SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the quarterly period ended September 28, 1997
------------------
[ ] 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: (650) 962-9111
-------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- ----------
As of September 28, 1997 there were 7,421,009 shares of the Registrant's Common
Stock outstanding.
This report, including all attachments, contains 14 pages.
1
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
INDEX
PART 1 FINANCIAL INFORMATION
Page Number
-----------
Item 1 Financial Statements:
Consolidated Balance Sheet - September 28, 1997
and December 31, 1996......................................3
Consolidated Statement of Operations -
three month and nine month periods ended
September 28, 1997 and September 29, 1996..................4
Consolidated Statement of Cash Flows -
nine months ended September 28, 1997
and September 29, 1996.....................................5
Consolidated Statement of Stockholders' Equity -
nine months ended September 28, 1997.......................6
Notes to Consolidated Financial Statements.................7
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of Operations...........9
PART II OTHER INFORMATION
Item 1 Legal Proceedings..................................................13
Item 2 Changes in Securities..............................................13
Item 3 Defaults Upon Senior Securities....................................13
Item 4 Submission of Matters to a Vote of Stockholders....................13
Item 5 Other Information..................................................13
Item 6 Exhibits and Reports on Form 8-K...................................13
Signatures.........................................................14
2
<PAGE>
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
Sept.28, 1997 Dec.31, 1996
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 8,117 $ 7,419
Short-term investments 7 7
Accounts receivable, net of allowance
for doubtful accounts of $866 and $682 9,956 7,097
Inventories 10,457 8,406
Other current assets 1,036 828
------- -------
Total current assets 29,573 23,757
Property and equipment, net 24,578 17,223
Other assets 1,533 1,529
------- -------
Total assets $55,684 $42,509
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,926 $ 2,635
Accrued compensation 2,015 2,141
Other accrued liabilities 1,815 1,954
Current portion of long-term debt 1,210 1,181
------- -------
Total current liabilities 9,966 7,911
Long-term debt 10,672 6,591
Deferred income taxes 410 410
------- -------
Total liabilities 21,048 14,912
------- -------
Commitments
Stockholders' equity:
Common stock, $.001 par value,
20,000 shares authorized:
Issued and outstanding: 7,636 and 6,917 8 7
Capital in excess of par value 51,565 46,673
Notes receivable (679) (596)
Accumulated deficit (15,334) (16,912)
Less Treasury stock of 215 and 390 (924) (1,575)
------- --------
Total stockholders' equity 34,636 27,597
------- -------
Total liabilities and
stockholders' equity $55,684 $42,509
======= =======
See accompanying notes to consolidated financial statements.
3
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 28, Sept.29, Sept. 28, Sept.29,
--------- -------- --------- --------
1997 1996 1997 1996
---- ---- ---- ----
Net revenues $12,083 $ 9,966 $34,622 $31,593
------- ------- ------- -------
Costs and expenses:
Cost of sales 8,289 6,677 22,878 21,634
Start up costs - Tempe 528 -- 1,076 --
Research and development 794 685 2,228 1,837
Selling, general and
administrative 2,300 2,020 6,845 6,225
------- ------- ------- -------
Total costs and expenses 11,911 9,382 33,027 29,696
------- ------- ------- -------
Income from operations 172 584 1,595 1,897
Interest income (expense) net 57 (10) 72 (43)
------- ------- ------- -------
Income before income taxes 229 574 1,667 1,854
Provision for income taxes 19 19 89 84
------- ------- ------- -------
Net income $ 210 $ 555 $ 1,578 $ 1,770
======= ======= ======= =======
Net income per share $ 0.03 $ 0.08 $ 0.21 $ 0.25
======= ======= ======= =======
Weighted average shares of common
stock and common stock equivalents 8,038 7,004 7,667 6,961
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
4
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended
-----------------
Sept. 28, 1997 Sept. 29, 1996
-------------- --------------
Cash flows from operating activities:
Net income $ 1,578 $ 1,770
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 1,892 1,707
Decrease (increase) in accounts receivable (2,859) (2,642)
Decrease (increase) in inventories (2,051) (705)
Decrease (increase) in other current assets (208) 420
(Decrease) increase in accounts payable
and accrued liabilities 2,119 1,389
------- -------
Cash provided by (used in) operating
activities 471 1,939
------- -------
Cash flows from investing activities:
Decrease (increase) in short-term investments -- 1,127
Expenditures for property and equipment
and other assets (9,251) (2,951)
------- -------
Net cash (used in) provided by investing
activities (9,251) (1,824)
------- -------
Cash flows from financing activities:
Increase in(reduction of) long-term debt 4,110 (83)
Sale of common stock, net 4,931 --
Issuance of treasury stock, net 437 853
------- -------
Net cash (used in) provided by financing activities 9,478 770
------- -------
Net increase (decrease) in cash and cash
equivalents 698 885
Cash and cash equivalents, beginning of year 7,419 1,434
------- -------
Cash and cash equivalents, end of period $ 8,117 $ 2,319
======= =======
Supplemental schedule of non-cash
investing and financing activities:
Treasury stock used for payment of interest $ 93 $ 93
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine Months Ended September 28, 1997
(in thousands)
(Unaudited)
<CAPTION>
Common Stock Capital in Total
------------ excess of Notes Accumulated Treasury Stockholders'
Shares Amount par value Receivable Deficit Stock Equity
------ ------ --------- ---------- ------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance; December 31, 1996 6,917 $7 $46,673 $(596) $(16,912) $(1,575) $27,597
Interest paid with stock 31 62 93
Exercise of options 52 (78) 535 457
Stock option loans (83) (83)
Sale of stock, net 667 1 4,930 4,931
Sales to employees under 9 54 63
Stock Purchase Plan
Net income 1,578 1,578
------ -- ------- ------ --------- -------- -------
Balance; September 28, 1997 7,636 $8 $51,565 $(679) $(15,334) $(924) $34,636
====== == ======= ====== ========= ====== =======
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
6
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(Unaudited)
Note 1 - Interim Period Reporting:
While the information presented in the accompanying consolidated financial
statements is unaudited, it includes all adjustments (consisting only of normal
recurring adjustments) which, in the opinion of management, are necessary to
present fairly the Company's financial position and results of operations, and
changes in financial position as of the dates and for the periods indicated.
Certain information and footnote disclosures normally contained in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the financial statements
contained in the Company's Form 10-K for the year ended December 31, 1996. The
results of operations for the interim periods presented are not necessarily
indicative of the operating results of the full year.
Note 2 - Inventories:
Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market. Inventories at September 28, 1997 and December 31,
1996, consisted of the following:
September 28, 1997 December 31, 1996
------------------ -----------------
Raw materials $ 5,088 $ 2,869
Work-in-process 2,034 1,848
Finished goods 3,335 3,689
------- -------
Total $10,457 $ 8,406
======= =======
Note 3 - Commitments:
During the first quarter of 1996, the Company and Sony Corporation signed an
Addendum #1 to Supply Agreement. Under the terms of the Amended Agreement, among
other things, Sony agreed to increase its minimum order of anti-reflective film
beginning July 1, 1997 and extending through December 31, 2000, and Southwall
agreed to install any necessary additional manufacturing capacity to supply the
minimum quantities required by this agreement. Should either Southwall fail to
supply or Sony fail to purchase the minimum quantities prescribed in the
contract, a penalty is enforceable by the other party in the amount of one half
of the selling price of the product for the quantity not supplied or purchased.
The Company began occupying a new leased facility located in Tempe, Arizona, on
June 27, 1997, has installed and is in the process of bringing on line the
7
<PAGE>
equipment required for the manufacturing of anti-reflective film. The Company
estimates that it will cost approximately $12 million to equip this facility.
The Company has also secured financing from a combination of borrowing from
lending institutions and an equity sale to a major investor to finance this
expansion and anticipated related working capital requirements. On December 16,
1996, the Company borrowed $5 million from an institutional lender. On April 9,
1997, the Company signed an agreement with Teijin Limited of Japan (Teijin), a
major raw material supplier of the Company, which included arrangements for
additional financing for the new manufacturing facility and for related
potential working capital growth. Teijin purchased 667,000 shares of the
Company's common stock at a price of $7.50 per share, and guaranteed a loan
through Sanwa Bank for an additional $10 million. Teijin also received warrants
to purchase 158,000 shares of common stock at a price of $9.00 per share at any
time within three years of the date of the agreement. The stock purchase
transaction of approximately $5 million was completed on April 28, 1997. In
addition, a loan agreement with Sanwa Bank was signed on May 2, 1997, and the
Company received the first $5 million of funding on May 6, 1997. The remaining
$5 million of loan funding was received on November 6, 1997. The loan is for a
period of seven and one half (7.5) years, with a four (4) year interest only
grace period, payable semi annually at an interest rate of BBA Libor, fixed semi
annually, plus seven sixteenths percent. In addition, a loan guarantee fee of
nine sixteenths percent (.5625%) per annum is payable to Teijin on the same
payment schedule as the loan interest payments.
8
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for the historical information contained herein, the matters discussed in
this Form 10-Q Report are forward-looking statements that involve risks and
uncertainties, including those discussed below and in the Company's Annual
Report on Form 10-K. Actual results may differ materially from those projected.
These forward-looking statements represent the Company's judgment as of the date
of the filing of this Form 10-Q Report. The Company disclaims, however, any
intent or obligation to update these forward-looking statements.
General
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(TM) products, which typically have
been strongest in the second and third quarters. 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 reduction in the sales of the Company's Heat Mirror products. In
addition, 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 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.
The Company believes that it must continue to increase revenues to remain
profitable. Although the Company is in the process of expanding it's capacity
and is seeking to expand existing applications, to develop new applications and
to continue to expand international marketing and sales efforts, there can be no
assurance that the Company will be able to continue to increase revenues.
Additionally, there is significant risk inherent in the expansion project
currently in process. The project is currently behind schedule and there can be
no assurances that the Company will be successful in completing this project in
accordance with the Company's current plans and in time to fulfill the supply
requirements for the period ended December 31, 1997 thereby avoiding potential
penalties provided for in the contract with Sony.
Nine Months Ended September 28, 1997 and September 29, 1996
Net revenues increased to $34.6 million for the first nine months of 1997,
compared to $31.6 million for the similar period of 1996. The increase was due
primarily to a $3.5 million increase in sales of anti-reflective film compared
to the similar period last year. Net sales of energy conservation products
decreased by $.5 million, primarily due to discontinued products of
approximately $2.1 million sold during 1996, plus a $1.5 million decrease in
Heat Mirror(TM) products, partly offset by increases of $1.6 million in sales of
Solis(TM) film, $1.0 million of Heat Mirror XIR(R) for automotive and commercial
and $.5 million of silver reflector product.
9
<PAGE>
Cost of sales, excluding start up costs of the new manufacturing facility in
Tempe, Arizona, for the first nine months of 1997 was 66% of net revenue,
compared to 68% for the similar period of 1996. Additional costs in 1997 for
start up of the new manufacturing facility were approximately $1.1 million or 3%
of net revenues. Start up costs will continue into the fourth quarter of 1997,
but will decrease as the production equipment is brought on line. The percentage
decrease in cost of sales excluding start up costs was primarily attributable to
production efficiency improvements which have resulted in increased throughputs
and improved yields on most products, which allowed for increased volume of
production and sales. Most of these improvements have taken place cumulatively
over the twelve month period beginning in October 1996 through September 28,
1997. These improvements more than offset costs from unplanned maintenance
downtime during the third quarter of 1997 on two of the Company's production
machines, and cost to scale up production of automotive OEM products for new
customers in Europe. There were also some operational problems that occurred
during the first quarter of 1996, and higher cost of certain metals used in the
coating process for most of the Company's products during the first half of
1996.
Research and development expenses, as a percent of net revenue, were 6% for the
first nine months of 1997, compared to 6% for the similar period in 1996. The
absolute dollars increased to $2.2 million in 1997 from $1.8 million in 1996.
The increase was primarily attributable to higher new product development,
mainly in film for laminated glass products, including film for the automotive
and California Series(TM) commercial and residential markets, and
anti-reflective product.
Selling, general and administrative expense, as a percent of net revenue, was
20% in the first nine months of 1997, compared to 20% for the similar period in
1996. The absolute dollars increased to $6.8 million in 1997 from $6.2 million
in 1996. The increase in absolute dollars was primarily caused by salary
inflation plus increased headcount to provide greater focus on management of the
two major product groupings, energy and electronics products and to broaden
selling coverage in Europe and South America.
Net interest income increased in 1997 compared to 1996 due to an increased
amount of money invested and to capitalization of interest expense related to
the construction in progress of the new manufacturing facility in Tempe.
As a result of the factors discussed above, the Company reported pre-tax income
of $1.7 million for the first nine months of 1997, compared to pre-tax income of
$1.9 million for the similar period in 1996.
Three Months Ended September 28, 1997 and September 29, 1996
Net revenues increased to $12.1 million for the third quarter of 1997, compared
to $10.0 million for the similar period of 1996. The increase was due primarily
to a $1.9 million increase in sales of anti-reflective film and a $.3 million
increase in net sales of electronics products other than anti-reflective film,
and partly offset by a $.1 million decrease in net sales of energy conservation
products,
Cost of sales for the third quarter of 1997, excluding start up costs of the new
manufacturing facility, was 69% of net sales compared to 67% for the similar
period of 1996. This percentage increase was primarily attributable to unplanned
maintenance downtime during the third quarter of 1997 on two of
10
<PAGE>
the Company's production machines, and cost to scale up production of automotive
OEM products for new customers in Europe. Additional costs in the third quarter
of 1997 for start up of the new manufacturing facility were approximately $.5
million or 4% of net revenues.
Research and development expenses, as a percent of net sales, were 7% for the
third quarter of 1997, compared to 7% for the similar period in 1996. The
absolute dollar increases in 1997 was primarily attributable to higher new
product development.
Selling, general and administrative expense, as a percent of net sales,
decreased to 19% in the third quarter of 1997, from 20% for the similar period
in 1996. The percentage decrease was due to increased net revenues. The absolute
dollar increase from $2.0 million in 1996 to $2.3 million in 1997, was primarily
caused by salary inflation plus increased headcount to provide greater focus on
management of the two major product groupings, energy and electronics products
and to broaden selling coverage in Europe and South America.
As a result of the factors discussed above, the Company reported pre-tax income
of $.2 million for the third quarter of 1997, compared to pre-tax income of $.6
million for the similar period in 1996.
Liquidity and Capital Resources
At September 28, 1997, the Company's net working capital was $19.6 million
compared with $15.8 million at December 31, 1996. On December 16, 1996, the
Company borrowed $5 million from an institutional lender for partial financing
of the new manufacturing facility in Tempe, Arizona. On April 9, 1997, the
Company signed an agreement with Teijin Limited of Japan (Teijin), a major raw
material supplier of the Company, which included arrangements for additional
financing for the new manufacturing facility and for related potential working
capital growth. Teijin purchased 667,000 shares of the Company's common stock at
a price of $7.50 per share, and guaranteed a loan through Sanwa Bank for an
additional $10 million. Teijin also received warrants to purchase 158,000 shares
of common stock at a price of $9.00 per share at any time within three years of
the date of the agreement. The stock purchase transaction of approximately $5
million was completed on April 28, 1997. In addition, a loan agreement with
Sanwa Bank was signed on May 2, 1997, and the Company received the first $5
million of funding on May 6, 1997. The remaining $5 million of loan funding was
received on November 6, 1997. The new manufacturing facility is currently in the
start up process and will be dedicated initially to the production of
anti-reflective film product to fulfill the supply requirements of the supply
agreement with Sony. Prior to the borrowing required to finance the new
facility, the Company had financed itself through cash flow from operations and
its existing cash balances.
From December 31, 1996, to September 28, 1997, cash and short-term investments
increased by $.7 million. Major increases were derived primarily from financing
activities, as stated above, totaling $9.5 million, net of debt repayments, net
income plus depreciation and amortization of $3.5 million and increased accounts
payable and accrued liabilities by $2.1 million. Major uses of cash were capital
expenditures of $9.3 million, including $7.7 million on the new manufacturing
facility mentioned above, increased accounts receivable by $2.9 million and
increased inventories by $2.1 million. The increase in accounts payable and
accrued liabilities was primarily due to
11
<PAGE>
timing of payments, including capital payments and raw materials for the new
manufacturing facility. The increase in accounts receivable is primarily
attributable to the increase in shipments billed in September 1997, which were
higher by $1.6 million compared to December 1996, and to increased past due
amounts by $.8 million. The increase in inventories was mostly due to timing of
receipts, with $1.1 million of raw materials received late in the period, and
due in part to inventories needed for the new manufacturing facility.
Additions to property and equipment were approximately $3.2 million during the
third quarter of 1997, including $2.7 million on capital plant and equipment for
the new manufacturing facility mentioned above. This brings the total capital
investment to date on the new manufacturing facility to $10.1 million, and the
Company currently has additional commitments for expenditures of approximately
$2 million during 1997 on this project, which when completed is expected to cost
a total of approximately $12.0 million, excluding any additional production
machinery yet to be ordered. The Company had originally planned to order a
second production machine for the new facility for delivery in mid 1997, but has
delayed that decision pending further study of the need and timing of this
capacity. The Company anticipates total capital expenditures of approximately
$2.0 million during 1997 for general replacements and discretionary improvements
of current facilities in Palo Alto, California.
At September 28, 1997, the Company had $8.1 million of cash and short-term
investments and a $6 million revolving line of credit, which is subject to
certain financial covenants and available borrowing base, which at September 28,
1997 did not restrict the amount available to the Company. The revolving line of
credit expires June 5, 1998, but may be extended for additional one year terms
with the bank's approval. As of September 28, 1997, 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 of existing facilities at least through 1997.
Debt and equity financing concluded in December 1996 and during April and May
1997, mentioned above, are expected to be adequate to satisfy capital and
operating requirements of the new manufacturing facility at least through 1997.
12
<PAGE>
PART II OTHER INFORMATION
Item 1 Legal Proceedings and Other Matters
The Company has been named a defendant in a lawsuit filed on April 5, 1996 by
one of its customers in the United States District Court for the Eastern
District of New York. The lawsuit in federal court alleges certain contractual
violations by the Company and seeks relief in an aggregate amount in excess of
$35 million. The Company believes that this lawsuit is without merit and intends
to defend against it vigorously.
In addition, the Company is involved in certain other legal actions arising in
the ordinary course of business. The Company believes, however, that none of
these actions, either individually or in the aggregate, will have a material
adverse effect on the Company's business or its consolidated financial position
or results of operations.
Item 2 Changes in Securities
Not applicable
Item 3 Defaults upon Senior Securities
Not applicable
Item 4 Submission of Matters to a Vote of stockholders
No matters were submitted to a vote of security holders during the
quarter ended September 28, 1997.
Item 5 Other Information
Not applicable
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports of Form 8-K - None
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 10, 1996 Southwall Technologies Inc.
By:/s/ Martin M. Schwartz
-------------------------
Martin M. Schwartz
President and
Chief Executive Officer
By:/s/ L. Ray Christie
----------------------
L. Ray Christie
Vice President and
Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-28-1997
<CASH> 8,117
<SECURITIES> 7
<RECEIVABLES> 9,956
<ALLOWANCES> (866)
<INVENTORY> 10,457
<CURRENT-ASSETS> 29,573
<PP&E> 47,448
<DEPRECIATION> (22,870)
<TOTAL-ASSETS> 55,684
<CURRENT-LIABILITIES> 9,966
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 34,628
<TOTAL-LIABILITY-AND-EQUITY> 55,684
<SALES> 12,576
<TOTAL-REVENUES> 12,083
<CGS> 8,817
<TOTAL-COSTS> 11,911
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (57)
<INCOME-PRETAX> 229
<INCOME-TAX> 19
<INCOME-CONTINUING> 210
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 210
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
