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 October 3, 1999
---------------
/_/ 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: (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 October 3, 1999 there were 7,476,044 shares of the Registrant's Common
Stock outstanding.
1
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SOUTHWALL TECHNOLOGIES INC.
INDEX
Page Number
-----------
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets - October 3, 1999
and December 31, 1998.......................................3
Consolidated Statements of Operations -
Three months and nine months
ended October 3, 1999 and September 27, 1998................4
Consolidated Statements of Cash Flows -
Nine months ended October 3, 1999
and September 27, 1998......................................5
Notes to Consolidated Financial Statements..................6
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of Operations............7
Item 3 Quantitative and Qualitative Disclosures about
Market Risk................................................12
PART II OTHER INFORMATION
Item 1 Legal Proceedings and Other Matters........................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
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PART I FINANCIAL INFORMATION
Item 1 - Financial Statements:
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
ASSETS October 3, 1999 December 31, 1998
--------------- -----------------
Current assets:
Cash and cash equivalents $ 297 $ 4,136
Short-term investments -- 7
Accounts receivable, net of allowance
for doubtful accounts of $853 and $845 11,722 12,355
Inventories 6,461 6,057
Other current assets 1,465 813
-------- --------
Total current assets 19,945 23,368
Property and equipment, net 43,214 29,068
Other assets 4,226 1,583
-------- --------
Total assets $ 67,385 $ 54,019
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank credit line $ 5,118 $ --
Accounts payable 8,687 6,307
Accrued compensation 2,599 2,265
Other accrued liabilities 1,958 3,655
Current portion of long-term debt 2,661 15,397
-------- --------
Total current liabilities 21,023 27,624
Long-term debt 20,204 141
Deferred income taxes 437 437
-------- --------
Total liabilities 41,664 28,202
-------- --------
Commitments
Stockholders' equity:
Common stock, $.001 par value,
20,000 shares authorized:
Issued and outstanding: 7,889 and 7,889 8 8
Capital in excess of par value 51,866 52,181
Notes receivable (930) (1,020)
Accumulated deficit (23,125) (22,500)
Less cost of treasury stock, 413
and 565 shares (2,098) (2,852)
-------- --------
Total stockholders' equity 25,721 25,817
-------- --------
Total liabilities and
stockholders' equity $ 67,385 $ 54,019
======== ========
See accompanying notes to consolidated financial statements.
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<TABLE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- --------------------
Oct. 3, Sep. 27, Oct. 3, Sep. 27,
------- -------- ------- --------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 15,195 $ 14,011 $ 39,580 $ 38,484
-------- -------- -------- --------
Costs and expenses:
Cost of sales 10,897 10,056 29,218 31,293
Research and development 1,388 928 3,914 2,901
Selling, general and
administrative 2,031 2,260 5,967 6,932
-------- -------- -------- --------
Total costs and expenses 14,316 13,244 39,099 41,126
-------- -------- -------- --------
Income (loss) from operations 879 767 481 (2,642)
Interest expense, net (505) (202) (1,067) (492)
-------- -------- -------- --------
Income (loss) before income taxes 374 565 (586) (3,134)
Provision for income taxes 14 13 39 37
-------- -------- -------- --------
Net income (loss) $ 360 $ 552 $ (625) $ (3,171)
======== ======== ======== ========
Net income (loss) per share
- Basic $ .05 $ .07 $ (.08) $ (.41)
======== ======== ======== ========
- Diluted $ .05 $ .07 $ (.08) $ (.41)
======== ======== ======== ========
Weighted average shares of
common stock and common
stock equivalents
- Basic 7,464 7,761 7,387 7,664
- Diluted 7,630 7,964 7,387 7,664
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
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<TABLE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
-----------------
Oct. 3, 1999 Sep. 27, 1998
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (625) $ (3,171)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,680 3,142
Decrease (increase) in accounts receivable 633 (310)
Decrease (increase) in inventories (404) 2,072
Decrease (increase) in other current assets (652) 93
(Decrease) increase in accounts payable
and accrued liabilities 1,109 (14)
-------- --------
Cash provided by operating activities 3,741 1,812
-------- --------
Cash flows from investing activities:
Decrease in short-term investments 7 --
Expenditures for property and equipment
and other assets (20,469) (3,484)
-------- --------
Net cash used in investing activities (20,462) (3,484)
-------- --------
Cash flows from financing activities:
Increase (decrease) in long-term debt 7,327 (759)
Bank line of credit borrowings 5,118 --
Issuance (purchase) of treasury stock, net 340 (316)
Sale of common stock, net -- 352
Repayment (issuance) of stock option loans, net 90 (372)
-------- --------
Net cash provided (used) by financing activities 12,875 (1,095)
-------- --------
Net decrease in cash and cash equivalents (3,846) (2,767)
Cash and cash equivalents, beginning of year 4,143 10,524
-------- --------
Cash and cash equivalents, end of period $ 297 $ 7,757
======== ========
<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,
1998. 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:
October 3, 1999 December 31, 1998
--------------- -----------------
Raw materials $3,638 $2,314
Work-in-process 832 2,155
Finished goods 1,991 1,588
------ ------
Total $6,461 $6,057
====== ======
Note 3 - 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 in July 1997, the Company was committed to supply and the
customer was committed to purchase fixed volumes thereafter until December 31,
2000. During the second quarter of 1999 the Company and its customer modified
certain terms and conditions of the supply agreement. The modifications
significantly reduced the amount of product the Company is committed to supply
and the customer is committed to purchase through December 31, 1999. The
modified agreement also eliminated any penalties for failure to supply or
purchase minimum quantities.
Note 4 - Line of Credit Agreement:
The Company has secured a $7.0 million revolving line of credit with a
bank which expires in June 2000. This line of credit 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 October 3, 1999, 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 11.00%. As of
October 3, 1999, $5.1 million was borrowed under this line of credit.
Note 5 - 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
6
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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 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 dilutive
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 anti-dilutive. Stock options aggregating
1,523 thousand and 1,537 thousand shares at October 3, 1999 and September 27,
1998, respectively, were not included in the computations of net loss for those
nine month periods because the effect on the calculations would be
anti-dilutive.
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, and the timing
of short-term sales contracts. Additionally, 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(TM) products.
Historically, operating results have varied from quarter to quarter as a
function of the utilization of the Company's production machines. In 1998, and
in the first quarter of 1999, operating results were affected by process and
machine problems resulting in quality issues associated with the anti-reflective
film product manufactured in Tempe, Arizona. The development and introduction of
new products and the changing mix of products manufactured have added to the
production problems and inefficiencies experienced by the Company. 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 a significant amount of
inventory obsolescence and believes that the cost of 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 and
improve manufacturing processes and yields to achieve sustained profitability.
Although the Company expanded its capacity by opening a new manufacturing
facility in 1997 in Tempe, Arizona and entered into a purchase agreement in 1998
for a new production machine currently being installed in Tempe
7
<PAGE>
and expected to be operational by the first quarter of 2000, and is continually
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 successful in these efforts and continue to increase
revenues.
Year 2000 readiness
The Company believes the Year 2000 issue represents a material risk to
the Company. The Year 2000 issue involves the potential inability of information
or other data dependent systems to properly distinguish year references at the
turn of the century and certain other dates.
The Company itself is heavily dependent upon the proper functioning of
its own computer systems, including (1) computers and related software for its
financial and manufacturing information systems, (2) computers, programmable
logic controllers and other data dependent equipment in its manufacturing
processes, and (3) computers, scientific equipment and related software for its
engineering, research and development activities. Any failure or malfunctioning
on the part of these or other systems could cause disruptions of operations,
including a temporary inability to process financial transactions, manufacture
products or engage in ordinary business activities in ways that are not
currently known, discernible, quantifiable or otherwise anticipated by the
Company.
In October 1996 the Company began reviewing Year 2000 issues and
prepared a plan (the "Plan") to address those issues. The Plan consists of
several phases. The first phase is the inventory and prioritization of potential
Year 2000 items, and the assessment of Year 2000 compliance. The second phase is
the remediation of any noted problems. The third phase is the testing of
material items, and the fourth phase is the preparation of contingency plans.
All phases of the Plan have been addressed with existing staff and the Company
believes the costs to address Year 2000 issues will not be significant.
The Company is currently developing contingency plans which will
continue to be reviewed and revised through the end of the year to ensure all
reasonable scenarios have been accounted for and alternate methods of resolution
are addressed.
For the Company's most significant IT and non-IT systems (defined
below), the first, second and third phases have been completed. The fourth
phase, contingency planning, has been underway for several months and will
continue to be reviewed and revised through the end of 1999. The Company has
completed major upgrades and modifications, which have made essentially all
mainframe accounting and inventory control software Year 2000 compliant. The
scope of the Year 2000 compliance effort includes (1) information technology
("IT") such as software and hardware; (2) non-IT systems or embedded technology
such as micro-controllers contained in various manufacturing and laboratory
equipment, environmental and safety systems, facilities and utilities; and (3)
the readiness of key third parties, including suppliers and customers, and the
electronic data interchange (EDI) with those key third parties.
8
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The Company's suppliers (particularly sole-source and long lead-time
suppliers) and key customers may be adversely affected by their respective
failures to address the Year 2000 issue. If the Company's suppliers are unable
to provide goods or services, the Company's operations could be materially
adversely affected. Key customers that encounter Year 2000 difficulties could
fail to order or take delivery of the Company's products, or could fail to make
or delay payments to the Company. Such failure or delay could have a material
adverse effect on the Company's business and results of operations. While some
of these risks are outside the control of the Company, the Plan includes a
requirement to communicate with suppliers and customers to ascertain the state
of their Year 2000 compliance program. The Company has received notification
from most of its major suppliers regarding their Year 2000 compliance and
readiness. Communications are underway with the Company's customers to avoid an
interruption in orders caused by a customer's failure to plan for potential Year
2000 complications.
The Company's products are not affected by calendar dating. Therefore,
there is no known or anticipated Year 2000 impact on its product offerings.
The Company believes its Year 2000 Plan will significantly reduce the
probability of significant interruptions of normal operations resulting from
Year 2000 issues. All reasonable effort has been taken to identify, assess and
correct all Year 2000 issues. The Company is attempting in the continued review
and revision of its contingency plans to mitigate any problems that may be
experienced by its key suppliers to protect the Company from any potential
problems that may occur from the inadequacy of a supplier's Year 2000 program.
It is still possible however, that Year 2000 issues could have an adverse impact
on the Company's results of operations, and interruption in normal business
operations, or an adverse impact on the Company's relationships with customers,
suppliers, or others.
Nine Months Ended October 3, 1999 and September 27, 1998
Net revenues increased $1.1 million to $39.6 million for the first nine
months of 1999, compared to $38.5 million for the similar period in 1998. The
increase was attributable primarily to an increase of $6.4 million in sales of
film used principally by OEM automotive glass manufacturers, compared to the
same period last year, partially offset by a $5.3 million decrease in sales of
anti-reflective film for use on CRT terminals. The decrease of anti-reflective
film sales was primarily due to minimal production in the Tempe plant during the
first quarter of 1999 which was the result of the re-certification of production
processes for anti-reflective film provided to a major customer. Additionally,
the supply agreement with this customer was modified during the second quarter
of 1999 which resulted in reduced quantities of anti-reflective film the Company
was committed to supply and the customer was committed to purchase in the second
and third quarters of 1999.
Cost of sales for the first nine months of 1999 was 74% of net
revenues, compared to 81% for the similar period of 1998. The decrease in cost
of sales as a percentage of net revenues for 1999 from 1998 was due primarily to
a shift in product mix. Sales of the higher margin automotive film increased
significantly while sales of the lower margin anti-reflective film decreased
significantly. Additionally, margins on the automotive film have increased in
1999 over 1998 due to improvements in production yields and throughput in 1999.
Research and development expenses, as a percent of net revenues, were
10% for the first nine months of 1999, compared to 8% for the similar period in
1998. The absolute dollars increased $1.0 million to $3.9 million in 1999 from
$2.9 million in 1998. The increase in research and development expenses in 1999
was attributable to an increase in personnel involved in the development of new
9
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deposition technologies resulting in the introduction of new anti-reflective
products and the installation of a new production machine in Tempe, Arizona.
Selling, general and administrative expense, as a percent of net
revenues, decreased to 15% in the first nine months of 1999, from 18% for the
similar period in 1998. The absolute dollars decreased $0.9 million to $6.0
million in 1999 from $6.9 million in 1998. The decrease in absolute dollars was
due primarily to a reduction in staffing and the absence of severance payments
associated with the realignment of organizations that occurred in the first nine
months of 1998.
Net interest expense increased for the first nine months of 1999 to
$1.1 million from $0.5 million in the similar period of 1998 due to an increase
in the use of the Company's line of credit with a bank and an increase in long
term debt borrowing.
As a result of the factors discussed above, the Company reported a net
loss of $0.6 million for the first nine months of 1999, compared to a net loss
of $3.2 million in the similar period of 1998.
Three Months Ended October 3, 1999 and September 27, 1998
Net revenues increased $1.2 million to $15.2 million for the third
quarter of 1999, compared to $14.0 million for the similar period of 1998. The
increase was primarily attributable to an increase of $1.7 million in sales of
silver film and $1.0 million in sales of automotive film partially offset by a
decrease in sales of anti-reflective film of $0.9 million and a decrease of $0.6
million in sales of various other products. The decrease in anti-reflective film
sales in the third quarter of 1999 was primarily due to the modification of a
supply agreement with a major customer which reduced the quantities of film the
Company was committed to supply and the customer was committed to purchase
during the quarter.
Cost of sales for the third quarter of 1999 was 72% of net revenues,
compared to 72% for the similar period of 1998. Cost of sales as a percentage of
net sales remained flat during the quarter due to an increase in sales of higher
margin silver and automotive products which were offset by higher cost of sales
for the introduction of new anti-reflective products and the phasing out of an
anti-reflective product sold to a single customer.
Research and development expenses, as a percent of net sales, were 9%
of net revenues for the third quarter of 1999, compared to 7% for the similar
period in 1998. The absolute dollars increased to $1.4 million in the third
quarter of 1999 from $0.9 million in the comparable period of 1998. The increase
in 1999 is attributable to additional personnel required to support the
development of new products, primarily the development of products for the
anti-reflective film market, and the installation of a new production machine in
Tempe, Arizona.
Selling, general and administrative expense, as a percent of net sales,
was 13% of net revenues in the third quarter of 1999, compared to 16% for the
similar period in 1998. The absolute dollars decreased to $2.0 million in 1999
from $2.3 million in 1998. The decrease in absolute dollars was primarily due to
a decrease in personnel in 1999 and reorganization severance payments that were
paid in 1998 as a result of combining the Company's two divisions in 1998.
Net interest expense increased to $0.5 million for the third quarter of
1999 compared to $0.2 million for the similar period of 1998 due to an increase
in the use of the Company's credit line with a bank and an increase in long term
debt borrowing.
10
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As a result of the factors discussed above, the Company reported net
income of $0.4 million for the third quarter of 1999, compared to net income of
$0.6 million for the similar period in 1998.
Liquidity and Capital Resources
From December 31, 1998 to October 3, 1999, cash and short-term
investments decreased by $3.8 million. The decrease in cash was due to $20.5
million in expenditures for property and equipment partially offset by $12.9
million of cash provided by financing activities and $3.8 million of cash
provided by operating activities. Major components of the $20.5 million in
capital expenditures made during the first nine months of 1999 includes $8.5
million for the Company's new manufacturing facility located in Dresden,
Germany, which the Company anticipates will begin to produce automotive film
products in mid-2000, $5.5 million for two new production machines for the
Company's Tempe, Arizona facility and $1.3 million for the conversion of an
older, large-scale production machine located in Palo Alto, California to
produce advanced anti-reflective film products. Major components of the $12.9
million of cash provided by financing activities include long-term and
short-term borrowings totaling $10.9 million and $5.1 million respectively,
partially offset by a one-time $2.7 million payment to retire the Company's
Convertible Subordinated Note that became due and payable May 31, 1999.
The $3.8 million in cash provided by operating activities resulted
primarily from depreciation and amortization of $3.7 million and from an
increase in accounts payable and accrued liabilities of $1.1 million partially
offset by a decrease of $0.4 million in accounts receivable, inventory and other
current assets and the Company's net loss of $0.6 million for the first nine
months of 1999.
At October 3, 1999, the Company had $0.3 million of cash and short-term
investments. The Company also has a bank line of credit for $7.0 million under
which the Company had $5.1 million in outstanding borrowings. Additionally, the
Company has term loans of $5.0 million and $10.0 million, which are subject to
certain financial covenants, and a new lease financing agreement for $3.0
million, which is also subject to certain financial covenants. During the first
nine months of 1999 the Company was in violation of some of the covenants
pertaining to each of the term loans and classified each as short-term debt
during the first and second quarters of 1999. In May 1999, the covenants
pertaining to the $5.0 million term loan were amended through December 31, 1999
and in August 1999, the covenants pertaining to the $10.0 million term loan were
amended through December 31, 2000. At October 3, 1999 the Company was in
violation of a single covenant pertaining to its $10 million loan and has
received a waiver from its lender for this violation through October 3, 1999.
The Company expects to be fully compliant at December 31, 1999, yet there can be
no assurance of this.
The Company anticipates that it will purchase approximately $2.0
million of new capital equipment in the fourth quarter of 1999 which includes
progress payments on two new production machines and the Company's expansion in
the European automotive film market. In July 1999 the Company secured $3.0
million of long term equipment financing, and in October 1999 the Company
secured an additional $3.6 million of long-term equipment financing to be used
to partially finance the two new production machines for Tempe, Arizona.
Additionally, the Company borrowed $7.9 million from a bank during the third
quarter of 1999 to provide progress payments on the Dresden, Germany project.
The $7.9 million has been classified as long-term debt at October 3, 1999.
While there can be no assurance that the Company will be able to obtain
the additional financing that will be necessary for its planned 1999 operating
cash requirements, the Company believes that existing cash, cash anticipated
11
<PAGE>
to be generated from operations, the bank line of credit and the additional term
loan borrowings, as discussed above, will be sufficient to meet the Company's
operating cash requirements through fiscal 1999.
If the Company is not successful in obtaining the additional financing
described above, it 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.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk:
The Company is exposed to the impact of interest rate changes, foreign
currency fluctuations, and changes in the market values of its investments.
FINANCING RISK. The Company's exposure to market rate risk for changes
in interest rates relates primarily to the Company's term loans which are tied
to the London Interbank Offered Rate ("LIBOR"). Fluctuations in interest rates
may adversely impact the interest expense expected for the Company. The effect
of interest rate fluctuations on the Company in the first nine months of 1999
was not material.
INVESTMENT RISK. The Company invests its excess cash in certificates of
deposit and money market accounts and, by policy, limits the amount of exposure
to any one institution. Investments in both fixed rate and floating rate
interest earning instruments carries a degree of interest rate risk. Fixed rate
securities may have their fair market value adversely impacted due to a rise in
interest rates, while floating rate securities may produce less income than
expected if interest rates fall.
FOREIGN CURRENCY RISK. International revenues amounted to 65% of the
Company's total sales in the first nine months of 1999 and, by policy, the
Company limits foreign currency risk by requiring all sales to be denominated in
U.S. dollars. The Company's international business is subject to risks typical
of an international business, including, but not limited to differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
the Company's future results could be materially adversely impacted by changes
in these or other factors. The effect of foreign exchange rate fluctuations on
the Company in the first nine months of 1999 was not material.
12
<PAGE>
PART II OTHER INFORMATION
Item 1 Legal Proceedings and Other Matters
Certain litigation filed against the Company by one of its customers
was described in the Company's Form 10-K filed on March 31, 1999. Subsequent to
such filing, no material developments have occurred with respect to this
litigation.
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 October 3, 1999.
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
13
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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, 1999
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
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
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0
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