<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 April 2, 1995
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[_] 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1029 Corporation Way, Palo Alto, California 94303
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 962-9111
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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 April 2, 1995 there were 5,846,745 shares of the Registrant's Common Stock
outstanding.
This report, including all attachments, contains 12 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 - April 2, 1995
and December 31, 1994...................................... 3
Consolidated Statement of Operations -
three months ended April 2, 1995
and April 3, 1994 ......................................... 4
Consolidated Statement of Cash Flows -
three months ended April 2, 1995
and April 3, 1994 ......................................... 5
Consolidated Statement of Stockholders' Equity -
three months ended April 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.......................................... 10
Item 6 Exhibits and Reports on Form 8-K........................... 10
Signatures................................................. 11
</TABLE>
2
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PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
- ----------------------------
CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
<TABLE>
<CAPTION>
April 2, 1995 December 31, 1994
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(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 604 $ 1,144
Short-term investments 3,051 4,051
Accounts receivable, net of allowance
for doubtful accounts of $524 and $528 4,641 3,720
Inventories 5,117 3,907
Other current assets 803 717
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Total current assets 14,216 13,539
Property and equipment, net 16,078 15,994
Other assets 1,866 1,839
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Total Assets $ 32,160 $ 31,372
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,298 $ 2,419
Accrued compensation 1,375 1,293
Other accrued liabilities 1,886 1,643
Current portion of long-term debt 36 82
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Total current liabilities 6,595 5,437
Long-term debt 2,650 2,650
Deferred income taxes 297 297
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Total liabilities 9,542 8,384
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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 47,273 47,273
Accumulated deficit (20,342) (19,972)
Less cost of treasury stock of 1,070
and 1,070 (4,320) (4,320)
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Total stockholders' equity 22,618 22,988
-------- --------
Total liabilities and
stockholders' equity $ 32,160 $ 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
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April 2, 1995 April 3, 1994
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<S> <C> <C>
Net product sales $6,691 $4,421
License revenues 10 58
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Net revenues $6,701 $4,479
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Costs and expenses:
Cost of product sales 4,602 3,444
Research & development 625 529
Selling, general and
administrative 1,844 1,172
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Total costs and expenses 7,071 5,145
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Income (loss) from operations (370) (666)
Interest income 54 85
Interest expense (54) (13)
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Net income (loss) $ (370) $ (594)
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Net income (loss) per share $(.06) $(.10)
====== ======
Weighted average shares of common
stock and common stock equivalents 5,847 5,804
====== ======
</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>
Three Months Ended
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April 2, 1995 April 3, 1994
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (370) $ (594)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 499 518
Decrease (increase) in accounts receivable (921) (533)
Decrease (increase) in inventories (1,210) (480)
Decrease (increase) in other current assets (86) 24
(Decrease) increase in accounts payable
and accrued liabilities 1,204 566
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Cash provided by (used in) operating
activities (884) (499)
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Cash flows from investing activities:
Decrease (increase) in short-term investments 1,000 0
Expenditures for property and equipment
and other assets (610) (221)
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Net cash provided by (used in) investing
activities 390 (221)
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Cash flows from financing activities:
Proceeds from issuance of stock 0 0
Increase in(reduction of) long-term debt (46) (55)
Purchase of treasury stock 0 0
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Net cash provided by (used in) financing activities (46) (55)
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Net increase (decrease) in cash and cash
equivalents (540) (775)
Cash and cash equivalents, beginning of year 1,144 1,340
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Cash and cash equivalents, end of period $ 604 $ 565
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</TABLE>
See accompanying notes to financial statements.
5
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CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three Months Ended April 2, 1995
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Capital in Total
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Common Stock excess of Accumulated Treasury Stockholders'
----------------- ------------ ----------- -------- -------------
Shares Amount par value Deficit Stock Equity
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<S> <C> <C> <C> <C> <C> <C>
Balance; December 31, 1994 6,917 $7 $47,273 $(19,972) $(4,320) $22,988
Net income (loss) (370) (370)
------ ------ ------------ ----------- -------- -------------
Balance; April 2, 1995 6,917 $7 $47,273 $(20,342) $(4,320) $22,618
====== ====== ============ =========== ======== =============
</TABLE>
See accompanying notes to financial statements.
6
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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:
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Inventories are stated at the lower of cost (determined by the first-in, first-
out method) or market. Inventories at April 2, 1995 and December 31, 1994,
consisted of the following:
<TABLE>
<CAPTION>
April 2, 1995 December 31, 1994
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<S> <C> <C>
Raw materials $1,887 $1,299
Work-in-process 1,006 440
Finished goods 2,224 2,168
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TOTAL $5,117 $3,907
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</TABLE>
Item 2 - Management's Discussion and Analysis of Financial Condition and
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Results of Operations (in thousands)
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Three Months Ended April 2, 1995 and April 3, 1994
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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.
7
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Net product sales increased to $6.7 million for the first three months of 1995,
compared to $4.4 million for the similar period of 1994. Of this increase,
which is 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 $1.5 million, and net product
sales of electronics products increased by approximately $.3 million, offsetting
a decrease of approximately $.3 million in aerospace product sales.
Cost of product sales for the first quarter of 1995 was 69% of net product
sales, compared to 78% for the similar period of 1994. This percentage decrease
was primarily attributable to the increase in sales volume and the related
improvement in manufacturing efficiencies.
Research and development expenses, as a percent of net product sales, were 9%
for the first three months of 1995, compared to 12% for the similar period in
1994. The percentage decrease was primarily attributable to the increase in net
product sales. The absolute dollar increase in 1995 is attributable to more new
product development.
Selling, general and administrative expense, as a percent of net product sales,
increased to 28% in the first three months of 1995, from 27% for the similar
period in 1994. The increase from $1.2 million in 1994 to $1.8 million in 1995,
is attributable to the new operations discussed above, and increased sales and
marketing expenses associated with the introduction of new products and
expansion into the Pacific Rim.
Interest income, net, decreased in 1995 compared to 1994 due primarily to a
decrease in monies invested.
As a result of the factors discussed above, the Company reported a pre-tax loss
of ($.4) million for the first three months 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.
Liquidity and Capital Resources
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At April 2, 1995, the Company's net working capital was $7.6 million compared
with $8.1 million at December 31, 1994. The Company has financed itself through
cash flow from operations and its existing cash balances.
From December 31, 1994, to April 2, 1995, cash and short-term investments
decreased by $1.5 million, while accounts receivable increased by $.9 million
and inventories increased by $1.2 million. The increase in accounts receivable
is primarily attributable to the increase in net revenues from $5.7 million in
the fourth quarter of 1994 to $6.7 million in the first 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 quarter of 1995. Further, additions to
property and equipment were approximately $.6 million during the first quarter
of 1995.
8
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The Company anticipates total capital expenditures of approximately $2.1 million
during 1995.
At April 2, 1995, the Company has $3.7 million of cash and short-term
investments and a $5 million line of credit. As of April 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.
9
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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(R)
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(R) 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 has filed an appeal to
the noninfringement decision with the Court of Appeals for the Federal Circuit.
On March 6, 1995, a hearing of this appeal was held at the Court of Appeals. As
of the date of filing this Form 10-Q, the Company has not heard from the Court
of Appeals of their decision on the appeal. While it is not possible to predict
the outcome of litigation, the Company believes that the district court's recent
summary judgment against Southwall should be overturned and that our patent
position should be validated by the appellate court.
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 April 2, 1995.
Item 5 Other Information
Not applicable
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports of Form 8-K - None
10
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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: May 10, 1995 Southwall Technologies Inc.
By: /s/ Martin M. Schwartz
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Martin M. Schwartz
President and
Chief Executive Officer
By: /s/ Alfred V. Larrenaga
--------------------------------
Alfred V. Larrenaga
Sr. Vice President and
Chief Financial Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> APR-02-1995
<CASH> 604
<SECURITIES> 3,051
<RECEIVABLES> 5,165
<ALLOWANCES> (524)
<INVENTORY> 5,117
<CURRENT-ASSETS> 14,216
<PP&E> 36,734
<DEPRECIATION> (20,656)
<TOTAL-ASSETS> 32,160
<CURRENT-LIABILITIES> 6,595
<BONDS> 0
<COMMON> 7
0
0
<OTHER-SE> 22,611
<TOTAL-LIABILITY-AND-EQUITY> 32,160
<SALES> 6,691
<TOTAL-REVENUES> 6,701
<CGS> 4,602
<TOTAL-COSTS> 4,602
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (370)
<INCOME-TAX> (370)
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<NET-INCOME> (370)
<EPS-PRIMARY> (0.06)
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</TABLE>
