<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q\A
(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 July 4, 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 July 4, 1999 there were 7,446,280 shares of the Registrant's Common Stock
outstanding.
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS:
Consolidated Balance Sheets - July 4, 1999
and December 31, 1998........................................3
Consolidated Statements of Operations -
three month and six month periods
ended July 4, 1999 and June 28, 1998 ........................4
Consolidated Statements of Cash Flows -
three month and six month periods
ended July 4, 1999 and June 28, 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..13
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings...........................................14
ITEM 2 Changes in Securities.......................................14
ITEM 3 Defaults Upon Senior Securities.............................14
ITEM 4 Submission of Matters to a Vote of Stockholders.............14
ITEM 5 Other Information...........................................14
ITEM 6 Exhibits and Reports on Form 8-K............................14
Signatures..................................................16
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS:
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS July 4, 1999 December 31, 1998
------------ -----------------
(Restated)
Note 6
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 538 $ 4,136
Restricted cash 1,329 -
Short-term investments - 7
Accounts receivable, net of allowance
for doubtful accounts of $816 and $845 10,138 12,355
Inventories 5,970 6,057
Other current assets 1,214 813
-------- --------
Total current assets 19,189 23,368
Property and equipment, net 32,335 29,068
Other assets 848 1,583
-------- --------
Total assets $ 52,372 $ 54,019
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank credit line $ 4,111 $ -
Accounts payable 7,202 6,307
Accrued compensation 1,774 2,265
Other accrued liabilities 1,498 3,655
Current portion of long-term debt 2,122 15,397
-------- --------
Total current liabilities 16,707 27,624
Long-term debt 10,083 141
Other 437 437
-------- --------
Total liabilities 27,227 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 51,892 52,181
Notes Receivable (940) (1,020)
Accumulated deficit (23,567) (22,500)
Less cost of treasury stock, 442
and 565 shares (2,248) (2,852)
-------- --------
Total stockholders' equity 25,145 25,817
-------- --------
Total liabilities and
stockholders' equity $ 52,372 $ 54,019
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -----------------------
July 4, June 28, July 4, June 28,
------- -------- ------- --------
1999 1998 1999 1998
---- ---- ---- ----
(Restated) (Restated)
Note 6 Note 6
<S> <C> <C> <C> <C>
Net revenues $ 13,479 $ 14,057 $ 24,337 $ 24,473
--------- --------- --------- ---------
Costs and expenses:
Cost of sales 9,444 11,022 18,355 21,237
Research and development 1,293 913 2,526 1,973
Selling, general and
administrative 1,970 2,264 3,936 4,672
--------- --------- --------- ---------
Total costs and expenses 12,707 14,199 24,817 27,882
--------- --------- --------- ---------
Income(loss) from operations 772 (142) (480) (3,409)
Interest income/(expense), net (307) (182) (562) (290)
--------- --------- --------- ---------
Income(loss) before income taxes 465 (324) (1,042) (3,699)
Provision for income taxes 13 24 25 24
--------- --------- --------- ---------
Net Income(loss) $ 452 $ (348) $ (1,067) $ (3,723)
========= ========= ========== =========
Net loss per share - Basic $ .06 $ (.05) $ (.15) $ (.49)
========= ========= ========== =========
- Diluted $ .06 $ (.05) $ (.15) $ (.49)
========= ========= ========== =========
Weighted average shares of
common stock and common
stock equivalents - Basic 7,404 7,664 7,364 7,614
- Diluted 7,454 7,664 7,364 7,614
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------
July 4, 1999 June 28, 1998
------------ -------------
(Restated)
Note 6
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,067) $ (3,723)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,380 2,048
Decrease (increase) in accounts receivable 2,299 2,129
Decrease (increase) in inventories 87 1,499
Decrease (increase) in other assets 325 51
(Decrease) increase in accounts payable
and accrued liabilities (1,743) (1,650)
----------- ----------
Cash provided by operating activities 2,281 354
----------- ----------
Cash flows from investing activities:
Decrease in short-term investments 7 -
Increase in restricted cash (1,329) -
Expenditures for property and equipment (5,638) (2,417)
----------- ----------
Net cash used in investing activities (6,960) (2,417)
----------- ----------
Cash flows from financing activities:
Payments on long-term debt (3,333) (440)
Bank line of credit borrowings 4,111 -
Issuance of treasury stock, net 223 330
Sale of common stock, net - 154
Repayment (issuance) of stock option loans, net 80 (250)
----------- ----------
Net cash provided (used) by financing activities 1,081 (206)
----------- ----------
Net decrease in cash and cash
equivalents (3,598) (2,269)
Cash and cash equivalents, beginning of year 4,136 10,524
----------- ----------
Cash and cash equivalents, end of period $ 538 $ 8,255
=========== ==========
</TABLE>
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,
1998. The results of operations for the interim periods presented are not
necessarily indicative of the operating results of the full year.
NOTE 2 - BALANCE SHEET:
RESTRICTED CASH
The restricted cash reflected on the balance sheet is restricted to use
for the German project.
INVENTORIES, NET
Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market. Inventories consisted of the following:
<TABLE>
<CAPTION>
July 4, 1999 December 31, 1998
------------ -----------------
<S> <C> <C>
Raw materials $ 3,456 $ 2,314
Work-in-process 462 2,155
Finished goods 2,052 1,588
------- -------
Total $ 5,970 $ 6,057
======= =======
</TABLE>
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. The supply agreement terminates effective December
31, 1999.
NOTE 4 - LINE OF CREDIT AGREEMENT:
The Company has secured a $6 million revolving line of credit with a
bank which expires in June 2000. 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 July 4, 1999, did
6
<PAGE>
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 July
4, 1999, $4.1 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 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 1,415 thousand and 1,637 thousand
shares at July 4, 1999 and June 28, 1998, respectively, and were not included in
the computations of net income (loss) for those six month periods because the
effect on the calculations would be anti-dilutive.
NOTE 6 - RESTATEMENT OF FINANCIAL STATEMENTS FOR THE THREE MONTHS AND SIX MONTHS
ENDED JULY 4, 1999:
The Company determined that previously reported financial statements
for the three months and six months ended July 4, 1999 required restatement
for deferral of revenue recognition ($48) and understatement of cost of goods
sold ($34). Furthermore, the company reclassified to restricted cash that
portion of cash ($1,329) that is restricted to payments for the facility in
Germany and assets of $726 were offset against accrued compensation as
payment.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
July 4, 1999 July 4, 1999
------------ ------------
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Revenue $13,527 $13,479 $ 24,385 $ 24,337
Cost of Sales 9,410 9,444 18,321 18,355
Income (loss) from operations 854 772 (398) (480)
Net income (loss) $ 534 $ 452 $ (985) $ (1,067)
===== ===== ======= ========
Net income (loss) per share
Basic $ 0.07 $0.06 $(0.13) $ (0.15)
===== ===== ======= ========
Diluted $ 0.07 $0.06 $(0.13) $ (0.15)
===== ===== ======= ========
</TABLE>
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.
7
<PAGE>
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 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 to be completed and installed
in Tempe by the first quarter of 2000, and is continuously seeking to expand
existing applications, to develop new applications and to expand
international marketing and sales efforts, there can be no assurance that the
Company will be 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.
8
<PAGE>
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 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.
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 supplies 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.
9
<PAGE>
SIX MONTHS ENDED JULY 4, 1999 AND JUNE 28, 1998
Net revenues decreased $0.1 million to $24.3 million for the first six
months of 1999, compared to $24.5 million for the similar period of 1998. The
decrease was attributable primarily to a $4.8 million decrease in sales of
anti-reflective film for use on CRT terminals along with a $0.7 million decrease
of other various products partially offset by an increase of $5.4 million in
sales of film used principally by OEM automotive glass manufacturers, compared
to the same period last year. The decrease of anti-reflective film sales was 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 reduced the quantities of anti-reflective film the Company was committed
to supply and the customer was committed to purchase.
Cost of sales for the first half of 1999 was 75% of net revenues,
compared to 87% 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 lower margin anti-reflective film decreased significantly. Also,
production yields on the Company's automotive film produced in the Palo Alto,
California facility improved over the same period a year ago, thereby reducing
the associated material and overhead costs on a per unit basis.
Research and development expenses, as a percent of net revenues, were
10% for the first six months of 1999, compared to 8% for the similar period in
1998. The absolute dollars increased $0.5 million to $2.5 million in 1999 from
$2.0 million in 1998. The increase in research and development expenses in 1999
is attributable to an increase in personnel involved in the development of new
products for the electronic display market and for the development of new
deposition technology.
Selling, general and administrative expense, as a percent of net
revenues, decreased to 16% in the first six months of 1999, from 19% for the
similar period in 1998. The absolute dollars decreased $0.8 million to $3.9
million in 1999 from $4.7 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 six
months of 1998.
Net interest expense increased for the first six months of 1999 to $0.6
million from $0.3 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 a decrease in interest
income. The average cash balances invested during the first six months of 1999
was significantly less than the average balances invested for the comparable
period of 1998.
As a result of the factors discussed above, the Company reported a
pre-tax loss of $1.1 million for the first six months of 1999, compared to a
pre-tax loss of $3.7 million for the similar period in 1998.
THREE MONTHS ENDED JULY 4, 1999 AND JUNE 28, 1998
Net revenues decreased to $13.5 million for the second quarter of 1999,
compared to $14.1 million for the similar period of 1998. The decrease was
primarily attributable to a decrease in anti-reflective film sales of $2.2
million and a decrease of $0.4 million in sales of various other products
partially offset by an increase in automotive film sales of $2.0 million. The
decrease in anti-reflective film sales in the second quarter of 1999 was
primarily due to the modification of a supply agreement with a major customer
which reduced the volume of film the Company was committed to supply and the
customer was committed to purchase during the quarter.
10
<PAGE>
Cost of sales for the second quarter of 1999 was 70% of net revenue,
compared to 78% for the similar period of 1998. The improvement in cost of sales
was caused by a change in sales mix from the second quarter of 1998 to the
second quarter of 1999. Sales of the higher gross margin automotive film product
increased $2.0 million and sales of the lower gross margin anti-reflective film
product decreased $2.2 million resulting in a higher gross margin for the
Company.
Research and development expenses, as a percent of net sales, were 10%
of net revenues for the second quarter of 1999, compared to 6% for the similar
period in 1998. The absolute dollars increased to $1.3 million in the second
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 development of new deposition technologies
which would result in faster coating processes.
Selling, general and administrative expense, as a percent of net sales,
was 15% of net revenues in the second 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 into one in
1998.
Net interest expense increased to $0.3 million for the second quarter
of 1999 compared to $0.2 million for the similar period of 1998 due to an
increase in the use of the bank credit line and a decrease in interest income.
The average cash balances invested during the second quarter of 1999 was
significantly less than the average balances invested for the comparable period
of 1998.
As a result of the factors discussed above, the Company reported
pre-tax income of $0.5 million for the second quarter of 1999, compared to a
pre-tax loss of $0.3 million for the similar period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
In December 1996, the Company borrowed $5 million from an institutional
lender for partial financing of the manufacturing facility in Tempe, Arizona. In
April 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 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 with Teijin of approximately $5 million was completed in April 1997.
In addition, a loan agreement with Sanwa Bank was signed in May 1997, and the
Company received the first $5 million of funding in May 1997, and the remaining
$5 million in November 1997.
From December 31, 1998 to July 4, 1999, cash, restricted cash and
short-term investments decreased by $2.3 million, primarily due to $5.6 million
in expenditures for property and equipment partially offset by $1.6 million
provided by operating activities and $1.1 million provided by financing
activities. Financing activities included a one-time $2.7 million payment to
retire the Company's Convertible Subordinated Note that became due and payable
May 31, 1999. The $5.6 million in capital expenditures made during the first six
months of 1999 includes approximately $1.3 million for the conversion of
11
<PAGE>
an older, large-scale production machine located in Palo Alto, California to
produce advanced anti-reflective film products and $2.1 million for a new
manufacturing machine to be located in Tempe, Arizona. The $1.6 million in cash
provided by operating activities resulted primarily from depreciation and
amortization of $2.4 million and from a decrease of $2.3 million in accounts
receivable partially offset by an increase of $1.0 million in accounts payable
and accrued liabilities and the net loss of $1.0 million for the first six
months of 1999.
At July 4, 1999, the Company had $1.9 million of cash and restricted
cash. The Company also has a bank line of credit for $6.0 million under which
the Company had $4.1 million in borrowings and term loans of $5.0 million and
$10.0 million, which are subject to certain financial covenants. In the
fourth quarter of 1998 and the first quarter 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 those two periods. In May of 1999
the covenants pertaining to the $5.0 million term loan were reset through
December 31, 1999 allowing the Company to achieve compliance at July 4, 1999.
Although the Company expects to remain in compliance with these modified
covenants through the end of 1999, there is no assurance the Company will be
able to remain compliant in the year 2000 when the covenants stipulated in
the original loan agreement take effect. Therefore, the Company has
classified this debt as short-term at July 4, 1999. Additionally, the Company
was not in compliance with some of the financial covenants pertaining to its
$10.0 million term loan at July 4, 1999. The Company requested and received a
waiver for these covenant violations through July 4, 1999 and negotiated new
covenants with its lender which are in effect beginning July 5, 1999 through
December 31, 2000 at which time the covenants stipulated in the original loan
agreement take effect. The Company expects to achieve and remain in
compliance with the new covenants through December 31, 2000 and has
classified the $10.0 million term loan as long-term debt at July 4, 1999.
The Company anticipates that it will acquire approximately $10 million
to $12 million of new capital equipment in the second half of 1999 which
includes progress payments on two new production machines for its film products
and a planned expansion in the European automotive film market. In July 1999 the
Company secured $3.0 million of new equipment financing and is currently seeking
an additional $7.0 million of equipment financing which it expects to be in
place by the end of the third quarter of 1999, although there can be no
assurance that the Company will be successful in obtaining this additional
financing.
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 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.
12
<PAGE>
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 six 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 69% of the
Company's total sales in the first six 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 six months of 1999 was not material.
13
<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
The Company's Annual Meeting of Stockholders was held on May 24, 1999 at the
Company's headquarters in Palo Alto, California. Of the 7,382,373 shares
outstanding as of the record date, 6,626,502 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:
<TABLE>
<CAPTION>
Votes in Favor Votes Withheld
-------------- --------------
<S> <C> <C>
J. Larry Smart 6,407,212 216,290
Bruce J. Alexander 6,428,295 198,207
Thomas G. Hood 6,436,124 187,378
Hideo Nakamori 6,443,022 180,480
Joseph B. Reagan 6,436,324 187,178
Walter C. Sedgwick 6,438,324 185,178
</TABLE>
(2) To ratify the selection of PricewaterhouseCoopers LLP as the
Company's principal independent auditors:
<TABLE>
<CAPTION>
VOTES
-----
<S> <C>
Votes for: 6,593,173
Votes against: 2,757
Votes abstaining: 27,572
</TABLE>
ITEM 5 OTHER INFORMATION
Not applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
14
<PAGE>
(a) Exhibits - None
(b) Reports on Form 8-K - None
15
<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: October 6, 2000
By:/s/Thomas G. Hood
--------------------
Thomas G. Hood
President and
Chief Executive Officer
By:/s/Robert R. Freeman
--------------------
Robert R. Freeman
Sr. Vice President and
Chief Financial Officer
16
