SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- -- ACT OF 1934 [NO FEE REQUIRED]
For the quarterly period ended June 28, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- -- ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______ to ________
Commission File Number: 0-15930
SOUTHWALL TECHNOLOGIES INC.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-2551470
--------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1029 Corporation Way, Palo Alto, California 94303
--------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 962-9111
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
As of June 28, 1998 there were 7,755,461 shares of the Registrant's Common Stock
outstanding.
This report, including all attachments, contains 13 pages.
1
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
INDEX
Page Number
-----------
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets - June 28, 1998
and December 31, 1997................................................3
Consolidated Statements of Operations -
three month and six month periods ended
June 28, 1998 and June 29, 1997......................................4
Consolidated Statements of Cash Flows -
six months ended June 28, 1998
and June 29, 1997 ...................................................5
Notes to Consolidated Financial Statements...........................6
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of Operations.....................7
PART II OTHER INFORMATION
Item 1 Legal Proceedings and Other Matters.................................10
Item 2 Changes in Securities...............................................10
Item 3 Defaults Upon Senior Securities.....................................10
Item 4 Submission of Matters to a Vote of Stockholders.....................11
Item 5 Other Information...................................................11
Item 6 Exhibits and Reports on Form 8-K....................................11
Signatures..........................................................12
2
<PAGE>
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
June 28, 1998 December 31, 1997
------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 8,255 $ 10,524
Short-term investments 7 7
Accounts receivable, net of allowance
for doubtful accounts of $1,005 and $834 9,797 11,926
Inventories 8,619 10,118
Other current assets 1,067 1,118
-------- --------
Total current assets 27,745 33,693
Property and equipment, net 26,630 26,272
Other assets 1,515 1,504
-------- --------
Total assets $ 55,890 $ 61,469
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,817 $ 4,835
Accrued compensation 1,703 2,009
Other accrued liabilities 1,127 1,546
Current portion of long-term debt 1,468 1,304
-------- --------
Total current liabilities 8,115 9,694
Long-term debt 14,935 15,539
Deferred income taxes 496 496
-------- --------
Total liabilities 23,546 25,729
-------- --------
Commitments (Note 4)
Stockholders' equity:
Common stock, $.001 par value,
20,000 shares authorized;
issued and outstanding: 7,784 and 7,636 8 8
Capital in excess of par value 51,835 51,513
Notes receivable (906) (656)
Accumulated deficit (18,354) (14,631)
Less cost of treasury stock, 28
and 123 shares outstanding (239) (494)
-------- --------
Total stockholders' equity 32,344 35,740
-------- --------
Total liabilities and
stockholders' equity $ 55,890 $ 61,469
======== ========
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 14,057 $ 11,684 $ 24,473 $ 22,539
-------- -------- -------- --------
Costs and expenses:
Cost of sales 11,022 7,609 21,237 14,589
Tempe start up costs -- 370 -- 548
Research and development 913 727 1,973 1,434
Selling, general and administrative 2,264 2,384 4,672 4,545
-------- -------- -------- --------
Total costs and expenses 14,199 11,090 27,882 21,116
-------- -------- -------- --------
Income(loss) from operations (142) 594 (3,409) 1,423
Interest income (expense), net (182) 48 (290) 15
-------- -------- -------- --------
Income(loss) before income taxes (324) 642 (3,699) 1,438
Provision for income taxes 24 40 24 70
-------- -------- -------- --------
Net income(loss) $ (348) $ 602 $ (3,723) $ 1,368
======== ======== ======== ========
Net income(loss) per share:
Basic $ (0.05) $ .09 $ (0.49) $ .20
Diluted $ (0.05) $ .08 $ (0.49) $ .18
Weighted average shares of
common stock and common
stock equivalents:
Basic 7,664 7,048 7,614 6,792
Diluted 7,664 7,759 7,614 7,471
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<CAPTION>
Six Months Ended
----------------
June 28, 1998 June 29, 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,723) $ 1,368
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 2,048 1,256
Decrease (increase) in accounts receivable 2,129 (2,609)
Decrease (increase) in inventories 1,499 (958)
Decrease (increase) in other current assets 51 (132)
(Decrease) in accounts payable and
accrued liabilities (1,650) (25)
-------- --------
Cash provided by (used in) operating activities 354 (1,100)
-------- --------
Cash flows from investing activities:
Expenditures for property and equipment
and other assets (2,417) (5,946)
-------- --------
Cash (used in) investing activities (2,417) (5,946)
-------- --------
Cash flows from financing activities:
Increase in (reduction of) long-term debt (440) 4,405
Collection (issuance) of stock option loans, net (250) 160
Sale of common stock, net 154 4,931
Issuance of treasury stock, net 330 188
-------- --------
Cash provided by (used in) financing activities (206) 9,684
-------- --------
Increase (decrease) in cash and cash equivalents (2,269) 2,638
Cash and cash equivalents, beginning of year 10,524 7,419
-------- --------
Cash and cash equivalents, end of period $ 8,255 $ 10,057
======== ========
Supplemental schedule of non-cash
investing and financing activities:
Treasury stock used for payment of interest $ 93 $ 93
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(Unaudited)
Note 1 - Interim Period Reporting
While the information presented in the accompanying consolidated
financial statements is unaudited, it includes all adjustments
(consisting only of normal recurring adjustments) which, in the opinion
of management, are necessary to present fairly the Company's financial
position and results of operations, and changes in financial position
as of the dates and for the periods indicated.
Certain information and footnote disclosures normally contained in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these consolidated financial statements be read in conjunction
with the financial statements contained in the Company's Form 10-K for
the year ended December 31, 1997. The results of operations for the
interim periods presented are not necessarily indicative of the
operating results for the full year.
Note 2 - Inventories
Inventories are stated at the lower of cost (determined by the
first-in, first-out method) or market. Inventories consisted of the
following:
June 28, 1998 December 31, 1997
------------- -----------------
Raw materials $ 3,235 $ 4,502
Work-in-process 2,893 2,551
Finished goods 2,491 3,065
------- -------
Total $ 8,619 $10,118
======= =======
Note 3 - Net Income (Loss) per Share
Basic net income (loss) per share is computed by dividing income
available to common shareholders (numerator) by the weighted average
number of common shares outstanding (denominator) for the period.
Diluted net income (loss) per share gives effect to all dilutive
potential common shares outstanding during the period. The computation
of diluted Earnings per Share uses the average market prices during the
period.
During each of the periods presented there were no differences between
the numerators used for the basic and diluted net income (loss) per
share. The total amount of the difference in the basic and diluted
weighted average shares of common stock and common stock equivalents in
the periods where there is net income is attributable to the effect of
diluted stock options. In net loss periods, the basic and diluted
weighted average shares of common stock and common stock equivalents
are the same because inclusions of stock options would be antidilutive.
Note 4 - Commitments
During 1996, the Company entered into an addendum to a previous supply
agreement with a major customer for the sale of the Company's
anti-reflective film. Beginning July 1, 1997, the Company is committed
to supply and the customer is committed to purchase fixed volumes
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.
6
<PAGE>
In order to meet the supply commitment, the Company opened a new
manufacturing facility, initially dedicated to the production of
anti-reflective film.
Note 5 - Line of Credit Agreement
The Company has secured a $6 million revolving line of credit which was
extended during the second quarter and now expires in June 1999. This
line of credit may be extended further for additional one year terms
with the bank's approval. The amount of borrowings is based upon a
percentage of accounts receivable, which at June 28, 1998, 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 June 28, 1998,
there were no borrowings under this line of credit.
Note 6 - Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 (FAS 131) "Disclosures about
Segments of an Enterprise and Related Information." FAS 131 revises
information regarding the reporting of certain operating segments for
periods beginning after December 15, 1997. The Statement also
establishes standards for related disclosures about products and
services, geographic areas, and major customers. The Company will adopt
FAS 131 in its 1998 annual report. The Company has not yet determined
the impact, if any, of adopting this new standard.
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Except for the historical information contained herein, the matters
discussed in this Form 10-Q Report are forward-looking statements that
involve risks and uncertainties, including those discussed below and in
the Company's Annual Report on Form 10-K. Actual results may differ
materially from those projected. These forward-looking statements
represent the Company's judgment as of the date of the filing of this
Form 10-Q Report. The Company disclaims, however, any intent or
obligation to update these forward-looking statements.
General
The Company has experienced significant fluctuations in quarterly
results of operations. Revenues have varied from quarter to quarter due
to the seasonal buying patterns for the Company's Heat Mirror(TM)
products, which typically have been strongest in the second and third
quarters. Additionally, sales of these energy conservation products are
significantly influenced by the residential and commercial construction
industries, and reduction in construction has generally resulted in a
reduction in the sales of the Company's Heat Mirror products. In
addition, operating results have historically varied from quarter to
quarter as a function of the utilization of the Company's production
machines and the start up of manufacturing operations in Tempe,
Arizona. Manufacturing inefficiencies have resulted from the
development and introduction of new products and the changing mix of
products manufactured. Primarily as a result of these factors and in
view of the Company's strategy of developing additional applications
for its thin-film technology, and its ongoing practice of upgrading its
manufacturing processes, the Company may continue to experience
quarterly fluctuations in its results of operations.
7
<PAGE>
The Company is committed to increasing revenues by expanding capacity,
and introducing new applications and technologies. Although the Company
has recently completed a major expansion of its capacity and is seeking
to further expand existing applications, to develop new applications
and to continue to expand international marketing and sales efforts,
there can be no assurance that the Company will be able to continue to
increase revenues. The Company has ordered a new production machine in
July 1998 at an approximate cost of $5.7 million plus installation and
leasehold improvement costs to accommodate the system. The Company
believes that the additional capacity will allow continued growth in
its Heat Mirror XIR(R) films sold to OEM automotive glass manufacturers
as well as to after market automotive and architectural customers.
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 unforeseen 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. Currently, the Company is
discussing 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, if any.
Six Months Ended June 28, 1998 and June 29, 1997
Net revenues increased $2.0 million to $24.5 million for the first six
months of 1998, compared to $22.5 million for the similar period of
1997. The increase was attributable primarily to a $2.9 million
increase in sales of Heat Mirror XIR(R) film used principally by OEM
automotive glass manufacturers but partially offset by a decrease of
$0.7 million in sales of electronic products compared to the same
period last year. The electronic products sales decrease was due to
Silver Reflector film shipments and discontinued products which were
sold during the first half of 1997 only.
Cost of sales for the first half of 1998 was 87% of net revenues,
compared to 65% for the similar period of 1997. The increase in cost of
sales as a percentage of net revenues for 1998 from 1997 was due to
process and mechanical problems, primarily at the Company's new Tempe,
Arizona facility, which resulted in low yields on anti-reflective film
for computer monitors. Production yields on the Company's Heat Mirror
XIR automotive film produced in the Palo Alto, California were also
lower than in the same period last year, requiring additional machine
time and increased material to meet customer demands. Additionally, the
Company experienced slightly higher overhead costs in the first half of
1998 due to the renovation of an existing production machine to
increase capacity for Heat Mirror products.
8
<PAGE>
Research and development expenses, as a percent of net revenues, were
8% for the first six months of 1998, compared to 6% for the similar
period in 1997. The absolute dollars increased $0.6 million to $2.0
million in 1998 from $1.4 million in 1997. The increase in 1998 is
attributable to higher new product development costs, primarily in
development of product for the electronic display market and
development of new deposition technology.
Selling, general and administrative expense, as a percent of net
revenues, decreased to 19% in the first six months of 1998, from 20%
for the similar period in 1997. The absolute dollars increased $0.2
million to $4.7 million in 1998 from $4.5 million in 1997. The increase
in absolute dollars was due primarily to severance payments associated
with the realignment of organizations and to additional staffing.
Net interest expense increased for the first six months of 1998 to
$300,000 from no interest expense in the first six months of 1997 due
primarily to interest payments on long-term debt for expansion
projects.
Three Months Ended June 28, 1998 and June 29, 1997
Net product sales increased $2.4 million to $14.1 million for the
second quarter of 1998, compared to $11.7 million for the similar
period of 1997. The higher 1998 sales were due primarily to a $1.2
million increase in sales of Heat Mirror XIR(R) film used primarily by
OEM automotive glass manufacturers and a $1.1 million increase in
shipments of anti-reflective film product to Sony compared to the same
period last year.
Cost of sales for the second quarter of 1998 was 78% of net revenues,
compared to 65% for the similar quarter of 1997. The increase in cost
of sales as a percentage of net revenues was due primarily to the
Company's new Tempe, Arizona facility experiencing process problems in
April 1998 which resulted in lower yields and throughput on
anti-reflective film for computer monitors.
Research and development expenses, as a percent of net revenues, were
6% for the second quarters of 1998 and 1997. The absolute dollars
increased to $.9 million in 1998 from $.7 million in 1997. The
increased expenses were primarily attributable to higher new product
development costs associated with film for electronic display products
and the development of new deposition technology.
Selling, general and administrative expense, as a percent of net
revenues, decreased to 16% in the second quarter of 1998, from 20% for
the similar period in 1997. The absolute dollar decrease from $2.4
million in 1997 to $2.3 million in 1998 is attributable primarily to
decreased advertising and promotional expenses.
Net interest expense increased in the second quarter of 1998 compared
to the similar period in 1997 due to interest costs on long term debt.
Long-term debt was higher by approximately $3.9 million at June 28,
1998 compared to June 29, 1997, due to borrowing for expansion
projects.
Liquidity and Capital Resources
At June 28, 1998, the Company's net working capital was $19.6 million
compared to $24.0 million at December 31, 1997.
9
<PAGE>
From December 31, 1997, to June 28, 1998, cash and short-term
investments decreased by $2.3 million. Major uses of cash were to fund
the net loss reduction of $3.7 million the first quarter of 1998 which
was offset by $2.0 million of depreciation and amortization, capital
expenditures of $2.4 million and decreased accounts payable and accrued
liabilities of $1.7 million. Major sources of cash were accounts
receivable of $2.1 million and inventories of $1.5 million.
Additions to property and equipment were approximately $1.4 million
during the second quarter of 1998, including $.8 million for the
renovation of an existing production machine. The Company anticipates
total capital expenditures of approximately $9.5 million during 1998
for improvements in Tempe for the newly ordered PM6, general
replacements and discretionary improvements of current facilities, and
further renovation of existing production machines.
At June 28, 1998, the Company had $8.3 million of cash and short-term
investments. Additionally, in June 1998, the Company extended a $6
million revolving line of credit that expires in June 1999. The Company
has no current borrowings under this line of credit. While the Company
believes that it currently has sufficient funds to finance its
operations through at least the remainder of 1998, to the extent that
such funds are insufficient to fund the Company's activities, including
the potential major expansion project discussed above, 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.
PART II OTHER INFORMATION
Item 1 Legal Proceedings and Other Matters
The Company has been named a defendant in a lawsuit filed on April 5,
1996 by one of its customers in the United States District Court for
the Eastern District of New York. The lawsuit in federal court alleges
certain contractual violations by the Company and seeks relief in an
aggregate amount in excess of $35 million. The Company believes that
this lawsuit is without merit and intends to defend against it
vigorously.
In addition, the Company is involved in certain other legal actions
arising in the ordinary course of business. The Company believes,
however, that none of these other legal actions, either individually or
in the aggregate, will have a material adverse effect on the Company's
business or its consolidated financial position or results of
operations.
Item 2 Changes in Securities
Not applicable
Item 3 Defaults upon Senior Securities
Not applicable
10
<PAGE>
Item 4 Submission of Matters to a Vote of Stockholders
The Company's Annual Meeting of Stockholders was held on May 20, 1998
at the Company's headquarters in Palo Alto, California. Of the
7,618,095 shares outstanding as of the record date, 7,425,140 shares
were present or represented by proxy at the meeting. The following
matters were submitted to a vote of security holders.
(1) To elect the following to serve as a Director of the Company:
Votes in Favor Votes Withheld
-------------- --------------
J. Larry Smart 6,981,265 443,875
Bruce J. Alexander 6,988,240 436,900
Yoshimichi Hase 7,001,790 423,350
Thomas G. Hood 7,001,090 424,050
Joseph B. Reagan 6,988,240 436,900
Walter C. Sedgwick 6,987,240 437,900
(2) To ratify the selection of Price WaterhouseCooper LLP as the
Company's principal independent auditors:
Votes
-----
Votes for: 6,999,709
Votes against: 416,750
Votes abstaining: 8,681
Item 5 Other Information
Not applicable
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports of Form 8-K - None
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Dated: August 12, 1998
Southwall Technologies Inc.
By:/s/Thomas G. Hood
------------------------------
Thomas G. Hood
President and
Chief Executive Officer
By:/s/Bill R. Finley
------------------------------
Bill R. Finley
Vice President and
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-30-1998
<PERIOD-END> JUN-28-1998
<CASH> 8,255
<SECURITIES> 7
<RECEIVABLES> 10,802
<ALLOWANCES> (1005)
<INVENTORY> 8,619
<CURRENT-ASSETS> 27,745
<PP&E> 51,574
<DEPRECIATION> (24,944)
<TOTAL-ASSETS> 55,890
<CURRENT-LIABILITIES> 8,115
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 32,336
<TOTAL-LIABILITY-AND-EQUITY> 55,890
<SALES> 14,057
<TOTAL-REVENUES> 14,057
<CGS> 11,022
<TOTAL-COSTS> 14,199
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (182)
<INCOME-PRETAX> (324)
<INCOME-TAX> 24
<INCOME-CONTINUING> (348)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (348)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
