SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the quarterly period ended September 27, 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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 962-9111
--------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
As of September 27, 1998 there were 7,705,965 shares of the
Registrant's Common Stock outstanding.
This report, including all attachments, contains 13 pages.
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
INDEX
PART 1 FINANCIAL INFORMATION
Page
Number
------
Item 1 Financial Statements:
Consolidated Balance Sheets - September 27, 1998
and December 31, 1997.............................................. 3
Consolidated Statements of Operations -
three month and nine month periods ended
September 27,1998 and September 28, 1997............................4
Consolidated Statements of Cash Flows -
nine months ended September 27, 1998
and September 28,1997...............................................5
Notes to Consolidated Financial Statements..........................6
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of Operations....................8
PART II OTHER INFORMATION
Item 1 Legal Proceedings and Other Matters................................12
Item 2 Changes in Securities..............................................12
Item 3 Defaults Upon Senior Securities....................................12
Item 4 Submission of Matters to a Vote of Stockholders....................12
Item 5 Other Information..................................................12
Item 6 Exhibits and Reports on Form 8-K...................................12
Signatures.........................................................13
2
<PAGE>
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
- ----------------------------
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
Sept. 27, Dec. 31,
1998 1997
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 7,757 $10,524
Short-term investments 7 7
Accounts receivable, net of allowance
for doubtful accounts of $1,169 and $834 12,236 11,926
Inventories 8,046 10,118
Other current assets 1,025 1,118
------ ------
Total current assets 29,071 33,693
Property and equipment, net 26,658 26,272
Other assets 1,460 1,504
------ ------
Total assets $57,189 $61,469
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,230 $ 4,835
Accrued compensation 2,233 2,009
Other accrued liabilities 1,820 1,546
Current portion of long-term debt 1,502 1,304
------ ------
Total current liabilities 9,785 9,694
Long-term debt 14,582 15,539
Deferred income taxes 496 496
------ ------
Total liabilities 24,863 25,729
------ ------
Commitments (Note 4)
Stockholders' equity:
Common stock, $.001 par value,
20,000 shares authorized;
Issued and outstanding: 7,861 and 7,636 8 8
Capital in excess of par value 51,925 51,513
Notes receivable (1,028) (656)
Accumulated deficit (17,802) (14,631)
Less cost of Treasury stock, 155 and 123
shares outstanding (777) (494)
Total stockholders' equity 32,326 35,740
------ ------
Total liabilities and
stockholders' equity $57,189 $61,469
====== ======
See accompanying notes to consolidated financial statements.
3
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 27 Sept. 28 Sept. 27 Sept. 28
1998 1997 1998 1997
---- ---- ---- ----
Net revenues $14,011 $12,083 $38,484 $34,622
------ ------ ------ ------
Costs and expenses:
Cost of sales 10,056 8,289 31,293 22,878
Tempe start up costs - 528 - 1,076
Research and development 928 794 2,901 2,228
Selling, general and
administrative 2,260 2,300 6,932 6,845
----- ----- ------ ------
Total costs and expenses 13,244 11,911 41,126 33,027
------ ------ ------ ------
Income (loss) from operations 767 172 (2,642) 1,595
Interest income (expense),net (202) 57 (492) 72
------ ------ ------ ------
Income (loss) before
income taxes 565 229 (3,134) 1,667
Provision for income taxes 13 19 37 89
------ ------ ------ ------
Net income (loss) $ 552 $ 210 $(3,171) $ 1,578
====== ====== ======= ======
Net income (loss) per share:
Basic $ .07 $ 0.03 $ (0.41) $ 0.23
Diluted $ .07 $ 0.03 $ (0.41) $ 0.21
Weighted average shares of
common stock and common
stock equivalents:
Basic 7,761 7,380 7,664 6,989
Diluted 7,964 8,039 7,664 7,671
See accompanying notes to consolidated financial statements.
4
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended
--------------------
Sept. 27, Sept. 28,
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) $(3,171) $1,578
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,142 1,892
(Increase) in accounts receivable (310) (2,859)
Decrease (increase) in inventories 2,072 (2,051)
Decrease (increase) in other
current assets 93 (208)
(Decrease) increase in accounts payable
and accrued liabilities (14) 2,119
------- ------
Cash provided by operating activities 1,812 471
------- ------
Cash flows from investing activities:
Expenditures for property and equipment
and other assets (3,484) (9,251)
Net cash used in investing activities (3,484) (9,251)
Cash flows from financing activities:
Increase in (reduction of) long-term debt (759) 4,110
(Issuance) of stock option loans, net (372) (83)
Sale of common stock, net 352 4,931
Issuance (repurchase) of
treasury stock, net (316) 520
------- ------
Net cash (used in) provided
by financing activities (1,095) 9,478
------- ------
Net increase (decrease) in cash and cash
equivalents (2,767) 698
Cash and cash equivalents, beginning of year 10,524 7,419
------- ------
Cash and cash equivalents, end of period $ 7,757 $8,117
======= ======
Supplemental schedule of non-cash
investing and financing activities:
Treasury stock used for payment
of interest $ 93 $ 93
See accompanying notes to consolidated financial statements.
5
<PAGE>
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 consisted of the following:
September 27, 1998 December 31, 1997
------------------ -----------------
Raw materials $3,753 $4,502
Work-in-process 2,547 2,551
Finished goods 1,746 3,065
----- ------
Total $8,046 $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.
6
<PAGE>
During each of the periods presented there were no differences between the
numerators used for the calculation of 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 inclusion 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. 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 of 1998 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 September 27, 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 September
27, 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.
7
<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. 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(TM) 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.
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, PM6, 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.
8
<PAGE>
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.
Nine Months Ended September 27, 1998 and September 28, 1997
Net revenues increased $3.9 million (or 11%) to $38.5 million for the first nine
months of 1998, compared to $34.6 million for the similar period of 1997. The
sales increase was attributable primarily to increases of $5.5 million in Heat
Mirror XIR(R) film used principally by OEM automotive glass manufacturers and a
$0.7 million increase in anti-reflective film which was partially offset by
decreases of $0.9 million due to discontinued sales of after market CRT glass
filters and $0.7 million of Solar Control products compared to the same period
last year. The balance of the decrease, net, relates to several products.
Cost of sales for the first nine months of 1998 was 81% of net revenues,
compared to 69% 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 in the first quarter of 1998, primarily at the Company's new
Tempe, Arizona facility. The problems resulted in low yields on anti-reflective
film for computer monitors. Production yields on the Company's Heat Mirror
XIR(R) automotive film produced in the Palo Alto, California facility 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 nine months of 1998 due
to the renovation of an existing production machine, PM2, to increase capacity
for Heat Mirror(TM) products.
Research and development expenses, as a percent of net revenues, were 8% for the
first nine months of 1998, compared to 6% for the similar period in 1997. The
absolute dollars increased $0.7 million
9
<PAGE>
to $2.9 million in 1998 from $2.2 million in 1997. The increase in 1998 is
attributable to higher new product development costs, primarily for products in
the electronic display market and, to a lessor extent, the development and
testing of new deposition technology.
Selling, general and administrative expense decreased to 18% of net revenues in
the first nine months of 1998 from 20% for the similar period in 1997. The
absolute dollars increased $0.1 million to $6.9 million in 1998 from $6.8
million in 1997. The increase in absolute dollars was due primarily to severance
payments associated with the realignment of organizations and additional
staffing associated with the reorganizations.
Net interest expense increased for the first nine months of 1998 to $492,000
from $72,000 net interest income in the first nine months of 1997 due primarily
to interest incurred on long-term debt for capacity expansion improvements.
Three Months Ended September 27, 1998 and September 28, 1997
Net revenues increased to $14.0 million for the third quarter of 1998, compared
to $12.1 million for the similar period of 1997. The increase was due primarily
to a $2.5 million increase in sales of Heat Mirror XIR(R) film partially offset
by a decrease of $0.5 million due to discontinued sales of after market CRT
glass filters compared to the same period last year.
Cost of sales for the third quarter of 1998 was 72% of net revenues, compared to
73% for the similar quarter of 1997. The decrease of one percent in cost of
sales was due to process efficiency improvements, primarily in anti-reflective
products in Tempe, Arizona.
Research and development expenses, as a percent of net revenues, were 7% for the
third quarters of 1998 and 1997. The absolute dollars increased to $0.9 million
in 1998 from $0.8 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 and testing of new deposition
technology.
Selling, general and administrative expense was 16% of net revenues in the third
quarter of 1998 compared to 19% for the similar period in 1997. The absolute
dollars remained constant at $2.3 million in both 1998 and 1997.
Net interest expense increased to $0.2 million in the third quarter of 1998 from
interest income of $0.1 million in the similar period in 1997 due to interest
costs on long-term debt. Long-term debt was higher by approximately $3.9 million
at September 27, 1998 compared to September 28, 1997, due to borrowing for
capital expansion.
10
<PAGE>
Liquidity and Capital Resources
At September 27, 1998, the Company's net working capital was $19.3 million
compared to $24.0 million at December 31, 1997. From December 31, 1997, to
September 27, 1998, cash and short-term investments decreased by $2.8 million.
Major uses of cash were to fund the net loss of $3.2 million for the first nine
months of 1998, which was offset by $3.1 million of depreciation and
amortization. Capital expenditures were $3.5 million and payments on long-term
debt were $0.8 million for the first nine months of 1998. The major source of
cash was a reduction of $2.1 million in inventories for the first nine months of
1998.
Additions to property and equipment were approximately $1.0 million during the
third quarter of 1998, including $0.6 million for the initial payment on the
newly ordered PM6 production machine to be installed in the Tempe, Arizona
facility. The Company anticipates total capital expenditures of approximately
$6.5 million during 1998 for improvements in Tempe for PM6, general replacements
and discretionary improvements of current facilities, and further renovation of
current production equipment.
At September 27, 1998, the Company had $7.8 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 projects 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.
11
<PAGE>
PART II OTHER INFORMATION
Item 1 Legal Proceedings and Other Matters
The Company has been named a defendant in a lawsuit filed on April 5, 1996 by
one of its customers in the United States District Court for the Eastern
District of New York. The lawsuit in federal court alleges certain contractual
violations by the Company and seeks relief in an aggregate amount in excess of
$35 million. The Company believes that this lawsuit is without merit and intends
to defend against it vigorously.
In addition, the Company is involved in certain other legal actions arising in
the ordinary course of business. The Company believes, however, that none of
these actions, either individually or in the aggregate, will have a material
adverse effect on the Company's business or its consolidated financial position
or results of operations.
Item 2 Changes in Securities
Not applicable
Item 3 Defaults upon Senior Securities
Not applicable
Item 4 Submission of Matters to a Vote of Stockholders
No matters were submitted to a vote of security
holders during the quarter ended September 27, 1998.
Item 5 Other Information
Not applicable
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 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
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