-----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, GAiZ2WKJfsl7iePqOZSIZxGn5M0nPRLH+7i63GoQbXpsoGzfsx+NrvoosHVmDzBH 5kvf/Y3nvHjtEHp6gzBfkw== 0000950005-99-001020.txt : 19991118 0000950005-99-001020.hdr.sgml : 19991118 ACCESSION NUMBER: 0000950005-99-001020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991003 FILED AS OF DATE: 19991117 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: 99759810 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 October 3, 1999 --------------- /_/ 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 October 3, 1999 there were 7,476,044 shares of the Registrant's Common Stock outstanding. 1 SOUTHWALL TECHNOLOGIES INC. INDEX Page Number ----------- PART I FINANCIAL INFORMATION Item 1 Financial Statements: Consolidated Balance Sheets - October 3, 1999 and December 31, 1998.......................................3 Consolidated Statements of Operations - Three months and nine months ended October 3, 1999 and September 27, 1998................4 Consolidated Statements of Cash Flows - Nine months ended October 3, 1999 and September 27, 1998......................................5 Notes to Consolidated Financial Statements..................6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations............7 Item 3 Quantitative and Qualitative Disclosures about Market Risk................................................12 PART II OTHER INFORMATION Item 1 Legal Proceedings and Other Matters........................13 Item 2 Changes in Securities......................................13 Item 3 Defaults Upon Senior Securities............................13 Item 4 Submission of Matters to a Vote of Stockholders............13 Item 5 Other Information..........................................13 Item 6 Exhibits and Reports on Form 8-K...........................13 Signatures.................................................14 2 PART I FINANCIAL INFORMATION Item 1 - Financial Statements: SOUTHWALL TECHNOLOGIES INC. CONSOLIDATED BALANCE SHEETS (in thousands) (Unaudited) ASSETS October 3, 1999 December 31, 1998 --------------- ----------------- Current assets: Cash and cash equivalents $ 297 $ 4,136 Short-term investments -- 7 Accounts receivable, net of allowance for doubtful accounts of $853 and $845 11,722 12,355 Inventories 6,461 6,057 Other current assets 1,465 813 -------- -------- Total current assets 19,945 23,368 Property and equipment, net 43,214 29,068 Other assets 4,226 1,583 -------- -------- Total assets $ 67,385 $ 54,019 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank credit line $ 5,118 $ -- Accounts payable 8,687 6,307 Accrued compensation 2,599 2,265 Other accrued liabilities 1,958 3,655 Current portion of long-term debt 2,661 15,397 -------- -------- Total current liabilities 21,023 27,624 Long-term debt 20,204 141 Deferred income taxes 437 437 -------- -------- Total liabilities 41,664 28,202 -------- -------- Commitments Stockholders' equity: Common stock, $.001 par value, 20,000 shares authorized: Issued and outstanding: 7,889 and 7,889 8 8 Capital in excess of par value 51,866 52,181 Notes receivable (930) (1,020) Accumulated deficit (23,125) (22,500) Less cost of treasury stock, 413 and 565 shares (2,098) (2,852) -------- -------- Total stockholders' equity 25,721 25,817 -------- -------- Total liabilities and stockholders' equity $ 67,385 $ 54,019 ======== ======== 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 -------------------- -------------------- Oct. 3, Sep. 27, Oct. 3, Sep. 27, ------- -------- ------- -------- 1999 1998 1999 1998 -------- -------- -------- -------- Net revenues $ 15,195 $ 14,011 $ 39,580 $ 38,484 -------- -------- -------- -------- Costs and expenses: Cost of sales 10,897 10,056 29,218 31,293 Research and development 1,388 928 3,914 2,901 Selling, general and administrative 2,031 2,260 5,967 6,932 -------- -------- -------- -------- Total costs and expenses 14,316 13,244 39,099 41,126 -------- -------- -------- -------- Income (loss) from operations 879 767 481 (2,642) Interest expense, net (505) (202) (1,067) (492) -------- -------- -------- -------- Income (loss) before income taxes 374 565 (586) (3,134) Provision for income taxes 14 13 39 37 -------- -------- -------- -------- Net income (loss) $ 360 $ 552 $ (625) $ (3,171) ======== ======== ======== ======== Net income (loss) per share - Basic $ .05 $ .07 $ (.08) $ (.41) ======== ======== ======== ======== - Diluted $ .05 $ .07 $ (.08) $ (.41) ======== ======== ======== ======== Weighted average shares of common stock and common stock equivalents - Basic 7,464 7,761 7,387 7,664 - Diluted 7,630 7,964 7,387 7,664 See accompanying notes to consolidated financial statements.
4 SOUTHWALL TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Nine Months Ended ----------------- Oct. 3, 1999 Sep. 27, 1998 ------------ ------------- Cash flows from operating activities: Net loss $ (625) $ (3,171) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 3,680 3,142 Decrease (increase) in accounts receivable 633 (310) Decrease (increase) in inventories (404) 2,072 Decrease (increase) in other current assets (652) 93 (Decrease) increase in accounts payable and accrued liabilities 1,109 (14) -------- -------- Cash provided by operating activities 3,741 1,812 -------- -------- Cash flows from investing activities: Decrease in short-term investments 7 -- Expenditures for property and equipment and other assets (20,469) (3,484) -------- -------- Net cash used in investing activities (20,462) (3,484) -------- -------- Cash flows from financing activities: Increase (decrease) in long-term debt 7,327 (759) Bank line of credit borrowings 5,118 -- Issuance (purchase) of treasury stock, net 340 (316) Sale of common stock, net -- 352 Repayment (issuance) of stock option loans, net 90 (372) -------- -------- Net cash provided (used) by financing activities 12,875 (1,095) -------- -------- Net decrease in cash and cash equivalents (3,846) (2,767) Cash and cash equivalents, beginning of year 4,143 10,524 -------- -------- Cash and cash equivalents, end of period $ 297 $ 7,757 ======== ======== 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, 1998. The results of operations for the interim periods presented are not necessarily indicative of the operating results for 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: October 3, 1999 December 31, 1998 --------------- ----------------- Raw materials $3,638 $2,314 Work-in-process 832 2,155 Finished goods 1,991 1,588 ------ ------ Total $6,461 $6,057 ====== ====== Note 3 - 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 in July 1997, the Company was committed to supply and the customer was committed to purchase fixed volumes thereafter until December 31, 2000. During the second quarter of 1999 the Company and its customer modified certain terms and conditions of the supply agreement. The modifications significantly reduced the amount of product the Company is committed to supply and the customer is committed to purchase through December 31, 1999. The modified agreement also eliminated any penalties for failure to supply or purchase minimum quantities. Note 4 - Line of Credit Agreement: The Company has secured a $7.0 million revolving line of credit with a bank which expires in June 2000. This line of credit may be extended for additional one-year terms with the bank's approval. The amount of borrowings is based upon a percentage of accounts receivable, which at October 3, 1999, 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 11.00%. As of October 3, 1999, $5.1 million was borrowed under this line of credit. Note 5 - 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 6 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. During each of the periods presented there were no differences between the numerators used for 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 dilutive 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 anti-dilutive. Stock options aggregating 1,523 thousand and 1,537 thousand shares at October 3, 1999 and September 27, 1998, respectively, were not included in the computations of net loss for those nine month periods because the effect on the calculations would be anti-dilutive. 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, and the timing of short-term sales contracts. Additionally, sales of the Company's 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. Historically, operating results have varied from quarter to quarter as a function of the utilization of the Company's production machines. In 1998, and in the first quarter of 1999, operating results were affected by process and machine problems resulting in quality issues associated with the anti-reflective film product manufactured in Tempe, Arizona. The development and introduction of new products and the changing mix of products manufactured have added to the production problems and inefficiencies experienced by the Company. 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. Although the Company has not experienced a significant amount of inventory obsolescence and believes that the cost of its inventory is recoverable, obsolescence of the Company's products could be affected by technological change, competition, loss of customers and reduction in demand, among other factors. The Company believes that it must continue to increase revenues and improve manufacturing processes and yields to achieve sustained profitability. Although the Company expanded its capacity by opening a new manufacturing facility in 1997 in Tempe, Arizona and entered into a purchase agreement in 1998 for a new production machine currently being installed in Tempe 7 and expected to be operational by the first quarter of 2000, and is continually seeking to expand existing applications, to develop new applications and to expand international marketing and sales efforts, there can be no assurance that the Company will be successful in these efforts and continue to increase revenues. Year 2000 readiness The Company believes the Year 2000 issue represents a material risk to the Company. The Year 2000 issue involves the potential inability of information or other data dependent systems to properly distinguish year references at the turn of the century and certain other dates. The Company itself is heavily dependent upon the proper functioning of its own computer systems, including (1) computers and related software for its financial and manufacturing information systems, (2) computers, programmable logic controllers and other data dependent equipment in its manufacturing processes, and (3) computers, scientific equipment and related software for its engineering, research and development activities. Any failure or malfunctioning on the part of these or other systems could cause disruptions of operations, including a temporary inability to process financial transactions, manufacture products or engage in ordinary business activities in ways that are not currently known, discernible, quantifiable or otherwise anticipated by the Company. In October 1996 the Company began reviewing Year 2000 issues and prepared a plan (the "Plan") to address those issues. The Plan consists of several phases. The first phase is the inventory and prioritization of potential Year 2000 items, and the assessment of Year 2000 compliance. The second phase is the remediation of any noted problems. The third phase is the testing of material items, and the fourth phase is the preparation of contingency plans. All phases of the Plan have been addressed with existing staff and the Company believes the costs to address Year 2000 issues will not be significant. The Company is currently developing contingency plans which will continue to be reviewed and revised through the end of the year to ensure all reasonable scenarios have been accounted for and alternate methods of resolution are addressed. For the Company's most significant IT and non-IT systems (defined below), the first, second and third phases have been completed. The fourth phase, contingency planning, has been underway for several months and will continue to be reviewed and revised through the end of 1999. The Company has completed major upgrades and modifications, which have made essentially all mainframe accounting and inventory control software Year 2000 compliant. The scope of the Year 2000 compliance effort includes (1) information technology ("IT") such as software and hardware; (2) non-IT systems or embedded technology such as micro-controllers contained in various manufacturing and laboratory equipment, environmental and safety systems, facilities and utilities; and (3) the readiness of key third parties, including suppliers and customers, and the electronic data interchange (EDI) with those key third parties. 8 The Company's suppliers (particularly sole-source and long lead-time suppliers) and key customers may be adversely affected by their respective failures to address the Year 2000 issue. If the Company's suppliers are unable to provide goods or services, the Company's operations could be materially adversely affected. Key customers that encounter Year 2000 difficulties could fail to order or take delivery of the Company's products, or could fail to make or delay payments to the Company. Such failure or delay could have a material adverse effect on the Company's business and results of operations. While some of these risks are outside the control of the Company, the Plan includes a requirement to communicate with suppliers and customers to ascertain the state of their Year 2000 compliance program. The Company has received notification from most of its major suppliers regarding their Year 2000 compliance and readiness. Communications are underway with the Company's customers to avoid an interruption in orders caused by a customer's failure to plan for potential Year 2000 complications. The Company's products are not affected by calendar dating. Therefore, there is no known or anticipated Year 2000 impact on its product offerings. The Company believes its Year 2000 Plan will significantly reduce the probability of significant interruptions of normal operations resulting from Year 2000 issues. All reasonable effort has been taken to identify, assess and correct all Year 2000 issues. The Company is attempting in the continued review and revision of its contingency plans to mitigate any problems that may be experienced by its key suppliers to protect the Company from any potential problems that may occur from the inadequacy of a supplier's Year 2000 program. It is still possible however, that Year 2000 issues could have an adverse impact on the Company's results of operations, and interruption in normal business operations, or an adverse impact on the Company's relationships with customers, suppliers, or others. Nine Months Ended October 3, 1999 and September 27, 1998 Net revenues increased $1.1 million to $39.6 million for the first nine months of 1999, compared to $38.5 million for the similar period in 1998. The increase was attributable primarily to an increase of $6.4 million in sales of film used principally by OEM automotive glass manufacturers, compared to the same period last year, partially offset by a $5.3 million decrease in sales of anti-reflective film for use on CRT terminals. The decrease of anti-reflective film sales was primarily due to minimal production in the Tempe plant during the first quarter of 1999 which was the result of the re-certification of production processes for anti-reflective film provided to a major customer. Additionally, the supply agreement with this customer was modified during the second quarter of 1999 which resulted in reduced quantities of anti-reflective film the Company was committed to supply and the customer was committed to purchase in the second and third quarters of 1999. Cost of sales for the first nine months of 1999 was 74% of net revenues, compared to 81% for the similar period of 1998. The decrease in cost of sales as a percentage of net revenues for 1999 from 1998 was due primarily to a shift in product mix. Sales of the higher margin automotive film increased significantly while sales of the lower margin anti-reflective film decreased significantly. Additionally, margins on the automotive film have increased in 1999 over 1998 due to improvements in production yields and throughput in 1999. Research and development expenses, as a percent of net revenues, were 10% for the first nine months of 1999, compared to 8% for the similar period in 1998. The absolute dollars increased $1.0 million to $3.9 million in 1999 from $2.9 million in 1998. The increase in research and development expenses in 1999 was attributable to an increase in personnel involved in the development of new 9 deposition technologies resulting in the introduction of new anti-reflective products and the installation of a new production machine in Tempe, Arizona. Selling, general and administrative expense, as a percent of net revenues, decreased to 15% in the first nine months of 1999, from 18% for the similar period in 1998. The absolute dollars decreased $0.9 million to $6.0 million in 1999 from $6.9 million in 1998. The decrease in absolute dollars was due primarily to a reduction in staffing and the absence of severance payments associated with the realignment of organizations that occurred in the first nine months of 1998. Net interest expense increased for the first nine months of 1999 to $1.1 million from $0.5 million in the similar period of 1998 due to an increase in the use of the Company's line of credit with a bank and an increase in long term debt borrowing. As a result of the factors discussed above, the Company reported a net loss of $0.6 million for the first nine months of 1999, compared to a net loss of $3.2 million in the similar period of 1998. Three Months Ended October 3, 1999 and September 27, 1998 Net revenues increased $1.2 million to $15.2 million for the third quarter of 1999, compared to $14.0 million for the similar period of 1998. The increase was primarily attributable to an increase of $1.7 million in sales of silver film and $1.0 million in sales of automotive film partially offset by a decrease in sales of anti-reflective film of $0.9 million and a decrease of $0.6 million in sales of various other products. The decrease in anti-reflective film sales in the third quarter of 1999 was primarily due to the modification of a supply agreement with a major customer which reduced the quantities of film the Company was committed to supply and the customer was committed to purchase during the quarter. Cost of sales for the third quarter of 1999 was 72% of net revenues, compared to 72% for the similar period of 1998. Cost of sales as a percentage of net sales remained flat during the quarter due to an increase in sales of higher margin silver and automotive products which were offset by higher cost of sales for the introduction of new anti-reflective products and the phasing out of an anti-reflective product sold to a single customer. Research and development expenses, as a percent of net sales, were 9% of net revenues for the third quarter of 1999, compared to 7% for the similar period in 1998. The absolute dollars increased to $1.4 million in the third quarter of 1999 from $0.9 million in the comparable period of 1998. The increase in 1999 is attributable to additional personnel required to support the development of new products, primarily the development of products for the anti-reflective film market, and the installation of a new production machine in Tempe, Arizona. Selling, general and administrative expense, as a percent of net sales, was 13% of net revenues in the third quarter of 1999, compared to 16% for the similar period in 1998. The absolute dollars decreased to $2.0 million in 1999 from $2.3 million in 1998. The decrease in absolute dollars was primarily due to a decrease in personnel in 1999 and reorganization severance payments that were paid in 1998 as a result of combining the Company's two divisions in 1998. Net interest expense increased to $0.5 million for the third quarter of 1999 compared to $0.2 million for the similar period of 1998 due to an increase in the use of the Company's credit line with a bank and an increase in long term debt borrowing. 10 As a result of the factors discussed above, the Company reported net income of $0.4 million for the third quarter of 1999, compared to net income of $0.6 million for the similar period in 1998. Liquidity and Capital Resources From December 31, 1998 to October 3, 1999, cash and short-term investments decreased by $3.8 million. The decrease in cash was due to $20.5 million in expenditures for property and equipment partially offset by $12.9 million of cash provided by financing activities and $3.8 million of cash provided by operating activities. Major components of the $20.5 million in capital expenditures made during the first nine months of 1999 includes $8.5 million for the Company's new manufacturing facility located in Dresden, Germany, which the Company anticipates will begin to produce automotive film products in mid-2000, $5.5 million for two new production machines for the Company's Tempe, Arizona facility and $1.3 million for the conversion of an older, large-scale production machine located in Palo Alto, California to produce advanced anti-reflective film products. Major components of the $12.9 million of cash provided by financing activities include long-term and short-term borrowings totaling $10.9 million and $5.1 million respectively, partially offset by a one-time $2.7 million payment to retire the Company's Convertible Subordinated Note that became due and payable May 31, 1999. The $3.8 million in cash provided by operating activities resulted primarily from depreciation and amortization of $3.7 million and from an increase in accounts payable and accrued liabilities of $1.1 million partially offset by a decrease of $0.4 million in accounts receivable, inventory and other current assets and the Company's net loss of $0.6 million for the first nine months of 1999. At October 3, 1999, the Company had $0.3 million of cash and short-term investments. The Company also has a bank line of credit for $7.0 million under which the Company had $5.1 million in outstanding borrowings. Additionally, the Company has term loans of $5.0 million and $10.0 million, which are subject to certain financial covenants, and a new lease financing agreement for $3.0 million, which is also subject to certain financial covenants. During the first nine months of 1999 the Company was in violation of some of the covenants pertaining to each of the term loans and classified each as short-term debt during the first and second quarters of 1999. In May 1999, the covenants pertaining to the $5.0 million term loan were amended through December 31, 1999 and in August 1999, the covenants pertaining to the $10.0 million term loan were amended through December 31, 2000. At October 3, 1999 the Company was in violation of a single covenant pertaining to its $10 million loan and has received a waiver from its lender for this violation through October 3, 1999. The Company expects to be fully compliant at December 31, 1999, yet there can be no assurance of this. The Company anticipates that it will purchase approximately $2.0 million of new capital equipment in the fourth quarter of 1999 which includes progress payments on two new production machines and the Company's expansion in the European automotive film market. In July 1999 the Company secured $3.0 million of long term equipment financing, and in October 1999 the Company secured an additional $3.6 million of long-term equipment financing to be used to partially finance the two new production machines for Tempe, Arizona. Additionally, the Company borrowed $7.9 million from a bank during the third quarter of 1999 to provide progress payments on the Dresden, Germany project. The $7.9 million has been classified as long-term debt at October 3, 1999. While there can be no assurance that the Company will be able to obtain the additional financing that will be necessary for its planned 1999 operating cash requirements, the Company believes that existing cash, cash anticipated 11 to be generated from operations, the bank line of credit and the additional term loan borrowings, as discussed above, will be sufficient to meet the Company's operating cash requirements through fiscal 1999. If the Company is not successful in obtaining the additional financing described above, it 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. Item 3 - Quantitative and Qualitative Disclosures about Market Risk: The Company is exposed to the impact of interest rate changes, foreign currency fluctuations, and changes in the market values of its investments. FINANCING RISK. The Company's exposure to market rate risk for changes in interest rates relates primarily to the Company's term loans which are tied to the London Interbank Offered Rate ("LIBOR"). Fluctuations in interest rates may adversely impact the interest expense expected for the Company. The effect of interest rate fluctuations on the Company in the first nine months of 1999 was not material. INVESTMENT RISK. The Company invests its excess cash in certificates of deposit and money market accounts and, by policy, limits the amount of exposure to any one institution. Investments in both fixed rate and floating rate interest earning instruments carries a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. FOREIGN CURRENCY RISK. International revenues amounted to 65% of the Company's total sales in the first nine months of 1999 and, by policy, the Company limits foreign currency risk by requiring all sales to be denominated in U.S. dollars. The Company's international business is subject to risks typical of an international business, including, but not limited to differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, the Company's future results could be materially adversely impacted by changes in these or other factors. The effect of foreign exchange rate fluctuations on the Company in the first nine months of 1999 was not material. 12 PART II OTHER INFORMATION Item 1 Legal Proceedings and Other Matters Certain litigation filed against the Company by one of its customers was described in the Company's Form 10-K filed on March 31, 1999. Subsequent to such filing, no material developments have occurred with respect to this litigation. 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 October 3, 1999. 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 13 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, 1999 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 14 EX-27 2 ART. 5 FDS FOR 2ND QUARTER 10-Q
5 1,000 3-MOS DEC-31-1999 OCT-03-1999 297 0 12,575 (853) 6,461 19,945 72,960 (29,746) 67,385 21,023 0 0 0 8 25,721 67,385 14,994 15,195 10,897 14,316 0 0 505 374 14 360 0 0 0 360 .05 .05
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