<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 June 30, 2000
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 Identification No.)
of incorporation or organization)
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 August 14, 2000, the Registrant had 13,468,609 shares of Common
Stock, $0.01 par value outstanding.
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Daw Technologies, Inc.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PART I FINANCIAL INFORMATION.......................................................... 1
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 (unaudited).... 1
Consolidated Statements of Operations - Three months and six months ended
June 30, 2000 and 1999 (unaudited)............................................... 2
Consolidated Statements of Cash Flows - Six months ended June 30, 2000 and
1999 (unaudited)................................................................. 3
Condensed Notes to Consolidated Financial Statements (unaudited)................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................ 10
Item 3. Qualitative and Quantitative Disclosures About Market Risk....................... 15
PART II OTHER INFORMATION................................................................ 16
Item 2. Changes in Securities and Use of Proceeds....................................... 16
Item 4. Submission of Matters to a Vote of Security Holders.............................. 17
Item 5. Other Information............................................................... 17
Item 6. Exhibits and Reports on Form 8-K................................................. 18
Signatures............................................................................... 19
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Daw Technologies, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, Dec. 31,
2000 1999
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,441 $ 296
Accounts receivable, net 9,203 7,447
Costs and estimated earnings in excess
of billings on contracts in progress 9,614 4,994
Inventories, net 2,197 2,612
Deferred income taxes 316 425
Other current assets 2,676 2,569
-------- --------
Total current assets 25,447 18,343
PROPERTY AND EQUIPMENT - NET, AT COST 2,794 3,402
DEFERRED INCOME TAXES 3,364 3,364
OTHER ASSETS 899 966
-------- --------
$ 32,504 $ 26,075
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Checks written in excess of cash in bank $ - $ 248
Accounts payable and accrued liabilities 9,563 8,117
Billings in excess of costs and estimated
earnings on contracts in progress 2,308 1,373
Line of credit 4,209 5,258
Current portion of long-term obligations 303 461
-------- --------
Total current liabilities 16,383 15,457
LONG TERM OBLIGATIONS, less current portion 78 110
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Preferred stock, authorized 10,000,000 shares of
$0.01 par value; 480 shares issued and outstanding
at June 30,2000 and none at December 31, 1999 - -
Common stock, authorized 50,000,000 shares of $0.01 par
value; issued and outstanding 13,468,609 shares at
June 30, 2000 and 12,513,114 at December 31, 1999 135 125
Additional paid-in-capital 21,602 16,579
Accumulated deficit (5,694) (6,196)
-------- --------
Total shareholders' equity 16,043 10,508
-------- --------
$ 32,504 $ 26,075
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
1
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Daw Technologies, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 15,011 $ 9,980 $ 29,686 $ 22,460
Cost of goods sold 12,251 9,933 25,353 20,836
------------ ------------ ------------ ------------
Gross profit 2,760 47 4,333 1,624
Operating expenses
Selling, general and 1,673 1,896 3,025 3,684
administrative
Research and development - 58 - 118
Depreciation and amortization 88 112 208 232
------------ ------------ ------------ ------------
1,761 2,066 3,233 4,034
------------ ------------ ------------ ------------
Earnings (loss) from 999 (2,019) 1,100 (2,410)
operations
Other income (expense)
Interest (223) (186) (415) (287)
Other, net 11 (84) 68 (93)
------------ ------------ ------------ ------------
(212) (270) (347) (380)
------------ ------------ ------------ ------------
Earnings (loss) before income 787 (2,289) 753 (2,790)
taxes
Income taxes (benefit) 251 (847) 251 (1,032)
------------ ------------ ------------ ------------
NET EARNINGS (LOSS) $ 536 $ (1,442) $ 502 $ (1,758)
============ ============ ============ ============
Earnings (loss) per common share
Basic $ 0.04 $ (0.12) $ 0.04 $ (0.14)
Diluted .03 (0.12) .03 (0.14)
Weighted-average common and dilutive
common equivalent shares outstanding
Basic 13,185,866 12,479,711 12,875,237 12,490,968
Diluted 18,468,179 12,479,711 18,194,264 12,490,968
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE> 5
Daw Technologies, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Six months ended
June 30,
2000 1999
------- -------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net earnings (loss) $ 502 $(1,758)
Adjustments to reconcile net earnings (loss) to net
cash used in operating activities
Depreciation and amortization 563 781
Deferred income taxes 109 (1,032)
Changes in assets and liabilities
Account receivables (1,756) 573
Costs and estimated earnings in excess
of billings on contracts in progress (4,620) (3,002)
Inventories 415 188
Other current assets (107) (26)
Accounts payable
and accrued liabilities 1,446 2,411
Billings in excess of costs and estimated
earnings on contracts in progress 935 701
Other assets 67 100
------- -------
Net cash used in
operating activities (2,446) (1,064)
------- -------
Cash flows from investing activities
Payments for purchase of property
and equipment (105) (51)
Proceeds from disposition of property
and equipment 150 -
------- -------
Net cash provided by (used in)
investing activities 45 (51)
------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 6
Daw Technologies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Six months ended
June 30,
2000 1999
------- -------
<S> <C> <C>
Cash flows from financing activities
Decrease in checks written in excess of cash (248) -
in bank
Net change in line of credit (1,049) 207
Proceeds from issuance of stock 5,033 22
Payments on long-term obligations (190) (293)
------- -------
Net cash provided by (used in)
financing activities 3,546 (64)
------- -------
Net increase (decrease) in cash
and cash equivalents 1,145 (1,179)
Cash and cash equivalents at beginning of period 296 2,140
------- -------
Cash and cash equivalents at end of period $ 1,441 $ 961
======= =======
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 415 $ 287
Income taxes - -
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE> 7
Daw Technologies, Inc.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share data)
1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been
prepared by Daw Technologies, Inc. (the "Company" or "Daw") 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
consolidated financial position as of June 30, 2000, its consolidated results of
operations for the three months ended June 30, 2000, and 1999, and its
consolidated results of operations and cash flows for the six months ended June
30, 2000, and 1999, have been included. All such adjustments are of a normal
recurring nature. These financial statements and footnote disclosures in this
Form 10-Q should be read in conjunction with the Company's annual report on Form
10-K for the calendar year ended December 31, 1999. The results of operations
for the three and six months ended June 30, 2000 may not be indicative of the
results that may be expected for the year ending December 31, 2000.
2. NET EARNINGS (LOSS) PER SHARE
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" (SFAS No. 128). SFAS No. 128 requires the
presentation of basic and diluted EPS. Basic EPS are calculated by dividing
earnings (loss) available to common shareholders by the weighted-average number
of common shares outstanding during each period. Diluted EPS are similarly
calculated, except that the weighted-average number of common shares outstanding
includes common shares that may be issued subject to existing rights with
dilutive potential.
3. LINE OF CREDIT
The Company maintains a revolving line of credit with a domestic bank
for the lesser of $5.0 million, or the available borrowing base. The interest
rate is computed at the bank's prime rate plus 5 percent per annum and requires
monthly payments of interest. The Company had approximately $4.2 million in
borrowings against the line at June 30, 2000 ($5.3 million at December 31,
1999). The line of credit expired December 31, 1999 and was extended to August
31, 2000, which included a waiver of the Company's non-compliance with the
covenants as of December 31, 1999. The Company was in compliance with the
extended line of credit agreement as of June 30, 2000. The line of credit is
collateralized by certain domestic receivables and inventories. The line of
credit agreement contains restrictive covenants imposing limitations on payments
of cash dividends, purchases or redemptions of capital stock, indebtedness and
other matters. The Company is currently reviewing several financing
alternatives.
5
<PAGE> 8
Daw Technologies, Inc.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share data)
4. 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 was completed on April 22, 2000, the second
closing date. At the first closing date, the Company delivered 27,023 shares of
common stock. On May 12, 2000, the Company issued an additional 618,439 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, equals 645,462 shares.
5. SEGMENT INFORMATION
The Company has two reportable segments for the three and six months
ended June 30, 2000, namely 1) cleanrooms and related products and 2) other
manufactured goods. 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 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.
Daw Technologies, Inc.
6
<PAGE> 9
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share data)
5. SEGMENT INFORMATION (CONTINUED)
Segment information for the cleanrooms and related products and other
manufactured goods are as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Cleanrooms and related $ 9,493 $ 7,037 $ 20,762 $ 16,760
products
Other manufactured goods 5,518 2,943 8,924 5,700
-------- -------- -------- --------
Totals $ 15,011 $ 9,980 $ 29,686 $ 22,460
======== ======== ======== ========
Earnings (loss) from operations
Cleanrooms and related products $ 1,178 $ (2,327) $ 1,339 $ (3,127)
Other manufactured goods (179) 308 (239) 717
-------- -------- -------- --------
Totals $ 999 $ (2,019) $ 1,100 $ (2,410)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
---------------------------
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
<S> <C> <C>
Total assets
Cleanrooms and related products $21,832 $15,640
Other manufactured goods 2,622 2,284
Manufacturing and corporate 8,050 8,151
------- -------
Totals $32,504 $26,075
======= =======
</TABLE>
Daw Technologies, Inc.
7
<PAGE> 10
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share data)
6. CAPITAL TRANSACTIONS
On April 28, 2000, the Company completed a $4.8 million private equity
placement through the issuance of 480 shares of the Company's 3% Series A
Convertible Preferred Stock, which are convertible into shares of the Company's
common stock. The Preferred Shares do not have voting rights. The Series A
Preferred is currently convertible into shares of Common Stock at a rate equal
to a fraction, the numerator of which is equal to $10,000 plus all accrued
dividends, and the denominator of which is equal to the lesser of (i) $1.32 and
(ii) 80% of the average of the five lowest consecutive per share market values
during the twenty-five trading days proceeding the conversion date. The net cash
received by the Company was $4,575,000.
During the six months ended June 30, 2000, the Company issued 301,550
shares of common stock in connection with the exercise of options related to its
1993 Stock Option Plan.
7. EARNINGS (LOSS) PER COMMON SHARE
The following data show the shares used in computing earnings (loss) per
common share including dilutive potential common stock:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net earnings (loss) $ 536 $ (1,442) $ 502 $ (1,758)
Dividends on preferred stock (25) - (25) -
------------ ------------ ------------ ------------
Net earnings (loss) applicable to $ 511 $ (1,442) $ 477 $ (1,758)
common stock
============ ============ ============ ============
Common shares outstanding
entire period 12,832,454 12,479,711 12,513,114 12,479,711
Net weighted average common shares
issued during period 353,412 - 362,123 11,257
------------ ------------ ------------ ------------
Weighted average number of common
shares used in basic EPS 13,185,866 12,479,711 12,875,237 12,490,968
Dilutive effect of stock options 5,225 - 36,010 -
Dilutive effect of warrants 16,095 - 4,024 -
Dilutive effect of preferred stock 5,278,993 - 5,278,993 -
------------ ------------ ------------ ------------
Weighted average number of common
shares and dilutive potential
common shares used in diluted EPS 18,486,179 12,479,711 18,194,264 12,490,968
============ ============ ============ ============
</TABLE>
8
<PAGE> 11
For the loss periods ended June 30, 1999, all of the options and
warrants that were outstanding were not included in the computation of diluted
EPS because to do so would have been anti-dilutive.
Daw Technologies, Inc.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share data)
8. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
---------- -----------
2000 1999
---------- -----------
<S> <C> <C>
Raw materials $1,699 $ 523
Work in process 798 2,389
------ ------
2,497 2,912
Less allowance for obsolescence 300 300
====== ======
Total $2,197 $2,612
====== ======
</TABLE>
9. SUBSEQUENT EVENTS
On July 10, 2000, the Company sold the assets associated with its
sleeper cab manufacturing business to Western Star Trucks US Inc. for
approximately $1,000,000. In addition, the Company retained certain accounts
receivables associated with its sleeper cab manufacturing line and will continue
to receive payments on such receivables in the ordinary course of business.
Western Star Trucks US Inc. has entered into an agreement with the Company for a
limited specified time period to provide labor and management services to
continue to operate the sleeper cab operations in Salt Lake City. Western Star
Trucks US Inc. has also entered into a short-term lease for the factory space
currently occupied by the sleeper cab operation.
The Company's contract manufacturing group, (Advanced Manufacturing), will also
be providing manufacturing and powder coat paint services to supply the
operation with raw materials for the assembly operation for the duration of
agreement.
9
<PAGE> 12
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
consolidated financial statements and notes thereto included elsewhere herein,
the audited consolidated Financial Statements and "Managements Discussion and
Analysis of Financial Condition and Results of Operations" included in the
Company's report on Form 10-K for the year ended December 31, 1999. All data in
the tables are in thousands, except for percentages and per-share data.
The Company's principal line of business is as a provider of ultra-clean
manufacturing environments or cleanrooms, and cleanroom component systems for
the semiconductor industry. In recent years, the Company has typically had one
to three significant customers, each of whom accounted for approximately 10% or
more of the Company's annual revenues; however, these customers do not
necessarily remain significant in subsequent years. The semiconductor industry
has been historically cyclical in nature. Capital spending by semiconductor
manufacturers has generally 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 new equipment and facilities by the chip manufacturers
surged to $45 billion from about $12 billion during the same period of time. As
chip sales declined over the past three years to about $122 billion in 1999,
capital spending on new equipment and facilities declined to less than $30
billion in 1998. Various industry analysts have reported that in 1999 chip sales
increased by 20%, which indicates that the recent downturn may be ending. In
addition, analysts predict that chip sales for 2000 may increase by an
additional 30 to 40%. The Company can provide no assurance that chip sales will,
in fact, continue to increase during year 2000 or thereafter.
The Company's operating results were impacted by the reduced capital
spending of the semiconductor industry during the past three years. While the
industry has shown signs of recovery from time to time over the past three
years, it has been consistently disappointed by continued declines. Management
believes the downturn is over and the industry is on the road to recovery. The
length and duration of the recovery is still subject to significant uncertainty.
The extended downturn in the semiconductor industry generally resulted in fewer
contracts available to bid, a significant increase in price competition on
contracts that were awarded, and reduced margins on such contracts. However,
beginning in the fourth quarter of 1999, the Company experienced growth in new
contract awards, resulting in an increase in the Company's backlog from $12.8
million at December 31, 1998 to $19.7 million at December 31, 1999.
Additionally, during the first six months of 2000, the Company has experienced
an increase in contract bidding at higher gross margins than at any time during
the three-year industry downturn. While cleanroom contract bidding continues at
a higher rate than any time in the previous three years, the actual award of
contracts does not occur evenly from quarter to quarter. During the six months
ended June 30, 2000, actual cleanroom contract awards were approximately $26.0
million. The Company's cleanroom contract backlog at June 30, 2000 was $15.1
million compared to $15.0 million at June 30, 1999.
Although there is uncertainty regarding length of the recovery in the
semiconductor industry, management believes that changes taking place in the
industry should result in expanded semiconductor industry capital expenditures.
Delays in the ramp-up of 300mm technology have delayed the expected construction
of a whole series of 300mm fabs worldwide, however, beginning in the fourth
quarter of 1999 and continuing in the first six months of 2000, construction of
some of these delayed fabs were initiated. In response to the downturn,
management has taken steps to reduce the Company's cost structure including an
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<PAGE> 13
approximate 26% cut in wages in 1999 as compared to 1998 and an additional 15%
in the first half of 2000. In 1998, the Company reduced its work force by more
than 50%. During 2000, management is continuing to closely monitor the Company's
cost structure, and is taking appropriate actions as considered necessary, but
is continuing to develop state-of- the-art cleanroom technology, providing
world-class support to the Company's customers, and continuing its
diversification strategy.
In response to reduced revenue generated by the sale of cleanrooms, the
Company has undertaken several initiatives to expand its revenue base beyond the
semiconductor industry and to reduce its reliance on this historically cyclical
business. The Company has developed an air entrance system used by large
national retail chains in their new "superstores". Air entrances are used in
lieu of conventional swinging and sliding doors to help the store maintain
comfort in the front of the store, reduce liability and increase and optimize
the traffic flow in and out of the store. The Company's air entrance system was
developed by applying its advanced cleanroom air movement and filtration
technology, resulting in a technically advanced air entrance system. Although
revenues to date from this line of business have been limited, this product
shows promise of providing increased revenue and gross profit over the next two
years. The Company also applied wall panel systems technology used in cleanrooms
to develop a stronger, more durable, and lighter weight sleeper cab for the
transportation industry. This technology may eventually be applied to other
products in the transportation industry. Even though the Company realized
certain revenues from the sleeper cab product, in July of 2000 the Company sold
the assets associated with its sleeper cab manufacturing business to Western
Star Trucks US Inc. for approximately $1,000,000. In addition, the Company
retained certain accounts receivables associated with its sleeper cab
manufacturing line and will continue to receive payments on such receivables in
the ordinary course of business. The Company will continue to use its resources
to pursue other contract manufacturing products.
It is the Company's objective to develop and maintain 40% of its
revenues from sources outside of the semiconductor industry by applying its
product and engineering expertise in custom metal fabrication, airflow systems
and panel production to similar type products used in other industries. The sale
of the Company's sleeper cab business, which accounted for substantially all of
the 25% of its revenue from sources outside of the semiconductor industry during
its last fiscal year, represents a setback in the Company's pursuit of that
objective. However, the Company has entered into several other contract
manufacturing agreements whereby the Company manufactures products owned and
marketed by third parties which will offset some of the lost revenues from the
sale of its sleeper cab operations. In addition, management believes that the
strength of the recovery in the cleanroom industry will also offset the decrease
in revenues from the sleeper cab operations. Contract manufacturing agreements
may change from time to time based on profitability, manufacturing capacity and
other related factors.
The Company's revenue and operating results can fluctuate substantially
from quarter to quarter depending on such factors as the timing of customer
orders, the timing of revenue and cost recognition, variations in contract mix,
changes in customer buying patterns, fluctuations in the semiconductor equipment
market, utilization of capacity, manufacturing productivity and efficiency,
availability of key components and trends in the economies of the geographical
regions in which the Company operates.
The Company uses the percentage-of-completion method of accounting for
its long-term cleanroom contracts. The Company recognizes revenue in proportion
to the costs incurred to date in relation to the total anticipated costs.
Revenue recognized may not be the same as progress billings to the customer.
Underbillings are reflected in an asset account (costs and estimated earnings in
excess of billings on contracts in progress), and overbillings are reflected in
a liability account (billings in excess of costs and estimated earnings on
contracts in progress). Non-cleanroom revenue is generally recognized when the
products are shipped to the customer.
The Company generates revenue in two geographic regions; North America
and Europe. Although risk of fluctuations in currency value does not affect the
Company's dollar-denominated contracts, changes in the relative value of the
dollar could make the Company less competitive in various markets. Contracts to
be performed in Europe may be denominated in local currency, and the
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<PAGE> 14
Company bears the risk of changes in the relative value of the dollar and the
local currencies. Devaluation of world currencies against the U.S. dollar has
created extreme price competitiveness from Korean, Japanese, and German
manufacturers and integrators of systems. The Company has in the past and may in
the future attempt to hedge against currency fluctuations on contracts
denominated in local currencies. There can be no assurance, however, that such
hedging will fully insulate the Company from fluctuations or will not expose the
Company to additional risks of loss.
The Company's business and operations have not been materially affected
by inflation during the periods for which financial information is presented.
RESULTS OF OPERATIONS (Data in the tables are in thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ................ $ 15,011 $ 9,980 $ 29,686 $ 22,460
Gross profit ............ 2,760 47 4,333 1,624
Operating expenses ...... 1,761 2,066 3,233 4,034
Net earnings (loss) ..... $ 536 $ (1,442) $ 502 $ (1,758)
</TABLE>
<TABLE>
<CAPTION>
-------------------------
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
BALANCE SHEET DATA:
<S> <C> <C>
Cash and cash equivalents ......... $ 1,441 $ 296
Working capital ................... 9,064 2,886
Total assets ...................... 32,504 26,075
Total liabilities ................. 16,461 15,567
Total shareholders' equity ........ 16,043 10,508
</TABLE>
Revenues for the second quarter of 2000 increased by 50.4% to $15.0
million compared to $10.0 million for the second quarter of 1999. Revenues for
the six months ended June 30, 2000 increased by 32.2% to $29.7 million compared
to $22.5 million for the six months ended June 30, 1999. The increase in
revenues is attributed to the increase in capital spending by the semiconductor
industry following the extended industry downturn during the last three years.
The capital spending increase resulted in more cleanroom-related contract awards
during the fourth quarter of 1999 and the first quarter of 2000. As a result,
the increase has resulted in more contracts being worked on during the first two
quarters of 2000 compared with the first two quarters of 1999.
Gross profit for the second quarter of 2000 increased by 5,772.3% to
$2.8 million from a gross profit of $47,000 for the second quarter of 1999 and
increased as a percentage of revenue to 18.4% for the second quarter of 2000
from .5% for the second quarter of 1999. Gross profit for the six months
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<PAGE> 15
ended June 30, 2000 increased by 166.8% to $4.3 million from a gross profit of
$1.6 million for the six months ended June 30, 1999 and increased as a
percentage of contract revenue to 14.6% for the six months ended June 30, 2000
from 7.2% for the six months ended June 30, 1999.
The extended downturn in capital spending by the semiconductor industry
resulted in a price competitive bidding environment. As a result, the Company
changed its strategy to purchase rather than manufacture some of its own
component parts, enabling the Company to offer its customers a wider range of
cleanroom solutions at lower prices. This strategy has enabled the Company to
increase its cleanroom revenues and gross profit margins during the first and
second quarters of 2000.
With the Company's efforts to develop a portion 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, the Company may experience cost inefficiencies due to ramp-up costs.
However, it is the Company's objective to identify, manufacture and sell other
products that have high gross profit margin potential.
Selling, general and administrative expenses for the second quarter of
2000 decreased by 11.8% to $1.7 million compared to $1.9 million for the second
quarter of 1999, and decreased as a percentage of contract revenue to 11.1% for
the second quarter of 2000 from 19.0% for the second quarter of 1999. For the
six months ended June 30, 2000, selling, general and administrative decreased by
17.9% to $3.0 million compared to $3.7 million for the six months ended June 30,
1999, and decreased as a percentage of contract revenue to 10.2% for the six
months ended June 30, 2000 from 16.4% for the six months ended June 30, 1999.
The decrease in selling, general and administrative expenses was the
result of the Company's continued efforts to manage and reduce its operating
cost structure. The reduction was primarily the result of reduced payroll and
related expenses.
Research and development expense for the second quarter of 2000
decreased 100.0% to zero compared to $58,000 for the second quarter of 1999.
Research and development expense for the six months ended June 30, 2000
decreased 100.0% to zero compared to $118,000 for the six months ended June 30,
1999. As a result of the Company's strategy to purchase, rather than manufacture
many of its own component parts, there has been a natural reduction in its
research and development expenses. The Company may fund future research and
development projects to improve existing products or develop new products in its
diversification program.
Depreciation and amortization expense, not included in cost of goods
sold, for the second quarter of 2000 decreased 21.4% to $88,000 compared to
$112,000 for the second quarter of 1999. Depreciation and amortization expense
for the six months ended June 30, 2000 decreased 10.3% to $208,000 compared to
$232,000 for the six months ended June 30, 1999.
Interest expense for the second quarter of 2000 increased 19.9% to
$223,000 compared to $186,000 for the second quarter of 1999. Interest expense
for the six months ended June 30, 2000 increased 44.6% to $415,000 compared to
$287,000 for the six months ended June 30, 1999. The increases in interest
expense during both the three and the six months ended June 30, 2000 compared to
the three and six months ended June 30, 1999 are the result of an increase in
borrowings at higher interest rates against the Company's line of credit through
June 30, 2000 compared with borrowings through the same period during 1999.
13
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
Working capital at June 30, 2000 was $9.1 million compared to $2.9
million at December 31, 1999. This includes cash and cash equivalents of $1.4
million at June 30, 2000 and $296,000 at December 31, 1999. The Company's
operations used $2.4 million of cash during the six months ended June 30, 2000,
compared to $1.1 million of cash used in operations during the six months ended
June 30, 1999. During the six months ended June 30, 2000, the Company
experienced increases in costs and estimated earnings in excess of billings on
contracts in progress, account receivables, accounts payable and accrued
liabilities and billings in excess of costs and estimated earnings on contracts
in progress. These increases were primarily due to an increase in work in
process resulting from work on a higher number of cleanroom projects. In
addition, the Company experienced decreases in the line of credit, inventories,
and current deferred income taxes during the six months ended June 30, 2000.
The Company maintains a revolving line of credit with a domestic bank
for the lesser of $5,000,000, or the available borrowing base. The interest rate
is computed at the bank's prime rate plus 5 percent per annum and requires
monthly payments of interest. The Company had approximately $4.2 million in
borrowings against the line at June 30, 2000 (approximately $5.3 million at
December 31, 1999). The line of credit expired December 31, 1999 and was
extended to August 31, 2000, which included a waiver of the Company's
non-compliance with the covenants as of December 31, 1999. The Company was in
compliance with the extended line of credit agreement as of June 30, 2000. The
line of credit is collateralized by certain domestic and foreign 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. The Company is currently
reviewing several financing alternatives.
On April 28, 2000, the Company completed a $4.8 million private equity
placement through the issuance of 480 shares of the Company's 3% Series A
Convertible Preferred Stock, which are convertible into shares of the Company's
common stock. The net cash received by the Company was $4,575,000. The private
equity placement was necessary due to the length and severity of the
semiconductor downturn, the losses incurred by the Company over the last 3
years, the Company's recent resurgence in business activity and the need for
working capital to finance this growth.
Management believes that existing cash balances, borrowings available
under the existing line of credit or future credit facilities, and cash
generated from operations will be adequate to meet the Company's anticipated
cash requirements through December 31, 2000. However, in the event the Company
experiences adverse operating performance, above-anticipated capital expenditure
requirements, or is unable to renew or replace its existing line of credit,
additional financing may be required. There can be no assurance that such
additional financing, if required, would be available on favorable terms if at
all.
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<PAGE> 17
FACTORS AFFECTING FUTURE RESULTS
The Company's future operations will be impacted by, among other
factors, 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 the need for
additional capital, the availability and price of such capital, pricing
pressures, cancellations of existing contracts, timing of significant customer
orders, increased competition, and changes in semiconductor and cleanroom
technology.
THIS REPORT CONTAINS CERTAIN "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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to various market risks, including changes in
foreign currency exchange rates and interest rate risks. Market risk is the
potential loss arising from adverse change in market rates and prices, such as
foreign currency exchange and interest rates. For the Company, these exposures
are primarily related to the sale of product to foreign customers and changes in
interest rates. The Company does not have any derivatives or other financial
instruments for trading or speculative purposes.
The Company is exposed to interest rate changes primarily in relation to
its revolving credit line debt with a bank. The fair value of the Company's
total revolving credit line debt at June 30, 2000 was $4.2 million. Market risk
was estimated as the potential decrease (increase) in future earnings and cash
flows resulting from a hypothetical 10% increase (decrease) in the Company's
estimated weighted average borrowing rate at June 30, 2000. Although most of the
interest on the Company's debt is indexed to a market rate, there would be no
material effect on the future earnings or cash flows related to the Company's
total debt for such a hypothetical change.
The Company's financial position is not materially affected by
fluctuations in currencies against the U.S. dollar, since assets held outside
the United States are negligible. The Company's sensitivity analysis of the
effects or changes in foreign currency exchange rates does not factor in a
potential change in sales levels of local currency prices, as the preponderance
of its foreign sales occur over short periods of time or are denominated in U.S.
dollars.
15
<PAGE> 18
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On April 28, 2000, the Company entered into a Convertible Preferred
Stock Purchase Agreement, pursuant to which certain accredited investors
purchased 480 shares of its 3% Series Convertible Preferred Stock ("Preferred
Shares") for aggregate purchase price of $4,800,000 (or $10,000 per share).
The Preferred Shares have a stated value equal to the sum of $10,000
plus all accrued dividends not previously paid in cash. Dividends accrue on the
stated value at the rate per share of 3% per annum, payable at the Company's
discretion (subject to certain exceptions) in cash or through increase in the
stated value of each Preferred Share. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary, the holders of the
Preferred Shares are entitled to receive the stated value of the Preferred
Shares before any distribution or payment to any securities junior to the
Preferred Shares. The Preferred Shares do not have voting rights, except as
required by law and with respect to a proposal to (a) alter or change adversely
the rights of the Preferred Shares, (b) authorize or create a class of stock
ranking as to dividends and distribution of assets upon liquidation equal or
senior to the Preferred Shares, (c) increase the authorized number of Preferred
Shares, or (d) enter into any agreement to do any of the foregoing.
Each Preferred Share is convertible into shares of Common Stock at the
option of the holder at any time after the issuance of the Preferred Shares. The
conversion price is the stated value of the Preferred Shares divided by the
lesser of (1) $1.32 per Common Share; or (2) 80% of the average of the five
lowest consecutive market values of Common Stock during the twenty-five trading
days preceding the date the Preferred Shares are converted. Subject to certain
exceptions, the Preferred Shares will automatically be converted at the earlier
of (a) the first anniversary of the effective date of a registration statement
with respect to such shares, and (b) the day following any consecutive
thirty-day trading period where, on each day of the period, the market price of
the Company's Common Stock exceeds $2.64. Notwithstanding the foregoing, each
holder of the Preferred Shares may not convert such Preferred Shares or receive
shares of Common Stock as a dividend if, after such transaction, the holder,
together with any of its affiliates, would beneficially own over 4.999% of the
outstanding shares of Common Stock. This restriction may be waived by each
holder on not less than 61 days' notice to the Company.
The Company is required to redeem each Preferred Share at a specified
premium rate in cash upon the occurrence of one of numerous events identified in
its Articles of Incorporation, including, without limitation, a change of
control of the Company or its failure to cure a breach of any agreements entered
into in connection with the Preferred Stock Purchase Agreement. In addition, the
Preferred Stock Purchase Agreement grants to the purchasers of the Preferred
Shares a right of first refusal with respect to most subsequent stock issuances
during a period extending 540 days following May 1, 2000 and prohibits its
registering any additional shares of Common Stock under the Securities Act for a
period extending 180 days following the effectiveness of the Registration
Statement.
In connection with the Company's sale of the Preferred Shares, it issued
360,000 warrants to purchase its Common Stock to the purchasers of the Preferred
Shares. Such warrants have an exercise price of $1.32 per share (and a cashless
exercise option) and are exercisable at any time on or before April 28, 2003;
provided, however, each holder of a warrant may not exercise his or its warrants
if, after such exercise, such holder, together with any of its affiliates, would
beneficially own over 4.999% of the
16
<PAGE> 19
outstanding shares of Common Stock. This restriction may be waived by each
holder on not less than 61 days' notice to the Company.
In connection with the purchase and sale of the Preferred Shares, the
Company also granted Cardinal Securities, LLC, placement agent with respect to
certain of the purchasers, 87,500 warrants as partial consideration for its
services. Such warrants have an exercise price of $1.72 (and a cashless exercise
option) and are exercisable at any time on or before May 1, 2005. In connection
with the purchase and sale of the Preferred Shares, the Company also granted
Institutional Finance Group, Inc., placement agent with respect to certain of
the purchasers, 25,000 warrants as partial consideration for its services. Such
warrants have an exercise price of $1.20 (and a cashless exercise option) and
are exercisable at any time on or before May 1, 2003.
The offer and sale of the above-described Preferred Shares and warrants
was effected in reliance upon the exemption for sales of securities not
involving a public offering, as set forth in Section 4(2) of the Securities Act
of 1933, as amended (the "Securities Act"), based upon the following: (a) the
investors represented and warranted to the Company that they were "accredited
investors," as defined in Rule 501 of Regulation D promulgated under the
Securities Act and had such background, education, and experience in financial
and business matters as to be able to evaluate the merits and risks of an
investment in the securities; (b) there was no public offering or general
solicitation with respect to the offering, and the investors represented and
warranted that they were acquiring the securities for their own account and not
with an intent to distribute such securities; (c) the investors were provided
with any and all other information requested by the investors with respect to
the Company, (d) the investors acknowledged that all securities being purchased
were "restricted securities" for purposes of the Securities Act, and agreed to
transfer such securities only in a transaction registered with the SEC under the
Securities Act or exempt from registration under the Securities Act; and (e) a
legend was placed on the certificates and other documents representing each such
security stating that it was restricted and could only be transferred if
subsequently registered under the Securities Act or transferred in a transaction
exempt from registration under the Securities Act.]
Item 4: Submission of Matters to a Vote of Security Holders
The registrant held its Annual Meeting of Shareholders on July 28, 2000. The
shareholders elected the following Board of Directors to serve for one year:
<TABLE>
<CAPTION>
Name of Nominee Votes For Votes Against Abstentions
--------------- --------- ------------- -----------
<S> <C> <C> <C>
Ronald W. Daw 10,999,636 - 234,907
Charles L. Bates, Jr. 11,005,371 - 229,172
Robert G. Chamberlain 11,010,636 - 223,907
James S. Jardine 11,008,136 - 226,407
Robert J. Frankenberg 11,010,636 - 223,907
Virginia Gore Giovale 10,997,771 - 236,772
Robert G. Teresi 11,001,236 - 233,307
</TABLE>
The shareholders also ratified the appointment of Grant Thornton LLP as
independent auditors for fiscal year 2000 by a vote of 11,066,801 for, 136,080
against and 31,662 abstentions.
Item 5. Other Information
17
<PAGE> 20
If a shareholder desiring to raise a proposal at the next annual meeting of
shareholders does not seek inclusion of the proposal in the Company's proxy
statement and fails to notify the Company at least 45 days prior to the month
and day of mailing of the prior year's proxy statement, management proxies will
be allowed to use their discretionary voting authority when the proposal is
raised at the annual meeting, without any discussion of the proposal in the
proxy statement.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED BY REFERENCE/
NO. DESCRIPTION [FILED HEREWITH (AND SEQUENTIAL PAGE #)
------------- -------------------------------- ---------------------------------------------
<S> <C> <C>
4.3 Form of Warrant issued to Incorporated by reference to the Company's
purchasers of Series A Registration Statement on Form S-3, File
Preferred Shares No. 333-38350, filed with the Commission on
June 1, 2000
Convertible Preferred Stock Incorporated by reference to the Company's
Purchase Agreement dated April Registration Statement on Form S-3, File
10.1 28, 2000. No. 333-38350, filed with the Commission on
June 1, 2000
10.2 Registration Rights Agreement Incorporated by reference to the Company's
Registration Statement on Form S-3, File
No. 333-38350, filed with the Commission on
June 1, 2000
27 Financial Data Schedule Filed herewith.
</TABLE>
(b) Reports on Form 8-K - There were no reports on Form 8-K
filed for the three months ended June 30, 2000.
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<PAGE> 21
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 August 14, 2000.
DAW TECHNOLOGIES, INC.
By: /s/ Ronald W. Daw
---------------------------------------------------
Ronald W. Daw
Chairman of the Board, President,
Chief Executive Officer and
Acting Principal Financial and Accounting Officer
19
