<PAGE>
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 July 2, 1995
------------
/_/ 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: (415) 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 July 2, 1995 there were 5,898,031 shares of the Registrant's Common Stock
outstanding.
This report, including all attachments, contains 13 pages.
1
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SOUTHWALL TECHNOLOGIES INC.
INDEX
<TABLE>
<CAPTION>
Page Number
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<S> <C>
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheet - July 2, 1995
and December 31, 1994...................................... 3
Consolidated Statement of Operations -
three month and six month periods ended
July 2, 1995 and July 3, 1994.............................. 4
Consolidated Statement of Cash Flows -
six months ended July 2, 1995
and July 3, 1994........................................... 5
Consolidated Statement of Stockholders' Equity -
six months ended July 2, 1995.............................. 6
Notes to Consolidated Financial Statements................. 7
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of Operations........... 7
PART II OTHER INFORMATION
Item 1 Legal Proceedings........................................... 10
Item 2 Changes in Securities....................................... 10
Item 3 Defaults Upon Senior Securities............................. 10
Item 4 Submission of Matters to a Vote of Stockholders............. 10
Item 5 Other Information........................................... 11
Item 6 Exhibits and Reports on Form 8-K............................ 11
Signatures............................................. 13
</TABLE>
2
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PART I FINANCIAL INFORMATION
SOUTHWALL TECHNOLOGIES INC.
Item 1 Financial Statements
- ---------------------------
CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
<TABLE>
<CAPTION>
July 2, 1995 December 31, 1994
------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 910 $ 1,144
Short-term investments 1,983 4,051
Trade accounts receivable, net of allowance
for doubtful accounts of $542 and $528 5,075 3,720
Inventories 6,114 3,907
Other current assets 1,166 717
------- -------
Total current assets 15,248 13,539
Property and equipment, net 15,807 15,994
Other assets 1,873 1,839
------- -------
Total Assets $32,928 $31,372
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,149 $ 2,419
Accrued compensation 1,355 1,293
Other accrued liabilities 2,063 1,643
Current portion of long-term debt 109 82
------- -------
Total current liabilities 6,676 5,437
Long-term debt 2,901 2,650
Deferred income taxes 297 297
------- -------
Total liabilities 9,874 8,384
------- -------
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value,
20,000 shares authorized:
Issued and outstanding: 6,917 and 6,917 7 7
Capital in excess of par value 47,197 47,273
Accumulated deficit (20,037) (19,972)
Less cost of treasury stock of 1,019 and 1,070 (4,113) (4,320)
Total stockholders' equity 23,054 22,988
-------- -------
Total Liabilities and
Stockholders' Equity $ 32,928 $ 31,372
======== ========
</TABLE>
See accompanying notes to financial statements.
3
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SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
July 2, July 3, July 2, July 3,
1995 1994 1995 1994
------ ------ ------ -------
<S> <C> <C> <C> <C>
Net product sales $8,154 $5,085 $14,845 $ 9,506
License revenues 117 220 127 278
------ ------ ------- -------
Net revenues 8,271 5,305 14,972 $ 9,784
------ ------ ------- -------
Costs and expenses:
Cost of product sales 5,593 3,505 10,195 6,948
Research and development 536 496 1,161 1,026
Selling, general and
administrative 1,767 1,313 3,611 2,485
------ ------ ------- -------
Total costs and expenses 7,896 5,314 14,967 10,459
------ ------ ------- -------
Income (loss) from operations 375 (9) 5 (675)
Interest income
(expense) net (70) 46 (70) 120
------ ------ ------- -------
Income (loss) before income taxes 305 37 (65) (555)
Provision for income taxes 0 0 0 1
------ ------ ------- -------
Net income (loss) $ 305 $ 37 $ (65) $ (556)
====== ====== ======= =======
Net income (loss) per share $.05 $.01 $ (.01) $ (.09)
====== ====== ======= =======
Weighted average shares
of common stock and dilutive
common stock equivalents 6,273 6,536 5,851 5,798
====== ====== ======= =======
</TABLE>
See accompanying notes to financial statements.
4
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SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------
July 2, 1995 July 3, 1994
----------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income(loss) $ (65) $ (556)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 1,010 1,032
Decrease (increase) in accounts receivable (1,355) (775)
Decrease (increase) in inventories (2,207) (415)
Decrease (increase) in other current assets (449) (69)
(Decrease) increase in accounts payable
and accrued liabilities 1,322 614
------- ------
Cash provided by (used in) operating
activities (1,744) (169)
------- ------
Cash flows from investing activities:
Decrease (increase) in short-term investments 2,068 908
Expenditures for property and equipment
and other assets (857) (573)
------- ------
Net cash provided by (used in) investing
activities 1,211 335
------- ------
Cash flows from financing activities:
Proceeds from issuance of stock 0 0
Increase(decrease) in long-term debt 278 (84)
Purchase of treasury stock 0 (73)
------- ------
Other changes in paid in capital 21 0
------- ------
Net cash provided by (used in) financing activities 299 (157)
------- ------
Net increase (decrease) in cash and
cash equivalents (234) 9
Cash and cash equivalents, beginning of year 1,144 1,340
------- ------
Cash and cash equivalents, end of period $ 910 $1,349
======= ======
Supplemental disclosure of non-cash investing
and financing activities:
Treasury stock used for payment of
Monsanto interest $ 110 $ 0
</TABLE>
See accompanying notes to financial statements.
5
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CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six Months Ended July 2, 1995
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Capital in Total
Common Stock excess of Accumulated Treasury Stockholders'
Shares Amount par value Deficit Stock Equity
------ ------ ----------- ----------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance: December 31, 1994 6,917 $7 $47,273 ($19,972) ($4,320) $22,988
Exercise of options (45) 45 0
Employee Stock Purchase Plan (16) 37 21
Monsanto Interest (15) 125 110
Net (loss) (65) (65)
----- --- ------- -------- ------- -------
Balance: July 2, 1995 6,917 $7 $47,197 ($20,037) ($4,113) $23,054
===== === ======= ======== ======= =======
</TABLE>
* Indicates amounts less than $.5
See accompanying notes to financial statements.
6
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SOUTHWALL TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands)
(Unaudited)
Note 1 - Interim Period Reporting:
- ---------------------------------
While the information presented in the accompanying condensed 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 condensed financial
statements be read in conjunction with the financial statements contained in the
Company's Form 10-K for the year ended December 31, 1994. 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 at July 2, 1995 and December 31, 1994,
consisted of the following:
<TABLE>
<CAPTION>
July 2, 1995 December 31, 1994
------------- -----------------
<S> <C> <C>
Raw materials $2,454 $1,299
Work-in-progress 1,174 440
Finished goods 2,486 2,168
------ ------
TOTAL $6,114 $3,907
====== ======
</TABLE>
Item 2 - Management's Discussion and Analysis of Financial Condition and
- -------------------------------------------------------------------------
Results of Operations
---------------------
Six Months Ended July 2, 1995 and July 3, 1994
- ----------------------------------------------
Effective September 1, 1994, the Company commenced leasing all the assets
formerly owned by Safety Glass, Inc., dba Armour Worldwide Glass, located in
Southern California, under a five year operating lease for $40 per month. A
wholly-owned subsidiary, Southwall Worldwide Glass Inc. ("SWGI"), was created to
operate the facility and to manufacture the Company's proprietary California
SeriesTM solar control laminated glass, as well as bullet resistant, security,
custom and standard laminated glass products.
7
<PAGE>
Effective October 31, 1994, the Company acquired Sunflex L.P. ("Sunflex") for
$500, which will only be paid from Sunflex's operating income, if any, over the
next four years. Sunflex assembles and markets aftermarket mesh, glass and film
anti-reflective filters primarily for personal computer monitors.
The consolidated financial statements for 1995 include the results of operations
of SWGI and Sunflex.
The Company's net product sales were $14.8 million for the first six months of
1995 compared to $9.5 million for the similar period of 1994. Of this increase,
which was primarily volume related, approximately $1.6 million was from the new
operations discussed above. In addition, net product sales of energy
conservation products increased by approximately $3.1 million, and net product
sales of electronics products, including sales of the Company's new anti-
reflective film product for computer monitors, increased by approximately $.8
million, offsetting a decrease of approximately $.1 million in aerospace product
sales.
Cost of product sales for the first half of 1995 was 69% of product sales
compared to 73% for the same period of 1994. The percentage decrease was
primarily due to increased sales volume and the related improvement in
manufacturing efficiencies. However, the Company continues to underutilize
capacity.
Research and development expenses, as a percent of product sales, were 8% for
the first half of 1995, compared to 11% for the same period in 1994. The
decrease is primarily attributable to an increased volume of product sales.
Selling, general and administrative expense, as a percent of net product sales,
decreased to 24% in the first half of 1995, from 26% for the similar period in
1994 due to increased sales volume. The increase from $2.5 million in 1994 to
$3.6 million in 1995, is attributable to the new operations discussed above, and
increased sales and marketing expenses associated with the introduction of new
products and expansion into the Pacific Rim.
Interest income, net, decreased in 1995 compared to 1994 due primarily to a
decrease in monies invested.
As a result of the factors discussed above, the Company reported a pre-tax loss
of ($.1) million for the first half of 1995, compared to a pre-tax loss of ($.6)
for the similar period in 1994.
The Company believes that it must continue to increase revenues to achieve
profitability. Although the Company is 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 able to increase
revenues and become profitable.
Three Months Ended July 2, 1995 and July 3, 1994
- ------------------------------------------------
The Company's net product sales were $8.2 million for the second quarter of 1995
compared to $5.1 million of net product sales for the same period of 1994. Of
this increase, which was primarily volume related, approximately $.9 million was
from the new operations discussed above. In addition, net product sales of
energy conservation products increased by approximately $1.7 million, and net
8
<PAGE>
product sales of electronics products, including sales of the Company's new
anti-reflective film product for computer monitors, increased by approximately
$.4 million, and aerospace product sales increased by approximately $.2 million.
Cost of product sales for the second quarter of 1995 was 69% of product sales
compared to 69% for the same period of 1994.
Research and development expenses, as a percent of product sales, were 7% for
the second quarter of 1995, compared to 10% for the same period in 1994. The
percentage decrease was primarily attributable to the higher product sales.
Selling, general and administrative expense, as a percent of net product sales,
decreased to 22% in the second quarter of 1995, from 26% for the similar period
in 1994 due to increased sales volume. The increase from $1.3 million in 1994
to $1.8 million in 1995, is attributable to the new operations discussed above,
and increased sales and marketing expenses associated with the introduction of
new products and expansion into the Pacific Rim.
Interest income, net decreased in 1995 compared to 1994 due primarily to a
decrease in monies invested.
As a result of the factors discussed above, the Company reported net income of
$.3 million for the second quarter of 1995, compared to essentially breakeven
for the similar period in 1994.
The Company believes that it must continue to increase revenues to achieve
sustained profitability. Although the Company is 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 able to
increase revenues and sustain profitability.
Liquidity and Capital Resources
- -------------------------------
At July 2, 1995, the Company's net working capital was $8.6 million compared to
$8.1 million at December 31, 1994. For the past 4 years the Company has
financed its operations through a combination of equity and debt instruments and
cash flow from operations.
From December 31, 1994, to July 2, 1995, cash and short-term investments
decreased by $2.3 million, while accounts receivable increased by $1.4 million
and inventories increased by $2.2 million. The increase in accounts receivable
is primarily attributable to the increase in net revenues from $5.9 million in
the fourth quarter of 1994 to $8.2 million in the second quarter of 1995, most
of which occurred during the later portion of the quarter. The increase in
inventories is primarily due to the fact that inventories at December 31, 1994,
were at relatively low levels as a result of a shut down of the Company's
production equipment during part of the fourth quarter of 1994 and a planned
increase in production during the first half of 1995. Further, additions to
property and equipment were approximately $1.0 million during the first half of
1995.
The Company anticipates total capital expenditures of approximately $2.0 million
during 1995.
9
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At July 2, 1995, the Company has $2.9 million of cash and short-term investments
and a $5 million line of credit, which is subject to certain financial
covenants. As of July 2, 1995, there were no borrowings under this line of
credit. Existing working capital and cash generated from operations are
expected to be adequate to satisfy the Company's capital and operating
requirements at least through 1995. Failure to generate sufficient cash flow
from operations or external sources would have a material adverse effect on the
Company.
10
<PAGE>
PART II OTHER INFORMATION
Item 1 Legal Proceedings
In January 1992, the Company filed a patent infringement suit against
Cardinal IG Company, and one of its customers, in the U.S. Federal
District Court of San Francisco, California. The suit alleges that
Cardinal's LoE2 glass product violates the Company's U.S. Patent
#4,799,745, which covers the structure of particular optical coatings for
glass products, including the Company's Heat Mirror XIR solar reflecting
film.
In April 1993, Cardinal filed a motion for summary judgment alleging that
the LoE2 coatings do not infringe the Company's patent and that the
patent is invalid. On March 2, 1994, the District Court judge entered an
order denying Cardinal's motion that the Company's patent was invalid,
but granting its motion with respect to noninfringement. The Company
filed an appeal to the noninfringement decision with the Court of Appeals
for the Federal Circuit. In May 1995, the Court of Appeals for the
Federal Circuit affirmed the Federal District Court decision. The
Company's subsequent petition for a rehearing was denied. The Company
plans to appeal to the Supreme Court of the United States.
The Company is not a party to any other material litigation.
Item 2 Changes in Securities
Not applicable
Item 3 Defaults upon Senior Securities
Not applicable
Item 4 Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on May 11, 1995.
(b) The meeting included the re-election of five members of the Board of
Directors, submitted as Proposal I, whose names are as follows:
Bruce J. Alexander
Joseph B. Reagan
Martin M. Schwartz
Walter C. Sedgwick
J. Larry Smart
(c) Other matters voted upon at the stockholders meeting were:
Proposal II, ratification of the selection of Price Waterhouse as the
Company's independent accountant for the year ending December 31, 1995.
11
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Shares of Common Stock were voted as follows:
Proposal I
(Election of Directors)
<TABLE>
<CAPTION>
Total Vote For Total Vote Withheld
Each Director From Each Director
------------- ------------------
<S> <C> <C>
Bruce J. Alexander 4,212,458 435,538
Joseph B. Reagan 4,212,029 436,009
Martin M. Schwartz 4,213,579 434,459
Walter C. Sedgwick 4,212,879 435,159
J. Larry Smart 4,195,929 452,112
<CAPTION>
Broker
For Against Abstain Non-Vote
--- ------- ------- --------
<S> <C> <C> <C> <C>
Proposal II
(Selection of
Accountants) 4,597,589 40,850 9,599 0
</TABLE>
(d) Settlements between the registrant and any other participant
None
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
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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: August 11, 1995 Southwall Technologies Inc.
By: /s/ Martin M. Schwartz
------------------
Martin M. Schwartz
President and
Chief Executive Officer
By: /s/ Alfred V. Larrenaga
-------------------
Alfred V. Larrenaga
Sr. Vice President and
Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SANTA ANITA
OPERATING COMPANY AND IS QUALIFIED IN ITS ENTRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUL-02-1995
<CASH> 910
<SECURITIES> 1,983
<RECEIVABLES> 5,617
<ALLOWANCES> (542)
<INVENTORY> 6,114
<CURRENT-ASSETS> 15,248
<PP&E> 34,211
<DEPRECIATION> (18,404)
<TOTAL-ASSETS> 32,928
<CURRENT-LIABILITIES> 6,676
<BONDS> 0
<COMMON> 7
0
0
<OTHER-SE> 23,047
<TOTAL-LIABILITY-AND-EQUITY> 32,928
<SALES> 8,154
<TOTAL-REVENUES> 8,271
<CGS> 5,593
<TOTAL-COSTS> 7,896
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70
<INCOME-PRETAX> 305
<INCOME-TAX> 0
<INCOME-CONTINUING> 305
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 305
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
