ITEM 1. BUSINESS.
INTRODUCTION
Daw Technologies, Inc. (the "Company") is a leading supplier of ultra-clean manufacturing environments, or cleanrooms, to the semiconductor industry. The Company designs, engineers, manufactures, installs and services all principal component systems for advanced cleanrooms. The Company is a single-source provider of the entire cleanroom, providing make-up and recirculating air handling systems, ceiling systems, wall systems and floor systems. The Company also provides its customers with services to integrate the design, installation and servicing of cleanrooms, including architectural engineering and design, installation, testing, certification, tool fit-up, and continuing on-site service and support. The Company believes its integrated approach enables customers to benefit from accelerated cleanroom design and installation, simplified project control, single-source performance certification and cost effectiveness.
Cleanrooms are critical to the semiconductor manufacturing process. Process yields are highly dependent upon controlling contamination levels and other environmental variables. These variables include the number of particles, humidity, gasses, vibration, temperature and electro-magnetic fields. To be competitive, semiconductor manufacturers must meet increasingly stringent standards for cleanliness and environmental control in their fabrication facilities ("fabs"). Moreover, because of shorter product life cycles and competitive pressures, semiconductor manufacturers are demanding that new cleanrooms be operational more quickly. The Company believes its advanced systems and integrated solution allow it to effectively address the requirements of efficient cleanroom design and installation.
The Company markets its cleanrooms through a direct sales force to customers building new fabs or renovating existing facilities. The majority of its business comes from repeat sales to these customers.
INDUSTRY BACKGROUND
The rapid pace of advances in semiconductor technology has led to shorter semiconductor product and facility life cycles. To bring new semiconductor products to market more rapidly, semiconductor manufacturers seek to compress design and construction lead times for new fabs. As feature sizes shrink and as wafer size, chip densities and the number of process steps increase, environmental variables must be more stringently controlled. Even slight deviations in key environmental parameters, most of which are controlled within the cleanroom, can negatively affect yields. Achieving higher yields is the motivating force behind many of the progressively more rigorous cleanroom standards for semiconductor fabs.
To meet the functional specifications required for these cleanrooms, each part of the cleanroom must meet stringent technical requirements, and all systems must be precisely integrated. In addition to the basic requirements for contamination control, semiconductor cleanrooms must function seamlessly as part of the overall production process. The cleanroom envelope might be viewed as a process tool in the same manner as the lithography tools, deposition tools, etching tools and other equipment inside the cleanroom.
Because of shorter product life cycles and the need to ramp new products up quickly, manufacturers are demanding that cleanrooms be designed and installed more rapidly. Historically, semiconductor manufacturers have purchased cleanroom component systems and related services from multiple vendors. Under this "traditional" approach, vendors are selected through an iterative process where requests for quotation ("RFQ") are issued, initial designs are prepared, and revised bids are submitted. This evaluation and redesign may occur repeatedly until final vendor selections are made. Following this process, final designs are prepared and the project is initiated. Component systems purchased in this fashion may be installed by the original vendor, or by non-affiliated installers.
INTEGRATED SOLUTION
The Company's integrated solution incorporates design, engineering, manufacturing, installation, testing, product development and on-going customer support and services. In contrast to the traditional approach, the Company believes that its integrated cleanroom approach provides customers with greater project control by reducing the number of vendors, subcontractors and suppliers and simplifying coordination of the project. The advantages of the Company's integrated solution include:
Accelerated Design and Installation. The integrated approach facilitates improved coordination of the installation process thus allowing the Company to meet the increasingly demanding schedules for the design and construction of new fabs. Delays from scheduling conflicts are minimized, since the Company manufactures and installs its own systems. Problems with system integration are minimized, since the Company designs its systems for compatibility. Components for newly-developed systems can be pre-assembled at the factory to test tolerances and new designs prior to installation. As a single source supplier, the Company can readily adapt to changes in scheduling or design of any cleanroom system.
Simplified Project Control. The Company's approach offers customers a single point of contact for the cleanroom, avoiding the need for the customer to coordinate the activities of multiple vendors. The Company believes that having one company design, manufacture and install the entire cleanroom facilitates coordination of the total construction.
Single-Source Performance Guarantee. The Company certifies that the cleanroom will meet the agreed upon performance specifications. The Company's approach provides the customer a single point of accountability for the entire cleanroom envelope. Although component manufacturers can design their individual cleanroom components to meet the technical specifications provided by the fab designer, they cannot effectively guarantee the as-built performance of the entire cleanroom after their components have been integrated with other manufacturer's components by a non-affiliated installer.
Cost Effectiveness. Having a single vendor responsible for the design, manufacture and installation of the entire cleanroom allows for significant on-site overhead savings over the traditional multi-vendor approach. A portion of these savings result from reduced administrative costs. By designing, manufacturing and installing all major cleanroom system components, the Company is able to avoid the redundancy that typically occurs with large, complex, multiple supplier projects. In addition, the Company's customers benefit from increased revenues resulting from bringing a new fab into operation in a shorter time period.
COMPANY STRATEGY
The Company's stated mission is to be the leading worldwide provider of ultraclean manufacturing environments by providing totally integrated system solutions. The Company's strategy for achieving this goal includes the following elements:
Expand Market Acceptance of Integrated Solution. The Company believes its integrated solution best addresses semiconductor manufacturers' needs to increase yields and expand or develop fabs as quickly as possible at a lower total cost. A number of leading semiconductor companies have adopted the Company's integrated solution, and the Company is focusing its marketing efforts on encouraging broader market acceptance of this approach.
Build Long-Term Customer Relationships with Industry Leaders. The semiconductor industry is highly concentrated, with the top 10 semiconductor manufacturers accounting for approximately 65% of capital expenditures. Most of the Company's revenue is derived from sales to leading semiconductor manufacturers. The Company's marketing strategy is focused on building long-term relationships with the industry leaders, their architectural and engineering firms and other parties involved in the cleanroom project. By building such relationships, the Company is positioned to work with those advanced semiconductor manufacturers that most benefit from its integrated approach.
Expand Local Service Network. In order to provide timely and efficient local customer service and support, the Company has established project management, design and sales offices near major semiconductor manufacturing centers. By expanding the Company's project management network and locating new offices in major semiconductor manufacturing centers, the Company believes it is in a better position to compete for service contracts. In addition, the Company believes a local service network enables it to strengthen customer relationships, expand sales leads and receive more direct customer feedback.
Expand International Business. Although the majority of the Company's revenues have been generated from projects in North America, revenues from international operations have increased over the last several years. The Company will continue to seek to increase revenues from international projects by expanding marketing efforts and bidding activities in the Asia/Pacific Rim region and Europe. To support its international expansion strategy, the Company has established design and engineering offices in Hsin-Chu, Taiwan, Livingston, Scotland and Aix-en-Provence, Southern France. Information concerning revenues summarized by geographical area is set forth in Note C of the footnotes to the financial statements.
Maintain Technological Leadership. The Company believes technological capability is a significant factor in the sale of cleanroom solutions. The Company seeks to develop technologically advanced solutions to its customers' evolving needs. Many major new cleanrooms designed by the Company are customized in some way to meet the manufacturer's needs. This customer-driven innovation allows the Company to regularly improve its systems to respond to evolving industry requirements. In addition, the Company seeks to expand its business through strategic relationships, joint ventures and acquisitions and to extend its business to related industry segments if appropriate.
CLEANROOM SYSTEMS AND SERVICES
Each component of the cleanroom plays an important role. The cleanroom consists of special high-performance air handling systems, ceiling modules and highly efficient filters, wall partitions, raised-access flooring and state of the art control systems. These systems provide a continuous flow of ultrafiltered air from the ceiling to the floor to flush out particles and other contaminants. The room is maintained at a slightly higher air pressure than surrounding rooms so leaks, open doors, or other temporary openings cause clean air to escape, rather than allow contaminated air to enter. Several important measures must be considered in cleanroom design. They are: The "room class" which defines the allowed number of particles per cubic foot of air, the number of "air changes" which is the number of times per minute the air in the room is completely replaced and the room "recovery rate" which is the amount of time it takes for the room to become clean following contamination. It is also essential that airflow through the cleanroom is unidirectional, where air flows through all areas in essentially straight vertical paths, avoiding vortices and eddies that could trap particles. The cleanroom must be designed to accommodate process manufacturing equipment including piping and wiring, and permit the movement of materials and personnel without compromising cleanliness. Cleanrooms are designed to control humidity, gasses, noise, vibrations, temperature, electro-magnetic fields, and other environmental variables.
A typical eight-inch wafer production line includes 60,000-150,000 square feet of Class 1 or better cleanroom. Cleanrooms are rated according to their "Class," the maximum number of particles greater than 0.12 microns found in any cubic foot of cleanroom space. Leading edge cleanrooms for advanced semiconductor fabrication are Class 1 or better. Virtually all of the Company's contracts involve Class 100 or better cleanrooms.
Component Systems.
The Company manufactures all principal component systems which comprise an integrated cleanroom, including make-up and recirculating air handlers, fan-filter units, filtered ceiling systems, wall systems, and floor systems. These components may be sold either as part of a fully integrated cleanroom or as individual components for integration by non-affiliated installers. Components are manufactured of non-shedding materials to mitigate microscopic particles in the air stream that may have deleterious effects on the cleanroom.
The Company's cleanroom component systems include the following:
STRATUS(TM) Air Handlers. Stratus(TM) Air Handling Systems deliver quiet, efficient and conditioned prefiltered air to clean manufacturing facilities. The Company manufactures and installs recirculating air handling systems, make-up air handling systems and localized fan filter units. The Company's air handlers are designed to reduce noise, vibration and power consumption and meet stringent standards defined by the industry. The moving elements in a STRATUS(TM) recirculating air handler are balanced to less than 25 milli-inches per second of vibration and meet stringent noise standards. Fan and motor bearings are rated in excess of the industry standards for continuous, uninterrupted service. The Company offers digitally controlled systems that instruct the air handler to adapt to changes in temperature, relative humidity, pressure drop and other environmental factors using feedback from an array of specialty sensors.
AIR-FRAME(TM) Ceiling Systems. AIR-FRAME(TM) Ceiling Systems are designed to provide ultra-clean air filtration and unidirectional airflow for cleanroom application. Each system fully integrates lighting, ionization and fire suppression into the ceiling modules for single point connection in the field. Modules can be fully welded or stick-built in sizes ranging from 1' x 1' to 10' x 24' and each are capable of supporting air handlers in excess of
4,000lbs. Individual modules can be configured as tunnels or as large ballrooms to form cleanrooms of virtually unlimited size and shape. The Company offers seven different ceiling schemes. Each is tailored to a particular cleanroom application to create optimal performance while maintaining absolute flexibility, facilitating rapid modifications to evolving cleanrooms. Precision modules (tolerance +0", -1/8") are custom-made of light weight precision-extruded aluminum (tolerance + or - .003") and finished with a nonshedding baked-on powder coat epoxy. Each module is carefully designed with all appropriate column notches and structural hanging points to match existing field conditions. Each module is taken directly off the powder coat line and placed in an on-site Class 10,000 clean packaging area where they are prewired, prelighted and clean packaged.
The Company's lightweight aluminum modules permit installation by two men and yet are strong enough to support a 4000lb. hanging load from any point below the grid and a 250 lb. man-rating above the grid. Ceiling modules can be designed with each filter individually ducted or as a pressure plenum. Plenum sides can be closed or open to share airflow with adjacent plenums. Optional filter dampers can be provided for finite airflow control.
The Company has developed, tested and refined the Flushlight(TM) and Flow Thru(TM) systems using a sophisticated computer airflow model. The airflow through the grid and light cavity eliminates the vortex created by the grid. A vortex caused by typical cleanroom ceiling systems is a turbulent zone below the ceiling grid members that captures particulate and permits particulate migration throughout the cleanroom.
NETWORK(TM) Wall Systems. NetWork(TM) Wall Systems separate cleanrooms into distinct airflow zones. Network(TM) offers five different wall systems: 2" studless self-supporting panels, -1/2" panel on aluminum stud, -1/4" batten panels on steel stud, -1/4" furring panels, and 1 -3/4" 3 in 1 wall. The 1 - -3/4" wall can be: A. 1 -3/4" studless, self-supporting panels; B. 1 -3/4" panel on aluminum stud; or C. -1/4" panel on aluminum stud all fully compatible with one another. Each of these wall systems has been developed to permit any or all systems to be interfaced together maintaining a uniform appearance. A typical installation might use 1/4" panels furred over existing walls, 2" panels in the large ballroom areas and 1/2" panels on structural studs to support Air-Frame(TM) ceiling modules and Stratus(TM) air handlers. Each panel is constructed of .032" aluminum skins laminated to an aluminum honeycomb core and finished with a nonshedding baked-on powder coat epoxy. Panels are held to strict dimensional and structural tolerances with surface flatness varying less than + or - .032", panel length and width accurate to + or - .040" and deflection less than L/240 at 5 lbs. per square foot. The panel edge is gasketed to provide a seal between varying cleanroom zones. Their lightweight construction permits ease of installation and field modification for equipment penetrations and bulkheading. Walls are demountable and non-progressive, meaning individual panels may be removed or replaced without affecting surrounding panels.
MATRIX(TM) Raised Access Flooring. MATRIX(TM) Raised Access Floors have been designed to meet the exacting air flow, structural and cleanliness requirements of Class 0.1 to Class 1000 cleanrooms. MATRIX(TM) floors provide maximum structural capability utilizing easily removable panels which meet the special material and airflow requirements of cleanrooms. MATRIX(TM) panels are available in a variety of finishes for corrosion resistance and conductivity requirements. The Company recently introduced the Vari-Span structural system, which reduces the number of pedestals needed to support the floor, allowing design freedom for an open waffle slab and frees under-floor space for additional process piping and conduits.
Cleanroom Services
As part of its integrated cleanroom solution, the Company provides its customers with the services necessary to integrate the design, installation and ongoing servicing of cleanrooms including:
Design and Engineering. The Company seeks to become involved in cleanroom design at an early stage of the semiconductor fab design process. The Company has a design team of in-house architects, engineers and designers to provide cleanroom systems which meet customers' specific requirements. The principal component systems of the Company's cleanroom are designed for rapid modification and quick expansion, providing flexibility in cleanroom configuration to meet the changing facilities needs of its customers. Being involved in the design of a new fabrication facility allows the Company to provide information early on to its manufacturing teams regarding systems needs, which further allows the Company to better plan its systems production schedule and accelerate the delivery of finished product to its customers.
Installation and Certification. The Company provides on-site installation, testing and certification services. Cleanroom installation is enhanced and expedited as Company personnel are cross-trained in all aspects of cleanroom construction. This enables them to quickly recognize and correct conflicts which arise during installation. Each cleanroom installation project is headed by a project manager who is responsible for logistics and coordination of the entire cleanroom project. The project manager is the primary contact with the customer during the entire process.
Continuing Service and Support. The Company offers its installation customers ongoing service and support at the project site, as well as after market component sales. The Company intends to place further emphasis on service and support contracts in the future. Customers often desire to have rooms modified or to have tools substituted or moved. Ongoing service personnel working at the project site perform equipment bulkheading, facilitate movement of process equipment and perform maintenance. The Company's support teams have a portable aluminum-working shop on-site which allows them to remove, modify, adapt and re-install wall panels, flooring and other components without shutting down the facility. Since they are generally the personnel who originally installed the cleanroom, they are familiar with the design and layout of the cleanroom and therefore are qualified to expedite layout changes and prevent downtime. Several customers have had Company personnel on-site performing these services for periods longer than one year. The Company's ongoing support program is a key component in the Company's strategy. On-site personnel provide detailed feedback on customers' ongoing design needs.
For customers who do not elect to have the Company provide on-site service, the Company provides service and spare parts on demand. Upon completion of a project, the customer support representative develops customer profiles and spare parts catalogues which are given to the customer.
CUSTOMERS
The Company's principal customers are microelectronics manufacturers. The Company has sold its component systems and cleanrooms to many of the world's leading semiconductor, disk drive, and flat panel display manufacturers. A major component of the Company's strategy is to develop long-term strategic relationships with such manufacturers. In addition, the Company sells component systems and cleanrooms to other manufacturers requiring ultra-clean environments.
Because of the nature of the Company's business and the size of contracts it enters into with its customers, the Company typically has had one to three customers in each year which accounted for more than 10% each of revenues. Customers that account for a significant amount of revenues in one year, however, do not necessarily remain significant in subsequent years.
SALES AND MARKETING
The Company's marketing program is focused on expanding market acceptance of the Company's integrated cleanroom approach and on building long term strategic relationships. By offering its customers a full array of cleanroom services, the Company is able to provide customers a single point of contact for design, component procurement, installation and ongoing service.
The Company sells its products utilizing a direct sales force in North America and Europe. The Company uses independent sales representatives as well as its direct sales force in the Asia/Pacific Rim region. The Company has design and engineering offices in Livingston, Scotland and Aix-en-Provence, Southern France which serve the European market. In addition the Company has an office in Hsin-Chu, Taiwan, which serves the Asia/Pacific Rim region. Sales are generally accomplished by building working relationships with microelectronics manufacturers as well as architectural and engineering firms, industry consultants, construction management companies and general contractors specializing in the industry.
Leads for new work are generated from a number of sources, including the Company's in-house salespeople, sales representatives, project managers, and field personnel who are in regular contact with present and prospective customers. The Company also participates in industry trade shows. Typically the Company, as well as the rest of the industry, is aware of the size, end use and basic design of major projects during the earliest planning phases.
PRODUCT DEVELOPMENT
The Company's product development effort focuses on enhancing existing products and developing new products to meet customer requirements. The Company seeks to develop innovative products, be on the cutting edge of new semiconductor technology including the 300mm manufacturing facility, and modify existing products to make them less expensive to produce and easier to install. This is partially accomplished by analyzing feedback from sales and service personnel on industry needs and developments. The Company regularly tests new ideas and techniques and measures the performance of new and existing products using a new AMCA-certifiable semi-reverberant testing laboratory adjacent to its manufacturing plant. The Company believes that its significant and growing experience base in designing, installing and servicing cleanrooms and manufacturing cleanroom components is a competitive advantage. The Company incurred approximately $246,000, $282,000 and $255,000 in non-project related research and development costs in 1997, 1996 and 1995, respectively.
INTELLECTUAL PROPERTY
The Company currently holds seven United States patents with respect to various aspects of its cleanroom wall systems, floor systems and air handling systems. The patents expire at various times from May 2007 through January 2010. The Company also has one patent application on file with the U.S. Patent and Trademark Office and certain foreign offices. The Company may file patent applications where appropriate to protect its proprietary technologies. Although the Company's patents have value, the Company believes that the success of its business depends more on innovation, technical expertise, and know-how of its personnel and other factors. In addition, no assurance can be given that any patents issued to the Company will not be challenged, invalidated or circumvented, or that the rights thereunder will provide competitive advantages to the Company.
The Company also relies upon trade secret protection for its confidential and proprietary information. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets or disclose such technology or that the Company can meaningfully protect its trade secrets.
MANUFACTURING
The Company's Salt Lake facility processes raw materials received in the form of die-cast panels, extruded aluminum members, sheet metal, honeycomb and various coverings and fasteners. These materials are modified and assembled into pre-fabricated modules through a series of automated and manual steps which may include cutting, milling, welding, perforating, measuring, assembling and finishing. Each individual module is made in accordance with customized fabrication drawings prepared by the Company's design staff.
The Company's components are finished in a dry powder applied and baked hybrid polyester-epoxy coating. After baking, this coating forms a monolithic, non-particulating seal over the surface of the component. This finish is available in many colors and is corrosion resistant. This finish outperforms nickel chrome and other finishes by substantial margins in chemical resistance and durability tests. This finish is normally conductive, but can be modified to meet any desired static dissipative or electrical isolation properties.
The Company's production staff is divided into self-directed working teams. The team manufacturing components for a project interacts directly with the project manager and the team installing the cleanroom. The close relationship between the Company's manufacturing teams and installation teams allows components to be altered rapidly in response to design changes initiated by the customer's facility management team. The Company believes this relationship and the accountability of the manufacturing team to site personnel enhances the Company's quality control.
The Company's installation teams are capable of modifying most components to accommodate last-second changes and still meet specifications for final fit and seal. The Company establishes a small shop at major project sites to support bulkheading, tooling changes and other modifications requested by the customer.
COMPETITION
The Company believes it is the largest supplier of integrated cleanroom solutions providing design, engineering, manufacturing, installation, testing, certification, and ongoing customer support. The Company competes with a number of companies providing cleanroom products or services, many of which may have significantly greater financial and capital resources than the Company. The Company competes with architectural and engineering firms for the provision of design and engineering services. Where appropriate, the Company attempts to work with these companies as a subcontractor rather than as a direct competitor. The Company faces competition from component manufacturers which include CleanPak International and HuntAir for air handlers and ceilings, Clestra for ceilings, Plascore and Unistrut for walls, and Hitachi, Hae Kwang and Tate for aluminum raised flooring. The Company competes with specialized cleanroom integrators, such as Meissner & Wurst, Takasago, and PCI for installation/on-site management services.
The Company believes the principal competitive factors in the cleanroom industry are quality, time to completion, reliability, responsiveness for design and installation, product performance and price. The order of importance of these factors vary from year to year. The Company believes it competes favorably with respect to such factors, although there can be no assurance that it will continue to do so in the future. If the Company experiences success in marketing its integrated approach, there can be no assurance that its competitors will not duplicate such approach, through acquisitions, affiliations, internal development or otherwise.
BACKLOG
The Company's backlog consists of future revenue that the Company expects to realize from work to be performed on uncompleted contracts, including new contractual arrangements on which work has not begun. At December 31, 1997, the Company's backlog was $15.7 million compared to $28.3 million at December 31, 1996. The Company's contracts, however, frequently allow the customer to terminate the project at any time. If a customer terminates a project, the Company would typically be entitled to progress payments earned to the date of termination, plus reimbursement of certain costs associated with the contract. Accordingly, the Company's backlog could be reduced if a customer terminates a contract, and there can be no assurance that a customer will not terminate a contract.
EMPLOYEES
The Company employed approximately 366 full-time employees and 4 part-time employees on December 31, 1997, compared to 524 full-time employees and 44 part-time employees on December 31, 1996. The Company's employees at its Salt Lake City, Utah facility are not represented by a labor union. The Company believes that its relationship with its employees is good. Where required by local practice or customer contract, the Company utilizes union members for on-site installation. In those instances, the Company has agreed to be bound by collective bargaining agreements and has agreed to contribute to union sponsored pension plans, including multi-employer pension plans. Under the Employee Retirement Income Security Act of 1974, as amended, the Company may be liable to a multi-employer plan upon its withdrawal from the plan for the Company's share of the unfunded liabilities of the plan.
ITEM 2.
ITEM 2. PROPERTIES
The Company leases approximately 221,000 square feet in two buildings at its headquarters in Salt Lake City, Utah, of which approximately 163,000 square feet are used for manufacturing, 46,000 square feet are used for administrative functions, and 12,000 square feet are used for testing and research and development. The Company's principal offices and manufacturing facility are leased through 2005, with renewal options for four five-year terms.
The Company also leases administrative office space totaling approximately 12,500 square feet in Mesa, Arizona; Austin, Texas; Santa Clara, California; Hsin-Chu, Taiwan; Livingston, Scotland; and Aix-en-Provence, Southern France with various lease expiration dates ranging from 1998 through 2006. The Company believes that its facilities are adequate for its current needs and it could obtain additional space on commercially reasonable terms, if needed.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is subject to routine, non-material litigation relating to claims made by or against the Company. The Company believes it has made adequate provisions for these matters, and is not aware of any material threatened or outstanding litigation against it.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is listed and traded on the NASDAQ Stock Market (National Market System) under the symbol "DAWK." The following table sets forth, for the periods indicated, the high and low sale prices for the Company's Common Stock, as reported on the NASDAQ Stock Market for the years ended December 31, 1997 and 1996, respectively.
The Company did not pay or declare dividends on its Common Stock during the years ended December 31, 1997, 1996 and 1995. The Company currently anticipates that it will retain all available funds to finance its future growth and business expansion. The Company does not presently intend to pay cash dividends in the foreseeable future. Under the terms of the Company's revolving line of credit agreement, the Company has agreed not to pay any dividends during the term of this agreement.
As of March 26, 1998, the Company had 12,407,977 shares of its Common Stock outstanding, held by 139 shareholders of record, which does not include shareholders whose shares are held in securities position listings.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company. The summary financial data in the table is derived from the financial statements of the Company. The data should be read in conjunction with the financial statements, related notes and other financial information included therein (in thousands, except per share data).
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
GENERAL
The following discussion should be read in conjunction with the financial statements and notes thereto included elsewhere herein. All data in the tables are in thousands, except for percentages and per-share data.
The Company is an integrated systems solution provider of cleanrooms and cleanroom component systems for the semiconductor industry. In recent years, the Company has typically had one to three significant customers, each of which accounted for more than 10% of the Company's annual revenues; these customers do not necessarily remain significant in subsequent years. The semiconductor industry has been historically cyclical in nature and continues to be adversely affected by a cyclical downturn that began in 1996.
The current industry downturn has resulted in lower capital spending by semiconductor manufacturers during the third and fourth quarters of 1996 and throughout 1997. Management believes the downturn is nearing its end but may continue through the first and second quarters of 1998. How quickly any recovery will take place is still subject to significant uncertainty. The downturn has resulted in fewer contracts available to bid, a significant increase in price competition on contracts that were awarded, and reduced margins on such contracts. During 1997, the Company experienced fewer new contract awards resulting in a decrease in the Company's backlog from $28.3 million at December 31, 1996 to $15.7 million at December 31, 1997. Although the Company has experienced an increase in the contract bidding activity during the third and fourth quarters of 1997 compared to each of the previous four quarters, management believes that the above-described events adversely affected its revenues and results of operations for 1997 and anticipates the industry downturn will continue to adversely affect its revenues and profitability through the first and second quarters of 1998.
Although there is uncertainty surrounding the timing of a recovery in the semiconductor industry, management continues to believe that changes taking place in the industry should result in expanded semiconductor industry capital expenditures in the long-term. Delays in the ramp-up of 300mm technology have delayed the expected construction of the whole series of 300mm fabs worldwide. Due, in part, to the lack of 300mm process tools, weaker than expected demand, and the current focus on lowering process geometries from .25m to .18m, the 300mm effort has slowed by at least twelve months. In response to the current downturn, management has taken steps to reduce the Company's cost structure including a reduction in the Company's work force of more than thirty percent during 1997. During 1998, management will monitor the Company's cost structure and take appropriate actions as considered necessary, but continue to develop state of the art cleanroom technology and provide world-class support to the Company's customers.
The Company's contract revenue and operating results fluctuate substantially from quarter to quarter depending on such factors as the timing of significant customer orders, the timing of revenue and cost recognition, variations in contract mix, changes in customer buying patterns, fluctuations in the semiconductor equipment market, utilization of capacity, manufacturing productivity and efficiency, availability of key components and trends in the economies of the geographical regions in which the Company operates.
The Company uses the percentage-of-completion method of accounting for its long-term contracts. The Company recognizes revenue in proportion to the costs incurred to date in relation to the total anticipated costs. Revenue recognized may not be the same as progress billings to the customer. Underbillings are reflected in an asset account (costs and estimated earnings in excess of billings on contracts in progress), and overbillings are reflected in a liability account (billings in excess of costs and estimated earnings on contracts in progress).
The Company generates revenue in three geographic regions; North America, Asia/Pacific Rim and Europe. Contracts in the Asia/Pacific Rim region are generally denominated in United States dollars. Although risk of fluctuations in currency value does not affect such dollar-denominated contracts, changes in the relative value of the dollar could make the Company less competitive in this region. Contracts to be performed in Europe may be denominated in local currency, and the Company bears the risk of changes in the relative value of the dollar and the local currencies. Devaluation of world currencies against the U.S. dollar has created extreme price competitiveness from Korean, Japanese, and German manufacturers and integrators of systems. The collapse of the Korean marketplace in particular, has forced Korean suppliers to look outside their historical business relationships for new markets. The Company has in the past and may in the future attempt to hedge against currency fluctuations on contracts denominated in local currencies. There can be no assurance, however, that such hedging will fully insulate the Company from fluctuations or will not expose the Company to additional risks of loss.
The Company's business and operations have not been materially affected by inflation during the periods for which financial information is presented.
RESULTS OF OPERATIONS
Contract revenue
Contract revenue for 1997 decreased by 53.4% to $52.5 million from $112.8 million in 1996. This decrease is directly related to the downturn in the semiconductor industry as more fully discussed above. The downturn has resulted in fewer contracts being constructed during the year ended December 31, 1997 compared with the year ended December 31, 1996. The decrease in the Company's backlog at December 31, 1997 compared to the backlog at December 31, 1996 is attributed to fewer contracts available to bid. During 1996, contract revenue increased by 59.7% to $112.8 million from $70.6 million in 1995. The increase in revenues is attributable to a large backlog at the beginning of 1996 that resulted in strong contract activity in the first half of 1996 and numerous large contracts that the Company was awarded during the first and second quarters of 1996 that resulted in additional revenue as the contracts progressed during the third and fourth quarters of 1996.
North America - Contract revenue for the year ended December 31, 1997 decreased by 54.4% to $34.0 million from $74.4 million for the year ended December 31, 1996. As a percentage of total revenue North America decreased to 64.7% in 1997 compared to 66.0% in 1996. The decrease in contract revenue is attributed to the semiconductor industry downturn resulting in fewer and smaller contracts available during 1997 than in 1996.
Contract revenue for the year ended December 31, 1996 increased by 68.6% to $74.4 million from $44.2 million for the year ended December 31, 1995. As a percentage of total revenue North America increased to 66.0% in 1996 compared to 62.5% in 1995. The increase is the result of numerous contracts received in North America. These contracts were larger than the Company had received historically and were completed on schedules that were much faster than the Company had historically been required to perform.
Asia/Pacific Rim - Contract revenue for the year ended December 31, 1997 decreased by 42.1% to $9.6 million from $16.6 million for the year ended December 31, 1996. As a percentage of total revenue Asia/Pacific revenue increased to 18.3% in 1997 compared to 14.7% in 1996. The fluctuation is attributed to the worldwide semiconductor industry downturn compounded by the uncertainty of the Asian financial environment. Several large cleanroom projects that were in the bidding process have been delayed indefinitely. The delays in these projects had a major impact on Asia/Pacific revenue during the fourth quarter of 1997.
Contract revenue for 1996 decreased by 16.6% to $16.6 million from $19.9 million for the year ended December 31, 1995. As a percentage of total revenue Asia/Pacific decreased to 14.7% in 1996 compared to 28.1% in 1995. Two factors contributed to the decrease in Asia/Pacific revenue. First, during 1995 the Company recognized revenue for two significantly large contracts in Taiwan. These contracts were substantially completed during 1995. Second, the semiconductor industry downturn impacted Taiwan and other Asian countries to the extent that the Company did not have the same opportunity to bid on contracts in 1996 that it had during 1995.
Europe - Contract revenue for the year ended December 31, 1997 decreased by 58.8% to $9.0 million from $21.8 million for the year ended December 31, 1996. As a percentage of total revenue European revenue decreased to 17.1% in 1997 compared to 19.3% in 1996. The decrease is attributed to two factors. First, the worldwide semiconductor industry downturn has delayed the investment into the European community by most major semiconductor manufacturers resulting in fewer contracts available during 1997 compared to 1996. Second, during 1996 the Company was involved in an unusually large project in France that generated a significant amount of revenue during 1996 that was not available to the Company during 1997.
Contract revenue for 1996 increased by 229.8% to $21.8 million from $6.6 million for the year ended December 31, 1995. As a percentage of total revenue Europe increased to 19.3% in 1996 compared to 9.4% in 1995. The increase is attributed to two contracts of significant size received in early 1996 and substantially completed by the end of the year.
Gross Profit
Gross profit for the year ended December 31, 1997 decreased by 65.9% to $5.3 million from $15.5 million for the year ended December 31, 1996. Gross profit decreased as a percentage of revenue to 10.0% for 1997 compared to 13.7% for 1996. The decrease in gross margin is the direct result of the semiconductor industry downturn (see discussion above.) The downturn has resulted in a competitive bidding process, and contracts awarded during 1997 are at margins less than the Company experienced in 1996. In addition, contract sizes through 1997 were significantly smaller.
Gross profit for 1996 increased by 116.2% to $15.5 million from $7.2 million in 1995 and increased as a percentage of contract revenue to 13.7% in 1996 from 10.1% in 1995. This increase is the result of: continual improvement in the Company's manufacturing facility creating greater efficiencies and less costs to produce product; and better project management resulting in less problems at the construction sites which allows the Company to install its product with less time and labor expense. Contracts received during 1996 also were generally bid at higher margins than those received during 1995. Also affecting the increase from 1995 to 1996 were significant events during 1995 that contributed to the Company realizing smaller margins during 1995. These events included the Company's continued expansion of manufacturing facilities and a product failure during the second quarter of 1995. The expansion created manufacturing inefficiencies, project delays and overruns resulting in higher than expected cost of contracts during 1995. The product failure was the result of defective motors purchased from a third party vendor and resulted in a one time charge to costs of contracts of approximately $1.5 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 1997 decreased 18.5% to $8.4 million, from $10.3 million, but increased as a percentage of revenue to 15.9% for the year ended December 31, 1997 compared to 9.1% for the year ended December 31, 1996. The decrease in actual dollars spent on selling, general and administrative expenses in 1997 compared with 1996 is the result a reduction in general and administrative headcount completed during the first and second quarters of 1997.
Selling, general and administrative expenses for 1996 increased 62.2% to $10.3 million, or 9.1% of contract revenue, from $6.3 million, or 9.0% of contract revenue, in 1995. The increase in selling, general and administrative expenses is the result of increased sales activity during 1996 compared with 1995 worldwide and a full year of costs associated with the Company's Asia/Pacific office. The Asia/Pacific office was only operational for six months during 1995. Selling, general and administrative expenses as a percentage of contract revenue has remained relatively constant from 1995 to 1996.
Research and Development
Research and development expense decreased slightly in actual dollars spent from 1996 to 1997. This decrease was not material. Management believes that the Company will increase its research and development expenses during 1998, both in actual dollars spent and as a percentage of revenue in order to develop innovative products, to be on the cutting edge of the 300 millimeter manufacturing facility technology and to modify existing products to be less expensive to produce and easier to install.
Research and development expense increased slightly from 1995 to 1996. This increase was the result of research and development projects that were based on specific customers and contracts.
Depreciation and Amortization
Depreciation and amortization expense during 1997 increased by 7.8% to $431,000, or 0.8% of contract revenue, from $400,000, or 0.4% of contract revenue, in 1996. This increase is the result of a full years depreciation expense on leasehold improvements, furniture, fixtures, computer equipment and software purchased during 1996.
Depreciation and amortization expense in 1996 increased by 82.6% to $400,000, or 0.4% of contract revenue, from $219,000, or 0.3% of contract revenue, in 1995. This increase is the result of the purchase of leasehold improvements, furniture, fixtures, computer equipment and software required for the increased sales, marketing and administrative activities during 1996.
Other Income (Expense), net
Other income (expense) decreased in 1997 to $(344,000) from $352,000 in 1996. The decrease in other income (expense) is the result of foreign currency losses recognized during 1997 resulting from the decline in Taiwan dollars throughout 1997 and a litigation settlement included as part of other income during 1996.
Other income (expense) increased in 1996 to $352,000 from $119,000 in 1995. The increase is generally the result of the net effect of an increase in interest expense and a settlement on litigation with a third party vendor for defective motors.
Income Taxes (Benefit)
The effective tax rate (benefit) for 1997 was approximately (45)% compared to 32% for 1996 and 38% for 1995. The decrease in the effective tax rate from 1996 to 1997 is primarily the result of a tax benefit resulting from the loss before taxes, calculated at the statutory federal rate (see Note I of Notes To Financial Statements). The decrease from 1995 to 1996 was primarily the result of tax benefits the Company was able to utilize during 1996 on foreign sales which were taxed in the Company's foreign sales corporation.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 1997 was $15.2 million compared to $17.1 million at December 31, 1996. This includes cash and cash equivalents of $5.8 million and $3.3 million at December 31, 1997 and 1996 respectively. Receivables, including retentions, (see Note D of Notes to Financial Statements) decreased to $12.5 million at December 31, 1997 compared to $27.4 million at December 31, 1996. This decrease was the result of lower revenues from fewer contracts during 1997 compared to 1996. Days sales outstanding (the ratio between receivables, excluding retention, and average daily revenue taken over the year) decreased to 67 days at December 31, 1997, from 72 days at December 31, 1996.
The Company's operations provided $7.9 million of cash during 1997, compared to using $3.4 million of cash in 1996. During 1997, the Company experienced a decrease in receivables of $14.7 million as a result of the decline in revenues and a decrease in accounts payable and accrued expenses of approximately $5.1 million.
At December 31, 1997, the Company had a line of credit totaling $8.0 million or the available borrowing base. The Company had $1.2 million in borrowings against the line at December 31, 1997. Amounts drawn under the line bears interest at the bank's prime rate (8.50% at December 31, 1997) and are due no later than June 30,
1998, with options to renew the agreement on an annual basis. The line is secured by certain domestic accounts receivable and inventory. In addition, at December 31, 1997, the Company maintained a guidance line of credit with a domestic bank used to facilitate the issuance of letters of credit. The facility allows for letters of credit to be issued up to the lesser of $3.0 million or the available borrowing base. No letters of credit were open under this facility at December 31, 1997. The facility expires July 31, 1998, with options to renew the agreement on an annual basis.
During 1997, the Company used $349,000 for the purchase of property and equipment. The Company anticipates that its capital expenditures in 1998 for routine additions and replacements of property, plant, and equipment will be approximately $1.3 million. These purchases will be financed through long-term debt or capital leases.
Management believes that existing cash balances, borrowings available under the lines of credit, and cash generated from operations will be adequate to meet the Company's anticipated cash requirements through December 31, 1998. However, in the event the Company experiences adverse operating performance or above-anticipated capital expenditure requirements, additional financing may be required. There can be no assurance that such additional financing, if required, would be available on favorable terms if at all.
IMPACT OF FUTURE ACCOUNTING PRONOUNCEMENTS
None. (See Notes To Financial Statements A-14)
FACTORS AFFECTING FUTURE RESULTS
The Company's future operations will be impacted by, among other factors, the length and severity of the current economic downturn in the semiconductor industry as more fully discussed above. The length and severity of the current economic downturn in the semiconductor industry remains subject to a high degree of uncertainty. The Company's operations are also subject to additional risks and uncertainties that could result in actual operating results differing materially from anticipated operating results and past operating results and trends. These risks and uncertainties include pricing pressures, cancellations of existing contracts, timing of significant customer orders, increased competition, and changes in semiconductor and cleanroom technology.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's financial statements and notes are included herein beginning on page. The supplementary data is included herein immediately following the signature page of this report on Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There has been no Form 8-K filed reporting a change of accountants or reporting disagreements on any matter of accounting principle, practice, financial statement disclosure or auditing scope or procedure during the years covered by this report.
PART III
ITEM 10, 11, 12 AND 13
These items are incorporated by reference to the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders scheduled for May 27, 1998. The definitive Proxy Statement will be filed with the Commission not later than 120 days after December 31, 1997, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents Filed as Part of this Report:
(1) Financial Statements. The following financial statements are filed with this report beginning on page:
-- Report of Independent Certified Public Accountants
-- Balance Sheets as of December 31, 1997 and 1996
-- Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995
-- Statements of Shareholders' Equity for the Years Ended December 31, 1997, 1996 and 1995
-- Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995
-- Notes to Financial Statements
(2) Financial Statement Schedule. The following financial statement schedules for the years ended December 31, 1997, 1996 and 1995 are included herein beginning on page S-1:
-- Report of Independent Certified Public Accountants on Schedule
-- Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because the information is not required, or if required the information required therein is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements or notes thereto.
(b) Reports on Form 8-K:
None.
(c) Exhibits:
The following exhibits required by Item 601 of Regulation S-K are filed herewith or have been filed previously with the Commission as indicated below:
EXHIBIT INDEX
- -------------------------
* These exhibits are incorporated herein by reference.
(d) Financial Statement Schedules:
See Item 14(a)(2) of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 26, 1998.
DAW TECHNOLOGIES, INC.
By: /s/ Ronald W. Daw ------------------------------------------ Ronald W. Daw Chairman of the Board, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 26, 1998.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors Daw Technologies, Inc.
We have audited the accompanying balance sheets of Daw Technologies, Inc. as of December 31, 1997 and 1996, and the related statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Daw Technologies, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Salt Lake City, Utah February 25, 1998
Daw Technologies, Inc.
BALANCE SHEETS (in thousands, except share data)
The accompanying notes are an integral part of these statements.
Daw Technologies, Inc.
STATEMENTS OF OPERATIONS
(in thousands, except share data)
The accompanying notes are an integral part of these statements.
Daw Technologies, Inc.
STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
Years ended December 31, 1997, 1996 and 1995
The accompanying notes are an integral part of these statements.
Daw Technologies, Inc.
STATEMENTS OF CASH FLOWS
(in thousands, except share data)
(continued)
Daw Technologies, Inc.
STATEMENTS OF CASH FLOWS -- CONTINUED
(in thousands, except share data)
The accompanying notes are an integral part of these statements.
Daw Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(in thousands, except share data)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows.
1. Business activity
Daw Technologies, Inc. (the Company) is a supplier of ultra-clean manufacturing environments, or cleanrooms, to the semiconductor industry (operating in one business segment). The Company designs, engineers, manufactures, installs and services all principal component systems for advanced cleanrooms.
2. Method of accounting for long-term contracts
The accompanying financial statements have been prepared using the percentage-of-completion method of accounting and, therefore, take into account the costs, estimated earnings and revenue to date on contracts not yet completed. For most contracts, the revenue recognized is that portion of the total contract price that cost incurred to date bears to anticipated final total cost, based on current estimates of cost to complete. Revenue from cost-plus-fixed-fee contracts is recognized on the basis of costs incurred during the period plus the fee earned, measured by the cost-to-cost method.
Contract costs include all direct and allocable indirect labor, benefits, materials unique to or installed in the project, subcontractor cost allocations, including employee benefits and equipment expense. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is recognized in the financial statements. As long-term contracts extend over one year, revisions in cost and earnings estimates during the course of the work are reflected in the accounting period in which the facts which require the revision become known. Costs attributable to contract claims or disputes are carried in the accompanying balance sheets only when realization is probable. These costs are recorded at the lesser of actual costs incurred or the amount expected to be realized. It is reasonably possible that estimates by management related to contracts can change in the future.
Daw Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(in thousands, except share data)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
2. Method of accounting for long-term contracts - continued
The current asset, "costs and estimated earnings in excess of billings on contracts in progress," represents revenues recognized in excess of amounts billed (under- billings), and the current liability, "billings in excess of costs and estimated earnings on contracts in progress," represents billings in excess of revenues recognized (over-billings). The amount of revenue recognized is not related to the progress billings to customers.
3. Depreciation and amortization
Property and equipment are stated at cost. Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. Leased property under capital leases and leasehold improvements are amortized over the shorter of the lives of the respective leases or over the service lives of the asset. The straight-line method of depreciation is followed for financial reporting purposes. Accelerated methods of depreciation are used for tax purposes.
4. Income taxes
The Company utilizes the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. An allowance against deferred tax assets is recorded when it is more likely than not that such tax benefits will not be realized. Research tax credits are recognized as utilized.
5. Cash and cash equivalents
The Company considers all highly liquid debt instruments with an original maturity of three months or less when purchased to be cash equivalents.
Daw Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(in thousands, except share data)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
6. Inventories
Inventories consist of raw materials and are stated at the lower of cost or market. Cost is determined principally by the first-in, first-out method.
7. Net earnings (loss) per share
Basic earnings (loss) per common share (BEPS) is based on the weighted average number of common shares outstanding during each period. Diluted earnings (loss) per common share are based on shares outstanding (computed as under BEPS) and dilutive potential common shares. Potential common shares included in the dilutive earnings (loss) per share calculation include stock options awarded (Note S).
8. Research and development costs
The Company conducts research and development to develop new products or product improvements not directly related to a specific project. Research and development costs have been charged to expense as incurred.
9. Concentrations
The Company's financial instruments that are exposed to concentration of credit risk consist primarily of cash and cash equivalents and receivables. The Company provides credit according to the terms of the individual project contracts, in the normal course of business, primarily to semi-conductor manufacturers.
Approximately 31% (40% in 1996) of receivables are with three different customers. In addition, approximately 42% (41% in 1996) of receivables are due from entities located outside of North America, primarily Europe and Asia. Of the total receivables, approximately 6% are denominated in foreign currencies (13% at December 31, 1996). The Company routinely evaluates the financial strength of its customers and monitors each account to minimize the risk of loss.
Daw Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(in thousands, except share data)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
9. Concentrations - continued
The Company maintains cash and cash equivalents at several financial institutions. Accounts at each domestic institution are insured by the FDIC up to $100. Uninsured domestic balances aggregate to approximately $229 at December 31, 1997 ($1,412 in 1996). The Company also maintains cash and cash equivalents in foreign accounts. These uninsured balances aggregate to $5,709 at December 31, 1997 ($2,413 in 1996).
10. Retentions
Many of the Company's contracts allow retentions, typically 5-10% of the amount billed, to be withheld from each progress payment by the customer until the project reaches substantial completion.
11. Estimates and assumptions
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
12. Fair value of financial instruments
The carrying value of the Company's cash and cash equivalents, contracts receivable and accounts payable, accrued liabilities and lines of credit approximate their fair values.
13. Reclassifications
Certain reclassifications have been made to the 1996 and 1995 financial statements to conform with the 1997 presentation.
Daw Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(in thousands, except share data)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
14. Recently issued accounting pronouncements not yet adopted
Comprehensive income
In September 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130 requires entities presenting a complete set of financial statements to include details of comprehensive income that arise in the reporting period. Comprehensive income consists of net earnings or loss for the current period and other comprehensive income, which consists of revenue, expenses, gains, and losses that bypass the statement of earnings and are reported directly in a separate component of equity. Other comprehensive income includes, for example, foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investment securities. SFAS 130 requires that components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This statement is effective for fiscal years beginning after December 15, 1997 and requires restatement of prior period financial statements presented for comparative purposes.
Disclosure of segments
Also in September 1997, the FASB issued Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information." This statement requires an entity to report financial and descriptive information about their reportable operating segments. An operating segment is a component of an entity for which financial information is developed and evaluated by the entity's chief operating decision maker to assess performance and to make decisions about resource allocation. Entities are required to report segment profit or loss, certain specific revenue and expense items and segment assets based on financial information used internally for evaluating performance and allocating resources. This statement is effective for fiscal years beginning after December 15, 1997 and requires restatement of prior period financial statements presented for comparative purposes.
Management does not believe that the adoption of SFAS 130 and SFAS 131 will have a material effect on the Company's financial statements.
Daw Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(in thousands, except share data)
NOTE B - CAPITAL TRANSACTIONS
During 1997, the Company received $84 from the issuance of 43,738 shares of common stock. The Company purchased and retired 36,304 shares of common stock.
During 1996, the Company received $196 from the issuance of 22,889 shares of common stock, upon the exercise of 46,500 common stock options and the exercise of 900 shares of common stock warrants.
During 1996, the shareholders of the Company approved an employee stock purchase plan. The maximum number of shares of common stock that may be issued under the plan is 750,000 shares. Employees are eligible upon completion of 90 days employment. Eligible employees may designate 2% to 15% (up to $25) of eligible compensation to be withheld for the purchase of stock. Price per share is 85% of the lower closing trading price of the stock on the applicable offering commencement date or offering termination date. Offering periods are six months in length beginning on May 1 and November 1 of each year. Employees purchased 43,738 shares under the plan in 1997 (22,889 in 1996).
NOTE C - INTERNATIONAL OPERATIONS
Financial information summarized by geographic area for the years ended December 31, 1997, 1996, and 1995, is as follows.
Daw Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(in thousands, except share data)
NOTE C - INTERNATIONAL OPERATIONS - CONTINUED
Foreign currency transaction losses totaling approximately $225 for 1997 are included in other income. Foreign currency transactions for 1996 and 1995 were not significant.
NOTE D - CONTRACTS RECEIVABLE
Contracts receivable consist of the following:
NOTE E - OTHER CURRENT ASSETS
Other current assets consist of the following:
Daw Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(in thousands, except share data)
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment and estimated useful lives consist of the following:
NOTE G - CONTRACTS IN PROGRESS
Costs incurred to date and estimated earnings and the related progress billings to date on contracts in progress are as follows:
The above are included in the balance sheets under the following captions:
Daw Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(in thousands, except share data)
NOTE H -- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
NOTE I -- INCOME TAXES
Components of income taxes (benefit) are as follows:
Daw Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(in thousands, except share data)
NOTE I - INCOME TAXES - CONTINUED
The income tax expense (benefit) reconciled to the tax computed at the statutory Federal rate of 34% is as follows:
Deferred income taxes related to the following:
The foreign tax credit carry forward of $162 expires during 2001. Management believes it is more likely than not that the Company will have sufficient foreign and domestic income to utilize the credits before expiration.
Daw Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(in thousands, except share data)
NOTE J- LINES OF CREDIT
During 1997, the Company maintained a revolving line of credit with a domestic bank for the lesser of $8,000 or the available borrowing base. The interest rate is computed at the bank's prime rate (8.50% at December 31, 1997) and requires monthly payments of interest. The Company had $1,230 in borrowings against the line at December 31, 1997 ($4,216 at December 31, 1996) . The line of credit expires June 30, 1998. The line of credit is collateralized by certain domestic receivables and inventories. The line of credit agreement contains restrictive covenants imposing limitations on payments of cash dividends, purchases or redemptions of capital stock, indebtedness and other matters. At December 31, 1997, the Company was out of compliance on certain indebtedness covenants for which they obtained a waiver subsequent to year end.
Also during 1997, the Company maintained a guidance line of credit with a domestic bank used to facilitate the issuance of letters of credit. The facility allows for letters of credit to be issued up to the lesser of $3,000 or the available borrowing base. The facility expires July 31, 1998. In addition, the facility maintains the same restrictive covenants and collateral requirements as the above mentioned revolving line of credit. No letters of credit were open under this facility at December 31, 1997.
In addition, during 1997 and 1996, the Company maintained another revolving line of credit with a domestic bank for $3,500 with a variable rate of interest of prime (8.50% at December 31, 1996). The line matured during 1997, and has not been renewed. The outstanding balance against the line at December 31, 1996 was $1,480. The line was collateralized by certain international receivables and inventories. This line also contained restrictive covenants imposing limitations on purchases or redemptions of capital stock, indebtedness and other matters.
NOTE K - LONG-TERM OBLIGATIONS
The Company has entered into capital lease obligations with various financial institutions and leasing organizations that carry interest rates ranging from 4% to 11.5%. The leases are collateralized by equipment. Payments approximate $65 monthly including interest.
Daw Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(in thousands, except share data)
NOTE K - LONG-TERM OBLIGATIONS - CONTINUED
The following is a schedule by year of future minimum lease payments under capital leases, together with the present value of the net lease payments as of December 31, 1997.
NOTE L - OPERATING LEASES
The Company leases buildings, machinery and equipment under operating leases. The building leases expire in 2000 and 2005. The machinery and equipment leases expire through 2000. The following is a schedule, by year, of future minimum rental payments as of December 31, 1997.
The building leases provide for payment of property taxes, insurance, and maintenance costs by the Company. Rental expense for operating leases totaled $1,670, $737 and $564 for 1997, 1996 and 1995 respectively.
The Company has an option to renew one building lease for four additional five year periods upon expiration of the current term in 2005.
Daw Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(in thousands, except share data)
NOTE M - BENEFIT PLANS
1. Savings Plan
The Company has established a 401(k) savings plan covering all non-union employees 21 years of age and older. The Company, at its discretion, matches 50 percent of employee contributions up to a maximum matching contribution of 3 percent of the employee's annual salary. Contributions are made at the discretion of the Board of Directors. The Company's contributions to the plan were $176, $184 and $30 for the years ended December 31, 1997, 1996 and 1995, respectively.
2. Multi-Employer Pension Plans
The Company contributes to several multi-employer pension plans for employees covered by collective bargaining agreements. Employees covered by these plans are engaged solely in on-site installation of cleanrooms. These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts. The Company's contributions to the multi-employer pension plans totaled approximately $303, $484 and $263 or 3.9%, 2.3% and 2.0% of gross payroll of covered employees, respectively, for the years ended December 31, 1997, 1996 and 1995. Information with respect to the Company's proportionate share of the excess, if any, of the actuarially computed value of vested benefits over the total pension plans' net assets is not available from the plans' administrators.
The Multi-Employer Pension Plan Amendments Act of 1980 (The "Act") significantly increased the pension responsibilities of participating employers. Under the provision of the Act, if the plans terminate or the Company withdraws, the Company could be subject to a withdrawal liability. Management has no intention of undertaking any action which could subject the Company to any withdrawal liability which would have a material effect on the Company's financial condition.
NOTE N - LEGAL PROCEEDINGS AND CLAIMS
The Company is engaged in various lawsuits and claims, either as plaintiff or defendant, in the normal course of business. In the opinion of management, based upon advice of counsel, the ultimate outcome of these lawsuits will not have a material impact on the Company's financial statements.
Daw Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(in thousands, except share data)
NOTE O - PRIMARY CUSTOMERS
The Company has typically had one to three customers in each year which accounted for more than 10% each of revenues; these customers do not necessarily remain significant in subsequent years. These major customers are typically general contractors of fabrication facilities.
The Company's major customers and revenue received therefrom are as follows:
NOTE P - RELATED PARTY TRANSACTIONS
Daw Incorporated is a regional interior specialties contracting company based in Utah. Certain stockholders of Daw Incorporated own more than 50% of the Company's common stock.
The Company purchased goods and services from Daw Incorporated totaling $223, $1,118, and $525 in 1997, 1996, and 1995, respectively.
Although the Company and Daw Incorporated maintain separate insurance policies, the Company understands that its insurance carriers consider the experience of both Daw Incorporated and the Company in establishing the Company's rate for workers compensation coverage because of the common ownership. This common ownership may also affect the Company's ability to make elections regarding contributions to its 401(k) plan which differ materially from Daw Incorporated's separate plan. Management of the Company does not believe these matters have materially affected the financial condition or results of operations of the Company.
A member of the board of directors works for a law firm which provided legal services to the Company approximating $138 and $137 in 1997 and 1996, respectively.
Daw Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(in thousands, except share data)
NOTE Q - WARRANTS AND OPTIONS
During 1996, the Board of Directors and the shareholders amended the Company's 1993 Stock Option Plan (Plan) to increase the number of shares reserved for issuance by 250,000. In addition, the amendment extended the life of the Plan for one year, to expire in 1998, and eliminated the limit on the number of options that can be granted in any given year. Also, the amendment limits to 100,000 the number of options that can be granted to any one individual in any given year. The Plan is a non-qualified plan, and the options granted thereunder are non-qualified stock options.
Under the amended Plan, 1,250,000 shares of common stock were reserved for issuance upon exercise of options. The Plan provides that options to purchase a maximum of 1,075,000 shares may be granted to eligible employees (including employees who are directors or officers) and options to purchase a maximum of 175,000 shares may be granted to non-employee directors.
The exercise price for stock options granted under the Plan may not be less than 100% of the fair market value of a share of common stock on the date the option is granted. Options granted under the Plan after October 24, 1996 expire through 2007. Options granted prior to or on October 24, 1996 expire through 2001.
The Company granted options to purchase 55,000 shares, 272,000 shares and 255,000 shares in 1997, 1996 and 1995, respectively, of the Company's common stock of which 20,000 shares in 1997, 40,000 shares in 1996 and 30,000 shares in 1995 respectively, were granted to non-employee directors. Additionally, 30,000 shares, 111,500 shares, and 63,500 shares, were granted to executive officers (including officers who are directors), during 1997, 1996, and 1995, respectively. Also, 5,000 shares, 120,500 shares and 161,500 shares in 1997, 1996, and 1995, respectively, were granted to other employees of the Company. On October 24, 1996 all options with an exercise price greater than $3.50 were re-priced to $3.50, which was the market price of the Company stock on that date.
Daw Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(in thousands, except share data)
NOTE Q - WARRANTS AND OPTIONS - CONTINUED
The Company has adopted only the disclosure provisions of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (FAS123). Therefore, the Company continues to account for stock based compensation under Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for the stock based compensation been determined based upon the fair value of the awards at the grant date consistent with the methodology prescribed by FAS123, the Company's net earnings (loss) and earnings (loss) per share would have been reduced (or increased) to the following pro forma amounts:
These pro forma amounts may not be representative of future disclosures because they do not take into effect pro forma compensation cost related to grants made before 1995. The fair value of these options was estimated at the date of grant using the modified Black-Scholes American option-pricing model with the following weighted-average assumptions for 1997, 1996 and 1995: expected volatility of 53% (56% for 1996 and 1995); risk-free interest rate of 6.05% (6.04% for 1996 and 1995); and expected life of 9.6 years (4.7 for 1996 and 1995). The weighted-average fair value of options granted was $1.60 and $2.19 in 1997 and 1996, respectively.
Option pricing models require the input of highly subjective assumptions including the expected stock price volatility. Also, the Company's employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate. Management believes the best input assumptions available were used to value the options and that the resulting option values are reasonable.
Daw Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(in thousands, except share data)
NOTE Q - WARRANTS AND OPTIONS - CONTINUED
Changes in the Company's stock options and warrants are as follows:
The weighted-average remaining contractual life of options outstanding at December 31, 1997 is 4.3 years.
Daw Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(in thousands, except share data)
NOTE R - QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarterly financial results for the years ended December 31, 1997, 1996, and 1995 are as follows:
Daw Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(in thousands, except share data)
NOTE S - EARNINGS (LOSS) PER COMMON SHARE
During 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 128, "Earnings per Share". This statement changed the method in which earnings (loss) per share are determined. The new standard requires the computation of basic earnings (loss) per share and earnings (loss) per share assuming dilution (Note A7). Adoption of this statement has been applied retroactively and the 1996 and 1995 earnings per share (EPS) amounts have been recomputed applying the new standard and has not had a material impact on earnings (loss) per share. Options to purchase 693,000 shares of common stock at $1.94 to $3.50 a share were outstanding at December 31, 1997. They were not included in the computation of loss per share because they would have had an anti-dilutive effect on the 1997 loss per share.
The following data show the shares used in computing earnings (loss) per common share including dilutive potential common stock:
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
Board of Directors Daw Technologies, Inc.
In connection with our audit of the financial statements of Daw Technologies, Inc. referred to in our report dated February 25, 1998, which is included in the annual report to shareholders and Form 10-K, we have also audited Schedule II - valuation and qualifying accounts for each of the three years in the period ended December 31, 1997. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein.
GRANT THORNTON LLP
Salt Lake City, Utah February 25, 1998
S-1 DAW TECHNOLOGIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
S-2 EXHIBIT INDEX
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* These exhibits are incorporated herein by reference.
(d) Financial Statement Schedules:
See Item 14(a)(2) of this report.