------------- ------------- ----------------- ---------------- ----------------- ----------------- First quarter $ 11,441 $ 486 $ (1,298) $ (831) $ (0.07) Second quarter 12,888 (1,768) (3,719) (2,403) (0.19) Third quarter 14,332 952 (878) (748) (0.06) Fourth quarter 14,417 2,185 381 60 - ------------- ----------------- ---------------- ----------------- ---------------- $ 53,078 $ 1,855 $ (5,514) $ (3,922) $ (0.32) ============= ================= ================ ================= ================ 1997 ----------------------- First quarter $ 16,795 $ 2,583 $ 327 $ 182 $ 0.02 Second quarter 16,463 2,398 97 15 - Third quarter 11,453 2,036 46 48 - Fourth quarter 7,830 (1,748) (4,251) (2,504) (0.20) ------------- ----------------- ---------------- ----------------- ---------------- $ 52,541 $ 5,269 $ (3,781) $ (2,259) $ (0.18) ============= ================= ================ ================= ================ 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 ============= ================= ================ ================= ================
F-26 52 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 26, 1999, 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, 1998. 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 26, 1999 S-1 53 DAW TECHNOLOGIES, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------------------- ------------ ----------------------------- ----------- ---------- ADDITIONS ----------------------------- (1) (2) BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COSTS AND OTHER ACCOUNTS DEDUCTIONS- END OF DESCRIPTION PERIOD EXPENSES DESCRIBE WRITE-OFFS PERIOD - ------------------------------------- ------------ ---------- -------------- ----------- ---------- Allowance for doubtful accounts Year ended December 31, 1998 $ 403 $ 100 $ 150(A) $ (38) $ 615 Year ended December 31, 1997 376 180 -- (153) 403 Year ended December 31, 1996 140 330 -- (94) 376 Allowance for contract estimates Year ended December 31, 1998 $ 366 $ -- $ 300(A) $ -- $ 666 Year ended December 31, 1997 575 654 -- (863) 366 Year ended December 31, 1996 438 940 -- (803) 575 Allowance for inventory obsolescence Year ended December 31, 1998 $ -- $ -- $ 300(A) $ -- $ 300 Year ended December 31, 1997 -- -- -- -- -- Year ended December 31, 1996 -- -- -- -- -- Allowance for contract repayment Year ended December 31, 1998 $ 803 $ -- $(750)(A) $ -- $ 53 Year ended December 31, 1997 803 -- -- -- 803 Year ended December 31, 1996 461 342 -- -- 803 (A) Reclassification
S-2 EX-10.5 2 REVOLVING CREDIT AGREEMENT 1 EXHIBIT 10.5.1 SECOND LOAN EXTENSION AGREEMENT This Second Loan Extension Agreement ("Agreement") is entered into on February 26, 1999 (and is effective as of January 1, 1999), between U.S. BANK NATIONAL ASSOCIATION ("U.S. Bank") and DAW TECHNOLOGIES, INC. ("Daw"). RECITALS A. On or about April 17, 1998, Daw and U.S. Bank entered into a loan agreement. The loan agreement was modified and amended by the terms of a modification and forbearance agreement dated September 10, 1998, and a loan extension agreement dated November ____, 1998, which operated, among other things, to extend the maturity date of the Note (as defined below) to December 31, 1998. The above-described loan agreement, as amended, is referred to herein as the "Loan Agreement." B. Pursuant to the terms of the Loan Agreement, U.S. Bank provides a revolving credit facility and a letter of credit facility to Daw. Capitalized terms used in this Agreement that are not defined herein shall have the meaning assigned to those terms in the Loan Agreement. C. Daw is obligated to U.S. Bank pursuant to a promissory note dated August 6, 1997, in the principal amount of $8,000,000 (the "Note"). As of February 11, 1999, Daw owes U.S. Bank the principal amount of $_______________ and accrued interest of $__________ pursuant to the Note. D. Interest continues to accrue on Daw's obligations to U.S. Bank pursuant to the Note on and after February ___, 1999. In addition, Daw is obligated to reimburse U.S. Bank (or pay directly if requested to do so by U.S. Bank) for fees and costs incurred by U.S. Bank in connection with its banking relationship with Daw, including attorney fees. E. The debts and obligations of Daw to U.S. Bank pursuant to the Loan Agreement and the Note are referred to below collectively as the "Indebtedness." F. The Indebtedness is secured by security interests and liens in, among other things, all of Daw's existing and after-acquired accounts, chattel paper, contract rights, equipment, fixtures, general intangibles, and inventory (and the products and proceeds of all of those assets). The security agreements executed by Daw that grant the security interests and liens described in the preceding sentence are referred to below as the "Security Agreements." The personal property of Daw in which security interests and liens have been granted in favor of U.S. Bank pursuant to the Security Agreements is referred to below as the "Collateral." G. The Loan Agreement, the Note, the Security Agreements, and the other documents executed by Daw in favor of U.S. Bank are referred to herein as the "Loan Documents." -1- 2 H. The credit commitment extended by U.S. Bank to Daw pursuant to the Loan Agreement has expired. U.S. Bank in its discretion has made certain advances to Daw following the expiration of the revolving credit facility governed by the Loan Agreement. Daw has asked U.S. Bank to extend the Maturity Date of the Note and the revolving credit facility extended by U.S. Bank to Daw. U.S. Bank is willing to do so, subject to the terms and conditions set forth in this Agreement. TERMS AND CONDITIONS NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties agree as follows: SECTION I AVAILABILITY OF CREDIT 1.1 Acknowledgment of Amounts Owed. Daw hereby acknowledges and agrees that the amounts of principal and interest specified in Recital C with respect to the Note are payable to U.S. Bank without offset, defense, counterclaim, or claim of recoupment. In addition, Daw acknowledges its obligation to pay U.S. Bank the amounts referred to in Recital D to this Agreement. 1.2 Extension of the Maturity Date of the Credit Facilities. U.S. Bank hereby agrees to continue to make Advances available to Daw through March 31, 1999, in accordance with the terms of the Loan Agreement (as modified hereby). In that regard, the maturity date of the Note and revolving credit facility governed by the Loan Agreement hereby is extended through March 31, 1999. 1.3 Amendment of the Note. Contemporaneously with the execution of this Agreement, Daw shall execute and deliver to U.S. Bank a document in a form satisfactory to U.S. Bank amending the Note to reflect the revised maturity date thereof. Following the execution of this Agreement and the note amendment agreement by Daw, references in the Loan Agreement to the Note shall mean the Note as amended by the document described in the preceding sentence. 1.4 Loan Extension Fee. Prior to or contemporaneously with the execution of this Agreement, Daw shall pay U.S. Bank a loan extension fee of $7,500. SECTION II COLLATERAL FOR THE INDEBTEDNESS 2.1 Continued Validity of the Security Agreements. Daw hereby expressly reaffirms and acknowledges the validity of the Security Agreements, the accuracy of the information contained in those documents, and its grant of security interests and liens in favor of U.S. Bank in the Collateral. Daw acknowledges and agrees that the Security Agreements, and the security interests and liens created by those agreements, secure payment of the Indebtedness. Furthermore, Daw acknowledges and agrees that the Security Agreements, and the security interests and liens created thereby, shall continue in full force and effect after the execution of this Agreement. -2- 3 2.2 Additional Financing Statements; Other Documents. Daw hereby agrees that until the Indebtedness has been paid in full, Daw promptly shall execute and deliver to U.S. Bank all documents deemed necessary or desirable by U.S. Bank to evidence, perfect, or continue U.S. Bank's security interests or liens in the Collateral. SECTION III MISCELLANEOUS PROVISIONS 3.1 No Agreement to Lend Additional Sums. Daw acknowledges and agrees that, except as specified in the Loan Agreement (as modified and amended by this Agreement), U.S. Bank has made no commitment to extend credit or to lend funds to Daw and that U.S. Bank has no obligation to do so. Daw acknowledges and agrees that this means, among other things, that U.S. Bank is not obligated to provide Daw a domestic line of credit once contemplated by the parties hereto, or the foreign accounts receivable credit facility guaranteed by the ExIm Bank previously discussed by U.S. Bank and Daw. 3.2 Expenses of U.S. Bank. Daw shall reimburse U.S. Bank for all expenses incurred by U.S. Bank, including, but not limited to, collateral appraisals, collateral examination and inspection costs, and the reasonable fees and expenses of legal counsel for U.S. Bank in connection with the analysis of the existing banking relationship between Daw and U.S. Bank, the preparation, negotiation, closing, administration, amendment, modification, and enforcement of this Agreement, or the agreement evidenced hereby; the preservation, protection, or disposition of the Collateral (or U.S. Bank's security interests therein); or as required by applicable law, rules, policies, and regulations. The amounts owed by Daw pursuant to the preceding sentence of this Agreement are part of the Indebtedness and shall be paid by Daw within ten days of the date U.S. Bank provides Daw with written notice requesting payment of such costs and expenses, or on March 31, 1999, whichever occurs first. 3.3 Release of Claims. Daw hereby releases and forever discharges U.S. Bank and U.S. Bank's agents, principals, successors, assigns, employees, officers, directors, and attorneys, and each of them, of and from any and all claims, demands, damages, suits, rights, defenses, offsets, or causes of action of every kind and nature that Daw has or may have as of the date it executes this Agreement, whether known or unknown, contingent or matured, foreseen or unforeseen, asserted or unasserted, including, but not limited to, all claims for compensatory, general, special, consequential, incidental, and punitive damages, attorney fees, and equitable relief, other than U.S. Bank's obligations under this Agreement and the Loan Agreement (as modified hereby). 3.4 Forbearance with Respect to Existing Defaults. Daw hereby acknowledges and agrees that it is in default with respect to various terms and conditions of the Loan Agreement, including the tangible net worth covenant and the debt service coverage covenant specified therein. Daw's existing defaults under the Loan Agreement are referred to in this Agreement as the "Existing Defaults." U.S. Bank hereby agrees to forbear from exercising its rights and remedies against Daw as a result of the Existing Defaults. U.S. Bank shall not be obligated to forbear with respect to any Events of Default of the types specified in paragraph 4.1 of this Agreement. -3- 4 SECTION IV DEFAULT AND REMEDIES 4.1 Events of Default. The occurrence of any of the following events ("Event(s) of Default") shall constitute a default by Daw under this Agreement and the Loan Documents: (a) Failure to Pay. Daw fails to pay any amount owed to U.S. Bank pursuant to the Note when such amount is due and such failure shall continue for three business days following written notice from U.S. Bank; (b) Failure to Pay Attorney Fees and Costs. Daw fails to pay U.S. Bank's attorney fees, costs, and expenses as required by paragraph 3.2 of this Agreement and such failure shall continue for three business days following written notice from U.S. Bank; (c) Failure to Comply with Other Obligations. Daw fails to comply with any other covenant, agreement, term, or condition imposed upon Daw by this Agreement, the Loan Documents, or any other agreement between Daw and U.S. Bank (or among Daw, U.S. Bank, and any third party or parties) (other than those that resulted in the Existing Defaults) and does not remedy or cure such failure within ten days following written notice from U.S. Bank of such failure; (d) Diminution in the Value of the Collateral. A material diminution in the value of all or any material portion of the Collateral; (e) Incorrect or Misleading Statement. Any material statement, representation, or warranty made by Daw in this Agreement, or in any oral or written statement furnished to U.S. Bank, whether prior to, contemporaneously with, or subsequent to the delivery of this Agreement, proves to have been incorrect or misleading in any material respect when made; or (f) Receivership/Bankruptcy. A receiver or trustee is appointed for Daw, or for any substantial part of its assets, or any bankruptcy case is instituted by or with respect to Daw. 4.2 Acceleration. At the option of U.S. Bank, upon the occurrence of any Event of Default, the Indebtedness immediately shall be due and payable and U.S. Bank shall have no obligation to extend any further credit to Daw. 4.3 Remedies. Following the occurrence of an Event of Default, U.S. Bank immediately and without notice to Daw may exercise any or all of its rights and remedies under the Loan Documents and applicable law, all of which rights and remedies are cumulative. -4- 5 SECTION V GENERAL TERMS 5.1 Assignment. U.S. Bank reserves the right to transfer or assign, without notice to or consent by Daw, any or all of the powers, rights, title, and interests held by U.S. Bank under this Agreement, the Loan Documents, or any other agreements between the parties to this Agreement (or among those parties and any third party or parties). Those agreements may not be assigned by Daw by operation of law, or otherwise, without U.S. Bank's prior, written consent, and any such attempted assignment shall be void and entirely without effect. 5.2 Captions. Any captions for the sections of this Agreement are for convenience only and do not control or affect the meaning or construction of any of the provisions of this Agreement. 5.3 Severability. If any term, condition, or provision of this Agreement, or any other document or instrument referred to in this Agreement, is held invalid for any reason, such offending term, condition, or provision shall be stricken therefrom, and the remainder of this Agreement shall not be affected thereby. 5.4 Amendments. The Loan Documents may be amended or modified only by a written agreement signed by an authorized representative of Daw and an authorized representative of U.S. Bank that by its terms expressly supersedes, modifies, amends, or alters those documents. 5.5 Continued Effectiveness of the Loan Documents. The Loan Documents remain in full force and effect and are binding and enforceable in accordance with their terms (as modified hereby and by the note amendment agreement referred to in paragraph 1.3 above). Following the execution of this Agreement, references in the Loan Agreement to the "Agreement" mean the Loan Agreement, as amended hereby. 5.6 Negotiated Agreement. This Agreement is a negotiated agreement. In the event of any ambiguity in this Agreement, such ambiguity shall not be subject to a rule of contract interpretation that would cause the ambiguity to be construed against either of the parties to this Agreement. 5.7 Voluntary and Entire Agreement. The only consideration for the execution of this Agreement is the consideration expressly recited herein. This Agreement and the other agreements and instruments referred to in this Agreement set forth and constitute the entire agreement among the parties hereto with respect to the subject matter of this Agreement. No oral promise or agreement of any kind or nature, other than those that have been reduced to writing and set forth herein, has been made among U.S. Bank and Daw. Daw acknowledges that it has been, or has had the opportunity to be, represented by legal counsel in connection with the negotiation and execution of this Agreement and the other agreements and instruments referred to in this Agreement. Daw fully understands the meaning and intent of this Agreement and voluntarily executed this Agreement and the other agreements and instruments referred to in this Agreement. -5- 6 5.8 Construction and Conflict with Other Agreements. In the event of any conflict between the terms of this Agreement and the terms of any other agreements or instruments referred to in this Agreement, the terms of this Agreement shall control. 5.9 Waivers. No waiver of any provision of this Agreement, the Loan Documents, or any other agreement between the parties hereto, nor consent to any failure by Daw to comply with such provisions, shall be effective unless the same shall be in writing and signed by U.S. Bank, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 5.10 Applicable Law. Notwithstanding anything in the Loan Documents to the contrary, the Loan Documents, this Agreement, and any other instruments or agreements required or contemplated hereunder shall be governed by, and construed under, the laws of the state of Oregon without regard to principles of conflicts of law. 5.11 Statutory Notices. UNDER OREGON LAW, MOST AGREEMENTS, PROMISES, AND COMMITMENTS MADE BY U.S. BANK CONCERNING LOANS AND OTHER CREDIT EXTENSIONS THAT ARE NOT FOR PERSONAL, FAMILY, OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION, AND BE SIGNED BY U.S. BANK TO BE ENFORCEABLE. BY UTAH STATUTE (UCA 25-5-4) THE FOLLOWING DISCLOSURE IS REQUIRED: THIS AGREEMENT IS A FINAL EXPRESSION OF THE AGREEMENT BETWEEN U.S. BANK AND DAW AND MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY ALLEGED ORAL AGREEMENT. DAW ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS AGREEMENT. U.S. BANK NATIONAL ASSOCIATION DAW TECHNOLOGIES, INC. By: By: ----------------------------- -------------------------------------- Betty J. Kinoshita Ronald W. Daw Vice President President By: -------------------------------------- Michael J. Schifsky Senior Vice President and Chief Financial Officer -6- EX-23.1 3 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23.1 CONSENT We have issued our reports dated February 26, 1999 accompanying the financial statements and schedule of Daw Technologies, Inc., included in the Annual Report of Daw Technologies, Inc., on Form 10-K for the year ended December 31, 1998. 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 26, 1999 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEETS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 AND 1996 AND THE STATEMENTS OF OPERATIONS FOR THE 12 MONTHS ENDED DECEMBER 31, 1998, 1997 AND 1996. 1,000 U.S. DOLLARS 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1 2,140 0 9,520 (616) 1,233 22,869 13,944 (9,085) 30,841 12,195 0 0 0 125 18,002 30,841 53,078 53,078 51,223 58,592 24 100 459 (5,997) (2,075) (3,922) 0 0 0 (3,922) (0.32) (0.32)
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