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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 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.
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SOUTHWALL TECHNOLOGIES INC.
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
PART I FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1 FINANCIAL STATEMENTS:
Consolidated Balance Sheets - October 3, 1999
and December 31, 1998.........................................3
Consolidated Statements of Operations -
Three months and six months
ended October 3, 1999 and September 27, 1998..................4
Consolidated Statements of Cash Flows -
Three months and 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..............8
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk...12
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings and Other Matters..........................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...................................................15
</TABLE>
2
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PART I FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS:
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS October 3, 1999 December 31, 1998
--------------- -----------------
(Restated)
Note 6
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 208 $ 4,136
Restricted cash 89 -
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 43,368 29,068
Other assets 3,299 1,583
------- -------
Total assets $ 66,612 $ 54,019
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank credit line $ 5,118 $ -
Accounts payable 8,687 6,307
Accrued compensation 1,672 2,265
Other accrued liabilities 2,039 3,655
Current portion of long-term debt 2,661 15,397
------- -------
Total current liabilities 20,177 27,624
Long-term debt 20,204 141
Other 458 437
------- -------
Total liabilities 40,839 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 (23,073) (22,500)
Less cost of treasury stock, 413
and 565 shares (2,098) (2,852)
------- -------
Total stockholders' equity 25,773 25,817
------- -------
Total liabilities and
stockholders' equity $ 66,612 $ 54,019
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Oct. 3, Sep. 27, Oct. 3, Sep. 27,
------- -------- ------- --------
1999 1998 1999 1998
---- ---- ---- ----
(Restated) (Restated)
Note 6 Note 6
<S> <C> <C> <C> <C>
Net revenues $ 15,122 $ 14,011 $ 39,459 $ 38,484
---------- --------- --------- ---------
Costs and expenses:
Cost of sales 10,844 10,056 29,199 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 14,263 13,244 39,080 41,126
-------- ------- ------- -------
Income (loss) from operations 859 767 379 (2,642)
Interest income (expense), net (351) (202) (913) (492)
------ ------ ----- ------
Income (loss) before income taxes 508 565 (534) (3,134)
Provision for income taxes 14 13 39 37
------- ------ ------ ------
Net income (loss) $ 494 $ 552 $ ( 573) $ (3,171)
======== ======== ========= ========
Net loss per share - Basic $ .07 $ .07 $ ( .08) $ ( .41)
======== ========= ======== ========
- Diluted $ .06 $ .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
</TABLE>
See accompanying notes to consolidated financial statements.
4
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SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
Oct. 3, 1999 Sep. 27, 1998
------------ -------------
(Restated)
Note 6
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (573) $ (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 assets 275 93
(Decrease) increase in accounts payable
and accrued liabilities 284 ( 14)
------ ------
Cash provided by operating activities 3,895 1,812
------ ------
Cash flows from investing activities:
Decrease in short-term investments 7 -
Increase in restricted cash (89) -
Expenditures for property and equipment (20,623) (3,484)
------- ------
Net cash used in investing activities (20,705) (3,484)
------- ------
Cash flows from financing activities:
Payment on long-term debt (3,693) (759)
Long-term debt borrowings 11,020 -
Bank line of credit borrowings 5,118 -
Issuance 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 (3,935) (2,767)
Cash and cash equivalents, beginning of year 4,143 10,524
------ ------
Cash and cash equivalents, end of period $ 208 $ 7,757
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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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 - 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>
Oct. 3, 1999 December 31, 1998
------------ -----------------
<S> <C> <C>
Raw materials $ 3,638 $ 2,314
Work-in-process 832 2,155
Finished goods 1,991 1,588
------ ------
Total $ 6,461 $ 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.
NOTE 4 - LINE OF CREDIT AGREEMENT:
The Company has secured a $7 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
6
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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
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 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.
NOTE 6 - RESTATEMENT OF FINANCIAL STATEMENTS FOR THE THREE MONTHS AND NINE
MONTHS ENDED OCTOBER 3, 1999:
The Company determined that previously reported financial statements for
the three months ended October 3, 1999 required restatement for deferral of
revenue recognition ($73), over accrual of expenses ($53), and capitalization of
interest expense ($154). This resulted in a credit of $134 to results of
operations for the three months ended October 3, 1999. In addition, the Company
determined that previously reported financial statements for the three months
ended July 4, 1999 required restatement for deferral of revenue recognition
($48) and understatement of cost of goods sold ($34). The aggregate effect of
these changes was a credit of $52 to results of operations for the nine months
ended October 3, 1999. Furthermore, the Company reclassified to restricted cash
($89) that portion of cash that is restricted to payments for the facility in
Germany and assets of $927 were offset against accrued compensation as payment.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
OCTOBER 3, 1999 OCTOBER 3, 1999
--------------- ---------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Revenue $15,195 $15,122 $ 39,580 $ 39,459
Cost of Sales 10,897 10,844 29,218 29,199
Income (loss) from operations
879 859 481 379
Net income (loss) $ 360 $ 494 $ (625) $ (573)
===== ===== ======= =======
Net income (loss) per share
Basic $ 0.05 $ 0.07 $ (0.08) $ (0.08)
===== ===== ======= =======
Diluted $ 0.05 $ 0.06 $ (0.08) $ (0.08)
===== ===== ======= =======
</TABLE>
7
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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 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 and operational 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.
8
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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.
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.
9
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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.
NINE MONTHS ENDED OCTOBER 3, 1999 AND SEPTEMBER 27, 1998
Net revenues increased $1.0 million to $39.5 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 a $5.2 million decrease in sales of
anti-reflective film for use on CRT terminals along with a $0.1 million decrease
of other various products partially offset by an increase of $6.4 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
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 reduced the 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
products and new deposition technology 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 $1.0 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 $0.9
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 pre-tax
loss of $0.5 million for the first nine months of 1999, compared to a pre-tax
loss of $3.1 million in the similar period of 1998.
10
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THREE MONTHS ENDED OCTOBER 3, 1999 AND SEPTEMBER 27, 1998
Net revenues increased to $15.1 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 in silver film sales of $1.7 million and
an increase in automotive film sales of $1.0 million 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 volume 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
on the introduction of new anti-reflective products and the phasing out of
certain existing anti-reflective products.
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 $0.4 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.
As a result of the factors discussed above, the Company reported pre-tax
income of $0.5 million for the third quarter of 1999, compared to pre-tax income
of $0.6 million for the similar period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
From December 31, 1998 to October 3, 1999, cash, restricted cash and
short-term investments decreased by $3.9 million, primarily due to $20.6 million
in expenditures for property and equipment partially offset by $13.0 million
provided by financing activities and $3.0 million provided by operating
activities. Additionally, 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 $19.7 million in capital expenditures made during
the first nine months of 1999 include approximately $8.5 million for the
Company's new manufacturing facility located in Dresden, Germany, which will
produce automotive film products in mid 2000. Additional capital expenditures
made during the first nine months of 1999 include approximately $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-
11
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reflective film products. The $3.0 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 $0.3 million
partially offset by a decrease of $0.4 million in accounts receivable, inventory
and other current assets and the 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 restricted
cash. The Company also has a bank line of credit for $7.0 million under which
the Company had $5.1 million in borrowings. Additionally, the Company has term
loans of $5.0 million and $10.0 million, which are subject to certain financial
covenants and a lease financing agreement for $3.0 million, which is also
subject to certain financial covenants. During the first nine months of 1999 the
Company has been in violation of some of the covenants pertaining to each of the
term loans and has classified each as short-term debt during the first and
second quarters of 1999. In May of 1999 the covenants pertaining to the $5.0
million term loan were reset through December 31, 1999 and in August of 1999 the
covenants pertaining to the $10.0 million term loan were reset through December
31, 2000. Although the Company expects to achieve compliance with these modified
covenants in the fourth quarter of 1999 it continued to remain out of compliance
with the covenants on both term loans in the third quarter of 1999. The Company
requested and received a waiver for the covenant violation on its $10 million
term loan through October 3, 1999 and has classified this term loan as long-term
debt at October 3, 1999. The Company expects to achieve and remain in compliance
with the new covenants pertaining to the $10 million term loan through December
31, 2000.
The Company anticipates that it will acquire approximately $2.0 million of
new capital equipment in the fourth quarter 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 long term equipment financing and in October 1999 the
Company secured an additional $3.6 million of long term equipment financing to
be used for the two new production machines for Tempe, Arizona. Additionally,
the Company borrowed $7.9 million from a bank for partial financing of the
Company's new manufacturing facility located in Dresden, Germany and has
classified this debt as long term 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 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
12
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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.
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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
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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: 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
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