SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1997
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to _________
Commission file number 0-15930
SOUTHWALL TECHNOLOGIES INC.
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(Exact name of registrant as specified in its charter)
Delaware 94-2551470
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1029 Corporation Way, Palo Alto, California 94303
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 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, 1998, (based upon the closing
sales price of the Common Stock on the Nasdaq National Market System on such
date) was $37,000,000. For purposes of this disclosure, Common Stock held by
stockholders whose ownership exceeds five percent of the Common Stock
outstanding as of January 31, 1998, 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, 1998, was 7,514,749.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed
with the Commission in connection with the Company's 1998 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.
1997 FORM 10-K ANNUAL REPORT
Table of Contents
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Page
PART I
ITEM 1. BUSINESS ........................................................ 4
ITEM 2. PROPERTIES ...................................................... 10
ITEM 3. LEGAL PROCEEDINGS................................................ 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SERURITY HOLDERS.............. 10
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..................................... 13
ITEM 8. FINANCIAL STATEMENTS............................................. 18
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............. 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT................... 33
ITEM 11. EXECUTIVE COMPENSATION........................................... 33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.. 34
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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 and electronics applications. The
Company has developed and currently offers a variety of thin-film products for
the residential and commercial architectural glazing, automotive glazing and
electronic display markets. These products include transparent insulation and
solar-control films, anti-reflective film for computer monitor CRTs and
television monitors, transparent conductive films for use in touch screen
displays, and various other types of commercial film.
During 1997 and years prior, the Company also manufactured or had
available products for various applications in the aerospace industry, including
thin-film materials for shielding and other applications, adhesiveless
conductive films for use in flexible electronic circuits and films that reduce
detectability of objects in selected portions of the electromagnetic spectrum.
However, the Company began a phase out of these products during 1996 and is no
longer pursuing these markets.
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 operated 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. That
subsidiary operation was closed in March 1996 and certain custom and laminated
glass products were discontinued. The Company continues to manufacture the
proprietary California Series solar control product line.
Effective October 31, 1994, the Company acquired Sunflex L.P. which
assembles and markets aftermarket film, mesh and glass anti-reflective filters
primarily for personal computer monitors under such trademark names as Krystal
Clear(TM), OPTIVIEW(TM) and Protector(TM). During 1997, the Company began
phasing out of the mesh and glass filter product lines, and began contracting
out the assembly of film filters, but will continue to market film filter
products.
Markets and Products
Southwall is currently supplying products for use in two broad markets:
energy conservation and electronic displays. 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 transportation glazing laminates and
applied film to provide solar control to windows, (3) anti-reflective films,
both OEM and after market, (4) its Altair(TM) family of transparent conductors,
(5) laminated glass products, and (6) other commercial thin-film products.
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Energy Conservation Products
Heat Mirror - Transparent Window Insulation
The Company offers a family of Heat Mirror films with various shading
and insulating properties. Windows are primary areas of heat loss in winter and
a major source of heat gain in summer. Windows containing Heat Mirror, while
generally more expensive, have approximately double the insulating capacity of
conventional double-pane windows, and transmit high levels of visible light with
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(R) fading
protection.
The Company believes that the Heat Mirror and Heat Mirror related
Superglass(R) system is the most comprehensive window glass product available
today, providing R-6 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
The Company's Heat Mirror XIR(R) Coating is a transparent,
sputter-coated, polyester film used in laminated safety glass for architectural
and transportation applications. 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 and specialty
transportation applications such as agricultural and construction vehicles.
Applied Solar-Control Films
Another glazing product utilizing the Heat Mirror XIR coating is
Solis(R) 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.
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Electronic Products
Anti-Reflective Film and Filters
Southwall's anti-reflective film for computer monitor CRTs minimize
reflection of ambient light, electromagnetic interference ("EMI") radiation and
static. This film is currently sold primarily to Sony Corporation under a supply
agreement for use in Sony's manufacture of CRTs. The Company, through its
Southwall-Sunflex, Inc. subsidiary, markets aftermarket anti-reflective filters
primarily for personal computer monitors under such trademark names as Krystal
Clear(R), OPTIVIEW lite(R), and Protector(R).
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 EMI shielding, infrared rejection and
electrostatic discharge packaging applications.
Other Products
Southwall manufactures a variety of other commercial thin-films,
including highly reflective coatings for use in optical storage media.
Manufacturing
Four 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. One of the large-scale machines was
commissioned during the fourth quarter of 1997, and is located in a new facility
in Tempe, Arizona. Also located in the Tempe facility is a new wet coating and
laminating machine which will be used to apply various top coats and adhesives
to film products and for lamination of liner films.
The Company began occupying a new 55,000 square foot leased facility in
Tempe, Arizona for the manufacturing of anti-reflective film during June 1997
and began shipping product from that operation during the fourth quarter. The
cost of equipment and leasehold improvements for the facility totaled
approximately $12 million, of which approximately $2.4 million was expended in
1996 and the balance in 1997. Financing of the project and related working
capital requirements were secured through a combination of debt and equity. The
Company secured $5 million of financing from a lending institution during
December 1996, and an additional $15 million through an agreement with Teijin
Limited of Japan, a raw material supplier to the Company, in April 1997. This
$15 million included the purchase of 667,000 shares of the Company's Common
Stock at $7.50 per share, or approximately $5 million, and guaranteed a loan
through Sanwa Bank for an additional $10 million.
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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 being sold to Sony are currently available
only from a single source. The single source for these substrates is Teijin
Limited of Japan, holder of approximately 8% of the Company's Common Stock. In
each case, an alternative source of supply is being pursued, however, there can
be no assurance that alternative sources of supply will be successfully
developed. Although the Company 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 totaled $2.1 million, $2.5 million and $3.1 million, 6%
of total net revenues during each of the three years 1995, 1996 and 1997.
Marketing and Customers
The Company markets its products to OEMs in the United States, Canada,
Europe, the Middle East 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 63%, 43% and 35% of the Company's net revenues resulted from sales
to customers located in the United States in 1995, 1996 and 1997, respectively.
Since 1992, the Company has maintained a European office to provide
marketing, sales and field service support in Europe, primarily for the
Company's Heat Mirror product line and, since 1995, for Heat Mirror XIR film
sold to automotive glass manufacturers.
Since 1995, the Company has maintained a sales office in Asia,
currently in Singapore, 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
under a Supply Agreement to Sony Corporation, Japan for computer monitor CRTs.
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 by July 1,
1997. The Company's new manufacturing facility in Tempe, Arizona, which was
first occupied in June of 1997, and from which product was first shipped during
the fourth quarter of 1997, was designed to meet the requirements of the Sony
agreement.
Southwall supplies Heat Mirror products to approximately 60 insulating
glass and window fabricators and distributors worldwide. The Company's
proprietary
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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 Field Services organization trains customers in the
manufacture of Heat Mirror-equipped windows.
In North America, the Company also promotes its Heat Mirror product
line, including its California Series laminated glazing product to the design
community, through approximately 30 regionally based architectural sales
representatives.
The Company sells its aftermarket anti-reflective filters through
distributors and 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 53%
and 63% of net product sales in 1996 and 1997, respectively. One customer, Sony
Corporation of Japan, accounted for 26% and 31% of net product sales in 1996 and
1997, 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 electronic display
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
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the quality and level of technical assistance furnished to customers.
Patents and Licenses
The Company relies primarily upon trade secrets and know-how to develop
and maintain its competitive position. There can be no assurance that others
will not develop and patent similar technology or that the confidentiality
agreements upon which the Company relies will be honored.
The Company has twenty-four (24) patents and five (5) 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 1998 to 2015. 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 the Company will be able to obtain such
licenses, if required, upon commercially reasonable terms or at all.
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, 1997, Southwall had 236 regular full-time employees,
of whom 24 were engaged in engineering, 145 in manufacturing, and 67 in selling,
general management, finance and administration. The Company is highly dependent
upon the existence and continuing services of certain key scientists, 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 are 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, the Company is subject to stringent federal, state and local
regulations governing the storage, use and disposal of wastes. The Company has
implemented a program to monitor its past and present compliance with
environmental laws and regulations. Although the Company believes that it is
currently in material compliance with such laws and regulations, current or
future laws and regulations
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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, one building of 55,000 square feet in Tempe,
Arizona, first occupied in June 1997, and during all of 1997, 15,000 square feet
in Sligo, Ireland where most of the Company's aftermarket anti-reflective
filters were assembled. The facility in Ireland was vacated during January 1998,
and the Company's anti-reflective film filters are subsequently being assembled
by a company owned by former employees of that facility. The buildings in Palo
Alto, California are occupied under leases that expire from December 1999 to
July 2002, with options to extend some of these leases for terms expiring
through 2009. The lease for the building in Tempe, Arizona will expire in April
2007, with options through 2017. The Company believes that these facilities are
suitable for it's manufacturing requirements at least through 1998. 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.
ITEM 3. LEGAL PROCEEDINGS
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 unfair
competition, tort and 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 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, 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National
Market System under the symbol "SWTX" since the completion of the Company's
initial public offering in June 1987. Prices in the following table represent
the high and low closing sales prices for the Company's Common Stock as reported
by Nasdaq.
Common Stock Prices:
1996 by Quarter High Low
--------------- ---- ---
1st $6.50 $4.13
2nd $9.63 $5.38
3rd $7.88 $5.50
4th $7.00 $5.63
1997 by Quarter High Low
--------------- ---- ---
1st $7.25 $6.13
2nd $7.50 $5.94
3rd $8.75 $5.88
4th $8.38 $6.38
The Company has not paid cash dividends and has no present plans to do
so. There were approximately 2,600 stockholders at December 31, 1997, 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,
----------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands, except per share data)
Statement of Operations Data:
- -----------------------------
<S> <C> <C> <C> <C> <C>
Revenues (1) $18,501 $21,739 $33,501 $41,720 $50,089
Income (loss) from
operations (2)(3) (1,509) (3,913) 726 2,568 2,446
Net income (loss) (1,324) (3,888) 633 2,427 2,281
Net income (loss) per
share:
Basic $( .23) $( .67) $ .11 $ .39 $ .32
Diluted ( .23) ( .67) .10 .35 .29
Weighted average shares of
common stock and common
stock equivalents:
Basic 5,792 5,808 5,880 6,200 7,107
Dilutive 5,792 5,808 6,218 7,034 7,799
<FN>
(1) Year 1993 includes $1.1 million of revenues from sale of a production
machine constructed for a Southwall customer in Japan in connection with a
license agreement.
(2) Year 1994 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).
(3) Year 1997 includes $1.6 million of start up costs related to the new
manufacturing facility in Tempe, Arizona.
</FN>
</TABLE>
<TABLE>
December 31,
-----------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
- -------------------
Working capital $10,955 $ 8,102 $ 9,724 $15,846 $23,999
Total assets 33,420 31,372 34,105 42,509 61,469
Long-term obligations 3,028 2,947 3,271 7,001 16,035
Stockholders' equity 26,766 22,988 23,914 27,597 35,740
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (in thousands)
This Form 10-K Report may contain, in this section and elsewhere in the
report, forward looking statements as that term is defined in the Private
Securities Reform Act of 1995, including, without limitation, statements
regarding the Company's expectations, beliefs, intentions or strategies
regarding the future. All forward-looking statements included in this document
are based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such 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, and the timing of
short-term sales 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 reduction
in the sales of the Company's Heat Mirror products. In addition, prior to 1996,
operating results historically varied from quarter to quarter as a function of
the utilization of the Company's production machines. In 1997, operating results
have also been affected by the start up of manufacturing operations in Tempe,
Arizona. Manufacturing inefficiencies have resulted from these new manufacturing
operations and 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.
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.
The Company believes that it must continue to increase revenues to
achieve sustained profitability. Although the Company has completed an expansion
of it's capacity by opening a new manufacturing facility during 1997 in Tempe,
Arizona, and is continuously 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 continue to increase
revenues. Additionally, even though the expansion project in Tempe is
essentially complete, there can be no assurance that the Company will be
successful in consistently achieving production levels necessary to fulfill the
minimum supply requirements for the period ended December 31, 1998, thereby
avoiding potential penalties provided for in the contract with Sony Corporation.
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.
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Recent Developments
On March 26, 1998 the Company announced that it anticipates a loss for
the first quarter of 1998. The Company anticipates reporting the results of
operations for the quarter on or before April 27, 1998. The loss is primarily
due to low product yields in the Company's anti-reflective film for computer
screens and Heat Mirror XIR films for the automotive market. The Company
experienced several mechanical and process problems on its new production
machine in Tempe, Arizona that resulted in low yields on its anti-reflective
film. The most serious problem on the Tempe machine has been corrected and the
Company believes the other problems are under control while improvements are
being implemented. Additionally, throughout and yield issues have negatively
impacted production of the Company's Heat Mirror XIR film. These problems are
also being addressed with improvements in process which are anticipated to
further relieve this situation during the second quarter 1998. The Company
believes that earnings for the second quarter 1998 will be impacted by some of
these problems, but to a significantly lesser degree than in the first quarter.
Percentage of Period to Period
Total Revenues Change
------------------------ -----------------
December 31, 1996 1997
------------------------ vs. vs.
1995 1996 1997 1995 1996
---- ---- ---- ---- ----
Net revenues 100.0 100.0 100.0 24.5 20.1
Costs and expenses:
Cost of sales 69.4 67.0 67.3 20.1 20.5
Start up costs - Tempe -- -- 3.2 -- 100.0
Research and development 6.2 6.0 6.2 20.2 25.3
Selling, general and
administrative 22.2 20.9 18.4 17.3 5.6
Total costs and expenses 97.8 93.8 95.1 19.5 21.7
Income from operations 2.2 6.2 4.9 253.7 (4.8)
Interest income(expense), net (0.3) (0.1) -- (72.6) (23.1)
Income before income taxes 1.9 6.1 4.8 302.9 (4.6)
Provision for income taxes -- 0.3 0.3 -- 26.1
Net income 1.9 5.8 4.6 283.4 (6.0)
Year 2000
In October 1996 the Company began reviewing year 2000 issues, prepared a
plan to address those issues and began systematically modifying, upgrading or
replacing software as necessary and then testing and implementing those changes.
The Company has completed major upgrades and modifications which have made
essentially all mainframe accounting and inventory control software year 2000
compliant. All systems not yet compliant are scheduled to be made compliant by
December 31, 1998. All projects relating to the year 2000 issue have been
handled with existing staff, and the total expense is not expected to be
material to the Company. The year 2000 problem creates risk for the Company
should any unforseen problems arise, both in its own systems and those of key
customers and suppliers. The greatest risk within the Company is related to
custom data base software. The Company plans to discuss with key customers and
suppliers their plans to address year 2000 issues during 1998, but management
has not yet assessed this related potential effect on the Company's earnings.
Results of Operations (in thousands)
1997 Compared to 1996
The Company's net revenues were $50.1 million for 1997 compared to $41.7
million in 1996, a 20% increase. Of this increase, which was primarily volume
related, approximately $5 million was from increased sales of anti-reflective
film to Sony. In addition, net sales of Heat Mirror XIR film to OEM automotive
glass customers increased by approximately $2.1 million and silver reflector
film sales increased by approximately $2 million, about $1 million each for
energy conservation and electronics customers. All other energy conservation
products were essentially
14
<PAGE>
even with last year. All other electronics products, excluding anti-reflective
and silver reflector films, decreased by approximately $.9 million.
Cost of sales, excluding start up costs of the new manufacturing facility
in Tempe, Arizona, for 1997 was 67% of net revenue compared to 67% for 1996.
Additional costs in 1997 for start up of the new manufacturing facility were
approximately $1.6 million or 3% of net revenues. The new facility began
producing product for shipment during the fourth quarter of 1997, but production
was inefficient, resulting in low yields and throughput. Efficiency levels are
expected to gradually increase during 1998, however management expects continued
inefficiencies and higher cost of operations, particularly during the first
quarter. Production efficiency improvements which have taken place during 1997
and the later part of 1996 resulted in improved yields and throughputs on most
products. These improvements offset the fourth quarter inefficient operations in
Tempe, costs of unplanned maintenance downtime, which occurred primarily during
the third quarter of 1997 on two of the Company's production machines, and costs
to scale up production of automotive OEM products for new customers in Europe
throughout the year.
Research and development expenses, as a percent of net revenue, were 6% for
1997, compared to 6% for 1996. The absolute dollars increased to $3.1 million in
1997 from $2.5 million in 1996. The increase was primarily attributable to an
increase in headcount to support higher new product development, primarily 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 expenses, as a percent of net revenue,
decreased to 18% in 1997, from 21% in 1996 due to increased sales volume. The
absolute dollars increased from $8.7 million in 1996 to $9.2 million in 1997.
This increase was primarily attributable to salary inflation and sales
commissions, 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 a pre-tax
income of $2.4 million for 1997, compared to pre-tax income of $2.5 million for
1996.
1996 Compared to 1995
The Company's net revenues were $41.7 million for 1996 compared to $33.5
million in 1995, a 25% increase. Net sales of electronic products, including
sales of the Company's new anti-reflective film for computer monitors, increased
by approximately $7.8 million. In addition, net sales of energy conservation
products increased by approximately $1.7 million, offsetting a decrease of
approximately $1.3 million in discontinued product sales.
Cost of sales for 1996 was 67% of sales compared to 69% for 1995. The
percentage decrease was primarily due to increased sales volume and the related
improvement in manufacturing efficiencies.
Research and development expenses, as a percent of sales, were 6% for 1996,
compared to 6% for 1995. The absolute dollar increase from $2.1 million in 1995
to $2.5 million in 1996 is due to an increased amount of new product
development.
15
<PAGE>
Selling, general and administrative expenses, as a percent of net revenues,
decreased to 21% in 1996, from 22% in 1995 due to increased sales volume. The
increase from $7.4 million in 1995 to $8.7 million in 1996, is attributable to
two new subsidiary operations acquired in 1994 for the manufacture and sale of
laminated glass products for windows and aftermarket anti-reflective filters for
computer monitors, and increased sales and marketing expenses associated with
the introduction of new products and continued expansion in the Pacific Rim.
As a result of the factors discussed above, the Company reported a pre-tax
income of $2.5 million for 1996, compared to a pre-tax income of $.6 million for
1995.
Liquidity and Capital Resources
At December 31, 1997, the Company's net working capital was $24 million
compared to $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, and the remaining $5 million was received on
November 6, 1997. The new manufacturing facility began operations during the
fourth quarter 1997, and is currently dedicated 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 December 31, 1997, cash and short-term investments
increased by $3.1 million, primarily from debt financing and sale of the
Company's common stock, partially offset by expenditures for property and
equipment. The Company used approximately $11.6 million for capital expenditures
during 1997, of which approximately $9.6 million was for the new manufacturing
facility. Accounts receivable increased by $4.8 million and inventories
increased by $1.7 million. The increase in accounts receivable is primarily
attributable to the increase in net revenues from $10.1 million in the fourth
quarter of 1996 to $15.5 million in the fourth quarter of 1997, and to the
timing of sales, most of which occurred during the later portion of the quarter,
due in part to the timing of the start up of shipments from the new
manufacturing facility. The increase in inventories is primarily due to volume
growth and preparing for anticipated continued growth in orders in the first
quarter of 1998.
The Company anticipates total capital expenditures of approximately $4.0
million during 1998. The Company is also considering an additional capacity
expansion, the cost of which is yet to be determined.
At December 31, 1997, the Company had $10.5 million of cash and short-term
investments. The Company also has a $6 million line of credit which expires in
16
<PAGE>
June 1998 and term loans of $10 million and $5 million which are subject to
certain financial covenants. As of December 31, 1997, there were no borrowings
under the line of credit
While the Company believes that it currently has sufficient funds to
finance its operations for at least the next twelve months, to the extent that
such funds are insufficient to fund the Company's activities, including a
potential major expansion project, the Company may need to raise additional
funds through public or private equity or debt financing from other sources. The
sale of additional equity or convertible debt may result in additional dilution
to the Company's stockholders and such securities may have rights, preferences
or privileges senior to those of the Common Stock. There can be no assurance
that additional equity or debt financing will be available or that if available
it can be obtained on terms favorable to the Company or its stockholders.
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, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, 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 28, 1998
18
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
December 31,
1 9 9 6 1 9 9 7
------- -------
Current assets:
Cash and cash equivalents $ 7,419 $10,524
Short-term investments 7 7
Accounts receivable, net 7,097 11,926
Inventories 8,406 10,118
Other current assets 828 1,118
------- -------
Total current assets 23,757 33,693
Property and equipment, net 17,223 26,272
Other assets 1,529 1,504
------- -------
Total assets $42,509 $61,469
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,635 $ 4,835
Accrued compensation 2,141 2,009
Other accrued liabilities 1,954 1,546
Current portion of long-term debt 1,181 1,304
------- -------
Total current liabilities 7,911 9,694
Long-term debt 6,591 15,539
Deferred income taxes 410 496
------- -------
Total liabilities 14,912 25,729
======= =======
Commitments (Note 6)
Stockholders' equity:
Common stock, $.001 par value, 20,000 shares
authorized; issued and outstanding 6,917
and 7,636 7 8
Capital in excess of par value 46,673 51,513
Notes receivable (596) (656)
Accumulated deficit (16,912) (14,631)
Less cost of treasury stock, 390 and
123 shares outstanding (1,575) ( 494)
-------- --------
Total stockholders' equity 27,597 35,740
-------- --------
Total liabilities and
stockholders' equity $ 42,509 $ 61,469
======== ========
See accompanying notes to consolidated financial statements.
19
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year ended December 31,
1 9 9 5 1 9 9 6 1 9 9 7
-------- -------- --------
Net revenues $ 33,501 $ 41,720 $ 50,089
Costs and expenses:
Cost of sales 23,265 27,936 33,669
Start up costs - Tempe 1,641
Research and development 2,069 2,487 3,117
Selling, general and administrative 7,441 8,729 9,216
-------- -------- --------
Total costs and expenses 32,775 39,152 47,643
-------- -------- --------
Income from operations 726 2,568 2,446
Interest income (expense), net (95) (26) (20)
-------- -------- --------
Income before income taxes 631 2,542 2,426
Provision for income taxes (2) 115 145
-------- -------- --------
Net income $ 633 $ 2,427 $ 2,281
======== ======== ========
Net income per share:
Basic $ .11 $ .39 $ .32
Diluted $ .10 $ .35 $ .29
Weighted average shares of common
stock and common stock equivalents:
Basic 5,880 6,200 7,107
Dilutive 6,218 7,034 7,799
See accompanying notes to consolidated financial statements.
20
<PAGE>
<TABLE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<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>
Balance, Jan. 1,
1995 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, Dec. 31,
1995 6,917 7 47,206 -- (19,339) (3,960) 23,914
Shares issued through:
Interest paid with
stock 86 193 279
Exercise of options (751) 2,111 1,360
Sales to employees
under Stock Purchase
Plan 9 81 90
Stock option loans (596) (596)
Stock option other 123 123
Net income 2,427 2,427
------ ------ --------- ---------- ----------- ------- --------------
Balance, Dec. 31,
1996 6,917 7 46,673 (596) (16,912) (1,575) 27,597
Shares issued through:
Interest paid with
stock 69 116 185
Exercise of options 52 (191) 811 620
Sale of stock, net 667 1 4,930 4,931
Sales to employees
under Stock Purchase
Plan 32 154 186
Stock option loans (60) (60)
Net income 2,281 2,281
------ ------ --------- ---------- ----------- ------- --------------
Balance, Dec. 31,
1997 7,636 $ 8 $ 51,513 $ (656 $ (14,631) $ (494) $ 35,740
====== ====== ======== ========== =========== ======== ==============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
21
<PAGE>
<TABLE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
Year ended December 31,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 633 $ 2,427 $ 2,281
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,157 2,313 2,703
Decrease (increase) in accounts receivable (1,568) (1,809) (4,829)
Decrease (increase) in inventories (2,717) (1,782) (1,712)
Decrease (increase) in other current assets ( 365) 367 (204)
(Decrease) increase in accounts payable
and accrued liabilities 1,607 190 1,845
------- ------ ------
Cash provided by (used in)
operating activities ( 253) 1,706 84
------- ------- ------
Cash flows from investing activities:
Decrease(increase) in short-term investments 1,919 2,125 --
Expenditures for property and equipment
and other assets (1,561) (3,604) (11,727)
------- ------- -------
Net cash (used in) provided by
investing activities 358 (1,479) (11,727)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of stock, net
of related costs -- -- 4,931
Proceeds from issuance of long-term debt 131 5,000 10,393
Payments on long-term debt ( 96) ( 219) (1,322)
Issuance of treasury stock, net 150 977 746
------- ------- -------
Net cash (used in) provided by financing
activities 185 5,758 14,748
------- ------- -------
Net increase (decrease) in cash
and cash equivalents 290 5,985 3,105
Cash and cash equivalents, beginning of year 1,144 1,434 7,419
------- ------- -------
Cash and cash equivalents, end of year $ 1,434 $ 7,419 $10,524
======= ======= =======
Supplemental cash flow disclosures:
Interest paid $ 40 $ 45 $ 620
Income taxes paid $( 2) $ 118 $ 100
Supplemental schedule of non-cash investing
and financing activities:
Property and equipment acquired via
capital lease $ 224 $ -- $ 365
Treasury stock used for payment
of interest $ 143 $ 279 $ 185
<FN>
See accompanying notes to consolidated financial tatements.
</FN>
</TABLE>
22
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except 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, development and production of
thin film coatings on flexible substrates. These coatings selectively absorb,
reflect or transmit certain types of electromagnetic radiation for use in energy
conservation and electronics applications. The Company has developed and
currently markets a variety of thin-film products for the residential and
commercial architectural glazing, automotive glazing and electronic display
markets. These products include transparent insulation and solar-control films,
anti-reflective film for computer monitor CRTs and television screens,
transparent conductive films for use in touch screen displays, and various other
commercial film.
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.
Management estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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, 1997, 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.
23
<PAGE>
The Company invests, as stated above, in a variety of financial
instruments. 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.
Revenue recognition
Revenues from sales of manufactured products are recorded at the time
shipments are made.
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 and receipt of payment is either received
or is certain to a reasonable degree.
Accounts receivable
Accounts receivable are stated net of allowance for doubtful accounts
of $682 and $834 at December 31, 1996 and 1997, 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 machines, 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, 1996 and 1997 patents, licenses and trademarks are included in other assets
at a cost of $882 and $843, net of accumulated amortization of $817 and $930,
24
<PAGE>
respectively. Amortization expense for 1995, 1996 and 1997 was $136, $121 and
$113, respectively.
Stock options
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation".
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 per share
The Company has adopted Financial Accounting Standards Board (FASB)
Statement 128 effective with the quarter and year ended December 31, 1997. All
earnings per share data has been restated to reflect the FASB 128 method of
computation. FASB 128 requires dual presentation of basic and diluted earnings
per share (EPS) on the face of the income statement. Basic EPS, which replaces
primary EPS, is computed by dividing income available to common stockholders
(numerator) by the weighted average number of common shares outstanding
(denominator) for the period. Diluted EPS replaces fully diluted EPS and gives
effect to all dilutive potential common shares outstanding during the period.
The computation of diluted EPS uses the average market prices during the period.
During the years ended December 31, 1995, 1996 and 1997 there were no
differences between the numerators used for the basic and diluted EPS
calculations and the total amount of the differences in the denominators in
those years is attributable to the effect of dilutive stock options.
NOTE 2 - BALANCE SHEET DETAIL:
<TABLE>
<CAPTION>
Inventories: December 31,
----------- -----------------------------
1 9 9 6 1 9 9 7
------- -------
<S> <C> <C>
Work-in-process $ 1,848 $ 2,551
Raw materials 2,869 4,502
Finished goods 3,689 3,065
------- -------
$ 8,406 $10,118
======= =======
Property and Equipment: December 31,
----------------------- ------------------------------
1 9 9 6 1 9 9 7
------- -------
Machinery and equipment $30,377 $38,108
Leasehold improvements 2,565 3,319
Furniture and fixtures 2,625 3,105
Construction-in-process 3,122 5,264
------- -------
38,689 49,796
Less - accumulated depreciation
and amortization (21,466) (23,524)
------- -------
$17,223 $26,272
======= =======
</TABLE>
25
<PAGE>
Depreciation and amortization expense for the years ended December 31,
1995, 1996 and 1997 was $2,021, $2,192 and $2,590, respectively.
Other Accrued Liabilities: December 31,
-----------------------------
1 9 9 6 1 9 9 7
------- -------
Reserve for warranties and sales
returns $ 875 $ 917
Other 1,079 629
------ ------
$1,954 $1,546
====== ======
NOTE 3 - LONG-TERM DEBT:
The Company's long term debt consists of the following at December 31,
1997:
Convertible Debenture $ 2,650
Promissory Note dated December 16, 1996 3,800
Promissory Note dated May 6, 1997 10,000
Other 393
-------
Total 16,843
Less current portion 1,304
-------
$15,539
=======
The $2.65 million convertible debenture is due May 31, 1999, bears
interest, payable semi-annually with the Company's common stock, at 2% below
prime, but not less than 7% nor higher than 11%, and is convertible into the
Company's common stock at a price of $9.74 per share (subject to certain
adjustments).
The Promissory Note dated December 16, 1996 is secured by a production
machine, bears interest at a rate of 9.7037%, and is subject to certain
financial covenants. The note is payable in monthly installments plus interest
for a term of 48 months.
The Promissory Note dated May 6, 1997 is guaranteed by Teijin Limited of
Japan (Teijin). The Teijin guarantee is secured by certain equipment located in
the Company's Tempe, Arizona manufacturing facility and inventory to the extent
necessary to provide 120% net book value coverage of the outstanding loan
balance. The interest rate on the loan is re-set semi-annually at LIBOR plus
0.4375% and the Company is subject to certain covenants. A loan guarantee
service fee is payable to Teijin at the rate of 0.5625% semi-annually. The note
provides for semi-annual payments of interest only during the first four years,
followed by semi-annual installments plus interest for the remaining three and
one half year term.
Other long-term debt consists of capitalized leases related primarily to
certain computer equipment used by the Company.
Principal reductions of long-term debt are scheduled as follows:
Year Amount
---- -------
1998 $ 1,304
1999 4,089
2000 1,450
2001 2,500
2002 2,500
Thereafter 5,000
-------
Total $16,843
=======
26
<PAGE>
The Company incurred total interest expense of $236 and $892 in 1996 and 1997,
respectively. Of these amounts, the Company capitalized $49 and $464 in 1996 and
1997, respectively, as cost related to the construction of the new manufacturing
facility in Tempe, Arizona.
NOTE 4 - INCOME TAXES:
The income tax provision in 1997 results primarily from minimum tax
liabilities related to federal taxes and foreign withholding taxes on royalty
payments. The effective income tax rate differs from the federal statutory rate
primarily as a result of the utilization of net operating loss carryforwards.
The deferred tax assets valuation allowance at December 31, 1995, 1996 and 1997
is attributable to federal and state deferred tax assets. Management believes
that sufficient uncertainty exists with regards to the realizability of these
tax assets such that a full valuation allowance is necessary. During 1995, 1996
and 1997, the Company realized $.4, $.6 and $.5 million respectively of deferred
tax assets previously reserved.
Deferred tax (liabilities) assets are comprised of the following:
December 31,
1 9 9 6 1 9 9 7
------- -------
Depreciation $(3,379) $(3,793)
Other ( 283) ( 165)
------- -------
Gross deferred tax liabilities (3,662) (3,958)
------- -------
Inventory reserves 320 383
Write-down of fixed assets 400 361
Other 2,179 1,856
Loss carryforwards 6,740 6,723
Credit carryforwards 1,050 1,202
------- -------
Gross deferred tax assets 10,689 10,525
Deferred tax assets valuation
allowance (7,027) (6,567)
------- -------
Net deferred taxes $ - $ -
======= =======
At December 31, 1997 the Company had net federal operating loss
carryforwards of approximately $18 million which expire at various dates from
1998 through 2011. The net operating loss carryforwards include approximately
$2.9 million resulting from employee exercises of non-incentive stock options or
disqualifying dispositions, 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 $1.2 million
are also available to reduce future federal and state income taxes and expire at
various dates through 2004. 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.
27
<PAGE>
NOTE 5 - STOCKHOLDER'S EQUITY
Stock Option Plans:
The Company has granted stock options under certain option agreements in
1981 and 1983, its 1983 Qualified and Non-Qualified Stock Option Plan; its
Restated 1987 Stock Option Plan, and its 1997 Stock Incentive Plan. The 1997
Stock Incentive Plan was adopted by the Board of Directors on March 20, 1997 and
subsequently approved by the Company's stockholders at the May 21, 1997 Annual
Meeting of Stockholders. 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 and the 1997 Stock Incentive Plan must be at least 85% of the fair
market value of the stock at the date of grant. All options granted to date
under these plans have been at the fair market value of the Company's stock on
the date of the 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.
During 1996 and 1997, certain employees, officers and directors exercised
stock options under the plan by issuing full recourse notes to the Company with
an interest rate of generally 7%. During 1997 outstanding notes to certain of
those employees, officers and directors were extended from terms of one year to
terms of two years. The principal and accrued interest on the notes are due at
the end of the term of each note. These notes aggregate $596 and $656 at
December 31, 1996 and 1997, respectively.
As of December 31, 1997, there were 50 shares of Common Stock available for
grant under all plans. In addition, at December 31, 1997, 754 options were
vested and exercisable at prices ranging from $2.50 to $6.75.
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.
In March 1997, the Company adopted the 1997 Employee Stock Purchase Plan ("the
1997 Plan") and reserved 100 shares of Common Stock for issuance thereunder.
Employees of the Company, subject to certain limitations, may purchase shares at
85% of the lower of the fair market value of the Common Stock at the beginning
of the six month offering period, or the last day of the purchase period. During
1995, 1996 and 1997, 20, 20 and 33 shares, respectively, were sold under the
Purchase Plan and the 1997 Plan. At December 31, 1997 there were no shares
remaining available for issuance under the 1988 Purchase Plan and 78 shares
available for issuance under the 1997 Plan.
Accounting for Stock Based Compensation
The Company has two stock option plans which reserve shares of Common Stock
for issuance to employees, officers and directors. The Company applies APB
Opinion 25 and related Interpretations in accounting for it's plans.
Accordingly, no
28
<PAGE>
compensation cost has been recognized for the stock option plans, except for
$123 related to certain transactions in 1996. The Company has adopted the
disclosure- only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation". Had compensation cost for the
Company's two stock option plans and stock purchase plan been determined based
on the fair value at the grant date for awards granted in 1995, 1996 and 1997
under those plans consistent with the provisions of FAS No. 123, the Company's
net income and net income per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net income - as reported.................... $ 633 $2,427 $2,281
Net income - pro forma...................... $ 505 $1,879 1,450
Net income per share - as reported
Basic........................ $ .11 $ .39 $ .32
Diluted...................... $ .10 $ .35 $ .29
Net income per share - pro forma
Basic........................ $ .09 $ .30 $ .20
Diluted...................... $ .08 $ .27 $ .19
</TABLE>
The pro forma amounts reflect compensation expense related to 1995,
1996 and 1997 stock option grants and purchase rights only. In future years, the
annual compensation expense will increase relative to the fair value of stock
options granted in those future years.
For the Stock Option Plan, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model for
the multiple option approach with the following weighted average assumptions
used for grants in 1995, 1996 and 1997, respectively; expected volatility of 60%
in years 1995, 1996 and 1997; risk-free interest rate of 6.0%, 6.2% and 6.4%;
and expected lives from vesting date of .68, .72 and .54 years. The Company has
not paid dividends and assumed no dividend yield. The weighted average fair
value of stock options granted in 1995, 1996 and 1997 was $1.69, $2.99 and $6.86
per share, respectively.
For the Employee Stock Purchase Plan, the fair value of each purchase
right is estimated at the beginning of the offering period using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used in 1995, 1996 and 1997, respectively; expected volatility of
63%, 57% and 60%; risk-free interest rate of 6.1%, 5.4% and 5.5%; and expected
lives of .5 years in 1995, 1996 and 1997. The Company has not paid dividends and
assumed no dividend yield. The weighted-average fair value of those purchase
rights granted in 1995, 1996 and 1997 was $0.90, $1.82 and $2.16 per right,
respectively.
29
<PAGE>
<TABLE>
The activity under the option plans, combined, was as follows:
<CAPTION>
Shares of
Common Range of Weighted-Average
Stock Exercise Price Exercise Price
--------- -------------- ----------------
<S> <C> <C> <C> <C>
Options outstanding at
January 1, 1995 1,506 $2.50 - $7.25 $2.80
Granted 343 $2.94 - $4.13 $3.62
Exercised ( 38) $2.50 - $3.25 $2.65
Cancelled or expired ( 84) $2.50 - $6.00 $3.55
-----
Options outstanding at
December 31, 1995 1,727 $2.50 - $7.25 $2.92
Granted 494 $4.63 - $8.13 $5.94
Exercises ( 523) $2.50 - $5.25 $2.60
Canceled or expired ( 34) $2.50 - $7.25 $4.66
------
Options outstanding at
December 31, 1996 1,664 $2.50 - $8.13 $3.88
Granted 403 $6.38 - $8.25 $6.86
Exercised ( 212) $2.50 - $5.63 $2.92
Canceled or expired ( 115) $2.50 - $7.88 $5.06
------
Options outstanding at
December 31, 1997 1,740 $2.50 - $8.25 $4.61
=====
</TABLE>
<TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices As of 12/31/97 Contractual Life Exercise Price As of 12/31/97 Exercise Price
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.50 - $2.50 433 1.62 $2.50 411 $2.50
$2.94 - $4.13 437 3.84 $3.45 225 $3.42
$4.25 - $6.50 491 5.57 $5.71 112 $5.31
$6.75 - $7.00 348 7.84 $6.87 6 $6.75
$7.03 - $8.25 31 8.85 $7.64 0 $0.00
-------------------------------------------------------------------------------------
$2.50 - $8.25 1,740 4.67 $4.61 754 $3.22
=====================================================================================
</TABLE>
NOTE 6 - COMMITMENTS:
The Company leases certain property and equipment as well as its facilities
under
30
<PAGE>
noncancellable operating leases and $365 of computer equipment under a capital
lease. These leases expire at various periods through 2007.
As of December 31, 1997, the future minimum payments under these leases are
as follows:
Capital Operating
------- ---------
1998 $ 154 $1,744
1999 149 1,870
2000 145 911
2001 - 898
2002 - 933
Thereafter - 2,131
----- ------
Future minimum lease payments $ 448 $8,487
======
Less - amount representing interest 55
Present value of future minimum
lease payments 393
Current maturities 120
-----
Long-term lease obligations $ 273
=====
Rent expense under operating leases was approximately $1,720, $1,398 and
$1,471, in 1995, 1996, and 1997, respectively.
During the first quarter 1996, the Company entered into an addendum to a
previous supply agreement with a major customer which provides for certain "best
efforts" sales and purchase commitments of the Company's anti-reflective film
from the date of the addendum through June 30, 1997. Beginning July 1, 1997, the
Company is firmly committed to supply and the customer is committed to purchase
fixed volumes for the period July 1, 1997 through December 31, 1997, and
annually thereafter until December 31, 2000. Should either the Company fail to
supply or the customer fail to purchase the specified quantities, a penalty,
based on the sales price to the customer from the prior period, must be paid to
the other. In order to meet the supply commitment, the Company opened a new
manufacturing facility, at a cost of approximately $12 million, initially
dedicated to the production of anti-reflective film. The new facility began
manufacturing operations during the fourth quarter of 1997.
NOTE 7 - LINE OF CREDIT AGREEMENT:
The Company has secured a $6 million revolving line of credit which expires
in June 1998, 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, which at December 31, 1997, did not limit available borrowing under
the line. The line is secured by certain assets of the Company and bears
interest at an annual rate of prime plus .5%. Under the terms of the agreement,
the Company is required to maintain certain financial ratios. As of December 31,
1997, there were no borrowings under this line of credit.
NOTE 8 - MAJOR CUSTOMERS:
In 1995, no one customer accounted for 10% of net sales and the five
largest customers accounted for 32% of net sales. One customer accounted for
approximately
31
<PAGE>
26% and 31% of net sales in 1996 and 1997 respectively. Export sales accounted
for 37%, 57% and 65% of the Company's net revenues in 1995, 1996 and 1997,
respectively.
NOTE 9 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for 1996 and 1997 is as follows:
First Second Third Fourth
----- ------ ----- ------
1996:
-----
Net sales $10,637 $10,990 $9,966 $10,127
Gross margin 3,228 3,442 3,289 3,825
Net income 511 704 555 657
Net income per share-Basic .09 .12 .09 .10
Net income per share-Diluted .08 .10 .08 .09
1997:
-----
Net sales $10,855 $11,684 $12,083 $15,467
Gross margin 3,697 3,705 3,266 4,111
Net income 766 602 210 703
Net income per share-Basic .12 .09 .03 .09
Net income per share-Diluted .11 .08 .03 .09
Per share amounts, based on average shares outstanding each quarter, may not
add to the total for the year.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
32
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF 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 1998 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.
33
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
The following documents are filed as part of this Form 10-K:
(a)(1) Index to Financial Statements. The following Financial
Statements of Southwall Technologies Inc. are filed as part of
this Form 10-K:
Form 10-K
Page Number
-----------
Report of Independent Accountants 18
Consolidated Balance Sheets as of
December 31, 1997 and 1996 19
Consolidated Statements of Operations
for the years ended December 31, 1997,
1996 and 1995 20
Consolidated Statements of Stockholders'
Equity for the years ended December 31,
1997, 1996 and 1995 21
Consolidated Statements of Cash Flows
for the years ended December 31, 1997,
1996 and 1995 22
Notes to Consolidated Financial Statements 23
(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
37 through 42 of this Form 10-K.
(b) Reports on Form 8-K.
None
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 12, 1990) under the Securities Act of 1933,
the undersigned registrant hereby undertakes as follows:
34
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered on the Form S-8 identified
below, the registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
The preceding undertaking shall be incorporated by reference into
registrant's Registration Statements on Form S-8 Nos. 33-28599 (filed on May 9,
1989), 33-37247 (filed October 11, 1990), 33-42753 (filed on September 16,
1991), 33-51758 (filed on September 8, 1992), 33-82138 (filed on July 28, 1994)
and 333- 34287 (filed August 25, 1997).
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of the 14th day of
March, 1998.
SOUTHWALL TECHNOLOGIES INC.
By /s/Thomas G. Hood
--------------------
Thomas G. Hood
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, 1998.
Signature Title
--------- -----
/s/J. Larry Smart
- ----------------- Chairman of the Board of Directors
J. Larry Smart)
/s/Thomas G. Hood
- ----------------- President, Chief Executive Officer
(Thomas G. Hood) and Director (Principal Executive
Officer)
/s/L. Ray Christie
- ------------------ Vice President, Chief Financial
(L. Ray Christie) Officer and Secretary (Principal
Financial and Accounting Officer)
/s/Bruce J. Alexander
- --------------------- Director
(Bruce J. Alexander)
/s/Yoshimichi Hase
- ------------------ Director
(Yoshimichi Hase)
/s/Joseph B. Reagan
- ------------------- Director
(Joseph B. Reagan)
/s/Walter C. Sedgwick
- --------------------- Director
(Walter C. Sedgwick)
36
<PAGE>
INDEX TO EXHIBITS FILED WITH
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997
Exhibit
Number Description
- ------- -----------
3.1(1) Restated Certificate of Incorporation of the Company.
3.2(1) By-laws of the Company.
10.4(1) The Company's Management Incentive Plan.
10.23(1) Agreement, dated January 31, 1984, between the Company and Mitsui
Toatsu Chemicals, Inc., as amended (with certain confidential
information deleted therefrom and filed separately).
10.35(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.
37
<PAGE>
10.62(3) Common Stock Sales Agreement, dated May 2, 1989, between the
Company and Monsanto Company.
10.63(3) Convertible Subordinated Note, Due May 31, 1999.
10.64(3) Warrants to Purchase Common Stock of Southwall Technologies Inc.,
void after May 31, 1996.
10.65(3) Second Restated Registration Rights Amendment, Dated May 2,1989,
among the Company, Lockheed Corporation, Minnesota Mining and
Manufacturing Company, Mitsui Toatsu Chemicals, Inc. and Marubeni
Corporation, and Monsanto Company.
10.66(3) Non-exclusive License Agreement, dated March 9, 1989, between the
Company and the Massachusetts Institute of Technology (with
certain confidential information deleted).
10.69(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(11) Supply Agreement between Sony Corporation and Southwall
Technologies Inc., effective October 23, 1995.
38
<PAGE>
10.83(12) Addendum #1 To Supply Agreement between Sony Corporation and
Southwall Technologies Inc., with effective dates of April 1,
1996 and July 1, 1997(with certain confidential information
deleted therefrom and filed separately).
10.84(12) Lease Agreement between Chamberlain Development, L.L.C., as
Lessor and Southwall Technologies Inc., a Delaware corporation,
as Lessee effective May 1, 1997.
10.85(12) Purchase Agreement, dated April 29, 1996, between an equipment
supplier and Southwall Technologies Inc., (with certain
confidential information deleted therefrom and filed separately).
10.86(12) Agreement regarding separation of employment between Alfred V.
Larrenaga, an officer of the Company and Southwall Technologies
Inc., dated July 29, 1996 and amended October 29, 1996.
10.87(12) Loan and security agreement dated as of December 3, 1996, between
the Company as debtor and CIT Group/Equipment Financing, Inc.
10.88(13) Basic Agreement dated April 9, 1997, for the sale of 667,000
shares of the Company's common stock to Teijin Limited, a
Japanese corporation, and for mutually beneficial cooperation and
collaboration between Teijin and Southwall Technologies Inc.
10.89(13) Credit Agreement dated May 6, 1997, between Sanwa Bank, Limited
and Southwall Technologies Inc.
10.90(13) Reimbursement and Security Agreement dated May 6, 1997, between
Teijin Limited, a Japanese corporation, and Southwall
Technologies Inc.
10.91(13) Promissory Note dated May 6, 1997 obligating Southwall
Technologies Inc. To Sanwa Bank, Limited in the amount of $10
million.
10.92(14) The Company's 1997 Stock Incentive Plan.
10.93(15) The Company's 1997 Employee Stock Purchase Plan.
10.94 Letter agreement between Sony Corporation of Japan and Southwall
Technologies Inc. amending Addendum #1 To Supply Agreement
between Sony Corporation and Southwall Technologies Inc., with
effective dates of April 1, 1996.
21(11) List of Subsidiaries of Southwall Technologies Inc.
23.1 Consent of Independent Accountants.
99.1(9) Letter, dated June 5, 1987, from the U.S. Department of the Air
Force to the SEC Pursuant to Rule 171.
-----------------
39
<PAGE>
(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.
(11) Filed as an exhibit to the Form 10-K Annual Report 1995, filed with the
Commission on March 19, 1996 and incorporated herein by reference.
(12) Filed as an exhibit to the Form 10-K Annual Report 1996, filed with the
Commission on March 27, 1997 and incorporated herein by reference.
(13) Filed as an exhibit to the Form 10-Q Quarterly report for Quarter Ended
June 29, 1997, filed with the Commission on August 14, 1997 and
incorporated herein by reference.
(14) Filed as Proposal 3 included in the 1997 Proxy statement filed with the
Commission on April 14, 1997 and incorporated herein by reference.
(15) Filed as Proposal 4 included in the 1997 Proxy statement filed with the
Commission on April 14, 1997 and incorporated herein by reference.
40
EXHIBIT 10.94
<PAGE>
[Southwall Corporate Office
Technologies] ----------------------------------------
1029 Corporation Way Palo Alto, CA 94303
Tel: 415 962-9111 Fax: 415 967-8713
sent by fax and couries November 4, 1997
Mr. Yosuhiro Hosozawa
General Manager
Industrial Use Picture Tube Dept.
Display Device Div.
Components Company
SONY Corporation, Atsugi Technology Center No. 2
4-16-1, Okata, Atsugi-shi
Kanagawa-ken, 243 Japan
Dear Mr. Hosozawa,
Please refer to my letter of October 20, 1997, also the letter from Dr. Ted
Larsen to Mr. Harv Yamada of October 28, 1997 and Mr. Yamada's FAX of November
4, 1997 to Dr. Larsen.
In order to clarify the wording regarding settlement of potential penalties
due as a result of any shortfall on the minimum supply quantity of 1.5 million
square feet from Southwall during the July through December 1997 period, I
propose the following:
In exchange for the elimination of the liability to pay liquidated damages
for any shortfall in the sale of Product to Sony for the period July 1,
1997 through December 31, 1997 per section 2.4(C) of the Amended Supply
Agreement, Southwall will reduce the total remaining surcharge as specified
in section 1.0 of the Amended Supply Agreement that is due on Products sold
in 1998 by an equivalent amount. To the extent that the penalty may be
greater than the total remaining surcharge, Southwall will propose to Sony
by the end of December 1997 a method for payment of the remaining penalty.
1
<PAGE>
I hope this wording and the explanatory letter from Dr. Larsen to Mr.
Yamada clarify our proposal. If you agree with this proposal, please sign below
and return a copy of this letter to me.
Yours very truly,
/s/ Martin M. Schwartz
-------------------------------------
Martin M. Schwartz
President and Chief Executive Officer
I agree to the proposal regarding settlement of the penalty provision of the
Amended Supply Agreement as indicated in this letter.
By: /s/ Yosuhiro Hosozawa
----------------------
Title: General Manager
-------------------
Date: Nov. 10 / 1997
--------------------
2
SOUTHWALL TECHNOLOGIES INC.
EXHIBIT 21
LIST OF SUBSIDIARIES OF SOUTHWALL TECHNOLOGIES INC.
Name State or other Jurisdiction of Incorporation
---- --------------------------------------------
Southwall Worldwide Glass Inc. California
Southwall-Sunflex, Inc. California
41
SOUTHWALL TECHNOLOGIES INC.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements of Southwall Technologies Inc. on Form S-8 Nos. 33-28599 (filed on
May 9, 1989), 33- 37247 (filed on October 11, 1990), 33-42753 (filed on
September 16, 1991), 33-51758 (filed on September 8, 1992), 33-82138 (filed on
July 28, 1994) and 33-34287 (filed August 25, 1997) of our report dated January
28, 1998 appearing on page 18 of this Form 10-K.
PRICE WATERHOUSE LLP
San Jose, California
March 27, 1998
42
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 10,524
<SECURITIES> 7
<RECEIVABLES> 12,760
<ALLOWANCES> 834
<INVENTORY> 10,118
<CURRENT-ASSETS> 33,693
<PP&E> 49,796
<DEPRECIATION> 23,524
<TOTAL-ASSETS> 61,469
<CURRENT-LIABILITIES> 9,694
<BONDS> 0
<COMMON> 50,371
0
0
<OTHER-SE> (14,631)
<TOTAL-LIABILITY-AND-EQUITY> 61,469
<SALES> 50,089
<TOTAL-REVENUES> 50,089
<CGS> 33,669
<TOTAL-COSTS> 47,643
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20
<INCOME-PRETAX> 2,426
<INCOME-TAX> 145
<INCOME-CONTINUING> 2,281
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,281
<EPS-PRIMARY> .32
<EPS-DILUTED> .29
</TABLE>
