<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM 10-K/A*
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
-------------------------------------------
[_] 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
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
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
--------- ---------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
<PAGE>
The approximate aggregate market value of the Common Stock held by non-
affiliates of the registrant on January 31, 1995, (based upon the closing sales
price of the Common Stock on the NASDAQ National Market System on such date) was
$12,000,000. For purposes of this disclosure, Common Stock held by stockholders
whose ownership exceeds five percent of the Common Stock outstanding as of
January 31, 1995, and Common Stock held by officers and directors of the
registrant has been excluded in that such persons may be deemed to be
"affiliates" as that term is defined in the rules and regulations promulgated
under the Securities Act of 1933, as amended. This determination is not
necessarily conclusive.
The number of shares of the registrant's Common Stock outstanding on
January 31, 1995, was 5,846,745.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed with
the Commission in connection with the Company's 1995 Annual Meeting of
Stockholders (the "Proxy Statement") are incorporated by reference in Part III
of this Form 10-K.
*This Form 10-K/A reflects the Registrant's Form 10-K, filed on March 2, 1995,
with the Securities and Exchange Commission, as amended on Form 10-K/A on August
14, 1995.
2
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SOUTHWALL TECHNOLOGIES INC.
1994 FORM 10-K ANNUAL REPORT
Table of Contents
-----------------
PART I
<TABLE>
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Page
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<S> <C> <C>
Item 1. Business..................................................... 4
Item 2. Properties................................................... 11
Item 3. Legal Proceedings............................................ 11
Item 4. Submission of Matters to a Vote of
Security Holders........................................... 12
<CAPTION>
PART II
<S> <C> <C>
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters.................................. 13
Item 6. Selected Financial Data...................................... 14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................. 14
Item 8. Financial Statements......................................... 20
Item 9. Disagreements on Accounting and Financial
Disclosure................................................. 32
<CAPTION>
PART III
<S> <C> <C>
Item 10. Directors and Executive Officers of the
Registrant ................................................ 33
Item 11. Executive Compensation ...................................... 33
Item 12. Security Ownership of Certain Beneficial
Owners and Management ..................................... 33
Item 13. Certain Relationships and Related
Transactions .............................................. 33
<CAPTION>
PART IV
<S> <C> <C>
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K .................................... 34
</TABLE>
3
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PART I
======
ITEM 1. BUSINESS
General
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Southwall Technologies Inc. ("Southwall" or the "Company") designs,
develops, manufactures and markets sputtered thin-film coatings on wide-web,
flexible substrates for energy conservation, electronics and aerospace
applications. The Company has developed and currently offers a variety of thin-
film products for the residential and commercial architectural glazing,
automotive glazing, electronics and aerospace markets. These products include
transparent insulation and solar-control films, transparent conductive films for
use in touchscreen displays, adhesiveless conductive films for use in flexible
electronic circuits and films that reduce detectability of objects in selected
portions of the electromagnetic spectrum and various other commercial film.
In September, 1994, the Company entered into an agreement to lease all the
assets formerly of Safety Glass, Inc., dba Armour Worldwide Glass, a glass
laminator in Southern California. The Company created a subsidiary, Southwall
Worldwide Glass Inc., which will operate the facility 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. which
assembles and markets aftermarket mesh and glass anti-reflective filters
primarily for personal computer monitors under such trademark names as Krystal
Clear(TM), OPTIVIEW(TM) and Protector(TM).
Markets and Products
--------------------
Southwall is currently supplying products for use in three broad markets:
energy conservation, electronics and aerospace. The Company's current
commercial products include: (1) its family of transparent Heat Mirror(TM) films
for high performance architectural glazing applications, (2) transparent
coatings for use in conjunction with architectural and automotive glazing
laminates and applied film to provide solar control to windows, (3) its Etch-A-
Flex(R) family of flexible thin-film circuit materials, (4) its Altair(TM)
family of transparent conductors, (5) other commercial thin-film products, (6)
laminated glass products, and (7) anti-reflective filters. The Company's
aerospace products include thin-film materials for shielding applications as
well as various other applications.
Energy Conservation Products
----------------------------
Heat Mirror - Transparent Window Insulation
-------------------------------------------
The Company offers a family of Heat Mirror films with various shading and
insulating properties. Windows are primary areas of heat loss in winter and a
major source of heat gain in summer. Windows containing Heat Mirror, while
generally more expensive, have approximately double the insulating capacity of
conventional double-pane windows, and transmit high levels of visible light with
4
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desired degrees of shading. Heat Mirror films, which are sold in rolls to
window manufacturers, are suspended in the airspace between sealed double-pane
residential and commercial windows. The Company has developed and patented this
film-mounting technology, which it licenses to window fabricators. The Company
currently offers a variety of different Heat Mirror films for residential and
commercial architectural applications, including Heat Mirror with XUV(TM) fading
protection.
The Company believes that the Superglass(R) system with Heat Mirror film is
the most comprehensive window glass product available today, providing R-8 to R-
10 insulation, transparent solar shading and protection from damaging
ultraviolet radiation, while also reducing noise and condensation build-up.
Heat Mirror Plus(TM) is a high-performance window product that offers
insulating values from R-5 to R-9. Heat Mirror Plus utilizes Heat Mirror
suspended between two panes of glass and various combinations of "low-e" glass
and gas fill.
Sales of the Company's Heat Mirror products have been subject to seasonal
buying patterns in the past. See Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Solar-Control Films for Laminated Glazing Applications and Laminated Glass
--------------------------------------------------------------------------
The Company's Heat Mirror XIR(R) Coating is a transparent, sputter-coated,
polyester film used in laminated safety glass for architectural applications and
laminated automotive glass. The film has a patented, transparent solar-control
coating on one side and a proprietary adhesion-promotion layer on the other
side.
The Company's California Series(TM) laminated glazing product is comprised
of Heat Mirror XIR, PVB and glass, for architectural windows.
With its new laminating capabilities, the Company manufactures and markets
California Series(TM) solar control laminated glass, as well as bullet
resistant, security, custom and standard laminated glass products.
Applied Solar-Control Films
---------------------------
Another glazing product utilizing the Heat Mirror XIR coating is Solis(TM)
solar-control films for the retro-fit market for both architectural and
automotive glass. The product has a protective hard coat over the patented,
transparent solar-control coating on one side and an adhesion layer on the other
side and is applied to existing windows.
Silver Reflector Films
----------------------
Southwall markets these mirrored films to fluorescent reflector
manufacturers for energy efficient lighting, primarily for the retrofit market
in North America, and to other manufacturers for various applications including
large screen televisions.
5
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Electronic Products
-------------------
Transparent Conductors
----------------------
Southwall currently markets several transparent conductive thin-films under
the brand names ALTAIR-O(TM) and ALTAIR-M(TM). Transparent conductive thin films
combine high visible light transmission with electrical conductivity and
environmental stability. They are typically used where the circuit or conductive
material must not obscure visual information behind the coating. ALTAIR-M films
are sold in roll and sheet form for incorporation into such electronic devices
as touch panels, liquid crystal displays and electroluminescent lighting and
displays. ALTAIR films are also used in electromagnetic interference ("EMI")
shielding, infrared rejection and electrostatic discharge packaging
applications.
Flexible Circuit Materials
--------------------------
Southwall currently offers two ETCH-A-FLEX products which have applications
in tape automated bonding, "smart" cards, capacitors, detonators, and other
devices where environmental stability, higher circuit density and other
performance characteristics are critical. ETCH-A-FLEX is a high performance,
copper, thin-film conductor that is bonded without adhesives to polyamide film.
Flexible circuits are used where weight, shape, size, motion or vibration is a
significant consideration.
Anti-Reflective Filters
-----------------------
The Company, through its Southwall-Sunflex, Inc. subsidiary, markets
aftermarket mesh, glass and film anti-reflective filters primarily for personal
computer monitors under such trademark names as Krystal Clear(TM), OPTIVIEW(TM),
and Protector(TM).
Other Products
--------------
Southwall manufactures a variety of other commercial thin-films, including
highly reflective coatings for use in optical storage media and reflective films
for large screen rear projection television.
Aerospace Products
------------------
Southwall has applied its capabilities in thin-film materials to various
shielding applications. The Company is producing materials that selectively
reflect, absorb, or transmit various portions of the electromagnetic spectrum.
These materials have uses in both new and retrofit applications. Southwall also
manufactures various custom coatings on flexible and rigid substrates for
defense and defense-related applications.
Manufacturing
-------------
Three large-scale sputtering production machines currently provide most of
the Company's sputtered thin-film coatings manufacturing capacity. The Company
6
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also uses two small-scale sputtering machines for smaller production runs and
research and development projects, and one rigid-substrate sputtering machine.
The Company manufacturers its laminated glass products at a separate
facility in Southern California. The Company assembles its anti-reflective
filters at its Palo Alto, California facility and its plant in Sligo, Ireland.
Southwall operated well below capacity in 1994, and the Company believes it
has more than adequate production capacity to meet the Company's manufacturing
requirements at least through 1995, absent major equipment failures.
Sources of Supply
-----------------
The Company has more than one supplier for much of its raw materials and
maintains inventories and close working relationships with its suppliers to
ensure timely and reliable delivery. The substrates used in the manufacture of
Heat Mirror and in several of the Company's aerospace products are currently
available only from a single source. In each case, an alternative source of
supply is being pursued, although there can be no assurance that alternative
sources of supply will be successfully developed. Although Southwall has not
experienced major interruptions in production due to a shortage of raw
materials, prolonged supply shortages would materially and adversely affect the
Company's manufacturing operations, business and financial performance.
Research and Development
------------------------
Southwall's research and development activities are focused upon the
development of new proprietary products, thin-film materials science, and
deposition process optimization and automation. Company-funded research and
development expenditures, which do not include contract research, totaled
$2,187,000, $2,068,000 and $2,310,000 or 9%, 11% and 11% of total net revenues
during 1992, 1993 and 1994, respectively.
Marketing and Customers
-----------------------
The Company markets its products to OEMs in the United States, Canada and
Europe principally through its own direct sales force and sales representatives
and in other countries through independent distributors. Mitsui and Marubeni
Corporation, are the Company's distributors for Heat Mirror and certain
electronics products in Japan, Taiwan, Korea and certain other Far East and
South East Asian countries. Mitsui also has exclusive manufacturing rights for
certain of the Company's electronics products in Japan using the Company's
proprietary sputtering technology. Approximately 83%, 80% and 80% of the
Company's net product sales (see below) resulted from sales to customers located
in the United States in 1992, 1993 and 1994, respectively.
In October 1992, the Company established and staffed a European office to
provide marketing, sales and field service support in Europe primarily for the
Company's Heat Mirror product line.
7
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In 1993, the Company started selling Heat Mirror XIR to Flachglas
Aktiengesellschaft, a German subsidiary of Pilkington Group, PLC of England, for
incorporation into automotive glass.
In December 1993, the Company established and staffed a sales office in
Singapore to provide marketing and sales support in Australia and Asia,
primarily for the Company's Heat Mirror product line.
In May, 1994, the Company entered into an agreement to supply Madico, Inc.,
of Woburn, Massachusetts with Southwall's Heat Mirror XIR(R) transparent solar
control film. Under the agreement, Madico will add adhesives and scratch-
resistant coatings to the Heat Mirror XIR film to produce ready-for-market solar
control window film. Madico will then have exclusive distribution rights for
the finished product in Europe, where it will be sold through Madico's
established distribution network under the Madico(R) trade name. Southwall will
purchase finished XIR solar control window film from Madico for sale, under
exclusive distribution rights, into North America, the Middle East and selected
Far East markets.
Southwall supplies Heat Mirror products to approximately 47 insulating
glass and window fabricators and distributors worldwide. The Company's
proprietary mounting technology is licensed to its customers, which must acquire
or build specialized mounting equipment for the manufacture of Heat Mirror-
equipped windows. The Company's customer support organization trains customers
in the manufacture of Heat Mirror-equipped windows.
In North America, the Company also sells its Heat Mirror product line,
including its California Series laminated glazing product, through approximately
22 sales representatives.
The Company sells its anti-reflective filters primarily through independent
direct sales organizations.
Products for the aerospace industry are sold principally under contracts
with defense contractors, subcontractors and agencies of the United States
Government. The programs in which the Company participates may extend for
several years, but are normally funded on an annual basis. Southwall supplies
its customers pursuant to purchase orders extending for one to three months.
The Company's aerospace business has been adversely affected by delays in
funding or termination of defense programs. A significant portion of the
Company's aerospace business is classified. As a result, the Company is and
will be prohibited from disclosing the substance or status of such business.
Southwall's products are sold under limited warranty. The Company has not
experienced significant product returns and the costs of its warranty programs
have not been substantial.
8
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A small number of customers have accounted for a substantial portion of the
Company's revenues. The Company's largest customer, Hurd Millwork Company,
accounted for 13% of 1994 net product sales. The Company's ten largest
customers accounted for 45% of net product sales. The loss of any of these
customers could have a materially adverse effect on the Company's operating
results. The Company anticipates that customer concentration will continue for
the foreseeable future.
Orders for the Company's products are typically short-term and Southwall
usually ships its products from inventory or produces special customer runs
within 90 days of receiving orders. As a result, the Company generally
experiences no significant order backlog.
Competition
-----------
The thin-film coatings industry and the markets in which Southwall's
customers compete experience rapid technological change. Southwall's revenues
and operating results could be materially adversely affected by new equipment or
process technologies that improve or change the methods of depositing films on
substrates. Technological change in customers' markets may also result in
obsolescence of the Company's products. Southwall's future success will depend,
in large part, on its ability to anticipate technological change and to
introduce new products.
Southwall has a number of present and potential competitors, many of which
have greater financial resources and greater selling, marketing and technical
resources than the Company. Other U.S. companies serving some of the same
markets as the Company include Material Sciences Corporation and Optical Coating
Laboratories, Inc. The two largest U.K. polymer film companies, Courtaulds PLC
and Imperial Chemical Industries PLC (ICI), entered the market in the mid-1980's
by acquiring certain U.S. thin-film manufacturers. The Company also competes in
certain markets with a number of Japanese companies. Southwall believes that
competition for its commercial products comes primarily from other types of
films, various chemical coatings and solar control coatings deposited directly
on glass, and heat absorbing glass, and that the principal competition to its
electronics and aerospace products is currently from non-thin-film alternatives
as well as thin-film alternatives.
The Company competes primarily on the basis of the characteristics and
quality of its products, its ability to meet individual customer specifications
and the quality and level of technical assistance furnished to customers.
Patents and Licenses
--------------------
The Company relies primarily upon trade secrets and know-how to develop and
maintain its competitive position. There can be no assurance that others will
not develop and patent similar technology or that the confidentiality agreements
upon which the Company relies will be honored. The Company's contracts
involving the United States Government present the risk that Southwall's
proprietary information may be disclosed to competitors as part of the
establishment by the Government of second-source manufacturing arrangements.
9
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The Company has twenty-seven (27) patents and seven (7) patent applications
pending in the United States that cover materials, processes, products and
production equipment. The Company also has patents and patent applications
pending in various foreign countries covering the same technology. Expiration
dates for the various patents range from 1997 to 2013. Southwall considers its
proprietary technology, as well as its patent protection, to be a significant
factor in its business. There can be no assurance that any patent will be
issued on pending applications or that any patent issued will provide adequate
protection for the technology or product covered by it. In addition, other
companies and universities have obtained patents covering film configurations
and processes. The Company has obtained licenses under some of these patents
and may from time to time require licenses under additional patents. There can
be no assurance that Southwall will be able to obtain such licenses, if
required, upon commercially reasonable terms.
Litigation has been and may in the future be necessary from time-to-time to
enforce patents issued to the Company to protect trade secrets and know-how
owned by the Company or to determine the enforceability, scope or validity of
the proprietary rights of others. Any such litigation could result in
substantial costs to the Company and division of effort by the Company's
management and technical personnel.
In January 1992, the Company filed a patent infringement suit against
Cardinal IG Company and one of its customers. The suit alleges that Cardinal's
LoE/2/ glass product violates one of the Company's patents. See Legal
Proceedings.
Employees
---------
As of December 31, 1994, Southwall had 180 regular full-time employees, of
whom 33 were engaged in engineering, 95 in manufacturing, and 52 in selling,
general management, finance and administration. The Company is highly dependent
upon the existence and continuing services of certain key scientists and
engineers and management personnel. The loss of services of these employees
could have a materially adverse impact on the business and prospects of the
Company. Many of the Company's employees are highly skilled, and the Company
faces strong competition in recruiting and retaining such personnel.
None of the Company's employees is covered by a collective bargaining
agreement, and the Company has not experienced any work stoppages. The Company
believes that its employee relations are good.
Environmental Matters
---------------------
The Company uses certain hazardous materials in its research and
manufacturing operations and has air and water emissions that require controls.
As a result, Southwall is subject to stringent federal, state and local
regulations governing the storage, use and disposal of wastes. The Company has
implemented a program to monitor its past and present compliance with
environmental laws and regulations. Although the Company believes that it is
currently in material compliance with such laws and regulations, current or
future laws and regulations may require the Company to make expenditures for
compliance with chemical exposure, waste treatment or disposal regulations.
10
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There can be no assurance that the operations, business or assets of the
Company will not be materially adversely affected by the interpretation and
enforcement of current or future environmental laws and regulations.
ITEM 2. PROPERTIES
Southwall's administrative, marketing, engineering and manufacturing
facilities are located in five buildings totaling approximately 119,000 square
feet in Palo Alto, California. In addition, the Company leases 70,000 square
feet in Santa Fe Springs, California for its manufacture of laminated glass
products and 15,000 square feet in Sligo, Ireland where most of the company's
anti-reflective filters are assembled. The buildings are occupied under leases
that expire from May 1997 to December 1999, with options to extend some of these
leases for terms expiring through 2009. The Company is currently sub-leasing
approximately 5,000 square feet of these facilities. The Company anticipates
that these facilities will be suitable for its needs over the next three years
and believes that additional facilities could be available at reasonable costs.
Facility Security Clearance
---------------------------
The Company has a facility security clearance from the United States
Department of Defense. A portion of the Company's sales and other revenues in
1992, 1993 and 1994 was derived from work for which this clearance was required.
Continuation of this clearance requires that the Company remain free from
foreign ownership, control or influence ("FOCI"). Management does not believe
that there is presently any substantial risk of FOCI that will cause its
facility security clearance to be revoked. Loss of such security clearance and
related loss of contracts relating to the United States Government could result
in an adverse decline in the Company's revenues.
ITEM 3. 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 Court of San
Francisco, California. The suit alleges that Cardinal's LoE/2/ 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/2/ 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. The
Company has been informed that the hearing of this appeal is scheduled for March
6, 1995. 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 the Company's patent position should be
validated when the case is tried in the district court.
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The Company is not a party to any other material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1994.
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PART II
=======
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been traded on the NASDAQ National Market
System under the symbol "SWTX" since the completion of the Company's initial
public offering in June 1987. Prices in the following table represent the high
and low closing sales prices for the Company's Common Stock as reported by
NASDAQ.
Common Stock Prices:
-------------------
<TABLE>
<CAPTION>
1993 by Quarter High Low
----------------- ------ -------
<S> <C> <C>
1st $6.00 $ 4.50
2nd $5.75 $ 3.75
3rd $4.50 $ 3.00
4th $4.00 $2.375
<CAPTION>
1994 by Quarter High Low
----------------- ------ ------
<S> <C> <C>
1st $5.38 $3.25
2nd $3.63 $3.00
3rd $3.63 $2.63
4th $3.25 $2.13
</TABLE>
The Company has not paid cash dividends and has no present plans to do so.
There were approximately 2,100 stockholders at December 31, 1994, which includes
stockholders of record and an estimate of the number of stockholders holding
Common Stock in broker name.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------
1990 1991 1992 1993 1994
-------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
----------------------------
Revenues (1)(3).............. $15,810 $18,133 $23,318 $18,501 $21,739
Income (loss) from
operations (2)(4)........... (1,433) (6,288) (429) (1,509) (3,913)
Net income (loss)............ (796) (6,173) 53 (1,324) (3,888)
Net income (loss) per
share....................... $ (.12) $ (.90) $ .01 $ (.23) ($.67)
Weighted average
shares outstanding ......... 6,777 6,858 6,372 5,792 5,808
</TABLE>
(1) Includes $3.8 million of license revenues in 1991.
(2) Includes a $3.5 million charge for restructuring in 1991.
(3) Includes $1.1 million in 1991, $3.5 million in 1992 and $1.1 million in
1993 of machine revenues.
(4) Includes $1 million of charges during the fourth quarter of 1994 to
eliminate three minor product lines ($.5 million) and to consolidate facilities
($.5 million). See Management's Discussion and Analysis of Financial Condition
and Results of Operations below.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1990 1991 1992 1993 1994
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
------------------
Working capital .............. $10,815 $11,792 $10,134 $10,955 $ 8,102
Total assets ................. 44,498 39,852 34,782 33,420 31,372
Long-term obligations ........ 3,079 2,987 3,182 3,028 2,947
Stockholders' equity ......... 38,160 32,267 27,844 26,766 22,988
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
-------
The following table sets forth for the periods indicated (i) the percentage
relationship to revenues of expense and income items and (ii) the percentage
change of such items as compared to the prior period. The table and the
subsequent discussion should be read in conjunction with the financial
statements and the notes thereto included elsewhere in this Form 10-K.
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 products, which typically have
been strongest in the second and third quarters and the timing of short-term
contracts. Sales of the Company's energy conservation products are
significantly
14
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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 products. In addition, revenues and operating results
have historically varied from quarter to quarter as a function of the
utilization of the Company's production machines. Manufacturing inefficiencies
have resulted from under utilization of capacity, the development and
introduction of new products and the changing mix of products manufactured.
Primarily as a result of these factors and in view of the Company's strategy of
developing additional applications for its thin-film technology, and its ongoing
practice of upgrading its manufacturing processes, the Company may continue to
experience quarterly fluctuations in its results of operations.
<TABLE>
<CAPTION>
Percentage of Period to Period
Total Revenues Change
-------------- ----------------
1993 1994
December 31, vs. vs.
--------------------
1992 1993 1994 1992 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net product sales 84.2% 90.6% 98.2% (14.6)% 27.3%
Machine revenues 14.9 5.8 - (69.0) -
License revenues .9 3.6 1.8 200.9 (39.6)
----- ----- ----- ----- -----
Total revenues 1 00.0 100.0 100.0 (20.7) 17.5
Costs and expenses:
Cost of product sales (1) 70.8 77.1 80.8 (7.0) 33.5
Cost of machine
revenues (2) 75.0 19.1 - (92.1) -
Research and development(1) 11.1 12.3 10.8 (5.4) 11.7
Selling, general and
administrative (1) 25.8 28.7 28.6 4.9 26.6
Total costs and expenses 101.8 108.2 118.0 (15.7) 28.2
(Loss) from operations (1.8) (8.2) (18.0) (251.8) -
Interest income 3.2 2.3 1.1 (41.4) (43.5)
Interest expense (1.1) (1.3) (1.0) (5.1) (9.1)
Income(loss) before income
taxes .3 (7.2) (17.9) - -
Provision for income taxes - - - - -
Net Income (loss) .3 (7.2) (17.9) - -
</TABLE>
(1) Computed as a percent of net product sales.
(2) Computed as a percent of machine revenues.
15
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Results of Operations
---------------------
1994 Compared to 1993
---------------------
Effective September 1, 1994, the Company commenced leasing all the assets
formerly of Safety Glass, Inc., dba Armour Worldwide Glass, located in Southern
California, under a five year operating lease for $40,000 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.
The consolidated financial statements for 1994 include four months of SWGI
operations. For the four month period ended December 31, 1994, SWGI's sales
were $.8 million and SWGI's loss before income taxes was $.3 million.
Effective October 31, 1994, the Company acquired Sunflex L.P. ("Sunflex")
for $.5 million to be paid from Sunflex's operating income, if any, over the
four years beginning with 1995. Sunflex assembles and markets aftermarket mesh,
glass and film anti-reflective filters primarily for personal computer monitors.
The consolidated financial statements for 1994 include two months of
Sunflex operations. For the two month period ended December 31, 1994, Sunflex's
sales were $.3 million and Sunflex's loss before income taxes was $.1 million.
Net product sales increased to $21.3 million in 1994 compared to $16.8
million in 1993, a 27% increase. This increase was primarily attributable to
increased volume of products rather than changes in product prices. Of this
increase, $1.1 million was from the new operations discussed above. The
remaining increase in net product sales of $3.2 million was primarily in energy
conservation products from the Company's silver reflector film, California
Series(TM) laminated glass and solar control products, including Solis(TM) solar
control film. Sales of the Company's Heat Mirror(TM) film for insulated glass
units was essentially unchanged in 1994 due to competitive pressures. The
Company's aerospace product sales were also flat year-to-year, reflecting the
continued reduction in defense spending. Machine revenues in 1993 resulted from
the completion of a contract for the design and construction of a semi-
commercial sputtering production machine for Mitsui Toatsu Chemicals
Incorporated.
Cost of product sales for 1994 was 81% of net product sales compared to 77%
for 1993. This percentage increase in 1994 was due to higher period costs which
resulted from a shutdown of the Company's production equipment during part of
the year to reduce inventory levels, a change in product mix which included an
increase in sales of the Company's lower margin products, start-up expenses for
new products and the new operations discussed above, and $.5 million of charges
during the fourth quarter associated with discontinued product lines. The $.5
million of fourth quarter charges was primarily for the write-off of the net
book value of equipment associated with three discontinued product lines. The
decision to discontinue these product lines was the result of a new strategic
plan formulated by the new President and CEO and adopted by the Board of
Directors during the fourth quarter. The product lines were relatively new to
the Company. 1994 net sales for these three product lines totaled approximately
16
<PAGE>
$1.1 million or 4.9% of 1994 net revenues. The Company believes that the
discontinuance of these product lines will allow the Company to focus its
resources on products which provide the opportunity for greater returns to the
Company.
In addition, the Company experienced manufacturing inefficiencies in 1994
resulting from under utilization of capacity. The Company expects this
condition to continue in 1995. Although the Company has not experienced any
significant amount of inventory obsolescence and believes that its inventory is
recoverable net of reserves, obsolescence of the Company's products could be
effected by technological change, competition, loss of customers and reduction
in demand, among other factors.
Research and development expenses, as a percent of net product sales, were
11% in 1994, compared to 12% for 1993. This percentage decrease was primarily
attributable to the increase in net product sales. The absolute dollar increase
in 1994 is attributable to more new product development.
Selling, general and administrative expenses increased from $4.8 million to
$6.1 million but, as a percent of net product sales, was 29% for both years. Of
this increase, $.4 million is associated with the new operations discussed
above, charges of approximately $.5 million during the fourth quarter for the
consolidation of facilities, and increased sales and marketing expenses
associated with the introduction of new products and expansion into the Pacific
Rim. As a result of the discontinuance of three product lines, as discussed
above, the Company determined that it could vacate one of its buildings under
lease, after consolidating certain remaining activities in other buildings, and
reduce future operating expenses. The $.5 million charge is primarily for
future obligations under the lease.
Interest income decreased in 1994 compared to 1993 due primarily to a
decrease in monies invested.
As a result of the factors discussed above, the Company reported a pre-tax
loss of ($3.9) million for 1994, compared to a pre-tax loss of ($1.3) million
for 1993.
The Company believes that it must 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.
1993 Compared to 1992
---------------------
The Company's net revenues were $18.5 million for 1993, including $1.1
million of machine revenues, compared to $23.3 million of net revenues for the
same period of 1992, which included $3.5 million of machine revenues. Net
product sales decreased to $16.8 million in 1993 compared to $19.6 million in
1992, a decrease of 15%. Product sales were down due to a $3.6 million decrease
in aerospace product sales volume which was partially offset by increases in
energy conservation product sales.
17
<PAGE>
Sales in North America in 1993 were below expectations due to the lingering
effects of the recession and bad weather adversely affecting the construction
industry, particularly in the early part of the year and increasing competitive
activities. In addition, aerospace product sales were adversely impacted by
lower defense spending.
Cost of product sales for 1993 was 77% of net product sales compared to 71%
for 1992. The percentage increase in 1993 compared to 1992 was due to the lower
volume of product sales during 1993, and the cost related to excess capacity and
the shutdown of the Company's production equipment during part of the fourth
quarter of 1993.
Cost of machine revenues, as a percentage of machine contract revenues, for
1993 was 19% compared to 75% for 1992. The Company recognized revenue on the
machine contract under the percentage of completion method. The project was
substantially completed during the first quarter of 1993. The machine passed
preliminary acceptance testing in March 1993, and final acceptance testing in
December 1993, removing a number of contingencies associated with this contract
which resulted in higher margins in 1993.
Research and development expenses, as a percent of net product sales, were
12% for 1993, compared to 11% for 1992. This percentage increase was primarily
attributable to the decrease in net product sales.
Selling, general and administrative expenses decreased from $5.1 million to
$4.8 million. However, as a percentage of net product sales, these expenses
increased to 29% in 1993 from 26% of product sales in 1992. This percentage
increase was due to the decrease in net product sales.
Interest income decreased in 1993 compared to 1992 due primarily to a
decrease in monies invested and reductions in interest rates.
As a result of the above, the Company reported a pre-tax loss of ($1.3)
million for 1993, compared to a pre-tax profit of $.1 million for 1992.
Liquidity and Capital Resources
-------------------------------
At December 31, 1994, the Company's net working capital was $8.1 million
compared with $11.0 million at December 31, 1993 and $10.1 million at December
31, 1992. The Company has financed itself primarily through cash from
operations and its existing cash balances. Cash used in operations amounted to
$.4 million and $.3 million in 1994 and 1993, respectively. Cash flow provided
by operations amounted to $2.4 million in 1992.
From December 31, 1993 to December 31, 1994, accounts receivable increased
from $2.2 million to $3.7 million, a $1.5 million increase. This increase is
attributable to the increase in net revenues from $4.3 million in the fourth
quarter of 1993 to $5.7 million in the fourth quarter of 1994, most of which
occurred in the later portion of the quarter, and the approximately $.3 million
of accounts receivable acquired in the purchase of Sunflex which was effective
October 31, 1994.
18
<PAGE>
During 1994, 1993 and 1992, the Company spent $.9 million, $.6 million and
$.5 million, respectively, on capital expenditures. The Company anticipates
total capital expenditures of approximately $2.1 million during 1995.
During 1994, the two new operations discussed above used approximately $1.0
million of cash. SWGI's equipment and facilities lease is for $40,000 per month
or $.5 million per year. This operating lease is cancelable, at any time, with
120 days notice.
At December 31, 1994, the Company has $5.2 million of cash and short-term
investments. In addition, in January 1995 the Company secured a $5 million line
of credit, see Note 8 of Notes to Consolidated Financial Statements. The
Company believes that the line of credit and cash anticipated to be generated
from operations to be adequate to satisfy the Company's capital and operating
requirements at least through 1995.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and
Stockholders of Southwall Technologies Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, cash flows and stockholders' equity
present fairly, in all material respects, the financial position of Southwall
Technologies Inc. and its subsidiaries at December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1994, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
January 27, 1995
20
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEET
--------------------------
(in thousands)
ASSETS
------
<TABLE>
<CAPTION>
December 31
1 9 9 3 1 9 9 4
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,340 $ 1,144
Short-term investments 5,582 4,051
Accounts receivable, net 2,218 3,720
Inventories 4,732 3,907
Other current assets 709 717
-------- --------
Total current assets 14,581 13,539
Property and equipment, net 17,291 15,994
Other assets 1,548 1,839
-------- --------
Total assets $ 33,420 $ 31,372
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,046 $ 2,419
Accrued compensation 833 1,293
Other accrued liabilities 1,571 1,643
Current portion of long-term debt 176 82
-------- --------
Total current liabilities 3,626 5,437
Long-term debt 2,731 2,650
Deferred income taxes 297 297
-------- --------
Total liabilities 6,654 8,384
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value, 20,000 shares
authorized; issued and outstanding 6,911
and 6,917 7 7
Capital in excess of par value 47,323 47,273
Accumulated deficit (16,084) (19,972)
Less cost of treasury stock, 1,108 and
1,070 shares outstanding (4,480) (4,320)
-------- --------
Total stockholders' equity 26,766 22,988
-------- --------
Total liabilities and
stockholders' equity $ 33,420 $ 31,372
======== ========
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31
1 9 9 2 1 9 9 3 1 9 9 4
------- ------- -------
<S> <C> <C> <C>
Net product sales $ 19,629 $ 16,770 $ 21,343
Machine revenues 3,471 1,075 -
License revenues 218 656 396
-------- --------- ---------
Net revenues 23,318 18,501 21,739
-------- --------- ---------
Costs and expenses:
Cost of product sales 13,895 12,923 17,247
Cost of machine revenues 2,604 205 -
Research and development 2,187 2,068 2,310
Selling, general and administrative 5,061 4,814 6,095
-------- --------- ---------
Total costs and expenses 23,747 20,010 25,652
-------- --------- ---------
(Loss) from operations (429) (1,509) (3,913)
Interest income 740 434 245
Interest expense (256) (243) (221)
-------- --------- ---------
Income (loss) before income taxes 55 (1,318) (3,889)
Provision for income taxes 2 6 (1)
-------- --------- ---------
Net income (loss) $ 53 ($ 1,324) ($ 3,888)
========
Net income (loss) per share $.01 ($.23) ($.67)
======== ========= =========
Weighted average shares of common stock
and dilutive common stock equivalents 6,372 5,792 5,808
======== ========= =========
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
----------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Common Stock Capital in Total
--------------- Excess of Accumulated Treasury Stockholders'
Shares Amount Par Value Deficit Stock Equity
------ ------ ---------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1992 6,888 $7 $47,174 $(14,813) $ (101) $32,267
Acquisition of 1,131 shares of
treasury stock at cost (4,581) (4,581)
Shares issued through:
Exercise of options 8 * 31 31
Sales to employees under
Stock Purchase Plan 10 * 40 34 74
Net income 53 53
------ ---- --------- --------- ------- ---------
Balance, December 31, 1992 6,906 7 47,245 (14,760) (4,648) 27,844
Acquisition of 25 shares of
treasury stock at cost (108) (108)
Sale of 55.5 shares for
purchase of license 66 225 291
Shares issued through:
Exercise of options 5 * 22 22
Sales to employees under
Stock Purchase Plan (10) 51 41
Net loss (1,324) (1,324)
------ ---- --------- --------- ------- ---------
Balance, December 31, 1993 6,911 7 47,323 (16,084) (4,480) 26,766
Acquisition of 25 shares of
treasury stock at cost (91) (91)
Shares issued through:
Interest paid with stock (55) 225 170
Sales to employees under
Stock Purchase Plan 6 * 5 26 31
------ ---- --------- --------- ------- ---------
Net loss (3,888) (3,888)
Balance, December 31, 1994 6,917 $7 $47,273 $(19,972) $(4,320) $22,988
====== ==== ========= ========= ======= =========
</TABLE>
*Indicates amount less than $500.
See accompanying notes to financial statements.
23
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31
1 9 9 2 1 9 9 3 1 9 9 4
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 53 ($ 1,324) ($3,888)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,189 2,938 2,059
Decrease (increase) in accounts receivable (487) 233 (1,502)
Decrease (increase) in inventories 450 (2,024) 825
Decrease (increase) in other current assets 76 (27) (8)
(Decrease) increase in accounts payable
and accrued liabilities (885) (130) 2,075
-------- --------- --------
Cash provided by (used in)
operating activities 2,396 (334) (439)
-------- --------- --------
Cash flows from investing activities:
Decrease(increase) in short-term investments 2,632 2,159 1,531
Expenditures for property and equipment
and other assets (550) (594) (1,053)
-------- --------- --------
Net cash (used in) provided by
investing activities 2,082 1,565 478
-------- --------- --------
Cash flows from financing activities:
Proceeds from issuance of stock, net
of related costs 105 21 31
Reduction of long-term debt (128) (154) (175)
Purchase of treasury stock, net (4,581) (66) (91)
-------- --------- --------
Net cash (used in) financing
activities (4,604) (199) (235)
-------- --------- --------
Net increase (decrease) in cash
and cash equivalents (126) 1,032 (196)
Cash and cash equivalents, beginning of year 434 308 1,340
-------- --------- --------
Cash and cash equivalents, end of year $ 308 $ 1,340 $ 1,144
======== ========= ========
Supplemental cash flow disclosures:
Interest paid $ 71 $ 58 $ 36
Income taxes paid $ 1 $ 6 $ (1)
Supplemental schedule of non-cash investing
and financing activities:
Property and equipment acquired via
capital lease $ 69 $ -- $ --
Treasury stock used for purchase of
license agreement $ -- $ 291 $ --
Treasury stock used for payment
of interest $ -- $ -- $ 170
</TABLE>
See accompanying notes to financial statements.
24
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(in thousands, except for per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
---------------------------------------------------
Operations
----------
Southwall Technologies Inc. (the "Company") operates in a single industry
segment and is engaged in the design and production of thin film coatings that
selectively absorb, reflect or transmit certain types of electromagnetic
radiation and in manufacturing certain products which use these coatings. These
coatings and other products are used in the residential and commercial building,
electronics and aerospace markets.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Southwall
Technologies Inc. and its wholly-owned subsidiaries, Southwall Worldwide Glass
Inc. since its inception on September 1, 1994, and Southwall-Sunflex, Inc.,
since October 31, 1994 when the company acquired Sunflex L.P. (see Note 2). All
significant intercompany balances and transactions have been eliminated.
Cash equivalents and short-term investments
-------------------------------------------
Cash equivalents and short-term investments consist of domestic and Eurodollar
certificates of deposit, treasury bills, commercial paper, bankers' acceptances,
corporate notes and mutual funds. Investments with maturities of three months
or less from the date of purchase are included in cash equivalents.
Statement of Financial Accounting Standards No. 115 (SFAS 115) "Accounting for
Certain Investments in Debt and Equity Securities," was adopted by the Company
effective January 1, 1994. Accordingly, the Company has classified its short-
term investments as "available-for-sale securities." At December 31, 1994, the
difference between cost and fair market value was insignificant and the
gains/losses on sales of securities during the year were insignificant.
Revenue recognition
-------------------
Revenues from sales of manufactured products are recorded at the time shipments
are made. Revenues from long-term contracts, including contracts to design and
build machines, are generally recorded using the percentage-of-completion method
whereby income is recognized based on the estimated stage of completion of
individual contracts.
The Company has agreements under which it receives fees for certain rights to
technology and products. License revenues associated with these agreements are
recognized when earned, generally upon receipt of payment or shipment of
product.
25
<PAGE>
Accounts receivable
-------------------
Accounts receivable are stated net of allowance for doubtful accounts of $528
and $540 at December 31, 1993 and 1994, respectively.
Inventories
-----------
Inventories are stated at the lower of cost (determined by the first-in, first-
out method) or market. Cost includes materials, labor and manufacturing
overhead.
Property and equipment
----------------------
Property and equipment are stated at cost. The Company uses the units-of-
production method for calculating depreciation on certain of its production
machines and the straight-line method for all other property and equipment.
Estimated useful lives of the assets range from five to ten years. On its large
scale production machine, for which the units-of-production depreciation method
is used, the Company records minimum annual depreciation of at least one-half of
the depreciation that would have been recorded utilizing the straight-line
depreciation method over a ten-year life. Leasehold improvements are amortized
using the term of the related lease or the economic life of the improvements, if
shorter.
Additions, major renewals and betterments are included in the asset accounts at
cost. Ordinary maintenance and repairs are charged to expense as incurred.
Gains or losses from disposal are included in earnings.
Intangible assets
-----------------
Patents and licenses relating to the Company's commercial products are stated at
cost less accumulated amortization. Amortization is computed on the straight-
line basis over terms of up to 17 years. At December 31, 1993 and 1994 patents
and licenses are included in other assets at a cost of $961 and $889, net of
accumulated amortization of $508 and $600, respectively. Amortization expense
for 1992, 1993, and 1994 was $80, $152 and $103, respectively.
Income taxes
------------
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts.
Net income (loss) per share
----------------------------
Net income (loss) per share is computed based upon the weighted average number
of common and dilutive common equivalent shares outstanding. Common equivalent
shares include the effect of stock options utilizing the treasury stock method
when dilutive. Convertible debentures are not included since they are anti-
dilutive.
26
<PAGE>
NOTE 2 - NEW OPERATIONS:
-----------------------
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.
The consolidated financial statements for 1994 include four months of SWGI
operations. For the four month period ended December 31, 1994, SWGI's sales
were $809 and SWGI's loss before income taxes was $323. SWGI's assets at
December 31, 1994 include accounts receivable of $290 and inventories of $147.
Effective October 31, 1994, the Company acquired Sunflex L.P. ("Sunflex") for
$500 to 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.
This acquisition is being accounted for as a purchase. Since the purchase price
is contingent upon future operating income, no payments were made at the time of
acquisition. At the date of acquisition, assets exceeded liabilities by 105,
resulting in negative goodwill. This negative goodwill will be amortized over
36 months.
The consolidated financial statements for 1994 include two months of Sunflex
operations. For the two month period ended December 31, 1994, Sunflex's sales
were $260 and Sunflex's loss before income taxes was $65. Sunflex's assets at
December 31, 1994 include accounts receivable of $355 and inventories of $199.
Had the acquisition of Sunflex been completed as of January 1, 1993, the
unaudited pro forma net revenues, net loss and net loss per share would have
been as follows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
1993 1994
-------- --------
(unaudited) (unaudited)
<S> <C> <C>
Net revenues $20,918 $23,290
Net loss (1,444) (4,316)
Net loss per share (.25) (.74)
</TABLE>
This unaudited pro forma financial information does not necessarily indicate the
operating results that would have been achieved had the transaction been in
effect as of the beginning of each year and should not be construed as
representative of future operations.
27
<PAGE>
NOTE 3 - BALANCE SHEET DETAIL:
-----------------------------
<TABLE>
<CAPTION>
Inventory: December 31,
--------- -------------------
1 9 9 3 1 9 9 4
-------- --------
<S> <C> <C>
Work-in-process $ 637 $ 440
Raw materials 1,111 1,299
Finished goods 2,984 2,168
-------- --------
$ 4,732 $ 3,907
======== ========
<CAPTION>
Property and Equipment: December 31,
---------------------- -------------------
1 9 9 3 1 9 9 4
-------- --------
<S> <C> <C>
Machinery and equipment $ 31,120 $ 31,080
Leasehold improvements 2,528 2,468
Furniture and fixtures 1,979 2,126
Construction-in-process 310 457
-------- --------
35,937 36,131
Less - accumulated depreciation
and amortization (18,646) (20,137)
-------- --------
$ 17,291 $ 15,994
======== ========
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1992,
1993 and 1994 was $3,109, $2,864 and $1,956, respectively.
<TABLE>
<CAPTION>
Other Accrued Liabilities: December 31,
-------------------------- -------------------
1 9 9 3 1 9 9 4
-------- --------
<C> <C>
Reserve for warranties and sales
returns $ 552 $ 201
Restructuring 220 -
Other, including facility
consolidation of $441 in 1994 799 1,442
-------- --------
$ 1,571 $ 1,643
======== ========
</TABLE>
NOTE 4 - LONG-TERM DEBT:
------------------------
The Company's long term debt is comprised of a $2,650 convertible debenture, due
May 31, 1999, bearing interest, payable semi-annually with the Company's common
stock, at two percent below prime, but not less than 7% nor higher than 11%, and
convertible into the Company's common stock at a price of $9.95 per share
(subject to certain adjustments).
28
<PAGE>
NOTE 5 - INCOME TAXES:
---------------------
Deferred tax liabilities (assets) are comprised of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1993 1994
-------- ---------
<S> <C> <C>
Depreciation $ 2,637 $ 3,199
Other 88 39
------- --------
Gross deferred tax liabilities 2,725 3,238
------- --------
Inventory reserves (261) (259)
Write-down of fixed assets (1,038) (964)
State depreciation (487) (311)
Other (1,145) (1,030)
Loss carryforwards (5,702) (7,707)
Credit carryforwards (1,050) (1,050)
------- --------
Gross deferred tax assets (9,683) (11,321)
------- --------
Deferred tax assets valuation
allowance 6,958 8,083
------- --------
Net deferred taxes $ - $ -
======= ========
</TABLE>
At December 31, 1994 the Company had net federal operating loss carryforwards of
approximately $20,000 which expire at various dates from 1997 through 2009. The
net operating loss carryforwards include approximately $1,500 resulting from
employee exercises of non-incentive stock options, the tax benefit of which,
when realized, will be accounted for as an addition to capital in excess of par
value, rather than as a reduction of the provision for income taxes. Research
and development, investment tax and foreign tax credit carryovers of
approximately $1,000 are also available to reduce future federal income taxes
and expire at various dates through 2005. If certain substantial changes in the
Company's ownership occur, there would be an annual limitation on the amount of
the carryforwards which can be utilized.
NOTE 6 - STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN:
------------------------------------------------------------
The Company has granted stock options under certain option agreements in 1981
and 1983, its 1983 Qualified and Non-Qualified Stock Option Plan, and its
restated 1987 Stock Option Plan. The plans and agreements are administered by
the Board of Directors. Under the terms of the 1983 Plan and the 1981 and 1983
Agreements, options to the Company's employees, directors and consultants were
granted at prices not less than the fair market value of the Company's stock on
the date of grant. The exercise price of options granted under the restated
1987 Stock Option Plan must be at least 85% of the fair market value of the
stock at the date of grant.
29
<PAGE>
Options under the plans generally vest at a rate of 25% per year, are non-
transferable and generally expire over terms not exceeding ten years from the
date of grant or three months after termination of the optionee's relationship
with the Company.
In October 1994, the Company allowed all holders of outstanding options to
exchange higher priced options for new non-qualified options at $2.50 per share,
the fair market value at the time of the Board's action. The repricing terms
provided that for each 100 shares of options exchanged, 75 shares of new options
would be granted; those options vested at the time of the exchange would revest
in one year; and those options unvested at the time of the exchange would vest
on the original option schedule. Options for 1,493 shares were exchanged for
new options for 1,120 shares.
The activity under the plans and agreements is as follows:
<TABLE>
<CAPTION>
Shares of
Common
Stock Exercise Price
---------- --------------
<S> <C> <C>
Options outstanding at
January 1, 1992 1,673 $2.50 -$ 8.33
Granted 171 $4.00 -$ 6.00
Exercised ( 8) $2.50 -$ 5.50
Canceled or Expired (59) $3.25 -$ 7.25
------
Options outstanding at
December 31, 1992 1,777 $2.50 -$ 8.33
Granted 271 $3.25 -$ 5.38
Exercised ( 5) $2.50 -$ 5.00
Canceled or Expired (227) $3.00 -$ 8.33
------
Options outstanding at
December 31, 1993 1,816 $2.50 -$ 7.75
Granted 1,527 $2.50 -$ 5.38
Exercised -
Canceled or Expired (1,837) $2.50 -$ 7.75
------
Options outstanding at
December 31, 1994 1,506 $2.50 -$ 7.25
======
</TABLE>
As of December 31, 1994, there were 394 shares of Common Stock available for
grant under all plans. In addition, at December 31, 1994, 114 options were
vested and exercisable at prices ranging from $2.50 to $7.25.
30
<PAGE>
Employee Stock Purchase Plan
----------------------------
In April 1988, the Company adopted the Employee Stock Purchase Plan ("the
Purchase Plan") and reserved 150 shares of Common Stock for issuance thereunder.
Employees of the Company, subject to certain limitations, may purchase a certain
number of shares at 85% of the fair market value of the stock. During 1992,
1993 and 1994, 20, 13 and 12 shares, respectively, were sold under the Purchase
Plan.
NOTE 7 - LEASE COMMITMENTS:
--------------------------
The Company leases certain property and equipment as well as its facilities
under noncancellable operating leases. These leases expire at various periods
through 1999.
As of December 31, 1994, the future minimum payments under these leases are as
follows:
1995 $1,816
1996 1,818
1997 1,728
1998 1,597
1999 and beyond 1,437
------
$8,396
======
Rent expense under operating leases was approximately $1,239, $1,241 and $1,337,
in 1992, 1993 and 1994, respectively.
NOTE 8 - LINE OF CREDIT AGREEMENT:
---------------------------------
In January 1995, the Company secured a $5 million revolving line of credit. The
facility expires in February 1996, but 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 and a percentage of the appraised liquidation
value of one of the Company's production machines. The line is secured by the
assets of the Company and bears interest at an annual rate of prime plus 1 1/2%,
reducing to prime plus 1/2% in certain circumstances. Under the terms of the
agreement, the Company is required to maintain certain financial ratios.
As of December 31, 1994, there were no borrowings under this line of credit.
NOTE 9 - MAJOR CUSTOMERS:
------------------------
Three commercial customers accounted for 21%, 15% and 12% in 1992; two
commercial customers accounted for 19% and 10% in 1993; and one commercial
customer accounted for 13% in 1994 of net product sales. Export product sales,
primarily to Canada, accounted for 17%, 20% and 20% of net product sales in
1992, 1993 and 1994, respectively.
31
<PAGE>
NOTE 10 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
-------------------------------------------------------
Summarized quarterly financial data for 1993 and 1994 is as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
------- ------- ------- -------
<S> <C> <C> <C> <C>
1993:
----
Net product sales $4,265 $4,047 $4,366 $4,092
Machine revenues 779 263 14 19
License revenues 151 170 120 215
Gross margin 1,612 1,354 1,530 877
Net income (loss) 38 (412) (261) (689)
Net income (loss) per share .01 (.07) (.04) (.12)
1994:
----
Net product sales $4,421 $5,085 $6,151 $5,686
License revenues 58 220 78 40
Gross margin 1,035 1,800 1,461 196
Net income (loss) (594) 37 (610) (2,721)
Net income (loss) per share (.10) .01 (.11) (.47)
</TABLE>
The fourth quarter of 1994 was adversely impacted by approximately $1 million of
charges to eliminate three under-performing product lines, to write-off related
and non-performing assets, and to consolidate facilities. In addition, the
quarter was also adversely impacted by higher period costs which resulted from a
shutdown of the Company's production equipment during part of the quarter to
reduce inventory levels, and start up expenses for new products and new
operations (see Note 2).
Per share amounts, based on average shares outstanding each quarter, may not add
to the total for the year.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
32
<PAGE>
PART III
========
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item concerning the Company's directors
and the Company's executive officers is incorporated by reference to the
sections entitled "Nominees" and "Management," respectively, appearing in the
Company's Proxy Statement for its 1995 Annual Meeting of Stockholders (the
"Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
sections entitled "Executive Compensation," "Severance Agreements" and "Report
of the Board of Directors Concerning Executive Compensation" appearing in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
section entitled "Security Ownership of Officers, Directors and Principal
Stockholders" appearing in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
section entitled "Certain Relationships and Other Transactions" appearing in the
Proxy Statement.
33
<PAGE>
PART IV
=======
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-K:
(a)(1) Index to Financial Statements. The following Financial
Statements of Southwall Technologies Inc. are filed as part of
this Form 10-K:
<TABLE>
<CAPTION>
Form 10-K
Page Number
-----------
<S> <C>
Report of Independent Accountants 20
Consolidated Balance Sheet as of
December 31, 1994 and 1993 21
Consolidated Statement of Operations
for the years ended December 31, 1994,
1993 and 1992 22
Consolidated Statement of Stockholders'
Equity for the years ended December 31,
1994, 1993 and 1992 23
Consolidated Statement of Cash Flows
for the years ended December 31, 1994,
1993 and 1992 24
Notes to Consolidated Financial Statements 25
</TABLE>
(a)(2) Index to Financial Statement Schedules. Schedules have been
omitted because they are not applicable or required, or the
information required to be set forth therein is included in the
Financial Statements or notes thereto.
(a)(3) Exhibits. Reference is made to the Exhibit Index on pages 38
--------
through 40 of this Form 10-K.
(b) Reports on Form 8-K.
-------------------
None
For the purposes of complying with the amendments to the rules governing
Form S-8 (effective July 12, 1990) under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows:
34
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the 1933 Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered on the Form S-8 identified below, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
The preceding undertaking shall be incorporated by reference into
registrant's Registration Statements on Form S-8 Nos. 33-28599 (filed on May 9,
1989), 33-37247 (filed October 11, 1990), 33-42753 (filed on September 16, 1991)
and 33-51758 (filed on September 8, 1992).
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, as of the 14th day of
August, 1995.
SOUTHWALL TECHNOLOGIES INC.
By /s/Martin M. Schwartz
---------------------
Martin M. Schwartz
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities
indicated, as of August 14, 1995.
Signature Title
--------- -----
/s/J. Larry Smart Chairman of the Board of Directors
---------------------------
(J. Larry Smart)
/s/Martin M. Schwartz President, Chief Executive Officer
--------------------------- and Director (Principal Executive
(Martin M. Schwartz) Officer)
/s/Alfred V. Larrenaga Sr. Vice President, Chief Financial
--------------------------- Officer and Secretary (Principal Financial
(Alfred V. Larrenaga) and Accounting Officer)
/s/Bruce J. Alexander Director
---------------------------
(Bruce J. Alexander)
/s/Joseph B. Reagan Director
---------------------------
(Joseph B. Reagan)
36
<PAGE>
/s/Walter C. Sedgwick Director
---------------------------
(Walter C. Sedgwick)
37
<PAGE>
INDEX TO EXHIBITS FILED WITH
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1994
Exhibit
Number Description
------- -----------
3.1(1) Restated Certificate of Incorporation of the Company.
3.2(1) By-laws of the Company.
10.4(1) The Company's Management Incentive Plan.
10.23(1) Agreement, dated January 31, 1984, between the Company and Mitsui
Toatsu Chemicals, Inc., as amended (with certain confidential
information deleted therefrom and filed separately).
10.24(1) Memorandum of Understanding, dated September 24, 1985, between the
Company and N.V. Bekaert S.A..
10.35(1) Lease Agreement for the facilities at 3941 East Bayshore Road,
dated March 20, 1979, between the Company and Straube Associates,
Inc.
10.36(1) Lease Agreement for the facilities at 3961 East Bayshore Road,
dated March 20, 1979, between the Company and Allan F. Brown and
Robert V. Brown.
10.40(1) Exclusive License Agreement, dated April 20, 1987, between the
Company and Massachusetts Institute of Technology.
10.41(1) Agreement, dated April 16, 1987, between the Company and the BOC
Group, Inc., and amending letter.
10.42(1) Form of Indemnity Agreement, dated April 21, 1987, between the
Company and each of its officers and directors.
10.52(2) Marketing and Distribution Agreement dated as of May 20, 1988,
among Mitsui Toatsu Chemicals, Inc. ("Mitsui"), Marubeni
Corporation ("Marubeni") and the Company.
10.53(2) Common Stock Purchase Agreement dated as of May 23, 1988, among
Mitsui, Marubeni and the Company.
10.57(10) Restated 1987 Stock Option Plan, as amended.
10.58(2) Employee Stock Purchase Plan, as amended.
38
<PAGE>
10.59(3) Lease Agreement for the facilities at 3969-3975 East Bayshore Road
Palo Alto, California, dated January 1, 1989, between the Company
and Bay Laurel Investment Company.
10.60(3) Lease Agreements for the facilities at 3977-3995 East Bayshore Road
Palo Alto, California, dated January 1, 1989, between the Company
and Bay Laurel Investment Company.
10.62(3) Common Stock Sales Agreement, dated May 2, 1989, between the
Company and Monsanto Company.
10.63(3) Convertible Subordinated Note, Due May 31, 1999.
10.64(3) Warrants to Purchase Common Stock of Southwall Technologies Inc.,
void after May 31, 1996.
10.65(3) Second Restated Registration Rights Amendment, Dated May 2,
1989, among the Company, Lockheed Corporation, Minnesota Mining and
Manufacturing Company, Mitsui Toatsu Chemicals, Inc. and Marubeni
Corporation, and Monsanto Company.
10.66(3) Non-exclusive License Agreement, dated March 9, 1989, between the
Company and the Massachusetts Institute of Technology (with certain
confidential information deleted).
10.68(3) Registration Rights Agreement, dated August 15, 1989, between the
Company and State Farm Mutual Automobile Insurance Company.
10.69(4) Lease Agreement for the facilities at 1029 Corporation Way Palo
Alto, California, dated April 27, 1989, between the Company and C&J
Development, as amended.
10.71(5) Lease Agreement for the facilities at 3780 Fabian Way Palo Alto to,
California, dated June 11, 1990, between the Company and The Fabian
Building.
10.72(5) License Agreement between Mitsui Toatsu Chemicals, Inc. and the
Company, dated January 30, 1991.
10.74(6) License Agreement between the Company and the Dow Chemical Company,
dated February 1, 1993.
10.77(10) Fourth Amendment, dated March 3, 1993, between the Company and C&J
Development to the Lease for the facilities at 1029 Corporate Way
filed as exhibit number 10.69.
10.78(7) Amendment to property lease dated February 2, 1994 to extend lease
period on building at 3961 E. Bayshore Road, Palo Alto, CA.
Original lease filed as exhibit number 10.36
39
<PAGE>
10.79(7) Amendment to property lease dated April 4, 1994 to extend lease
period on building at 3941 E. Bayshore Road, Palo Alto, CA.
Original lease filed as exhibit number 10.35.
10.80(8) Lease Agreement between Frank Gant, an individual, as Lessor and
Southwall Technologies Inc., a Delaware corporation, as Lessee
effective September 1, 1994.
10.81(8) Purchase Agreement among Southwall Technologies Inc., Southwall-
Sunflex, Inc., Sunflex, L.P., and Sunflex Partners effective
October 31, 1994.
21 List of Subsidiaries of Southwall Technologies Inc.
23.1 Consent of Independent Accountants.
99.1(9) Letter, dated June 5, 1987, from the U.S. Department of the Air
Force to the SEC Pursuant to Rule 171.
_________________
(1) Filed as an exhibit to the Registration Statement on Form S-1 filed with the
Commission on April 27, 1987 (Registration No. 33- 13779) (the "Registration
Statement") and incorporated herein by reference.
(2) Filed as an exhibit to the Form 10-Q Quarterly Report for Quarter Ended June
30, 1988, filed with the Commission on August 15, 1988 and incorporated
herein by reference.
(3) Filed as an exhibit to the Form 10-Q Quarterly Report for Quarter Ended
July 2, 1989, filed with the Commission on August 16, 1989 and incorporated
herein by reference.
(4) Filed as an exhibit to the Form 10-K Annual Report 1989, filed with the
Commission on March 30, 1990 and incorporated herein by reference.
(5) Filed as an exhibit to the Form 10-K Annual Report 1990, filed with the
Commission on March 25, 1991 and incorporated herein by reference.
(6) Filed as an exhibit to the Form 10-K Annual Report 1992, filed with the
Commission on March 15, 1993 and incorporated herein by reference.
(7) Filed as an exhibit to the Form 10-Q Quarterly Report for Quarter Ended July
3, 1994, filed with the Commission on August 15, 1994 and incorporated
herein by reference.
(8) Filed as an exhibit to the Form 10-Q Quarterly report for Quarter Ended
October 2, 1994, filed with the Commission on November 9, 1994 and
incorporated herein by reference.
(9) Filed as Exhibit No. 28.1 to Post-Effective Amendment No. 1 to the
Registration Statement, filed with the Commission on June 9, 1987 and
incorporated herein by reference.
40
<PAGE>
(10) Filed as an exhibit to the Form 10-K Annual Report 1994, filed with the
Commission on March 2, 1995 and incorporated herein by reference.
41
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
EXHIBIT 21
----------
LIST OF SUBSIDIARIES OF SOUTHWALL TECHNOLOGIES INC.
---------------------------------------------------
Name State or other Jurisdiction of Incorporation
---- --------------------------------------------
Southwall Worldwide Glass Inc. California
Southwall-Sunflex, Inc. California
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
EXHIBIT 23.1
------------
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements of Southwall Technologies Inc. on Form S-8 Nos. 33-28599 (filed on
May 9, 1989), 33-37247 (filed on October 11, 1990), 33-42753 (filed on September
16, 1991) and 33-51758 (filed on September 8, 1992) of our report dated January
27, 1995 appearing on page 20 of this Form 10-K/A.
PRICE WATERHOUSE LLP
San Jose, California
August 14, 1995
