<PAGE>
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, 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 (IRS Employer
jurisdiction 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 November 11, 2000, the Registrant had 13,580,932 shares of
Common Stock, $0.01 par value outstanding.
<PAGE>
Daw Technologies, Inc.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PART I FINANCIAL INFORMATION..................................................................................................1
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2000 (unaudited) and December 31, 1999.................................1
Consolidated Statements of Operations - Three months and nine months
ended September 30, 2000 and 1999 (unaudited).... .................................................................2
Consolidated Statements of Cash Flows - Nine months ended September 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 6. Exhibits and Reports on Form 8-K...................................................................................17
Signatures ......................................................................................................................18
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Daw Technologies, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
2000 1999
----------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,298 $ 296
Accounts receivable, net 8,355 7,447
Costs and estimated earnings in excess
of billings on contracts in progress 8,416 4,994
Inventories, net 1,801 2,612
Deferred income taxes 316 425
Other current assets 2,349 2,569
--------- ------
Total current assets 24,535 18,343
PROPERTY AND EQUIPMENT - NET, AT COST 2,347 3,402
DEFERRED INCOME TAXES 3,091 3,364
OTHER ASSETS 861 966
-------- -------
$ 30,834 $26,075
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Checks written in excess of cash in bank $ - $ 248
Accounts payable and accrued liabilities 8,304 8,117
Billings in excess of costs and estimated
earnings on contracts in progress 2,091 1,373
Line of credit 3,505 5,258
Current portion of long-term obligations 186 461
---------- --------
Total current liabilities 14,086 15,457
LONG TERM OBLIGATIONS, less current portion 48 110
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Preferred stock, authorized 10,000,000 shares of
$0.01 par value; 472 shares issued and outstanding
at September 30, 2000 and none at December 31, 1999 - -
Common stock, authorized 50,000,000 shares of $0.01 par
value; issued and outstanding 13,580,932 shares at
September 30, 2000 and 12,513,114 at December 31, 1999 136 125
Additional paid-in-capital 21,601 16,579
Accumulated deficit (5,037) (6,196)
-------- --------
Total shareholders' equity 16,700 10,508
------- --------
$30,834 $26,075
======= =======
</TABLE>
See accompanying notes to condensed financial statements.
1
<PAGE>
Daw Technologies, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues $ 12,734 $ 12,433 $ 42,420 $ 34,893
Cost of goods sold 10,580 11,659 35,934 32,495
---------------- ------------------ ----------------- -----------------
Gross profit 2,154 774 6,486 2,398
Operating expenses
Selling, general and administrative 1,236 1,685 4,261 5,369
Research and development - 5 - 123
Depreciation and amortization 83 102 291 334
---------------- ------------------ ----------------- -----------------
1,319 1,792 4,552 5,826
---------------- ------------------ ----------------- -----------------
Earnings (loss) from
operations 835 (1,018) 1,934 (3,428)
Other income (expense)
Interest (151) (106) (566) (393)
Other, net 310 (5) 379 (98)
---------------- ------------------ ----------------- -----------------
159 (111) (187) (491)
---------------- ------------------ ----------------- -----------------
Earnings (loss) before income
taxes 994 (1,129) 1,747 (3,919)
Income taxes (benefit) 336 -0- 588 (1,032)
---------------- ------------------ ----------------- -----------------
NET EARNINGS (LOSS) $ 658 $ (1,129) $ 1,159 $ (2,887)
================ ================== ================= =================
Earnings (loss) per common share
Basic $ 0.04 $ (0.09) $ 0.08 $ (0.23)
Diluted 0.03 (0.09) 0.06 (0.23)
Weighted-average common and dilutive
common equivalent shares outstanding
Basic 13,496,689 12,513,114 13,097,898 12,498,431
Diluted 18,919,139 12,513,114 18,539,062 12,498,431
</TABLE>
See accompanying notes to condensed financial statements.
(continued)
2
<PAGE>
Daw Technologies, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Nine months ended
September 30,
2000 1999
---------------- ---------------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net earnings (loss) $ 1,159 $ (2,887)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 928 1,159
Provision for losses on accounts receivable (31) (224)
Deferred income taxes 382 (1,032)
Changes in assets and liabilities
Account receivables (877) (398)
Costs and estimated earnings in excess
of billings on contracts in progress (3,422) (2,066)
Inventories 811 419
Other current assets 220 (649)
Accounts payable
and accrued liabilities 187 4,413
Billings in excess of costs and estimated
earnings on contracts in progress 718 766
Other assets 105 140
---------------- ---------------
Net cash provided by (used in) operating activities 180 (359)
---------------- ---------------
Cash flows from investing activities
Payments for purchase of property
and equipment (169) (88)
Proceeds from disposition of property
and equipment 296 -
---------------- ---------------
Net cash provided by (used in)
investing activities 127 (88)
---------------- ---------------
</TABLE>
See accompanying notes to condensed financial statements.
(continued)
3
<PAGE>
Daw Technologies, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Nine months ended
September 30,
2000 1999
---------------- ------------
<S> <C> <C>
Cash flows from financing activities
Decrease in checks written in excess of cash in bank (248) -
Net change in line of credit (1,753) 158
Proceeds from issuance of stock 5,033 22
Payments on long-term obligations (337) (357)
---------------- ------------
Net cash provided by (used in)
financing activities 2,695 (177)
---------------- -------------
Net increase (decrease) in cash
and cash equivalents 3,002 (624)
Cash and cash equivalents at beginning of period 296 2,140
---------------- ------------
Cash and cash equivalents at end of period $ 3,298 $ 1,516
================ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 566 $ 393
Income taxes - -
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
12
Daw Technologies, Inc.
CONDENSED NOTES TO CONSOLIDATED 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, 2000 and 1999 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
months and nine months ended September 30, 2000 may not be indicative of the
results that may be expected for the year ending December 31, 2000.
2. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share (Basic EPS) is based on
the weighted average number of common shares outstanding during each period.
Diluted earnings (loss) per common share is based on shares outstanding
(computed as under Basic EPS) and potentially dilutive common shares.
Potential common shares included in the dilutive earning per share
calculation include stock options and warrants granted. Potential common
shares are not included in the diluted loss per share calculation because to
do so would be antidilutive.
3. LINE OF CREDIT
The Company maintains a revolving line of credit with a domestic
bank for the lesser of $4.6 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 $3.5
million in borrowings against the line at September 30, 2000 ($5.3 million at
December 31, 1999). The line of credit expired December 31, 1999 and was first
extended to August 31, 2000 and subsequently to December 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 September 30, 2000. The line of credit is collateralized
by certain domestic receivables, fixed assets 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.
Daw Technologies, Inc.
5
<PAGE>
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 nine
months ended September 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>
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------------- ---------------------------------------
2000 1999 2000 1999
----------------------------------- ---------------------------------------
<S> <C> <C> <C> <C>
Revenues
Cleanrooms and related products $10,160 $ 9,010 $ 30,922 $ 25,770
Other manufactured goods 2,574 3,423 11,498 9,123
------- ------- --------- -------
Totals $12,734 $ 12,433 $ 42,420 $ 34,893
======= ======== ======== ========
Earnings (loss) from operations
Cleanrooms and related products $ 702 $ (644) $ 2,041 $ (3,771)
Other manufactured goods 133 (374) (107) 343
------- ------- --------- -------
Totals $ 835 $ (1,018) $ 1,934 $ (3,428)
====== ======== ====== =======
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------
SEPTEMBER 30, DECEMBER 31,
2000 1999
-----------------------------------------
<S> <C> <C>
Total assets
Cleanrooms and related products $ 21,512 $15,640
Other manufactured goods 1,672 2,284
Manufacturing and corporate 7,650 8,151
------- -------
Totals $ 30,834 $26,075
======== =======
</TABLE>
Daw Technologies, Inc.
7
<PAGE>
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. Eight shares of said preferred stock was
converted to 112,323 shares of common stock on September 7, 2000 leaving 472
preferred shares outstanding as of September 30, 2000.
During the nine months ended September 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 Nine months ended
September 30, September 30,
2000 1999 2000 1999
---------------- --------------------- ----------------- --------------
<S> <C> <C> <C> <C>
Net earnings (loss) $ 658 $ (1,129) $ 1,159 $ (2,887)
Dividends on preferred stock (61) - (61) -
----------------- ----------------- ----------------- --------------
Net earnings (loss) applicable to
common stock $ 597 $ (1,129) $ 1,098 $ (2,887)
================= ================= ================= ==============
Common shares outstanding
entire period 13,468,609 12,513,114 12,513,114 12,498,431
Net weighted average common shares
issued during period 28,080 - 584,784
----------------- ----------------- ----------------- --------------
Weighted average number of common
shares used in basic EPS 13,496,689 12,513,114 13,097,898 12,498,431
Dilutive effect of stock options 5,225 - 36,010 -
Dilutive effect of warrants 16,095 - 4,024 -
Dilutive effect of preferred stock 5,401,130 - 5,401,130 -
----------------- ----------------- ----------------- --------------
Weighted average number of common
shares and dilutive potential common
shares used in diluted EPS 18,919,139 12,513,114 18,539,062 12,498,431
================= ================= ================= ================
</TABLE>
For the loss periods ended September 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.
8
<PAGE>
Daw Technologies, Inc.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share data)
8. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
--------------------- -----------------------
2000 1999
--------------------- -----------------------
<S> <C> <C>
Raw materials $ 1,570 $ 523
Work in process 531 2,389
--------------------- -----------------------
2,101 2,912
Less allowance for obsolescence 300 300
--------------------- -----------------------
Total $ 1,801 $ 2,612
===================== =======================
</TABLE>
9. SALE OF SLEEPER CAB MANUFACTURING BUSINESS
On July 10, 2000, the Company sold the assets associated with its
sleeper cab manufacturing business to Western Star Trucks US Inc. for
approximately $750,000. In addition, the Company retained certain accounts
receivable associated with its sleeper cab manufacturing 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 Daw Technologies for a
limited specified time period, not to extend beyond year-end 2000, 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 the agreement all at a set markup.
In connection with the sleeper cab manufacturing business, the
Company had recognized costs and begun setup for sleeper cab operations in
South Carolina. Due to the sale of the sleeper cab manufacturing business,
the Company discontinued operations in this location creating a loss for the
quarter of approximately $450,000 that was offset by the gain from the sale
of this business as reflected in other income on the Statement of Operations.
9
<PAGE>
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, the Company has been consistently disappointed by continued declines.
Management believes the most recent 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.
REVENUE BACKLOG
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 nine 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 nine months
ended September 30, 2000, actual cleanroom contract awards were approximately
$40.5 million. The Company's cleanroom contract backlog as of November 14, 2000
was $25.8 million compared to $11.4 million at September 30, 1999. Management
expects to enter the year 2001 with the highest cleanroom contract backlog since
the beginning of the semiconductor downturn three years ago.
COST REDUCTIONS
Although there is uncertainty regarding the 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 nine months of 2000, construction of
some of these delayed fabs was initiated. In response to the most recent down
cycle, management has taken steps to reduce the Company's cost structure,
including an approximate 26% cut in wages in 1999 as compared to 1998 and
10
<PAGE>
an additional 22% in the first nine months of 2000 as compared to 1999. 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.
DIVERSIFICATION
In the development of ultra-clean environments, the Company has been
able to develop several related technologies and has become very efficient in
light-weight construction, air handling, filtering, powder painting, and
environmental controls. These related technologies have enabled the Company to
diversify in new areas outside of ultra-clean environments, which so closely
depends upon the semiconductor industry. The development of the light-weight
sleeper cab business unit that was sold for a gain is an example of the
technology opportunities available to the Company. Air doors and light-weight
trailers are also areas the Company is developing. In addition to
diversification in cleanroom-related technologies, the Company has developed a
lower class of cleanroom used in the biochemical, pharmaceutical, and medical
hospital applications. The Company's European operation is currently under
contract for the construction of several Class 3 cleanroom facilities.
Management is not only committed to growth within the semiconductor cleanroom
industry but also is pursuing several other related ventures.
DAW TECHNOLOGY MANUFACTURED PRODUCTS
Daw Technologies continues to provide some of the most accepted floor, wall, and
ceiling products in the cleanroom industry. The Company continues to accept
orders for its high quality products on a regular basis. However, due to price
competitiveness in the international markets, it has become necessary to offer
customers alternative product solutions in the bid process. The Company has been
able to identify alternative third-party products that meet the specifications
of the semiconductor industry and compare in the level of quality that the Daw
products provide.
COMPANY PRACTICES AND PROCEDURES
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.
Under-billings are reflected in an asset account (costs and estimated earnings
in excess of billings on contracts in progress), and over-billings 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 primarily in two geographic regions;
North America and Europe. Although the 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 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.
11
<PAGE>
RESULTS OF OPERATIONS (Data in the tables are in thousands)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues.............................$ 12,734 $ 12,433 $ 42,420 $ 34,893
Gross profit.......................... 2,154 774 6,486 2,398
Operating expenses.................... 1,319 1,792 4,552 5,826
Net earnings (loss)...................$ 658 $ (1,129) $ 1,159 $ (2,887)
-----------------------------------------
SEPTEMBER 30, DECEMBER 31,
2000 1999
---------------------- -----------------
BALANCE SHEET DATA:
Cash and cash equivalents............. $3,298 $296
Working capital....................... 10,449 2,886
Total assets.......................... 30,834 26,075
Total liabilities..................... 14,134 15,567
Total shareholders' equity............ 16,700 10,508
</TABLE>
Revenue for the three months ended September 30, 2000 increased by
2.4% to $12.7 million compared to $12.4 million for the three months ended
September 30, 1999. Revenue for the nine months ended September 30, 2000
increased by 21.6% to $42.4 million compared to $34.9 million for the nine
months ended September 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 semiconductor
industry capital spending increase resulted in more cleanroom-related contract
awards during the fourth quarter of 1999 and the first three quarters of 2000.
As a result, the increase has resulted in more recognition of revenue during the
first three quarters of 2000 compared with the first three quarters of 1999.
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. However, the sale of the sleeper
cab business unit on July 10, 2000 did contribute to a decrease in revenue of
approximately $1.8 million for the three months ended September 30, 2000 as
compared to the average revenue recognized for the sleeper cab business unit
during the first two quarters of 2000.
Gross profit for the three months ended September 30, 2000 increased by 178.3%
to $2.2 million from $774,000 for the three months ended September 30, 1999 and
increased as a percentage of revenue to 16.9% for the three months ended
September 30, 2000 from 6.2% for the three months ended September 30, 1999.
Gross profit for the nine months ended September 30, 2000 increased by 170.5% to
$6.5 million from $2.4 million for the nine months ended September 30, 1999 and
increased as a percentage of revenue to 15.3% for the nine months ended
September 30, 2000 from 6.9% for the nine months ended September 30, 1999. 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
as part of the bidding process.
12
<PAGE>
Selling, general and administrative expenses for the three months
ended September 30, 2000 decreased by 26.6% to $1.2 million compared to $1.7
million for the three months ended September 30, 1999, and decreased as a
percentage of revenue to 9.7% for the three months ended September 30, 2000 from
13.6% for the three months ended September 30, 1999. For the nine months ended
September 30, 2000, selling, general and administrative expenses decreased by
20.6% to $4.3 million compared to $5.4 million for the nine months ended
September 30, 1999, and decreased as a percentage of contract revenue to 10.0%
for the nine months ended September 30, 2000, from 15.4% for the nine months
ended September 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 three months ended September
30, 2000 decreased to zero compared to $5,000 for the three months ended
September 30, 1999. Research and development expense for the nine months ended
September 30, 2000 decreased to zero compared to $123,000 for the nine months
ended September 30, 1999. The Company continues to improve current Daw products
and may fund future research and development projects to develop new products in
its diversification program.
Depreciation and amortization expense for the three months ended
September 30, 2000 decreased 18.6% to $83,000 compared to $102,000 for the three
months ended September 30, 1999. Depreciation and amortization expense for the
nine months ended September 30, 2000 decreased 12.9% to $291,000 compared to
$334,000 for the nine months ended September 30, 1999. The decreases are due to
numerous assets becoming fully depreciated and expiration of certain capital
leases.
Interest expense for the three months ended September 30, 2000
increased 42.5% to $151,000 compared to $106,000 for the three months ended
September 30, 1999. Interest expense for the nine months ended September 30,
2000 increased 44.0% to $566,000 compared to $393,000 for the nine months ended
September 30, 1999. The increase in interest expense is the result of an
increase in borrowings during the quarter and nine months, higher interest rates
against the Company's line of credit and additional fees associated with the
extension of the line of credit.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 30, 2000 was $10.4 million compared to
$2.9 million at December 31, 1999. This includes cash and cash equivalents of
$3.3 million at September 30, 2000 and $296,000 at December 31, 1999. The
Company's operations provided $180,000 of net cash during the nine months
ended September 30, 2000, compared to using $359,000 of net cash in
operations during the nine months ended September 30, 1999. During the nine
months ended September 30, 2000, the Company experienced an increase in
receivables, costs and estimated earnings in excess of billings on contracts
in progress, billings in excess of costs and estimated earnings on contracts
in progress and accounts payable and accrued liabilities. In addition, the
Company experienced a decrease in its line of credit and inventories during
the nine months ended September 30, 2000.
The Company maintains a revolving line of credit with a domestic bank
for the lesser of $4.6 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 accrued interest only. The Company had approximately $3.5
million in borrowings against the line at September 30, 2000 ($5.3 million at
December 31, 1999). The line of credit expired December 31, 1999 and was first
extended to August 31, 2000 and subsequently to December 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 September 30, 2000. The line of credit is collateralized
by
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certain domestic receivables, fixed assets 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.
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 the next twelve months. 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.
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.
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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 September 30, 2000 was $3.5 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 September 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 of changes in foreign currency exchange rates does not factor in a
potential change in sales levels or local currency prices, as the preponderance
of its foreign sales occur over short periods of time or are denominated in U.S.
dollars.
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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 A Convertible Preferred Stock ("Preferred
Shares") for an 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
per share 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 certain 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
of 1933 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, wouldbeneficially 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.
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
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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 certain exemptions 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") and regulation D
promulgated thereunder, 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Regulation S-K
Exhibit No. Description
------------------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K - There were no reports
on Form 8-K filed for the three months ended
September 30, 2000.
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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 14, 2000.
DAW TECHNOLOGIES, INC.
---------------------
(Registrant)
By: /s/ RONALD W. DAW By: /s/ B.J. MENDENHALL
--------------------------------------- --------------------------
It's President, Chief Executive Officer It's: Chief Financial Officer
(Principal financial and
accounting officer)
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