-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JX+vcqLb2ZBMyKf1DaAbCjRHuWJ5iu3TgMhVdme+PSoI3qyLCQSgn3w/jzTdERqc zQurAF6p1LWwUofEBy5isg== 0000813619-04-000012.txt : 20040303 0000813619-04-000012.hdr.sgml : 20040303 20040303155828 ACCESSION NUMBER: 0000813619-04-000012 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040303 ITEM INFORMATION: Other events FILED AS OF DATE: 20040303 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHWALL TECHNOLOGIES INC /DE/ CENTRAL INDEX KEY: 0000813619 STANDARD INDUSTRIAL CLASSIFICATION: UNSUPPORTED PLASTICS FILM & SHEET [3081] IRS NUMBER: 942551470 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-15930 FILM NUMBER: 04646151 BUSINESS ADDRESS: STREET 1: 1029 CORPORATION WAY CITY: PALO ALTO STATE: CA ZIP: 94303 BUSINESS PHONE: 4159629111 8-K/A 1 sw_8k030304.htm FORM 8-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K/A

AMENDMENT NO. 1

CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF

THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of Earliest Event Reported): March 3, 2004

Southwall Technologies Inc.

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(Exact name of registrant as specified in its charter)

Delaware

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(State of incorporation or organization)

0-15930 94-2551470

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(Commission File Number) (I.R.S. Employer

Identification No.)

3975 East Bayshore Road, Palo Alto, California 94303

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(Address of Principal Executive Office) (Zip Code)

Registrant's telephone number, including area code: (650) 962-9111

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The undersigned registrant hereby amends and restates the following items of the Current Report on Form 8-K dated February 25, 2004 (as amended, the "Amended Report"), as set forth below and in the pages attached hereto. The description of the transactions contained in this Amended Report is qualified in its entirety by the exhibits attached hereto, each of which is incorporated by reference herein.

Item 5. Other Events.

On February 24, 2004, Southwall Technologies Inc. ("Southwall") issued a press release announcing that it had amended and restated its December 18, 2003 bank guarantee and equity financing agreement (as amended and restated, the "Investment Agreement") with Needham & Company, Inc. ("Needham & Company"), Needham Capital Partners II, L.P., Needham Capital Partners II (Bermuda), L.P., Needham Capital Partners III, L.P., Needham Capital Partners IIIA, L.P., and Needham Capital Partners III (Bermuda), L.P. (collectively, the "NCP Entities"), and Dolphin Direct Equity Partners, LP ("Dolphin", and collectively with the NCP Entities, the "Purchasers") by issuing $4.5 million of convertible notes (the "Convertible Notes") in one tranche instead of preferred stock in two separate tranches. The Convertible Notes are convertible, at the holders' option, into preferred stock of Southwall at a conversion price of $1.00 per sh are, accrue interest at an annual rate of 10%, compounded daily, are secured by a pledge of a portion of the stock of Southwall's subsidiary, Southwall Europe GmBH, and are due and payable on February 20, 2009 or earlier under certain circumstances. The preferred stock will initially be convertible on a one-for-one basis into Southwall's common stock, subject to anti-dilution provisions such as a weighted-average adjustment to the conversion price for sales of common stock below the conversion price and an adjustment to the conversion price if Southwall subdivides or combines shares of its common stock or pays a stock dividend on shares of its common stock. The preferred stock will have a preference over the common stock in the event of a liquidation or winding up of Southwall, and carry a cumulative dividend of 10% per annum. The approval of the holders of the preferred stock will be required for Southwall to take certain actions, including the consumma tion of any merger or sale of the company or all or substantially all of its assets.

As part of the Investment Agreement, in December 2003, Needham & Company executed guaranties of up to $3 million under Southwall's line of credit facility with Pacific Business Funding, a division Greater Bay Bank, N.A. ("PBF"), and received warrants to purchase 1,882,229 shares of Southwall's common stock. The warrants, exercisable for $0.01 per share, will expire five years from their issuance. As of the date of this Amended Report, Southwall had drawn down on the entire $3 million available under the line of credit. The line of credit along with Southwall's other borrowing arrangements with PBF are scheduled to expire on May 5, 2004. There is no assurance that Southwall will be able to find financing arrangements on commercially reasonable terms to replace its arrangements with PBF, if at all. The total bank guarantee and debt financing package created by the Investment Agreement provides for up to $7.5 million in fin ancing for Southwall, all of which the company has already received.

In connection with the sale of the Convertible Notes, Southwall issued warrants to purchase a total of 18,877,485 shares of its common stock to the Purchasers (including warrants issued to the Purchasers as anti-dilution protection for the issuance of debt and equity by Southwall as part of the company's restructuring of its obligations to creditors, as described below). The warrants, exercisable for $0.01 per share, will expire five years from their issuance. If the NCP Entities and their affiliated entities were to exercise all warrants and convert all shares of preferred stock issuable to them pursuant to the terms of the Investment Agreement, while maintaining their current position of approximately 2,200,067 shares of common stock, then they and their affiliated entities would own approximately 15,412,466 shares of Southwall common stock, or about 60% of the total shares outstanding, including such issuances to the NCP Entities but excluding outstanding warrants held by other parties. Dolphin currently does not own any shares of common stock but upon exercise of its warrants and conversion of the preferred stock issuable to it pursuant to the terms of the Investment Agreement, it would own approximately 5,665,085 shares of Southwall common stock, or about 31% of the total shares outstanding, including such issuances to Dolphin but excluding outstanding warrants held by other parties. Under the terms of the Investment Agreement, the Purchasers are entitled to anti-dilution protection for the issuance of any other debt or equity by Southwall as part of the company's restructuring of its obligations to creditors. Southwall granted certain registration rights to the Purchasers with respect to the shares of common stock issuable upon exercise of the warrants or conversion of the preferred stock.

Southwall currently has authorized 20,000,000 shares of common stock, which amount would be insufficient to cover all of the shares that would be required upon exercise of all outstanding warrants and options and conversion of all preferred stock issuable under the Convertible Notes. If the Purchasers were to exercise all warrants and convert all shares of preferred stock issuable to them pursuant to the terms of the Investment Agreement, PBF were to exercise all warrants currently issued to them, and the company's option holders were to exercise all options currently outstanding, Southwall would have 34,527,733 shares of common stock outstanding (not including warrants exercisable for up to an additional 5% of the company that Southwall may issue to certain creditors, as described below). The difference between the number of authorized shares of the company's common stock and the number of shares that would be required in such a situation is approximately 14,527,733. As a result, South wall is required under the Investment Agreement to hold a shareholder meeting to obtain the consent of its shareholders to increase the number of authorized shares of its common stock. Failure by Southwall to obtain the consent of its shareholders to increase the number of authorized shares of its common stock will result in the acceleration of the Convertible Notes. There can be no assurances that approval will be obtained or that Southwall will not be sued by the Purchasers or others if it does not have enough authorized shares of common stock to make the required issuances.

As a further condition to receiving the most recent funding, Southwall was required to reach agreements with certain of its major creditors that were satisfactory to the Purchasers. Under the terms of the agreements with these creditors, Southwall restructured its payment obligations and obtained concessions which reduced the total obligations due in 2004 to these creditors from approximately $11.8 million to approximately $2.1 million. Remaining obligations to these creditors will be spread out through 2009. As a condition to obtaining payment concessions, Southwall may issue warrants to certain creditors to purchase shares of its common stock equal to a total of up to 5% of the company.

Southwall and PBF have entered into an amendment to the Forbearance Agreement, dated December 18, 2003, in which PBF agreed to forbear until May 5, 2004 from pursuing its remedies pursuant to certain defaults by Southwall under a factoring line of credit previously entered into between the parties. The amendment allowed for the changes to the Investment Agreement. Southwall has also issued PBF warrants to purchase a total of 360,000 shares of common stock at an exercise price of $0.01 per share. The warrants will expire five years from their issuance. Southwall granted certain registration rights to PBF with respect to the shares issuable upon exercise of the warrants.

Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.

99.1 Press Release, dated February 24, 2004, issued by Southwall Technologies Inc.

99.2 Amended and Restated Investment Agreement, dated February 20, 2004, by and among Southwall Technologies Inc., Needham & Company, Inc., Needham Capital Partners II, L.P., Needham Capital Partners II (Bermuda), L.P., Needham Capital Partners III, L.P., Needham Capital Partners IIIA, L.P., Needham Capital Partners III (Bermuda), L.P., and Dolphin Direct Equity Partners, LP.

99.3 Amended and Restated Registration Rights Agreement, dated February 20, 2004, by and among Southwall Technologies Inc., Pacific Business Funding, Judd Properties, LLC, Needham & Company, Inc., Needham Capital Partners II, L.P., Needham Capital Partners II (Bermuda), L.P., Needham Capital Partners III, L.P., Needham Capital Partners IIIA, L.P., Needham Capital Partners III (Bermuda), L.P., and Dolphin Direct Equity Partners, LP.

99.4 Amended and Restated Certificate of Designation, Preferences and Rights of Series A 10% Cumulative Preferred Stock of Southwall Technologies Inc. filed with the Secretary of State of Delaware on January 30, 2004.

99.5 Form of Secured Convertible Promissory Note.

99.6 Pledge Agreement, dated February 20, 2004, between Southwall Technologies Inc. and Needham & Company, Inc.

99.7 Second Amendment to Forbearance Agreement, dated February 20, 2004, between Southwall Technologies Inc. and Pacific Business Funding.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

SOUTHWALL TECHNOLOGIES INC.

Date: March 3, 2004 By: /s/ Thomas G. Hood____________

Thomas G. Hood

President and Chief Executive Officer

EXHIBIT INDEX

Exhibit No. Description

99.1 Press Release, dated February 24, 2004, issued by Southwall Technologies Inc.

99.5 Form of Secured Convertible Promissory Note.

99.6 Pledge Agreement, dated February 20, 2004, between Southwall Technologies Inc. and Needham & Company, Inc.

99.7 Second Amendment to Forbearance Agreement, dated February 20, 2004, between Southwall Technologies Inc. and Pacific Business Funding.

EX-99.1 3 exh99-1.htm PRESS RELEASE Investor/Media Advisory: PRESS RELEASE

Southwall Technologies, Inc.

3975 East Bayshore Road

Palo Alto, CA 94303

Phone: (650) 962-9111

Fax: (650) 967-8713

Contacts:

Thomas G. Hood, President and CEO

thood@southwall.com

Maury Austin, Vice President and CFO

maustin@southwall.com

For Immediate Release

SOUTHWALL TECHNOLOGIES RAISES $4.5 MILLION IN CONVERTIBLE DEBT AND REACHES AGREEMENTS WITH MAJOR CREDITORS

PALO ALTO, CA - February 24, 2004 - Southwall Technologies Inc. (Nasdaq:SWTX), a global developer, manufacturer and marketer of thin-film coatings for the electronic display, automotive glass and architectural markets, today announced that it has raised $4.5 million in convertible debt funding under an amended and restated agreement with a group of investors led by Needham Capital Partners. At the option of the investors, the secured convertible debt can be converted into 4,500,000 shares of preferred stock. Other terms remain generally unchanged as the total bank guarantee and secured debt financing package provides up to $7.5 million in funding for Southwall. As a condition to receiving funding under the December 18^th agreement, Southwall had to reach satisfactory agreements with its major creditors. Under the terms of the revised creditor agreements Southw all restructured its payment obligations, which is expected to result in a cash outlay reduction of over $6 million in 2004.

"We are very pleased to have secured additional funding and reached agreements with several of our largest creditors," said Thomas G. Hood, Southwall's president and chief executive officer. "The restructuring of these financial obligations with our creditors is expected to substantially improve Southwall's cash situation and is an indication of the significant progress we are making in putting Southwall back on solid financial ground. These agreements, along with the financial benefits from our workforce reduction and consolidation of our U.S. operations, should allow the company to successfully rebuild in 2004."

For a complete description of the amended investment agreement, please refer to Southwall's Form 8-K which is expected to be filed with the Securities and Exchange Commission on Wednesday February 25, 2004. The descriptions of those documents in this press release are qualified in their entirety by reference to the actual documents.

About Southwall Technologies Inc.

Southwall Technologies Inc., designs and produces thin film coatings that selectively absorb, reflect or transmit light. Southwall products are used in a number of automotive, electronic display and architectural glass products to enhance optical and thermal performance characteristics, improve user comfort and reduce energy costs. Southwall is an ISO 9001:2000-certified manufacturer and exports advanced thin film coatings to over 25 countries around the world. Southwall's customers include Audi, BMW, DaimlerChrysler, Hewlett-Packard, Mitsubishi Electric, Mitsui Chemicals, Peugeot-Citroën, Pilkington, Renault, Saint-Gobain Sekurit, and Volvo.

About Needham & Company

Needham & Company, Inc., a leading U.S. investment banking, securities and asset management firm focused primarily on serving emerging growth industries and their investors. Further information is available at www.needhamco.com.

About Dolphin Asset Management

Dolphin Asset Management Corp. is a New York-based asset management firm investing exclusively in micro-cap opportunities.

This press release may contain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995, including, without limitation, statements regarding the company's expectations, beliefs, intentions, or strategies regarding the future. All forward-looking statements in this press release are based on information available to the company on the date hereof, and the company assumes no obligation to update any such forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those presented, specifically that the guarantees and the proceeds from the stock sales described herein will not be sufficient to allow Southwall to meet its obligations or otherwise remain liquid; that the company will default under its credit facility or under agreements with Needham or Dolphin; that the company will not receive an exemption from the Nasdaq National Market stockholder approval requirements; that Southwall's common stock may be voluntarily or involuntarily removed from listing on the Nasdaq National Market; that the company's circumstances will trigger defaults under one or more of its borrowing arrangements; and that the transactions contemplated in this release will have a material adverse effect on the trading price of Southwall's common stock, as well as risks associated with the company's failure to meet covenants under credit facilities and strains on its liquidity. Further risks are detailed in the company's filings with the Securities and Exchange Commission, including those set forth in the company's most recent Annual Report on Form 10-K for the year ended December 31, 2002, filed on March 31, 2003; its Quarterly Report on Form 10-Q for the quarter ended September 28, 2003, filed on November 17, 2003, as amended by its Quarterly Report Form 10-Q/A, filed on November 19, 2003; its Current Reports on Form 8-K, filed on December 9, 2003, December 16, 2003 and December 23, 2003, respectively; and its Current Report on Form 8-K filed on January 9, 2004 and January 29, 2004 and on or about February 25, 2004.

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EX-99.2 4 exh99-2.htm AMENDED AND RESTATED INVESTMENT AGREEMENT AMENDED AND RESTATED
INVESTMENT AGREEMENT

This Amended and Restated Investment Agreement is entered into on February 20, 2004 (this "Agreement"), by and among Southwall Technologies Inc., a Delaware corporation ("Southwall"), Needham & Company, Inc., a Delaware corporation, ("Needham & Company"), and Needham Capital Partners II, L.P., a Delaware limited partnership, Needham Capital Partners II (Bermuda), L.P., a limited partnership organized and existing under the laws of Bermuda, Needham Capital Partners III, L.P., a Delaware limited partnership, Needham Capital Partners IIIA, L.P., a Delaware limited partnership, and Needham Capital Partners III (Bermuda), L.P., a limited partnership organized and existing under the laws of Bermuda (each, individually, an "NCP Entity" and, collectively, "NCP Entities"), and Dolphin Direct Equity Partners, LP, a Delaware limited partnership ("Dolphin"). Each NCP Entity and Dolphin may from time to t ime be referred to herein individually as a "Convertible Notes Purchaser" and collectively as the "Convertible Notes Purchasers").

RECITALS

On December 18, 2003, Southwall, Needham & Company and the Convertible Notes Purchasers entered into an Investment Agreement, as amended (the "Previous Agreement") which provided for, among other things, the provision of certain guaranties by Needham & Company and for the purchase of shares of preferred stock of Southwall, each subject to the terms and conditions of the Previous Agreement.
As of the date of this Agreement, the Initial Extension of Credit Closing and the Second Extension of Credit Closing have each occurred.
The parties to the Previous Agreement wish to amend and restate the Previous Agreement to provide for the purchase of secured convertible promissory notes rather than the preferred shares contemplated by the Previous Agreement and also add two additional NCP Entities as parties to this Agreement.
In addition, the parties wish that the Agreement be effective as of December 18, 2003.
Southwall needs additional funds to maintain its operations, and Needham & Company and the Convertible Notes Purchasers have indicated their willingness to provide Southwall with a financing package in order for Southwall to maintain its operations.
Pursuant to the terms of that certain Domestic Factoring Agreement, as amended (the "Domestic Factoring Agreement") and that certain Export-Import Bank Factoring Agreement, as amended (the "EX-IM Agreement" and collectively with the Domestic Factoring Agreement, the "Bank Agreements"), by and between Southwall and Pacific Business Funding, a division of Cupertino National Bank (the "Bank"), Southwall has borrowed, as of the date hereof, approximately $4,200,000. In connection with the transactions contemplated hereby, the Bank and Southwall have entered into a Forbearance Agreement (as amended by the First Amendment to Forbearance Agreement and Second Amendment to the Forbearance Agreement, the "Forbearance Agreement"), and have, among other things, agreed to amend the Bank Agreements to reduce the amount of availability thereunder from $10,000,000 to $7,000,000 (the "Amendment").
In connection with the execution of the Forbearance Agreement, the Bank has indicated its willingness to lend additional amounts to Southwall under a Loan and Security Agreement (as defined below), which provides for an extension of credit of up to $3,000,000 so long as Needham & Company executes a guaranty of Southwall's payment obligations under the Loan and Security Agreement.
In addition, the Convertible Notes Purchasers, have indicated their willingness to purchase secured promissory notes convertible into equity of Southwall from Southwall if, among other things, Southwall completes certain restructuring actions.

THE PARTIES AGREE AS FOLLOWS:

DEFINITIONS

1.1 Definitions. In addition to the terms defined elsewhere in this Agreement, the following terms shall have the meanings set forth in this Section 1.1:

"Action" means any action, suit, inquiry, notice of violation, proceeding (including any partial proceeding such as a deposition) or investigation pending or threatened in writing against or affecting Southwall or any Subsidiary or any of their respective properties before or by any Person, court, arbitrator, governmental or administrative agency, regulatory authority (federal, state, county, local or foreign), stock market, stock exchange or trading facility.

"Affiliate" means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 144 under the Securities Act.

"Amended and Restated Certificate of Designation" means the Amended and Restated Certificate of Designation, Preferences and Rights of Series A 10% Cumulative Convertible Preferred Stock, in the form attached as Exhibit A hereto, setting forth the terms and conditions of the Series A Preferred Stock.

"Amended and Restated Registration Rights Agreement" means the Amended and Restated Registration Rights Agreement, dated as of the date of this Agreement, among Southwall, Needham & Company, the Convertible Notes Purchasers, the Bank and certain other parties, in the form of Exhibit B attached to this Agreement.

"Bankruptcy Event" means any of the following events: (a) Southwall or any Subsidiary commences a case or other proceeding under any bankruptcy, reorganization, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to Southwall or any Subsidiary thereof; (b) there is commenced against Southwall or any Subsidiary any such case or proceeding; (c) Southwall or any Subsidiary is adjudicated by a court of competent jurisdiction insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered; (d) Southwall or any Subsidiary suffers any appointment of any custodian or the like for it or any part of its property; (e) under applicable bankruptcy law Southwall or any Subsidiary makes a general assignment for the benefit of creditors; (f) Southwall or any Subsidiary fails to pay, or states that it is unable to pay or is unable to pay, its debts generally as they become due; (g) Southwall or any Subsidiary calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or (h) Southwall or any Subsidiary, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing; provided that, with respect to (f) and (g) above and (h) solely as it relates to (f) and (g), no action or inaction on the part of Southwall or its Subsidiaries that has been agreed to by the parties in the Transaction Documents or that has been approved by Needham & Company and/or NCP in writing shall constitute a Bankruptcy Event including, but not limited to, the renegotiation of leases and agreements to defer and/or extend payment terms with creditors and lenders on terms agreed to in writing by Needham & Company and/or NCP Entities.

"Business Day" means any day except Saturday, Sunday and any day which shall be a federal legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.

"Capital Lease Obligations" of any Person shall mean the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP and, for the purposes of this Agreement, the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP.

"Certificate of Designation" means that Certificate of Designation, Preferences and Rights of 10% Cumulative Convertible Preferred Stock filed with the Secretary of State of the State of Delaware on December 18, 2003.

"Closing," when used generically herein, means the Closing of any of the extensions of credit and purchases and sale of Securities pursuant to Section 2.1. Specific Closings provided for under this Agreement and subject to its terms and conditions are the Initial Extension of Credit Closing, the Second Extension of Credit Closing, the Convertible Debt Closing.

"Closing Date" means the Business Day immediately following the date on which all the conditions set forth in Article 6 hereof applicable to a Closing are satisfied or waived.

"Commission" means the Securities and Exchange Commission.

"Common Stock" means the common stock of Southwall, $0.001 par value per share, and any securities into which such common stock may hereafter be reclassified.

"Common Stock Equivalents" means any securities of Southwall or any Subsidiary which entitle the holder thereof to acquire Common Stock at any time, including without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock or other securities that entitle the holder to receive, directly or indirectly, Common Stock.

"Convertible Debt Closing" means the closing of the Convertible Debt transactions which shall take place, subject to the terms and conditions of this Agreement (including satisfaction or waiver of conditions), between January 4, 2004, and the Convertible Debt End Date.

"Convertible Note" means the convertible promissory note of Southwall in the form attached as Exhibit C hereto, which is convertible into shares of Series A Preferred Stock of Southwall and is secured by 65% of the issued and outstanding stock of the Material Subsidiary.

"Default" means the occurrence of any Event of Default.

"Disclosure Schedule" means the disclosure schedule of Southwall dated as of the date of this Agreement provided to Needham & Company and the Convertible Notes Purchasers.

"Dolphin Convertible Debt Warrants" means common stock purchase warrants in the form of Exhibit D attached to the Previous Agreement issued in favor of Dolphin for an aggregate of 564,669 shares of Common Stock.

"Event of Default" means any of the following:

Southwall shall fail to pay the principal and/or interest accrued thereon under the Bank Agreements or the Loan and Security Agreement on or before the expiration of any applicable grace periods;
Southwall shall fail to pay the principal and/or interest accrued under the Convertible Notes on or before the expiration of any applicable grace periods;
Southwall or any of its Subsidiaries shall fail to pay any obligations on other Indebtedness when due other than, as set forth in the Restructuring Plan, Indebtedness owed to Teijin Limited (including any amounts owed to Teijin Limited as a trade creditor) or The Sanwa Bank Ltd., or any other Indebtedness agreed to by Needham & Company in writing;
Southwall breaches in any material respect any covenant contained in this Investment Agreement, any other of the Transaction Documents, or the Bank Agreements and such breach is not cured within 3 Business Days;
Any representation or warranty made by Southwall herein or in any other Transaction Document (or in any certificate or other writing furnished in connection with any Transaction Document) shall not have been true and correct in all material respects (without giving effect to any qualifications as to materiality contained therein) (except for such representations and warranties that speak as of a particular date, which shall have been true and correct as of the date when made) and such inaccuracy is not cured within 10 days after such representation or warranty becomes inaccurate;
The occurrence of any Bankruptcy Event, and, in the event of a Bankruptcy Event that was commenced by a party other than Southwall, such case or proceeding shall not have been dismissed within 90 days;
Any Transaction Document shall fail to be the legal and valid, obligation and agreement of Southwall;
Any of Southwall or its Subsidiaries shall be liquidated, dissolved, wound up or cease to exist for any reason whatsoever, or any of Southwall or its Subsidiaries shall elect, undertake or resolve to do so; or
Southwall shall default in the payment of principal of or interest on any Indebtedness for borrowed money in an amount greater than $50,000 or default in the performance of any other term, condition or agreement respecting any such Indebtedness and the other party thereto shall have accelerated the maturity thereof;

provided that no action or inaction on the part of Southwall or its Subsidiaries that has been agreed to by the parties in the Transaction Documents or that has been approved by Needham & Company and/or NCP in writing shall constitute an Event of Default including, but not limited to, the renegotiation of leases and agreements to defer and/or extend payment terms with creditors and lenders on terms agreed to in writing by Needham & Company and/or NCP.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Guarantee" of or by any Person shall mean any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of such Person, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Indebtedness, (b) to purchase property, securities or services for the purpose of assuring the owner of such Indebtedness of the payment of such Indebtedness or (c) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness, provided, that the term Guarantee shall not include endorsements for collection or deposit, in e ither case in the ordinary course of business.

"Indebtedness" of any Person shall mean, without duplication, (a) all obligations of such Person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property or assets purchased by such Person, (e) all obligations of such Person issued or assumed as the deferred purchase price of property or services (other than trade debt in a total amount not more than $7,500,000 at any time incurred in the ordinary course of business and repayable in accordance with customary trade practices), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, (g) all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all obligations of such Person in respect of interest rate protection agreements, foreign currency exchange agreements or other interest or exchange rate hedging arrangements and (j) all obligations of such Person as an account party in respect of letters of credit and bankers' acceptances. The Indebtedness of any Person shall include the Indebtedness of any partnership in which such Person is a general partner.

"Initial Extension of Credit" means the initial extension of credit by Needham & Company up to $2,250,000 pursuant to the Loan and Security Agreement.

"Initial Extension of Credit Closing" means the closing of the Initial Extension of Credit pursuant to Section 2.2.

"Initial Extension of Credit Warrant" means a common stock purchase warrant in the form of Exhibit D attached to the Previous Agreement for 941,115 shares of Common Stock issued to Needham & Company.

"Loan and Security Agreement" means the Loan and Security Agreement by and between Southwall and the Bank, dated as of the date of the Previous Agreement, attached as Exhibit B attached to the Previous Agreement, as amended and supplemented through the date hereof.

"Losses" means any and all losses, claims, damages, liabilities, settlement costs and expenses, including without limitation costs of preparation of legal action and reasonable attorneys' fees.

"Material Subsidiary" means Southwall Europe GMBH.

"Needham & Company and NCP Counsel" means Heller Ehrman White & McAuliffe LLP.

"NCP Entities Convertible Debt Warrants" means common stock purchase warrants in the form of Exhibit D attached to the Previous Agreement issued in favor of the NCP Entities for an aggregate of 1,129,338 shares of Common Stock.

"Person" means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.

"Pledge Agreement" means the Pledge Agreement by and among Southwall and the Convertible Note Purchasers in the form of Exhibit D attached to this Agreement.

"Proceeding" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened in writing.

"Registration Rights Agreement" means the Registration Rights Agreement, dated as of the date of this Agreement, among Southwall and Needham & Company and Southwall and the Convertible Notes Purchasers, in the form of Exhibit C attached to the Previous Agreement.

"Restructuring Plan" shall mean the restructuring plan of Southwall and its Subsidiaries attached as Disclosure Schedule A to this Agreement.

"Rule 144" means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

"Second Extension of Credit" means the extension by Needham & Company of additional credit up to $750,000 pursuant to the Loan and Security Agreement.

"Second Extension of Credit Closing" means the Closing of the Second Extension of Credit which shall take place, subject to the terms and conditions of this Agreement (including satisfaction or waiver of conditions), between January 2, 2004 and the Second Extension of Credit end date.

"Second Extension of Credit Warrant" means the Warrant in the form of Exhibit D attached to the Previous Agreement for 941,115 shares of Common Stock issued to Needham & Company.

"Securities" means the Convertible Notes, the Series A Preferred Stock issuable upon conversion of the Convertible Notes, the Warrants and the Underlying Shares issuable to Needham & Company and the Convertible Notes Purchasers pursuant to the Transaction Documents.

"Securities Act" means the Securities Act of 1933, as amended.

"Series A Preferred Stock" means the preferred stock of Southwall, par value $0.001 per share, with the designations, preferences and rights as set forth in the Amended and Restated Certificate of Designation.

"Southwall Counsel" means Choate Hall & Stewart.

"Southwall Material Adverse Effect." An event, circumstance, violation, inaccuracy, or other matter will be deemed to have a "Southwall Material Adverse Effect" if such event, circumstance, violation, inaccuracy, or other matter had, has or could reasonably be expected to have a material adverse effect on (i) the business, condition (financial or otherwise), general affairs, capitalization, assets, liabilities, operations, financial performance or prospects of Southwall and its Subsidiaries, as a whole, (ii) the ability of Southwall to consummate the transactions contemplated by the Transaction Documents or to perform any of its obligations under the Transaction Documents, or (iii) the ability of Needham & Company or the Convertible Notes Purchasers to vote, receive dividends with respect to or otherwise exercise ownership rights with respect to the Common Stock, Series A Preferred Stock or Warrants, other than (a) changes, effects or circumstances tha t (1) result from changes in general economic or debt or equity market conditions that do not affect the Company disproportionately, (2) are the result of factors generally affecting the Company's industry or are the result of any changes in any regulation or statute that has or could reasonably be expected to have an industry-wide effect, or (3) result from the consummation of transactions contemplated hereby or any of the actions required to be taken by the Company hereunder or the seeking or receiving of a hardship exemption from Nasdaq with respect to its stockholder approval requirements, (b) any adverse change in the Company's stock price, and (c) changes in GAAP or changes in laws or regulations or the interpretation thereof.

"Subsidiary" means any corporation, partnership, joint venture, or other entity more than 50% of whose equity interests (measured by virtue of voting rights) is owned by Southwall.

"Trading Day" means (i) a day on which the Common Stock is traded on a Trading Market, or (ii) if the Common Stock is not listed on a Trading Market, a day on which the Common Stock is traded in the over-the-counter market, as reported by the OTC Bulletin Board, or (iii) if the Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding to its functions of reporting prices); provided, that in the event that the Common Stock is not listed or quoted as set forth in (i), (ii) and (iii) hereof, then Trading Day shall mean a Business Day.

"Trading Market" means any other national securities exchange, market or trading or quotation facility on which the Common Stock is then listed or quoted.

"Transaction Documents" means this Agreement, the Warrants, the Convertible Notes, the Amended and Restated Certificate of Designation, the Series A Preferred Stock, the Amended and Restated Registration Rights Agreement, the Pledge Agreement, the Loan and Security Agreement, the Forbearance Agreement and any other documents or agreements executed or delivered in connection with the transactions contemplated hereunder.

"Underlying Shares" means the shares of Common Stock issuable upon exercise of the Warrants, conversion of the Series A Preferred Stock, and in satisfaction of any other obligation of Southwall to issue shares of Common Stock pursuant to the Transaction Documents.

"Warrant" means a Common Stock purchase warrant in the form of Exhibit D attached to the Previous Agreement.

EXTENSIONS OF CREDIT, PURCHASE AND SALE

2.1 Closings. Closings shall occur two business days after the conditions set forth in Article VI, as applicable, have been satisfied or waived. Closings shall occur at 9:00 a.m. local time at the offices of Needham & Company and NCP's Counsel. Subject to the terms and conditions set forth in this Agreement, the following Closings shall occur:

Initial Extension of Credit Closing. At the Initial Extension of Credit Closing, Needham & Company will grant the Initial Extension of Credit in accordance with the terms of the Loan and Security Agreement.

Second Extension of Credit Closing. At the Second Extension of Credit Closing, Needham & Company will grant the Second Extension of Credit in accordance with the terms of the Loan and Security Agreement.

Convertible Debt Closing. At the Convertible Debt Closing, Southwall shall issue and sell to the NCP Entities, and the NCP Entities shall purchase from Southwall, Convertible Notes in the aggregate principal amount of $3,000,000, which shall be issued in amounts designated by the NCP Entities prior to or at the Convertible Debt Closing. At the Convertible Debt Closing, Southwall shall issue and sell to Dolphin, and Dolphin shall purchase from Southwall, a Convertible Note in the principal amount of $1,500,000.

Initial Extension of Credit Closing Deliveries.

At the Initial Extension of Credit Closing, Southwall shall deliver or cause to be delivered to Needham & Company the following:

A copy of the Loan and Security Agreement executed by Southwall and the Bank;
The Initial Extension of Credit Warrant;
A copy of the Registration Rights Agreement executed by Southwall;
A certified copy of the Certificate of Designation as filed with the Secretary of State of the State of Delaware;
The legal opinion of Southwall Counsel, in a form reasonably agreed to by the parties, executed by such counsel and delivered to Needham & Company and the Convertible Notes Purchasers;
A certificate from a duly authorized officer certifying on behalf of Southwall that each of the conditions set forth in Sections 6.1 and 6.2 has been satisfied or waived; and
A check or evidence of wire transfer to Heller Ehrman White & McAuliffe in the amount of $50,000.

At the Initial Extension of Credit Closing, (i) Needham & Company shall grant the Initial Extension of Credit in accordance with the terms of the Loan and Security Agreement and (ii) Needham & Company and NCP shall deliver or cause to be delivered to Southwall (A) the Registration Rights Agreement with Southwall, duly executed by Needham & Company and by the Convertible Notes Purchasers, (B) a certificate from a duly authorized officer certifying on behalf of Needham & Company that each of the conditions set forth in Section 6.5 has been satisfied or waived and (C) the common stock purchase warrant dated November 11, 2003 issued by Southwall in favor of Needham & Company for an aggregate of 1,254,235 shares of Common Stock.

Second Extension of Credit Closing Deliveries.

Subject to the terms and conditions set forth in this Agreement, on the Second Extension of Credit Closing Date, Southwall shall deliver or cause to be delivered to Needham & Company the following:

The Second Extension of Credit Warrant; and
A certificate from a duly authorized officer certifying on behalf of Southwall that each of the conditions set forth in Sections 6.1 and 6.3 has been satisfied or waived.

Subject to the terms and conditions set forth in this Agreement, at the Second Extension of Credit Closing, (i) Needham & Company shall grant to Southwall the Second Extension of Credit in accordance with the terms of the Loan and Security Agreement and (ii) Needham & Company shall deliver to Southwall a certificate from a duly authorized officer certifying on behalf of Needham & Company that each of the conditions set forth in Section 6.5 has been satisfied or waived.

Convertible Debt Closing Deliveries.

Subject to the terms and conditions set forth in this Agreement, on the Convertible Debt Closing Date, Southwall shall sell an aggregate principal amount of $3,000,000 of Convertible Notes to the NCP Entities and shall deliver or cause to be delivered to the NCP Entities the following:

NCP Entities Convertible Debt Warrants, issued in the amounts designated by the NCP Entities prior to or at the Convertible Debt Closing;
Convertible Notes in the aggregate principal amount of $3,000,000 registered in the names of the NCP Entities, issued in the amounts designated by the NCP Entities prior to or at the Convertible Debt Closing;
A certificate from a duly authorized officer certifying on behalf of Southwall that each of the conditions set forth in Sections 6.1 and 6.4 has been satisfied or waived;
A certified copy of the Amended and Restated Certificate of Designation as filed with the Secretary of State of the State of Delaware;
A copy of the Amended and Registration Rights Agreement executed by Southwall; and
A copy of the Pledge Agreement executed by Southwall.

Subject to the terms and conditions set forth in this Agreement, at the Convertible Debt Closing, (i) the NCP Entities shall purchase Convertible Notes in an aggregate principal amount of $3,000,000 from Southwall and shall deliver or cause to be delivered to Southwall $3,000,000 in United States dollars and in immediately available funds, by wire transfer to an account designated in writing by Southwall for such purpose, and (ii) the NCP Entities shall deliver to Southwall a certificate from a duly authorized officer certifying on behalf of NCP Entities that each of the conditions set forth in Section 6.5 has been satisfied or waived.
Subject to the terms and conditions set forth in this Agreement, on the Convertible Debt Closing Date, Southwall shall sell a Convertible Note in the principal amount of $1,500,000 to Dolphin and shall deliver or cause to be delivered to Dolphin the following:

Dolphin Convertible Debt Warrant; and
A Convertible Note in the principal amount of $1,500,000 registered in the name of Dolphin;
A certificate from a duly authorized officer certifying on behalf of Southwall that each of the conditions set forth in Sections 6.1 and 6.4 has been satisfied or waived;
A certified copy of the Amended and Restated Certificate of Designation as filed with the Secretary of State of the State of Delaware;
A copy of the Amended and Registration Rights Agreement executed by Southwall; and
A copy of the Pledge Agreement executed by Southwall.

Subject to the terms and conditions set forth in this Agreement, at the Convertible Debt Closing, (i) Dolphin shall purchase a Convertible Note in the principal amount of $1,500,000 from Southwall and shall deliver or cause to be delivered to Southwall $1,500,000 in United States dollars and in immediately available funds, by wire transfer to an account designated in writing by Southwall for such purpose, and (ii) Dolphin shall deliver to Southwall a certificate from a duly authorized officer certifying on behalf of Dolphin that each of the conditions set forth in Section 6.5 has been satisfied or waived.

Obligations. The obligations of the Convertible Notes Purchasers to purchase the Convertible Notes shall be several and not joint.

REPRESENTATIONS AND WARRANTIES

3.1 Representations and Warranties of Southwall. Southwall hereby makes the following representations and warranties to Needham & Company and the Convertible Notes Purchasers:

Subsidiaries. Except as set forth in Disclosure Schedule 3.1(a), Southwall does not directly or indirectly control or own any interest in any other corporation, partnership, joint venture or other business association or entity. Except as disclosed in Disclosure Schedule 3.1(a), Southwall owns, directly or indirectly, all of the capital stock of each Subsidiary free and clear of any lien, charge, claim, security interest, encumbrance, right of first refusal or other restriction (collectively, "Liens"), and all the issued and outstanding shares of capital stock of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights. None of Southwall's Subsidiaries, other than the Material Subsidiary, has any material assets or liabilities or is material to the business, operations, condition (financial or otherwise) or prospects of Southwall. None of the Subsidiaries, other than the Material Subsidiary, conducts, or has conducted in the past three years, any business.

Organization and Qualification. Each of Southwall and the Material Subsidiary is an entity duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (as applicable), with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted. Neither Southwall nor the Material Subsidiary is in violation of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents. Southwall and the Material Subsidiary is duly qualified to conduct business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the failure to be so qualified could reasonably be expected to result in a Southwall Material Adverse Effect.

Authorization; Enforcement. Southwall has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of each of the Transaction Documents by Southwall and the consummation by it of the transactions contemplated hereunder and thereunder have been duly authorized by all necessary action on the part of Southwall and no further consent or action is required by Southwall, its Board of Directors or its stockholders other than as contemplated by Section 4.16 and any stockholder approval that may be required by the rules applicable to companies listed on the Nasdaq National Market. Each of the Transaction Documents has been (or upon delivery will be) duly executed by Southwall and, when delivered in accordance with the terms hereof, will constitute the valid and binding obligation of Southwall enforceable against South wall in accordance with its terms.

No Conflicts. The execution, delivery and performance of the Transaction Documents by Southwall and the consummation by Southwall of the transactions contemplated hereby and thereby do not and will not (i) conflict with or violate any provision of Southwall's or any Subsidiary's certificate or articles of incorporation, bylaws or other organizational or charter documents other than as contemplated by Section 4.16, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both could reasonably be expected to become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any material agreement, credit facility, debt or other instrument (evidencing a Southwall or Material Subsidiary debt or otherwise) or other understanding to which Southwall or the Material Subsidiary is a party or by which any material property or asset of Southwall or the Mater ial Subsidiary is bound or affected (other than such defaults or other rights as shall have been waived or amended away prior to the consummation of the applicable transaction), or (iii) other than violations that could not reasonably be expected to result in a Southwall Material Adverse Effect, result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which Southwall or the Material Subsidiary is subject (including federal and state securities laws and regulations) and the rules and regulations of any self-regulatory organization to which Southwall or its securities are subject other than any stockholder approval that may be required by the rules applicable to companies listed on the Nasdaq National Market, or by which any property or asset of Southwall or the Material Subsidiary is bound or affected.

Filings, Consents and Approvals. Southwall is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by Southwall of the Transaction Documents, other than the filing of the Amended and Restated Certificate of Designation with the Secretary of State of the State of Delaware, the filing of requisite notices to and receipt of approvals and waivers from the Nasdaq National Market, and the filing of a Form D with the Commission.

Issuance of the Securities. Other than contemplated by Section 4.16, the Securities have been duly authorized and, when issued and paid for in accordance with the Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens. Other than as contemplated by Section 4.16, Southwall has reserved from its duly authorized capital stock a number of shares of Common Stock to be issued to Needham & Company or the Convertible Notes Purchasers, as applicable, upon conversion or exercise of the Convertible Notes, the Series A Preferred Stock and Warrants.

Capitalization. The number of shares and type of all authorized, issued and outstanding capital stock of Southwall, and all shares of capital stock reserved for issuance under Southwall's various option and incentive plans, is set forth in Disclosure Schedule 3.1(g). Except as set forth in Disclosure Schedule 3.1(g), no securities of Southwall are entitled to preemptive or similar rights, and no Person has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents. Except as a result of the purchase and sale of the Securities and except as disclosed in Disclosure Schedule 3.1(g), there are no outstanding options, warrants, scrip rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exchangeable for, or giving any Person any right to subscribe for or acquire, any shares of Common Stock, or contracts, commitments, understandings or arrangements by which Southwall is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock. Except as set forth in Disclosure Schedule 3.1(g), the issue and sale of the Securities will not, immediately or with the passage of time, obligate Southwall to issue shares of Common Stock or other securities to any Person (other than the Needham & Company and the Convertible Notes Purchasers) and will not result in a right of any holder of Southwall securities to adjust the exercise, conversion, exchange or reset price under such securities.

SEC Reports; Financial Statements. Southwall has filed all reports required to be filed by it under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the 24 months preceding the date hereof (the foregoing materials being collectively referred to herein as the "SEC Reports" and, together with this Agreement and the Schedules to this Agreement, the "Disclosure Materials") on a timely basis or has timely filed a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension. Southwall has made available to Needham & Company and the Convertible Notes Purchasers a copy of all SEC Reports filed within the 10 days preceding the date hereof. As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and none of the SEC Reports, whe n filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of Southwall included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved ("GAAP"), except as may be otherwise specified in such financial statements or the notes thereto or in the case of unaudited financial statements, as permitted by Form 10-Q of the Commission, and fairly present in all material respects the financial position of Southwall and its consolidated Subsidiaries as of and for the dates thereof and the resu lts of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments. All material contracts, as such contracts are defined in section 601(a)(10) of Reg. S-K under the Securities Act, to which Southwall or the Material Subsidiary is a party or to which the property or assets of Southwall or any Subsidiary are subject are included as part of or specifically identified in the SEC Reports.

Press Releases. As of their respective dates, the press releases disseminated by Southwall during the 24 months preceding the date of this Agreement taken as a whole did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.

Material Changes. Since the date of the latest audited financial statements included within the SEC Reports, except as specifically disclosed in the SEC Reports, (i) there has been no event, occurrence or development that has had or that could reasonably be expected to result in a Southwall Material Adverse Effect, (ii) Southwall has not incurred any liabilities (contingent or otherwise) other than (A) as of the date hereof, trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice, (B) as of the date hereof, liabilities not required to be reflected in Southwall's financial statements pursuant to GAAP or required to be disclosed in filings made with the Commission, and (C) as of the date hereof, liabilities incurred in accordance with the Restructuring Plan, (iii) as of the date hereof, Southwall has not altered its method of accounting or the identity of its auditors, (iv) Southwall has not declared or made any dividend or distribution of cash or other property to its stockholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock, and (v) Southwall has not issued any equity securities to any officer, director or Affiliate, except pursuant to existing Southwall stock option and stock purchase plans, a warrant to purchase shares of Common Stock to NCP which has terminated, warrants issued to the Bank, warrants issued to Judd Properties, LLC and the Warrants and Series A Preferred Stock issued or to be issued to Needham & Company and the Convertible Notes Purchasers pursuant to this Agreement. Other than as set forth on Disclosure Schedule 3.1(j), Southwall does not have pending before the Commission any request for confidential treatment of information.

Litigation. Except as set forth on Disclosure Schedule 3.1(k), as of the date hereof, none of Southwall or its Subsidiaries is party to any Action or Proceeding. There is no Action pending that adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents, the Bank Agreements, or the Securities. As of the date hereof, neither Southwall nor any Subsidiary, nor any director or officer thereof, is currently the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty. There has not been, and to the knowledge of Southwall, there is not pending or contemplated, any investigation by the Commission involving Southwall or any current or former director or officer of Southwall. During the last three years, the Commission has not issued any stop order or other order suspending the effectiveness of any registration statement filed by Southwall under the E xchange Act or the Securities Act.

Labor Relations. No material labor dispute exists or, to the knowledge of Southwall, is imminent with respect to any of the employees of Southwall or the Material Subsidiary.

Compliance. Except as set forth in Disclosure Schedule 3.1(m) and except in each case as could not, individually or in the aggregate, reasonably be expected to result in a Southwall Material Adverse Effect, neither Southwall nor the Material Subsidiary is (i) in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, could reasonably be expected to result in a default by Southwall or the Material Subsidiary under), nor has Southwall or any Subsidiary received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) in violation of any order of any court, arbitrator or governmental body, and (iii) in violation of any statute, rule or regulation of any governmental aut hority, including without limitation all foreign, federal, state and local laws relating to taxes, environmental protection, occupational health and safety, product quality and safety and employment and labor matters. Southwall is in compliance in all material respects with the applicable requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations thereunder promulgated by the Commission.

Regulatory Permits. Southwall and the Material Subsidiary possess all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as described in the SEC Reports, except where the failure to possess such permits could not, individually or in the aggregate, have or could reasonably be expected to result in a Southwall Material Adverse Effect ("Material Permits"), and neither Southwall nor the Material Subsidiary has received notice of proceedings relating to the revocation or modification of any Material Permit.

Title to Assets. Southwall and the Material Subsidiary have good and marketable title in fee simple to all real property owned by them that is material to their respective businesses and good and marketable title in all personal property owned by them that is material to their respective businesses, in each case free and clear of all Liens, except for Liens granted to the Bank pursuant to the Factoring Agreement, liens set forth in Disclosure Schedule 3.1(o), and except for Liens as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by Southwall and its Subsidiaries. Except as set forth in Disclosure Schedule 3.1(o), any real property and facilities held under lease by Southwall or the Material Subsidiary are held by it under valid, subsisting and enforceable leases of which Southwall and the Material Subsidiary are in compliance in all material respects.

Patents and Trademarks. Southwall and the Material Subsidiary have, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses and other similar rights that are necessary or material for use in connection with their respective businesses as described in the SEC Reports and which the failure to so have could, individually or in the aggregate, have or reasonably be expected to result in a Southwall Material Adverse Effect (collectively, the "Intellectual Property Rights"). To the knowledge of Southwall, the Intellectual Property Rights used by Southwall and the Material Subsidiary do not violate or infringe upon the rights of any Person. To the knowledge of Southwall, all such Intellectual Property Rights are enforceable and there is no existing infringement by another Person of any of the Intellectual Property Rights.

Proprietary Information of Third Parties. No third party has claimed in writing to Southwall or the Material Subsidiary that any Person employed by or affiliated with any of Southwall or the Material Subsidiary has (a) violated or may be violating to any extent any of the terms or conditions of such Person's employment, non-competition or non-disclosure agreement with such third party, (b) disclosed or may be disclosing or utilized or may be utilizing any trade secret or proprietary information or documentation of such third party, or (c) interfered or may be interfering in the employment relationship between such third party and any of its present or former employees.

Product Liability. Except as set forth on Disclosure Schedule 3.1(r) or as reserved for in the SEC Reports, all products sold, distributed, installed, used, delivered or held in inventory in connection with the business of Southwall and the Material Subsidiary (including, without limitation, all documentation furnished in connection therewith) conform in all material respects with all applicable contractual commitments and with all express and implied warranties, and neither Southwall nor the Material Subsidiary have any material liability and cost (and there is no basis for any present or future proceeding giving rise to any liability and cost) for replacement or repair thereof or other damages in connection therewith. Except as set forth on Disclosure Schedule 3.1(r), no product sold, distributed, used or delivered by Southwall or the Material Subsidiary in connection with their respective businesses is subject to any guaranty, warranty or other indemnity beyond the applic able standard terms and conditions of sale.

Insurance. Southwall and the Material Subsidiary are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which Southwall and the Material Subsidiary are engaged.

Transactions With Affiliates and Employees. Except as set forth in SEC Reports, none of the officers or directors of Southwall and, to the knowledge of Southwall, none of the employees of Southwall or the Material Subsidiary is presently a party to any transaction with Southwall or the Material Subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of Southwall, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner.

Internal Accounting Controls. Southwall and the Material Subsidiary maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

Certain Fees. No brokerage or finder's fees or commissions are or will be payable by Southwall to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by this Agreement. Neither Needham & Company nor the Convertible Notes Purchasers shall have any obligation with respect to any fees or with respect to any claims (other than such fees or commissions owed by Needham & Company or the Convertible Notes Purchasers pursuant to written agreements executed by Needham & Company or the Convertible Notes Purchasers, which fees or commissions shall be the sole responsibility of Needham & Company or the Convertible Notes Purchasers, as applicable) made by or on behalf of other Persons for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by this Agreement.

Certain Registration Matters. Assuming the accuracy of the representations and warranties of Needham & Company and the Convertible Notes Purchasers set forth in Sections 3.2(b) and (c), no registration under the Securities Act is required for the offer and sale of the Securities by Southwall to Needham & Company or the Convertible Notes Purchasers under the Transaction Documents. Except as described in Disclosure Schedule 3.1(w), Southwall has not granted or agreed to grant to any Person any rights (including "piggyback" registration rights) to have any securities of Southwall registered with the Commission or any other governmental authority that have not been satisfied.

Listing and Maintenance Requirements. Except as set forth in Disclosure Schedule 3.1(x), Southwall has not, in the two years preceding the date hereof, received notice from the Trading Market to the effect that Southwall is not in compliance with the listing or maintenance requirements thereof.

Investment Company. Southwall is not, and is not an Affiliate of, an "investment company" within the meaning of the Investment Company Act of 1940, as amended.

Disclosure. Southwall understands and confirms that Needham & Company and the Convertible Notes Purchasers each will rely on the foregoing representations and covenants in effecting transactions in securities of Southwall. All disclosure provided to Needham & Company and the Convertible Notes Purchasers in writing regarding Southwall, its business and the transactions contemplated hereby, furnished by or on behalf of Southwall (including Southwall's representations and warranties set forth in this Agreement) are true and correct in all material respects and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading.

Acknowledgment Regarding Purchase of Securities by Needham & Company and the Convertible Notes Purchasers. Southwall acknowledges and agrees that each of Needham & Company and the Convertible Notes Purchasers is acting solely in the capacity of an arm's length finance provider with respect to the Transaction Documents and the transactions contemplated hereby and thereby. Southwall further acknowledges that none of Needham & Company nor the Convertible Notes Purchasers is acting as a financial advisor or fiduciary of Southwall (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated hereby and thereby and any advice given by either of Needham & Company, the Convertible Notes Purchasers or any of their respective representatives or agents in connection with the Transaction Documents and the transactions contemplated hereby is merely incidental to the purchase of the Securities by Needham & Company and the Convertible Notes Purchasers, respectively. Southwall further represents to each of Needham & Company and the Convertible Notes Purchasers that Southwall's decision to enter into this Agreement has been based solely on the independent evaluation by Southwall, its Board of Directors and its representatives.

Seniority. Other than as set forth in Disclosure Schedule 3.1(bb), as of the date hereof, no Indebtedness of Southwall or the Material Subsidiary is senior to or pari passu with the Indebtedness under the Bank Agreements, or the Loan and Security Agreement in right of payment, whether with respect to interest or upon liquidation or dissolution, or otherwise.

3.2 Representations and Warranties of Needham & Company and the Convertible Notes Purchasers. Each of Needham & Company and the Convertible Notes Purchasers hereby represent and warrant, severally and not jointly, to Southwall as follows:

(a) Organization; Authority. Each of Needham & Company and each of the Convertible Notes Purchasers is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with the requisite corporate or partnership power and authority to enter into and to consummate the transactions contemplated by the applicable Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution, delivery and performance by Needham & Company and/or the Convertible Notes Purchasers of the transactions contemplated by this Agreement has been duly authorized by all necessary corporate action by Needham & Company, and other applicable like action by each of the Convertible Notes Purchasers. Each of this Agreement and the applicable Amended and Restated Registration Rights Agreement has been duly executed by Needham & Company and the Convertible Notes Purchasers, and when delivered by Needham & Compa ny and the Convertible Notes Purchasers in accordance with terms hereof, will constitute the valid and legally binding obligation of each of Needham & Company and the Convertible Notes Purchasers, respectively, enforceable against it in accordance with its terms.

(b) Accredited Investor Status. At the time each of Needham & Company and each of the Convertible Notes Purchasers was offered the Securities, it was, and at the date hereof and as of each Closing Date (if any), it is, and on each date on which it exercises the Warrants it will be, an "accredited investor" as defined in Rule 501(a) under the Securities Act and will have acquired the Securities for investment purposes only and not with a view to the resale or distribution thereof.

(i) Needham & Company and the Convertible Notes Purchasers are each aware that the Securities have not been registered under the Securities Act, that such offer and sale are intended to be exempt from registration under the Securities Act and the rules promulgated thereunder by the Commission, and that the Securities may not be offered, sold, assigned, transferred or otherwise disposed of unless they are registered under the Securities Act or an exemption from such registration is available. Needham & Company and the Convertible Notes Purchasers are each also aware that sales or transfers of the Securities are subject to further restrictions by state securities laws and the provisions of the Transaction Documents.

(ii) Needham & Company and the Convertible Notes Purchasers each has such knowledge and experience in financial, business and tax matters that it is capable of evaluating the merits and risks relating to the investment in the Securities and making an investment decision with respect to Southwall.

(iii) Each of Needham & Company and the Convertible Notes Purchasers has been given the opportunity to obtain information and documents relating to Southwall and to ask questions of and receive answers from representatives of Southwall concerning Southwall and its investment in Southwall.

(iv) Each of Needham & Company and the Convertible Notes Purchasers is able at this time, and in the foreseeable future, to bear the economic risk of a total loss of its investment in Southwall.

(v) Each of Needham & Company and the Convertible Notes Purchasers is aware that there are substantial risks incident to an investment in the Securities.

(vi) Each of Needham & Company and the Convertible Notes Purchasers are aware that in the foreseeable future Southwall may be de-listed from The Nasdaq Stock Market.

(d) Filings, Consents and Approvals. Each of Needham & Company and the Convertible Notes Purchasers is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by it of the Transaction Documents other than post-closing notice filings.

OTHER AGREEMENTS OF THE PARTIES

Federal and State Securities Loans.

Each of Needham & Company and the Convertible Notes Purchasers agree that the Securities will only be offered, sold, assigned, transferred, exchanged or otherwise disposed of in compliance with state and federal securities laws and the Transaction Documents.
Each of Needham & Company and the Convertible Notes Purchasers agree that the certificates evidencing the Securities will contain the following legend, so long as is required by this Section 4.1(b) or Section 4.1(c):

THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO SOUTHWALL. THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES, BUT SOUTHWALL MAY REQUIRE A LEGAL OPINION IN CONNECTION WITH A SUBSEQUENT TRANSFER FOLLOWING DEFAULT BY THE TRANSFEREE OF THE PLEDGE.

Southwall acknowledges and agrees that each of Needham & Company and the Convertible Notes Purchasers may from time to time pledge, and/or grant a security interest in some or all of the Securities pursuant to a bona fide margin agreement in connection with a bona fide margin account and, if required under the terms of such agreement or account, each of Needham & Company and the Convertible Notes Purchasers, as applicable, may transfer pledged or secured Securities to the pledgees or secured parties. Such a pledge or transfer would not be subject to approval or consent of Southwall and no legal opinion of legal counsel to the pledgee, secured party or pledgor shall be required in connection with the pledge, but Southwall may require such legal opinion in connection with a subsequent transfer following default by the transferee of the pledge and the Securities would still be subject to this Section 4.1. No notice shall be required of such pledge. At the expense of Needham & Company or the Convertible Notes Purchasers, as applicable, Southwall will execute and deliver such reasonable documentation as a pledgee or secured party of Securities may reasonably request in connection with a pledge or transfer of the Securities including the preparation and filing of any required prospectus supplement under Rule 424(b)(3) of the Securities Act or other applicable provision of the Securities Act to appropriately amend the list of selling stockholders thereunder.

Certificates evidencing the Underlying Shares shall not contain any legend (including the legend set forth in Section 4.1(b)): (i) following any sale of such Underlying Shares pursuant to Rule 144, or (ii) while such Underlying Shares are eligible for sale under Rule 144(k), or (iii) if such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the Staff of the Commission). Following the Effective Date or at such earlier time as a legend is no longer required for the Underlying Shares under this Section 4.1(c), Southwall will, no later than three Trading Days following the delivery by Needham & Company and/or the Convertible Notes Purchasers to Southwall or Southwall's transfer agent of a certificate representing the Underlying Shares containing a restrictive legend, deliver or cause to be delivered to Needham & Company and/or the Convertible Notes Purchasers, as applicable, a certificate representing such Underlying Shares that is free from all restrictive and other legends. Southwall may not make any notation on its records or give instructions to any transfer agent of Southwall that enlarge the restrictions on transfer set forth in this Section.

Furnishing of Information. As long as each of Needham & Company or the Convertible Notes Purchasers owns the Securities issued or issuable to it that are not registered under the Securities Act or eligible for sale under Rule 144(k), Southwall covenants to use commercially reasonable efforts to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by Southwall after the date hereof pursuant to the Exchange Act. Upon the request of any such Person, Southwall shall deliver to such Person a written certification of a duly authorized officer as to whether it has complied with the preceding sentence. As long as Needham & Company or the Convertible Notes Purchasers owns Securities, if Southwall is not required to file reports pursuant to such laws, it will prepare and furnish to Needham & Company and/or the Convertible Notes Purchasers, as applicable, and make publicly available in accordance with Rule&nbs p;144(c) such information as is required for Needham & Company or the Convertible Notes Purchasers, as applicable, to sell the Underlying Shares under Rule 144. Southwall further covenants that it will take such further action as any holder of Securities may reasonably request, all to the extent required from time to time to enable such Person to sell such Underlying Shares without registration under the Securities Act within the limitation of the exemptions provided by Rule 144.

Acknowledgment of Dilution. Southwall acknowledges that the issuance of the Securities (including the Underlying Shares) will result in dilution of the outstanding shares of Common Stock, which dilution may be substantial. Southwall further acknowledges that its obligations under the Transaction Documents, including without limitation its obligation to issue the Securities (including the Underlying Shares) pursuant to the Transaction Documents, are unconditional and absolute and not subject to any right of set off, counterclaim, delay or reduction, regardless of the effect of any such dilution or any claim that Southwall may have against either of Needham & Company or the Convertible Notes Purchasers.

Integration. Southwall shall not, and shall use commercially reasonable efforts to ensure that no Affiliate of Southwall shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the Securities Act of the sale of the Securities to Needham & Company or the Convertible Notes Purchasers, or that would be integrated with the offer or sale of the Securities for purposes of the rules and regulations of any Trading Market.

Listing of Securities. If the Common Stock is listed on any Trading Market, Southwall shall: (i) in the time and manner required by each Trading Market on which the Common Stock is listed, prepare and file with such Trading Market an additional shares listing application covering the Underlying Shares, (ii) take all steps necessary to cause such shares to be approved for listing on each Trading Market on which the Common Stock is listed as soon as possible thereafter, and (iii) provide to either of Needham & Company or the Convertible Notes Purchasers evidence of such listing.

Reservation of Shares; Issuance of Shares. Southwall shall maintain a reserve from its duly authorized shares of Common Stock to comply with its conversion and exercise obligations under the Series A Preferred Stock and the Warrants pursuant to the Transaction Documents. Other than issuances specifically described in the Restructuring Plan, options granted in exchange for like or lesser number of outstanding options in connection with an option exchange program undertaken by Southwall and shares of Common Stock granted to members of the board of directors of Southwall in lieu of cash for attending meetings of the board of directors, Southwall shall not issue any equity or warrants, options, rights or other instruments exercisable, convertible or exchangeable into equity of Southwall to any trade creditor, other creditor, landlord, employee, director, agent or consultant until such time as Southwall has received approval of its stockholders increasing the authorized number of shares of Com mon Stock issuable under its certificate of incorporation as contemplated by Section 4.16 of this Agreement.

Securities Laws Disclosure; Publicity. By 8:30 a.m. (New York City time) on the Trading Day following each Closing Date, if any, Southwall shall issue a press release reasonably acceptable to Needham & Company or the Convertible Notes Purchasers, as applicable, disclosing the transactions contemplated hereby. In addition, Southwall will make such other filings and notices in the manner and time required by the Commission and the Trading Market on which the Common Stock is listed. Notwithstanding the foregoing, Southwall shall not publicly disclose the name of either of Needham & Company or the Convertible Notes Purchasers, or include the name of either of Needham & Company or the Convertible Notes Purchasers in any filing with the Commission (other than the Registration Statement and any exhibits to filings made in respect of this transaction in accordance with periodic filing requirements under the Exchange Act) or any regulatory agency or Trading Market, without the prior written consent of Needham & Company and/or the Convertible Notes Purchasers, as applicable, except to the extent such disclosure is required by law or Trading Market regulations, in which case Southwall shall provide Needham & Company or the Convertible Notes Purchasers, as applicable, with prior notice of such disclosure, and notice is hereby given that Southwall will disclose the names of Needham & Company and the Convertible Notes Purchasers in filings with the Commission, regulatory agencies and Trading Markets, as required by law or applicable regulations.

Use of Proceeds. Southwall shall use the net proceeds from the extensions of credit and sale of the Securities, if any, hereunder for general corporate and working capital purposes; provided that Southwall shall use $1,000,000 of the proceeds from the sale of Convertible Notes in accordance with the terms of that certain Second Amendment to Lease.

Inspection. So long as Needham & Company or NCP owns shares of Series A Preferred Stock or any amounts remain outstanding under an Extension of Credit, Southwall shall permit each of Needham & Company and NCP, at the expense of each, upon two days prior notice, to visit and inspect Southwall's and the Subsidiaries' properties, to examine their books of account and records and to discuss Southwall's affairs, finances, and accounts with its officers, all at such reasonable times as may be requested; provided, however, that Southwall shall not be obligated pursuant to this Section to provide any information which it reasonably considers to be a trade secret or confidential information.
[Intentionally Omitted]

Hardship Exemption. Immediately after the execution and delivery of this Agreement Southwall shall use commercially reasonable efforts to apply for and a secure a hardship exemption from The Nasdaq Stock Market that waives any requirement that issuance of securities under this Agreement be approved by Southwall stockholders.

Restructuring Plan. Southwall shall use its commercially reasonable efforts to take all actions necessary to complete the Restructuring Plan within the timeline set forth in the Restructuring Plan.

Investor Representation at Board Meetings. For so long as Needham & Company or any of its Affiliates owns 5% or more of the Common Stock (on a fully diluted basis) or any amounts remain outstanding under the Loan and Security Agreement, Southwall shall notify each of Needham & Company and NCP of meetings of the Southwall board of directors and deliver minutes of each such meeting as if each were a director. Needham & Company and NCP may collectively designate one Person to attend all board meetings and to speak or otherwise participate in such meetings to the extent permitted by the board; provided, however, that such Person may disclose or use any information made known by virtue of such notice, minutes, or attendance only to the extent consistent with the fiduciary obligations of a director of Southwall, whether or not such Person actually is a director and that such Person shall sign such Confidentiality Agreement as Southwall may reasonably request.

Additional Warrants.

Debt Issuances. If, in connection with its restructuring efforts as set forth in the Restructuring Plan, Southwall issues notes or other debt instruments to any of its creditors, then Southwall shall issue to Needham & Company and the Convertible Notes Purchasers Warrants representing the right to purchase that number of shares of Common Stock equal to the product of (x) 1.25 and (y) the original principal amount of such note or debt instrument; provided that the letter of credit issued in favor of that certain landlord of Southwall's Palo Alto property shall not be deemed to be an issuance of notes or other instruments hereunder.. Southwall shall divide such Warrants among Needham & Company and the Convertible Notes Purchasers as requested by Needham & Company and the Convertible Notes Purchasers at the time of issuance, subject to the allocation rules set forth in paragraph (c) below.

Equity Issuances. If, as part of its restructuring efforts as set forth in the Restructuring Plan, Southwall issues any equity or warrants, options, rights or other instruments exercisable, convertible or exchangeable into equity of Southwall to any trade creditor, other creditor, landlord, employee, director, agent or consultant (each, a "Restructuring Equity Issuance"), then Southwall shall, at each Closing thereafter, issue additional Warrants to each of Needham & Company and each of the Convertible Notes Purchasers in such amounts that would allow Needham & Company and each of the Convertible Notes Purchasers to maintain an aggregate ownership percentage (on a fully-diluted basis and assuming exercise of all outstanding warrants and conversion of all outstanding preferred stock and convertible debt and any issuances related to the restructuring including, without limitation, issuances of options or rights to the management of Southwall) of Southwall Common Stoc k as if the Restructuring Equity Issuance or Restructuring Equity Issuances had not occurred; provided, however that options issued to the non-executive chairman of the board in connection with his appointment to the board of directors shall not be deemed to a Restructuring Equity Issuance. If, due to the prohibitions set forth in Section 4.6 of this Agreement, Southwall is unable to make Restructuring Equity Issuances and a particular Closing occurs, then the right to receive additional Warrants as a result of a Restructuring Equity Issuance shall be deferred until such time as the Restructuring Equity Issuance occurs, and if the Restructuring Equity Issuance occurs after the Convertible Debt Closing, then the all of the Warrants shall be issued at that time.

Any securities held in escrow in connection with the restructuring of Southwall shall not be deemed issued for purposes of this Section 4.14 until released from such escrow to a landlord or other creditor of Southwall.

Maximum Equity Position. Dolphin shall receive one-third of any Warrants issued under this Section 4.14, and Needham & Company and NCP Entities, together, will receive two-thirds or any such Warrants; provided, however, that if the issuances contemplated in this Section 4.14, plus all of the equity securities of Southwall owned by Needham & Company and the NCP Entities aggregated together exceed 49% of the outstanding Southwall Common Stock (on a fully-diluted basis and assuming exercise of all outstanding warrants and conversion of all outstanding preferred stock and convertible debt and any issuances related to the restructuring including, without limitation, issuances of options or rights to the management of Southwall), then the number of shares issuable upon exercise of the Warrants allocable to Dolphin shall be increased and the number of shares issuable upon exercise of Warrants allocable to Needham & Company and the NCP Entities under this paragraph shall be proportiona lly reduced so that Needham & Company and NCP Entities will own in the aggregate 49% of the outstanding Southwall Common Stock (on a fully-diluted basis and assuming exercise of all outstanding warrants and conversion of all outstanding preferred stock and convertible debt).

Certain Other Affirmative Covenants. So long as any Indebtedness under the Loan and Security Agreement or Convertible Notes remains outstanding, unless Needham & Company and the Convertible Notes Purchasers otherwise consent in writing (which Needham & Company and the Convertible Notes Purchasers shall be entitled not to do in their sole discretion), Southwall and its Subsidiaries, as applicable, shall, for the benefit of Needham & Company and the Convertible Notes Purchasers:

use commercially reasonable efforts to timely file all registration statements, prospectuses, proxy or information statements, forms, reports or other reports required to be filed under the Exchange Act or the Securities Act with the Commission;
deliver to Needham & Company and the Convertible Note Purchasers, promptly upon becoming aware of the existence of any Default or Event of Default, a written notice describing its nature;
comply with, and perform all obligations under, all of the Transaction Documents in all material respects;
discharge promptly all material taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or upon any of its property, real, personal or mixed, before they shall become delinquent unless such taxes, assessments, charges or levies are subject to protest in good faith by Southwall; and all material claims of materialmen, mechanics, carriers, warehousemen, landlords and other similar persons for labor, materials, supplies and rent, and all liabilities arising under ERISA which if unpaid might by law become a Lien unless such claims are subject to protest in good faith by Southwall;
take all reasonable steps to (i) maintain, preserve, protect and keep all properties owned or held under lease by it in good repair, working order and condition and make all needful and proper renewals, replacements, additions, betterments and improvements thereto, so that the business carried on in connection therewith may be conducted properly and efficiently at all times, (ii) keep adequately insured all its property and assets, and (iii) do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights and franchises except to the extent that failure to do so could not reasonably be expected to result in a Southwall Material Adverse Effect;
take all action reasonably necessary to comply with (i) all laws, ordinances, governmental rules and regulations to which it is or might become subject and which the failure to comply with could reasonably be expected to result in a Southwall Material Adverse Effect; and (ii) obtain all patents, trademarks, service-marks, tradenames, servicenames, copyrights, licenses, permits, franchises and other governmental authorizations which are necessary to the ownership of its property or the conduct of its business except to the extent that failure to do so could not reasonably be expected to result in a Southwall Material Adverse Effect; and
pay, discharge, or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its material obligations and liabilities of whatever nature except as set forth in the Restructuring Plan.

Stockholders Meeting.

Promptly after the execution and delivery of this Agreement, Southwall will take all action necessary to call a meeting of its stockholders (the "Stockholders Meeting") for the purpose of seeking approval of an amendment to its certificate of incorporation increasing the number of authorized shares available for issuance to a number that would allow Southwall to meet fully its obligations to issue shares of its capital stock (the "Proposal"). In connection therewith Southwall will promptly prepare and file with the Commission proxy materials (including a proxy statement and form of proxy) for use at the Stockholders Meeting and, promptly after receiving clearance from the Commission, shall promptly mail such proxy materials to the stockholders of Southwall. Southwall will comply with Section 14(a) of the 1934 Act and the rules promulgated thereunder in relations to any proxy statement (as amended or supplemented, the "Proxy Statement") and any form of proxy to be sent to the stockholders in connection with the Stockholders Meeting.
Southwall's Board of Directors shall recommend to Southwall's stockholders that the stockholders vote in favor of and approve the Proposal at the Stockholders Meeting and will set the date of the Stockholders Meeting no later than 25 days after receiving clearance of the proxy materials from the Commission, and shall cause Southwall to use commercially reasonable efforts to solicit the approval of the stockholders for the Proposal. Southwall is required, and will take, in accordance with applicable law and its certificate of incorporation and bylaws, all actions necessary to convene the Stockholders Meeting along the timeframe indicated herein to consider and vote upon the approval of the Proposal.

Pledge Agreement. Each of the Convertible Notes Purchasers hereby authorizes Needham & Company to act as its Agent (as defined in the Pledge Agreement) pursuant to the terms of the Pledge Agreement.

NEGATIVE COVENANTS

Negative Covenants. So long as any Indebtedness under the Loan and Security Agreement or the Convertible Notes remains outstanding, unless Needham & Company and the Convertible Notes Purchasers otherwise consent in writing (which Needham & Company and the Convertible Notes Purchasers shall be entitled not to do in their sole discretion), Southwall shall not, and shall not permit its Subsidiaries to:

engage in any business other than the business of developing, manufacturing and marketing thin film coatings for the automotive glass, electronic display and architectural markets;
other than with respect to the Series A Preferred Stock, declare, pay or set aside any dividends on any shares of Southwall or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, retirement or other acquisition of any shares of Southwall, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of Southwall;
enter into any arrangement with any Person whereby Southwall shall sell or transfer any property, real or personal, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property which Southwall intends to use for substantially the same purpose or purposes as the property being sold or transferred, if such arrangement would result in Southwall's retention of such property for a period in excess of six months from the date of commencement of such lease;
make or permit to remain outstanding any loan or advance to, or guarantee or endorse or otherwise be or become contingently liable, directly or indirectly, for or in connection with, the obligations, shares or dividends of, or own, purchase or acquire any shares, obligations or securities of, or any interest in, or make or maintain any capital contribution to, any Person other than its Subsidiaries, or Southwall in the case of its Subsidiaries;
enter into any transaction, including, without limitation, the purchase, sale or exchange of property or the rendering of any service, with any Affiliate, except in the ordinary course of business and pursuant to the reasonable requirements of Southwall's business and upon fair and reasonable terms no less favorable to Southwall than Southwall would obtain in a comparable arm's length transaction with a Person not an Affiliate; and/or
modify, amend or change in any manner the Amended and Restated Certificate of Designation as filed with the Secretary of State of the State of Delaware.

CONDITIONS

Conditions Precedent to the Obligations of Needham & Company or the Convertible Notes Purchasers at each Closing Date.

The obligations of Needham & Company or the Convertible Notes Purchasers, as applicable, at a Closing, if any, are subject to the satisfaction or waiver by Needham & Company and/or the Convertible Notes Purchasers, as applicable, at or before such Closing, of each of the following conditions:

Representations and Warranties. Each of the representations and warranties of Southwall contained herein shall be true and correct in all material respects as of the date when made and as of the Closing as though made on and as of such date (except for such representations and warranties that speak as of a particular date which shall have been true and correct as of the date when made);

Performance. Southwall shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by it at or prior to the Closing;

Loan and Security Agreement. The Loan and Security Agreement by and between Southwall and the Bank, and the related Forbearance Agreement and guaranty executed by Needham & Company, shall have been entered into, shall not have been modified without the consent of Needham & Company, and shall remain in full force and effect;

No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, or promulgated by any court or governmental authority of competent jurisdiction that prohibits the consummation of any of the transactions contemplated by the Transaction Documents;

Bankruptcy Event. No Bankruptcy Event shall have occurred.

No Defaults. Neither Southwall nor any of its Subsidiaries shall be in violation or breach of or in default in any material respect with respect to any provision of this Agreement, the Bank Agreements, the Amendment, the Loan and Security Agreement, the other documents executed in connection with this Agreement, the Transaction Documents and/or any other document executed by Southwall to which either the Bank, NCP or Needham & Company is a party;

No Action or Proceeding. Since the date hereof, no Action or Proceeding against Southwall or any of its officers and directors shall have commenced or been threatened in connection with the transactions contemplated by the Transaction Documents or could reasonably be expected to have a Southwall Material Adverse Effect; and

Adverse Changes. Since the date of this Agreement, no Southwall Material Adverse Effect shall have occurred and be continuing.

Conditions Precedent to the Obligations of Needham & Company on the Initial Extension of Credit Closing Date.

The obligations of Needham & Company at the Initial Extension of Credit Closing are subject to the satisfaction or waiver by Needham & Company, at or before the Closing, of the following condition:

Appointment of Mr. Boyadjieff. Southwall shall have named Mr. George Boyadjieff as its non-executive chairman of the board of directors, Mr. Boyadjieff shall have accepted such position.

Matters relating to Creditors. Needham and Southwall shall have reached agreement in principle with respect to the arrangements that will be offered to Southwall's creditors, trade creditors and landlords.

Conditions Precedent to the Obligations of Needham & Company on the Second Extension of Credit Closing Date.

[Intentionally Omitted]

Conditions Precedent to the Obligations of the Convertible Notes Purchasers on the Convertible Debt Closing Date.

The obligations of the Convertible Notes Purchasers at the Convertible Debt Closing are subject to the satisfaction or waiver by the Convertible Notes Purchasers, at or before the Convertible Debt Closing, of each of the following conditions:

Restructuring. Southwall shall have completed in all material respects the Restructuring Plan;

Occurrence of Earlier Closings. The Initial and Second Extension of Credit Closings between Southwall and Needham & Company shall have taken place;

Amended and Restated Certificate of Designation. The Amended and Restated Certificate of Designation shall not have been modified, amended or changed and shall be in full force and effect;

Releases. Southwall shall have secured releases from its Tempe landlord and the Tempe equipment lessor releasing Southwall from all claims and liabilities on terms reasonably satisfactory to Needham & Company;

Agreements with Creditors. Southwall shall have entered into arrangements with its trade creditors, other creditors and landlords, including, without limitation, (i) Teijin Limited in its capacity as a trade creditor and as the holder of $1.25 million of debt of Southwall that it paid to The Sanwa Bank Ltd. in connection with a guaranty of Southwall's obligations to The Sanwa Bank Ltd. and (ii) the landlords of its leases in Palo Alto with respect to such leases) deferring and/or extending payment terms on terms reasonably satisfactory to Needham & Company;

Terms of Credit Arrangements. Southwall shall have delivered to the Convertible Note Purchasers a written schedule setting forth the terms and payment amounts and status of each credit arrangement described in Section 6.4(e) hereof; and

Amended and Restated Certificate of Designation. The Amended and Restated Certificate of Designation shall not have been modified, amended or changed and shall be in full force and effect.

Conditions Precedent to the Obligations of Southwall on any Closing Date.

The obligations of Southwall at any Closing are subject to the satisfaction or waiver by Southwall, at or before such Closing, of each of the following conditions:

Representations and Warranties. The representations and warranties of Needham & Company or the Convertible Notes Purchasers, as applicable, contained herein shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made on and as of such date; and

Performance. Needham & Company or the Convertible Notes Purchasers, as applicable, shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by Needham & Company or the Convertible Notes Purchasers at or prior to the Closing.

MISCELLANEOUS

Termination. This Agreement may be terminated prior to the Convertible Debt Closing under any of the following circumstances:

by mutual written consent of Southwall, the Convertible Notes Purchasers and Needham;
by either Needham & Company and the Convertible Notes Purchasers or Southwall if a court or other governmental body of competent jurisdiction shall have issued a final and nonappealable order, decree or ruling, or shall have taken any other action, having the effect of permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by the Transaction Documents;
by Southwall if: (i) any of the representations and warranties of Needham & Company or the Convertible Notes Purchasers shall have been inaccurate as of the date of this Agreement in any material respect (without giving effect to any qualifications as to materiality contained therein); (ii) any of the representations and warranties Needham & Company or the Convertible Notes Purchasers become inaccurate in any material respect (without giving effect to any qualifications as to materiality contained therein) as of a date subsequent to the date of this Agreement (as if made on such subsequent date) and Needham & Company or the Convertible Notes Purchasers, as applicable, shall not have cured such inaccuracy within ten days after such representation or warranty becomes inaccurate; or (iii) any of the covenants of Needham & Company or the Convertible Notes Purchasers contained in this Agreement shall have been breached in any material respect;
by Needham & Company and the Convertible Notes Purchasers or Southwall if: (i) the Initial Extension of Credit Closing has not occurred by December 19, 2003 (the "Initial Extension of Credit End Date"); (ii) the Second Extension of Credit Closing has not occurred by January 15, 2004 (the "Second Extension of Credit Closing End Date"); or (iii) the Convertible Debt Closing has not occurred by February 20, 2004 (the "Convertible Debt End Date"), unless, in each case, the failure of a Closing to occur is attributable to a failure by the party seeking to terminate this Agreement to perform any material obligation required to be performed by such party at or prior to such End Date;
by Needham & Company and the Convertible Notes Purchasers if: (i) any of Southwall's representations and warranties shall have been inaccurate in any material respect (without giving effect to any qualifications as to materiality contained therein) as of the date of this Agreement (except for such representations and warranties that speak as of a particular date, which shall have been true and correct as of the date when made); (ii) any of Southwall's representations and warranties become inaccurate in any material respect (without giving effect to any qualifications as to materiality contained therein) as of a date subsequent to the date of this Agreement (as if made on such subsequent date) and Southwall shall not have cured such inaccuracy within ten days after such representation or warranty becomes inaccurate; or (iii) any of Southwall's covenants contained in this Agreement shall have been breached in any material respect;
by Needham & Company and the Convertible Notes Purchasers if, since the date of this Agreement, there shall have occurred and be continuing any Southwall Material Adverse Effect; or
by Needham & Company and the Convertible Notes Purchasers if a Bankruptcy Event shall have occurred and, in the event of a Bankruptcy Event that was commenced by a party other than Southwall, such case or proceeding shall not have been dismissed within 90 days of being filed.

Effect of Termination. In the event of the termination of this Agreement as provided in Section 7.1, this Agreement shall be of no further force or effect; provided, however, that (i) Sections 7.2 through 7.19 shall survive the termination of this Agreement and shall remain in full force and effect; and (ii) the termination of this Agreement shall not relieve any party from any liability for any material inaccuracy in or breach of any representation or any material breach of any warranty, covenant or other provision contained in this Agreement.

Fees and Expenses. Except as specified in this Agreement, the Amended and Restated Registration Rights Agreement or the Loan and Security Agreement, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of the Transaction Documents. Southwall shall pay all stamp and other taxes and duties levied in connection with the sale of the Securities.

Entire Agreement. The Transaction Documents, together with the Exhibits and Schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules. At or after each and any Closing, and without further consideration, each party will execute and deliver to each other party, as applicable, such further documents as may be reasonably requested in order to give practical effect to the intention of the parties under the Transaction Documents.

Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section prior to 6:30 p.m. (New York City time) on a Trading Day, (b) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section on a day that is not a Trading Day or later than 6:30 p.m. (New York City time) on any Trading Day, (c) the Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows:

If to Southwall: Southwall Technologies Inc.
3975 East Bayshore Road
Palo Alto, CA 94304
Attn: Chief Executive Officer
Facsimile No.: (650) 962-9111

With a copy to (which copy shall not constitute notice):

Choate Hall & Stewart
53 State Street
Boston, MA 02109
Attn: James W. Hackett, Jr., Esq.
Facsimile No.: (617) 248-4000

If to Needham or

NCP Entities: Needham & Company, Inc.
445 Park Avenue
New York, NY 10022
Attn: Ellen McKay
Facsimile No.: (212) 751-1450

and

Needham Capital Partners
445 Park Avenue
New York, NY 10022
Attn: Ellen McKay
Facsimile No.: (212) 751-1450

With a copy to (which copy shall not constitute notice):

Heller Ehrman White & McAuliffe LLP
333 Bush Street
San Francisco, CA 94104
Attn: Victor A. Hebert, Esq.
Facsimile No.: (415) 772-6268

If to Dolphin: Dolphin Direct Equity Partners, LP
c/o Dolphin Asset Management Corp.
129 East 17th Street
New York, NY 10003
Attn: Carlos P. Salas
Facsimile No.: (212) 202-3817

or such other address as may be designated in writing hereafter, in the same manner, by such Person.

Amendments; Waivers. No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by all the parties or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right.

Construction. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. This Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement or any of the Transaction Documents.

Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. Southwall may not assign this Agreement or any rights or obligations hereunder without the prior written consent of each of Needham & Company and the Convertible Notes Purchasers. Each of Needham & Company and the Convertible Notes Purchasers may assign its respective rights under this Agreement to any Person to whom it assigns or transfers any Securities and each of the NCP Entities may assign its rights and obligations hereunder to any entity controlled by Needham & Company, and Dolphin may assign its rights and obligations hereunder to an Affiliate.

No Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person.

Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all Proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought against a party hereto or its respective Affiliates, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York, Borough of Manhattan (the "New York Courts"). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of the any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any Proceeding, any claim that it is not personally subject to the jurisdiction of any such New York Court, or that such Proceeding has been commenced in an improper or inconvenient forum. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such Proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. If any party shall commence a Proceeding to enforce any provisions of a Transaction Document, then the prevailing party in such Proceeding shall be reimbursed by the other parties for its attorney's fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Proceeding.

Survival. The representations, warranties, agreements and covenants contained herein shall survive the Closings (if any) and the delivery, exercise and/or conversion of the Securities, as applicable.

Execution. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature page were an original thereof.

Severability. If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefore, and upon so agreeing, shall incorporate such substitute provision in this Agreement.

Rescission and Withdrawal Right. Notwithstanding anything to the contrary contained in (and without limiting any similar provisions of) the Transaction Documents, whenever either of Needham & Company or the Convertible Notes Purchasers exercises a right, election, demand or option under a Transaction Document and Southwall does not timely perform its related obligations in all material respects within the periods therein provided, then Needham & Company or the Convertible Notes Purchasers, as applicable, may rescind or withdraw, in its sole discretion from time to time upon written notice to Southwall, any relevant notice, demand or election in whole or in part without prejudice to its future actions and rights.

Replacement of Securities. If any certificate or instrument evidencing any Securities is mutilated, lost, stolen or destroyed, Southwall shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof, or in lieu of and substitution therefore, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to Southwall of such loss, theft or destruction and customary and reasonable indemnity, if requested. The applicants for a new certificate or instrument under such circumstances shall also pay any reasonable third-party costs associated with the issuance of such replacement Securities.

Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, either of Needham & Company and the Convertible Notes Purchasers or Southwall will be entitled to specific performance under the Transaction Documents. The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate.

Payment Set Aside. To the extent that Southwall makes a payment or payments to either of Needham & Company or the Convertible Notes Purchasers pursuant to any Transaction Document or Needham & Company or the Convertible Notes Purchasers enforces or exercises its rights thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to Southwall, a trustee, receiver or any other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.

Adjustments in Share Numbers and Prices. In the event of any stock split, subdivision, dividend or distribution payable in shares of Common Stock (or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly shares of Common Stock), combination or other similar recapitalization or event occurring after the date hereof but prior to the Convertible Debt Closing, each reference in this Agreement to a number of shares or a price per share shall be amended to appropriately account for such event.

Confidentiality. Each of Needham & Company and the Convertible Notes Purchasers agrees that, until December 31, 2004, it will keep confidential and will not disclose, divulge or use for any purpose other than to monitor its investment in Southwall any confidential, proprietary or secret information which it may obtain from Southwall pursuant to financial statements, reports and other materials submitted by Southwall to it pursuant to this Agreement, or pursuant to visitation or inspection rights granted hereunder ("Confidential Information"), unless such Confidential Information is known, or until such Confidential Information becomes known, to the public (other than as a result of a breach of this Section 7.19).

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGES FOLLOW]

IN WITNESS WHEREOF, the parties hereto have caused this Amended and Restated Investment Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

SOUTHWALL TECHNOLOGIES INC.

By:
Name: Thomas G. Hood
Title: Chief Executive Officer

NEEDHAM & COMPANY, INC.

By:
Name: Glen Albanese
Title: Managing Director and Chief Financial
Officer

NEEDHAM CAPITAL PARTNERS II, L.P.

By:
Name: John C. Michaelson
Title: Authorized Signatory

NEEDHAM CAPITAL PARTNERS III, L.P.

By:
Name: John C. Michaelson
Title: Authorized Signatory

NEEDHAM CAPITAL PARTNERS II (BERMUDA), L.P.

By:
Name: John C. Michaelson
Title: Authorized Signatory

NEEDHAM CAPITAL PARTNERS IIIA, L.P.

By:
Name: John C. Michaelson
Title: Authorized Signatory

NEEDHAM CAPITAL PARTNERS III (BERMUDA), L.P.

By:
Name: John C. Michaelson
Title: Authorized Signatory

DOLPHIN DIRECT EQUITY PARTNERS, LP

By:
Name: Peter E. Salas
Title: Authorized Signatory

Exhibit A

AMENDED AND RESTATED CERTIFICATE OF DESIGNATION

Exhibit B

AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT

Exhibit C

CONVERTIBLE NOTE

Exhibit D

PLEDGE AGREEMENT

LA 271845 v10
2/27/04 11:33 AM (26579.0012)

EX-99.3 5 exh99-3.htm AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT Southwall Technologies Inc.
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT

THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of February 20, 2004, by and among Southwall Technologies Inc., a Delaware corporation (the "Company"), and the persons listed on the attached Exhibit A (collectively, the "Investors").

RECITALS

The Company and the Investors have (i) entered into an amended and restated investment agreement of even date herewith (as amended, restated or otherwise modified, the "Investment Agreement") which provides, among other things, for arrangements with one Investor guaranteeing borrowings under the Company's new line of credit and the sale by the Company and purchase by other Investors of Convertible Notes of the Company which are convertible into Series A Preferred Stock of the Company, (ii) entered into a Loan and Security Agreement (as amended, restated or otherwise modified, the "Loan and Security Agreement"), or (iii) entered into a Second Amendment to Lease (3969-3975 E. Bayshore Road - Building 1) and a Surrender and Termination Agreement (3977-3995 E. Bayshore Road - Building 2) (collectively, the "Lease Amendments").
The Company and the Investors wish to enter into this Agreement in order (i) to provide for certain rights of the Investors, and (ii) to induce the Investors to purchase shares of the Series A Preferred Stock, enter into arrangements relating to the extension of credit or enter into the Lease Amendment, as the case may be.

THE PARTIES AGREE AS FOLLOWS:

Certain Definitions. As used in this Agreement, the following terms shall have the following respective meanings:

"Board" shall mean the Board of Directors of the Company.

"Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act.

. "Convertible Note" means the convertible promissory note of the Company which is convertible into shares of Series A Preferred Stock of the Company and is secured by 65% of the issued and outstanding stock of the Material Subsidiary (as defined in the Investment Agreement).
"Convertible Securities" shall mean the shares of Series A Preferred Stock issuable upon conversion of the Convertible Promissory Notes purchased by the Investors purchasing Convertible Promissory Notes pursuant to the Investment Agreement, the Warrants issued to the Investors, the Warrants issued pursuant to the Loan and Security Agreement and/or the Warrants issued pursuant to the Lease Amendments.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time.
"Form S-3" shall mean Form S-3 issued by the Commission or any substantially similar form then in effect.
"Holder" shall mean any holder of outstanding Registrable Securities which have not been sold to the public, but only if such holder is one of the Investors or an assignee or transferee of registration rights as permitted by Section 10.
"Initiating Holders" shall mean Holders who in the aggregate hold at least 50% of the Registrable Securities.
"Material Adverse Event" shall mean any change, event or effect that (a) is materially adverse to the general affairs, business, operations, assets, condition (financial or otherwise) or results of operations or prospects of the Company, or (b) is reasonably foreseeable, has a reasonable likelihood of occurring, and if it were to occur could reasonably be expected to materially adversely affect the general affairs, business, operations, assets, condition (financial or otherwise) or results of operations or prospects of the Company.

The terms "Register," "Registered," and "Registration" refer to a registration effected by preparing and filing a registration statement on Form S-1, S-2, or S-3 in compliance with the Securities Act ("Registration Statement"), and the declaration or ordering of the effectiveness of such Registration Statement.
"Registrable Securities" shall mean all Common Stock not previously sold to the public and issued or issuable upon conversion or exercise of any of the Company's Convertible Securities purchased by or issued to the Investors, including Common Stock issued pursuant to stock splits, stock dividends, and similar distributions; provided, however, that such shares of Common Stock as to which any of the following apply shall cease to be Registrable Securities: (a) a registration statement with respect to the sale of such Registrable Securities shall have become effective under the Securities Act and such Registrable Securities shall have been disposed of under such registration statement; (b) such Registrable Securities shall have been transferred pursuant to Rule 144 or any successor rule or provision promulgated under the Securities Act ("Rule 144"); (c) such Registr able Securities shall have been transferred in a transaction in which the Investor's rights and obligations under this Agreement were not assigned; (d) the holder of such Registrable Securities is then permitted to sell all of such securities within any three-month period pursuant to Rule 144 (and, with respect to any holder who is a registered broker/dealer, counsel to such holder delivers a written opinion to such effect); or (e) the termination of this Agreement.
"Registration Expenses" shall mean all expenses incurred by the Company in complying with Sections 4 and 6 of this Agreement, including, without limitation, all federal and state registration, qualification, and filing fees, printing expenses, fees and disbursements of counsel for the Company and reasonable fees and disbursements of one special counsel for all Holders, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration. Registration Expenses shall not include Selling Expenses or fees and disbursements of counsel for any underwriter of any Registrable Securities being registered.
"Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities pursuant to this Agreement.

Demand Registration.

Request for Registration on Form other than Form S-3. Subject to the terms of this Agreement, in the event that the Company shall receive from the Initiating Holders at any time after December 18, 2004 a written request that the Company effect any Registration with respect to all or a part of the Registrable Securities on a form other than Form S-3 for an offering of at least 40% (which shall be at least an aggregate of 500,000 shares) of the then outstanding Registrable Securities the Company shall (i) promptly give written notice of the proposed Registration to all other Holders, and (ii) subject to receipt of all necessary information from the Holders of such s hares, as soon as practicable, use commercially reasonable efforts to effect Registration of the Registrable Securities specified in such request, together with any Registrable Securities of any Holder joining in such request as are specified in a written request given within 20 days after written notice from the Company. The Company shall not be obligated to take any action to effect any such registration after the Company has effected three such Registrations pursuant to this Section 2.1 and such Registrations have been declared effective.
Request for Registration on Form S-3. Any time after December 18, 2004, if the Initiating Holders request that the Company file a Registration Statement on Form S-3 (or any successor form to Form S-3) for a public offering of shares of Registrable Securities the reasonably anticipated aggregate price to the public of which, net of Selling Expenses, would not be less than $1,000,000, and the Company is a registrant entitled to use Form S-3 to register the Registrable Securities for such an offering, the Company shall use all reasonable efforts to effect Registration of the Registrable Securities on such form; provide d, however, that the Company shall not be required to effect more than one Registration pursuant to this Section 2.2 in any 12 month period. The substantive provisions of Section 2.5 shall be applicable to each Registration initiated under this Section 2.2.
Right of Deferral. Notwithstanding the foregoing, the Company shall not be obligated to file a registration statement pursuant to this Section 2 if the Company shall furnish to such Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board it would be seriously detrimental to the Company or its stockholders for a Registration Statement to be filed in the near future, then the Company's obligation to use all reasonable efforts to file a Registration Statement shall be deferred for a period not to exceed 90 days from the receipt of the request to file such registration by such Holder; provided, however, that the Company shall not exercise the ri ght contained in this subsection 2.3 more than once in any 12 month period.
Registration of Other Securities in Demand Registration. Any Registration Statement filed pursuant to the request of the Initiating Holders under this Section 2 may, subject to the provisions of Section 2.5, include securities of the Company other than Registrable Securities.
Underwriting in Demand Registration.

Notice of Underwriting. If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 2, and the Company shall include such information in the written notice referred to in Sections 2.1 and 2.3. The right of any Holder to Registration pursuant to Section 2 shall be conditioned upon such Holder's agreement to participate in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting.
Selection of Underwriter in Demand Registration. The Company shall (together with all Holders proposing to distribute their securities through such underwriting) enter into an underwriting agreement with the representative ("Underwriter's Representative") of the underwriter or underwriters selected for such underwriting by the Holders of a majority of the Registrable Securities being registered by the Initiating Holders and agreed to by the Company.
Marketing Limitation in Demand Registration. If the Underwriter's Representative advises the Initiating Holders in writing that market factors (including, without limitation, the aggregate number of shares of Common Stock requested to be Registered, the general condition of the market, and the status of the persons proposing to sell securities pursuant to the Registration) require a limitation of the number of shares to be underwritten, then (i) first, the Common Stock (other than Registrable Securities) held by officers or directors of the Company, (ii) second, the securities other than Registrable Securities, and (iii) third, the securities requested to be registered by the Company, shall be excluded from such Registration to the extent required by such limitation . If a limitation of the number of shares is still required, the Initiating Holders shall so advise all Holders and the number of shares of Registrable Securities that may be included in the Registration and underwriting shall be allocated among all Holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities entitled to inclusion in such Registration held by such Holders at the time of filing the Registration Statement. No Registrable Securities or other securities excluded from the underwriting by reason of this Section 2.5(c) shall be included in such Registration Statement.
Right of Withdrawal in Demand Registration. If any Holder of Registrable Securities, or a holder of other securities entitled (upon request) to be included in such Registration, disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the Underwriter's Representative and the Initiating Holders delivered at least fifteen days prior to the effective date of the Registration Statement. The securities so withdrawn shall also be withdrawn from the Registration Statement, without prejudice to the other registration rights hereunder or under any other agreement with the Company with respect to such securities.

Piggyback Registration.

Notice of Piggyback Registration and Inclusion of Registrable Securities. Subject to the terms of this Agreement, if the Company decides to Register any of its Common Stock (either for its own account or the account of a security holder or holders exercising their respective demand registration rights) on a form that would be suitable for a registration involving solely Registrable Securities, the Company shall: (i) promptly give each Holder written notice thereof (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable Blue Sky or other state securities laws), and (ii) include in such Registration (and any related qualifi cation under Blue Sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request delivered to the Company by any Holder within 15 days after delivery of such written notice from the Company.
Underwriting in Piggyback Registration.

Notice of Underwriting in Piggyback Registration. If the Registration of which the Company gives notice is for a Registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 3.1. In such event, the right of any Holder to Registration shall be conditioned upon such underwriting and the inclusion of such Holder's Registrable Securities in such underwriting to the extent provided in this Section 3. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders distributing their securities through such underwriting) enter into an underwriting agreement with the Underwriter's Representative for such offering. The Hol ders shall have no right to participate in the selection of the underwriters for an offering pursuant to this Section 3.

Marketing Limitation in Piggyback Registration. If the Underwriter's Representative advises the Holders seeking registration of Registrable Securities pursuant to this Section 3 in writing that market factors (including, without limitation, the aggregate number of shares of Common Stock requested to be Registered, the general condition of the market, and the status of the persons proposing to sell securities pursuant to the Registration) require a limitation of the number of shares to be underwritten, the Underwriter's Representative (subject to the allocation priority set forth in Section 3.2(c)) may limit the number of shares of Registrable Securities to be included in such Registration and underwriting to not less than 20% of the securities included in such Registration .
Allocation of Shares in Piggyback Registration. If the Underwriter's Representative limits the number of shares to be included in a Registration pursuant to Section 3.2(b), the number of shares to be included in such Registration shall be allocated (subject to Section 3.2(b)) in the following manner: The shares (other than Registrable Securities) held by officers or directors of the Company shall be excluded from such registration and underwriting to the extent required by such limitation. If a limitation of the number of shares is still required after such exclusion, the number of shares that may be included in the Registration and underwriting by selling stockholders shall be allocated among all other Holders thereof and other holders of securities (other than Registrable Securities) requesting and legally entitled to include such securities in such Registration, in proportion, as nearly as practicable, to the respective amounts of securities (including Registrable Securities) which such Holders and such other holders would otherwise be entitled to include in such Registration. No Registrable Securities or other securities excluded from the underwriting by reason of this Section 3.2(c) shall be included in the Registration Statement.
Withdrawal in Piggyback Registration. If any Holder disapproves of the terms of any such underwriting, such person may elect to withdraw therefrom by written notice to the Company and the Underwriter's Representative delivered at least fifteen days prior to the effective date of the Registration Statement. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such Registration without prejudice to the other registration rights hereunder or under any other agreement with the Company with respect to such securities. The Company shall have the right to postpone or withdraw any Registration effected pursuant to this Section 3.2 without obligation to any Holder.

Expenses of Registration. All Registration Expenses incurred in connection with two Registrations pursuant to Section 2.1, three Registrations pursuant to Section 2.2 and unlimited Registrations pursuant to Section 3, shall be borne by the Company. All Registration Expenses incurred in connection with any other Registration, qualification, or compliance, shall be apportioned among the Holders and other holders of the securities so registered on the basis of the number of shares so registered. Notwithstanding the above, the Company shall not be required to pay for any expenses of any Registration proceeding begun pursuant to Section 2 if the Registration request is subsequently withdrawn at the requ est of the Holders of a majority of the Registrable Securities to be registered (which Holders who vote to withdraw the request shall bear such expenses), unless the Holders of a majority of the Registrable Securities agree to forfeit their right to one demand Registration pursuant to Section 2; provided further, however, that if at the time of such withdrawal, the Holders have learned of a Material Adverse Event not known to the Holders at the time of their request, then the Holders shall not be required to pay any of such expenses (and the Company shall pay all such expenses) and the Holders shall retain their rights pursuant to Section 2. All Selling Expenses shall be borne by the holders of the securities Registered pro rata on the basis of the number of shares Registered.
Termination of Registration Rights. The rights to cause the Company to register securities granted under Sections 2 and 3 of this Agreement and to receive notices pursuant to Section 3 of this Agreement shall terminate, with respect to each Holder, if such Holder is eligible to sell all of such Holder's Registrable Securities within a three-month period under Rule 144 of the Securities Act.
Registration Procedures and Obligations. Whenever required under this Agreement to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:

Prepare and file with the Commission a Registration Statement with respect to such Registrable Securities and use its reasonable efforts to cause such Registration Statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such Registration Statement effective until the expiration of 12 months after such Registration Statement first becomes effective, or, if sooner, such time as all shares so Registered have been sold.

Prepare and file, as expeditiously as reasonably practicable, with the Commission such amendments and supplements to such Registration Statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement; provided that, if the filing of any such amendment or supplement would cause the disclosure of material non-public information concerning the Company, the disclosure of which at the time is not, in the good faith opinion of the Board, in the best interests of the Company, such filing shall not be made until the Board in good faith determines.

Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them; provided that the obligation of the Company to deliver copies of prospectuses or other documents to each Holder shall be subject to the receipt by the Company of reasonable assurances from such Holder that such Holder will comply with the applicable provisions of the Securities Act and of such other securities or blue sky laws as may be applicable in connection with the use of any such prospectus or other documents.

Use its reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business in any jurisdiction where it is not so qualified, to subject itself to taxation in any such jurisdiction or to file a general consent to service of process in any such states or jurisdictions, and provided, further, that in the event any jurisdiction in which the securities shall be qualified imposes a non-waivable requirement that expenses incurred in connection with the qualification of the securities be borne by selling stockholders, such expenses shall be payable pro rata by selling stockholders.

In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement.

Notify each Holder of Registrable Securities covered by such Registration Statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances in which they were made.

Provide a transfer agent and registrar for all Registrable Securities registered pursuant to such Registration Statement and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration.

Furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Agreement, on the date that such Registrable Securities are delivered for sale in connection with a registration pursuant to this Agreement, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters (with a copy provided to each holder of Registrable Securities) in an underwritten public offering, and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters (with a copy provided to each holder of Registrable Securities).

Use all reasonable efforts to list the Registrable Securities covered by such registration statement with NASDAQ or any securities exchange on which the Common Stock of the Company is then listed, or NASDAQ or such securities exchange as shall be selected by the Company, or, if the Company fails to make an application to so list within 30 days of a request for the same by the Investors in connection with a Registered public offering involving an underwriting, the Investors may determine the place of listing, subject to qualification by the Company to list its shares thereon.

Notify each seller of Registrable Securities under such registration statement of (i) the effectiveness of such registration statement, (ii) the filing of any post-effective amendments to such registration statement, or (iii) the filing of a supplement to such registration statement.

Make available for inspection upon reasonable notice during the Company's regular business hours by each seller of Registrable Securities, any underwriter participating in any distribution pursuant to such registration statement, and any attorney, accountant, or other agent retained by such seller or underwriter, all material financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such seller, underwriter, attorney, accountant, or agent in connection with such registration statement; provided that the Company shall not be required to disclose any confidential information or to meet with any seller or its representatives until and unless the seller and/or such representative shall have entered into a confidentiality agreement with the Company in form and substance reasonably satisfactory to the Company.

Information Furnished by Holder. It shall be a condition precedent of the Company's obligations under this Agreement that each Holder of Registrable Securities included in any Registration furnish to the Company such information regarding such Holder and the distribution proposed by such Holder or Holders as the Company may reasonably request.
Indemnification.

Company's Indemnification of Holders. To the extent permitted by law, the Company shall indemnify each Holder, each of its officers, members, directors, and constituent partners, legal counsel for the Holders, and each person controlling such Holder, with respect to which Registration, qualification, or compliance of Registrable Securities has been effected pursuant to this Agreement, and each underwriter, if any, and each person who controls any underwriter against all claims, losses, damages, liabilities, or actions in respect thereof (collectively, "Damages") to the extent such Damages arise out of or are based upon any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus (including any related Registra tion Statement) incident to any such Registration, qualification, or compliance, or are based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company and relating to action or inaction required of the Company in connection with any such Registration, qualification, or compliance; and the Company shall reimburse each such Holder, each such underwriter, and each person who controls any such Holder, officer, member, director, constituent partner, legal counsel, person controlling Holder, or underwriter, for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability, or action; provided, however, that the indemnity contained in this Section 8.1 shall not apply to amounts paid in settlement of any such Damages if settlement is effected without the consent of the Company (which consent shall not unreasonably be withheld); and provided, further, that the Company shall not be liable in any such case (a) to the extent that any such Damages arise out of or are based upon any untrue statement or omission based upon written information furnished to the Company by such Holder, underwriter, or controlling person and stated to be for use in connection with the offering of securities of the Company or (b) in connection with the failure by the Holder to deliver in connection with any sale or sales by the Holder a subsequent prospectus, amendment or supplement that corrects any statement or omission in any prospectus if such subsequent prospectus, supplement or amendment was delivered to the Holder prior to such sale.
Holder's Indemnification of Company. To the extent permitted by law, each Holder shall, if Registrable Securities held by such Holder are included in the securities as to which a Registration, qualification or, compliance is being effected pursuant to this Agreement, indemnify the Company, each of its employees, directors and officers, each legal counsel and independent accountant of the Company, each underwriter, if any, of the Company's securities covered by such a Registration Statement, each person who controls the Company or such underwriter within the meaning of the Securities Act, and each other such Holder, each of its officers, members, directors, and constituent partners, and each person controll ing such other Holder, against all Damages arising out of or based upon (a) any untrue statement (or alleged untrue statement) of a material fact contained in any such Registration Statement, prospectus, offering circular, or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (b) any violation by such Holder of any rule or regulation promulgated under the Securities Act applicable to such Holder and relating to action or inaction required of such Holder in connection with any such Registration, qualification, or compliance including, but not limited to, failure by the Holder to deliver in connection with any sale or sales by the Holder a subsequent prospectus, amendment or supplement that corrects any statement or omission in any prospectus if such subsequent prospectus, supplement or amendment was delivered to the Holder pri or to such sale, and shall reimburse the Company, such Holders, such employees, directors, officers, members, partners, persons, law and accounting firms, underwriters, or control persons for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability, or action; provided, however, in the case of a situation set forth in Section 8.2(a), to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such Registration Statement, prospectus, offering circular, or other document in reliance upon and in conformity with written information furnished to the Company by such Holder and stated to be specifically for use in connection with the offering of securities of the Company; provided, further, that the indemnity contained in this Section 8.2 shall not apply to amounts paid in settlement of any such Damages if settlement is effected without the consent of such Holder (which consent shall not be unreasonably withheld); and provided, further, that each Holder's liability under this Section 8.2 shall not exceed such Holder's proceeds from the offering of securities made in connection with such Registration.
Indemnification Procedure. Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof and generally summarize such action. The indemnifying party shall have the right to participate in and to assume the defense of such claim; provided, however, that the indemnifying party shall be entitled to select counsel for the defense of such claim with the approval of any parties entitled to indemnification, which approval shall not be unreasonably withheld; provided further, however, that if either party reasona bly determines that there may be a conflict between the position of the Company and the Investors in conducting the defense of such action, suit, or proceeding by reason of recognized claims for indemnity under this Section 8, then counsel for such party shall be entitled to conduct the defense to the extent reasonably determined by such counsel to be necessary to protect the interest of such party. The failure to notify an indemnifying party promptly of the commencement of any such action, if prejudicial to the ability of the indemnifying party to defend such action, shall relieve such indemnifying party, to the extent so prejudiced, of any liability to the indemnified party under this Section 8, but the omission so to notify the indemnifying party shall not relieve such party of any liability that such party may have to any indemnified party otherwise than under this Section 8.
Contribution. If the indemnification provided for in this Section 8 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any Damages referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party pursuant to this Section 8 as a result of such Damages in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such Damages as well as any other relevant equitable considerations. The re lative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission.

Conflicts. Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control.

Survival of Obligations. The obligations of the Company and Holders under this Section 8 shall survive the completion of any offering of Registrable Securities in a registration statement under this Agreement or otherwise.

Limitations on Registration Rights Granted to Other Securities. From and after the date of this Agreement, the Company shall not enter into any agreement with any holder or prospective holder of any securities of the Company providing for the granting to such holder of any Registration rights .
Transfer of Rights. The right to cause the Company to Register securities under this Agreement may be assigned by any Holder to a transferee or assignee of at least 500,000 shares of Registrable Securities (or Convertible Securities convertible into at least 500,000 shares of Registrable Securities) not sold to the public (i) the Company must receive written notice prior to the time of said transfer, stating the name and address of said transferee or assignee and identifying the securities with respect to which such rights are being assigned, and (ii) such transferee or assignee must agree to be bound by the terms and conditions of this Agreement. Notwithstanding the limitation set forth in the foregoing sente nce respecting the minimum number of shares which must be transferred, any Holder which is a partnership or limited liability company may transfer such Holder's Registration rights to such Holder's constituent partners or members, as the case may be, without restriction as to the number or percentage of shares acquired by any such constituent partner or member.
No-Action Letter or Opinion of Counsel in Lieu of Registration; Conversion of Preferred Stock. Notwithstanding anything else in this Agreement, if the Company shall have obtained from the Commission a "no-action" letter in which the Commission has indicated that it shall take no action if, without Registration under the Securities Act, any Holder disposes of Registrable Securities covered by any request for Registration made under this Section 11 in the specific manner in which such Holder proposes to dispose of the Registrable Securities included in such request (such as including, without limitation, inclusion of such Registrable Securities in an underwriting initiated by either the Company or the Holders) and that such Registrable Securities may be sold to the public without Registration, or if in the opinion of counsel for the Company concurred in by counsel for such Holder, which concurrence shall not be unreasonably withheld, no Registration under the Securities Act is required in connection with such disposition and that such Registrable Securities may be sold to the public without Registration, the Registrable Securities included in such request shall not be eligible for Registration under this Agreement; provided, however, that any Registrable Securities not so disposed of shall be eligible for Registration in accordance with the terms of this Agreement with respect to other proposed dispositions to which this Section 11 does not apply. The Registration rights of the Holders of the Registrable Securities set forth in this Agreement are conditioned upon the conversion of the Registrable Securities with respect to which registration is sought into Common Stock prior to the effective date of the Re gistration Statement.
Certain Events. In the event: (i) of any request by the Commission or any other federal or state governmental authority during the period of effectiveness of any Registration Statement for amendments or supplements to a Registration Statement or related prospectus or for additional information; (ii) of the issuance by the Commission or any other federal or state governmental authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of proceedings for that purpose; (iii) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceedings for such purpose; or (iv) of any event or circumstance that necessitates the making of changes in the Registration Statement or prospectus, or any document incorporated or deemed to be incorporated therein by reference, so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or any omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of a prospectus, it will not contain any untrue statement of a material fact or any omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; then the Company shall deliver, upon a resolution of the Board, a certificate in writing to each Holder (a "Suspension Notice") to the effect of the foregoing and detailing the facts and circumstances related to the foregoing and, upon receipt of such Suspension Notice, each Holder will refrain from selling any Registrable Securities pursuant to a Registration Statement (a "Suspension") until the Holder's receipt of copies of a supplemented or amended prospectus prepared and filed with the Commission by the Company, or until it is advised in writing by the Company that the current prospectus may be used, and has received copies of any additional or supplemental filings that are incorporated or deemed incorporated by reference in any such prospectus. In the event of any Suspension, the Company shall use commercially reasonable efforts to cause the use of the prospectus so suspended to be resumed as soon as reasonably practicable, provided that, if such use would cause the disclosure of material non-public information concerning the Company, the disclosure of which at the time is not, in the good faith opinion of the Board, in the best interests of the Company, such Suspension shall be continued until the Board in good faith determines.

Reports under the Exchange Act. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Securities Act and any other rule or regulation of the Commission that may at any time permit a Holder to sell securities of the Company to the public without Registration or pursuant to a registration on Form S-3, the Company agrees to:

use commercially reasonable efforts to make and keep public information available, as those terms are understood and defined in Rule 144, at all times after 90 days after the effective date of the first Registration Statement filed by the Company for the offering of its securities to the public;
use commercially reasonable efforts to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities, such action to be taken as soon as reasonably practicable after the end of the fiscal year in which the first Registration Statement filed by the Company for the offering of its securities to the general public is declared effective;
use commercially reasonable efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and
furnish to any Holder, so long as the Holder owns any Registrable Securities, promptly upon request (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144 (at any time after 90 days after the effective date of the first Registration Statement filed by the Company), the Securities Act, and the Exchange Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the Commission which permits the selling of any such securities without Registration or pursuant to such form.

Stand-Off Agreement. Each Holder (other than Judd Properties, LLC), if requested by the Company and the managing underwriter of a Registration, hereby agrees not to sell publicly or otherwise transfer or dispose of any Registrable Securities or other securities of the Company held by such Holder for a specified period of time (not to exceed 180 days) following the effective date of such Registration Statement; provided that all executive officers, directors and 5% or more stockholders of the Company enter into similar agreements.

Miscellaneous.

Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, excluding those laws that direct the application of the laws of another jurisdiction.
Headings. The headings of the sections of this Agreement are for convenience and shall not by themselves determine the interpretation of this Agreement.
Notices. Any notice required or permitted hereunder shall be given in writing and shall be conclusively deemed effectively given upon personal delivery or delivery by courier, or on the first business day after transmission if sent by confirmed facsimile transmission, or five days after deposit in the United States mail, by registered or certified mail, postage prepaid, addressed (i) if to the Company, as set forth below the Company's name on the signature page of this Agreement, and (ii) if to an Investor, at such Investor's address as set forth below such Investor's name on the signatures pages of this Agreement, or at such oth er address as the Company or an Investor may designate by 10 days' advance written notice to the other parties hereto.
Amendment of Agreement. Any provision of this Agreement may be amended only by a written instrument signed by the Company and by persons holding a majority of the Registrable Securities (calculated on an as-converted basis).
Severability. In case any provision of this Agreement shall be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
Entire Agreement; Successors and Assigns. This Agreement constitutes the entire agreement among the parties with regard to the subject matter hereof and supercedes any and all prior negotiations, correspondence, understandings and agreements among the parties regarding the subject matter hereof. Subject to the exceptions specifically set forth in this Agreement, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective executors, administrators, heirs, successor, and assigns of the parties.

Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

[SIGNATURE PAGES FOLLOW]

IN WITNESS WHEREOF, the parties hereto have executed this Amend and Restated Registration Rights Agreement as of the date first above written.

Company: Southwall Technologies Inc.

a Delaware corporation

By:

Thomas G. Hood
Chief Executive Officer

Address: 3975 East Bayshore Road
Palo Alto, CA 94304
Attention: Chief Executive Officer

Investors: Needham & Company, Inc.

By:

Name: Glen Albanese
Title: Managing Director and Chief Financial Officer

Address: 445 Park Avenue
New York, NY 10022
Attention: Ellen McKay

Needham Capital Partners III, L.P.

By:

Name: John C. Michaelson
Title: Authorized Signatory

Address: 445 Park Avenue
New York, NY 10022
Attention: Ellen McKay
Needham Capital Partners II, L.P.

By:

Name: John C. Michaelson
Title: Authorized Signatory

Address: 445 Park Avenue
New York, NY 10022
Attention: Ellen McKay

Needham Capital Partners II (Bermuda), L.P.

By:

Name: John C. Michaelson
Title: Authorized Signatory

Address: 445 Park Avenue
New York, NY 10022
Attention: Ellen McKay

Needham Capital Partners IIIA, L.P.

By:

Name: John C. Michaelson
Title: Authorized Signatory

Address: 445 Park Avenue
New York, NY 10022
Attention: Ellen McKay
Needham Capital Partners III (Bermuda), L.P.

By:

Name: John C. Michaelson
Title: Authorized Signatory

Address: 445 Park Avenue
New York, NY 10022
Attention: Ellen McKay

Dolphin Direct Equity Partners, LP

By:

Name: Peter E. Salas
Title: Authorized Signatory

Address: c/o Dolphin Asset Management Corp.
129 East 17^th Street
New York, NY 10003
Attention: Carlos P. Salas

Pacific Business Funding, A division of Greater Bay Bank, N. A.

By:

Name:
Title: Authorized Signatory

Address:

Judd Properties, LLC

By:

Name:
Title: Authorized Signatory

Address:

Exhibit A

SCHEDULE OF INVESTORS

Needham & Company

Needham Capital Partners III, L.P.

Needham Capital Partners II, L.P.

Needham Capital Partners IIIA, L.P.

Needham Capital Partners III (Bermuda), L.P.

Needham Capital Partners II (Bermuda), L.P.

Dolphin Direct Equity Partners, LP

Pacific Business Funding, a division of Greater Bay Bank, N. A.

Judd Properties, LLC

________________________________________________________________________

________________________________________________________________________
Southwall Technologies Inc.

AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT

________________________________________________________________________

________________________________________________________________________

February 20, 2004

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EX-99.4 6 exh99-4.htm AMENDED AND RESTATED CERTIFICATE OF DESIGNATION

Amended and Restated Certificate of Designation, Preferences and Rights of Series A 10% Cumulative Preferred Stock of Southwall Technologies Inc.

On December 18, 2003, SOUTHWALL TECHNOLOGIES INC. (the "Company"), a corporation organized and existing under the General Corporation Law of the State of Delaware, duly adopted resolutions authorizing a series of the Company's previously authorized Preferred Stock, par value $0.001 per share. As of the date hereof, no such shares of Preferred Stock have been issued. The Board of Directors of the Company desires to amend the terms of the Preferred Stock set forth in the Certificate of Designation, Preferences and Rights of Series A 10% Cumulative Preferred Stock. Accordingly, the Company does hereby certify that, pursuant to the authority conferred upon the Board of Directors of the Company by the Certificate of Incorporation of the Company and pursuant to Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Company, at a meeting duly held on January 29, 2004, duly adopted resolutions authorizing a series of the Company's previously authoriz ed Preferred Stock, par value $0.001 per share, with the following preferences and rights:

1. Designation, Amount and Par Value. The Series of Preferred Stock shall be designated the Series A 10% Cumulative Convertible Preferred Stock (the "Series A Preferred Stock"), and the number of shares so designated shall be 4,500,000. The par value of each share of Series A Preferred Stock shall be $0.001. Each share of Series A Preferred Stock shall have a stated value of $1.00 per share (the "Stated Value").
2. Dividends.

(a) Accrual. Holders of Series A Preferred Stock shall be entitled to receive and the Company shall pay, when, as and if declared by the Board of Directors out of funds legally available therefor, cumulative cash dividends at the rate per share (as a percentage of the Stated Value per share) equal to 10% per annum, payable quarterly in arrears on each March 31, June 30, September 30 and December 31 (each, a "Dividend Payment Date") and on the Conversion Date (as herein defined). Dividends on the Series A Preferred Stock shall accrue daily commencing on the Original Issue Date (as defined in Section 8) and shall be deemed to accrue whether or not earned or declared and whether or not there are profits, surplus or other funds of the Company legally available for the payment of dividends. The person that is shown on the Company's records as the holder of the Series A Preferred Stock on an applicable record date (the "Holder") for any dividend payment will be e ntitled to receive such dividend payment and any other accrued and unpaid dividends which accrued prior to such Dividend Payment Date, without regard to any sale or disposition of such Series A Preferred Stock subsequent to the applicable record date but prior to the applicable Dividend Payment Date. Except as otherwise provided herein, if at any time the Company pays less than the total amount of dividends then accrued on the Series A Preferred Stock, such payment shall be distributed ratably among the Holders of the Series A Preferred Stock based upon the number of shares held by each Holder.

(b) Restrictions on Company. So long as any Series A Preferred Stock shall remain outstanding, unless all accrued dividends payable on the Series A Preferred Stock for all prior Dividend Payment Dates shall have been paid, neither the Company nor any subsidiary thereof shall redeem, purchase or otherwise acquire, directly or indirectly, any Common Stock (as defined in Section 5) or any shares of any other capital stock of the Company, ranking junior to the Series A Preferred Stock in respect of dividends or liquidation preference, except the repurchase of shares of capital stock of the Company held by officers, directors or employees or former officers, directors or employees (or their estates or beneficiaries), upon death, disability, retirement, severance or termination of employment, or in order to satisfy tax withholding obligations of such persons upon the exercise of options or the vesting of performance shares or pursuant to any agreement under which such shares were issued, nor s hall the Company directly or indirectly pay or declare any cash dividend or make any cash distribution (other than a dividend or distribution described in Section 5) upon, nor shall any cash distribution be made in respect of, any Common Stock or any other capital stock of the Company ranking junior to the Series A Preferred Stock in respect of dividends or liquidation preference, nor shall any monies be set aside for or applied to the purchase or redemption (through a sinking fund or otherwise) of any Common Stock or any shares of any other capital stock of the Company, ranking junior to the Series A Preferred Stock in respect of dividends or liquidation preference, except as described above.

3. Voting Rights. Except as otherwise expressly provided herein or as provided by law, the Series A Preferred Stock shall have no voting rights.

4. Liquidation. Upon any (i) liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, (ii) the sale, lease, assignment, transfer, conveyance or disposal of all or substantially all of the assets of the Company, or (iii) the acquisition of the Company by another entity by means of consolidation, corporate reorganization, merger or other transaction or series of related transactions in which the stockholders of the Company immediately prior to such transaction do not own at least 50% of the outstanding voting securities of the successor entity, (a "Liquidation Event"), the Holders of shares of Series A Preferred Stock shall be entitled to receive out of the assets of the Company, whether such assets are capital or surplus, for each share of Series A Preferred Stock an amount equal to the Stated Value, plus an amount equal to the then-accrued but unpaid dividends per share, whether declared or not, but without interest ("Liquidation Preference"), before any distribution or payment shall be made to the holders of Common Stock or any other capital stock of the Company junior in respect of distribution of assets, and if the assets of the Company shall be insufficient to pay in full such amounts, then the entire assets to be distributed shall be distributed among the Holders of Series A Preferred Stock ratably in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full. The Company shall mail written notice of any such Liquidation, not less than 30 days prior to the payment date stated therein, to each record Holder of Series A Preferred Stock.

5. Conversion.

(a) Right to Convert. Each Holder of the Series A Preferred Stock shall have the right at any time and from time to time, at the option of such Holder, to convert any or all Series A Preferred Stock held by such Holder, into such number of fully paid, validly issued and nonassessable shares of common stock, par value $0.001 per share, of the Company ("Common Stock"), free and clear of any liens, claims or encumbrances created by the Company, as is determined by dividing (i) the Liquidation Preference times the number of shares of Series A Preferred Stock being converted ("Conversion Amount"), by (ii) the applicable Conversion Price (determined as hereinafter provided) in effect on the Conversion Date. Immediately following such conversion, the rights of the Holders of converted Series A Preferred Stock shall cease and the persons entitled to receive the Common Stock upon the conversion of Series A Preferred Stock shall be treated for all purposes as then hav ing become the owners of such Common Stock. If the Per Share Market Value of the Company's Common Stock is $4.00 or more per share (as appropriately adjusted for any stock splits, reverse stock splits or similar transactions) for 30 consecutive days, all of the remaining shares of Series A Preferred Stock then outstanding shall be converted into the number of shares of Common Stock into which such shares of Series A Preferred Stock are then convertible pursuant to this Section 5. All Holders of record of shares of Series A Preferred Stock will be given at least 20 days' prior written notice of the date fixed and the place designated for mandatory conversion of all such shares of Series A Preferred Stock pursuant to this Section 5(a). On or before the date fixed for conversion, each Holder of shares of Series A Preferred Stock shall surrender such Holder's certificate or certificates for all such shares to the Company or its transfer agent at the place designated in such notice, and shall thereafter r eceive certificates for the number of shares of Common Stock to which such Holder is entitled pursuant to this Section 5(a). As soon as reasonably practicable after the date of such mandatory conversion and the surrender of the certificate of certificates for Series A Preferred Stock, the Company shall cause to be issued and delivered to such Holder, or on such Holder's written order, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof and cash as provided in Section 5(h) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion.

(b) Mechanics of Conversion. To convert Series A Preferred Stock into Common Stock, the Holder shall give written notice ("Conversion Notice") to the Company (which Conversion Notice may be given by facsimile transmission no later than the Conversion Date) stating that such Holder elects to convert the same and shall state therein the number of shares of Series A Preferred Stock to be converted and the name or names in which such Holder wishes the certificate or certificates for Common Stock to be issued (the conversion date specified in such Conversion Notice shall be referred to herein as the "Conversion Date"). As soon as possible after delivery of the Conversion Notice, such Holder shall surrender the certificate or certificates representing the Series A Preferred Stock being converted, duly endorsed, at the office of the Company or, if identified in writing to such Holder by the Company, at the offices of any transfer agent for the Series A Preferr ed Stock. The Company shall, upon receipt of such Conversion Notice, issue and deliver to or upon the order of such Holder, against delivery of the certificates representing the Series A Preferred Stock which have been converted, a certificate or certificates for the number of shares of Common Stock to which such Holder shall be entitled (with the number of and denomination of such certificates designated by such Holder), and the Company shall immediately issue and deliver to such Holder a certificate or certificates for the number of shares of Series A Preferred Stock (including any fractional shares) which such Holder has not yet elected to convert hereunder but which are evidenced in part by the certificate(s) delivered to the Company in connection with such Conversion Notice. The Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless certificates evidencing such shares of the Series A Preferred Stock being converted are either del ivered to the Company or its transfer agent or the Holder notifies the Company or any such transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement reasonably satisfactory to the Company to indemnify the Company from any loss incurred by it in connection therewith. In lieu of delivering physical certificates representing the Common Stock issuable upon conversion of Series A Preferred Stock, provided the Company's transfer agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer program, upon request of the Holder, the Company shall use reasonable commercial efforts to cause its transfer agent to electronically transmit the Common Stock issuable upon conversion to the Holder, by crediting the account of the Holder's prime broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system. The parties agree to coordinate with DTC to accomplish this objective.

The conversion pursuant to this Section 5 shall be deemed to have been made immediately prior to the close of business on the Conversion Date. The person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Common Stock at the close of business on the Conversion Date. The Company's obligation to issue Common Stock upon conversion of Series A Preferred Stock shall, except with respect to the Holder's compliance with the notice and delivery requirements set forth above in this Section 5(b), be absolute, is independent of any covenant of the Holder of Series A Preferred Stock, and shall not be subject to: (i) any offset or defense, or (ii) any claims against the Holders of Series A Preferred Stock whether pursuant to this Certificate of Designation, the Amended and Restated Investment Agreement (as defined in Section 7) or otherwise. In the event that the Company disputes the Holder's computation of the num ber of shares of Common Stock to be received, then the Company shall deliver to the Holder the number of shares of Common Stock not in dispute and shall seek to mutually agree with the Holder in good faith on the correct number of shares to be received.

(c) Determination of Conversion Price. The Conversion Price applicable with respect to the Series A Preferred Stock (the "Conversion Price"), subject to the adjustments set forth below, shall be $1.00 per share.

(d) Stock Splits; Dividends; Adjustments.

(i) If the Company, at any time, (A) pays a stock dividend or otherwise makes a distribution or distributions on any equity securities (including instruments or securities convertible into or exchangeable for such equity securities) in shares of Common Stock, (B) subdivides outstanding Common Stock into a larger number of shares, or (C) combines outstanding Common Stock into a smaller number of shares, then the Conversion Price shall be multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately before such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to this Section 5(d)(i) shall become effective immediately after the paying or making of such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination.

(ii) In the event that the Company issues or sells any Common Stock or securities which are convertible into or exchangeable for its Common Stock (other than the Series A Preferred Stock), or any warrants or other rights to subscribe for or to purchase or any options for the purchase of its Common Stock ("Convertible Securities") (other than shares or options issued or which may be issued pursuant to (A) the Company's current or future employee, consultant or director stock incentive or option plans or shares issued upon exercise of options, warrants or rights outstanding on the date of the Amended and Restated Investment Agreement (as defined herein), (B) arrangements with the Holders of Series A Preferred Stock, (C) upon the conversion of the Series A Preferred Stock) or (D) transactions for which certain stockholders of the Company will be entitled to receive Common Stock or Convertible Securities under Section 4.14 of the Amended and Restated Investment Agreement ("Exem pted Issuances") at an effective purchase price per share which is less than the Per Share Market Value (as defined in Section 8) of the Common Stock on the Trading Day next preceding such issue or sale or, in the case of issuances to holders of its Common Stock, the record date fixed for the determination of stockholders entitled to receive Common Stock or Convertible Securities (the "Fair Market Price") (such shares of Common Stock or Convertible Securities, the "Dilutive Securities"), the Conversion Price in effect immediately prior to such issue or sale or record date, as applicable, shall be reduced effective concurrently with such issue or sale to an amount determined by multiplying the Conversion Price then in effect by a fraction, (1) the numerator of which shall be the sum of (x) the number of shares of Common Stock outstanding immediately prior to such issue or sale and (y) the number of shares of Common Stock which the aggregate consideration received b y the Company for such Dilutive Securities would purchase at the Fair Market Price, and (2) the denominator of which shall be the number of shares of Common Stock of the Company and the Dilutive Securities outstanding immediately after such issue or sale.

For the purposes of the foregoing adjustment, shares of Common Stock owned by or held on account of the Company or any subsidiary shall not be deemed outstanding for the purpose of any such computation. In addition, for the purposes of the foregoing adjustment, in the case of the issuance of any Convertible Securities, the maximum number of shares of Common Stock issuable upon exercise, exchange or conversion of such Convertible Securities shall be deemed to be outstanding, and the aggregate consideration received by the Company for the issuance or sale of such Convertible Securities shall be deemed to include any consideration that would be received by the Company in connection with the exercise, exchange or conversion of such Convertible Securities, provided that no further adjustment shall be made upon the actual issuance of Common Stock upon exercise, exchange or conversion of such Convertible Securities. However, upon the expiration of any Convertible Securities or any right or warrant to purchase Common Stock the issuance of which resulted in an adjustment in the Conversion Price pursuant to this Section 5(d)(ii), if any such right or warrant shall expire and shall not have been exercised, the Conversion Price shall immediately upon such expiration be recomputed and effective immediately upon such expiration be increased to the price which it would have been (but reflecting any other adjustments in the Conversion Price made pursuant to the provisions of this Section 5 after the issuance of such rights or warrants) had the adjustment of the Conversion Price made upon the issuance of such rights or warrants been made on the basis of offering for subscription or purchase only that number of shares of Common Stock actually purchased upon the exercise of such rights or warrants actually exercised.

(iii) If the Company, at any time while the Series A Preferred Stock is outstanding, shall distribute to all holders of Common Stock evidence of its indebtedness or assets or cash (other than ordinary cash dividends) or rights or warrants to subscribe for or purchase any security of the Company or any of its subsidiaries (excluding those referred to in Sections 5(d)(i) or 5(d)(ii) above), then concurrently with such distributions to holders of Common Stock, the Company shall distribute to Holders of the Series A Preferred Stock, the amount of such indebtedness, assets, cash or rights or warrants which the Holders of Series A Preferred Stock would have received had they converted all their Series A Preferred Stock into Common Stock immediately prior to the record date for such distribution.

(iv) All calculations under this Section 5 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be.

(v) Whenever the Conversion Price is adjusted pursuant to this Section 5(d), the Company shall promptly mail to each Holder of Series A Preferred Stock, a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.

(vi) No adjustment in the Conversion Price shall reduce the Conversion Price below the then-par value of the Common Stock.

(vii) The Company from time to time may reduce the Conversion Price by any amount for any period of time if the period is at least 20 Trading Days and if the reduction is irrevocable during the period. Whenever the Conversion Price is reduced, the Company shall mail to the Holders of Series A Preferred Stock a notice of the reduction. The Company shall mail the notice, first-class, postage-prepaid, at least 10 days before the date the reduced Conversion Price takes effect. The notice shall state the reduced Conversion Price and the period it will be in effect. A reduction of the Conversion Price does not change or adjust the Conversion Price otherwise in effect for purposes of Section 5(d)(i), (ii) or (iii).

(viii) If:

A. In the event of any taking by the Company of a record date of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, any security or right convertible into or entitling the holder thereof to receive additional shares of Common Stock, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right; or

B. The Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or

C. The approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company (other than a subdivision or combination of the outstanding shares of Common Stock), any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or

D. The Company shall authorize the voluntary or involuntary dissolution, liquidation or winding-up of the affairs of the Company;

then the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of Series A Preferred Stock, and shall cause to be mailed to the Holders of Series A Preferred Stock at their last addresses as they shall appear upon the stock books of the Company, at least 10 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding-up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their sha res of Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding-up; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice.

(e) Other Actions. The Company will not avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company and will at all times in good faith assist in the carrying out of all of the provisions of this Section 5 and in the taking of all action as may be necessary or appropriate in order to protect the conversion rights of the Holders of the Series A Preferred Stock against impairment.

(f) Reservation of Shares. The Company covenants that it will at all times reserve and keep available out of its authorized and unissued Common Stock solely for the purpose of issuance upon conversion of Series A Preferred Stock as herein provided, free from preemptive rights or any other contingent purchase rights of persons other than the Holders of Series A Preferred Stock, such number of shares of Common Stock as shall be issuable (taking into account the adjustments of Section 5(d) hereof) upon the conversion of all outstanding shares of Series A Preferred Stock. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid and nonassessable. The Company promptly will take such corporate action as may, in the opinion of its counsel, which may be an employee of the Company, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be suffici ent for such purpose, including without limitation engaging in reasonable commercial efforts to obtain the requisite stockholder approval.

(g) Fractional Shares. Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of Common Stock, but may if otherwise permitted by applicable law, make a cash payment in respect of any final fraction of a share based on the Per Share Market Value at such time. If the Company elects not, or is unable, to make such a cash payment, the Holder of a share of Series A Preferred Stock shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock.

(h) Taxes. The issuance of certificates for shares of Common Stock on conversion of Series A Preferred Stock shall be made without charge to the Holders thereof for any documentary, stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of such shares of Series A Preferred Stock so converted and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.

(i) Status of Converted Shares. Shares of Series A Preferred Stock converted into Common Stock shall be canceled and shall have the status of authorized but unissued shares of Series A Preferred Stock.

(j) Giving of Notice. Each Conversion Notice shall be given (i) by facsimile and by mail, postage prepaid, addressed to the attention of the Chief Financial Officer of the Company at the facsimile telephone number and address of the principal place of business of the Company, (ii) by overnight courier or (iii) by hand. Any such notice shall be deemed given and effective upon the earliest to occur of (1)(a) if such Conversion Notice is delivered via facsimile prior to 4:30 p.m. (local time in New York City) on any date, such date or such later date as is specified in the Conversion Notice, and (b) if such Conversion Notice is delivered via facsimile after 4:30 p.m. (local time in New York City) on any date, the next date or such later date as is specified in the Conversion Notice, (2) if such Conversion Notice is delivered by overnight courier, two business days after delivery to a nationally recognized overnight courier service or (3) if such Conversion Notice is delivered by hand, upo n actual receipt.

6. Redemption. The Series A Preferred Stock shall not be redeemable.

7. Covenants. In addition to any other rights provided by law, so long as any shares of Series A Preferred Stock remain issued and outstanding, the Company shall not, without first obtaining the affirmative vote or written consent of the Holders of a majority of the then-outstanding shares of Series A Preferred Stock, voting as a single class:

(a) authorize or issue shares of any class or series of stock having any preference or priority as to dividends or redemption rights, liquidation preferences, conversion rights, or voting rights, superior to or on a parity with any preference or priority of any series of Series A Preferred Stock;

(b) reclassify any shares of capital stock of the Company into shares having any preference or priority as to dividends or redemption rights, liquidation preferences, conversion rights, or voting rights, superior to or on a parity with any preference or priority of any series of Series A Preferred Stock;

(c) authorize or issue any bonds, debentures, notes or other obligations convertible into or exchangeable for, or having option rights to purchase, any shares of stock of the Company having any preference or priority as to dividends or redemption rights, liquidation preferences, conversion rights, or voting rights, superior to or on a parity with any preference or priority of Series A Preferred Stock;

(d) declare or pay dividends on or make any distributions with respect to Common Stock;

(e) increase or decrease the authorized number of shares of Series A Preferred Stock;

(f) amend or repeal any provision of, or add any provision to, its certificate of incorporation or bylaws if such action would alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of, any series of Series A Preferred Stock;

(g) increase the number of shares of Common Stock reserved for issuance under the Company's stock option plans, other than the annual increase currently provided in such plans and other than a further increase of not more than 500,000 shares under the Company's 1997 Stock Incentive Plan;

(h) engage in any transaction or series of related transactions constituting a Liquidation Event;

(i) do any act or thing which would result in taxation of the Holders of shares of the Series A Preferred Stock under Section 305 of the Tax Code (or any comparable provision of the Tax Code as hereafter from time to time amended); or

(j) make any material change to the Company's line of business.

8. Definitions. For the purpose hereof, the following terms shall have the following meanings:

"Original Issue Date" shall mean the date of the first issuance of any shares of Series A Preferred Stock regardless of the number of transfers of any particular shares of Series A Preferred Stock and regardless of the number of certificates which may be issued to evidence such Series A Preferred Stock.

"Per Share Market Value" means on any particular date (a) the closing sales price per share of the Common Stock on such date on The Nasdaq Stock Market or if the Common Stock is not listed on The Nasdaq Stock Market, on such other stock exchange on which the Common Stock has been listed or if there is no such price on such date, then the closing sales price on such exchange on the date nearest preceding such date, or (b) if the Common Stock is not listed on The Nasdaq Stock Market or any stock exchange, the closing sales price for a share of Common Stock in the over-the-counter market, as reported by the NASD at the close of business on such date, or (c) if the Common Stock is not quoted on the NASD, the closing sales price for a share of Common Stock in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), or (d) if the Common Stock is no longer publicly traded the fair ma rket value of a share of Common Stock as determined by a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) (an "Appraiser") selected in good faith by the Holders of a majority of the shares of the Series A Preferred Stock; provided, however, that the Company, after receipt of the determination by such Appraiser, shall have the right to select an additional Appraiser, in which case, the fair market value shall be equal to the average of the determinations by each such Appraiser.

"Amended and Restated Investment Agreement" means the Amended and Restated Investment Agreement, dated as of the date hereof (as the same may be amended or supplemented from time to time), between the Company, purchasers of the Company's convertible promissory notes and certain other parties.

"Trading Day" means (a) a day on which the Common Stock is traded on The Nasdaq Stock Market or principal stock exchange on which the Common Stock is then listed, or (b) if the Common Stock is not listed on The Nasdaq Stock Market or any stock exchange, a day on which the Common Stock is traded in the over-the-counter market, as reported by the NASD, or (c) if the Common Stock is not quoted on The Nasdaq Stock Market, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices).

IN WITNESS WHEREOF, Southwall Technologies Inc. has caused this certificate to be signed by Thomas G. Hood, its Chief Executive Officer, this 30th day of January 2004.

SOUTHWALL TECHNOLOGIES INC.

By: /s/ Thomas G. Hood

Thomas G. Hood
Chief Executive Officer

EX-99.5 7 exh99-5.htm FORM OF SECURED CONVERTIBLE PROMISSORY NOTE
Execution Copy

THIS NOTE AND THE SECURITIES ISSUABLE UPON THE CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER THE ACT.

THIS NOTE IS SUBJECT TO A SUBORDINATION AGREEMENT DATED FEBRUARY 20 2004, BY AND BETWEEN PACIFIC BUSINESS FUNDING, A DIVISION OF GREATER BAY BANK, N.A. AND NEEDHAM & COMPANY, INC.

Southwall Technologies Inc.

SECURED CONVERTIBLE PROMISSORY NOTE

February 20, 2004 $[________]

FOR VALUE RECEIVED, Southwall Technologies Inc., a Delaware corporation (the "Company"), promises to pay to the order of [_______________], or its permitted assigns, transferees and successors as provided herein (the "Holder"), or as the Holder may direct in writing, at its offices located at [______________] or at such other location as the Holder may designate in writing, $[________], plus cash interest thereon from the date of this Convertible Promissory Note ("Note") at an annual interest rate equal to the lower of (i) 10 percent (10%) or (ii) the highest rate permitted by applicable law (the "Interest Rate") compounded daily. Interest will be computed on the basis of a year of 360 days for the actual number of days elapsed from the date of this Note. The number of days used to compute the interest will include the first day but exclude the last day during which any principal is outstanding.

Amended and Restated Investment Agreement.

This Note is one of several Convertible Promissory Notes (collectively, the "Notes") issued by the Company pursuant to the Amended and Restated Investment Agreement by and among the Company, Needham & Company, Inc. and the Convertible Notes Purchasers (as defined in the Investment Agreement) dated February 20, 2004 (the "Investment Agreement"). The Notes and the Company's obligations under the Notes are secured pursuant to the provisions of the Pledge Agreement made by the Company and Needham & Company, Inc., acting in its capacity as an agent for each of the Convertible Notes Purchasers.

Principal and Interest Payments.

Accrued interest will be payable annually on December 31, commencing from the date of this Note and continuing thereafter until the earlier of the date all principal and accrued interest is paid in full and the date this Note is converted in accordance with Section 4.

The entire principal amount of this Note together with accrued and unpaid interest thereon will be due and payable on the earlier to occur of: (i) 45 days after a duly called and held meeting of the stockholders of the Company at which the stockholders of the Company fail to approve the Proposal (as defined in the Investment Agreement) and (ii) February 20, 2009 (the "Repayment Date") unless this Note has been previously converted in accordance with Section 4.

The principal and interest on this Note will be payable in the lawful currency of the United States of America by wire transfer of immediately available funds and without set-off or counterclaim, free and clear of and without deduction for any present or future taxes, restrictions or conditions of any nature.

All payments under this Note prior to demand or acceleration will be applied first, to any and all costs, expenses, or charges then owed by the Company to the Holder, second, to accrued and unpaid interest, and third, to the unpaid principal balance. All payments so received after demand or acceleration will be applied in such manner as the Holder may determine in its sole and absolute discretion.

Whenever any payment on this Note is stated to be due on a day which is not a business day, the payment will be made on the next succeeding business day and the extension of time will be included in the computation of the payment of interest of this Note.

This Note is subject to the express condition that at no time will the Company be obligated or required to pay interest at a rate which could subject the Company or the Holder to either civil or criminal liability as a result of being in excess of the maximum rate which the Company is permitted by law to contract or agree to pay. If, by the terms of this Note, the Company is at any time required or obligated to pay interest at a rate in excess of such maximum rate, the rate of interest under this Note will be deemed to be immediately reduced to the maximum rate and interest payable under this Note will be computed at the maximum rate and the portion of all prior interest payments in excess of the maximum rate will be applied and will be deemed to have been payments in reduction of the principal balance of this Note.

Prepayment.

This Note may not be prepaid without the consent of the Holder.

Conversion.

Conversion Rate. The outstanding principal plus any accrued and unpaid interest ("Debt") will be convertible, in whole or in part, at the option of the Holder into shares of Series A Preferred Stock of the Company at a rate of one share of Series A Preferred Stock for each $1.00 of Debt converted. Upon the conversion of a majority of the aggregate principal outstanding under the Notes, the remaining Notes will automatically convert.

Duties of the Holder Upon Conversion. In the event of conversion, the Holder will surrender this note for conversion at the principal office of the Company at the time of the conversion.

Issuance of Stock on Conversion. This Note will be canceled upon conversion. As soon as practicable after conversion of this Note, the Company at its expense will issue in the name of and deliver to the Holder a certificate or certificates for the number of shares of securities to which the Holder is entitled on conversion (bearing such legends as may be required by applicable state and federal securities laws in the opinion of legal counsel for the Company), together with any other securities and property to which the Holder is entitled upon conversion of this Note.

Fractional Shares Upon Conversion. If a fraction of a share would result upon conversion of this Note pursuant to this Section 4, the Company will, in lieu of issuing a fractional share, pay in cash the amount of principal represented by the fractional share calculated on the basis of the Conversion Price, as defined in Section 5.

Default; Acceleration.

Upon the occurrence of an Event of Default (as defined in the Investment Agreement) under this Note the holders of a majority of the aggregate principal amount of the Notes may, at their option (i) by written notice to the Company, declare the entire unpaid principal balance of this Note and the other Notes, together with all accrued but unpaid interest thereon, immediately due and payable regardless of any prior forbearance, and (ii) exercise any and all rights and remedies available to them under applicable law, including, without limitation, the right to collect from the Company all amounts due under this Note.

Miscellaneous.

Certain Covenants. In addition to any other rights provided by law, so long as any of the Notes remain issued and outstanding, the Company shall not, without first obtaining the affirmative vote or written consent of the Holders of a majority of the aggregate principal amount of the Notes:

authorize or issue shares of any class or series of stock having any preference or priority as to dividends or redemption rights, liquidation preferences, conversion rights, or voting rights, superior to or on a parity with any preference or priority of any series of Series A Preferred Stock;

reclassify any shares of capital stock of the Company into shares having any preference or priority as to dividends or redemption rights, liquidation preferences, conversion rights, or voting rights, superior to or on a parity with any preference or priority of any series of Series A Preferred Stock;

authorize or issue any bonds, debentures, notes or other obligations convertible into or exchangeable for, or having option rights to purchase, any shares of stock of the Company having any preference or priority as to dividends or redemption rights, liquidation preferences, conversion rights, or voting rights, superior to or on a parity with any preference or priority of Series A Preferred Stock;

declare or pay dividends on or make any distributions with respect to Common Stock;

increase or decrease the authorized number of shares of Series A Preferred Stock;

amend or repeal any provision of, or add any provision to, its certificate of incorporation or bylaws if such action would alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of, the Series A Preferred Stock;

increase the number of shares of Common Stock reserved for issuance under the Company's stock option plans, other than the annual increase currently provided in such plans and other than a further increase of not more than 500,000 shares under the Company's 1997 Stock Incentive Plan;

engage in any transaction or series of related transactions constituting a Liquidation Event (as defined in the Company's Certificate of Designation, Preferences and Rights of Series A 10% Cumulative, Convertible Preferred Stock);

do any act or thing which would result in taxation of the Holders under Section 305 of the Internal Revenue Code of 1986, as amended (the "Tax Code") (or any comparable provision of the Tax Code as hereafter from time to time amended); or

make any material change to the Company's line of business.

Waiver by the Company. The Company waives diligence, presentment, protest, demand and notice of protest, demand, dishonor and nonpayment of this Note, and expressly agrees that this Note, and any payment under it, may be extended and any security may be accepted, released or substituted by the Holder from time without in any way affecting the liability of the Company.

Waiver by the Holder and Amendment. No delay or omission by the Holder to exercise any right or remedy accruing upon any Event of Default shall (a) impair any right or remedy, (b) waive any default or operate as an acquiescence to the Event of Default, or (c) affect any subsequent default of the same or of a different nature. Any provision of this Note may be waived only upon the express written consent of the Holder. Any provision of this Note may be amended or modified only upon the express written consent of the Company and the Holder.

Restrictions on Transfer; Assignment. Neither party will assign this Note or any or its rights, duties or obligations under this Note without first obtaining the written consent of the other party, except that the Holder may assign its rights and obligations to any Affiliate (as defined in the Investment Agreement). This Note may only be transferred in compliance with applicable state and federal laws.

Successors. All rights and obligations of the Company and the Holder shall be binding upon and benefit the successors, assigns, heirs, and administrators of the parties. As used in this Note, the Company includes any corporation, partnership, limited liability company or other entity that succeeds to or assumes the obligations of the Company under this Note. "Holder" means any person who is at the time the registered holder of this Note.

Fees and Expenses; Costs of Collection. All expenses incurred in connection with the preparation and negotiation of this Note, including attorneys' fees, shall be paid by the party incurring such expenses. The Company agrees to reimburse the Holder for all out of pocket expenses of the Holder and, to the extent permitted by applicable law, all reasonable attorney fees and expenses incurred by the Holder in connection with the collection and enforcement of this Note. Such expenses include those related to, but not limited to: (i) the administration and enforcement of this Note; (ii) any waiver or amendment of any provision of this Note; (iii) the exercise or enforcement of any of the rights, powers, or remedies of the Holder under this Note at equity or at law, whether or not suit is filed; (iv) any workout, refinancing, restructuring, or reorganization of the Company, including reasonable attorney's fees incurred by the Holder pursuant to proceedings arising under the Bankruptcy Code or any other applicable federal or state law; and (v) disbursements, appraiser's fees and court costs in the event collection procedures are commenced by the Holder.

Rights and Remedies Cumulative. The rights and remedies of the Holder under this Note and the Investment Agreement and as may otherwise be available at law or in equity are cumulative and concurrent and at the sole discretion of the Holder may be pursued singly, successively or together and exercised as often as the Holder desires.

Governing Law; Venue. The provisions of Section 7.10 of the Investment Agreement shall apply hereto and are incorporated by reference herein.

TRIAL BY JURY. THE COMPANY HEREBY WAIVES AND AGREES THAT THE COMPANY WILL NOT ASSERT IN ANY CAPACITY ANY RIGHT TO TRIAL BY JURY IN ANY FORUM WITH RESPECT TO ANY ISSUE, CLAIM, DEMAND OR ACTION ARISING OUT OF OR BASED UPON THIS NOTE, WHETHER FOUNDED IN CONTRACT, TORT OR OTHERWISE.

Notices. The provisions of Section 7.5 of the Investment Agreement shall apply hereto and are incorporated by reference herein.

Lost or Stolen Note. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Note and, in the case of loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of mutilation, upon surrender and cancellation of this Note, the Company, at its expense, will make and deliver a new Note, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Note.

Treatment of Note. To the extent permitted by generally accepted accounting principles, the Company will treat, account and report the Note as debt and not equity for accounting purposes and with respect to any returns filed with federal, state or local tax authorities.

Severability. If one or more provisions of this Note are held unenforceable under applicable law, the unenforceable provision will be excluded from this Note and the balance of this Note will be interpreted as if such provision were so excluded and will be enforceable in accordance with its terms. The parties to this Note agree to replace any void or unenforceable provision of this Note with a valid and enforceable provision that will achieve, to the extent possible, the economic, business, and other purposes of the void or unenforceable provision.

Heading; References. All headings used herein are used for convenience only and will not be used to construe or interpret this Note. Except where otherwise indicated, all references herein to Sections refer to Sections of this Note.

Entire Agreement. This instrument and the Investment Agreement represents the entire agreement between the parties hereto with respect to this Note and its terms and conditions.

[Signature Page Follows]

IN WITNESS WHEREOF, the Company and the Holder have executed this Note by their duly authorized officers as of the date and year first written above.

Southwall Technologies Inc.

A Delaware corporation

By: _________________________________

Thomas G. Hood,
Chief Executive Officer

[SIGNATURE PAGE TO _____________ NOTE]
EX-99.6 8 exh99-6.htm PLEDGE AGREEMENT

PLEDGE AGREEMENT

THIS PLEDGE AGREEMENT (this "Agreement") dated as of February 20, 2004 (the "Effective Date") is between Southwall Technologies Inc., a Delaware corporation (the "Company") and Needham & Company, Inc., in its capacity as administrative agent of and for the benefit of the Convertible Notes Purchasers (as defined below) (in such capacity, the "Agent").
RECITALS

A. Pursuant to that certain Amended and Restated Investment Agreement, dated the Effective Date (the "Investment Agreement"), by and among the Company, the Agent, and the Convertible Notes Purchasers (as defined in the Investment Agreement), the Convertible Notes Purchasers are purchasing and, subject to the terms and conditions of the Investment Agreement, will purchase certain convertible promissory notes of the Company (the "Notes").

B. The Company has granted a security interest in all of its assets to Pacific Business Funding, a division of the Cupertino National Bank ("Pacific Business Funding").

C. Company now wishes to grant the Agent a security interest in the Collateral (as defined below).

D. Concurrently with the execution and delivery of this Agreement, Pacific Business Funding and the Agent are entering into a Subordination Agreement (as defined below).

E. It is a condition to Convertible Notes Purchasers' purchase of the Notes that the Company execute this Agreement.

NOW, THEREFORE, for and in consideration of any loan, advance or other financial accommodation heretofore or hereafter made to the Company under or in connection with the Investment Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. Definitions. When used herein, (a) capitalized terms which are not otherwise defined have the meanings assigned thereto in the Investment Agreement; and (b) the following terms have the following meanings (such meanings to be applicable to both the singular and plural forms of such terms):

Collateral - see Section 2.

Default means any Event of Default.

Issuer means the issuer of any of the shares of stock or other securities representing all or any of the Collateral.

Liabilities means all obligations (monetary or otherwise) of the Company, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due, which arise out of or in connection with the Investment Agreement, the Notes, this Agreement or any document or instrument executed in connection therewith.

2. Pledge. As security for the payment of all Liabilities, the Company hereby pledges to the Agent for the benefit of the Agent and the Convertible Notes Purchasers, and grants to the Agent for the benefit of the Agent and the Convertible Notes Purchasers, a continuing security interest in, all of the following:

A. All of the shares of stock and other securities described in Schedule I hereto, all of the certificates and/or instruments representing such shares of stock and other securities, and all cash, securities, dividends, rights and other property at any time and from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares or other securities;

B. All additional shares of stock of any of the Issuers listed in Schedule I hereto at any time and from time to time acquired by the Company in any manner, all of the certificates representing such additional shares, and all cash, securities, dividends, rights and other property at any time and from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares; provided, however, that such additional shares of stock shall only be pledged to support the Liabilities such that the total amount of pledged shares of stock represents 65% of the issued equity interests of the Issuers;

C. All other property hereafter delivered to the Agent in substitution for or in addition to any of the foregoing, all certificates and instruments representing or evidencing such property, and all cash, securities, interest, dividends, rights and other property at any time and from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all thereof; and

D. All products and proceeds of all of the foregoing, (collectively, the "Collateral"); provided, however, the Agent and Convertible Notes Purchasers agree that the pledge and the security interest created hereby, and the rights of the Agent and Convertible Notes Purchasers contained herein, are subject and subordinate to each of the liabilities and obligations of the Company to Pacific Business Funding pursuant to the Loan and Security Agreement or either of the Bank Agreements and all renewals, refinancings, extensions and modifications thereof or any similar arrangement which replaces the arrangements with Pacific Business Funding (the "Senior Debt"). The terms of such subordination are set forth in any subordination agreement by and among the Agent, the Convertible Notes Purchasers and the holder of Senior Debt, including but not limited to the Subordination Agreement dated the date hereof by and among Pacific Business Funding, the Agent and the Convertible Note s Purchasers, as such document may be amended, restated, renewed or modified from time to time (the "Subordination Agreement").

Subject to the terms of the Subordination Agreement, the Company agrees to deliver to the Agent, promptly upon receipt and in due form for transfer (i.e., endorsed in blank or accompanied by stock or bond powers executed in blank), any Collateral (other than dividends which the Company is entitled to receive and retain pursuant to Section 5 hereof) which may at any time or from time to time come into the possession or control of the Company; and prior to the delivery thereof to the Agent, such Collateral shall be held by the Company separate and apart from its other property and in express trust for the Agent.

3. Warranties; Further Assurances. The Company warrants to the Agent and each Convertible Notes Purchaser that: (a) the Company is (or at the time of any future delivery, pledge, assignment or transfer thereof will be) the legal and equitable owner of the Collateral free and clear of all liens, security interests and encumbrances of every description whatsoever other than the security interest created hereunder; and liens, security interests and encumbrances created in connection with the Senior Debt; (b) all shares of stock referred to in Schedule I hereto are duly authorized, validly issued, fully paid and non-assessable; (c) as to each Issuer whose name appears in Schedule I hereto, the Collateral represents on the date hereof not less than the applicable percentage (as shown in Schedule I hereto) of the total shares of capital stock issued and outstanding of such Issuer; and (d) the information contained in Schedule I hereto is true and accurate in all respects.

So long as any of the Liabilities shall be outstanding or any commitment shall exist on the part of the Agent or any Convertible Notes Purchaser with respect to the creation of any Liabilities, the Company (i) other than in connection with the Senior Debt, shall not, without the express prior written consent of the Agent, sell, assign, exchange, pledge or otherwise transfer, encumber, or grant any option, warrant or other right to purchase the stock of any Issuer which is pledged hereunder, or otherwise diminish or impair any of its rights in, to or under any of the Collateral; (ii) shall execute such Uniform Commercial Code financing statements and other documents (and pay the costs of filing and recording or re-filing and re-recording the same in all public offices reasonably deemed necessary or appropriate by the Agent) and do such other acts and things, all as the Agent may from time to time reasonably request, to establish and maintain a valid, perfected security interest in the Collateral (free of a ll other liens, claims and rights of third parties whatsoever), other than liens, security interests and encumbrances created in connection with the Senior Debt) to secure the performance and payment of the Liabilities; (iii) will execute and deliver to the Agent such stock powers and similar documents relating to the Collateral, satisfactory in form and substance to the Agent, as the Agent may reasonably request; (iv) will furnish the Agent or any Convertible Notes Purchaser such information concerning the Collateral as the Agent or such Convertible Notes Purchaser may from time to time reasonably request, and will permit the Agent or any Convertible Notes Purchaser or any designee of the Agent or any Convertible Notes Purchaser, from time to time at reasonable times and on reasonable notice (or at any time without notice during the existence of a Default), to inspect, audit and make copies of and extracts from all records and all other papers in the possession of the Company which pertain to the Collateral , and will, upon request of the Agent at any time when a Default has occurred and is continuing, deliver to the Agent all of such records and papers, and (v) other than in connection with the existing pledge to Pacific Business Funding, shall not, without the express prior written consent of the Agent, sell, assign, exchange, pledge or otherwise transfer, encumber, or grant any option, warrant or other right to purchase any portion of the stock of any Issuer which is not pledged pursuant to this Agreement.

4. Holding in Name of Agent, etc. The Agent may from time to time after the occurrence and during the continuance of a Default and subject to the terms of the Subordination Agreement, without notice to the Company, take all or any of the following actions: (a) transfer all or any part of the Collateral into the name of the Agent or any nominee or sub-agent for the Agent, with or without disclosing that such Collateral is subject to the lien and security interest hereunder, (b) appoint one or more sub-agents or nominees for the purpose of retaining physical possession of the Collateral, (c) notify the parties obligated on any of the Collateral to make payment to the Agent of any amounts due or to become due thereunder, (d) endorse any checks, drafts or other writings in the name of the Company to allow collection of the Collateral, (e) enforce collection of any of the Collateral by suit or otherwise, and surrender, release or exchange all or any part thereof, or compromise or re new for any period (whether or not longer than the original period) any obligations of any nature of any party with respect thereto, and (f) take control of any proceeds of the Collateral.

5. Voting Rights, Dividends, etc. (a) Notwithstanding certain provisions of Section 4 hereof, so long as the Agent has not given the notice referred to in paragraph (b) below:

A. The Company shall be entitled to exercise any and all voting or consensual rights and powers and stock purchase or subscription rights (but any such exercise by the Company of stock purchase or subscription rights may be made only from funds of the Company not comprising part of the Collateral) relating or pertaining to the Collateral or any part thereof for any purpose; provided that the Company agrees that it will not exercise any such right or power in any manner which would have a material adverse effect on the value of the Collateral or any part thereof.

B. The Company shall be entitled to receive and retain any and all lawful dividends payable in respect of the Collateral which are paid in cash by any Issuer if such dividends are permitted by the Investment Agreement, but all dividends and distributions in respect of the Collateral or any part thereof made in shares of stock or other property or representing any return of capital, whether resulting from a subdivision, combination or reclassification of Collateral or any part thereof or received in exchange for Collateral or any part thereof or as a result of any merger, consolidation, acquisition or other exchange of assets to which any Issuer may be a party or otherwise or as a result of any exercise of any stock purchase or subscription right, shall be and become part of the Collateral hereunder and, if received by the Company, shall subject to the terms of the Subordination Agreement, be forthwith delivered to the Agent in due form for transfer (i.e., endorsed in blank or accompanie d by stock or bond powers executed in blank) to be held for the purposes of this Agreement.

C. The Agent shall execute and deliver, or cause to be executed and delivered, to the Company all such proxies, powers of attorney, dividend orders and other instruments as the Company may request for the purpose of enabling the Company to exercise the rights and powers which it is entitled to exercise pursuant to clause (A) above and to receive the dividends which it is authorized to retain pursuant to clause (B) above.

(b) Upon notice from the Agent during the existence of a Default, and so long as the same shall be continuing, all rights and powers which the Company is entitled to exercise pursuant to Section 5(a)(A) hereof, and all rights of the Company to receive and retain dividends pursuant to Section 5(a)(B) hereof, shall forthwith cease, and all such rights and powers shall subject to the terms of the Subordination Agreement, thereupon become vested in the Agent which shall have, during the continuance of such Default, the sole and exclusive authority to exercise such rights and powers and to receive such dividends. Any and all money and other property paid over to or received by the Agent pursuant to this paragraph (b) shall be retained by the Agent as additional Collateral hereunder and applied in accordance with the provisions hereof.

6. Remedies. Whenever a Default shall exist, the Agent may, subject to the terms of the Subordination Agreement, exercise from time to time any rights and remedies available to it under the Uniform Commercial Code as in effect or otherwise available to it. Without limiting the foregoing, whenever a Default shall exist the Agent, subject to the terms of the Subordination Agreement, (a) may, to the fullest extent permitted by applicable law, without notice, advertisement, hearing or process of law of any kind, (i) sell any or all of the Collateral, free of all rights and claims of the Company therein and thereto, at any public or private sale or brokers' board and (ii) bid for and purchase any or all of the Collateral at any such public sale and (b) shall have the right, for and in the name, place and stead of the Company, to execute endorsements, assignments, stock powers and other instruments of conveyance or transfer with respect to all or any of the Collateral. The Company h ereby expressly waives, to the fullest extent permitted by applicable law, any and all notices, advertisements, hearings or process of law in connection with the exercise by the Agent of any of its rights and remedies during the continuance of a Default. Any notification of intended disposition of any of the Collateral shall be deemed reasonably and properly given if given at least ten (10) days before such disposition. Any proceeds of any of the Collateral may be applied by the Agent to the payment of expenses in connection with the Collateral, including, without limitation, reasonable attorneys' fees and legal expenses, and any balance of such proceeds may be applied by the Agent toward the payment of such of the Liabilities, and in such order of application, as the Agent may from time to time elect (and, after payment in full of all Liabilities, any excess shall be delivered to the Company or as a court of competent jurisdiction shall direct).

The Agent is hereby authorized to comply with any limitation or restriction in connection with any sale of Collateral as it may be advised by counsel is necessary in order to (a) avoid any violation of applicable law (including, without limitation, compliance with such procedures as may restrict the number of prospective bidders or purchasers and/or further restrict such prospective bidders or purchasers to persons or entities who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale of such Collateral) or (b) obtain any required approval of the sale or of the purchase by any governmental regulatory authority or official, and the Company agrees that such compliance shall not result in such sale being considered or deemed not to have been made in a commercially reasonable manner and that the Agent shall not be liable or accountable to the Company for any discount allowed by reason of the fact that such Collat eral is sold in compliance with any such limitation or restriction.

7. General. The Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if it takes such action for that purpose as the Company shall request in writing, but failure of the Agent to comply with any such request shall not of itself be deemed a failure to exercise reasonable care, and no failure of the Agent to preserve or protect any rights with respect to the Collateral against prior parties, or to do any act with respect to preservation of the Collateral not so requested by the Company, shall be deemed a failure to exercise reasonable care in the custody or preservation of any Collateral.

No delay on the part of the Agent in exercising any right, power or remedy shall operate as a waiver thereof, and no single or partial exercise of any such right, power or remedy shall preclude any other or further exercise thereof, or the exercise of any other right, power or remedy. No amendment, modification or waiver of, or consent with respect to, any provision of this Agreement shall be effective unless the same shall be in writing and signed and delivered by each party to the other party, and then such amendment, modification, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

All obligations of the Company and all rights, powers and remedies of the Agent and the Convertible Notes Purchasers expressed herein are in addition to all other rights, powers and remedies possessed by them, including, without limitation, those provided by applicable law or in any other written instrument or agreement relating to any of the Liabilities or any security therefor.

The provisions of Sections 7.5, 7.10, 7.12 and 7.13 of the Investment Agreement shall be applicable hereto and are incorporated by reference herein.

This Agreement shall be binding upon the Company and the Agent and their respective successors and assigns, and shall inure to the benefit of the Company and the Agent and the successors and assigns of the Agent.

[signature page follows]

IN WITNESS WHEREOF, this Agreement has been duly executed and delivered as of the day and year first written above.

Southwall Technologies Inc.

By: ______________________________________
Name: Thomas G. Hood
Title: Chief Executive Officer

Needham & Company, Inc.,

as Agent

By: ______________________________________
Name: Glen Albanese
Title: Managing Director and Chief Financial Officer

SCHEDULE I

TO PLEDGE AGREEMENT

STOCK

Issuer

Certificate

Nos.

No. of

Pledged

Shares

Pledged Shares

as % of Total

Shares Issued

and Outstanding

Total Shares

of Issuer

Outstanding

Southwall Europe GmBH

_________

65%

100%

EX-99.7 9 exh99-7.htm SECOND AMENDMENT TO FORBEARANCE AGREEMENT SECOND AMENDMENT TO FORBEARANCE AGREEMENT Second AMENDMENT TO FORBEARANCE AGREEMENT

This Second Amendment To Forbearance Agreement ("Amendment") is entered into on this 20th day of February 2004, at Cupertino, California, by and between the following parties: PACIFIC BUSINESS FUNDING, a division of GREATER BAY BANK N.A. (and formerly a division of Cupertino National Bank), ("PBF"), and SOUTHWALL TECHNOLOGIES INC., a Delaware corporation ("STI").

RECITALS

On or about December 18, 2003, PBF and STI entered into a certain written Forbearance Agreement (hereinafter "Forbearance Agreement") with respect to certain extensions of credit described therein. Among other things, the Forbearance Agreement described and was conditioned upon the occurrence of certain events set forth in a written Investment Agreement entered into by STI with Needham & Company and other parties. Said Investment Agreement is referred to in the Forbearance Agreement as the "Investment Agreement."

STI and the other parties to the Investment Agreement have agreed to certain amendments and changes to the Investment Agreement and concurrently with the execution of this Amendment are entering into a written agreement entitled Amended and Restated Investment Agreement (the "Restated Investment Agreement"). STI has requested that PBF to further amend the Forbearance Agreement to reflect the Restated Investment Agreement. On or about January 30, 2004, the parties hereto amended the Forbearance Agreement in writing by that certain written First Amendment To Forbearance Agreement, which among other things deleted the term "Investment Agreement" from the Forbearance Agreement and replaced it with the term "Restated Investment Agreement."

The purpose of this Amendment is to amend the Forbearance Agreement, as previously amended, as PBF deems appropriate in connection with the Restated Investment Agreement.

NOW THEREFORE, IN CONSIDERATION of the foregoing Recitals and the terms and conditions and agreements contained herein, the parties hereby agree as follows:
AGREEMENT

Definitions. Capitalized terms not otherwise defined in this Amendment shall have the meanings set forth in the Forbearance Agreement and the Factoring Documents.

Acknowledgment. STI acknowledges the truth and accuracy of each of the facts and legal relations contained in the Recitals to this Amendment.

Amendments To Forbearance Agreement. The Forbearance Agreement is hereby amended as follows:

Sections 5.4 and 5.5 of the Forbearance Agreement are deleted and replaced with the following:

"5.4 STI shall, on or before February 23, 2004, have closed and received all funds to be delivered to STI pursuant to the "Convertible Debt" investment described in Article II of the Restated Investment Agreement;

5.5 [Intentionally omitted];"

The term "Restated Investment Agreement" as used in the Forbearance Agreement as amended shall mean that certain Amended and Restated Investment Agreement entered into by STI and other parties on or about February 20, 2004.

Section 11.7 is deleted and replaced with the following:

"11.7 An Event of Default under the Restated Investment Agreement or any agreement executed in connection therewith, including without limitation the Convertible Notes (as defined in the Restated Investment Agreement) to be executed and delivered pursuant to Article II of the Restated Investment Agreement."

The following section 11.9 is added to the Forbearance Agreement:

"11.9 Failure of Bank of America, N.A., Portfolio Financial Servicing Company and Lehman Brothers to execute and deliver to PBF a subordination agreement, in a form acceptable to PBF, on or before March 5, 2004 subordinating said parties' security interest and obligations with respect to Southwall to the security interest and obligations of PBF with respect to Southwall.

Terms And Conditions Of Forbearance Agreement. Except as expressly amended in section 3 above, all terms and conditions in the Forbearance Agreement as amended and the Factoring Documents, as the same were expressly amended in the Forbearance Agreement, remain in full force and effect as set forth therein.

Warranty and Release. In connection with this Amendment, STI hereby agrees as follows:

STI warrants and represents that to the extent STI makes any payments hereunder or the under the Forbearance Agreement or Factoring Documents, at the time of each such payment, STI is fully authorized to make such payment.

STI warrants and represents to PBF that to the best of its knowledge or information, it has and has had no claims, causes of action, demands, costs, losses or actions of any nature against PBF, whether the same have been or might have been asserted as a claim, cross-claim, counter-claim or cause of action in any tribunal.

For and in consideration of PBF's agreement set forth herein, STI hereby releases and forever discharges PBF, its affiliates, and their respective officers, directors, employees, shareholders, attorneys, agents and representatives, individually and collectively, from any and all matters arising out of the business relationships which have existed to the date hereof between PBF and STI, including any and all past, present or future claims, actions, causes of action, obligations, costs or demands, known or unknown, whether or not any such claim, action, cause of action, obligation, cost, lost or demand has been, or might have been, asserted as a claim, cross-claim, counter-claim or cause of action in any tribunal.

STI warrants and represents that it has not assigned or transferred or purported to assign or transfer to any other person or entity any claim or matter released herein and that no other person has any interest therein of any nature. In the event that STI shall have assigned or transferred, or purported to assign or transfer, or any other person shall claim an interest in any claim or other matter herein released, then the releasing party or parties shall indemnify PBF and hold it harmless from and against any and all losses, costs, claims or expenses, including but not limited to all costs related to the defense of any action, including reasonable attorneys' fees, based upon or arising out of or incurred as a result of any such claim, assignment or transfer.

STI understands and acknowledges that if any claims or other matters herein released existed, such would be disputed by PBF. No action taken by the parties to this Amendment, or any of them, either previously or in connection with this Amendment shall be deemed or construed to be (a) an admission to the truth or falsity of any claims made; or (b) an acknowledgment or admission by PBF of any fault or liability whatsoever to any other party or to any third party.

STI hereby relinquishes and waives all rights conferred upon it by the provisions of Section 1542 of the California Civil Code (or any like provision of federal or state law), which reads as follows:

A General Release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.

STI hereby acknowledges that it is aware that it or its attorneys might hereafter discover facts different from or in addition to those which it or its attorneys now know or believe to be true with respect to any of the matters herein released, including that no such claims presently exist, and STI agrees that this instrument shall remain in effect as a full and complete release notwithstanding any such different or additional facts.

No Waiver of Default. By entering into this Amendment, PBF waives none of the Defaults or any other default under the Factoring Documents nor its right to collect all obligations currently owing under either the Factoring Documents.

Governing Law. This Amendment shall be interpreted and governed by California law without giving effect to principles of conflicts of law, and the parties agree that the venue for any lawsuit relating to this Amendment, the Forbearance Agreement or the Factoring Documents shall be the State or Federal courts situated in the County of Santa Clara, California. THE PARTIES ACKNOWLEDGE AND AGREE THAT IN ANY SUCH LAWSUIT, THEY EACH WAIVE THE RIGHT TO TRIAL BY JURY AND THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO THE OTHER PARTY TO ENTER INTO THIS AMENDMENT.

Successors. The parties hereto expressly agree and covenant that this Amendment shall inure to the benefit of and be binding upon their respective representatives, successors, trustees and assigns. With the exception of the foregoing, this Amendment is not for the benefit of any other parties apart from PBF and STI.

Entire Agreement. This Amendment contains the entire agreement between the parties pertaining to the subject matter herein, and supersedes any and all prior and/or contemporaneous oral or written negotiations, agreements, representations, and understandings, with respect to such subject matter.

Consent. PBF hereby consents, to the extent such is required by any agreement between STI and PBF, to the (i) amendments to the Investment Agreement effected by the Restated Investment Agreement (ii) Mutual Release and Settlement Agreement dated February _ 2004 by and among STI and Bank of America, N.A., Portfolio Financial Servicing Company and Lehman Brothers and (iii) Second Amendment to Lease (3969-3975 E. Bayshore Road-Building 1) between Judd Properties, LLC and STI, and the transactions contemplated thereby and waives any default that would otherwise result therefrom, and agrees that all references to the Investment Agreement in any agreement between STI and PBF shall be deemed to refer to the Restated Investment Agreement.

Execution in Counterparts. This Amendment may be executed in an original or one or more counterparts, each of which shall constitute a duplicate original.

IN WITNESS WHEREOF, this First Amendment to Forbearance Agreement has been executed as of the date first above written.

PACIFIC BUSINESS FUNDING,

a division of GREATER BAY BANK, N.A.

By:

Its:

SOUTHWALL TECHNOLOGIES INC.,

a Delaware corporation

By:

Its:

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