**S****ECURITIESAND****E****XCHANGE****C****OMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

| **ý** | **Quarterly report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934 for the quarterly period ended June 30, 2002** |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **or** |
|--------|--------|

 

| **o** | **Transition report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934.** |
|-------|------------------------------------------------------------------------------------------------|

 

| **0-21818**           |
|-----------------------|
| (Commission File No.) |

 

**D****AW****T****ECHNOLOGIES,****I****NC.**

(Exactname of registrant as specified in its charter)

 

| **Utah**                                                                           |   | **87-0464280**                    |
|------------------------------------------------------------------------------------|--------|-----------------------------------|
| (State or other jurisdictionof  incorporation or organization)                     |   | (IRS EmployerIdentification  No.) |
|                                                                               |   |                              |
| **2700 South 900 WestSalt 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 reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  ý    No  o

 

As of July 31, 2002, the Registrant had 3,759,329 shares of CommonStock, $0.01 par value outstanding.

 

This QuarterlyReport on Form 10-Q includes financial statements that have not been reviewedby an independent audit firm because the Company has been unable to obtain sucha review from Arthur Andersen LLP, and has been unable, despite diligenteffort, to obtain such a review from any other independent audit firm.

 

 

----

 

Daw Technologies, Inc.

 

INDEX

 
| PART  I     Financial Information |
|------------------------------------------------------------|
|                                                       |
| Item 1 Financial Statements                                |
|                                                       |   |
|                                                       | Condensed  Consolidated Balance Sheets - June 30, 2002 and December 31, 2001 |
|                                                       |   |
|                                                       | Condensed  Consolidated Statements of Operations -  Three and six months ended June 30, 2002 and 2001 (unaudited) |
|                                                       |   |
|                                                       | Condensed  Consolidated Statements of Cash Flows -  Three and six months ended June 30, 2002 and 2001 (unaudited) |
|                                                       |   |
|                                                       | Notes  to Condensed Consolidated Financial  Statements (unaudited) |
|                                                       |   |
| Item  2.                                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                                       |   |
| Item  3.                                                   | Quantitative  and Qualitative Disclosures About Market  Risk |
|                                                       |   |
| PART II Other Information                                  |
|                                                       |   |
| Item 3.                                                    | Defaults Upon  Senior Securities |
|                                                       |   |
| Item  4.                                                   | Submission  of Matters to Vote of Security Holders |
|                                                       |   |
| Item 6.                                                    | Exhibits and  Reports on Form 8-K |
|                                                       |   |
| Signatures                                                 |

 

----

 

PART I - FINANCIAL INFORMATION

 

Item 1.      FinancialStatements

 

This Quarterly Report on Form 10-Qincludes financial statements that have not been reviewed by an independentaudit firm.  On August 9, 2002, DawTechnologies, Inc. (the “Company”) filed with the Securities and Exchange Commission(the “Commission”) a Current Report on Form 8-K reporting that Arthur AndersenLLP effectively terminated its relationship with the Company when it notifiedthe Commission that it was unable to perform future audit services for theCompany because of the winding down of Arthur Andersen LLP’s business.  The Company is actively attempting to retainan independent audit firm to replace Arthur Andersen LLP, which it expects toaccomplish within the next 30-60 days. The Company intends to have the financial statements included herein andincluded in the Company’s Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2002, reviewed by an independent auditor prior to the date theCompany files its Quarterly Report on Form 10-Q for the quarter endingSeptember 30, 2002.

 

1

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Daw Technologies, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 
|                                                                                                                                                                 |   | **June 30,  2002** |   | **December  31,  2001** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|-------------------------|--------|
|                                                                                                                                                                 |   | **(unaudited)**    |   |                    |   |
| ASSETS                                                                                                                                                               |   |               |   |                    |   |
| CURRENT ASSETS:                                                                                                                                                      |   |               |   |                    |   |
| ***Cash and cash equivalents***                                                                                                                                      |   | $                  | 1,385  |                    | $      | 1,969 |   |
| ***Restricted cash***                                                                                                                                                |   | 141                |   | 716                     |   |
| ***Accounts receivable, net***                                                                                                                                       |   | 4,242              |   | 6,967                   |   |
| ***Costs and estimated earnings in  excess of billings on contracts in progress***                                                                                   |   | 1,364              |   | 1,803                   |   |
| ***Inventories, net***                                                                                                                                               |   | 1,195              |   | 1,983                   |   |
| ***Other current assets***                                                                                                                                           |   | 758                |   | 745                     |   |
| Total current assets                                                                                                                                                 |   | 9,085              |   | 14,183                  |   |
| PROPERTY AND EQUIPMENT, NET                                                                                                                                          |   | 1,260              |   | 1,594                   |   |
| OTHER ASSETS                                                                                                                                                         |   | 626                |   | 678                     |   |
|                                                                                                                                                                 |   | $                  | 10,971 |                    | $      | 16,455 |   |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                                                           |   |               |   |                    |   |
| CURRENT  LIABILITIES:                                                                                                                                                |   |               |   |                    |   |
| ***Accounts payable and accrued  liabilities***                                                                                                                      |   | $                  | 7,998  |                    | $      | 6,356 |   |
| ***Billings in excess of costs and  estimated  earnings on contracts in  progress***                                                                            |   | 708                |   | 1,912                   |   |
| ***Line of credit***                                                                                                                                                 |   | 1,709              |   | 2,585                   |   |
| ***Current portion of capital lease  obligations***                                                                                                                  |   | 78                 |   | 109                     |   |
| Total current liabilities                                                                                                                                            |   | 10,493             |   | 10,962                  |   |
| CAPITAL LEASE  OBLIGATIONS, less current portion                                                                                                                     |   | 22                 |   | 50                      |   |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                                       |   |               |   |                    |   |
| ***REDEEMABLE PREFERRED STOCK:***                                                                                                                                    |   |               |   |                    |   |
| ***3% Series A Redeemable  Convertible Preferred Stock, authorized 10,000,000 shares of $0.01 par value;  411 and 465 shares issued and outstanding, respectively*** |   | 5,401              |   | 5,401                   |   |
| SHAREHOLDERS’  EQUITY:                                                                                                                                          |   |               |   |                    |   |
| ***Common stock, authorized  50,000,000 shares of $0.01 par value; 3,759,303 issued and outstanding***                                                               |   | 38                 |   | 38                      |   |
| ***Additional paid-in capital***                                                                                                                                     |   | 20,364             |   | 20,364                  |   |
| ***Common stock warrants***                                                                                                                                          |   | 350                |   | 350                     |   |
| ***Accumulated deficit***                                                                                                                                            |   | (25,240            | )      | (20,244                 | )      |
| ***Accumulated other comprehensive  loss***                                                                                                                          |   | (457               | )      | (466                    | )      |
| Total shareholders’ equity                                                                                                                                      |   | (4,945             | )      | 42                      |   |
|                                                                                                                                                                 |   | $                  | 10,971 |                    | $      | 16,455 |   |
|                                                                                                                                                                      |        |                    |        |                         |        |  |  |  |  |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

2

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Daw Technologies,Inc. and Subsidiaries

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share data)

(unaudited)

 
|                                         |   | **Three  months ended   June 30,** |   | **Six months  ended  June 30,** |   |
|----------------------------------------------|--------|------------------------------------|--------|---------------------------------|--------|
|                                         |   | **2002**                           |   | **2001**                        |   | **2002** |   | **2001** |   |
| Revenue,  net                                |   | $                                  | 7,001  |                            | $      | 12,160 |   | $ | 13,594 |   | $ | 27,049 |   |
|                                         |   |                               |   |                            |   |   |   |   |   |
| Cost  of goods sold                          |   | 8,780                              |   | 11,317                          |   | 15,584 |   | 24,639 |   |
|                                         |   |                               |   |                            |   |   |   |   |   |
| Gross  profit (loss)                         |   | (1,779                             | )      | 843                             |   | (1,990 | ) | 2,410 |   |
|                                         |   |                               |   |                            |   |   |   |   |   |
| Operating  expenses:                         |   |                               |   |                            |   |   |   |   |   |
| Selling,  general and administrative         |   | 1,258                              |   | 1,041                           |   | 2,465 |   | 2,085 |   |
| Research  and development                    |   | 35                                 |   | 75                              |   | 91 |   | 162 |   |
| Depreciation  and amortization               |   | 108                                |   | 140                             |   | 211 |   | 235 |   |
|                                         |   |                               |   |                            |   |   |   |   |   |
|                                         |   | 1,401                              |   | 1,256                           |   | 2,767 |   | 2,482 |   |
|                                         |   |                               |   |                            |   |   |   |   |   |
| Loss  from operations                        |   | (3,180                             | )      | (413                            | )      | (4,757 | ) | (72 | ) |
| Other  income (expense):                     |   |                               |   |                            |   |   |   |   |   |
| Interest  expense                            |   | (56                                | )      | (130                            | )      | (111 | ) | (270 | ) |
| Other,  net                                  |   | (26                                | )      | (373                            | )      | (28 | ) | (737 | ) |
|                                         |   |                               |   |                            |   |   |   |   |   |
|                                         |   | (82                                | )      | (503                            | )      | (139 | ) | (1,007 | ) |
|                                         |   |                               |   |                            |   |   |   |   |   |
| Loss  before provision for income taxes      |   | (3,262                             | )      | (916                            | )      | (4,896 | ) | (1,079 | ) |
|                                         |   |                               |   |                            |   |   |   |   |   |
| Provision  for income taxes                  |   | 5                                  |   | 233                             |   | 22 |   | 432 |   |
|                                         |   |                               |   |                            |   |   |   |   |   |
| NET  LOSS                                    |   | $                                  | (3,267 | )                               | $      | (1,149 | ) | $ | (4,918 | ) | $ | (1,511 | ) |
|                                         |   |                               |   |                            |   |   |   |   |   |
| Net  loss per common share:                  |   |                               |   |                            |   |   |   |   |   |
| Basic                                        |   | $                                  | (0.88  | )                               | $      | (0.31 | ) | $ | (1.33 | ) | $ | (0.43 | ) |
| Diluted                                      |   | (0.88                              | )      | (0.31                           | )      | (1.33 | ) | (0.43 | ) |
|                                         |   |                               |   |                            |   |   |   |   |   |
| Weighted-average  common shares outstanding: |   |                               |   |                            |   |   |   |   |   |
| Basic                                        |   | 3,759,303                          |   | 3,755,563                       |   | 3,759,303 |   | 3,678,763 |   |
| Diluted                                      |   | 3,759,303                          |   | 3,755,563                       |   | 3,759,303 |   | 3,678,763 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

3

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Daw Technologies, Inc. and Subsidiaries

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, except share data)

(unaudited)

 
|                                                                                      |   | **Six months  ended  June 30,** |   |
|-------------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                                      |   | **2002**                        |   | **2001** |   |
| Increase  (decrease) in cash and cash equivalents                                         |   |                            |   |   |   |
| Cash flows from  operating activities:                                                    |   |                            |   |   |   |
| Net loss                                                                                  |   | $                               | (4,918 | ) | $ | (1,511 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |   |                            |   |   |   |
| Depreciation and  amortization                                                            |   | 445                             |   | 472 |   |
| Loss (gain) on  disposal of property and equipment                                        |   | —                          |   | 201 |   |
| Provision for  losses on accounts receivable                                              |   | (6                              | )      | 160 |   |
| Changes in  current assets and liabilities:                                               |   |                            |   |   |   |
| Restricted cash                                                                           |   | 535                             |   | (741 | ) |
| Accounts  receivable                                                                      |   | 2,837                           |   | (2,844 | ) |
| Costs and  estimated earnings in excess  of  billings on contracts in progress       |   | 518                             |   | 2,701 |   |
| Inventories                                                                               |   | 802                             |   | 419 |   |
| Other assets                                                                              |   | (11                             | )      | 1,725 |   |
| Accounts payable  and accrued liabilities                                                 |   | 1,356                           |   | 946 |   |
| Billings in  excess of costs and estimated earnings on contracts in progress              |   | (1,223                          | )      | 273 |   |
| Net cash  provided by operating activities                                                |   | 335                             |   | 1,801 |   |
| Cash flows from  investing activities                                                     |   |                            |   |   |   |
| Purchase  of property and equipment                                                       |   | (49                             | )      | (159 | ) |
| Proceeds from  sale of property and equipment                                             |   | 28                              |   | — |   |
| Net cash  provided by investing activities                                                |   | $                               | (21    | ) | $ | (159 | ) |
|                                                                                      |   |                            |   |   |   |
| Increase  (decrease) in cash and cash equivalents                                         |   |                            |   |   |   |
|                                                                                      |   |                            |   |   |   |
| Cash flows from  financing activities:                                                    |   |                            |   |   |   |
| Decrease in  checks written in excess of cash in bank                                     |   | $                               | — |   | $ | (22 |   |
| Net change in  line of credit                                                             |   | (876                            | )      | 637 |   |
| Payments on  capital lease obligations                                                    |   | (59                             | )      | (28 |   |
| Net cash  provided by (used in) financing activities                                      |   | (935                            | )      | 587 |   |
| Effect of  foreign exchange rates on cash and cash equivalents                            |   | 37                              |   | (111 |   |
| Net increase in  cash and cash equivalents                                                |   | (584                            | )      | 2,118 |   |
| Cash and cash  equivalents at beginning of period                                         |   | 1,969                           |   | 2,175 |   |
| Cash and cash  equivalents at end of period                                               |   | $                               | 1,385  |   | $ | 4,293 |   |
|                                                                                      |   |                            |   |   |   |
| Supplemental  disclosures of cash flow information                                        |   |                            |   |   |   |
| Cash paid during  the period for:                                                         |   |                            |   |   |   |
| Interest                                                                                  |   | $                               | 111    |   | $ | 270 |   |
| Noncash  investing and financing activities                                               |   |                            |   |   |   |
| The Company accrued dividends of $77 on its 3%  Series A convertible preferred stock.     |   |                            |   |   |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

4

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Daw Technologies,Inc. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, exceptshare data)

(unaudited)

 

1.               SUMMARY OF SIGNIFICANTACCOUNTING POLICIES

 

##### Principles ofconsolidation

 

The consolidatedfinancial statements include the accounts and operations of the Company and itswholly owned subsidiaries, Daw Technologies Europe Ltd., which was organized in1999, Daw Technologies France SAS, which was organized in 2001, and TransliteSystems, Inc., (inactive) which was organized in 1999.  All significant intercompany accounts andtransactions have been eliminated in consolidation.

 

Translation of foreign currencies

 

The functional currency for the Company’s foreign operations isthe British Sterling.  The financialstatements of the Company’s foreign subsidiaries are translated into U.S.Dollars in accordance with Statement of Financial Accounting Standards No. 52 *“ForeignCurrency Translation”*. Assets and liabilities of the foreign subsidiaries are translated intothe U.S. Dollar at the exchange rate at the end of each reporting period.Income and expense items are translated at the weighted average exchange ratesfor the period.  Translation gains andlosses are reflected as a separate component of shareholders’ equity asaccumulated other comprehensive loss. Foreign currency transaction gains and losses are reported in theaccompanying consolidated statements of operations.

 

Accounting for long-term contracts

 

Revenue recorded for contracts inthe accompanying financial statements is recognized using thepercentage-of-completion method and, therefore, takes into account the costs,estimated earnings and revenue to date on contracts not yet completed.  The revenue recognized is that portion ofthe total contract price that cost incurred to date bears to anticipated finaltotal cost, based on current estimates of costs to complete.  Revenue from cost-plus-fixed-fee contractsis recognized on the basis of costs incurred during the period plus the feeearned, 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 costallocations, including employee benefits and equipment expense.  At the time a loss on a contract becomesknown, the entire amount of the estimated ultimate loss is recognized in thefinancial statements.  As long-termcontracts extend over one year, revisions in cost and earnings estimates duringthe course of the work are reflected in the accounting period in which thefacts become known which require the revision. Costs attributable to contract claims or disputes are carried in theaccompanying balance sheets only when realization is probable.  These costs are recorded at the lesser ofactual costs incurred or the amount expected to be realized.  It is reasonably possible that estimates bymanagement related to contracts can change in the future.

 

The current asset, costs and estimated earnings in excess ofbillings on contracts in progress, represents revenue recognized in excess ofamounts billed (unbilled revenue).  Thecurrent liability, billings in excess of costs and estimated earnings on contractsin progress, represents billings in excess of revenue recognized (unearnedrevenue).  The amount of revenuerecognized is not related to the progress billings to customers.

 

5

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Other revenue recognition

 

The Company recognizes revenue on its other product sales and contractmanufacturing services when the product is shipped and title passes to thecustomer or when the services are performed.

 

Use of estimates

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

Cash and cash equivalents

 

The Company considers all highly liquid instruments with anoriginal maturity of three months or less to be cash equivalents.

 

## Income taxes

 

The Company utilizes the liability method of accounting forincome taxes.  Under the liabilitymethod, deferred tax assets and liabilities are determined based on differencesbetween financial reporting and tax bases of assets and liabilities and aremeasured using the enacted tax rates and laws that will be in effect when thedifferences are expected to reverse.  Anallowance against deferred tax assets is recorded when it is more likely thannot that such tax benefits will not be realized.  Research tax credits are recognized as utilized.

 

2.               ACCOUNTS RECEIVABLE

 

Accounts receivable consist of the following:

 
|                                         |   | **June 30,  2002** |   | **December 31,  2001** |   |
|----------------------------------------------|--------|--------------------|--------|------------------------|--------|
| Contract  and trade account receivables |   | $                  | 4,679  |                   | $      | 7,039 |   |
| Retention  receivables                       |   | 12                 |   | 368                    |   |
|                                         |   | 4,691              |   | 7,407                  |   |
| Less  allowance for doubtful accounts        |   | (449               | )      | (440                   | )      |
| Total                                        |   | $                  | 4,242  |                   | $      | 6,967 |   |

 

Some of the Company’s contracts require retentions, typically5-10 percent of the amount billed, to be withheld from each progress payment bythe customer until the project reaches substantial completion. Earned, butunbilled retention amounts are included in retention receivables.

 

6

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3.               INVENTORIES

 

The components ofinventories, net are as follows as of June 30, 2002 and December 31, 2001:

 
|                             |   | **June 30,  2002** |   | **December 31,  2001** |   |
|----------------------------------|--------|--------------------|--------|------------------------|--------|
| Raw  materials                   |   | $                  | 1,730  |                   | $      | 1,801 |   |
| Finished  goods                  |   | 42                 |   | —                 |   |
| Work in  process                 |   | 221                |   | 385                    |   |
|                             |   | 1,993              |   | 2,186                  |   |
| Less  allowance for obsolescence |   | (798               | )      | (203                   | )      |
| Total                            |   | $                  | 1,195  |                   | $      | 1,983 |   |

 

4.               NET LOSS PERCOMMON SHARE

 

The Company follows the provisions of Statement of Financial AccountingStandards (“SFAS”) No. 128 “Earnings Per Share”.  SFAS No. 128 requires the presentation of basic and dilutedearnings per share (“EPS”). Basic EPS is calculated by dividing net lossavailable to common shareholders by the weighted-average number of commonshares outstanding during each period. Diluted EPS is similarly calculated,except that the weighted-average number of common shares reflects the potentialdilution that could occur if outstanding stock options, warrants and preferredstock conversion features were exercised.

 

The following data show the amounts used in computing net loss per commonshare, including the effect on net loss for preferred stock dividends.  The following data also show the weightedaverage number of shares and rights to acquire shares with dilutive potential:

 

7

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|                                                                                               |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|----------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                                               |   | **2002**                          |   | **2001**                        |   | **2002** |   | **2001** |   |
|                                                                                               |   |                              |   |                            |   |   |   |   |   |
| Net loss                                                                                           |   | $                                 | (3,267 | )                               | $      | (1,149 | ) | $ | (4,918 | ) | $ | (1,511 | ) |
|                                                                                               |   |                              |   |                            |   |   |   |   |   |
| Imputed dividends from beneficial conversion feature of preferred  stock                           |   | —                            |   | —                          |   | — |   | — |   |
|                                                                                               |   |                              |   |                            |   |   |   |   |   |
| Dividends on preferred stock                                                                       |   | (47                               | )      | (33                             | )      | (78 | ) | (80 | ) |
|                                                                                               |   |                              |   |                            |   |   |   |   |   |
| Net loss applicable to common shareholders                                                         |   | $                                 | (3,314 | )                               | $      | (1,182 | ) | $ | (4,996 | ) | $ | (1,591 | ) |
|                                                                                               |   |                              |   |                            |   |   |   |   |   |
| Weighted average number of common shares used in basic EPS                                         |   | 3,759,303                         |   | 3,755,563                       |   | 3,759,303 |   | 3,678,763 |   |
|                                                                                               |   |                              |   |                            |   |   |   |   |   |
| Dilutive effect of stock options                                                                   |   | —                            |   | —                          |   | — |   | — |   |
|                                                                                               |   |                              |   |                            |   |   |   |   |   |
| Dilutive effect of warrants                                                                        |   | —                            |   | —                          |   | — |   | — |   |
|                                                                                               |   |                              |   |                            |   |   |   |   |   |
| Dilutive effect of preferred stock                                                                 |   | —                            |   | —                          |   | — |   | — |   |
|                                                                                               |   |                              |   |                            |   |   |   |   |   |
| Weighted average number of common shares and dilutive potential  common shares used in diluted EPS |   | 3,759,303                         |   | 3,755,563                       |   | 3,759,303 |   | 3,678,763 |   |

 

Forthe three and six month periods ended June 30, 2002 and for the three and sixmonth periods ended June 30, 2001, all stock options, warrants and preferredstock outstanding were not included in the computation of diluted EPS becauseto do so would have been anti-dilutive.

 

5.               LINE OF CREDIT

 

During 2002 and 2001, the Company maintained a revolving line of creditwith a domestic bank.  The Company had$3,240 outstanding in borrowings under the line of credit as of June 30,2001.  As of June 30, 2002, borrowingsunder the line of credit were limited to the lesser of $3,000 or an availableborrowing base equal to 75 percent of the Company’s domestic accountsreceivable (approximately $1,709 at June 30, 2002 and $2,585 at December 31,2001).  Interest on borrowings under theline of credit is payable monthly.  Theinterest rate associated with the line of credit is variable and at June 30,2002, the interest rate was 7.25%. Borrowings under the line of credit are secured by substantially all theassets of the Company.  The line ofcredit was to expire on January 31, 2002. In January 2002, the bank extended the expiration date to January 31,2003.  The maximum borrowings availableunder the extended line of credit is $3,000 from February 2002 until October2002 and $2,750 from November 2002 to January 2003.

 

As of June 30, 2002 the Company was out of compliance with certaincovenants.  If the bank were to requirethe immediate repayment of this line of credit, the Company would be forced toseek alternative sources of financing which may not be available to the Companyor may only be available on terms that are not acceptable to the Company.  The Company is currently in the process ofseeking alternative financing from other sources; however, there can be noassurance that the Company will be successful in these efforts.

 

8

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6.               SEGMENTINFORMATION

 

TheCompany has three reportable segments, namely cleanroom, mini-environment andmanufactured products.  The operationsof the Company’s cleanroom segment consists primarily of the design,manufacture and installation of cleanroom components and integrated cleanroomsystems such as those used in the semiconductor, computer hardware,pharmaceutical, biotechnology and food processing industries.  The operations of the Company’s minienvironments segment consist of the design, manufacture and installation ofsmall clean environment systems such as those used in semiconductor andpharmaceutical research and development. The operations of the manufactured products segment consists primarilyof contract-based manufacturing and specialized painting services formanufacturers and fabricators.

 

Theaccounting policies of the segments are the same as those described in thesummary of significant accounting policies (see Note 1).  The Company evaluates performance of eachsegment based on income or loss from operations.  Revenue by segment reflects sales to unaffiliated customers.  Each segment uses the same manufacturingfacility.  Accordingly, in computingincome or loss from operations, the Company allocates certain general andadministrative expenses, consisting primarily of facilities expenses, utilitiesand manufacturing overhead.  It is notpractical to determine the total assets per segment and depreciation by segmentbecause each segment uses the same manufacturing facility.  Identifiable assets, capital expenditures bysegment are reported below.  Unallocableassets and capital expenditures relate primarily to the Company’s manufacturingfacility and other non operating assets.

 

Segmentinformation for the three and six month periods ended June 30, 2002 and June30, 2001 is as follows:

 
|                                   |   | **Three months  Ended June 30,** |   | **Six months  Ended June 30,** |   |
|----------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                   |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
| Revenue,  net                          |   |                             |   |                           |   |   |   |   |   |
| Cleanrooms  and related products       |   | $                                | 4,837  |                           | $      | 10,929 |   | $ | 9,382 |   | $ | 23,092 |   |
| Mini  environment                      |   | 225                              |   | 546                            |   | 638 |   | 1,369 |   |
| Other  manufactured goods and services |   | 1,939                            |   | 685                            |   | 3,574 |   | 2,588 |   |
| Totals                                 |   | $                                | 7,001  |                           | $      | 12,160 |   | $ | 13,594 |   | $ | 27,049 |   |
| Income  (loss) from operations:        |   |                             |   |                           |   |   |   |   |   |
| Cleanrooms  and related products       |   | $                                | (1,010 | )                              | $      | 607 |   | $ | (1,166 | ) | $ | 2,012 |   |
| Mini  environment                      |   | (47                              | )      | (106                           | )      | (84 | ) | (138 | ) |
| Other  manufactured goods and services |   | (722                             | )      | (914                           | )      | (854 | ) | (332 | ) |
| Unallocated                            |   | (1,401                           | )      | 0                              |   | (2,653 | ) | (1614 | ) |
| Totals                                 |   | $                                | (3,180 | )                              | $      | (413 | ) | $ | (4,757 | ) | $ | (72 | ) |

 

9

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|                             |   | **June 30,  2002** |   | **December  31,  2001** |   |
|----------------------------------|--------|--------------------|--------|-------------------------|--------|
| Total  assets:                   |   |               |   |                    |   |
| Cleanrooms  and related products |   | $                  | 6,367  |                    | $      | 11,337 |   |
| Mini  environment                |   | 810                |   | 647                     |   |
|                             |   |               |   |                    |   |
| Manufactured  products           |   | 2,302              |   | 1,776                   |   |
|                             |   |               |   |                    |   |
| Unallocated                      |   | 1,492              |   | 2,695                   |   |
| Totals                           |   | $                  | 10,971 |                    | $      | 16,455 |   |

 

7.               COMPREHENSIVELOSS

 

Thefollowing table reports comprehensive loss for the three and six months endedJune 30, 2002 and 2001:

 
|                                     |   | **Three months ended  June 30,** |   |
|------------------------------------------|--------|----------------------------------|--------|
|                                     |   | **2002**                         |   | **2001** |   |
| Net income  (loss)                       |   | $                                | (3,267 | ) | $ | (1,149 | ) |
| Foreign currency  translation adjustment |   | 50                               |   | (152 | ) |
|                                     |   |                             |   |   |   |
| Comprehensive  loss                      |   | $                                | (3,217 | ) | $ | (1,301 | ) |

 
|                                     |   | **Six months ended  June 30,** |   |
|------------------------------------------|--------|--------------------------------|--------|
|                                     |   | **2002**                       |   | **2001** |   |
| Net loss                                 |   | $                              | (4,918 | ) | $ | (1,511 | ) |
| Foreign currency  translation adjustment |   | (9                             | )      | (186 | ) |
|                                     |   |                           |   |   |   |
| Comprehensive  loss                      |   | $                              | (4,927 | ) | $ | (1,697 | ) |

 

10

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**Item 2.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

# *GENERAL*

 

The following discussion should be read in conjunction with thefinancial statements and notes thereto included elsewhere herein.  All data in the tables are in thousands,except for percentages and share data.

 

The Company’s principal line of business is the design,manufacture and installation of cleanroom components and integrated cleanroomsystems, primarily for the semiconductor industry.  The Company also designs, manufactures and installs cleanroomcomponents and integrated cleanroom systems for other industries, such as thepharmaceutical, flat panel display, disk drive, biotechnology and foodprocessing industries.  The Company is aglobal leader in the cleanroom installation business.  In addition, the Company designs and manufactures environmentallycontrolled “mini-environments,” which range in size from the size of a desk tothe size of a bus.  These mini-environmentstypically house expensive automation and robotic equipment used in thesemiconductor manufacturing process or in pharmaceutical research anddevelopment.  The Company also recentlyestablished a division in its European operations that offers ultra high puritypiping services, usually in conjunction with the installation of highlyspecialized tools and equipment in advanced manufacturing applications.  Finally, the Company offers manufacturingand specialized painting services on a contract basis, primarily to local andregional manufacturers and fabricators.

 

RESULTS OFOPERATIONS (Data in the tables are in thousands)

 

Selected Financial Information

 

 
|                |   | **Three months ended  June 30,** |   | **Six Months ended  June 30,** |   |
|---------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
|                |   |                             |   |                           |   |   |   |   |   |
| Revenue, net        |   | $                                | 7,001  |                           | $      | 12,160 |   | $ | 13,594 |   | $ | 27,049 |   |
|                |   |                             |   |                           |   |   |   |   |   |
| Gross profit (loss) |   | (1,779                           | )      | 843                            |   | (1,990 | ) | 2,410 |   |
|                |   |                             |   |                           |   |   |   |   |   |
| Operating expenses  |   | 1,401                            |   | 1,256                          |   | 2,767 |   | 2,482 |   |
|                |   |                             |   |                           |   |   |   |   |   |
| Net loss            |   | (3,267                           | )      | (1,149                         | )      | (4,918 | ) | (1,511 | ) |
|                     |        |                                  |        |                                |        |  |  |  |  |  |  |  |  |

 
|                            |   | **June 30,  2002** |   | **December 31,****2001** |   |
|---------------------------------|--------|--------------------|--------|--------------------------|--------|
| Balance  Sheet Data:            |   |               |   |                     |   |
|                            |   |               |   |                     |   |
| Cash and cash equivalents       |   | $                  | 1,385  |                     | $      | 1,969 |   |
|                            |   |               |   |                     |   |
| Working capital                 |   | (1,408             | )      | 3,221                    |   |
|                            |   |               |   |                     |   |
| Total assets                    |   | 10,971             |   | 16,455                   |   |
|                            |   |               |   |                     |   |
| Total liabilities               |   | 10,515             |   | 11,012                   |   |
|                            |   |               |   |                     |   |
| Redeemable preferred stock      |   | 5,401              |   | 5,401                    |   |
|                            |   |               |   |                     |   |
| Total stockholders’ equity |   | (4,945             | )      | 42                       |   |
|                                 |        |                    |        |                          |        |  |  |

 

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### Discussion

 

Revenue for the second quarter of 2002decreased by 42.4% to $7.0 million compared to $12.2 million for the secondquarter of 2001.  Revenue from cleanroomand related products decreased $ 6.1 million, or 55.7%, to $ 4.8 million forthe second quarter of 2002 from $ 10.9 million during the second quarter of 2001.  Revenue from mini-environment and relatedproducts decreased $321,000, or 58.8% to $225,000 for the second quarter of2002 from $546,000 during the second quarter of 2001.  Revenue from other manufactured goods and services increased to$2.0 million for the period ended June 30, 2002, as compared with $685,000 forthe period ended June 30, 2001.  Thedecline in cleanroom and mini-environment revenue is primarily attributable tothe severe recession in the semiconductor industry that began in the firstquarter of 2001.  The increase inrevenue from other manufactured goods and services during the three monthsended June 30, 2002 as compared to the same period in 2001 is primarilyattributable to the increase in the amount of contract manufacturing done bythe Company, which has been largely a response to the excess manufacturingcapacity created by the decline in cleanroom component manufacturing.

 

Gross profit for the second quarter of 2002decreased by 311.0% to $(1.8) million from $843,000 for the second quarter of2001 and decreased to (25.4)% as a percentage of revenue for the second quarter of 2002 compared to 6.9% for thesecond quarter of 2001.  The decrease ingross profit in the second quarter of 2002 as compared to the second quarter of2001 is, in large part, a result of a $1.7 million estimated tax assessmentcharged to cost of goods sold that is related to VAT and other taxes in ourinternational markets (see discussion below), additional inventory reserves of$543,000 for slow moving products, and the decrease in the semiconductormarket, as well as the decline in the worldwide economy as a whole, and anincrease in the competitive nature of the cleanroom bidding process.  With the Company’s efforts to developa portion of its revenue from sources outside of the semiconductor industry byapplying its product and engineering expertise in custom metal fabrication andairflow systems, the Company continues to experience some cost inefficienciesdue to ramp-up costs.  However, itcontinues to be the Company’s objective to identify, manufacture and sellnon-semiconductor cleanroom products and services that have acceptable grossprofit margin potential.

 

The extended and severe downturn in capitalspending by the semiconductor industry has resulted in a price competitivebidding environment as well as fewerlarge cleanroom projects to bid.  TheCompany is continuing to pursue the outsourcing of cleanroom component partswhere such outsourcing will allow it to offer its customers a wider range ofcleanroom solutions at competitive prices. Management hopes that this strategy will enable the Company to be moreflexible in the current environment.

 

The Company is also continuing its effortsto develop revenues from sources outside of the manufacture and installation ofclean room systems for the semiconductor industry by applying its product and engineering expertise in advanced custom metal fabricationand airflow systems that are strategically focused on our markets. The Companymay experience cost inefficiencies due to ramp-up costs as a variety of non-semiconductorproducts are evaluated and tested. However, it is the Company’s objective to identify, manufacture and sellother products that have acceptable gross profit margin potential.

 

The Company also recently introduced aproduct line in its European operations offering ultra high purity pipingservices.  These services, which consistlargely of the installation and hook-up of highly specialized tools andequipment in advanced manufacturing facilities, are in high demand.  This division has already secured contractsin Europe, and management is optimistic about the potential revenue that may bederived from this new business unit.  Atthis point, the most significant obstacle for significant growth in the ultra highpurity piping business unit appears to be the Company’s ability to recruit andretain sufficient highly skilled labor for the very technical work involved.

 

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Selling, general and administrativeexpenses for the second quarter of 2002 increased 20.8% to $1.3 million, or18.0% of revenue, compared to $1.0 million, or 8.6%of revenue for the secondquarter of 2001.  The increase inselling, general and administrative expenses was due largely to the increasedcosts incurred in restating the company’s financial statements dating back to1999.  These costs have included, buthave not been limited to, audit fees, consulting fees, legal fees, increasedwages for additional employees and overtime costs.

 

Research and development expenses for the second quarter of 2002 decreasedto $35,000, compared to $75,000 for the second quarter of 2001.  This decrease is primarily attributable tothe Company’s effort to control costs in down times but continue to fundresearch and development to improve its existing products and develop newproducts in the cleanroom segment of its business and in its diversificationprogram. For the six months ended June 30, 2002, research and developmentexpenses were $91,000 as compared to $162,000 for the same period in 2001.

 

Interest expense for the second quarter of2002 decreased to $56,000, compared to $130,000 for the second quarter of 2001,and interest expense for the first six months of 2002 was $111,000 as comparedto $270,000 for the first six months of 2001. The decrease in interest expense in 2002 as compared to 2001 isdirectly attributable to decreasedborrowings against the Company’s credit line during the first half of 2002 overthe same period in 2001.

 

The Company booked depreciation expense of$108,000 for the quarter ended June 30, 2002, which is 22.9% less than the sameperiod in 2001.  Depreciation for thefirst six months of 2002 was $211,000, as compared to $235,000 during the firstsix months of 2001, a reduction of 10.2%.

 

The Company has recently received assessmentsand information related to foreign taxes, including penalties, interest andother provisions.  The Company does notagree with these assessments and intends to file formal objections and attemptto minimize any potential liability. Management believes that in some cases no actual tax liability willarise but is unable to determine the extent to which it will be successful ineliminating potential liability. Consequently, since these taxes are generally attributed to the cost ofproduction, management has recorded a provision included in cost of goods soldin its financial statements for an estimated liability of $1,700,000 that mayarise in consequence of these issues.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Working capital at June 30, 2002 was $(1.4) million, compared to$3.2 million at December 31, 2001.  Thisincludes cash and cash equivalents of $1.4 million at June 30, 2002 and $2.0million at December 31, 2001.

 

The Company’s operations provided $335,000 of cash during the secondquarter of 2002, compared to providing $1.8 million of cash from operationsduring the second quarter of 2001. During the second quarter of 2002, the Company experienced a netdecrease in receivables of $2.8 million, which is attributable to the Company’sdecreased billings to replace those collected. In addition, costs and estimated earnings in excess of billings oncontracts in progress decreased by $518,000 and billings in excess of costs andestimated earnings on contracts in progress decreased by $1.2 million.

 

During 2002 and2001, the Company maintained a revolving line of credit with a domesticbank.  The Company had $3,240,000outstanding in borrowings under the line of credit as of June 30, 2001.  As of June 30, 2002, borrowings under theline of credit were limited to the lesser of $3,000,000 or an availableborrowing base equal to 75 percent of the Company’s domestic accountsreceivable (approximately $1,709,000 at June 30, 2002 and $2,585,000 atDecember 31, 2001).  Interest onborrowings under the line of credit is payable monthly.  The interest rate associated with the lineof credit is variable and at June 30, 2002, the interest rate was 7.25%.  During the quarter ending September 30, 2002, theinterest rate will be prime plus 2.75%, during the quarter ending 

 

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December 31, 2002, the interest rate will be prime plus 3.0%,and from January 1, 2003 until the expiration of the line of credit on January31, 2003, the interest rate will be prime plus 3.25%.  Borrowings under the line of credit are secured bysubstantially all the assets of the Company. The line of credit was to expire on January 31, 2002.  In January 2002, the bank extended theexpiration date to January 31, 2003. The maximum borrowings available under the extended line of credit is$3,000,000 from February 2002 until October 2002 and $2,750,000 from November2002 to January 2003.

 

The line of credit agreement contains restrictive covenantsimposing limitations on payments of cash dividends, purchases or redemptions ofcapital stock, indebtedness and other matters. At times during 2001 and the three months ended June 30, 2002 and atboth December 31, 2001 and June 30, 2002, the Company was not in compliancewith certain covenants.  Because of theCompany’s noncompliance with certain covenants in the line of credit, thelender has the right to terminate the line of credit and require repayment ofall outstanding borrowings prior to the line of credit’s scheduled terminationdate of January 31, 2003.  The Companydoes not have sufficient resources to repay the outstanding borrowings in theevent the line of credit is terminated. The Company is currently seeking alternative financing from othersources; however, there can be no assurance that the Company will be successfulin these efforts.

 

The Company’s common stock is no longer listed for trading onthe Nasdaq National Market.  Trading inthe stock was suspended on November 19, 2001 when the Company was unable totimely file its Quarterly Report on Form 10-Q for the third quarter of2001.  On November 20, 2001, the Nasdaqstaff determined that the Company’s stock should be delisted from Nasdaq.  The Company appealed the staffdetermination, and on January 25, 2002 the Listing Hearing and Review Panelupheld the staff determination and ruled that the Company’s stock be delistedfrom the Nasdaq National Market.  Thisruling was appealed to the Nasdaq Listing and Hearing Review Council, which, onJuly 2, 2002 upheld the ruling.  On July26, 2002, the NASD Board declined to call for review the delisting decision ofthe Listing and Hearing Review Council. The Company is presently taking steps to assure that its common stockwill be quoted on the OTC-Bulletin Board.

 

The fact that the Company’s stock is no longer listed fortrading on Nasdaq may impair the Company’s ability to raise needed capital, andwill hinder the Company’s ability to acquire other companies using its stock asconsideration.

 

In addition, the Company is in breach of certain covenants setforth in the documents relating to the issuance of the Company’s Series APreferred Stock, including the covenant that the Company’s Common Stock willcontinue to trade on Nasdaq.  Theholders of the Company’s outstanding Series A Preferred Stock have variousremedies they can enforce as a result of the breach of the covenants by theCompany.  These remedies include theright to require the Company to redeem their shares of preferred stock.  Management has been in frequentcommunication with the holders of the Series A Preferred Stock and to date thepreferred shareholders have not demanded redemption.  The Company does not have adequate capital resources to redeemall or a significant portion of the Series A Preferred Stock in the event theholders of the Series A Preferred Stock exercise their redemption rights.

 

In December 2001, the Company received a tax assessment fromFrance in the total amount of approximately $3.3 million.  The assessment covers corporate income tax,value added tax, penalties and interest. The Company is appealing the amount ofthe assessment, and management estimates that the total ultimate tax liabilityowing to France will be less than $1 million.

 

The Company hasrecently received additional assessments and information related to foreigntaxes, including penalties, interest and other provisions.  The Company does not agree with theseassessments and intends to file formal objections and attempt to minimize anypotential liability.  Managementbelieves that in some cases no actual tax liability will arise but is unable todetermine the extent to which it will be successful in 

 

14

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eliminatingpotential liability.  Consequently,since these taxes are generally attributed to the cost of production,management has recorded a provision included in cost of goods sold in itsfinancial statements for an estimated liability of $1,700,000 that may arise inconsequence of these issues.

 

The Company does not presently have sufficient capital resourcesto pay the amounts that may ultimately be found to be owing with respect to theCompany’s foreign tax obligations.

 

The Company recently restated its financial statements datingback to December 1999 because of certain accounting errors primarily arisingout of the Company’s European operations. The restatement resulted in the Company incurring unusually largeaccounting, audit and legal fees, totaling approximately $850,000.  Payment of these unusual, one-time fees has,and will continue, to put a severe strain on the Company’s cash flow.

 

*This Report contains“forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995, which can be identified by the use offorward-looking terminology such as “may,” “will,” “should,” “expect,”“anticipate,” “estimate,” or “continue,” or the negative thereof or othervariations thereon or comparable terminology. These forward-looking statements are subject to risks and uncertaintiesthat include, but are not limited to, those identified in this report,described from time to time in the Company’s other Securities and ExchangeCommission filings, or discussed in the Company’s press releases.  Actual results may vary materially fromexpectations.*

** **

**Item 3.   Quantitativeand Qualitative Disclosures About Market Risk**

 

The Company is exposed to various market risks, including changes inforeign currency exchange rates and interest rate risks.  Market risk is the potential loss arisingfrom adverse change in market rates and prices, such as foreign currencyexchange and interest rates.  For theCompany, these exposures are primarily related to the sale of product toforeign customers and changes in interest rates.  The Company does not have any derivatives or other financialinstruments for trading or speculative purposes.

 

The Company is exposed to interest rate changes primarily in relationto its revolving credit line debt with a bank. The fair value of the Company’s total revolving credit line debt atSeptember 30, 2001 was $2.0 million. Market risk was estimated as the potential decrease (increase) in futureearnings and cash flows resulting from a hypothetical 10% increase (decrease)in the Company’s estimated weighted average borrowing rate at September 30,2001.  Although most of the interest onthe Company’s debt is indexed to a market rate, there would be no materialeffect on the future earnings or cash flows related to the Company’s total debtfor such a hypothetical change.

 

15

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PART II – OTHER INFORMATION

 

**Item 3.  DefaultsUpon Senior Securities**

 

The Company is in breach of various covenants set forth in thedocuments relating to the creation, issuance and sale of the Series A PreferredStock, including the covenant that the Company’s common stock would continue tobe listed for trading on Nasdaq.  As aresult of the breach of the covenant that the Company’s common stock wouldcontinue to be listed for trading on Nasdaq, the holders of Series A PreferredStock have the right to demand that the Company redeem all or part of theiroutstanding Series A Preferred Stock. The redemption of all of the outstanding shares of Series A PreferredStock would require approximately $5.0 million cash.

 

**Item 4: Submission of Matters to aVote of Security Holders**

 

The Company held its Annual Meeting of Shareholders onJune 14, 2002.  The holders of 3,391,418of the Company’s 3,759,303 outstanding shares were present at the meeting inperson or by proxy.  The only mattersubmitted to a vote of shareholders was the election of directors.  The shareholders elected the followingindividuals to serve on the Company’s Board of Directors until the next annualmeeting of shareholders or until their successors are duly elected andqualified:

 
| **Name of  Nominee**  |   | **Votes For** |   | **Votes Withheld** |
|-----------------------|--------|---------------|--------|--------------------|
| Ronald W. Daw         |   | 3,304,133     |   | 87,285             |
| James S. Jardine      |   | 3,304,133     |   | 87,285             |
| Robert J. Frankenberg |   | 3,304,133     |   | 87,285             |
| Carl E. Snyder        |   | 3,304,133     |   | 87,285             |
| James C. Collings     |   | 3,304,133     |   | 87,285             |

 

**Item 6.     Exhibitsand Reports on Form 8-K**

 

(a)                                  Exhibits.

 

99.1                           Certificationof Chief Executive Officer

99.2                           Certificationof Chief Financial Officer

 

(b)                                 Reports onForm 8-K.

 

A report on Form 8-K was filed on April17, 2002 reporting that he Company had hired Donald K. McCauley as its ChiefFinancial Officer effective April 8, 2002.

 

A report on Form 8-K was filed on May 7, 2002 reporting that theCompany had filed with the SEC amended Annual Reports on Form 10-K for thefiscal years ended December 31, 1999 and 2000, amended Quarterly Reports onForm 10-Q for the quarters ended March 31, 2000, June 30, 2000, March 31, 2001and June 30, 2001, its Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2001, its Annual Report on Form 10-K for the fiscal year endedDecember 31, 2001.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized, on August 13, 2002.

 
|   | DAW TECHNOLOGIES,  INC. |
|--------|-------------------------|
|   |                    |   |
|   | By:                     | /s/ James C. Collings |   |
|   |                    | James C. Collings |
|   |                    | Chief Executive Officer |
|   |                    | Principal Executive Officer |
|   |                    |   |
|   |                    |   |
|   | By:                     | /s/ Donald K. McCauley |   |
|   |                    | Donald K. McCauley |
|   |                    | Senior Vice President and Chief Financial Officer |
|   |                    | Principal Financial and Accounting Officer |
|   |                    |   |

 

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