**SECURITIESAND EXCHANGE COMMISSION**

**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  March 31, 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 TECHNOLOGIES, INC.**

(Exact name of registrant as specified in its charter)

 

| **Utah**                                                                            |   | **87-0464280**                    |
|-------------------------------------------------------------------------------------|--------|-----------------------------------|
| (State  or other jurisdictionof incorporation or organization)                      |   | (IRS  EmployerIdentification No.) |
|                                                                                |   |                              |
| **2700 South 900  West****Salt Lake City, Utah 84119**                              |
| (Address  of principal executive offices, including zip code)                       |
|                                                                                |
| Registrant’s  telephone number, including area code:   **(801) 977-3100** |

 

Indicate by check mark whetherthe Registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the Registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No  o

 

As of May 10, 2002, theRegistrant had 3,759,303 shares of Common Stock, $0.01 par value outstanding.

 

This Quarterly Report on Form 10-Q includes financialstatements that have not been reviewed by an independent audit firm because theCompany was unable to obtain such a review from Arthur Andersen LLP.

 

 

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Daw Technologies, Inc.

 

**INDEX**

 
|                                |
|-------------------------------------|
| **PART I**                          | **Financial Information** |
|                                |   |
| Item 1. Financial  Statements       |
|                                |   |
|                                | Condensed  Consolidated Balance Sheets - March 31, 2002 and December 31, 2001  (unaudited) |
|                                |   |
|                                | Condensed  Consolidated Statements of Operations -  Three months ended March 31, 2002 and 2001 (unaudited) |
|                                |   |
|                                | Condensed  Consolidated Statements of Cash Flows -  Three months ended March 31, 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 |
|                                |   |
| **PART II  Other Information** |
|                                |   |
| Item 6.                             | Exhibits and  Reports on Form 8-K |
|                                |   |
| Signatures                          |
|                                     |  |  |

 

----

 

PART I - FINANCIAL INFORMATION

 

**Item 1.       FinancialStatements**

 

This Quarterly Report on Form 10-Q includes financial statements thathave not been reviewed by an independent audit firm because the Company wasunable to obtain such a review from Arthur Andersen LLP.  The Company intends to have the financialstatements included herein reviewed by an independent auditor prior to the datethe Company files its Quarterly Report on Form 10-Q for the quarter ending June30, 2002.

 

1

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Daw Technologies, Inc.and Subsidiaries

CONDENSED CONSOLIDATEDBALANCE SHEETS

(in thousands, exceptshare data)

 

 
|                                                                                                                                                                                        |   | **March 31,  2002** |   | **December  31,  2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|-------------------------|--------|
| **ASSETS**                                                                                                                                                                                  |   | **(unaudited)**     |   |                    |   |
| CURRENT ASSETS:                                                                                                                                                                             |   |                |   |                    |   |
| ***Cash and cash equivalents***                                                                                                                                                             |   | $                   | 1,383  |                    | $      | 1,969 |   |
| ***Restricted cash***                                                                                                                                                                       |   | 259                 |   | 716                     |   |
| ***Accounts receivable, net***                                                                                                                                                              |   | 5,561               |   | 6,967                   |   |
| ***Costs and estimated earnings in excess of billings on  contracts in progress***                                                                                                          |   | 1,083               |   | 1,803                   |   |
| ***Inventories, net***                                                                                                                                                                      |   | 1,880               |   | 1,983                   |   |
| ***Deferred income taxes***                                                                                                                                                                 |   | —              |   | —                  |   |
| ***Other current assets***                                                                                                                                                                  |   | 798                 |   | 745                     |   |
| Total current assets                                                                                                                                                                        |   | 10,964              |   | 14,183                  |   |
| PROPERTY AND EQUIPMENT, NET                                                                                                                                                                 |   | 1,408               |   | 1,594                   |   |
| DEFERRED INCOME TAXES                                                                                                                                                                       |   | —              |   | —                  |   |
| OTHER ASSETS                                                                                                                                                                                |   | 652                 |   | 678                     |   |
|                                                                                                                                                                                        |   | $                   | 13,024 |                    | $      | 16,455 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                                              |   |                |   |                    |   |
| CURRENT  LIABILITIES:                                                                                                                                                                       |   |                |   |                    |   |
| ***Accounts payable and accrued liabilities***                                                                                                                                              |   | $                   | 5,553  |                    | $      | 6,356 |   |
| ***Billings in excess of costs and estimated earnings on  contracts in progress***                                                                                                          |   | 1,180               |   | 1,912                   |   |
| ***Line of credit***                                                                                                                                                                        |   | 2,471               |   | 2,585                   |   |
| ***Current portion of capital lease obligations***                                                                                                                                          |   | 75                  |   | 109                     |   |
| Total current liabilities                                                                                                                                                                   |   | 9,279               |   | 10,962                  |   |
| CAPITAL LEASE  OBLIGATIONS, less current portion                                                                                                                                            |   | 25                  |   | 50                      |   |
|                                                                                                                                                                                        |   |                |   |                    |   |
| ***COMMITMENTS AND CONTINGENCIES***                                                                                                                                                         |   |                |   |                    |   |
|                                                                                                                                                                                        |   |                |   |                    |   |
| ***REDEEMABLE PREFERRED STOCK:***                                                                                                                                                           |   |                |   |                    |   |
| ***3% Series A Redeemable Convertible Preferred Stock, 500  shares authorized of $0.01 par value; 411 and 411 shares issued and  outstanding, as of March 31, 2002 and December 31, 2001*** |   | 5,401               |   | 5,401                   |   |
| SHAREHOLDERS’  EQUITY:                                                                                                                                                                 |   |                |   |                    |   |
| ***Common stock, authorized 50,000,000 shares of $0.01 par  value; 3,759,303 and 3,759,303 shares issued and outstanding, as of March 31,  2002 and December 31, 2001***                    |   | 38                  |   | 38                      |   |
| ***Additional paid-in capital***                                                                                                                                                            |   | 20,364              |   | 20,364                  |   |
| ***Common stock warrants***                                                                                                                                                                 |   | 350                 |   | 350                     |   |
| ***Accumulated deficit***                                                                                                                                                                   |   | (21,926             | )      | (20,244                 | )      |
| ***Accumulated other comprehensive loss***                                                                                                                                                  |   | (507                | )      | (466                    | )      |
| Total shareholders’ equity                                                                                                                                                             |   | (1,681              | )      | 42                      |   |
|                                                                                                                                                                                        |   | $                   | 13,024 |                    | $      | 16,455 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

2

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Daw Technologies, Inc.and Subsidiaries

 

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

(in thousands, exceptshare data)

(unaudited)

 
|                                         |   | **Three months ended  March 31,** |   |
|----------------------------------------------|--------|-----------------------------------|--------|
|                                         |   | **2002**                          |   | **2001** |   |
|                                         |   |                              |   |   |   |
| Revenue, net                                 |   | $                                 | 6,593  |   | $ | 14,889 |   |
|                                         |   |                              |   |   |   |
| Cost of goods  sold                          |   | 6,804                             |   | 13,322 |   |
|                                         |   |                              |   |   |   |
| Gross profit (loss)                          |   | (211                              | )      | 1,567 |   |
|                                         |   |                              |   |   |   |
| Operating  expenses:                         |   |                              |   |   |   |
| Selling, general  and administrative         |   | 1,207                             |   | 1,044 |   |
| Research and  development                    |   | 56                                |   | 87 |   |
| Depreciation and  amortization               |   | 103                               |   | 95 |   |
|                                         |   |                              |   |   |   |
|                                         |   | 1,366                             |   | 1,226 |   |
| Income (loss)  from operations               |   | (1,577                            | )      | 341 |   |
|                                         |   |                              |   |   |   |
| Other income  (expense):                     |   |                              |   |   |   |
| Interest expense                             |   | (55                               | )      | (140 | ) |
| Other, net                                   |   | (2                                | )      | (364 | ) |
|                                         |   |                              |   |   |   |
|                                         |   | (57                               | )      | (504 | ) |
|                                         |   |                              |   |   |   |
| Loss before  provision for income taxes      |   | (1,634                            | )      | (163 | ) |
|                                         |   |                              |   |   |   |
| Provision for  income taxes                  |   | 17                                |   | 199 |   |
|                                         |   |                              |   |   |   |
| NET LOSS                                     |   | $                                 | (1,651 | ) | $ | (362 | ) |
|                                         |   |                              |   |   |   |
| Net loss per  common share:                  |   |                              |   |   |   |
| Basic                                        |   | $                                 | (0.45  | ) | $ | (0.11 | ) |
| Diluted                                      |   | (0.45                             | )      | (0.11 | ) |
|                                         |   |                              |   |   |   |
| Weighted-average  common shares outstanding: |   |                              |   |   |   |
| Basic                                        |   | 3,759,303                         |   | 3,601,099 |   |
| Diluted                                      |   | 3,759,303                         |   | 3,601,099 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

3

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Daw Technologies, Inc.and Subsidiaries

 

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(in thousands, exceptshare data)

(unaudited)

 
|                                                                         |   | **Three months ended  March 31,** |   |
|------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                         |   | **2002**                          |   | **2001** |   |
|                                                                         |   |                              |   |   |   |
| Increase (decrease) in cash and cash equivalents                             |   |                              |   |   |   |
| Cash flows from  operating activities:                                       |   |                              |   |   |   |
| Net loss                                                                     |   | $                                 | (1,651 | ) | $ | (362 | ) |
| Adjustments to  reconcile net loss to net                                    |   |                              |   |   |   |
| Cash provided by  (used in) operating activities:                            |   |                              |   |   |   |
| Depreciation and  amortization                                               |   | 219                               |   | 237 |   |
| Loss on  disposition of property and equipment                               |   | —                            |   | 90 |   |
| Provision for  losses on accounts receivable                                 |   | (25                               | )      | 78 |   |
| Changes in  current assets and liabilities:                                  |   |                              |   |   |   |
| Restricted cash                                                              |   | 443                               |   | (728 | ) |
| Accounts  receivable                                                         |   | 1,386                             |   | (6,516 | ) |
| Costs and  estimated earnings in excess of billings on contracts in progress |   | 685                               |   | 2,424 |   |
| Inventories                                                                  |   | 97                                |   | (500 | ) |
| Other assets                                                                 |   | 158                               |   | (89 | ) |
| Accounts payable  and accrued liabilities                                    |   | (983                              | )      | 2,935 |   |
| Billings in  excess of costs and estimated earnings on contracts in progress |   | (726                              | )      | 1,370 |   |
|                                                                         |   |                              |   |   |   |
| Net cash  provided by (used in) operating activities                         |   | (397                              | )      | (1,061 | ) |
|                                                                         |   |                              |   |   |   |
| Cash flows from  investing activities:                                       |   |                              |   |   |   |
| Purchase of  property and equipment                                          |   | (24                               | )      | (63 | ) |
| Proceeds from  sale of assets                                                |   | 29                                |   |   |   |
|                                                                         |   |                              |   |   |   |
| Net cash used in  investing activities                                       |   | 5                                 |   | (63 | ) |
|                                                                              |        |                                   |        |  |  |  |  |

 

See accompanying notes tocondensed consolidated financial statements.

 

4

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|                                                           |   | **Three months ended  March 31,** |   |
|----------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                           |   | **2002**                          |   | **2001** |   |
|                                                           |   |                              |   |   |   |
| Increase (decrease) in cash and cash equivalents               |   |                              |   |   |   |
|                                                           |   |                              |   |   |   |
| Cash flows from  financing activities:                         |   |                              |   |   |   |
| Decrease in  checks written in excess of cash in bank          |   | $                                 | 0      |   | $ | (22 | ) |
| Net change in  line of credit                                  |   | (114                              | )      | 430 |   |
| Proceeds from  issuance of stock                               |   |                              |   | — |   |
| Payments on  capital lease obligations                         |   | (59                               | )      | — |   |
|                                                           |   |                              |   |   |   |
| Net cash  provided by financing activities                     |   | (173                              | )      | 408 |   |
|                                                           |   |                              |   |   |   |
| Effect of  foreign exchange rates on cash and cash equivalents |   | (21                               | )      | (68 | ) |
|                                                           |   |                              |   |   |   |
| Net increase  (decrease) in cash and cash equivalents          |   | (586                              | )      | (784 | ) |
|                                                           |   |                              |   |   |   |
| Cash and cash  equivalents at beginning of period              |   | 1,969                             |   | 2,175 |   |
|                                                           |   |                              |   |   |   |
| Cash and cash  equivalents at end of period                    |   | $                                 | 1,383  |   | $ | 1,391 |   |
|                                                           |   |                              |   |   |   |
| Supplemental  disclosures of cash flow information             |   |                              |   |   |   |
| Cash paid during  the period for:                              |   |                              |   |   |   |
| Interest                                                       |   | $                                 | 55     |   | $ | 140 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

5

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Daw Technologies, Inc.and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in thousands, exceptshare data)

(unaudited)

 

1.             SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of consolidation

 

The consolidated financial statements include the accounts andoperations of the Company and its wholly owned subsidiaries, Daw TechnologiesFrance, which was organized in 2000, Daw Technologies Europe Ltd., which wasorganized in 1999, and Translite Systems, Inc., (inactive) which was organizedin 1999.  All significant intercompanybalances and transactions have been eliminated in consolidation.

 

Translation of foreign currencies

 

The functional currency for the Company’s foreign operations is theBritish Sterling.  The financialstatements of the Company’s foreign subsidiaries are translated into U.S. Dollarsin 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. Incomeand expense items are translated at the weighted average exchange rates for theperiod.  Translation gains and lossesare reflected as a separate component of shareholders’ equity as accumulatedother comprehensive loss.  Foreigncurrency transaction gains and losses are reported in the accompanyingconsolidated statements of operations.

 

Accounting for long-term contracts

 

Revenue recorded for contracts in the accompanying financial statementsis recognized using the percentage-of-completion method and, therefore, takesinto account the costs, estimated earnings and revenue to date on contracts notyet completed.  The revenue recognizedis that portion of the total contract price that cost incurred to date bears toanticipated final total cost, based on current estimates of costs tocomplete.  Revenue fromcost-plus-fixed-fee contracts is recognized on the basis of costs incurredduring 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 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 the factsbecome 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 of billingson contracts in progress, represents revenue recognized in excess of amountsbilled (unbilled revenue).  The currentliability, billings in excess of costs and estimated earnings on contracts inprogress, represents billings in excess of revenue recognized (unearnedrevenue).  The amount of revenuerecognized is not related to the progress billings to customers.

 

6

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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.

 

Cash and cash equivalents

 

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

 

Accounts Receivable

 

Accounts receivable consist of the following:

 

|                                    |   | **March 31,  2002** |   | **December  31,  2001** |   |
|-----------------------------------------|--------|---------------------|--------|-------------------------|--------|
| Contract and  trade account receivables |   | $                   | 5,934  |                    | $      | 7,039 |   |
| Retention  receivables                  |   | 35                  |   | 368                     |   |
|                                    |   | 5,969               |   | 7,407                   |   |
| Less allowance  for doubtful accounts   |   | (408                | )      | (440                    | )      |
|                                    |   |                |   |                    |   |
| Total                                   |   | $                   | 5,561  |                    | $      | 6,967 |   |

 

Many of the Company’s contracts require retentions, typically 5-10percent of the amount billed, to be withheld from each progress payment by thecustomer until the project reaches substantial completion. Earned, but unbilledretention amounts are included in retention receivables.

 

Income taxes

 

The Company utilizes the liability method of accounting for incometaxes.  Under the liability method,deferred tax assets and liabilities are determined based on differences betweenfinancial reporting and tax bases of assets and liabilities and are measuredusing 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 than notthat such tax benefits will not be realized. Research tax credits are recognized as utilized.

 

Net loss per common share

 

The Company follows the provisions of Statement of Financial AccountingStandards (“SFAS”) No. 128 *“Earnings Per Share”*.  SFAS No. 128 requires the presentation ofbasic and diluted earnings per share (“EPS”). Basic EPS is calculated bydividing net loss available to common shareholders by the weighted-averagenumber of common shares outstanding during each period. Diluted EPS issimilarly calculated, except that the weighted-average number of common sharesreflects the potential dilution that could occur if outstanding stock options,warrants and preferred stock conversion features were exercised.

 

 

7

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The following data show the amounts used in computing net loss percommon share, including the effect on net loss for preferred stockdividends.  The following data also showthe weighted average number of shares and rights to acquire shares withdilutive potential:

 

|                                                                                               |   | **For the three  months ended   March 31,** |   |
|----------------------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                                                               |   | **2002**                                    |   | **2001** |   |
| Net loss                                                                                           |   | $                                           | (1,651 | ) | $ | (362 | ) |
|                                                                                               |   |                                        |   |   |   |
| Dividends on preferred stock                                                                       |   | (31                                         | )      | (47 | ) |
|                                                                                               |   |                                        |   |   |   |
| Net loss applicable to common shareholders                                                         |   | $                                           | (1,682 | ) | $ | (409 | ) |
|                                                                                               |   |                                        |   |   |   |
|                                                                                               |   |                                        |   |   |   |
| Weighted average number of common shares used  in basic EPS                                        |   | 3,759,303                                   |   | 3,601,099 |   |
|                                                                                               |   |                                        |   |   |   |
| 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                                   |   | 3,601,099 |   |

 

For the three month periods ended March 31, 2002 and 2001 all of thestock options, warrants and preferred stock that were outstanding were notincluded in the computation of diluted EPS because to do so would have beenanti-dilutive.

 

Use of estimates

 

The preparation of financial statements in conformity with generallyaccepted accounting principles in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenue and expense duringthe reporting period.  Actual resultscould differ from those estimates.

 

Reclassifications

 

Certain reclassifications have been made to the 2001 financialstatements to conform with the 2002 presentation.

 

4.             LINEOF CREDIT

 

During 2002 and 2001, the Company maintained a revolving line of creditwith a domestic bank.  The Company had$3,033 outstanding in borrowings under the line of credit as of March 31,2001.  As of March 31, 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 $2,471 at March 31, 2002).  Interest on borrowings under the line of credit is payablemonthly.  The interest rate associatedwith the line of credit is variable and at March 31, 2002 the interest rate was7.25%.  Borrowings under the line ofcredit are secured by substantially all the assets of the Company.  The line of credit was to expire on January31, 2002.  In January 2002, the bankextended the expiration date to January 31, 2003.  The maximum borrowings available under the extended line ofcredit is $3,000 from February 2002 until October 2002 and $2,750 from November2002 to January 2003.

 

8

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As of March 31, 2002 the Company was out of compliance with certaincovenants.  The Company is currently inthe process of negotiating a waiver for the events of noncompliance,renegotiating the terms of the line of credit and securing alternativefinancing from other sources; however, there can be no assurance that theCompany will be successful in these efforts.

 

5.             SEGMENTINFORMATION

 

The Company has three reportable segments, namely cleanroom,mini-environment and manufactured products. The operations of the Company’s cleanroom segment consists primarily ofthe design, manufacture and installation of cleanroom components and integratedcleanroom systems such as those used in the semiconductor, computer hardware,pharmaceutical, biotechnology and food processing industries.  The operations of the Company’s mini environmentssegment consists of the design, manufacture and installation of small cleanenvironment systems such as those used in semiconductor and pharmaceuticalresearch and development.  Theoperations of the manufactured products segment consists primarily ofcontract-based manufacturing and specialized painting services formanufacturers and fabricators.  In 2001,the Company established the mini environments segment.  Prior to 2001, this segment was included inthe results of the cleanroom segment. Information for 2000 has been restated to reflect the establishment ofthis new segment.

 

The accounting policies of the segments are the same as those describedin the summary of significant accounting policies (see Note 2).  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.

 

Segment information for the cleanrooms and related products and othermanufactured products are as follows:

 
|                           |   | **Three  Months Ended********March 31,** |   |
|--------------------------------|--------|------------------------------------------|--------|
|                           |   | **2002**                                 |   | **2001** |   |
| Revenue, net                   |   |                                     |   |   |   |
| Cleanroom                      |   | $                                        | 4,855  |   | $ | 12,288 |   |
| Mini environment               |   | 413                                      |   | 822 |   |
| Manufactured products          |   | 1,325                                    |   | 1,779 |   |
| Totals                         |   | $                                        | 6,593  |   | $ | 14,889 |   |
|                           |   |                                     |   |   |   |
| Income (loss)  from operations |   |                                     |   |   |   |
| Cleanroom                      |   | $                                        | (135   | ) | $ | 1,405 |   |
| Mini environment               |   | (35                                      | )      | 245 |   |
| Manufactured products          |   | (116                                     | )      | (177 | ) |
| Unallocated                    |   | (1,291                                   | )      | (1,132 | ) |
| Totals                         |   | $                                        | (1,577 | ) | $ | 341 |   |

 

9

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|                                                                              |   | **Three Months Ended********March 31,** |   |
|-----------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                              |   | **2002**                                |   | **2001** |   |
| Capital expenditures (including acquisitions through capital lease  obligations): |   |                                    |   |   |   |
| Cleanroom                                                                         |   | $                                       | 21     |   | $ | 7 |   |
| Mini environment                                                                  |   | —                                  |   | — |   |
| Manufactured products                                                             |   | 3                                       |   | 183 |   |
| Unallocated                                                                       |   | —                                  |   | 4 |   |
|                                                                              |   | $                                       | 24     |   | $ | 194 |   |
|                                                                              |   |                                    |   |   |   |
| Depreciation and amortization, including amounts charged to cost of  goods sold:  |   |                                    |   |   |   |
| Cleanroom                                                                         |   | $                                       | 28     |   | $ | 34 |   |
| Mini environment                                                                  |   | 42                                      |   | 44 |   |
| Manufactured products                                                             |   | 108                                     |   | 111 |   |
| Unallocated                                                                       |   | 41                                      |   | 48 |   |
|                                                                              |   | $                                       | 219    |   | $ | 237 |   |
|                                                                              |   |                                    |   |   |   |
|                                                                              |   | **March 31,**                           |   | **December 31,** |   |
|                                                                              |   | **2002**                                |   | **2001** |   |
| Total assets                                                                      |   |                                    |   |   |   |
| Cleanroom                                                                         |   | $                                       | 7,047  |   | $ | 11,337 |   |
| Mini environment                                                                  |   | 878                                     |   | 647 |   |
| Manufactured products                                                             |   | 3,563                                   |   | 1,776 |   |
| Unallocated                                                                       |   | 1,536                                   |   | 2,695 |   |
|                                                                              |   | $                                       | 13,024 |   | $ | 16,455 |   |

 

6.             COMPREHENSIVELOSS

 

The Following table reports comprehensive loss for the three monthsended March 31, 2002 and 2001:

 
|                                     |   | **Three  months ended  March 31,** |   |
|------------------------------------------|--------|------------------------------------|--------|
|                                     |   | **2002**                           |   | **2001** |   |
| Net loss                                 |   | $                                  | (1,651 | ) | $ | (362 | ) |
| Foreign currency  translation adjustment |   | (41                                | )      | (152 | ) |
|                                     |   |                               |   |   |   |
| Comprehensive  loss                      |   | $                                  | (1,692 | ) | $ | (514 | ) |

 

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**Item2.       Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

 

GENERAL

 

The following discussion should be read in conjunctionwith the financial 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 thedesign, manufacture and installation of cleanroom components and integratedcleanroom systems, primarily for the semiconductor industry.  The Company also designs, manufactures andinstalls cleanroom components and integrated cleanroom systems for otherindustries, such as the pharmaceutical, flat panel display, disk drive, biotechnologyand food processing industries.  TheCompany is a global leader in the cleanroom installation business.  In addition, the Company designs andmanufactures environmentally controlled “mini-environments,” which range insize from the size of a desk to the size of a bus.  These mini-environments typically house expensive automation androbotic equipment used in the semiconductor manufacturing process or inpharmaceutical research and development. Finally, the Company offers manufacturing and specialized paintingservices on a contract basis, primarily to local and regional manufacturers andfabricators.

 

RESULTS OF OPERATIONS (Data in the tables are inthousands)

 

Selected Financial Information

 
|               |   | **Three months ended  March 31,** |   |
|--------------------|--------|-----------------------------------|--------|
|               |   | **2002**                          |   | **2001** |   |
|               |   |                              |   |   |   |
| Revenue, net       |   | $                                 | 6,593  |   | $ | 14,889 |   |
|               |   |                              |   |   |   |
| Gross profit       |   | (211                              | )      | 1,567 |   |
|               |   |                              |   |   |   |
| Operating expenses |   | 1,366                             |   | 1,226 |   |
|               |   |                              |   |   |   |
| Net loss           |   |                              | (1,651 | ) |   | (362 | ) |

 
|                             |   | **March 31,  2002** |   | **December 31,  2001** |   |
|----------------------------------|--------|---------------------|--------|------------------------|--------|
| **Balance Sheet Data:**          |   |                |   |                   |   |
|                             |   |                |   |                   |   |
| Cash and cash  equivalents       |   | $                   | 1,383  |                   | $      | 1,969 |   |
|                             |   |                |   |                   |   |
| Working capital                  |   | 1,685               |   | 3,221                  |   |
|                             |   |                |   |                   |   |
| Total assets                     |   | 13,024              |   | 16,455                 |   |
|                             |   |                |   |                   |   |
| Total  liabilities               |   | 9,304               |   | 11,012                 |   |
|                             |   |                |   |                   |   |
| Redeemable  preferred stock      |   | 5,401               |   | 5,401                  |   |
|                             |   |                |   |                   |   |
| Total  stockholders’ equity |   | (1,681              | )      | 42                     |   |
|                                  |        |                     |        |                        |        |  |  |

 

Discussion

 

Revenue for thefirst quarter of 2002 decreased by 55.7% to $6.6 million compared to $14.9million for the first quarter of 2001. Revenue from cleanroom and related products decreased $7.4 million, or60.5%, to $4.9 million for the first quarter of 2002 from $12.3 million during the first quarter of 2001.  Additionally, the sale of other manufacturedproducts decreased by $0.4.  Revenuefrom other manufactured goods and services decreased to $1.3 million for theperiod ended March 31, 2002, as compared with $1.8 million for the period endedMarch 31, 2001.  The decline incleanroom revenue is primarily attributable to the recession in thesemiconductor industry that began in the first quarter of 2001.  The decline in other revenue is a result ofthe general economic slowdown.

 

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Gross profit for first quarter of2002 decreased by 113.5% to $(211,000) from $1.6 million for the first quarterof 2001 and decreased to (3.2)% as a percentage ofrevenue for the first quarter of 2002 compared to 10.5% for the first quarterof 2001.  The decrease in gross profitin the first quarter of 2002 as compared to the first quarter of 2001 is, inlarge part, a result of the decrease in the semiconductor markets as well asthe decline in the worldwide economy as a whole, and an increase in thecompetitive nature of the cleanroom bidding process.  With the Company’s efforts to develop a portion of itsrevenue from sources outside of the semiconductor industry by applying itsproduct and engineering expertise in custom metal fabrication and airflowsystems, the Company continues to experience cost inefficiencies due to ramp-upcosts.  However, it continues to be theCompany’s objective to identify, manufacture and sell non-cleanroom productsthat have acceptable gross profit margin potential.

 

The recent downturn in capitalspending by the semiconductor industry resulted in a price competitive biddingenvironment as well as fewer large cleanroom projects to bid.  The Company is continuing to pursue theoutsourcing of cleanroom component parts where such outsourcing will allow itto offer its customers a wider range of cleanroom solutions at competitiveprices.  Management hopes that thisstrategy will enable the Company to be more flexible in the currentenvironment.

 

The Company is also continuingits efforts to develop revenues from sources outside of the semiconductorindustry by applying its product and engineeringexpertise in advanced custom metal fabrication, airflow systems and compositepanel production. The Company may experience cost inefficiencies due to ramp-upcosts as a variety of non-semiconductor products are evaluated and tested.  However, it is the Company’s objective toidentify, manufacture and sell other products that have acceptable gross profitmargin potential.

 

Selling, general andadministrative expenses for the first quarter of 2002 increased 15.6% to $1.2million, or 18.3% of revenue, compared to $1.0 million, or 7.0% of revenue forthe first quarter of 2001.  The increasein selling, general and administrative expenses was due primarily to theincreased cost necessary to restate the company’s financial statements datingback to 1999.  These costs include, butare not limited to, audit fees, consulting fees, legal fees, increased wagesfor additional employees and overtime costs.

 

Research and development expenses for the first quarter of 2002 decreased to $56,000, comparedto $87,000 for the first quarter of 2001. This decrease is primarily attributable to an effort to control costs indown times but continue to fund research and development to improve itsexisting products and develop new products in its diversification program.

 

Interest expense for the firstquarter of 2002 decreased to $55,000, compared to $140,000 for the firstquarter of 2001.  This decreasewas directly related to decreased borrowings against the Company’s credit lineduring the first quarter of 2002, compared to borrowings during the first quarter of 2001.

 

Other expense, net was $2,000 forthe three months ended March 31, 2002 compared to other expense, net of$364,000 for the three months ended March 31, 2001.  Other expense in 2002, included $32,000 of currency exchange lossbut was nearly offset by other income such as interest income.

 

The provisionfor income taxes for the first quarter of 2002 resulted from the Company’sforeign operations.  The Company had aprovision for income taxes of approximately $17,000 from its foreign operationsduring the first quarter of 2002.

 

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LIQUIDITY AND CAPITAL RESOURCES

 

Working capital atMarch 31, 2002 was $1.7 million, compared to $3.2 million at December 31,2001.  This includes cash and cashequivalents of $1.4 million at March 31, 2002 and $2.0 million at December 31,2001.

 

A bonus accrual established in 2001 was determined tobe in excess during the first quarter of 2002 by $172,000.  This amount was reversed to income in March2002.

 

The Company’s operations used $397,000 of cash during the first quarter of 2002, compared tousing $1.1 million of cash from operations during the first quarter of 2001. During the first quarter of 2002, the Company experienced a net decreasein receivables of $1.4 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 $685,000 and billings in excess of costs andestimated earnings on contracts in progress decreased by $726,000.

 

During thethree months ended March 31, 2002, the Company maintained a revolving line ofcredit with a domestic bank for the lesser of $3,000,000 or the available borrowing base.  The interest rate is floating and as ofMarch 31, 2002 was 7.25%.  The line ofcredit requires monthly payments of interest. The Company had $2,471,000 in borrowings against the line atMarch 31, 2002 ($2,585,000 atDecember 31, 2001).  The line of creditoriginally expired October 31, 1999 and was extended to December 31, 2001.  Borrowings under the line of credit aresecured by substantially all the assets of the Company.  The line of credit was to expire on January31, 2002.  In January 2002, the bankextended the expiration date to January 31, 2003.  The maximum borrowings available under the extended line ofcredit is $3,000,000 from February2002 until October 2002 and $2,750,000from November 2002 to January 2003.

 

The line of credit agreement contains restrictivecovenants imposing limitations on payments of cash dividends, purchases orredemptions of capital stock, indebtedness and other matters.  At times during 2001 and the three monthsended March 31, 2002 and at both December 31, 2001 and March 31, 2002, the Companywas not in compliance with certain covenants. The Company is currently in the process of negotiating a waiver for theevents of noncompliance, renegotiating the terms of the line of credit andsecuring alternative financing from other sources; however, there can be noassurance that the Company will be successful in these efforts.  The Company is currently reviewing severalfinancing alternatives.

 

In addition, the holders of the outstanding Series APreferred Stock have the right to require the Company to redeem their shares ofpreferred stock as a result of the Company’s suspension of trading anddelisting from Nasdaq.  The Company isappealing this delisting.  Managementhas been in frequent communication with the holders of the Series A PreferredStock and to date the preferred shareholders have not demanded redemption.  The Company does not have adequate capitalresources to redeem all or a significant portion of the Series A PreferredStock.

 

In December 2001, the Company received a taxassessment from France 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. Nevertheless, the Company does not presently have sufficient capitalresources to pay the amount that management thinks will ultimately be found tobe owing.

 

Finally, the Company recently restated its financialstatements dating back to October 1999 because of certain accounting errorsprimarily arising out of the Company’s European operations.  The restatement resulted in the Companybeing charged unusually large accounting and audit fees which may total closeto $1 million.  The majority of thoseaccounting and audit fees were incurred in the first quarter of 2002.  Payment of these unusual, one-time fees willput a severe strain on the Company’s cash flow.

 

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*ThisReport contains “forward-looking statements” within the meaning of the PrivateSecurities Litigation 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, describedfrom time to time in the Company’s other Securities and Exchange Commissionfilings, or discussed in the Company’s press releases.  Actual results may vary materially fromexpectations.*

 

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PART II - OTHERINFORMATION

 

Item 6.        Exhibits and Reports on Form 8-K

 

(a)           Exhibits.

 

None

 

(b)           Reports on Form 8-K.

 

A report on Form 8-K wasfiled on January 25, 2002 reporting that the Company's common stock has beendelisted from the Nasdaq National Market.

 

A report on Form 8-K wasfiled on March 4, 2002 reporting that the Company had hired James C. Collingsas its Chief Executive Officer and as a member of the Company's Board ofDirectors.

 

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SIGNATURES

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized, on May 15, 2002.

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

 

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