<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 October 1, 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.
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(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 October 1, 1995 there were 5,913,581 shares of the Registrant's Common
Stock outstanding.
This report, including all attachments, contains 11 pages.
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SOUTHWALL TECHNOLOGIES INC.
INDEX
<TABLE>
<CAPTION>
Page Number
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PART 1 FINANCIAL INFORMATION
<S> <C> <C>
Item 1 Financial Statements: (unaudited)
Consolidated Balance Sheet - October 1, 1995
and December 31, 1994..........................................3
Consolidated Statement of Operations -
three month and nine month periods ended
October 1, 1995 and October 2, 1994 ...........................4
Consolidated Statement of Cash Flows -
nine months ended October 1, 1995
and October 2, 1994............................................5
Consolidated Statement of Stockholders' Equity -
nine months ended October 1,1995...............................6
Notes to Consolidated Financial Statements.....................7
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of Operations...............7
<CAPTION>
PART II OTHER INFORMATION
<S> <C> <C>
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.............................................10
Item 6 Exhibits and Reports on Form 8-K..............................10
Signatures....................................................11
</TABLE>
2
<PAGE>
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
- ----------------------------
CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
<TABLE>
<CAPTION>
October 1, 1995 December 31, 1994
---------------- -----------------
<S> <C> <C>
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,303 $ 1,144
Short-term investments 2,132 4,051
Accounts receivable, net of allowance
for doubtful accounts of $528 and $528 6,133 3,720
Inventories 6,015 3,907
Other current assets 993 717
------ ------
Total current assets 16,576 13,539
Property and equipment, net 15,447 15,994
Other assets 1,902 1,839
------ ------
Total Assets $33,925 $31,372
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,643 $2,419
Accrued compensation 1,601 1,293
Other accrued liabilities 1,916 1,643
Current portion of long-term debt 100 82
------ ------
Total current liabilities 7,260 5,437
Long-term debt 2,898 2,650
Deferred income taxes 297 297
------ ------
Total liabilities 10,455 8,384
------ ------
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 47,205 47,273
Accumulated deficit (19,692) (19,972)
Less cost of treasury stock of 1,003
and 1,070 ( 4,050) ( 4,320)
------ ------
Total stockholders' equity 23,470 22,988
------ ------
Total Liabilities and
Stockholders' Equity $33,925 $31,372
====== ======
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
OCT. 1, OCT. 2, OCT. 1, OCT.2,
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net product sales $9,315 $6,151 $24,160 $15,657
License revenues 96 78 223 356
----- ----- ------ ------
Net Revenues 9,411 6,229 24,383 16,013
Cost and expenses:
Cost of product sales 6,848 4,768 17,043 11,716
Research and development 476 634 1,637 1,660
Selling, general and
administrative 1,720 1,473 5,332 3,958
----- ----- ----- ------
Total costs and expenses 9,044 6,875 24,012 17,334
----- ----- ------ ------
Income (loss) from operations 367 (646) 371 (1,321)
Interest income (expense), net (22) 36 (91) 156
------ ---- ------ -------
Income (loss) before income taxes 345 ( 610) 280 (1,165)
Provision for income taxes - - - 1
------ ----- ----- -----
Net income (loss) $ 345 $( 610) $ 280 $ (1,166)
===== ===== ====== ======
Net income (loss) per share $ .05 $( .11) $ .04 $ ( .20)
===== ===== ====== ======
Weighted average shares
of common stock and common
stock equivalents 6,341 5,785 6,279 5,794
===== ===== ===== =====
</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>
Nine Months Ended
-----------------
October 1, 1995 October 2, 1994
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) 280 $(1,166)
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 1,597 1,548
Decrease (increase) in accounts receivable (2,413) (1,599)
Decrease (increase) in inventories (2,108) (173)
Decrease (increase) in other current assets (276) (25)
(Decrease) increase in accounts payable
and accrued liabilities 1,915 1,017
----- -----
Cash provided by (used in) operating activities (1,005) ( 398)
----- -----
Cash flows from investing activities:
Decrease (increase) in short-term investments 1,919 1,530
Expenditures for property and equipment
and other assets (1,113) ( 800)
----- -----
Net cash provided by (used in) investing activities 806 730
----- -----
Cash flows from financing activities:
Increase (decrease) in long-term debt 266 ( 128)
Proceeds from issuance of treasury stock 92 -
Purchase of treasury stock, net - ( 74)
------- ----
Net cash provided by (used in)
financing activities 358 ( 202)
------- ----
Net increase (decrease) in cash and
cash equivalents 159 130
Cash and cash equivalents, end of period 1,144 1,340
------- -----
Cash and cash equivalents, end of period $ 1,303 $1,470
======= =====
Supplemental non-cash financing activities:
Payment of interest with treasury stock $ 110 $ -
======= =====
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine Months Ended October 1, 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 option (37) 108 71
Employee Stock Purchase Plan (16) 37 21
Monsanto Interest (15) 125 110
Net Income 280 280
--------- -------- --------- ------- -------- ------
Balance: October 1, 1995 6,917 $ 7 $47,205 $(19,692) $(4,050) $23,470
===== === ====== ======= ====== ======
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 October 1, 1995 and December 31, 1994,
consisted of the following:
<TABLE>
<CAPTION>
October 1, 1995 December 31, 1994
--------------- -----------------
<S> <C> <C>
Raw materials 2,540 $1,299
Work-in-process 998 440
Finished goods 2,477 2,168
----- -----
TOTAL $6,015 $3,907
===== =====
</TABLE>
Item 2 - Management's Discussion and Analysis of Financial Condition and
- -------------------------------------------------------------------------
Results of Operations (in thousands)
- ---------------------
Nine Months Ended October 1, 1995 and October 1, 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
Series (TM) solar control laminated glass, as well as bullet resistant,
security, custom and standard laminated glass products.
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 $24.2 million for the first nine months of
1995 compared to $15.7 million for the similar period of 1994. Of this
increase, which was primarily volume related, approximately $2.2 million was
from the new operations discussed above. In addition, net product sales of
energy conservation products increased by approximately $4.9 million, and net
7
<PAGE>
product sales of electronics products, including sales of the Company's new
anti-reflective film product for computer monitors, increased by approximately
$1.8 million, offsetting a decrease of approximately $.4 million in aerospace
and other product sales.
Cost of product sales for the first nine months of 1995 was 71% of product sales
compared to 75% for the same period of 1994. The percentage decrease was
primarily due to increased sales volume and the related improvement in
manufacturing efficiencies.
Research and development expenses, as a percent of product sales, were 7% for
the nine months 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 expenses, as a percent of net product sales,
decreased to 22% in the first nine months of 1995, from 25% for the similar
period in 1994 due to increased sales volume. The increase from $4.0 million in
1994 to $5.3 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
income of $.3 million for the first nine months of 1995, compared to a pre-tax
loss of $(1.2) 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
remain profitable.
Three Months Ended October 1,1995 and October 2, 1994
- -----------------------------------------------------
The Company's net product sales were $9.3 million for the third quarter of 1995
compared to $6.2 million of net product sales for the same period of 1994. Of
this increase, which was primarily volume related, approximately $.7 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
product sales of electronics products, including sales of the Company's new
anti-reflective film product for computer monitors, increased by approximately
$1.1 million, offsetting a decrease of approximately $.3 million in aerospace
and other product sales.
Cost of product sales for the third quarter of 1995 was 74% of product sales
compared to 78% for the same period of 1994. The percentage decrease was
primarily due to increased sales volume. However, the Company's new anti-
reflective film product for use on CRTs for computer applications is early in
its commercial cycle and start-up costs have adversely affected cost of sales
and profitability.
Research and development expenses, as a percent of product sales, were 5% for
the third quarter of 1995, compared to 10% for the same period in 1994. The
percentage decrease was primarily attributable to the higher product sales.
8
<PAGE>
Selling, general and administrative expense, as a percent of net product sales
decreased to 18% in the third quarter of 1995, from 24% for the similar period
in 1994 due to increased sales volume. The increase from $1.5 million to $1.7
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 third quarter of 1995, compared to a net loss of $.6 million
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 October 1, 1995, the Company's net working capital was $9.3 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 October 1, 1995, cash and short-term investments
decreased by $1.8 million, while accounts receivable increased by $2.4 million
and inventories increased by $2.1 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 $9.4 million in the third 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 1995. Further, additions to property and
equipment were approximately $1.1 million during the first nine months of 1995.
The Company anticipates total capital expenditures of approximately $1.5 million
during 1995.
At October 1, 1995, the Company has $3.4 million of cash and short-term
investments and a $5 million line of credit, which is subject to certain
financial covenants. As of October 1, 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.
9
<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 LoE 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 LoE 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 has filed an 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 to Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
quarter ended October 1, 1995.
Item 5 Other Information
Not applicable
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K -October 31, 1994, filed August 15, 1995
10
<PAGE>
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 13, 1995
By:/s/Martin M. Schwartz
---------------------
Martin M. Schwartz
President and Chief Executive Officer
By:/s/Alfred V. Larrenaga
----------------------
Alfred V. Larrenaga
Senior Vice President and
Chief Financial Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> OCT-01-1995
<CASH> 1,303
<SECURITIES> 2,132
<RECEIVABLES> 6,661
<ALLOWANCES> 528
<INVENTORY> 6,015
<CURRENT-ASSETS> 16,576
<PP&E> 34,280
<DEPRECIATION> (18,833)
<TOTAL-ASSETS> 33,925
<CURRENT-LIABILITIES> 7,290
<BONDS> 0
<COMMON> 43,162
0
0
<OTHER-SE> (19,692)
<TOTAL-LIABILITY-AND-EQUITY> 33,925
<SALES> 9,315
<TOTAL-REVENUES> 9,411
<CGS> 6,848
<TOTAL-COSTS> 9,044
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> 345
<INCOME-TAX> 0
<INCOME-CONTINUING> 345
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 345
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
