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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM 10-K
(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, 1995
-------------------------------------------
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to _________
Commission file number 0-15930
-------
SOUTHWALL TECHNOLOGIES INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2551470
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1029 Corporation Way, Palo Alto, California 94303
------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 962-9111
--------------
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]
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The approximate aggregate market value of the Common Stock held by
non-affiliates of the registrant on January 31, 1996, (based upon the closing
sales price of the Common Stock on the NASDAQ National Market System on such
date) was $21,000,000. For purposes of this disclosure, Common Stock held by
stockholders whose ownership exceeds five percent of the Common Stock
outstanding as of January 31, 1996, 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, 1996, was 5,935,863.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed
with the Commission in connection with the Company's 1996 Annual Meeting of
Stockholders (the "Proxy Statement") are incorporated by reference in Part III
of this Form 10-K.
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SOUTHWALL TECHNOLOGIES INC.
1995 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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<TABLE>
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Page
<S> <C>
PART I
ITEM 1. BUSINESS....................................................... 4
ITEM 2. PROPERTIES..................................................... 10
ITEM 3. LEGAL PROCEEDINGS.............................................. 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS............................................ 11
ITEM 6. SELECTED FINANCIAL DATA........................................ 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................ 12
ITEM 8. FINANCIAL STATEMENTS........................................... 18
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........... 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT................. 32
ITEM 11. EXECUTIVE COMPENSATION......................................... 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................. 32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.................................................... 33
</TABLE>
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PART I
======
ITEM 1. BUSINESS
General
- -------
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, anti-reflective film for
computer monitor CRTs, 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 operates 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) anti-
reflective filters, (4) its Altair(TM) family of transparent conductors, (5) its
Etch-A-Flex(R) family of flexible thin-film circuit materials, (6) laminated
glass products, and (7) other commercial thin-film products. 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
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visible light with 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.
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 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 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.
Electronic Products
-------------------
Anti-Reflective Film and Filters
--------------------------------
Southwall's anti-reflective film for computer monitor CRTs minimize
glare, radiation and static. This film is marketed to manufacturers of CRTs.
The Company, through its Southwall-Sunflex, Inc. subsidiary, markets aftermarket
mesh, glass and film anti-reflective filters primarily for
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personal computer monitors under such trademark names as Krystal Clear,
OPTIVIEW, and Protector.
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
polyimide film. Flexible circuits are used where weight, shape, size, motion or
vibration is a significant consideration.
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 also uses two small-scale sputtering machines for smaller production
runs, and research and development projects.
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 believes it has more than adequate production capacity to
meet the Company's manufacturing requirements at least through 1996, absent
major equipment failures.
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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 anti-reflective film 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
$2,068,000, $2,310,000 and $2,069,000, or 11%, 11% and 6% of total net revenues
during 1993, 1994 and 1995, respectively.
Marketing and Customers
- -----------------------
The Company markets its products to OEMs in the United States, Canada,
Europe and Asia principally through its own direct sales force and sales
representatives. Mitsui and Marubeni Corporation, are the Company's
distributors for Heat Mirror and certain electronics products in Japan. Mitsui
also has exclusive manufacturing rights for certain of the Company's electronics
products in Japan using the Company's proprietary sputtering technology.
Approximately 80%, 80% and 63% of the Company's net product sales (see below)
resulted from sales to customers located in the United States in 1993, 1994 and
1995, respectively.
In 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.
In 1995, the Company established and staffed a sales office in Hong
Kong to provide marketing and sales support in Australia and Asia, primarily for
the Company's window products.
In 1995, Southwall started selling its proprietary anti-reflective
film to SONY Corporation, Japan for computer monitor CRTs.
Southwall supplies Heat Mirror products to approximately 60 insulating
glass and window fabricators and distributors worldwide. The Company's
proprietary mounting technology is licensed to its customers, who 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.
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In North America, the Company also sells its Heat Mirror product line,
including its California Series laminated glazing product, through approximately
30 sales representatives.
The Company sells its anti-reflective filters primarily through
independent direct sales organizations.
Southwall's products are sold with a limited warranty. The Company
has not experienced significant product returns and the costs of its warranty
programs have not been substantial.
A small number of customers have accounted for a substantial portion
of the Company's revenues. The Company's ten largest customers accounted for
45% and 47% of net product sales in 1994 and 1995, respectively. 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. One of the largest U.K. polymer film companies,
Courtaulds PLC, 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.
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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 has twenty-two (22) patents and eleven (11) 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 2014. 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.
Employees
- ---------
As of December 31, 1995, Southwall had 191 regular full-time
employees, of whom 28 were engaged in engineering, 111 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
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or future laws and regulations may require the Company to make expenditures for
compliance with chemical exposure, waste treatment or disposal regulations.
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 believes that these
facilities are suitable for 1996. However, should demand for the Company's
products increase significantly, additional facilities could be necessary. The
Company believes that such 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
1993, 1994 and 1995 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 suite alleges that Cardinal's LoE2 glass product
violates the Company's U.S. Patent #4,799,745, which covers the structure of
particular optical coatings for glass products, including the Company's Heat
Mirror XIR solar reflecting film.
In April 1993 Cardinal filed a motion for summary judgment alleging
that the LoE2 coatings do not infringe the Company's patent and that the patent
is invalid. On March 2, 1994 the District Court judge entered an order denying
Cardinal's motion that the Company's patent was invalid, but granting its motion
with respect to noninfringement. The Company filed an appeal to the
noninfringement decision with the Court of Appeals for the Federal Circuit. In
May 1995, the Court of Appeals for the Federal Circuit affirmed the Federal
District Court decision. The Company's subsequent petition for a rehearing was
denied. The Company's petition to the Supreme Court of the United States was
denied in November, 1995.
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The Company is not a party to any 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, 1995.
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>
1994 by Quarter High Low
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<S> <C> <C>
1st $5.38 $3.25
2nd $3.63 $3.00
3rd $3.63 $2.63
4th $3.25 $2.13
<CAPTION>
1995 by Quarter High Low
--------------- ---- ---
<S> <C> <C>
1st $3.25 $2.69
2nd $3.25 $2.88
3rd $4.88 $2.94
4th $4.44 $3.63
</TABLE>
The Company has not paid cash dividends and has no present plans to do
so. There were approximately 2,000 stockholders at December 31, 1995, 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,
----------------------------------------------------
1991 1992 1993 1994 1995
-------- -------- --------- -------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
- -----------------------------
Revenues (1)(3) $18,133 $23,318 $ 18,501 $21,739 $33,501
Income (loss) from operations (2)(4) (6,288) (429) (1,509) (3,913) 726
Net income (loss) (6,173) 53 (1,324) (3,888) 633
Net income (loss) per share $ (.90) $ .01 $ (.23) $ (.67) $ .10
Weighted average shares outstanding 6,858 6,372 5,792 5,808 6,315
</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).
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1991 1992 1993 1994 1995
-------- -------- --------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
- -------------------
Working capital $11,792 $10,134 $10,955 $ 8,102 $ 9,724
Total assets 39,852 34,782 33,420 31,372 34,105
Long-term obligations 2,987 3,182 3,028 2,947 3,271
Stockholders' equity 32,267 27,844 26,766 22,988 23,914
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
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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 influenced by the residential and commercial construction
industries, and reduction in construction has generally resulted in a
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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,
primarily in 1993 and 1994, 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
-------------------------------------- --------------------
December 31, 1994 1995
-------------------------------------- vs. vs.
1993 1994 1995 1993 1994
----- ----- ----- -------- ------
<S> <C> <C> <C> <C> <C>
Net product sales 90.6% 98.2% 98.8% 27.3 % 55.0%
Other revenues 9.4 1.8 1.2 (77.1)% 3.5%
----- ----- ----- ----- -----
Total revenues 100.0 100.0 100.0 17.5 54.1
Costs and expenses:
Cost of product sales (1) 77.1 80.8 70.3 33.5 34.9
Cost of other revenues(2) 11.8 - - - -
Research and development(1) 12.3 10.8 6.3 11.7 (10.4)
Selling, general and administrative (1) 28.7 28.6 22.5 26.6 22.1
Total costs and expenses 108.2 118.0 99.0 28.2 27.8
Income(loss) from operations (8.2) (18.0) 2.2 - -
Interest income 2.3 1.1 0.4 (43.5) (48.6)
Interest expense (1.3) (1.0) (0.7) (9.1) -
Income(loss) before income taxes (7.2) (17.9) 1.9 - -
Provision for income taxes - - - - -
Net income (loss) (7.2) (17.9) 1.9 - -
</TABLE>
(1) Computed as a percent of net product sales.
(2) Computed as a percent of other revenues.
Results of Operations (in thousands)
-----------------------------------
1995 Compared to 1994
---------------------
Effective September 1, 1994, the Company commenced leasing all the
assets formerly owned by Safety Glass, Inc., dba Armour Worldwide Glass, located
in Southern California, under a five year operating lease for $40 per
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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 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. Sunflex did not have operating income in 1995 and, as a result, no
payments have been made to previous owners.
The Company's net product sales were $33.1 million for 1995 compared
to $21.3 million in 1994, a 55% increase. Of this increase, which was primarily
volume related, approximately $2.5 million was from the new operations discussed
above. In addition, net product sales of energy conservation products increased
by approximately $6.5 million, and net product sales of electronic products,
including sales of the Company's new anti-reflective film product for computer
monitors, increased by approximately $3.5 million, offsetting a decrease of
approximately $.5 million in aerospace and other product sales.
Cost of product sales for 1995 was 70% of product sales compared to
81% for 1994. The percentage decrease was primarily due to increased sales
volume and the related improvement in manufacturing efficiencies.
Although the Company has not experienced any significant amount of
inventory obsolescence and believes that its inventory is recoverable,
obsolescence of the Company's products could be affected by technological
change, competition, loss of customers and reduction in demand among other
factors.
Research and development expenses, as a percent of product sales, were
6% for 1995, compared to 11% for 1994. The decrease is primarily attributable to
an increased volume of product sales. The absolute dollar decrease in 1995 is
due to a decreased amount of new product development.
Selling, general and administrative expenses, as a percent of net
sales, decreased to 23% in 1995, from 29% in 1994 due to increased sales volume.
The increase from $6.1 million in 1994 to $7.4 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 in the
Pacific Rim.
Interest income, net decreased in 1995 compared to 1994 due primarily
to a decrease in monies invested.
As a result of the factors discussed above, the Company reported a
pre-tax income of $.6 million for 1995, compared to a pre-tax loss of $(3.9
million) for 1994.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123). The
Company will adopt the FAS 123 disclosure method of reporting in its 1996
financial statements.
14
<PAGE>
The Company believes that it must continue to increase revenues to
achieve sustained profitability. Although the Company is seeking to expand
existing applications, to develop new applications and to expand international
marketing and sales efforts, there can be no assurance that the Company will be
able to remain profitable.
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 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 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 laminated glass and solar control products, including Solis solar control
film. Sales of the Company's Heat Mirror 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 decision to discontinue these product lines was the result of a new
strategic plan formulated by the new President and Chief Executive
15
<PAGE>
Officer 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 $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. 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 affected 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.
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.
Liquidity and Capital Resources
-------------------------------
At December 31, 1995, the Company's net working capital was $9.7
million compared to $8.1 million at December 31, 1994. For the past 4 years the
Company has financed its operations through a combination of equity and debt
instruments and cash flow from operations.
From December 31, 1994, to December 31, 1995, cash and short-term
investments decreased by $1.6 million, while accounts receivable increased by
$1.6 million and inventories increased by $2.7 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 $9.1 million in the fourth 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
16
<PAGE>
quarter of 1994 and a planned increase in production in 1995. Further, additions
to property and equipment were approximately $1.6 million during 1995.
The Company anticipates total capital expenditures of approximately
$2.5 million during 1996. If demand for the Company's products increase
significantly, additional capital expenditures could be necessary.
At December 31, 1995, the Company has $3.6 million of cash and short-
term investments and a $5 million line of credit, which is subject to certain
financial covenants. As of December 31, 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 1996. Failure to generate sufficient cash flow
from operations or external sources would have a material adverse effect on the
Company.
17
<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 sheets 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, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, 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 26, 1996
18
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(in thousands)
ASSETS
------
<TABLE>
<CAPTION>
December 31,
1994 1995
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,144 $ 1,434
Short-term investments 4,051 2,132
Accounts receivable, net 3,720 5,288
Inventories 3,907 6,624
Other current assets 717 1,166
-------- --------
Total current assets 13,539 16,644
Property and equipment, net 15,994 15,518
Other assets 1,839 1,943
-------- --------
Total assets $ 31,372 $ 34,105
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 2,419 $ 3,236
Accrued compensation 1,293 1,413
Other accrued liabilities 1,643 2,170
Current portion of long-term debt 82 101
-------- --------
Total current liabilities 5,437 6,920
Long-term debt 2,650 2,890
Deferred income taxes 297 381
-------- --------
Total liabilities 8,384 10,191
-------- --------
Commitments
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 47,206
Accumulated deficit (19,972) (19,339)
Less cost of treasury stock, 1,070 and
981 shares outstanding (4,320) (3,960)
Total stockholders' equity 22,988 23,914
-------- --------
Total liabilities and
stockholders' equity $ 31,372 $ 34,105
======== ========
</TABLE>
See accompanying notes to financial statements.
19
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Net product sales $ 16,770 $ 21,343 $33,091
Other revenues 1,731 396 410
-------- -------- -------
Net revenues 18,501 21,739 33,501
-------- -------- -------
Costs and expenses:
Cost of product sales 12,923 17,247 23,265
Cost of other revenues 205 -- --
Research and development 2,068 2,310 2,069
Selling, general and administrative 4,814 6,095 7,441
-------- -------- -------
Total costs and expenses 20,010 25,652 32,775
-------- -------- -------
Income (loss) from operations (1,509) (3,913) 726
Interest income 434 245 126
Interest expense (243) (221) (221)
Income (loss) before income taxes (1,318) (3,889) 631
Provision for income taxes 6 (1) (2)
-------- -------- -------
Net income (loss) $ (1,324) $ (3,888) $ 633
======== ======== =======
Net income (loss) per share $ (.23) $ (.67) $ .10
======== ======== =======
Weighted average shares of common stock
and dilutive common stock equivalents 5,792 5,808 6,315
======== ======== =======
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Common Stock Capial in Total
---------------- Excess of Accumulated Treasury Stockholders'
Shares Amount Par Value Deficit Stock Equity
------- ------ --------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 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
Shares issued through:
Interest paid with stock 18 125 143
Exercise of options (55) 156 101
Sales to employees under
Stock Purchase Plan (30) 79 49
Net income 633 633
----- -- ------- -------- ------- -------
Balance, December 31, 1995 6,917 $7 $47,206 $(19,339) $(3,960) $23,914
===== == ======= ======== ======= =======
</TABLE>
*Indicates amount less than $500.
See accompanying notes to financial statements.
21
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(in thousands)
--------------
<TABLE>
<CAPTION>
Year ended December 31,
1993 1994 1995
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,324) $(3,888) $ 633
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,938 2,059 2,157
Decrease (increase) in accounts receivable 233 (1,502) (1,568)
Decrease (increase) in inventories (2,024) 825 (2,717)
Decrease (increase) in other current assets (27) (8) (365)
(Decrease) increase in accounts payable
and accrued liabilities (130) 2,075 1,607
------- ------- -------
Cash provided by (used in)
operating activities (334) (439) (253)
------- ------- -------
Cash flows from investing activities:
Decrease(increase) in short-term investments 2,159 1,531 1,919
Expenditures for property and equipment
and other assets (594) (1,053) (1,561)
------- ------- -------
Net cash (used in) provided by
investing activities 1,565 478 358
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of stock, net
of related costs 21 31 --
(Decrease) increase of long-term debt (154) (175) 35
(Purchase) issuance of treasury stock, net (66) (91) 150
------- ------- -------
Net cash (used in) provided by financing
activities (199) (235) 185
------- ------- -------
Net increase (decrease) in cash
and cash equivalents 1,032 (196) 290
Cash and cash equivalents, beginning of year 308 1,340 1,144
------- ------- -------
Cash and cash equivalents, end of year $ 1,340 $ 1,144 $ 1,434
======= ======= =======
Supplemental cash flow disclosures:
Interest paid $ 58 $ 36 $ 40
Income taxes paid $ 6 $ (1) $ (2)
Supplemental schedule of non-cash investing
and financing activities:
Property and equipment acquired via
capital lease $ -- $ -- $ 224
Treasury stock used for purchase of
license agreement $ 291 $ -- $ --
Treasury stock used for payment
of interest $ -- $ 170 $ 143
</TABLE>
See accompanying notes to financial statements.
22
<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. The Company's
foreign operations, which are not significant, are translated using appropriate
rates of exchange, with the U.S. dollar as the functional currency. Foreign
currency transaction gains and losses have not been significant. All
significant intercompany balances and transactions have been eliminated. The
financial statements are subject to estimates made by management.
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.
The Company has classified its short-term investments as "available-
for-sale securities." At December 31, 1995, the difference between cost and fair
market value was insignificant and the gains/losses on sales of securities
during the year were insignificant.
Concentration of Credit Risk
- ----------------------------
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of investments and
trade accounts receivable.
The Company invests in a variety of financial instruments such as
certificates of deposit, commercial paper, municipal debt and U.S. Government
debt. The Company, by policy, limits the amount of credit exposure to any one
financial institution or commercial issuer.
The Company sells its products throughout the world. The Company
performs ongoing credit evaluations of its customers' financial condition and,
generally, requires no collateral from its customers. The Company maintains an
allowance for uncollectible accounts receivable based upon expected
collectibility of all accounts receivable. The write-off of uncollectible
amounts has been insignificant.
23
<PAGE>
Revenue recognition
- -------------------
Revenues from sales of manufactured products are recorded at the time
shipments are made. Revenues from long-term contracts, which are not
significant, are generally recorded using the percentage-of-completion method.
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.
Accounts receivable
- -------------------
Accounts receivable are stated net of allowance for doubtful accounts
of $540 and $534 at December 31, 1994 and 1995, 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, licenses and trademarks 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, 1994 and 1995 patents, licenses and trademarks are included in other assets
at a cost of $889 and $906, net of accumulated amortization of $600 and $703,
respectively. Amortization expense for 1993, 1994, and 1995 was $152, $103 and
$136, respectively.
Stock options
- -------------
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123). The
Company will adopt the FAS 123 disclosure method of reporting in its 1996
financial statements.
24
<PAGE>
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.
NOTE 2 - BALANCE SHEET DETAIL:
- ------------------------------
<TABLE>
<CAPTION>
Inventory: December 31,
---------- --------------------
1994 1995
-------- --------
<S> <C> <C>
Work-in-process $ 440 $ 989
Raw materials 1,299 2,696
Finished goods 2,168 2,939
-------- --------
$ 3,907 $ 6,624
======== ========
<CAPTION>
Property and Equipment: December 31,
----------------------- --------------------
1994 1995
-------- --------
<S> <C> <C>
Machinery and equipment $ 31,080 $ 29,499
Leasehold improvements 2,468 2,518
Furniture and fixtures 2,126 2,553
Construction-in-process 457 313
-------- --------
36,131 34,883
Less - accumulated depreciation
and amortization (20,137) (19,365)
-------- --------
$ 15,994 $ 15,518
======== ========
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1993, 1994 and 1995 was $2,864, $1,956, and $2,021 respectively.
<TABLE>
<CAPTION>
Other Accrued Liabilities: December 31,
-------------------------- --------------------
1994 1995
-------- --------
<S> <C> <C>
Reserve for warranties and sales
returns $ 201 $ 394
Other, including $441 for facility
consolidation in 1994 and 1995 1,442 1,776
-------- --------
$ 1,643 $ 2,170
======== ========
</TABLE>
NOTE 3 - LONG-TERM DEBT:
- -----------------------
The Company's long term debt includes a $2,650 convertible debenture,
due May 31, 1999, bearing interest, payable semi-annually with the Company's
common stock, at 2% 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).
25
<PAGE>
NOTE 4 - INCOME TAXES:
- ---------------------
Deferred tax (liabilities) assets are comprised of the following:
<TABLE>
<CAPTION>
Other Accrued Liabilities: December 31,
-------------------------- --------------------
1994 1995
-------- --------
<S> <C> <C>
Depreciation $(3,199) $(3,310)
Other (39) (172)
-------- --------
Gross deferred tax liabilities (3,238) (3,482)
-------- --------
Inventory reserves 259 340
Write-down of fixed assets 964 964
State depreciation 311 293
Other 1,030 1,121
Loss carryforwards 7,707 7,363
Credit carryforwards 1,050 1,050
-------- --------
Gross deferred tax assets 11,321 11,131
-------- --------
Deferred tax assets valuation
allowance (8,083) ( 7,649)
Net deferred taxes $ - $ -
======== ========
</TABLE>
At December 31, 1995 the Company had net federal operating loss
carryforwards of approximately $19,500 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 5 - 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.
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.
26
<PAGE>
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.
<TABLE>
<CAPTION>
Shares of
Common
Stock Exercise Price
--------- --------------
<S> <C> <C>
Options outstanding at
January 1, 1993 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
Granted 343 $2.94 - $4.13
Exercised (38) $2.50 - $3.25
Canceled or expired (84) $2.50 - $6.00
------
Options outstanding at
December 31, 1995 1,727 $2.50 - $7.25
======
</TABLE>
As of December 31, 1995, there were 523 shares of Common Stock
available for grant under all plans. In addition, at December 31, 1995, 895
options were vested and exercisable at prices ranging from $2.50 to $7.25.
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 1993, 1994 and 1995, 13, 12 and 20 shares, respectively, were sold
under the Purchase Plan.
NOTE 6 - LEASE COMMITMENTS:
- --------------------------
The Company leases certain property and equipment as well as its
facilities under noncancellable operating leases and $224 of computer
27
<PAGE>
equipment under a capital lease. These leases expire at various periods through
2000.
As of December 31, 1995, the future minimum payments under these
leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
------- ---------
<S> <C> <C>
1996 $ 66 $1,727
1997 66 1,674
1998 66 1,596
1999 66 1,435
2000 22 12
---- ------
Future minimum lease payments $286 $6,444
======
Less - amount representing interest 58
----
Present value of future minimum
lease payments 228
Current maturities 44
----
Long-term lease obligations $184
====
</TABLE>
Rent expense under operating leases was approximately $1,241, $1,337,
and $1,720, in 1993, 1994, and 1995, respectively.
NOTE 7 - LINE OF CREDIT AGREEMENT:
- ---------------------------------
The Company has secured a $6 million revolving line of credit which
expires in February 1997, 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 1/2%. Under the
terms of the agreement, the Company is required to maintain certain financial
ratios.
As of December 31, 1995, there were no borrowings under this line of
credit.
NOTE 8 - MAJOR CUSTOMERS:
- ------------------------
Two commercial customers accounted for 19% and 10% in 1993; one
commercial customer accounted for 13% in 1994 of net product sales. In 1995, no
one customer accounted for 10% of net product sales and the five largest
customers accounted for 32% of net product sales. Export product sales accounted
for 20%, 20% and 37% (24% in the Pacific Rim) in 1993, 1994 and 1995,
respectively.
NOTE 9 - ACQUISITIONS:
- ---------------------
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
28
<PAGE>
California Series 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 was accounted for as a purchase. Since the purchase
price is contingent upon future operating income, no payments were made at the
time of acquisition. Sunflex did not have operating income in 1995 and, as a
result, no payments were made in 1995. 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.
NOTE 10 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
- -------------------------------------------------------
Summarized quarterly financial data for 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
------- ------ ------- --------
<S> <C> <C> <C> <C>
1994:
- -----
Net product sales $4,421 $5,085 $6,151 $ 5,686
Other 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>
29
<PAGE>
<TABLE>
<CAPTION>
First Second Third Fourth
------- ------ ------- --------
<S> <C> <C> <C> <C>
1995:
- ------
Net product sales $6,691 $8,154 $9,315 $ 8,931
Other revenues 10 117 96 187
Gross margin 2,099 2,678 2,563 2,896
Net income (loss) (370) 305 345 353
Net income (loss) per share (.06) .05 .05 .05
</TABLE>
The fourth quarter of 1994 was adversely impacted by approximately $1
million of charges to eliminate three under-performing product lines, 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.
Per share amounts, based on average shares outstanding each quarter,
may not add to the total for the year.
30
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
31
<PAGE>
PART III
========
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF 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 1996 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 Agreement" 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.
32
<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 18
Consolidated Balance Sheets as of
December 31, 1995 and 1994 19
Consolidated Statements of Operations
for the years ended December 31, 1995,
1994 and 1993 20
Consolidated Statements of Stockholders'
Equity for the years ended December 31,
1995, 1994 and 1993 21
Consolidated Statements of Cash Flows
for the years ended December 31, 1995,
1994 and 1993 22
Notes to Consolidated Financial Statements 23
</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 36
--------
through 38 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:
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
33
<PAGE>
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), 33-51758 (filed on September 8, 1992) and 33-82138 (filed on July 28,
1994).
34
<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
March, 1996.
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 March 14, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/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)
/s/Walter C. Sedgwick Director
- ---------------------
(Walter C. Sedgwick)
</TABLE>
35
<PAGE>
INDEX TO EXHIBITS FILED WITH
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
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).
10.35(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, as amended.
10.53(2) Common Stock Purchase Agreement dated as of May 23, 1988, among
Mitsui, Marubeni and the Company.
10.57 Restated 1987 Stock Option Plan, as amended.
10.58(2) Employee Stock Purchase Plan, as amended.
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.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
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).
10.69(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,
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,
California. Original lease filed as exhibit number 10.36
10.79(7) Amendment to property lease dated April 4, 1994 to extend lease
period on building at 3941 E. Bayshore Road, Palo Alto,
California. 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.
10.82 Supply Agreement between Sony Corporation and Southwall
Technologies Inc., effective October 23, 1995.
21 List of Subsidiaries of Southwall Technologies Inc.
23.1 Consent of Independent Accountants.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
99.1(9) Letter, dated June 5, 1987, from the U.S. Department of the Air
Force to the SEC Pursuant to Rule 171.
</TABLE>
_________________
(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.
(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.
38
<PAGE>
EXHIBIT 10.82
SUPPLY AGREEMENT
----------------
This Agreement is entered as of October 23, 1995, by and between Southwall
Technologies, Inc.("Seller"), a Delaware corporation, and Sony Corporation
("Buyer"), a Japanese corporation.
WHEREAS, the parties previously negotiated a preliminary agreement
entitled "Sony/Southwall Supply Agreement" that was executed by Seller on August
23, 1994 and by Buyer on August 30, 1994 that related to the tooling and supply
of anti-reflection film by Seller to Buyer for lamination to computer monitor
CRTs ("Preliminary Agreement").
WHEREAS, Buyer wishes to purchase such Products from Seller and Seller is
willing to supply Buyer with such Products on the terms hereof.
NOW, THEREFORE, in consideration of the premises and the mutual promises
and covenants set forth below, Seller and Buyer mutually agree as follows:
ARTICLE I
---------
DEFINITIONS
-----------
1.1 "Affiliate" of a party shall mean (i) any entity controlled by such
---------
party, (ii) any entity controlling such party and (iii) any entity under common
control with such party. Control may be direct or indirect.
1.2 "Delivery Date(s)" shall mean a date(s) for which delivery of
----------------
Products is properly requested in a purchase order.
1.3 "Computer Monitor CRT Applications" shall mean use of the Products as
---------------------------------
anti-reflective filters which Buyer will laminate onto computer monitor CRT
products.
1.4 "Products" shall mean the anti-reflective filters set forth in
--------
Exhibit I, attached hereto and made a part hereof, as such Exhibit may be
amended by the parties from time to time.
1.5 "After-Market Applications" shall mean the use of the Products as
-------------------------
anti-reflective filters other than for Computer Monitor CRT Applications.
1.6 "Specification(s)" shall mean the specifications of the Products as
----------------
prescribed in Exhibit I attached hereto and made a part hereof.
<PAGE>
ARTICLE II
----------
SALE AND PURCHASE OF PRODUCTS; SUPPORT
--------------------------------------
2.1 Sale and Purchase. Seller, subject to the terms and conditions herein
-----------------
contained, agrees to sell to Buyer, and Buyer agrees to purchase from Seller,
the Products during the term of this Agreement.
2.2 Exclusivity.
-----------
(a) During the term of this Agreement, Seller will not sell or
authorize any third party to sell Products (other than to Buyer and companies
the parties have agreed upon in writing) (i) with the knowledge that they will
be used in Computer Monitor CRT Applications and/or (ii) without the promise of
such third party that it will not use such Products in Computer Monitor CRT
Applications; provided that Seller shall be released from the foregoing
restrictions if Buyer fails to purchase at least two million square feet
(2,000,000 sq. ft.) of Products for Computer Monitor CRT Applications each year.
Purchases of Products for non-Computer Monitor CRT Applications (e.g.,
television monitor applications) shall not count toward this minimum quantity.
(b) During the exclusivity period described in Section 2.2(a) of
this Agreement, Seller may freely sell and authorize others to sell Products for
After-Market Applications provided that Seller will submit the business overview
for such after-market business to Buyer for Buyer to review and the parties
shall at that time negotiate in good faith the circumstances under which Seller
shall pursue such business.
2.3 Re-sale of Products. Buyer agrees that it will not sell or distribute
-------------------
(or allow anyone else to sell or distribute) Products that Buyer purchases
hereunder except as part of a finished product that incorporates the Products.
2.4 Best Efforts. In addition to, and not in limitation of Section 2.2 of
------------
this Agreement, in exchange for the foregoing exclusivity, Buyer agrees to use
its best efforts to sell and market Products for the Computer Monitor CRT
Applications throughout the world. Without limiting the foregoing, Buyer expects
to and will use best efforts to purchase the following amounts of Products: (i)
two million square feet (2,000,000 sq. ft.) in the eighteen (18) month period
following the date first above written and (ii) two million square feet
(2,000,000 sq. ft.) for each twelve (12) month period thereafter.
2.5 Quantity; Forecasts.
-------------------
(a) Two (2) months prior to commencement of production Buyer will
provide to Seller (i) a firm purchase order and Delivery Dates for Products
covering the immediately following two (2) month period and (ii) a good faith
forecast of its
2
<PAGE>
quantity requirements for Products for the subsequent four (4) calendar months.
Thereafter, Buyer shall deliver to Seller within ten (10) days after the
beginning of each calendar month, Buyer's six (6) month forecast of required
Products quantity and Delivery Dates. The first two (2) months of each forecast
shall be deemed firm, noncancellable purchase orders; Buyer may, however,
reschedule any such shipment within the calendar month in which the shipment was
due, by giving Seller one (1) week prior written notice. The last four (4)
calendar months of any previous forecast may be changed as follows: (i) the
third month of the six month forecast's commitment may be increased or decreased
by up to an aggregate of twenty five percent (25%) of the forecast for that
month, (ii) the fourth month of the six month forecast's commitment may be
increased or decreased by up to an aggregate of fifty percent (50%) of the
forecast for that month and (iii) the fifth and sixth months of each six month
forecast's commitment may be increased or decreased by up to an aggregate of one
hundred percent (100%) of the forecast for each month. If a required forecast or
order for a month is not timely submitted for Products, then the sixth month of
the immediately preceding forecast shall become the new forecast or order for
the last month of the late forecast.
(b) Buyer's forecasts and orders shall reflect its good faith
expectations of customer demand and Buyer shall act in a commercially reasonable
manner to schedule orders to avoid creating over or under capacity problems
for Seller.
(c) Seller will use commercially reasonable efforts to fulfill
Buyer's firm, noncancellable purchase orders as referred to in Section 2.5(a) of
this Agreement which meet the terms and conditions hereof. Buyer will accept any
shipment of Products as fulfilling an order if the amount of Products shipped is
more than ninety-five percent (95%) and less than one hundred five percent
(105%) of the amount ordered. Notwithstanding the foregoing, Buyer shall be
responsible for paying Seller for the amount of Products actually shipped.
2.6 Delivery and Incidental Charges; Packaging and Storage. All Products
------------------------------------------------------
delivered to Buyer shall be F.O.B. Seller's plant or other place of shipment
designated by Seller. Commencing October 1, 1995, Seller shall use its best
efforts to deliver Products no more than one (1) day after, or three (3) days
prior, to Buyer's desired Delivery Date. Seller shall arrange with commercial
carefulness on Buyer's behalf transportation (which will normally be by land and
sea, but may be by air in unusual circumstances) to any destinations specified
in writing from time to time by Buyer. All customs, duties, costs, insurance
premiums, other expenses relating to such transportation and delivery, all costs
of compliance with export and import controls and regulations, and all sales,
use, withholding, value-added, excise and similar taxes or charges, as well as
risk of loss, are not included in the prices of the Products and shall be borne
by Buyer. Exhibit 1 contains specifications for the packaging and boxing of
Products and are included in the Products' price.
3
<PAGE>
2.7 Risk of Loss. Risk of loss and title to the Products shall pass from
------------
Seller to Buyer upon deliveries of the Products.
2.8 Inventory. Commencing October 31, 1995, Seller will use diligent
---------
efforts to maintain in inventory an amount of Products equal to one-half (0.5)
of the next month's Products commitment.
2.9 Products Improvement. Seller will use commercially reasonable efforts
--------------------
to improve Products quality, and shall inform Buyer if and when such
improvements are available; provided, however, that Seller shall not change
the Specifications without Buyer's written permission. In the event of a change
in the Specification, each party shall use diligent efforts to exhaust their
existing inventory. Each party agrees to keep the other informed as to any
changes in processes or technology that may affect the Products, including,
without limitation, effects on Products' performance.
2.10 Technical Support. Seller will provide Buyer, upon request and at
-----------------
Seller's expense, with reasonable technical support at Buyer's location; not to
exceed one (1) man week of effort.
ARTICLE III
-----------
PRICE AND PAYMENTS
------------------
3.1 Price. The prices for the Products applicable hereunder shall be set
-----
forth in Exhibit II attached hereto and made a part hereof. All such prices are
quoted in United States dollars.
3.2 Method of Payment. All payments due hereunder to Seller shall be paid
-----------------
to Seller in United States dollars by wire transfer on or before the fifteenth
day of the calendar month following the later of: (i) the invoice date and (ii)
the date Products were made available to Buyer pursuant to Section 2.6 of this
Agreement.
3.3 Price Review. Each quarter Seller and Buyer shall review the current
------------
pricing structure, and shall negotiate in good faith to adjust the price if
necessary.
ARTICLE IV
----------
TERMINATION, RIGHTS AND OBLIGATIONS UPON TERMINATION
----------------------------------------------------
4.1 Term. Unless terminated earlier as provided herein, this Agreement
----
shall continue in effect until two (2) years from the date first above written
(the "Initial
4
<PAGE>
Term"), and shall thereafter be extended for successive one year terms until
terminated by either party upon at least six (6) months prior notice to the
other party.
4.2 Termination for Default. If either party defaults in the performance of
-----------------------
any material agreement, condition or covenant of this Agreement and such default
or noncompliance shall not have been remedied within sixty (60) days (or ten
days in the case of non-payment) after receipt by the defaulting party of a
written notice thereof from the other party, the party not in default may
terminate this Agreement.
4.3 Buyer's Obligations at Termination. If Buyer terminates this Agreement
----------------------------------
pursuant to Section 4.1 of this Agreement, or Seller terminates this Agreement
pursuant to Section 4.2 of this Agreement, then Buyer shall be required to pay
Seller: (i) for finished goods, work-in progress and unreturnable raw materials
manufactured or purchased by Seller in compliance with the requirement as set
forth in Section 2.5 of this Agreement and (ii) for any of Seller's unamortized
start-up costs not to exceed two hundred and forty thousand dollars
(US$240,000).
4.4 Seller's Obligations at Termination.
-----------------------------------
(a) If Seller terminates this Agreement pursuant to Section 4.1 of this
Agreement (or it expires), or Buyer terminates this Agreement pursuant to
Section 4.2 of this Agreement, then Seller shall remain obligated to supply
Buyer with Products pursuant to the terms and conditions of this Agreement for
two (2) years from the date of such termination or expiration. Furthermore, if
Buyer properly terminates this Agreement pursuant to Section 4.2 of this
Agreement then Seller will negotiate in good faith with Buyer for a license
granting Buyer the right to manufacture Products.
(b) If Seller terminates this Agreement pursuant to Section 4.2 of this
Agreement, then Seller will have no obligation to fulfill any existing or future
orders of Buyer.
4.5 Survival of Terms. Except to the extent expressly provided to the
-----------------
contrary in this Agreement, the following provisions shall survive the
termination of this Agreement: Sections 2.5, 2.6, and 2.7 of this Agreement, all
to the extent necessary to comply with Section 4.3 of this Agreement, and
Sections 4.3, 4.4, 4.5, 4.6, and Articles III, V, VI and VII of this Agreement.
4.6 No Liability. Each party understands that the rights of termination
------------
hereunder are absolute and that it has no rights to a continued relationship
with the other after termination except as expressly stated herein. Neither
party shall incur any liability whatsoever for any damage, loss or expenses of
any kind suffered or incurred by the other (or for any compensation to the
other) arising from or incident to any termination of this Agreement by such
party which complies with the terms of the
5
<PAGE>
Agreement whether or not such party is aware of any such damage, loss or
expenses, except as expressly stated herein.
ARTICLE V
---------
WARRANTY, PRODUCTS INSPECTION AND INDEMNIFICATION
-------------------------------------------------
5.1 Warranties. Seller warrants that Products, when used on CRT computer
----------
monitors for conductive anti-reflection purposes, and when properly laminated,
installed and maintained, will substantially maintain the performance
characteristics specified in Exhibit I for a period of one (1) year from the
date of sale of the CRT by Buyer to Buyer's customer, but in no event longer
than one and one-half (1.5) years from date of delivery of the Products by
Seller. In addition, Seller warrants against catastrophic failure of the
Products for a period of one and one-half (1.5) years from date of sale of the
CRT by Buyer, but in no event longer than two (2) years from the date of
delivery of the Products by Seller. Excluded from this warranty is any failure,
in whole or in part, related to or caused by the lamination adhesive, lamination
process as practiced by Buyer, PET substrate and/or the PET hardcoat. Also
excluded from this warranty is any nonconforming condition or deterioration
which is the result, in whole or in part, of unusual abrasion and/or scratching,
fire, accident, abuse, misuse, negligence, acts of God and the like.
BUYER'S SOLE AND EXCLUSIVE REMEDY FOR ANY BREACH OF THE FOREGOING
WARRANTIES SHALL BE REPLACEMENT OF OR (AT SELLER'S OPTION OR IF REPLACEMENT IS
IMPRACTICAL) REFUND FOR THOSE PRODUCTS PROVIDED BUYER PROVIDES SELLER WITH FULL
DOCUMENTATION AND PROOF OF WARRANTY BREACH WITHIN THE APPLICABLE WARRANTY
PERIOD. BUYER SHALL DESTROY THE BREACHING PRODUCTS AND CERTIFY SUCH DESTRUCTION
TO SELLER. EXCEPT FOR THE FOREGOING WARRANTIES, SELLER DOES NOT WARRANT THE
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE PRODUCTS OR
PERFORMANCE OR NONINFRINGEMENT, DOES NOT MAKE ANY WARRANTY, EXPRESS OR IMPLIED,
WITH RESPECT TO PRODUCTS, SPECIFICATIONS, SUPPORT, SERVICE OR ANYTHING ELSE AND
DOES NOT MAKE ANY WARRANTY TO BUYER'S CUSTOMERS OR AGENTS. SELLER HAS NOT
AUTHORIZED ANYONE TO MAKE ANY REPRESENTATION OR WARRANTY OTHER THAN AS PROVIDED
ABOVE.
5.2 Buyer shall inspect, within a reasonable period, each shipment Seller
makes to verify that the Products materially conforms to the Specifications.
5.3 Neither party is aware of any claims of infringement, of any valid
patent by the Products and each will notify the other promptly of any such claim
of
6
<PAGE>
which it becomes aware. Seller shall hold buyer and its officers, directors,
agents and employees harmless from all damages, settlements, attorney's fees and
expenses arising out of or in connection with any claim or action that the
Products and/or portions and/or components thereof infringe any patent or other
intellectual property rights of third parties issued as of the date first
written above, provided Seller is promptly notified of any and all threats,
claims and proceedings related thereto and given reasonable assistance and the
opportunity to assume sole control over the defense and all negotiations for a
settlement or compromise; Seller will not be responsible for any settlement it
does not approve in writing. The foregoing obligation of Seller does not apply
with respect to Products or portions or components (i) not supplied by seller,
(ii) made in whole or in part in accordance to Buyer Specifications or
requests, if the alleged infringement relates to such Specifications or
requests, (iii) which are modified after delivery by Seller, if the alleged
infringement relates to such modification, (iv) combined, processed or used with
other products, processes or materials where the alleged infringement relates to
such combination, process or use, (v) where Buyer continues allegedly infringing
activity after being notified thereof or after being informed of modifications
that would have avoided the alleged infringement, or (vi) where the infringement
is incident to use of the Products but does not result primarily from the
Products. buyer will indemnify Seller and its officers, directors, agents and
employees from all damages, settlements, attorneys' fees and expenses (i)
related to a claim of infringement or misappropriation excluded from Seller's
indemnity obligation by the immediately preceding sentence or (ii) in connection
with Buyer's activities regarding the Products or its failure to effectively
pass on to its direct or indirect customers Seller's liability and warranty
limitations and disclaimers.
ARTICLE VI
----------
CONFIDENTIALLY
--------------
6.1 For the purpose of this Agreement, the words "Confidential Information"
shall mean any confidential, proprietary or secret information (including, but
not limited to, technical business or financial information, business plans,
customer lists, product information, specifications, drawings, inventions,
processes, software and know-how) disclosed by either party ("Discloser") to the
other party ("Recipient") in connection with the performance of this Agreement,
and designated by Discloser as "Confidential," or if orally or visually
disclosed, reduced to writing with such "Confidential" designation and notified
to Recipient within thirty (30) days after the disclosure.
6.2 Recipient shall keep confidential and not disclose at any time, or use
other than in the performance of this Agreement, during the term of this
Agreement and any extension(s) thereof, if any, and for two (2) years
thereafter, any Confidential
7
<PAGE>
Information disclosed by Discloser without obtaining prior written authorization
of Discloser.
6.3 Recipient further agrees that the Confidential Information will be
disclosed only to those of Recipient's employees, officers, directors, agents or
representatives with a need to know the Confidential Information, and only after
such individuals have signed a written instrument obligating them at least to
the extent Recipient is obligated under this Agreement.
6.4 Buyer agrees not to analyze (except as necessary to determine defects)
or reverse engineer any Products or authorize anyone else to do so. Each party's
obligations under this Section 6.4 shall cease with respect to any Confidential
Information when one of the exceptions set forth in Section 6.5 of this
Agreement applies with respect thereto or, if earlier, when and to the extent
the Discloser releases such confidential Information from such obligations.
6.5 It is understood, however, that the foregoing restrictions shall not
apply to any portion of the Confidential Information which:
(a) was previously known to Recipient without restriction on disclosure
or use; or
(b) is rightfully obtained by Recipient from a third party source
without restriction on disclosure or use; or
(c) is or becomes part of the public domain through no fault of
Recipient or its employees; or
(d) is independently ascertainable or developed by Recipient or its
employees, officers, directors, agents or representatives who have not had
access to the Confidential Information; or
(e) is required to be disclosed by administrative or judicial action;
provided that Recipient attempted to maintain the confidentiality of such
Confidential Information by asserting in such action any applicable privileges,
and immediately after receiving notice of such action, notified Discloser of
such action to give Discloser the opportunity to seek any other legal remedies
to maintain such Confidential Information in confidence as herein provided; or
(f) is approved for release by written authorization of Discloser.
6.6 Recipient acknowledges and agrees that due to the unique nature of the
Confidential Information, there can be no adequate remedy at law for any breach
of its Article VI obligations hereunder, that any such breach may allow the
Recipient or
8
<PAGE>
third parties to unfairly compete with the Discloser resulting in irreparable
harm to the Discloser, and therefore, that upon any such breach or any threat
thereof, the Discloser shall be entitled to appropriate injunctive relief in
addition to whatever remedies it might have at law. The Recipient will notify
the Discloser in writing immediately upon the occurrence of any such
unauthorized release or other breach.
6.7 All Confidential Information disclosed to or acquired by Recipient and
all inventions and developments which arise from the confidential Information,
shall be and remain the sole property of Discloser. No copies of any
Confidential Information may be made without Discloser's prior written consent.
Recipient agrees to return all Confidential Information, and any copies of same,
upon the expiration or termination of this Agreement or ten (10) days after
Discloser's request for return, whichever is earlier.
ARTICLE VII
-----------
MISCELLANEOUS
-------------
7.1 Sony Trading International Corporation. It is agreed between the
--------------------------------------
parties that Buyer may, at its own discretion, have Sony Trading International
Corporation, a Japanese corporation and Affiliate of Buyer, issue purchase
orders, make payments, accept the delivery of the Products, inspect the
Products, and perform any other activities hereunder on behalf of Buyer in
accordance with the terms and conditions of this Agreement.
7.2 Entire Agreement. This Agreement contains the entire agreement of the
----------------
parties regarding the subject matter hereof and supersedes all prior agreements,
understandings and negotiations regarding the same (including, without
limitation, the Preliminary Agreement). This Agreement may not be changed,
modified, amended or supplemented except by a written instrument signed by both
parties. Furthermore, it is the intention of the parties that this Agreement be
controlling over additional or different terms of any order, confirmation,
invoice or similar document, unless otherwise accepted in writing by both
parties. Further, waivers and amendments shall be effective only if made by
written agreements clearly understood by both parties to be an amendment or
waiver.
7.3 Assignability. This Agreement or any part hereof may not be assigned by
-------------
either party without the prior written consent of the other party; provided,
however, that either party may assign this Agreement to any entity which
acquires substantially all of its assets or business, provided that the assignor
remains obligated hereunder.
7.4 Severability. If any provision of this Agreement shall be held illegal
------------
or unenforceable, that provision shall be limited or eliminated to the minimum
extent
9
<PAGE>
necessary so that this Agreement shall otherwise remain in full force and effect
and enforceable, and the parties will negotiate in good faith to restore to the
fullest extent legally possible the intent of the parties reflected in this
Agreement before such limitation or elimination.
7.5 Further Assurances. Each party hereto agrees to execute, acknowledge
------------------
and deliver such further instruments, and to do all such other acts, as may be
necessary or appropriate in order to carry out the purposes and intent of this
Agreement.
7.6 Use of Party's Name. No right, express or implied, is granted by
-------------------
this Agreement to either party to use in any manner the name of the other or any
other trade name or trademark of the other in connection with the performance of
this Agreement, except as expressly provided herein.
7.7 Notice and Reports. All notices, consent or approvals required by
------------------
this Agreement shall be in writing sent by certified or registered air mail,
postage prepaid or by facsimile or cable (confirmed by such certified or
registered mail) to the parties at the following addresses or such other
addresses as may be designated in writing by the respective parties:
To Seller: Southwall Technologies, Inc.
1029 Corporation Way
Palo Alto, CA 94303 USA
Attention: Mr. Martin M. Schwartz, President
To Buyer: Sony Trading International Corp.
TS Bldg. 2-13-40, Konan
Minato-ku, Tokyo, 108 Japan
Attention: Mr. Minoru Mizukoshi, Manager, International
Procurement
Notices shall be deemed effective five days after the date of mailing, if
mailed.
7.8 Relationships of the Parties. Both parties are independent
----------------------------
contractors under this Agreement. Nothing contained in this Agreement is
intended nor is to be construed so as to constitute Seller and Buyer as
partners, agents or joint venturers with respect to this Agreement. Neither
party hereto shall have any express or implied right or authority to assume or
create any obligations on behalf of or in the name of the other party or to bind
the other party to any contract, agreement or undertaking with any third party.
10
<PAGE>
7.9 Waiver. The waiver by either party of a breach of any provisions
------
contained herein shall be in writing and shall in no way be construed as a
waiver of any succeeding breach of such provision or the waiver of the provision
itself.
7.10 Applicable Law; Actions. All disputes arising in connection with
-----------------------
this Agreement or relating to the subject matter hereof shall be finally settled
under the Rules of Conciliation and Arbitration of the International Chamber of
Commerce by one or more arbitrators appointed in accordance with those Rules.
Ordinary Law Courts will not be used to settle any dispute arising under this
Agreement or connected with the subject matter hereof, except that the parties
may apply to any court of competent jurisdiction for injunctive or other similar
relief or to enforce the decision of the arbitrators. Buyer and Seller represent
that the Rules of Conciliation and Arbitration of the International Chamber of
Commerce are known to them and that the parties are ready to comply voluntarily
with any decision. The place of arbitration shall be Palo Alto, California. The
substantive laws of Switzerland shall be applied to any arbitration proceedings
(, but the language of this Agreement and of any arbitration shall be English),
without regard to the United Nations Convention on the International Sales of
Goods. Service of process in any such action may be effected in the manner
provided in Section 7.7 of this Agreement for delivery of notices. The
prevailing party in any legal action (including arbitration) to enforce or
interpret this Agreement shall be entitled to reasonable costs and attorney's
fees.
7.11 Captions. Paragraph captions are inserted for convenience only and
--------
in no way are to construed to define, limit or affect the construction or
interpretation hereof.
7.12 Limited Liability. NOTWITHSTANDING ANYTHING ELSE IN THIS AGREEMENT OR
-----------------
OTHERWISE, SELLER WILL NOT BE OBLIGATED OR LIABLE WITH RESPECT TO ANY SUBJECT
MATTER OF THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR
OTHER LEGAL OR EQUITABLE THEORY FOR (I) ANY AMOUNTS IN EXCESS IN THE AGGREGATE
OF AMOUNTS PAID TO SELLER HEREUNDER DURING THE THREE MONTH PERIOD PRIOR TO DATE
THE LAST CAUSE OF ACTION AROSE, ESTIMATED TO BE $3.75 MILLION, OR (II) ANY
INCIDENTAL OR CONSEQUENTIAL DAMAGES, OR (III) COST OF PROCUREMENT OF SUBSTITUTE
GOODS, TECHNOLOGY OR SERVICES. SELLER SHALL HAVE NO LIABILITY FOR ANY FAILURE OR
DELAY DUE TO MATTERS BEYOND ITS REASONABLE CONTROL (A "FORCE MAJEURE") OR FOR
ANY ALLOCATION OF PRODUCTS BETWEEN ITS CUSTOMERS IN THE EVENT OF A SHORTAGE.
7.13 Foreign Law. Buyer represents and warrants that neither this
-----------
Agreement (or any term hereof) nor the performance of or exercise of rights
under this Agreement, is restricted by, contrary to, in conflict with,
ineffective under, requires
11
<PAGE>
registration or approval or tax withholding under, or affects Seller's
proprietary rights (or the duration thereof) under, or will require any
termination payment or compulsory licensing under, any law or regulation of or
binding upon or effective in Japan.
7.14 Export Control. Each party agrees to comply with all export laws and
--------------
restrictions and regulations of the Department of Commerce or other United
States or foreign agency or authority, and not to export, or authorize the
export or reexport of any Products (or technical data or information related
thereto) or any direct product thereof in violation of any such restrictions,
laws or regulations, or, without all necessary licenses and approvals, to
Afghanistan, the People's Republic of China or any Group Q, S, W, Y or Z country
specified in the then current Supplement No. 1 to Section 770 of the U.S. Export
Administration Regulations (or any successor supplement or regulations). Buyer
will notify its customers of the obligation to comply with such export laws and
regulations.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be
effective as of the date first written above.
SELLER
By: /s/ Martin M. Schwartz
-------------------------------
Title: President/CEO
-----------------------------
BUYER
By: /s/
--------------------------------
Title: General Manager/Sony CPC
-----------------------------
12
<PAGE>
EXHIBIT 1
SONY-SOUTHWALL SUPPLY AGREEMENT
PRODUCT SPECIFICATIONS
----------------------
Specifications for the Anti-Reflection Film Product are attached in this
exhibit. The draft form of these specifications, identified as PS-0059 -
09/15/95, REV. B - DRAFT (13 pages), represents the current status of our
agreement. Such product specifications are anticipated to be subject to change
as improved definitions, measurement techniques and product attributes are
identified and modified. Any changes or modifications of this document require
written agreement of both parties. Specifications for Packaging, Shipping and
Storage are included in this document.
<PAGE>
1.0 PURPOSE
-------
This document defines the requirements for 15" and 17" SONY CRT
Anti-Reflective Coatings.
2.0 RELATED DOCUMENTS
-----------------
2.1 Standard Method for Computing the Colors of Objects by Using the CIE
System, ASTM E 308.
2.2 Method of Measuring and Specifying Color Rendering Properties of Light
Sources, CIE 13.2.
2.3 Standard Packaging Specification, MT-0009.
2.4 Standard Test Method for Measuring Adhesion by Tape Test, ASTM D 3359.
2.5 Standard Test Method for Film Hardness by Pencil Test, ASTM D 3363.
2.6 AR1 Defect Definitions, II-0078.
3.0 PRODUCT SPECIFICATION
---------------------
NOTE 1: Physical dimensions for QC samples are located in Figure 1. Data
are to be taken at the beginning and end of each finished roll.
NOTE 2: Table 1 describes which of the items in section 3.0 are to be
measured by the QC department, measured and reported by the Post
Processing department, or are not routinely measured but are
certified to meet the appropriate specification based on
demonstrated process repeatability. Post Processing data regarding
the location of physical defects will be supplied for each roll.
NOTE 3: Items with asterisks are areas that are to be reviewed at a future
date. These items include both the current specification and
proposed goal.
3.1 PART NUMBERS.
------------
3.1.1 Southwall Technologies:
----------------------
17" monitors: 904-7003
15" monitors: 904-7004
<PAGE>
3.1.2 Sony:
----
17" monitors: 2-162-321-01
15" monitors: 2-162-318-01
3.2 OPTICAL SPECIFICATION.
---------------------
Note 1 Refer to Figure 1. Make scans at the center of the web and
(plus/minus) 100 mm from the center of the web for each QC sample
pulled from a finished roll. Make all scans on the Perkin Elmer
Lambda 9 spectrophotometer equipped with an integrating sphere. Scans
are to span the wavelength region between 400nm and 820 nm, with
measurement every 5nm. Base all chromaticity measurements on color
illuminant D65 (CIE 1931).
Note 2 All reflection measurements are to be specular and made at near
normal incidence. Laminate samples (coated side out) to a specially
designed light trap (this is a laminate made up of .090" clear float
glass, approximately 11 mm (.450") of Monsanto's black PVB and a
piece of 1/8" bronze glass) using Norland type 7204 U.V. curing
adhesive.
Note 3 Smooth interference fringes set up by the index mis-match between
the PET and hard coat using a simplified least squares procedure
(from Savitzky, A. and J.E. Golay: Analytical Chemistry vol. 36 no.
8, pp 1627-1639).
Note 4 Determine the coating absorption using non-laminated samples.
Measure coating absorption at the center of the web only for each QC
sample pulled from a finished roll.
3.2.1 Spectral Reflectance.
---------------------
The spectral reflection between 450 nm and 650 nm shall have an
average reflection of 0.75% or less. No measurement is to exceed 2.0%
within this wavelength region.
3.2.2 Reflection Color.
-----------------
The reflection color (x,y) is to fall within a box defined by the
following co-ordinates:
A: x= 0.13, y= 0.13
B: x= 0.13, y= 0.24
C: x= 0.20, y= 0.40
D: x= 0.34, y= 0.40
<PAGE>
E: x= 0.34 y= 0.20
F: x= 0.24 y= 0.13
3.2.3 Visible Reflection.
------------------
The RVis (1931 standard observer with a D65 color illuminant)
will be (less than or equal to) 0.6%.
*3.2.4 Coating Bandwidth.
-----------------
The coating bandwidth is to be equal to or greater than:
Current: 1.41 Goal: 1.50 (Target date: 1/1/96).
The coating bandwidth is defined as the ratio of the long
((lambda)\\red\\) to short ((lambda)\\blue\\) wavelengths
having a reflection value of 1.0%. Use the average reflection of
the scan when determining bandwidth (i.e. all hard coat fringes
are to be averaged out as described above in section 3.0,
Note 3).
3.2.5 Crossweb Reflectance Change:
---------------------------
The crossweb reflection variation (as defined below) is to be
(less than or equal to) 0.05 (i.e. (less than or equal to) 5%).
The crossweb reflection change I/red/ is defined as the absolute
value of the center of web red wavelength ((lambda)\\CRed\\) at
1.0% reflection minus the edge ((plus/minus) 100 mm from the
center) of web red wavelength ((lambda)\\ERed\\) at 1.0%
reflection divided by the center of web red wavelength at 1.0%
reflection. Only the red portion (from 600 to 750 nm) of the
reflection spectrus is to be analyzed. Use the average reflection
of the scan when determining band width (i.e. all hard coat
fringes are to be averaged out as described above in Note 3).
I\\red\\ = |((lambda)\\CRed\\ (minus) (lambda)\\ERed\\) /
(lambda)\\CRed\\|
Where:
Cross web reflection change = I\\red\\
Center of web red wavelength = (lambda)\\CRed\\
Edge of web red wavelength = (lambda)\\ERed\\)
<PAGE>
3.2.6 Production Absorption.
---------------------
The center of web visible absorption (AVis) (1931 standard
observer with a D65 color illuminant) is to be (less than or
equal to) 3.0%. This measurement is to be made in the center of
the web.
3.2.7 Product Haze.
------------
The product haze is not to exceed 1.5%. This measurement is to be
made in the center of the web.
3.3 COATING DURABILITY.
------------------
3.3.1 Coating Adhension.
-----------------
Refer to Figure 1. The coating shall show no evidence of damage
(ASTM D 3359 5b) after a "snap tape test" by which Scotch(R)
brand #610 cellulose tape is pressed firmly against the scribed
coating surface and quickly removed. The tape test is to be done
(plus/minus) 100 mm from the center of web for all QC samples.
3.3.2 3H Pencil Test.
--------------
Refer to Figure 1. The coating shall show no evidence of visible
deterioration after being subjected to the "3H pencil test" using
9.8 N of force (loaded with a 1000g mass). There will be a total
of 5 pulls evenly spaced across each QC sample taken from a
finished roll. Tests are to be made using Sony 3H pencil tester
part #1705637.
Visible deterioration is defined as any mark showing up in
reflection ONLY caused by the abrasion test. Initial digs or pits
caused by the testing are to be ignored. Any noticeable marking
or loose debris is to be cleaned with a soft lens tissue. If the
marking is not removed the sample is considered rejected.
3.3.3 Mechanical Pencil Tip Test.
--------------------------
Refer to Figure 1. The coating shall show no evidence of visible
deterioration (see section 3.3.2 for definition) after being
subjected to a mechanical pencil tip using a 1.5 N force (loaded
with a 150g mass). There will be a total of 3 tests having a
length of 100 mm long evenly spaced down the center of the web
for each QC sample pulled from a finished roll.
<PAGE>
3.3.4 Steel Wool Test.
---------------
The product shall show no evidence of visible deterioration (see
section 3.3.2 for definition) after being subjected to 60 strokes
of steel wool #0000. The force applied is to be 2.0 N (200 g
mass) over an area of 1 cm/2/ (0.155 in/2/).
The test is to be conducted in the center portion of each QC
sample pulled from a finished roll (see Figure 1).
3.3.5 Acetone Rub Test.
----------------
The product shall show no evidence of visible deterioration,
whether before or after humidity testing, after being subjected
to 50 strokes at a force of 22 N/cm/2/ (2224 grms/cm/2/).
Test set-up:
Use a Sutherland Ink Rub Tester machine for this test. Raise the
area of the machine that is swept by the abrader approximately 5
mm (3/16") by attaching a 3 mm (1/8") thick by 70 mm (2.75") wide
by 140 mm (5.5") long piece of clear float glass centered under
the area being swept by the abrader. Place on top of this piece
of glass a 1.5 mm (1/16") thick piece of ABS or equivalent
plastic 125 mm (5") wide by 150 mm (6") long. Attach to the top
of the plastic and center in the area being swept by the abrader
a piece of black paper (generated by making a photocopy with the
cover open) measuring 45 mm (1.75") wide by 100 mm (4") long.
Surround this piece of paper with double-back adhesive tape to
keep the sample from moving during the test.
The abrader has a 3 mm (1/8") thick by 12.5 mm (1/2") diameter
rubber pad attached to the bottom center of the abrader. Place a
lint free towel (as prepared below) over the rubber pad with the
long axis of the towel wrapped over the edges of the long axis of
the abrader. Hold the towel in place with a rubber band.
Prepare each towel by cutting a fresh lint-free towel into
quarters. Fold one quarter section in half, making a square. Fold
twice more in the same direction making a finished towel having 8
layers and measuring 40 mm (1.5") by 150 mm (6").
<PAGE>
Test Procedure:
The sample to be tested should be at least 50 mm (2") by 125 mm
(5") in size. Place the sample on the tester coated side up and
orientated so that the north/south axis is in line with the
motion of the abrader. Position the sample so that the double-
back tape will hold it in place.
Saturate the area of the towel covering the rubber pad with
acetone. Place the abrader into position on the machine rubber
pad/towel side down, with the towel against the sample. Add
additional weight to the top of the abrader to bring the total
weight on the sample up to 2224 grams.
Abrade the test sample using five sets of 10 strokes each. Remove
the abrader after each set of 10 strokes and check the sample for
scratching or coating removal. The sample passes if no noticeable
scratching or coating removal takes place (the sample can be
cleaned of any residue with acetone prior to being checked). Add
acetone to the towel between each set before continuing with
another set of 10 strokes.
3.3.6 Thermal Shock Test.
------------------
The product shall show no evidence of deterioration after being
exposed to an ambient temperature of (minus)54(degrees)C for 4
hours and then 71(degrees)C for 4 hours.
Refer to Figure 1 for sample size. Laminate samples to be
environmentally tested to the AR side out to a piece of 1/8"
clear float glass or equivalent using SONY supplied U.V. curable
optical adhesive. After lamination, apply a cross-web and
down-web scribe spanning the length and width of the sample. This
scribe is to penetrate the sputtered coating and continue into
the hard coat.
3.3.7 Humidity Test.
-------------
The product shall show no evidence of deterioration after being
subjected for 48 hrs to a temperature of 48.9 (plus/minus)
2.2(degrees)C and a relative humidity of 98 (plus/minus) 2%.
Refer to 3.3.6 for sample preparation.
3.3.8 Chemical Test.
-------------
The product shall show no evidence of deterioration after being
immersed for 24 hours in a solution of sodium chloride (NaCl)
that consists of 45 grams of NaCl per liter of distilled water.
<PAGE>
The product shall show no evidence of deterioration after a 15 mm
(1/2") diameter puddle of the following agents is allowed to remain on
the AR coating surface for 24 hours:
Acetone, ethanol, methanol, isopropanol, ammonia hydroxide (50% by
volume or 30% concentration in DI H\\2\\O), acetic acid (50% by volume
in DI H\\2\\O), citric acid (10% by volume in DI H\\2\\O), artificial
perspiration (NaCl 5g, acetic acid 5 ml, butyric acid 3 ml, DI H\\2\\O
84 ml), rubber cement, office automation cleaner, 5% by volume Triton
X-10 cleansing agent, tea, ballpoint pen ink, coffee, cola, stamping
ink, felt pen, nail polish, grease pencil, lipstick, pencil lead
(soft #2).
3.4 ELECTRICAL SPECIFICATIONS.
-------------------------
Sheet resistance is measured at the center and (plus/minus) 100 mm from the
center (see Figure 1 for sample size). The product is to have an average
ohms/square value of less than 250. No individual reading is to exceed 270
ohms/square. This is measured on an LEI Contactless Conductivity Probe,
Model 1000.
3.5 PHYSICAL DEFECTS.
----------------
Physical defects are marked out in Post Processing. Unacceptable physical
defects should occur no closer than 30.48 cm (one foot), otherwise the web
is marked out continuously. If the continuously marked out section is longer
than 3.048 meters (ten feet), then the defective section is physically
removed and replaced by a splice. If a roll averages more than one defect
per two meters (one defect per six feet) after splicing out unacceptable
sections, then the entire roll is rejected.
Physical defects are marked on each side of the web no further than 5 mm
(0.20 inches) from each edge.
<PAGE>
3.5.1 Spot Defects-Coated Side.
------------------------
The following applies to translucent defects on the coated surface.
===============================================================================
Average Size Allowable Number/Notes
- -------------------------------------------------------------------------------
(greater than)0.6mm mean diameter*: None allowed
- -------------------------------------------------------------------------------
0.4 mm to 0.6 mm mean 6 or less allowed per sample with a
diameter*: minimum distance of 50 mm between
defects.
- -------------------------------------------------------------------------------
(less than)0.4 mm mean diameter*: unlimited provided that no more than
6 occur in a 20 mm diameter and no
more than 3 are bunched.
===============================================================================
*where mean diameter = (length + width)/2
3.5.2 Scratch Defects - Coated Side.
-----------------------------
The following applies to translucent linear defects on the coated surface
and visible in reflection only:
===============================================================================
Average Width Allowable Notes
Length
- -------------------------------------------------------------------------------
(equal to or None Allowed Can be felt by dragging
greater than)0.076 mm finger nail across surface
- -------------------------------------------------------------------------------
0.025 to 0.076 mm 15 mm long Can not be felt by dragging
max. finger nail across surface
===============================================================================
3.5.3 Star Defects-Coated Side.
------------------------
These defects are not allowed regardless of size. Use a 20x magnification
eye loop for identification ease.
3.5.4 Cross Web Cracks-Coated Side.
----------------------------
Cross web cracks in the coating which extend more than 5 mm (0.197 inches)
from the edge are unacceptable.
3.5.5 Feathers-Uncoated Side.
----------------------
Feathers which are larger than 3mm (0.118 inches) are not acceptable.
<PAGE>
3.5.6 Scratches - Uncoated Side.
-------------------------
Scratches on the backside of AR1 material which are visually
detectable after being laminated to a glass sheet using Sony's UV
cured adhesive are not acceptable. Use Sony provided samples to
determine acceptability. Generally these scratches have
dimensions as outlined below.
===============================================================
Average Width Allowable Length Notes
---------------------------------------------------------------
TBD TBD TBD
===============================================================
3.5.7 Web Distortion.
--------------
Web distortion which results in an uneven surface after
lamination using Sony's UV curable adhesive is not acceptable.
(Limit samples will be provided by Sony.)
3.5.8 Stains.
------
Stains which cannot be wiped off are not acceptable if the mean
diameter is greater than 0.6 mm (0.024 inches).
3.5.9 Curl Specification.
------------------
See Figure 1 for sample size. No QC sample is to show more than a
5.0 mm (0.197") curl along any edge when viewed with the coating
side up. Wind all QC samples onto 6" laboratory cores prior to
being cut to the required size.
Measure QC samples after allowing for 24 hours of relaxation
stored in a flat or unwound condition.
3.6 Post Processing.
---------------
3.6.1 Material Width:
--------------
15" Monitors: Coated material is to be slit to
240(plus/minus) 1.0 mm.
17" Monitors: Coated material is to be slit to
269(plus/minus) 1.0 mm.
<PAGE>
3.6.2 Centering.
---------
Center slit material onto the re-wind core within (plus/minus)
1.5 mm (0.06") from one edge of the core.
3.6.3 Roll size.
---------
The maximum roll weight (core and product only) is 18.2 Kg (40
lbs). This equates to a roll length of approximately 255 M (837
ft) for 269 mm wide. The maximum roll length is not to exceed
this length for either 269 mm (17" monitors) or 240 mm (15"
monitors) material widths. The minimum roll length is 200 M (656
ft).
3.6.4 Wrap.
----
Wind material onto cores coated side out.
3.6.5 Core Dimension.
--------------
Wind slit material onto 6" Schedule 40 ABS type plastic cores
having a 154 (STOCK) mm (6.063") I.D. and a 168 (STOCK) mm
(6.625") O.D. Use a core length of 275 (plus/minus) 3 mm (10.827
(plus/minus) .12"). The edges of the cores are to be
perpendicular to the central axis to within (plus/minus) 0.4 mm
(0.015") with a surface flatness of 0.4mm (0.015").
3.6.6 Defect Location.
---------------
All rolls are to have tables or graphs explaining the location of
mark-outs and splices.
3.6.7 Roll Splicing/Mark-outs.
-----------------------
Limit splices to 3 per roll. Use 1 mil Kapton tape on both side
of the joint for splices.
Mark out all rejectable areas with a Sharpie or equivalent
permanent marker within 5 mm (1 inch) of either edge.
3.6.8 Escapes.
-------
Escapes are optical or physical non-conformities that have been
missed during the material inspection process. Goal: "Escapes"
are not to exceed 3%.
Table 1: Items to be measured for each QC sample pulled from a finished
roll.
<PAGE>
==============================================================================
Item Number/Description Measurement Scheme
==============================================================================
3.2.1 Spectral Reflectance QC Measured
- ------------------------------------------------------------------------------
3.2.2 Reflection Color QC Measured
- ------------------------------------------------------------------------------
3.2.3 Visible Reflection QC Measured
- ------------------------------------------------------------------------------
3.2.4 Coating Bandwidth QC Measured
- ------------------------------------------------------------------------------
3.2.5 Crossweb Reflectance QC Measured
- ------------------------------------------------------------------------------
3.2.6 Product Absorption QC Measured
- ------------------------------------------------------------------------------
3.2.7 Product Haze QC Measured
- ------------------------------------------------------------------------------
3.3.1 Coating Adhesion QC Measured
- ------------------------------------------------------------------------------
3.3.2 3H Pencil Test QC Measured
- ------------------------------------------------------------------------------
3.3.3 Mechanical Pencil Tip Test QC Measured
- ------------------------------------------------------------------------------
3.3.4 Steel Wool Test QC Measured
- ------------------------------------------------------------------------------
3.3.5 Acetone Rub Test QC Measured
- ------------------------------------------------------------------------------
3.3.6 Thermal Shock Certified to meet spec.
- ------------------------------------------------------------------------------
3.3.7 Humidity Test Certified to meet spec.
- ------------------------------------------------------------------------------
3.3.8 Chemical Test Certified to meet spec.
- ------------------------------------------------------------------------------
3.4.1 Resistance, Buss to Buss QC Measured
- ------------------------------------------------------------------------------
3.4.2 Resistance, Sheet QC Measured
- ------------------------------------------------------------------------------
3.5.1 Spot Defects Post Processing Measured
- ------------------------------------------------------------------------------
3.5.2 Scratch Defects Post Processing Measured
- ------------------------------------------------------------------------------
3.5.3 Star Defects Post Processing Measured
- ------------------------------------------------------------------------------
3.5.4 Cross Web Cracks Post Processing Measured
- ------------------------------------------------------------------------------
3.5.5 Feathers Post Processing Measured
- ------------------------------------------------------------------------------
3.5.6 Scratches - Uncoated Post Processing Measured
- ------------------------------------------------------------------------------
3.5.7 Web Distortion Post Processing Measured
- ------------------------------------------------------------------------------
3.5.8 Stains Post Processing Measured
- ------------------------------------------------------------------------------
3.5.9 Curl Specification QC Measured
- ------------------------------------------------------------------------------
3.6.1 Material Width Post Processing Measured
==============================================================================
<PAGE>
4.0 SHIPPING AND PACKAGING
----------------------
4.1 Package all product for shipment according to STI's standard packaging
specification number MT-0009.
4.2 Place desiccant on the outer wrap of all rolls prior to covering the
roll with the polyethylene roll bag.
4.3 Box only one roll in each telescoping type box (this type of a box
provides quadruple wall protection). Use this packaging for air or
ground freight only. Additional packaging or crating is required for
ocean shipment. Inside box dimensions are 381 mm (15") X 381 mm (15") X
318 mm (12.5").
4.4 ROLL INFORMATION.
----------------
Ship rolls that are within specification with the QC and Post Processing
data and any appropriate defect location tables. Material that does not meet
specification will be evaluated by a Southwall Material Review Board. If it
is deemed likely to be usable by Sony, it will be shipped accompanied with
QC results and comments from the Material Review Board.
4.5 STORAGE
-------
4.5.1 Store rolls remaining in their shipping boxes in a horizontal
position. Store rolls that have been removed from their shipping boxes
in either a horizontal or vertical position.
4.5.2 All rolls are to be supported by their end plates when boxed, stored,
or being transported and are to remain banded with end plates and
protective plastic cover until use.
4.5.3 Do not store rolls more than 1 year.
4.5.4 Do not allow un-boxed rolls to remain in direct sunlight for more than
1 hour.
4.5.5 Storage temperature is not to exceed 50(degree)C (122(degree)F) with a
relative humidity of 90%.
<PAGE>
Figure 1. Approximate inspection locations and dimensions for SONY Q.C.
measurements.
[CHART APPEARS HERE]
6. Numbers in parenthesis are dimensions for 15" monitors.
5. Both Mechanical and Pencil Tests are to use 10 mm long pulls.
4. Unless otherwise noted, all dimensions are (plus/minus) 1.0 mm.
3. Scale = None.
2. Approximate location for 5 EA. 3H Pencil Test.
1. Approximate location for 2 EA. Cross Hatch Peel Test.
NOTES: UNLESS OTHERWISE SPECIFIED
<PAGE>
EXHIBIT II
SONY - SOUTHWALL SUPPLY AGREEMENT
PRICES
------
CURRENT ORDER - THROUGH Q3-1995
The price of product to SONY shall continue at U.S. $10.00 per linear foot (for
product in widths for both 15" and 17" CRTs) until Purchase order No. STI-001
(from STIC), dated April 24, 1995, is complete (anticipated in early October,
1995). The price does not include the cost of hardcoated substrate. The product
price shall be FOB Palo Alto factory.
Substrate has been provided by STIC, free of charge, except freight and duty,
which have been paid by STI. Should SONY elect to chare STI for substrate, the
price of product to SONY shall be adjusted, with allowance for STI production
yields, so as to fully compensate STI for all costs of purchase and use of
vendor's (Teijin) hardcoated substrate.
NEW ORDER FOR Q4-1995
For any new orders covering purchases in Q4-1995, the price of product to SONY
shall be determined by negotiation prior to placement of order. The product
price shall be FOB Palo Alto factory.
Should SONY elect to charge STI for substrate, the price of product to SONY
shall fully compensate STI for all costs of purchase and use of vendor's
(Teijin) hardcoated substrate.
<PAGE>
EXHIBIT 21
----------
SOUTHWALL TECHNOLOGIES INC.
LIST OF SUBSIDIARIES OF SOUTHWALL TECHNOLOGIES INC.
---------------------------------------------------
Name State or other Jurisdiction of Incorporation
---- --------------------------------------------
Southwall Worldwide Glass Inc. California
Southwall-Sunflex, Inc. California
<PAGE>
EXHIBIT 23.1
------------
SOUTHWALL TECHNOLOGIES INC.
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), 33-51758 (filed on September 8, 1992) and 33-82138 (filed on July 28,
1994) of our report dated January 26, 1996 appearing on page 18 of this Form
10-K.
PRICE WATERHOUSE LLP
San Jose, California
March 14, 1996
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