SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
_ ACT OF 1934 [NO FEE REQUIRED]
For the quarterly period ended March 29, 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 March 29, 1998 there were 7,618,095 shares of the Registrant's Common
Stock outstanding.
This report, including all attachments, contains 12 pages.
1
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
INDEX
Page Number
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheet - March 29, 1998
and December 31, 1997......................................3
Consolidated Statement of Operations -
three months ended March 29, 1998
and March 30, 1997 ........................................4
Consolidated Statement of Cash Flows -
three months ended March 29, 1998
and March 30, 1997 ........................................5
Consolidated Statement of Stockholders' Equity -
three months ended March 29, 1998..........................6
Notes to Consolidated Financial Statements.................7
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of Operations...........9
PART II OTHER INFORMATION
Item 1 Legal Proceedings..........................................13
Item 2 Changes in Securities......................................13
Item 3 Defaults Upon Senior Securities............................13
Item 4 Submission of Matters to a Vote of Stockholders............13
Item 5 Other Information..........................................13
Item 6 Exhibits and Reports on Form 8-K...........................13
Signatures.................................................14
2
<PAGE>
<TABLE>
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
<CAPTION>
March 29, 1998 December 31, 1997
-------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,861 $ 10,524
Short-term investments 1,517 7
Accounts receivable, net of allowance
for doubtful accounts of $915 and $834 9,214 11,926
Inventories 10,453 10,118
Other current assets 1,120 1,118
-------- --------
Total current assets 31,165 33,693
Property and equipment, net 26,394 26,272
Other assets 1,486 1,504
-------- --------
Total assets $ 59,045 $ 61,469
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,727 $ 4,835
Accrued compensation 2,102 2,009
Other accrued liabilities 1,506 1,546
Current portion of long-term debt 1,436 1,304
-------- --------
Total current liabilities 10,771 9,694
Long-term debt 15,289 15,539
Deferred income taxes 496 496
-------- --------
Total liabilities 26,556 25,729
======== ========
Commitments
Stockholders' equity:
Common stock, $.001 par value,
20,000 shares authorized:
Issued and outstanding: 7,742 and 7,636 8 8
Capital in excess of par value 51,708 51,513
Notes Receivable (606) (656)
Accumulated deficit (18,006) (14,631)
Less treasury stock, 124
and 123 shares (615) (494)
-------- --------
Total stockholders' equity 32,489 35,740
-------- --------
Total liabilities and
stockholders' equity $ 59,045 $ 61,469
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
3
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<TABLE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<CAPTION>
March 29, 1998 March 30, 1997
-------------- --------------
<S> <C> <C>
Net revenues $ 10,416 $ 10,855
-------- --------
Costs and expenses:
Cost of sales 10,215 6,980
Start-up costs - Tempe -- 178
Research & development 1,060 707
Selling, general and
administrative 2,408 2,161
-------- --------
Total costs and expenses 13,683 10,026
-------- --------
Income/loss) from operations (3,267) 829
Interest income/(expense), net (108) (33)
-------- --------
Income/(loss) before income taxes (3,375) 796
Provision for income taxes -- 30
-------- --------
Net income/(loss) $ (3,375) $ 766
======== ========
Net income/(loss) per share - Basic $ (.45) $ .12
Diluted $ (.45) $ .11
Weighted average shares of
common stock and common
stock equivalents - Basic 7,561 6,534
Diluted 7,561 7,212
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
4
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<TABLE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<CAPTION>
Three Months Ended
------------------------------------
March 29, 1998 March 30, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,375) $ 766
Adjustments to reconcile net income(loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 940 627
Decrease (increase) in accounts receivable 2,712 (1,696)
Decrease (increase) in inventories (335) (227)
Decrease (increase) in other current assets (2) (48)
(Decrease) increase in accounts payable
and accrued liabilities 945 (445)
-------- --------
Cash provided by (used in) operating
activities 885 (1,023)
-------- --------
Cash flows from investing activities:
Decrease (increase) in short-term investments (1,510) --
Expenditures for property and equipment
and other assets (1,044) (1,367)
-------- --------
Net cash (used in) provided by investing
activities (2,554) (1,367)
-------- --------
Cash flows from financing activities:
Increase in(reduction of) long-term debt (118) (317)
(Purchase) issuance of treasury stock, net 74 191
Repayment of stock option loans 50 --
-------- --------
Net cash (used in) provided by financing activities 6 (126)
-------- --------
Net increase (decrease) in cash and cash
equivalents (1,663) (2,516)
Cash and cash equivalents, beginning of year 10,524 7,419
-------- --------
Cash and cash equivalents, end of period $ 8,861 $ 4,903
======== ========
Supplemental schedule of non-cash
investing and financing activities: -- --
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
5
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<TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three Months Ended March 29, 1998
(in thousands)
(Unaudited)
<CAPTION>
Capital in Total
Common Stock excess of Notes Accumulated Treasury Stockholders'
Shares Amount par value Receivable Deficit Stock Equity
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance; December 31, 1997 7,636 $ 8 $ 51,513 $ (656) $(14,631) $ (494) $ 35,740
Exercise of Stock Options:
Paid with cash $ (69) $ 143 $ 74
Paid with stock 106 $ 264 $ (264) --
Repayment of Stock Option Loans $ 50 $ 50
Net loss $ (3,375) $ (3,375)
-------- -------- -------- -------- -------- -------- --------
Balance; March 29, 1998 7,742 $ 8 $ 51,708 $ (606) $(18,006) $ (615) $ 32,489
======== ======== ======== ======== ======== ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
6
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(Unaudited)
Note 1 - Interim Period Reporting:
While the information presented in the accompanying consolidated
financial statements is unaudited, it includes all adjustments
(consisting only of normal recurring adjustments) which, in the opinion
of management, are necessary to present fairly the Company's financial
position and results of operations, and changes in financial position
as of the dates and for the periods indicated.
Certain information and footnote disclosures normally contained in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these consolidated financial statements be read in conjunction
with the financial statements contained in the Company's Form 10-K for
the year ended December 31, 1997. The results of operations for the
interim periods presented are not necessarily indicative of the
operating results of the full year.
Note 2 - Inventories:
Inventories are stated at the lower of cost (determined by the
first-in, first-out method) or market. Inventories at March 29, 1998
and December 31, 1997, consisted of the following:
March 29, 1998 December 31, 1997
-------------- -----------------
Raw materials $ 4,010 $ 4,502
Work-in-process 3,251 2,551
Finished goods 3,192 3,065
------- -------
Total $10,453 $10,118
======= =======
Note 3 - Commitments:
During the first quarter of 1996, the Company and Sony Corporation
signed an Addendum #1 to Supply Agreement. Under the terms of the
amended agreement, among other things, Sony agreed to increase its
minimum order of anti-reflective film beginning July 1, 1997 and
extending through December 31, 2000 and Southwall agreed to install any
necessary additional manufacturing capacity to supply the minimum
quantities required by this agreement. Should either Southwall fail to
supply or Sony fail to purchase the minimum quantities prescribed in
the contract, a penalty is enforceable by the other party in the amount
of one half of the selling price of the product for the quantity not
supplied or purchased.
The Company began occupying a new leased facility located in Tempe,
Arizona, on June 27, 1997, has installed and is operating the equipment
required for the manufacturing of anti-reflective film.
The Company has also secured financing from a combination of borrowing
from lending institutions and an equity sale to a major investor to
finance this expansion and related working capital requirements. On
December 16, 1996, the
7
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Company borrowed $5 million from an institutional lender. On April 9,
1997, the Company signed an agreement with Teijin Limited of Japan
(Teijin), a major raw material supplier of the Company, which included
arrangements for additional financing for the new manufacturing
facility and for related potential working capital growth. Teijin
purchased 667,000 shares of the Company's common stock at a price of
$7.50 per share, and guaranteed a loan through Sanwa Bank for an
additional $10 million. Teijin also received warrants to purchase
158,000 shares of common stock at a price of $9.00 per share at any
time within three years of the date of the agreement. The stock
purchase transaction of approximately $5 million was completed on April
28, 1997. In addition, a loan agreement with Sanwa Bank was signed on
May 2, 1997, and the Company received the first $5 million of funding
on May 6, 1997. The remaining $5 million of loan funding was received
on November 6, 1997. The loan is for a period of seven and one half
(7.5) years, with a four(4) year interest only grace period, payable
semi annually at an interest rate of BBA Libor, fixed semi annually,
plus seven sixteenths percent (4.375%). In addition, a loan guarantee
fee of nine sixteenths percent (.5625%) per annum is payable to Teijin
on the same payment schedule as the loan interest payments.
8
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Except for the historical information contained herein, the matters
discussed in this Form 10-Q Report are forward-looking statements that
involve risks and uncertainties, including those discussed below and in
the Company's Annual Report on Form 10-K. Actual results may differ
materially from those projected. These forward-looking statements
represent the Company's judgment as of the date of the filing of this
Form 10-Q Report. The Company disclaims, however, any intent or
obligation to update these forward-looking statements.
General
The Company has experienced significant fluctuations in quarterly
results of operations. Revenues have varied from quarter to quarter due
to the seasonal buying patterns for the Company's Heat Mirror(TM)
products, which typically have been strongest in the second and third
quarters. Sales of the Company's energy conservation products are
significantly influenced by the residential and commercial construction
industries, and reduction in construction has generally resulted in a
reduction in the sales of the Company's Heat Mirror products. In
addition, operating results have historically varied from quarter to
quarter as a function of the utilization of the Company's production
machines. Manufacturing inefficiencies have resulted from the
development and introduction of new products and the changing mix of
products manufactured. Primarily as a result of these factors and in
view of the Company's strategy of developing additional applications
for its thin-film technology, and its ongoing practice of upgrading its
manufacturing processes, the Company may continue to experience
quarterly fluctuations in its results of operations.
The Company is committed to increasing revenues by expanding capacity,
applications, and introducing new 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 is currently planning to order a new
production machine as early as June 1998 at an approximate cost of $11
million and is in the process of renovating an existing production
machine at an estimated cost of $1.3 million. 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. The Company is
also considering ordering another new production machine in the second
half of 1998 at an estimated cost of approximately $7.5 million to
expand its capacity to manufacture anti-reflective films. There is
significant risk in the expansion projects currently in process and
planned and there can be no assurances that the Company will be
successful in completing these projects when scheduled or that start-up
costs and initial production will be completed in accordance with the
Company's current plans.
As previously reported, process and machine problems during the first
quarter at the Company's new Tempe, Arizona facility resulted in yield
levels on anti-reflective film of less than half the level expected,
contributing to an increase in average cost of the product of
approximately 35%. In addition, average production yields on Heat
Mirror XIR automotive films manufactured in the Company's Palo Alto,
California facility were approximately 16% lower than in the first
quarter 1997, increasing labor and material costs and using additional
machine time to meet customer demand. These yield issues have been
addressed and are expected to be substantially resolved during the
second
9
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quarter 1998. Improvements made during the first quarter are expected
to lead to significantly better yields for these products, allowing the
Company to ship more while reducing costs. Additionally, capacity
constraints which have impacted the Company's ability to meet customer
demands are being addressed with the planned purchase of at least one
and possibly two new production machines and renovation of an existing
machine as mentioned above. Inability to effectively increase yields to
anticipated levels and to successfully complete the renovation
projects, could result in the Company not meeting its future revenue
and net income objectives and the minimum quantity delivery
requirements under the Sony contract.
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.
Three Months Ended March 29, 1998 and March 30, 1997
Net revenue decreased to $10.4 million for the first three months of
1998, compared to $10.9 million for the similar period of 1997. The
decrease was due primarily to a lower price for anti-reflective film
products sold to Sony, and yield problems which reduced the amount of
anti-reflective product available to ship to Sony. Yield problems on
the Company's Heat Mirror XIR film for OEM automotive glass
manufacturers also reduced the amount of product available for shipment
to those customers and to other customers of product in that product
family.
Cost of sales for the first quarter of 1998 was 98% of net revenue,
compared to 66% for the similar period of 1997. The increase in cost of
sales was due to process and mechanical problems, primarily at the
Company's new Tempe, Arizona facility, which resulted in low yields and
throughput on anti-reflective film for computer monitors. Production
yields on the Company's Heat Mirror XIR automotive film produced in the
Palo Alto, California facility were also lower than in the same period
last year, using additional machine time and material to meet customer
demands. Additionally, inventory reserves were increased $.5 million in
the quarter for older inventories.
Research and development expenses, as a percent of net sales, were 10%
for the first three months of 1998, compared to 7% for the similar
period in 1997. The absolute dollars increased to $1.1 million from $.7
million. The increase in 1998 is attributable to higher new product
development costs, primarily in development of product for the
automotive film market, and development of new deposition technology.
Additionally, the Company wrote off a $.1 million for a license
agreement.
Selling, general and administrative expense, as a percent of net sales,
was 23% in the first three months of 1998, compared to 20% for the
similar period
10
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in 1997. The absolute dollars increased to $2.4 million in 1998 from
$2.2 million in 1997. The increase in absolute dollars was primarily
caused by reorganization severance payments and to the addition of
sales personnel in Europe and South America.
Net interest expense increased in 1998 compared to 1997 due to interest
payments on long term debt. Long term debt was higher by approximately
$9.3 million due to borrowing for expansion projects. Additionally, the
Company is no longer capitalizing interest expense related to the
expansion project in Tempe, Arizona. Increased interest expense was
also partially offset by higher interest income due to an increase in
cash invested by approximately $5 million.
As a result of the factors discussed above, the Company reported a
pre-tax loss of $3.4 million for the first three months of 1998,
compared to a pre-tax profit of $.8 million for the similar period in
1997.
Liquidity and Capital Resources
At March 29, 1998, the Company's net working capital was $20.4 million,
decreasing from $24.0 million at December 31, 1997. 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, 1997, to March 29, 1998, cash and short-term
investments decreased by $.2 million. Accounts receivable decreased by
$2.7 million primarily due to sales which were $5.1 million lower in
the first quarter 1998 compared to the fourth quarter 1997.
Additions to property and equipment were approximately $1.0 million
during the first quarter of 1998. The Company anticipates total capital
expenditures of approximately $4.5 million during 1998 for general
replacements and discretionary improvements of current facilities,
including approximately $1.3 million for the renovation of an existing
production machine.
At March 29, 1998, the Company had $10.4 million of cash and short-term
investments and a $6 million revolving line of credit, which is subject
to certain financial covenants. The loss incurred by the Company for
the first quarter of 1998 violated a loan covenant under the revolving
line which prohibited any loss in excess of $1 million dollars for any
quarter. However, the bank has indicated they do not intend to revoke
the line and will present a new proposal to extend the line for one
year from the June 5, 1998
11
<PAGE>
expiration date of the current loan agreement. As of March 29, 1998,
there were no 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 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.
12
<PAGE>
PART II OTHER INFORMATION
Item 1 Legal Proceedings and Other Matters
The Company has been named a defendant in a lawsuit filed on April 5,
1996 by one of its customers in the United States District Court for
the Eastern District of New York. The lawsuit in federal court alleges
certain contractual violations by the Company and seeks relief in an
aggregate amount in excess of $35 million. The Company believes that
this lawsuit is without merit and intends to defend against it
vigorously.
In addition, the Company is involved in certain other legal actions
arising in the ordinary course of business. The Company believes,
however, that none of these actions, either individually or in the
aggregate, will have a material adverse effect on the Company's
business or its consolidated financial position or results of
operations.
Item 2 Changes in Securities
Not applicable
Item 3 Defaults upon Senior Securities
Not applicable
Item 4 Submission of Matters to a Vote of stockholders
No matters were submitted to a vote of security holders during
the quarter ended March 29, 1998.
Item 5 Other Information
Not applicable
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports of Form 8-K - None
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Dated: May 12, 1998
By: /s/ Thomas G. Hood
---------------------
Thomas G. Hood
President and
Chief Executive Officer
By: /s/ L. Ray Christie
---------------------
L. Ray Christie
Vice President and
Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-29-1998
<CASH> 8,861
<SECURITIES> 1,517
<RECEIVABLES> 10,129
<ALLOWANCES> (915)
<INVENTORY> 10,453
<CURRENT-ASSETS> 31,165
<PP&E> 50,278
<DEPRECIATION> (23,884)
<TOTAL-ASSETS> 59,045
<CURRENT-LIABILITIES> 10,771
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 32,481
<TOTAL-LIABILITY-AND-EQUITY> 59,045
<SALES> 10,348
<TOTAL-REVENUES> 10,416
<CGS> 10,215
<TOTAL-COSTS> 13,683
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (108)
<INCOME-PRETAX> (3,375)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,375)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,375)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
