<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1999
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
0-21818
---------------------
(Commission File No.)
DAW TECHNOLOGIES, INC.
------------------------------------------------
(Exact name of registrant as specified in its charter)
UTAH 87-0464280
- --------------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) 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
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 [ ]
As of November 15, 1999, the Registrant had 12,513,114 shares of Common
Stock, $0.01 par value outstanding.
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<PAGE> 2
Daw Technologies, Inc.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I FINANCIAL INFORMATION. 1
Item 1. Financial Statements
Condensed Balance Sheets
as of September 30, 1999 (Unaudited) and December 31, 1998 1
Condensed Statements of Operations - Three months and nine months ended
September 30, 1999 and 1998 (Unaudited) 2
Condensed Statements of Cash Flows - Nine months ended September 30, 1999
and 1998 (Unaudited) 3
Notes to Condensed Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II OTHER INFORMATION 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Daw Technologies, Inc.
CONDENSED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,516 $ 2,140
Accounts receivable, net 9,526 8,904
Costs and estimated earnings in excess
of billings on contracts in progress 9,612 7,546
Inventories, net 814 1,233
Deferred income taxes 1,052 655
Other current assets 3,040 2,391
-------- --------
Total current assets 25,560 22,869
PROPERTY AND EQUIPMENT - NET, AT COST 3,788 4,859
DEFERRED INCOME TAXES 2,556 1,921
OTHER ASSETS 1,052 1,192
-------- --------
$ 32,956 $ 30,841
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 9,162 $ 4,749
Billings in excess of costs and estimated
earnings on contracts in progress 2,401 1,635
Line of credit 5,412 5,254
Current portion of long-term obligations 488 557
-------- --------
Total current liabilities 17,463 12,195
LONG-TERM OBLIGATIONS, less current portion 231 519
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Preferred stock, authorized 10,000,000 shares of
$.01 par value; none issued and outstanding - -
Common stock, authorized 50,000,000 shares of $.01 par
value; issued and outstanding 12,513,114 shares at
September 30, 1999 and 12,479,711 at December 31, 1998 125 125
Additional paid-in-capital 16,579 16,557
Retained earnings (deficit) (1,442) 1,445
-------- --------
Total shareholders' equity 15,262 18,127
-------- --------
$ 32,956 $ 30,841
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 4
Daw Technologies, Inc.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 12,433 $ 14,332 $ 34,893 $ 38,662
Cost of goods sold 11,659 13,380 32,495 38,990
------------ ------------ ------------ ------------
Gross profit (loss) 774 952 2,398 (328)
------------ ------------ ------------ ------------
Operating expenses
Selling, general and administrative 1,685 1,640 5,369 4,993
Research and development 5 38 123 160
Depreciation and amortization 102 152 334 413
------------ ------------ ------------ ------------
1,792 1,830 5,826 5,566
------------ ------------ ------------ ------------
Loss from operations (1,018) (878) (3,428) (5,894)
Other income (expense)
Interest (106) (146) (393) (335)
Other, net (5) (168) (98) (113)
------------ ------------ ------------ ------------
(111) (314) (491) (448)
------------ ------------ ------------ ------------
Loss before income taxes (1,129) (1,192) (3,919) (6,342)
Income tax benefit -0- (444) (1,032) (2,360)
------------ ------------ ------------ ------------
NET LOSS $ (1,129) $ (748) $ (2,887) $ (3,982)
============ ============ ============ ============
Loss per common share
Basic $ (0.09) $ (0.06) $ (0.23) $ (0.32)
Diluted $ (0.09) $ (0.06) $ (0.23) $ (0.32)
Weighted average common and
dilutive common equivalent
shares outstanding
Basic 12,513,114 12,450,607 12,498,431 12,432,759
Dilutive 12,513,114 12,450,607 12,498,431 12,432,759
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 5
Daw Technologies, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------
1999 1998
------- -------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net loss $(2,887) $(3,982)
Adjustments to reconcile net loss
to net cash provided by (used in) operating
activities
Depreciation and amortization 1,159 1,309
Provision for losses on accounts receivable (224) (6)
Deferred income tax (1,032) (2,151)
Changes in assets and liabilities
Accounts receivable (398) (2,946)
Costs and estimated earnings in excess
of billings on contracts in progress (2,066) (812)
Inventories 419 (2,705)
Other current assets (649) (1,687)
Accounts payable and accrued liabilities 4,413 4,654
Income taxes payable - -
Billings in excess of costs and estimated
earnings on contracts in progress 766 (34)
Other assets 140 (1,208)
------- -------
Net cash used in
operating activities (359) (9,568)
------- -------
Cash flows from investing activities
Payments for purchase of property
and equipment (88) (183)
------- -------
</TABLE>
(continued)
See accompanying notes to condensed financial statements.
<PAGE> 6
Daw Technologies, Inc.
CONDENSED STATEMENTS OF CASH FLOWS - CONTINUED
(Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------
1999 1998
------- -------
<S> <C> <C>
Cash flows from financing activities
Net change in line of credit 158 4,399
Proceeds from issuance of common stock 22 69
Obligations to issue common stock - 1,258
Payments on long-term obligations (357) (499)
------- -------
Net cash provided by (used in)
financing activities (177) 5,227
------- -------
Net decrease in cash and cash equivalents (624) (4,524)
Cash and cash equivalents at beginning of period 2,140 5,802
------- -------
Cash and cash equivalents at end of period $ 1,516 $ 1,278
======= =======
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 393 $ 335
Income taxes - -
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 7
Daw Technologies, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share data)
1. INTERIM CONDENSED FINANCIAL STATEMENTS
The accompanying unaudited condensed financial statements of Daw
Technologies, Inc. (the "Company" or "Daw") have been prepared in accordance
with generally accepted accounting principles for interim financial reporting
and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared under generally accepted accounting principles have been
condensed or omitted pursuant to such regulations. In the opinion of management,
all adjustments considered necessary for a fair presentation of the Company's
financial position, results of operations and cash flows have been included. All
such adjustments are of a normal recurring nature. This report on Form 10-Q for
the three months and nine months ended September 30, 1999 and 1998 should be
read in conjunction with the Company's annual report on Form 10-K for the
calendar year ended December 31, 1998. The results of operations for the three
months and nine months ended September 30, 1999 may not be indicative of the
results that may be expected for the year ending December 31, 1999.
2. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share".
The statement is effective for financial statements for periods ending after
December 15, 1997, and changes the method in which earnings per share will be
determined. Adoption of this statement by the Company did not have a material
impact on earnings per share. Options to acquire 750,000 shares of common stock
were not included in the calculation of dilutive weighted shares outstanding for
the three and nine months ended September 30, 1999 because they would have been
anti-dilutive.
3. LINE OF CREDIT
At September 30, 1999, the Company maintained a revolving line of credit
with a domestic bank for the lesser of $6 million or the available borrowing
base. The loan agreement has established the interest rate at the bank's prime
rate plus 1.0% (9.25% at September 30, 1999) and requires monthly payments of
interest. However, due to the existence of a current borrowing base deficit,
effective September 10, 1999 the bank invoked the default rate of 13.25%. The
available borrowing base is limited to certain current domestic accounts
receivable. As the result of a significant customer account balance becoming
past due (see note 6 below) it became necessary to remove the balance from the
borrowing base calculation, thus causing the loan balance to exceed the
available borrowing base. This borrowing base deficit put the Company in default
of the borrowing base provision of the loan agreement resulting in the bank
invoking the default rate of interest.
<PAGE> 8
Daw Technologies, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share data)
3. LINE OF CREDIT (CONTINUED)
The Company had borrowings under the line of $5.4 million and $5.3
million as of September 30, 1999, and December 31, 1998, respectively. The line
of credit, which expired on December 31, 1998, was extended to October 31, 1999.
Under the terms of the loan extension agreement the maximum loan amount is the
lesser of $6.0 million or the standard allowable borrowing base plus the
permitted out-of-formula amount of $1.6 million. The line of credit is
collateralized by certain domestic receivables, equipment, 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 September 30, 1999, the Company was out of
compliance on certain other covenants for which they signed a forbearance
agreement with the lender where the lender agreed to forbear exercise of its
remedies against the Company. The Company is currently negotiating with the bank
to extend the line of credit and is reviewing several other financing
alternatives. Since October 31, 1999, the bank has continued to allow for
discretionary advances against the existing line of credit.
4. BUSINESS ACQUISITION
On April 22, 1998, in a stock for asset transaction, the Company
acquired the net assets of Intelligent Enclosures Corporation, a leader in high
performance controlled environments and contamination control solutions,
including tool isolation environments, for microelectronic and semiconductor
manufacturers. The transaction has been accounted for as a purchase and is
staged in two closing dates. At the first closing on April 22, 1998, the Company
issued 27,073 shares of common stock. At the second closing, on or before April
22, 2000, 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, which, in addition to the shares issued at the first closing,
will equal $1.3 million.
5. SEGMENT INFORMATION
The Company has two reportable segments for the quarter ended September
30, 1999, namely 1) cleanrooms and related products and 2) other manufactured
products. Prior to March 31, 1998, the Company operated in one segment,
cleanrooms and related products. The accounting policies for the segments are
the same as those described in the Company's annual report on Form 10-K for the
calendar year ended December 31, 1998. The Company evaluates performance of each
segment based on earnings or loss from operations. The Company's 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
<PAGE> 9
Daw Technologies, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share data)
5. SEGMENT INFORMATION (CONTINUED)
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, related products and other
manufactured goods are as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Cleanrooms and related
products $ 9,010 $ 12,370 $ 25,770 $ 34,984
Other manufactured goods 3,423 1,962 9,123 3,678
-------- -------- -------- --------
Totals $ 12,433 $ 14,332 $ 34,893 $ 38,662
======== ======== ======== ========
Operating profit (loss)
Cleanrooms and related products $ (644) $ (1,080) $ (3,771) $ (5,747)
Other manufactured goods (374) 202 343 (147)
-------- -------- -------- --------
Totals $ (1,018) $ (878) $ (3,428) $ (5,894)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
--------------------------
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------------------
<S> <C> <C>
Total assets
Cleanrooms and related products $15,716 $15,053
Other manufactured goods 3,290 1,397
Manufacturing and corporate 13,950 14,391
------- -------
Totals $32,956 $30,841
======= =======
</TABLE>
<PAGE> 10
Daw Technologies, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share data)
6. COMMITMENTS AND CONTINGENCIES
In July of 1999, the Company filed suit against Motorola, Inc.
("Motorola") in the Superior Court for the County of Maricopa, Arizona. The
complaint alleged breach of contract for failure to pay for delivered and
installed products. In September 1999 Motorola filed suit against the Company in
the same court. The complaint alleges breach of contract, fraud and fraudulent
inducement, and negligent misrepresentation. The Motorola suit claims Daw caused
it damages as the result of late delivery of several air handling systems. Under
Arizona law, the cases will be consolidated with the Company's case being the
lead case. The Company was forced to file suit after unsuccessful attempts at
mediation (as required by Motorola in the contract). Both parties met with a
mutually agreed upon mediator in Arizona in an attempt to resolve the issues.
Motorola claimed consequential damages as the result of late delivery by the
Company, whereas the Company claims the original delivery dates, as outlined in
Motorola's original bid document, could not have possibly been met as Motorola
was significantly late in both awarding the contract as well as reviewing and
approving the Company's subsequent drawings and submittals. In the second round
of mediation, the mediator recommended Motorola pay the Company in full. It was
his opinion that the Company would prevail at trial. Motorola has refused to
comply with this recommendation. The Company believes that Motorola's claims of
consequential damages are without merit and intends to pursue this case
vigorously.
Motorola's non-payment of the balances due the Company has resulted in a
significant borrowing base deficit on the Company's revolving line of credit.
Advances against the credit line are limited to certain domestic trade accounts
receivable aged less than 90 days. As the balance due in dispute from Motorola
is greater than 90 days it is technically no longer eligible for inclusion in
the Company's borrowing base calculation. Removal of the balance from the
borrowing base has resulted in a borrowing base deficit. As a result of this
violation, effective September 10, 1999 the bank invoked the default rate of
interest of 13.25%.
<PAGE> 11
Item 2. 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. The Company also manufactures sleeper cabs for
heavy-duty trucks, and air entrance systems for large national retail chains.
Additionally, the Company has recently entered into various 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.
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.
Since chip sales drive capital spending by the industry, capital spending on
facilities and equipment also tends to be highly cyclical.
While the semiconductor industry continues to shown signs of recovery,
with most of the major semiconductor and micro-electronic manufacturers posting
record bookings and higher backlogs during the third quarter of 1999, the rate
of capital spending on new facilities and major expansions has continued to be
slow. After peaking at $45 billion in 1995, worldwide capital spending fell by
almost one-third to around $30 billion in 1998. For 1999, industry analysts
anticipate capital spending to recover modestly but increase to $43 billion in
2000 and to finally surpass the 1995 level of spending and top $60 billion in
2001. The recent trend of increased chip sales, which started their upward
movement in July of 1998, began to push equipment sales up during the fourth
quarter of 1998 and this trend has continued through the first three quarters of
1999. Management believes that increased spending by the industry on re-tooling
and new equipment is a precursor to spending on larger capital items such as
facilities and cleanrooms.
While the continued slump in capital spending on new facilities has
resulted in fewer contracts available to bid throughout the current fiscal year,
the Company has been successful during the third quarter of 1999 in securing
numerous new contracts. At September 30, 1999 the Company had a backlog of $11.4
million, compared to $21.1 million at September 30, 1998. The significant
decrease is due to an unusually large backlog posted in September of 1998 as a
result of two major contracts, one of which was postponed and the other which
was subsequently cancelled.
<PAGE> 12
Management believes that changes taking place in the industry should
result in expanded semiconductor industry capital spending in the long-term.
With virtually every major chip manufacturer currently experiencing some form of
capacity constraint, it appears that the excess capacity carried over the past
couple years has been absorbed. Longer lead times, expanded backlogs, and
improved chip pricing are all creating tight supply. In response, chip makers
continue to revise upwardly their capital expenditure budgets as demand for new
chips is expected to outpace supply for years 2000 and 2001. This upcycle in
chip sales is expected to be sustained by better economic conditions in Asia and
Europe, the explosive use of the internet and the ever increasing use of digital
cellular phones. Increased sales of PC's and other new digital consumer products
will also increase demand for more chips. Additionally, the long anticipated
introduction of the 300mm fabs is underway. Several announcements have been made
for the construction of new fabs utilizing the 300mm technology and several more
are expected to follow.
In response to the continued operating losses experienced by the
Company, management will continue to monitor the Company's cost structure and
take appropriate actions as considered necessary, but continue to develop state
of the art cleanroom technology and provide world-class support to the Company's
customers. The Company will also continue to actively seek ways in which to
diversify its revenue and income sources.
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).
<PAGE> 13
RESULTS OF OPERATIONS (Data in the tables are in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 12,433 $ 14,332 $ 34,893 $ 38,662
Gross profit (loss) 774 952 2,398 (328)
Selling, general and
Administrative expenses 1,685 1,640 5,369 4,993
Research and development 5 38 123 160
Net loss (1,129) (748) (2,887) (3,982)
</TABLE>
<TABLE>
<CAPTION>
----------------------------
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------------------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 1,516 $ 2,140
Working capital 8,097 10,674
Total assets 32,956 30,841
Total liabilities 17,694 12,714
Total shareholders' equity 15,262 18,127
</TABLE>
Revenue for the third quarter of 1999 decreased by 13.3% to $12.4
million compared to $14.3 million for the third quarter of 1998. This decrease
was largely due to revenues earned during the third quarter of 1998 on a large
Asian contract that was subsequently canceled. Revenue for the nine months ended
September 30, 1999 decreased by 9.7% to $34.9 million compared to $38.7 million
for the nine months ended September 30, 1998. This decrease is attributed to the
continued downturn in capital spending by the semiconductor industry as more
fully discussed above. The downturn has resulted in fewer contracts being worked
on during the first three quarters of 1999 compared with the first three
quarters of 1998. Year to date cleanroom revenues continue to fall behind
management's projections. Overall revenues from other manufactured goods have
also fallen behind plan with the exception of the sale of tractor sleeper cabs
which have remained on target all year. Revenues from air entrances and contract
manufacturing, while picking up and showing improvement, have also fallen short
of plan for the year.
As noted above, the Company's revenues fluctuate substantially from
quarter to quarter depending on such factors as the timing of significant
customer orders, the timing of revenue and cost recognition, and fluctuations in
capital spending by the semiconductor industry.
Gross profit for the third quarter of 1999 decreased by 18.7% to
$774,000 from $952,000 for the third quarter of 1998 and decreased as a
percentage of revenue to 6.2% for the third quarter of 1999 from 6.6% for the
third quarter of 1998. Gross profit for the nine months ended September 30, 1999
increased by 831.1% to $2.4 million from a $328,000 loss for the nine months
ended September 30, 1998 and increased as a percentage of contract revenue to
6.9% for the nine months ended September 30, 1999 from a loss of 0.8% for the
<PAGE> 14
nine months ended September 30, 1998. The increase in gross profit is the result
of a combination of higher margins realized on certain contracts in process
through various gains in efficiencies and reduced manufacturing costs as a
result of implemented cost reduction programs. Additionally, during the first
nine months of 1998, the Company experienced certain manufacturing
inefficiencies related to lower volume of work in certain product divisions and
production start-up costs related to the manufacture of panels for semi tractor
sleeper shells.
The semiconductor industry downturn has resulted in an increasingly
price competitive bidding environment. Additionally, the downturn has resulted
in a decrease in the volume of certain manufactured cleanroom component
products.
Selling, general and administrative expenses for the third quarter of
1999 increased by 2.7% to $1.7 million compared to $1.6 million for the third
quarter of 1998, and increased as a percentage of revenue to 13.6% for the third
quarter of 1999 from 11.4% for the third quarter of 1998. For the nine months
ended September 30, 1999, selling, general and administrative expenses increased
by 7.5% to $5.4 million compared to $5.0 million for the nine months ended
September 30, 1998, and increased as a percentage of contract revenue to 15.4%
for the nine months ended September 30, 1999, from 12.9% for the nine months
ended September 30, 1998.
Research and development expense for the third quarter of 1999 decreased
86.8% to $5,000 compared to $38,000 for the third quarter of 1998. Research and
development expense for the nine months ended September 30, 1999 decreased 23.1%
to $123,000 compared to $160,000 for the nine months ended September 30, 1998.
During 1998 the Company was involved with certain research and development
projects related to value engineering of existing products. These projects were
completed prior to the third quarter of 1999, resulting in lower research and
development expense for the nine months ended September 30, 1999 compared to the
same period in 1998.
Depreciation and amortization expense for the third quarter of 1999
decreased 32.9% to $102,000 compared to $152,000 for the third quarter of 1998.
Depreciation and amortization expense for the nine months ended September 30,
1999 decreased 19.1% to $334,000 compared to $413,000 for the nine months ended
September 30, 1998. The decreases are due to numerous assets becoming fully
depreciated and expiration of certain capital leases. There have been no
significant additions or deletions of fixed assets during the current year.
Interest expense for the third quarter of 1999 decreased 27.4% to
$106,000 compared to $146,000 for the third quarter of 1998. Interest expense
for the nine months ended September 30, 1999 increased 17.3% to $393,000
compared to $335,000 for the nine months ended September 30, 1998. These changes
are directly related to borrowings against the Company's credit line during 1999
compared to borrowings during 1998.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 30, 1999 was $8.1 million compared to $10.7
million at December 31, 1998. This includes cash and cash equivalents of $1.5
million at September 30, 1999 and $2.1 million at December 31, 1998. The
Company's operations
<PAGE> 15
used $359,000 of cash during the nine months ended September 30, 1999, compared
to using $9.6 million of cash from operations during the nine months ended
September 30, 1998. During the nine months ended September 30, 1999, the Company
experienced an increase in receivables, costs and estimated earnings in excess
of billings on contracts in progress, deferred income taxes, and other current
assets. In addition, the Company experienced an increase in accounts payable and
accrued liabilities, billings in excess of costs and estimated earnings on
contracts in progress and line of credit, and a decrease in inventories during
the nine months ended September 30, 1999.
At September 30, 1999, the Company maintained a revolving line of
credit with a domestic bank for the lesser of $6 million or the available
borrowing base. The loan agreement has established the interest rate at the
bank's prime rate plus 1.0% (9.25% at September 30, 1999) and requires monthly
payments of interest. However, due to the existence of a current borrowing base
deficit, effective September 10, 1999 the bank invoked the default rate of
13.25%. The available borrowing base is limited to certain current domestic
accounts receivable. As the result of a significant customer account balance
becoming past due (see note 6 of Notes to Condensed Financial Statements above)
it became necessary to remove the balance from the borrowing base calculation,
thus causing the loan balance to exceed the available borrowing base. This
borrowing base deficit put the Company in default of the borrowing base
provision of the loan agreement resulting in the bank invoking the default rate
of interest.
The Company had borrowings under the line of $5.4 million and $5.3
million as of September 30, 1999, and December 31, 1998, respectively. The line
of credit, which expired on December 31, 1998, was extended to October 31, 1999.
Under the terms of the loan extension agreement the maximum loan amount is the
lesser of $6.0 million or the standard allowable borrowing base plus the
permitted out-of-formula amount of $1.6 million. The line of credit is
collateralized by certain domestic receivables, equipment, 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 September 30, 1999, the Company was out of
compliance on certain other covenants for which they signed a forbearance
agreement with the lender where the lender agreed to forbear exercise of its
remedies against the Company. The Company is currently negotiating with the bank
to extend the line of credit and is reviewing several other financing
alternatives
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, 1999.
However, in the event the Company experiences adverse operating performance,
above-anticipated capital expenditure requirements, or is unable to negotiate a
renewal or extension of its current credit line, additional financing may be
required. There can be no assurance that such additional financing, if required,
would be available on favorable terms.
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
<PAGE> 16
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 year 2000
compliant. In conjunction with the installation of the Oracle software, the
Company installed new HP computer hardware to run the application software. All
necessary upgrades have been applied to the HP hardware and operating system to
make them fully year 2000 compliant. The Company expects to test these hardware,
operating systems and software applications by November 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 applications. 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 has surveyed
each major third party supplier to confirm their year 2000 readiness and has
received year 2000 compliance certificates and other assurances of their
readiness.
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 fourth quarter of 1999.
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
<PAGE> 17
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
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.
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.
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.
<PAGE> 18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Regulation S-K
Exhibit No. Description
-------------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K - There were no reports on Form 8-K filed
for the three months ended September 30, 1999.
<PAGE> 19
SIGNATURES
Pursuant to the requirements 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 November 15, 1999.
DAW TECHNOLOGIES, INC.
----------------------
(Registrant)
By: /s/ Michael J. Schifsky
It's: Senior Vice President, Chief Financial Officer
(Principal financial and accounting officer)
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
-------------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEETS AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998, AND THE
CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEP. 30,
1999 AND 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH.
</LEGEND>
<CIK> 0000882159
<NAME> DAW TECHNOLOGIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,516
<SECURITIES> 0
<RECEIVABLES> 9,917
<ALLOWANCES> (391)
<INVENTORY> 814
<CURRENT-ASSETS> 25,560
<PP&E> 14,032
<DEPRECIATION> (10,244)
<TOTAL-ASSETS> 32,956
<CURRENT-LIABILITIES> 17,463
<BONDS> 0
0
0
<COMMON> 125
<OTHER-SE> 15,137
<TOTAL-LIABILITY-AND-EQUITY> 32,956
<SALES> 34,893
<TOTAL-REVENUES> 34,893
<CGS> 32,495
<TOTAL-COSTS> 38,321
<OTHER-EXPENSES> 491
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 393
<INCOME-PRETAX> (3,919)
<INCOME-TAX> (1,032)
<INCOME-CONTINUING> (2,887)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,887)
<EPS-BASIC> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
