-----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, NWlPTJ1YtoHmX/t9C0BAz57OIzsjgirJZ5B20ZX9dKt2cEEBQWxCQhMdHPapvE+K ih89h7IuXP7/xShAKnkNvw== 0000950005-98-000872.txt : 19981113 0000950005-98-000872.hdr.sgml : 19981113 ACCESSION NUMBER: 0000950005-98-000872 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980927 FILED AS OF DATE: 19981112 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-15930 FILM NUMBER: 98744377 BUSINESS ADDRESS: STREET 1: 1029 CORPORATION WAY CITY: PALO ALTO STATE: CA ZIP: 94303 BUSINESS PHONE: 4159629111 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the quarterly period ended September 27, 1998 /_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ______ to ________ Commission File Number: 0-15930 SOUTHWALL TECHNOLOGIES INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 94-2551470 ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1029 Corporation Way, Palo Alto, California 94303 ------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (650) 962-9111 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- As of September 27, 1998 there were 7,705,965 shares of the Registrant's Common Stock outstanding. This report, including all attachments, contains 13 pages. SOUTHWALL TECHNOLOGIES INC. INDEX PART 1 FINANCIAL INFORMATION Page Number ------ Item 1 Financial Statements: Consolidated Balance Sheets - September 27, 1998 and December 31, 1997.............................................. 3 Consolidated Statements of Operations - three month and nine month periods ended September 27,1998 and September 28, 1997............................4 Consolidated Statements of Cash Flows - nine months ended September 27, 1998 and September 28,1997...............................................5 Notes to Consolidated Financial Statements..........................6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations....................8 PART II OTHER INFORMATION Item 1 Legal Proceedings and Other Matters................................12 Item 2 Changes in Securities..............................................12 Item 3 Defaults Upon Senior Securities....................................12 Item 4 Submission of Matters to a Vote of Stockholders....................12 Item 5 Other Information..................................................12 Item 6 Exhibits and Reports on Form 8-K...................................12 Signatures.........................................................13 2 PART 1 FINANCIAL INFORMATION Item 1 Financial Statements - ---------------------------- SOUTHWALL TECHNOLOGIES INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) Sept. 27, Dec. 31, 1998 1997 ---- ---- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 7,757 $10,524 Short-term investments 7 7 Accounts receivable, net of allowance for doubtful accounts of $1,169 and $834 12,236 11,926 Inventories 8,046 10,118 Other current assets 1,025 1,118 ------ ------ Total current assets 29,071 33,693 Property and equipment, net 26,658 26,272 Other assets 1,460 1,504 ------ ------ Total assets $57,189 $61,469 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,230 $ 4,835 Accrued compensation 2,233 2,009 Other accrued liabilities 1,820 1,546 Current portion of long-term debt 1,502 1,304 ------ ------ Total current liabilities 9,785 9,694 Long-term debt 14,582 15,539 Deferred income taxes 496 496 ------ ------ Total liabilities 24,863 25,729 ------ ------ Commitments (Note 4) Stockholders' equity: Common stock, $.001 par value, 20,000 shares authorized; Issued and outstanding: 7,861 and 7,636 8 8 Capital in excess of par value 51,925 51,513 Notes receivable (1,028) (656) Accumulated deficit (17,802) (14,631) Less cost of Treasury stock, 155 and 123 shares outstanding (777) (494) Total stockholders' equity 32,326 35,740 ------ ------ Total liabilities and stockholders' equity $57,189 $61,469 ====== ====== See accompanying notes to consolidated financial statements. 3 SOUTHWALL TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited) Three Months Ended Nine Months Ended ------------------ ----------------- Sept. 27 Sept. 28 Sept. 27 Sept. 28 1998 1997 1998 1997 ---- ---- ---- ---- Net revenues $14,011 $12,083 $38,484 $34,622 ------ ------ ------ ------ Costs and expenses: Cost of sales 10,056 8,289 31,293 22,878 Tempe start up costs - 528 - 1,076 Research and development 928 794 2,901 2,228 Selling, general and administrative 2,260 2,300 6,932 6,845 ----- ----- ------ ------ Total costs and expenses 13,244 11,911 41,126 33,027 ------ ------ ------ ------ Income (loss) from operations 767 172 (2,642) 1,595 Interest income (expense),net (202) 57 (492) 72 ------ ------ ------ ------ Income (loss) before income taxes 565 229 (3,134) 1,667 Provision for income taxes 13 19 37 89 ------ ------ ------ ------ Net income (loss) $ 552 $ 210 $(3,171) $ 1,578 ====== ====== ======= ====== Net income (loss) per share: Basic $ .07 $ 0.03 $ (0.41) $ 0.23 Diluted $ .07 $ 0.03 $ (0.41) $ 0.21 Weighted average shares of common stock and common stock equivalents: Basic 7,761 7,380 7,664 6,989 Diluted 7,964 8,039 7,664 7,671 See accompanying notes to consolidated financial statements. 4 SOUTHWALL TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) Nine Months Ended -------------------- Sept. 27, Sept. 28, 1998 1997 ---- ---- Cash flows from operating activities: Net income (loss) $(3,171) $1,578 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 3,142 1,892 (Increase) in accounts receivable (310) (2,859) Decrease (increase) in inventories 2,072 (2,051) Decrease (increase) in other current assets 93 (208) (Decrease) increase in accounts payable and accrued liabilities (14) 2,119 ------- ------ Cash provided by operating activities 1,812 471 ------- ------ Cash flows from investing activities: Expenditures for property and equipment and other assets (3,484) (9,251) Net cash used in investing activities (3,484) (9,251) Cash flows from financing activities: Increase in (reduction of) long-term debt (759) 4,110 (Issuance) of stock option loans, net (372) (83) Sale of common stock, net 352 4,931 Issuance (repurchase) of treasury stock, net (316) 520 ------- ------ Net cash (used in) provided by financing activities (1,095) 9,478 ------- ------ Net increase (decrease) in cash and cash equivalents (2,767) 698 Cash and cash equivalents, beginning of year 10,524 7,419 ------- ------ Cash and cash equivalents, end of period $ 7,757 $8,117 ======= ====== Supplemental schedule of non-cash investing and financing activities: Treasury stock used for payment of interest $ 93 $ 93 See accompanying notes to consolidated financial statements. 5 SOUTHWALL TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) (Unaudited) Note 1 - Interim Period Reporting: While the information presented in the accompanying consolidated financial statements is unaudited, it includes all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the Company's financial position and results of operations, and changes in financial position as of the dates and for the periods indicated. Certain information and footnote disclosures normally contained in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements contained in the Company's Form 10-K for the year ended December 31, 1997. The results of operations for the interim periods presented are not necessarily indicative of the operating results of the full year. Note 2 - Inventories: Inventories are stated at the lower of cost (determined by the first-in, first-out method) or market. Inventories consisted of the following: September 27, 1998 December 31, 1997 ------------------ ----------------- Raw materials $3,753 $4,502 Work-in-process 2,547 2,551 Finished goods 1,746 3,065 ----- ------ Total $8,046 $10,118 ===== ====== Note 3 - Net Income (Loss) per Share Basic net income (loss) per share is computed by dividing income available to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator) for the period. Diluted net income (loss) per share gives effect to all dilutive potential common shares outstanding during the period. The computation of diluted earnings per share uses the average market prices during the period. 6 During each of the periods presented there were no differences between the numerators used for the calculation of basic and diluted net income (loss) per share. The total amount of the difference in the basic and diluted weighted average shares of common stock and common stock equivalents in the periods where there is net income is attributable to the effect of diluted stock options. In net loss periods, the basic and diluted weighted average shares of common stock and common stock equivalents are the same because inclusion of stock options would be antidilutive. Note 4 - Commitments During 1996, the Company entered into an addendum to a previous supply agreement with a major customer for the sale of the Company's anti-reflective film. Beginning July 1, 1997, the Company is committed to supply and the customer is committed to purchase fixed volumes thereafter until December 31, 2000. Should either the Company fail to supply or the customer fail to purchase the specified quantities, a penalty, based on the sales price to the customer from the prior period, must be paid to the other. In order to meet the supply commitment, the Company opened a new manufacturing facility, initially dedicated to the production of anti-reflective film. Note 5 - Line of Credit Agreement The Company has secured a $6 million revolving line of credit which was extended during the second quarter of 1998 and now expires in June 1999. This line of credit may be extended further for additional one-year terms with the bank's approval. The amount of borrowings is based upon a percentage of accounts receivable, which at September 27, 1998, did not limit available borrowing under the line. The line is secured by certain assets of the Company and bears interest at an annual rate of prime plus .5%. Under the terms of the agreement, the Company is required to maintain certain financial ratios. As of September 27, 1998, there were no borrowings under this line of credit. Note 6 - Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 (FAS 131) "Disclosures about Segments of an Enterprise and Related Information." FAS 131 revises information regarding the reporting of certain operating segments for periods beginning after December 15, 1997. The Statement also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company will adopt FAS 131 in its 1998 annual report. The Company has not yet determined the impact, if any, of adopting this new standard. 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Except for the historical information contained herein, the matters discussed in this Form 10-Q Report are forward-looking statements that involve risks and uncertainties, including those discussed below and in the Company's Annual Report on Form 10-K. Actual results may differ materially from those projected. These forward-looking statements represent the Company's judgment as of the date of the filing of this Form 10-Q Report. The Company disclaims, however, any intent or obligation to update these forward-looking statements. General The Company has experienced significant fluctuations in quarterly results of operations. Revenues have varied from quarter to quarter due to the seasonal buying patterns for the Company's Heat Mirror(TM) products, which typically have been strongest in the second and third quarters. Additionally, sales of these energy conservation products are significantly influenced by the residential and commercial construction industries, and reduction in construction has generally resulted in a reduction in the sales of the Company's Heat Mirror(TM) products. In addition, operating results have historically varied from quarter to quarter as a function of the utilization of the Company's production machines and the start up of manufacturing operations in Tempe, Arizona. Manufacturing inefficiencies have resulted from the development and introduction of new products and the changing mix of products manufactured. Primarily as a result of these factors and in view of the Company's strategy of developing additional applications for its thin-film technology, and its ongoing practice of upgrading its manufacturing processes, the Company may continue to experience quarterly fluctuations in its results of operations. The Company is committed to increasing revenues by expanding capacity, and introducing new applications and technologies. Although the Company has recently completed a major expansion of its capacity and is seeking to further expand existing applications, to develop new applications and to continue to expand international marketing and sales efforts, there can be no assurance that the Company will be able to continue to increase revenues. The Company has ordered a new production machine, PM6, in July 1998 at an approximate cost of $5.7 million plus installation and leasehold improvement costs to accommodate the system. The Company believes that the additional capacity will allow continued growth in its Heat Mirror XIR(R) films sold to OEM automotive glass manufacturers as well as to after market automotive and architectural customers. 8 Year 2000 In October 1996 the Company began reviewing year 2000 issues, prepared a plan to address those issues and began systematically modifying, upgrading or replacing software as necessary and then testing and implementing those changes. The Company has completed major upgrades and modifications, which have made essentially all mainframe accounting and inventory control software year 2000 compliant. All systems not yet compliant are scheduled to be made compliant by December 31, 1998. All projects relating to the year 2000 issue have been handled with existing staff, and the total expense is not expected to be material to the Company. The year 2000 problem creates risk for the Company should any unforeseen problems arise, both in its own systems and those of key customers and suppliers. The greatest risk within the Company is related to custom data base software. Currently, the Company is discussing with key customers and suppliers their plans to address year 2000 issues during 1998, but management has not yet assessed this related potential effect on the Company's earnings, if any. Nine Months Ended September 27, 1998 and September 28, 1997 Net revenues increased $3.9 million (or 11%) to $38.5 million for the first nine months of 1998, compared to $34.6 million for the similar period of 1997. The sales increase was attributable primarily to increases of $5.5 million in Heat Mirror XIR(R) film used principally by OEM automotive glass manufacturers and a $0.7 million increase in anti-reflective film which was partially offset by decreases of $0.9 million due to discontinued sales of after market CRT glass filters and $0.7 million of Solar Control products compared to the same period last year. The balance of the decrease, net, relates to several products. Cost of sales for the first nine months of 1998 was 81% of net revenues, compared to 69% for the similar period of 1997. The increase in cost of sales, as a percentage of net revenues, for 1998 from 1997 was due to process and mechanical problems in the first quarter of 1998, primarily at the Company's new Tempe, Arizona facility. The problems resulted in low yields on anti-reflective film for computer monitors. Production yields on the Company's Heat Mirror XIR(R) automotive film produced in the Palo Alto, California facility were also lower than in the same period last year, requiring additional machine time and increased material to meet customer demands. Additionally, the Company experienced slightly higher overhead costs in the first nine months of 1998 due to the renovation of an existing production machine, PM2, to increase capacity for Heat Mirror(TM) products. Research and development expenses, as a percent of net revenues, were 8% for the first nine months of 1998, compared to 6% for the similar period in 1997. The absolute dollars increased $0.7 million 9 to $2.9 million in 1998 from $2.2 million in 1997. The increase in 1998 is attributable to higher new product development costs, primarily for products in the electronic display market and, to a lessor extent, the development and testing of new deposition technology. Selling, general and administrative expense decreased to 18% of net revenues in the first nine months of 1998 from 20% for the similar period in 1997. The absolute dollars increased $0.1 million to $6.9 million in 1998 from $6.8 million in 1997. The increase in absolute dollars was due primarily to severance payments associated with the realignment of organizations and additional staffing associated with the reorganizations. Net interest expense increased for the first nine months of 1998 to $492,000 from $72,000 net interest income in the first nine months of 1997 due primarily to interest incurred on long-term debt for capacity expansion improvements. Three Months Ended September 27, 1998 and September 28, 1997 Net revenues increased to $14.0 million for the third quarter of 1998, compared to $12.1 million for the similar period of 1997. The increase was due primarily to a $2.5 million increase in sales of Heat Mirror XIR(R) film partially offset by a decrease of $0.5 million due to discontinued sales of after market CRT glass filters compared to the same period last year. Cost of sales for the third quarter of 1998 was 72% of net revenues, compared to 73% for the similar quarter of 1997. The decrease of one percent in cost of sales was due to process efficiency improvements, primarily in anti-reflective products in Tempe, Arizona. Research and development expenses, as a percent of net revenues, were 7% for the third quarters of 1998 and 1997. The absolute dollars increased to $0.9 million in 1998 from $0.8 million in 1997. The increased expenses were primarily attributable to higher new product development costs associated with film for electronic display products and the development and testing of new deposition technology. Selling, general and administrative expense was 16% of net revenues in the third quarter of 1998 compared to 19% for the similar period in 1997. The absolute dollars remained constant at $2.3 million in both 1998 and 1997. Net interest expense increased to $0.2 million in the third quarter of 1998 from interest income of $0.1 million in the similar period in 1997 due to interest costs on long-term debt. Long-term debt was higher by approximately $3.9 million at September 27, 1998 compared to September 28, 1997, due to borrowing for capital expansion. 10 Liquidity and Capital Resources At September 27, 1998, the Company's net working capital was $19.3 million compared to $24.0 million at December 31, 1997. From December 31, 1997, to September 27, 1998, cash and short-term investments decreased by $2.8 million. Major uses of cash were to fund the net loss of $3.2 million for the first nine months of 1998, which was offset by $3.1 million of depreciation and amortization. Capital expenditures were $3.5 million and payments on long-term debt were $0.8 million for the first nine months of 1998. The major source of cash was a reduction of $2.1 million in inventories for the first nine months of 1998. Additions to property and equipment were approximately $1.0 million during the third quarter of 1998, including $0.6 million for the initial payment on the newly ordered PM6 production machine to be installed in the Tempe, Arizona facility. The Company anticipates total capital expenditures of approximately $6.5 million during 1998 for improvements in Tempe for PM6, general replacements and discretionary improvements of current facilities, and further renovation of current production equipment. At September 27, 1998, the Company had $7.8 million of cash and short-term investments. Additionally, in June 1998, the Company extended a $6 million revolving line of credit that expires in June 1999. The Company has no current borrowings under this line of credit. While the Company believes that it currently has sufficient funds to finance its operations through at least the remainder of 1998, to the extent that such funds are insufficient to fund the Company's activities, including the potential major expansion projects discussed above, the Company may need to raise additional funds through public or private equity or debt financing from other sources. The sale of additional equity or convertible debt may result in additional dilution to the Company's stockholders and such securities may have rights, preferences or privileges senior to those of the Common Stock. There can be no assurance that additional equity or debt financing will be available or that if available it can be obtained on terms favorable to the Company or its stockholders. 11 PART II OTHER INFORMATION Item 1 Legal Proceedings and Other Matters The Company has been named a defendant in a lawsuit filed on April 5, 1996 by one of its customers in the United States District Court for the Eastern District of New York. The lawsuit in federal court alleges certain contractual violations by the Company and seeks relief in an aggregate amount in excess of $35 million. The Company believes that this lawsuit is without merit and intends to defend against it vigorously. In addition, the Company is involved in certain other legal actions arising in the ordinary course of business. The Company believes, however, that none of these actions, either individually or in the aggregate, will have a material adverse effect on the Company's business or its consolidated financial position or results of operations. Item 2 Changes in Securities Not applicable Item 3 Defaults upon Senior Securities Not applicable Item 4 Submission of Matters to a Vote of Stockholders No matters were submitted to a vote of security holders during the quarter ended September 27, 1998. Item 5 Other Information Not applicable Item 6 Exhibits and Reports on Form 8-K (a) Exhibits - None (b) Reports on Form 8-K - None 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 12, 1998 Southwall Technologies Inc. By:/s/Thomas G. Hood ----------------- Thomas G. Hood, President and Chief Executive Officer By:/s/Bill R. Finley ----------------- Bill R. Finley, Vice President and Chief Financial Officer EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 SEP-27-1998 7,757 7 13,405 (1,169) 8,046 29,071 52,619 (25,961) 57,189 9,785 0 0 0 8 32,318 57,189 13,906 14,011 10,056 13,244 0 0 (202) 565 13 552 0 0 0 552 .07 .07
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