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 March 30, 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 94-2551470
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1029 Corporation Way, Palo Alto, California 94303
------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 962-9111
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
As of March 30, 1997 there were 6,541,621 shares of the Registrant's Common
Stock outstanding.
This report, including all attachments, contains 12 pages.
1
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
INDEX
Page Number
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PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheet - March 30, 1997
and December 31, 1996......................................3
Consolidated Statement of Operations -
three months ended March 30, 1997
and March 31, 1996 ........................................4
Consolidated Statement of Cash Flows -
three months ended March 30, 1997
and March 31, 1996 ........................................5
Consolidated Statement of Stockholders' Equity -
three months ended March 30, 1997..........................6
Notes to Consolidated Financial Statements.................7
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of Operations...........8
PART II OTHER INFORMATION
Item 1 Legal Proceedings..................................................11
Item 2 Changes in Securities..............................................11
Item 3 Defaults Upon Senior Securities....................................11
Item 4 Submission of Matters to a Vote of Stockholders....................11
Item 5 Other Information..................................................11
Item 6 Exhibits and Reports on Form 8-K...................................11
Signatures.........................................................12
2
<PAGE>
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
- ----------------------------
CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
March 30, 1997 December 31, 1996
-------------- -----------------
audited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,903 $ 7,419
Short-term investments 7 7
Accounts receivable, net of allowance
for doubtful accounts of $728 and $682 8,793 7,097
Inventories 8,633 8,406
Other current assets 876 828
------- -------
Total current assets 23,212 23,757
Property and equipment, net 17,989 17,223
Other assets 1,503 1,529
------- -------
Total assets $42,704 $42,509
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,464 $ 2,635
Accrued compensation 1,153 2,141
Other accrued liabilities 1,668 1,954
Current portion of long-term debt 1,163 1,181
------- -------
Total current liabilities 7,448 7,911
Long-term debt 6,292 6,591
Deferred income taxes 410 410
------- -------
Total liabilities 14,150 14,912
======= =======
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 46,659 46,673
Notes Receivable (440) (596)
Accumulated deficit (16,146) (16,912)
Less treasury stock of 378
and 390 (1,526) (1,575)
------ -------
Total stockholders' equity 28,554 27,597
------- -------
Total liabilities and
stockholders' equity $42,704 $42,509
======= =======
See accompanying notes to financial statements.
3
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SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three Months Ended
March 30, March 31,
1997 1996
-------- --------
Net revenues $10,855 $10,637
------- -------
Costs and expenses:
Cost of sales 7,158 7,409
Research & development 707 576
Selling, general and
administrative 2,161 2,100
------ ------
Total costs and expenses 10,026 10,085
------ ------
Income from operations 829 552
Interest income/(expense), net (33) (22)
------ ------
Income before income taxes 796 530
Provision for income taxes 30 19
------ ------
Net income $ 766 $ 511
====== ======
Net income per share $ .11 $ .08
====== ======
Weighted average shares of common
stock and common stock equivalents 7,202 6,690
====== ======
See accompanying notes to financial statements.
4
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<TABLE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<CAPTION>
Three Months Ended
-----------------------------------
March 30, 1997 March 31, 1996
------------- --------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 766 $ 511
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 627 568
Decrease (increase) in accounts receivable (1,696) (1,947)
Decrease (increase) in inventories (227) (147)
Decrease (increase) in other current assets (48) 163
(Decrease) increase in accounts payable
and accrued liabilities (445) 740
------ -----
Cash provided by (used in) operating
activities (1,023) (112)
------ ------
Cash flows from investing activities:
Decrease (increase) in short-term investments -- 453
Expenditures for property and equipment
and other assets (1,367) (415)
------ ------
Net cash (used in) provided by investing
activities (1,367 38
------ ------
Cash flows from financing activities:
Proceeds from issuance of stock, net of
related costs -- --
Increase in(reduction of) long-term debt (317) (60)
(Purchase) issuance of treasury stock, net 191 90
------ ------
Net cash (used in) provided by financing activities (126) (30)
------ -----
Net increase (decrease) in cash and cash
equivalents (2,516) (44)
Cash and cash equivalents, beginning of year 7,419 1,434
------ ------
Cash and cash equivalents, end of period $4,903 $1,390
====== ======
Supplemental schedule of non-cash investing and
financing activities:
Treasury stock used for payment of interest $ -- $ 93
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three Months Ended March 30, 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
Exercise of Options (14) 49 35
Stock Option Loans 156 156
Net income 766 766
------- ---- ------- ------- ---------- -------- -------
Balance; March 30, 1997 6,917 $7 $46,659 (440) $(16,146) $(1,526) $28,554
======= ==== ======= ======= ========== ======== =======
</TABLE>
See accompanying notes to financial statements.
6
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SOUTHWALL TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(Unaudited)
Note 1 - Interim Period Reporting:
While the information presented in the accompanying 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 March 30, 1997
and December 31, 1996, consisted of the following:
March 30, 1997 December 31, 1996
-------------- -----------------
Raw materials $3,178 $2,869
Work-in-process 1,877 1,848
Finished goods 3,578 3,689
----- -----
Total $8,633 $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.
The Company is currently constructing and equipping a new facility
located in Tempe, Arizona, for the manufacturing of anti-reflective
film. The Company estimates that it will cost approximately $14.5
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.
7
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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
From 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 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
and there can be no assurances that the Company will be successful in
completing this project when scheduled or that start-up costs and
initial production will be completed in accordance with the Company's
current plans.
Effective March 31, 1996, the Company terminated its lease of equipment
and facilities in Southern California to laminate glass and closed it's
wholly owned subsidiary, Southwall Worldwide Glass, Inc. (SWGI). The
Company has continued to market its California Series(TM) clear solar
shading laminated glass products, which are currently being laminated
by a sub-contractor, but no longer markets other laminated products.
8
<PAGE>
Three Months Ended March 30, 1997 and March 31, 1996
Net revenue increased to $10.9 million for the first three months of
1997, compared to $10.6 million for the similar period of 1996. The
increase was due to a $1.1 million increase in sales of anti-reflective
film which more than offset a $.3 million decrease in other electronic
product sales. Net sales of energy conservation products was down by
$.5 million compared to the same period last year, primarily due to
discontinued products which were sold during the first quarter of 1996
from SWGI.
Cost of sales for the first quarter of 1997 was 66% of net revenue,
compared to 70% for the similar period of 1996. First quarter 1997 cost
of sales included $.2 million of costs associated with the start up of
the Company's new facility under construction in Tempe, Arizona. This
net percentage decrease in cost rate was due to a combination of one
time operational problems which adversely impacted the first quarter of
1996 and to ongoing operational improvements that have occurred since
that time. The improvements were made both through capital improvements
to production equipment and through process improvements and have
resulted in yield improvements in essentially every product line.
Research and development expenses, as a percent of net sales, were 7%
for the first three months of 1997, compared to 5% for the similar
period in 1996. The increase in 1997 is attributable to higher new
product development costs, primarily in development of product for the
automotive film market.
Selling, general and administrative expense, as a percent of net sales,
stayed approximately the same at 20% in the first three months of 1997,
compared to the similar period in 1996.
Net interest expense increased in 1997 compared to 1996 due to interest
payments on long term debt taken in December 1996 for partial financing
of an expansion project.
As a result of the factors discussed above, the Company reported a
pre-tax profit of $.8 million for the first three months of 1997,
compared to a pre-tax profit of $.5 million for the similar period in
1996.
Liquidity and Capital Resources
At March 30, 1997, the Company's net working capital was $15.8 million,
remaining essentially the same as the December 31, 1996 net working
capital level. On December 16, 1996, the Company borrowed $5 million
from an institutional lender for partial financing of an expansion
project. The project, currently in process for a new facility located
in Tempe, Arizona, is to be dedicated to the production of
anti-reflective film product and to fulfill the supply requirements of
a supply agreement. Prior to that date the Company had financed itself
through cash flow from operations and its existing cash balances.
From December 31, 1996, to March 30, 1997, cash and short-term
investments decreased by $2.5 million. Accounts receivable increased by
$1.7 million primarily due to higher sales by $1.5 million in March
1997 compared to December 1996.
Additions to property and equipment were approximately $1.4 million
during the first quarter of 1997. These expenditures included
approximately $1 million on capital equipment for the expansion project
mentioned above. This brings the total capital investment to date on
the project to $3.4 million, and the Company anticipates making
additional expenditures of approximately $8 million
9
<PAGE>
during 1997 on the project, which when completed is expected to cost a
total of approximately $14.5 million. The Company anticipates total
capital expenditures of approximately $2.5 million during 1997 for
general replacements and discretionary improvements of current
facilities.
At March 30, 1997, the Company had $4.9 million of cash and short-term
investments and a $6 million revolving line of credit, which is subject
to certain financial covenants, which at March 30, 1997 restricted the
amount available to the Company to $4.7 million. The revolving line of
credit expires in June 1997, but may be extended for additional one
year terms with the bank's approval. As of March 30, 1997, there were
no borrowings under this line of credit.
During April and early May 1997, the Company concluded arrangements for
additional financing for the planned new facility mentioned above and
for related potential working capital growth. A major raw material
supplier of the Company, Teijin Limited of Japan, agreed to purchase
667,000 shares of the Company's common stock at a price of $7.50 per
share, and to guarantee 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 purchase transaction of
approximately $5 million for 667,000 shares was completed on April 28,
1997. The 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 is scheduled for November 6,
1997. The loan is for a period of eight (8) years, with a four (4) year
interest only grace period, at an interest rate of BBA Libor, plus one
percent (1%).
The above mentioned financing plus 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 1997.
10
<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 March 30, 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
11
<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: May 13, 1997
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
12
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-30-1997
<CASH> 4,903
<SECURITIES> 7
<RECEIVABLES> 9,521
<ALLOWANCES> (728)
<INVENTORY> 8,633
<CURRENT-ASSETS> 23,212
<PP&E> 39,642
<DEPRECIATION> (21,653)
<TOTAL-ASSETS> 42,704
<CURRENT-LIABILITIES> 7,448
<BONDS> 0
<COMMON> 0
0
7
<OTHER-SE> 28,547
<TOTAL-LIABILITY-AND-EQUITY> 42,704
<SALES> 10,818
<TOTAL-REVENUES> 10,855
<CGS> 7,158
<TOTAL-COSTS> 10,026
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (33)
<INCOME-PRETAX> 796
<INCOME-TAX> 30
<INCOME-CONTINUING> 766
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 766
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
