<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
For the quarterly period ended APRIL 2, 2000
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 April 17, 2000 there were 7,609,223 shares of the Registrant's Common
Stock outstanding.
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS: PAGE
<S> <C>
Consolidated Balance Sheets - April 2, 2000
and December 31, 1999 ............................................ 3
Consolidated Statements of Operations -
three months ended April 2, 2000
and April 4, 1999 ................................................ 4
Consolidated Statements of Cash Flows -
three months ended April 2, 2000
and April 4, 1999................................................. 5
Notes to Consolidated Financial Statements ....................... 6
ITEM 2 Management's Discussion and Analysis
of Financial Condition and Results of Operations.................. 13
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk ....... 19
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings................................................. 20
ITEM 2 Changes in Securities............................................. 20
ITEM 3 Defaults Upon Senior Securities................................... 20
ITEM 4 Submission of Matters to a Vote of Stockholders................... 20
ITEM 5 Other Information................................................. 20
ITEM 6 Exhibits and Reports on Form 8-K.................................. 20
Signatures........................................................ 21
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS:
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS April 2, 2000 December 31,1999
------------- ----------------
(Restated)
Note 9
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2 $ 1,772
Restricted cash 1,729 1,883
Accounts receivable, net of allowance
for doubtful accounts of $852 and $875 14,293 11,129
Inventories 9,061 7,221
Other current assets 1,454 1,294
-------- --------
Total current assets 26,539 23,299
Property and equipment, net 46,446 43,533
Other assets 3,176 3,310
-------- --------
Total Assets $ 76,161 $ 70,142
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit $ 7,930 $ 4,920
Accounts payable 13,660 9,775
Accrued compensation 1,212 1,817
Other accrued liabilities 3,786 4,311
Current portion of long-term debt 15,523 14,175
-------- --------
Total current liabilities 42,111 34,998
Long-term debt 10,000 10,000
Deferred income taxes 564 564
-------- --------
Total liabilities 52,675 45,562
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 51,641 51,771
Less cost of treasury stock, 290
and 371 shares (1,474) (1,888)
Notes Receivable (597) (906)
Other Comprehensive Income
Translation loss on subsidiary (44) (40)
Accumulated deficit (26,048) (24,365)
-------- --------
Total stockholders' equity 23,486 24,586
-------- --------
Total liabilities and
stockholders' equity $ 76,161 $ 70,142
======== ========
</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
------------------
April 2, 2000 April 4, 1999
------------- -------------
(Restated)
Note 9
<S> <C> <C>
Net revenues $ 17,109 $ 10,858
-------- --------
Costs and expenses:
Cost of sales 14,783 8,911
Research and development 1,511 1,233
Selling, general and
administrative 1,992 1,966
-------- --------
Total costs and expenses 18,286 12,110
-------- --------
Income(loss) from operations (1,177) (1,252)
Interest expense, net (470) (255)
-------- --------
Income(loss)before income taxes (1,647) (1,507)
Provision for income taxes (36) (12)
-------- --------
Net Income(loss) $ (1,683) $ (1,519)
======== ========
Net Income(loss) per share
- Basic $ (0.22) $ (0.21)
- Diluted $ (0.22) $ (0.21)
Weighted average shares of
common stock and common
stock equivalents
- Basic 7,567 7,324
- Diluted 7,567 7,324
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------
April 2, 2000 April 4, 1999
------------- -------------
(Restated)
Note 9
<S> <C> <C>
Cash flows (used in) from operating activities:
Net loss $ (1,683) $ (1,519)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 1,123 1,152
Decrease (increase) in accounts receivable (3,165) 2,495
Decrease (increase) in inventories (1,843) (464)
Decrease (increase) in other current and
noncurrent assets (66) (286)
(Decrease) increase in accounts payable
and accrued liabilities 2,760 (2,912)
-------- --------
Cash used in operating activities (2,874) (1,534)
-------- --------
Cash flows from investing activities:
Decrease (increase) in short-term investments - 7
Decrease (increase) in restricted cash 69 -
Expenditures for property, plant and equipment
and other assets (4,280) (2,530)
-------- --------
Net cash used in investing activities (4,211) (2,523)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt 2,444 39
Principal payments on long-term debt (1,073) (388)
Proceeds from bank line of credit 11,933 500
Principal payments on bank line of credit (8,582) -
Repayment of stock option loans 309 -
Issuance of treasury stock, net 284 -
-------- --------
Net cash provided by financing activities 5,315 151
-------- --------
Net decrease in cash and cash
equivalents (1,770) (3,906)
Cash and cash equivalents, beginning of year 1,772 4,136
-------- --------
Cash and cash equivalents, end of period $ 2 $ 230
======== ========
</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, results of
operations, and changes in financial position as of the dates and of 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. These consolidated financial
statements should be read in conjunction with the financial statements contained
in the Company's Form 10-K\A, as amended for the year ended December 31, 1999.
The condensed consolidated balance sheet at December 31, 1999 has been derived
from the audited financial statements as of that date. 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 or market (determined by
the first-in, first-out method). Inventories consisted of the following:
<TABLE>
<CAPTION>
April 2, 2000 December 31, 1999
------------- -----------------
(Restated)
Note 9
<S> <C> <C>
Raw materials $ 4,270 $ 2,940
Work-in-process 3,537 2,592
Finished goods 1,254 1,689
------- -------
Total $ 9,061 $ 7,221
======= =======
</TABLE>
NOTE 3 - FINANCING LINE OF CREDIT:
The Company has an $8.0 million receivable financing line of credit
with a bank. Availability under the line of credit is based on 80% of the
approved accounts receivable balances and bears a finance fee of 0.088% per
month of the average daily account balance outstanding during the settlement
period. In connection with the line of credit, the Company has granted the bank,
a continuing lien upon and security interest in, and right of set off with
respect to all of the Company's rights, title and interest in all accounts
receivable, inventory, monies, remittances and fixed assets. There was $7.9
million of borrowing outstanding under this line of credit at April 2, 2000.
(See Note 10 - Going Concern and Loan Covenants)
6
<PAGE>
NOTE 4 - NET INCOME (LOSS) PER SHARE:
Basic net income (loss) per share is computed as net income (loss)
available to common stockholders divided by the weighted-average number of
common shares outstanding. Diluted net income per share is computed as net
income available to common stockholders divided by the weighted-average number
of outstanding common shares and potentially dilutive common shares, including
stock options, restricted stock awards, warrants and other convertible
securities. Diluted net loss per share is computed in a manner similar to that
of basic net income (loss) per share. For the periods ended April 2, 2000 and
April 4, 1999, there is no difference in the basic and dilutive loss per share
as the Company is in a net loss position, and there will not be any potentially
dilutive common shares.
During the period ended April 2, 2000, there were 813 thousand
additional outstanding, non-exercised, dilutive common stock options excluded in
the calculation of diluted income per share.
NOTE 5 - LONG-TERM DEBT:
The Company's long-term debt consists of the following at April 2,
2000:
<TABLE>
<S> <C>
Promissory note dated December 16, 1996.................... $ 961
Promissory note dated May 6, 1997.......................... 10,000
Sale-leaseback agreement dated July 19,1999................ 2,934
Sale-leaseback agreement dated October 19, 1999............ 3,600
Bank loan dated May 12, 1999............................... 2,479
Bank loan dated May 28, 1999............................... 3,794
Bank loan dated August 14, 1999............................ 1,612
Other...................................................... 143
--------
Total...................................................... 25,523
Less current portion....................................... (15,523)
--------
$ 10,000
</TABLE>
The promissory note dated December 16, 1996 is payable to a leasing
company. The borrowings are collateralized by certain production equipment, bear
interest of 9.7037% per annum and are subject to certain financial covenants.
The Note is payable in monthly installments plus interest for a term of 48
months. At April 2, 2000 the Company was not in compliance with certain of the
financial covenants pertaining to this promissory note. The Company has received
a waiver from the leasing company for failure to comply with such covenants
through the remaining term of the loan. The amount outstanding is repayable
within the next 12 months and has been classified as current debt. (See Note 10
- Going Concern and Loan Covenants)
The promissory note dated May 6, 1997 is payable to a bank. The note
payments are guaranteed by Teijin Limited in Japan ("Teijin"), a stockholder and
supplier of the Company. The Teijin guarantee is collateralized by certain
equipment located in the Company's Tempe manufacturing facility and inventory,
to the extent necessary to provide 120% net book value coverage of the
outstanding loan balance. The interest rate on the loan is re-set semi-annually
at LIBOR plus 0.4375%, (6.1313% at April 2, 2000). The Company is also subject
to certain financial covenants. A loan guarantee service fee is payable to
Teijin semi-annually on the outstanding balance at the rate of 0.5625%. The note
provides for semi-annual payments of interest only during the first four years,
followed by semi-annual installments plus interest for the remaining three and
one half year term. Teijin also received warrants
7
<PAGE>
in 1997 to purchase 158,000 shares of the Company's common stock at $9 per
share. These warrants were not exercised and expired on May 30, 2000. At April
2, 2000 the Company was not in compliance with certain of the financial
covenants with Teijin, the guarantor, pertaining to this promissory note. The
Company received a waiver from Teijin through October 1, 2001. (See Note 10 -
Going Concern and Loan Covenants)
During 1999, the Company entered into two equipment sale-leaseback
agreements with a leasing company ("Lessor"). Because the Company has an option
to purchase the equipment at a price to be determined between the Company and
the Lessor at the end of the lease period, the sale-leaseback agreements have
been treated as financing. One lease agreement has a lease term of three years
and the other lease agreement has an initial lease term of two years with an
option to extend it for an additional year. At April 2, 2000, the Company had a
total of $6,534 outstanding and due under these leases. The leases are
collateralized by the leased equipment and certain other production equipment of
the Company. The effective interest rate of both leases is approximately 13% per
annum and they are repayable over their lease term commencing in May 2000.
Additionally, the Company has provided the Lessor an irrevocable standby letter
of credit in the amount of $0.5 million to collateralize all of the Company's
obligations under these agreements. The letter of credit shall not expire before
January 1, 2002. In addition, $1 million of the amounts received from the Lessor
is in an escrow account and will be released to the Company, pending the Company
meeting certain financial conditions. Due to the uncertainty of compliance with
these financial conditions, the Company has classified the amount in escrow
under non-current "Other Assets." (See Note 10 - Going Concern and Loan
Covenants)
On May 12, 1999, the Company entered into a loan agreement with a
German bank that provides for borrowings up to $2.9 million (DM 6.0 million).
Under the terms of this agreement, the funds will be used solely for the purpose
of capital investment by the German subsidiary. The term of the loan is for a
period of 10 years and the principal is repayable in Deutschemarks after the end
of 5 years in 10 equal semi-annual payments. The loan bears interest at 7.10%
per annum for the first five years, and will be revised to the prevailing rate
at the end of the fifth year. (See Note 10 - Going Concern and Loan Covenants)
An additional loan for $733 (DM 1.5 million) was received from the
German bank discussed above. This loan is an advance on a government grant to be
received approximately August 2001. The proceeds of the grant are collateral for
the loan and, per legal arrangements, will be paid directly to the bank by the
government. Payments of interest only are due in Deutschemarks until then at
7.10% per annum. (See Note 10 - Going Concern and Loan Covenants)
On May 28, 1999, the Company entered into a loan agreement with a
German bank that provides for borrowings up to $6.4 million (DM 12.5 million).
Under the terms of this agreement, the funds shall be used solely for the
purpose of capital investment by the German subsidiary. The term of the loan is
for a period of 20 years and the principal is repayable in Deutschemarks after
the end of 10 years in 20 equal semi-annual payments. The loan bears interest at
7.10% per annum for the first ten years, and will be revised to the prevailing
rate at the end of the tenth year. (See Note 10 - Going Concern and Loan
Covenants)
On August 14, 1999, the Company entered into a loan agreement with a
German bank that provides for borrowings up to $1.7 million (DM 3.3 million).
Under the terms of this agreement, the funds will be used solely for the purpose
of capital investment by the German subsidiary. The principal balance is due in
a single payment on June 30, 2009 and bears interest at a rate of 5.75% per
annum. The interest is payable
8
<PAGE>
quarterly in Deutschemarks. 50% of the loan proceeds are restricted in an escrow
account for the duration of the loan period and are classified as non-current
"Other Assets." (See Note 10 - Going Concern and Loan Covenants)
The preceding German bank loans are collateralized by the production
equipment, building and land owned by the German subsidiary.
Other long-term debt consists of capitalized leases primarily related
to certain computer equipment used by the Company.
Principal reductions of long-term debt (excluding long-term debt
reclassified to current portion) are scheduled as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
2000 $ 1,799
2001 4,626
2002 4,870
2003 4,073
2004 2,500
Thereafter 7,655
-------
Total $ 25,523
</TABLE>
The Company incurred total interest expense of $1,206 and $255 in
the first quarter of 2000 and 1999 respectively. Of these amounts, the
Company capitalized $736 and nil in the first quarter of 2000 and 1999,
respectively, as part of the costs related to the construction of new
manufacturing facilities in Tempe and Dresden, Germany.
NOTE 6 - GOVERNMENT GRANT:
In May 1999, the Company has an agreement to receive a grant award
("the Grant") from the State Government of Saxony in Germany ("the Grantor")
for a maximum amount of approximately $9.9 million (DM 20.3 million). During
the year ended December 31, 1999, the Company received approximately $4.9
million (DM 9.6 million) under this Grant and accounted for the Grant by
applying the proceeds received against the cost of the German manufacturing
facility. The Company is scheduled to receive the remaining balance through
2002.
The Grant is subject to the following requirements:
a) The grant is earmarked to co-finance the costs of the construction
of a facility to manufacture Heat Mirror XIR-Registered Trademark-
film for the automotive glass industry, located at Grossroehrsdorf,
Germany.
b) The construction period for the project is from March 15, 1999 to
March 14, 2002.
c) The total investment should be at least $37.6 million (DM 73.3
million).
d) The project must create at least 143 permanent jobs and 7
apprenticeships.
In the event that the Company fails to meet the above requirements, the
Grantor has the right to reclaim the Grant.
The Company is further eligible for investment allowances calculated
based on the capital investment of $39.2 million (DM 80.3 million) amounting
to $3.7 million (DM 7.7 million), subject to European Union regulatory
approval.
The investment allowance is subject to the following requirements:
a) The movable and immovable assets which acquisition cost are taken
into account in determining the investment allowance shall be
employed within the subsidized territory for a period of at least
five years following the acquisition or production.
b) The movable assets which acquisition cost are taken into account
in determining the increased investment allowance shall remain in
a business that is engaged in the processing industry, or in a
similar production industry for a period of at least five years
following the acquisition or production.
In the event that the Company fails to meet the above requirements, the
investment allowance must be paid back with interest.
NOTE 7 - SEGMENT REPORTING:
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information." SFAS 131 supercedes SFAS 14, "Financial Reporting for
Segments of a Business Enterprise" replacing
9
<PAGE>
the "industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS 131 also requires disclosures about products
and services, geographic areas, and major customers. The adoption of SFAS 131
did not affect results of operations or financial position or the segments
reported in 1997. The Company is organized on the basis of products and
services. The total net revenues for the Electronic Display, Automotive Glass
and Building product lines were as follows:
<TABLE>
<CAPTION>
April 2, 2000 April 4, 1999
------------- -------------
<S> <C> <C>
Electronic display.......................... $ 8,371 $ 1,278
Automotive glass............................ 4,804 5,634
Building.................................... 3,934 3,946
----- -----
Total net revenues........................ $17,109 $10,858
======= =======
</TABLE>
NOTE 8 - CONTINGENCIES:
The Company has been named a defendant in a purported class action
lawsuit. Plaintiffs contend that Heat Mirror equipped glass units manufactured
throughout the country are subject to clouding and discoloration. The Company is
in the process of filing demurrers and setting pleadings. In addition, several
of the Company's co-defendants have settled their portions of the case. At this
point, the Company believes the class action lawsuit is without merit and
intends to vigorously defend this lawsuit by moving to defeat the class action
certification. No reasonable estimate could be made of the likely range of
claims prior to class certification.
In 1997, the Company was named a defendant in a lawsuit with a
manufacturer of insulated glass units wherein the plaintiff claimed that the
insulated glass manufactured with the use of coated film manufactured by the
Company was subject to various failures and deficiencies, giving rise to
warranty and other consumer claims. Plaintiff is claiming damages for past
replacement cost and future potential claims. The lawsuit was settled in March
2000 for $500. Accordingly an expense of $500 was accrued at December 31, 1999.
The Company has been named a defendant in a lawsuit filed on April 5,
1996 by one of its customers in the United States District Court for the Eastern
District of New York. The lawsuit alleges certain unfair competition, tort and
contractual violations by the Company and seeks relief in an aggregate amount in
excess of $32 million. The Company believes the lawsuit is without merit and
intends to vigorously defend its position.
10
<PAGE>
The Company's German subsidiary is a defendant in a lawsuit filed by
one of its suppliers on March 21, 2000 in a German court to seek payment of $922
for engineering services rendered in connection with developing the plans for a
new plant. The Company issued letters of award to the plaintiff amounting to
$256 prior to terminating their services for not meeting their expectations. The
plaintiff claims fees for services rendered, including the costs of significant
modifications and revisions requested by the Company calculated in accordance
with the German Federal Schedule of Architects' fees. The plaintiff further
alleged that the Company utilized their planning work in further developing the
plant. The Company believes that the suit is without merit and intends to
vigorously defend its position. Although the Company believes that it will
prevail, a $256 portion of the claim was accrued as a liability, as it is likely
that this amount will be awarded to the plaintiff.
In August 2000, the Company, its Chief Executive Officer, Thomas P.
Hood, and former Chief Financial Officer, Bill R. Finley, have been named as
defendants in seven lawsuits, all filed in the United States District Court for
the Northern District of California (Docket Nos: C-00-2792-MMC; C-00-2795-BZ;
C-00-2834-SC; C-00-20856-EAI; C-00-3007-EDL; C-00-3027-JCS; and C-00-3079-MMC)
(the "Actions") all alleging violations of the federal securities laws. Each of
the plaintiffs in the Actions alleges that he purchased shares in the Company
and seeks to represent a class of shareholders who purchased shares during the
period April 26, 2000 through August 1, 2000, such dates constituting the period
from the Company's release of its financial results for the first quarter of FY
2000, to the date that it issued its press release announcing that it would be
restating its financial statements for that quarter. The substantive allegations
in each of the Actions are essentially the same, i.e., that the defendants knew,
or were reckless in not knowing, that the Company's first quarter financial
statements were in error and violated Generally Accepted Accounting Principles,
and that as a result the putative class members purchased stock at artificially
inflated prices and were damaged. It is anticipated that the Actions will be
consolidated into a single action by the filing of an Amended Consolidated
Complaint. No pleading in response to the Actions is yet due. The Company
believes the Actions to be wholly without merit and intends to defend them
vigorously.
In the third quarter of 2000, the Company was named a co-defendant,
along with a glass manufacturer, in a legal suit brought by certain contractors.
The contractors alleged the insulating glass units (`IGU') installed at an
airport project, which incorporated the Company's insulation film, have failed.
The Company is in the process of assessing the claim and expects to vigorously
defend this suit.
In addition, the Company is involved in a number of other legal actions arising
in the ordinary course of business. The Company believes, that the various
asserted claims and litigation in which it is involved will not materially
affect its consolidated financial position, future operating results or cash
flows.
NOTE 9 - RESTATEMENT OF FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED APRIL 2,
2000:
The Company determined that previously reported financial statements
for the three months ended April 2, 2000 required restatement for the following
items: deferral of revenue recognition ($531), understatement of cost of goods
sold ($2,466) and over recognition of expenses ($420). This resulted in a charge
of $2,577 to results of operations for the three months ended April 2, 2000. The
Company further reclassified
11
<PAGE>
long-term debt ($13,865) to current liabilities to the extent that it cannot
determine if it can meet the covenants.
<TABLE>
<CAPTION>
AS REPORTED AS RESTATED
----------- -----------
<S> <C> <C>
Net Revenue $ 17,640 $ 17,109
Cost of Sales 12,317 14,783
Income (loss) from operations 1,400 (1,177)
Net income (loss) $ 894 $ (1,683)
======== ========
Net income (loss) per share
Basic 0.12 (0.22)
Diluted 0.11 (0.22)
</TABLE>
NOTE 10 - GOING CONCERN AND LOAN COVENANTS:
Loan Covenants
Pursuant to the loan and or lease agreements listed above, and related
terms, conditions and covenants we requested and received waivers from the
financial institutions, except the German bank loans and sale-leaseback
agreements as discussed below, related to the Company's default or event of
default pursuant to these respective agreements or otherwise arising in
connection with the Company's requirement to restate prior financial periods,
the financial position of the Company reflected in such restated financial
statements, the Company's failure to file its Form 10-Q for the second quarter
of 2000 in a timely manner and trading halts or other actions taken or
threatened to be taken by NASDAQ, or any law suits filed or threatened to be
filed in connection with such restatements or late filings.
The Company has received from the German banks a waiver of the Events
of Default pursuant to the agreements but the German banks did not provide a
waiver of the Events of Default or any rights it may have with respect to any
further material adverse change in the financial condition of the Company
resulting from the Events of Default and the German banks have reserved the
right to terminate the loan agreements after the third and fourth quarter of
2000 if the expectations relating to turnover and profit as provided by the
Company don't occur and provide a cause for termination. The Company cannot
currently determine with reasonable certainty whether it will be able to comply
with these provisions and accordingly has reclassified these loans from
long-term to current liabilities in the balance sheet.
Also the Company is in discussions with the leasing company for the
sale-leaseback agreements dated July 19, 1999 and October 19, 1999 concerning a
waiver of Events of Default related to the material adverse change discussed
above. The Company cannot currently determine with reasonable certainty whether
it will obtain such waiver and accordingly has reclassified these agreements
from long-term to current liabilities in the balance sheet.
Going Concern
On July 12, 2000, the Company's receivable financing line of credit was
increased to $12.0 million. This increase will expire September 30, 2000, at
which time the credit limit will be reduced to $10.0 million. The Company is
exploring other potential revolving credit arrangements,
12
<PAGE>
although no assurance can be given that it will succeed. In addition, the
Company's promissory note dated December 16, 1996 will be fully repaid by
November 2000. The Company is seeking new equipment financing to replace this
loan, using its underlying security as collateral.
These consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has experienced
recurring losses from operations, has significant current and long-term debt
containing certain covenants with which the Company has not complied requiring
the Company to obtain waivers and to classify as a current liability the debt
for which waivers have not been obtained, and on-going capital commitments for
debt service, manufacturing facilities and equipment that raise substantial
doubt about its ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty. As a result of this uncertainty, the Company may not be able to
carry out all of its proposed capital expenditures or to otherwise finance its
operations as currently proposed. The Company believes that it will need
additional financing to meet its operating cash requirements through 2000 and
beyond. However, the Company can give no assurances it will be successful in
obtaining the required additional financing and cash from operations.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
Except for the historical information contained herein, certain matters
discussed in this Form 10-Q\A 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\A. 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\A Report. The Company disclaims,
however, any intent or obligation to update these forward-looking statements.
GENERAL
We are a designer and manufacturer of technologically advanced
thin-film coatings that selectively absorb, reflect or transmit light and
electromagnetic and infrared emissions. Our products are used in a number of
electronic, automotive and building products to enhance optical and thermal
performance characteristics, improve user comfort and reduce energy costs. From
our founding in 1979 through the early 1990's, we developed and produced
thin-film coated substrates primarily for residential and commercial buildings,
and for military applications. In the early 1990's, we began to develop products
for the electronic display and automotive markets.
In 1996, we realized our first material revenue from the electronic
display and automotive markets. Currently, electronic display products account
for almost one-half of our revenues. We expect most of our revenue growth to
continue to come from the electronic display and automotive markets.
Several factors affect our gross margins, including manufacturing
efficiencies, product mix, product differentiation, inventory management, volume
pricing, and the start-up of equipment and new plants. Over the past several
years, each of these factors has contributed to margin volatility as we have
added new capacity to meet the demand of our electronics and automotive markets.
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CAPITAL EXPENDITURES
In 2000, we expect to spend approximately $14.0 million for capital
expenditures to increase production capacity in our operations. From the time we
order a new production machine, it typically takes 12 to 18 months until we are
able to produce in commercial volumes. The last six months of this period are
typically spent testing the machine to make sure it meets our product quality
requirements and those of our customers. During this period the new production
machines typically produce minimal revenues. In accordance with generally
accepted accounting principles, all substrate, target and material costs
incurred prior to a machine beginning any commercial production are expensed as
incurred and classified as costs of sales. In addition, interest costs
associated with borrowings for capital expenditures are capitalized until these
assets begin commercial production.
In the first quarter of 2000, our second production machine at Tempe
(PM 6) began to produce limited amounts of film for commercial use. We ordered
an additional machine (PM 7) for delivery to Tempe in the third quarter of 2000.
This production machine is expected to commence commercial production in the
first half of 2001. Additionally, we took possession of our new facility in
Dresden in May 2000, which will contain two new production machines (PM 8 and PM
9). We expect these two production machines to commence commercial production in
the second half of 2000 and the first half of 2001, respectively.
In general, we experienced significant start-up costs in connection
with bringing new production machines into commercial viability. In 1998, our
operating results were adversely affected by quality problems associated with
the electronic display film product produced by a new production machine (PM 5)
in Tempe. In the fourth quarter of 1998, we discovered quality issues with
product that had been shipped to Sony and other electronic display film that was
still in inventory in Tempe that did not meet Sony's specifications. We recorded
a $4.0 million provision in the fourth quarter of 1998 to account for product
returns from Sony and the related write-off of inventory. During 1999, we
continued to experience ongoing production problems with the Sony electronic
display film. In March 1999, we amended the terms of the supply agreement to
eliminate purchase and supply requirements. Sales to Sony through the first
three quarters of 1999 declined significantly. We discontinued the manufacture
and sale of coated anti-reflective film to Sony in September 1999.
Due to the unprofitable relationship with Sony and our increased
capital expenditures, we have been operating with minimal cash balances. We have
been using cash available from operations, German government grants, bank
borrowings and other long-term debt to finance our increased capital
expenditures.
THREE MONTHS ENDED APRIL 4, 1999 COMPARED WITH THREE MONTHS ENDED APRIL 2,
2000(1) (1) Restated as described in Note 9 of Item 1
NET REVENUES
Net revenues increased $6.2 million, or 57.6%, from $10.9 million for
the first three months of 1999 to $17.1 million for the first three months of
2000. 1999 sales were reduced as our Tempe facility had minimal production as a
result of the re-certification of production processes for product provided to
Sony. Following the September 1999 termination of our relationship with Sony,
the Tempe production machine was converted to the production of a newly
developed anti-reflective
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<PAGE>
product for new customers. The increase in net revenues was primarily
attributable to a $7.4 million increase in sales of electronic display films,
primarily due to the successful yield improvements in our rebuilt production
machine, PM1, located in Palo Alto, along with continued improvements with PM5
in Tempe. PM6 produced only $0.02 million of revenue for the quarter.
COST AND EXPENSES
COST OF SALES
Cost of sales expense consists primarily of materials, production labor
and machine overhead. Cost of sales increased $5.9 million, or 66.0%, from $8.9
million in the first quarter of 1999 to $14.8 million for the similar period of
2000. As a percentage of net revenues, cost of sales increased from 82.1% of net
revenues in the first quarter of 1999, to 86.4% of net revenues for the similar
period of 2000. The percentage increase in cost of sales was due to production
inefficiencies experienced with one of the newly developed antireflective films
on PM5 (Tempe) and start-up costs associated with the new machine PM6 (Tempe)
during the first quarter of 2000. Additionally, costs of sales increased during
the period due to substantial additional processing costs in Japan necessary to
complete the production of one of the newly developed antireflective films.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development spending increased $0.3 million, or 22.5%,
from $1.2 million in the first quarter of 1999 to $1.5 million in the first
quarter of 2000. Research and development expenses decreased from 11.3% of net
revenues for the first three months of 1999, to 8.8% of net revenues for the
similar period in 2000. We incurred additional costs during the first quarter of
2000 in the development of a prototype antenna and a heatable windshield for
automobiles using our XIR films.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consist primarily of
corporate and administrative overhead, selling commissions, advertising costs
and occupancy costs. These expenses increased $ 26, or 1.3%, from $2.0 million
in the first quarter of 1999. Selling, general and administrative expenses
decreased from 18.1% of net revenues for the first three months of 1999 to 11.6%
of net revenues for the similar period of 2000. The small increase in the first
three months of 2000 was primarily related to our hiring of additional sales
personnel and preparation of marketing materials to support our higher planned
production capacities. Additionally, travel and communication expenses also
increased as the additional sales personnel devoted themselves to international
sales.
INCOME (LOSS) FROM OPERATIONS
Loss from operations was $1.2 million for the first quarter of 2000
compared to a loss of $1.3 million for the first quarter of 1999 due to
increased sales, partially offset by lower gross margins on the sale of
electronic display films, increased start up costs on the new production
machine at our Tempe facility and higher R & D operating expenses.
INTEREST INCOME (EXPENSE), NET
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Net interest expense increased $0.2 million from $0.3 million for the
first quarter of 1999 compared to $0.5 million for the similar period in 2000.
Interest expense increased from 1999 due to an increase in borrowings from debt
and bank credit lines at a higher average annual interest rate.
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
We reported a pre-tax loss of $1.5 million for the first quarter of
1999, compared to a pre-tax loss of $1.7 million for the corresponding period
in 2000 due to increased revenues, partially offset by lower gross margins on
the sale of electronic display films, increased start up costs on the new
production machine at our Tempe facility, higher R & D operating expenses and
increased interest expense.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL EXPENDITURES
Since 1998, we have used borrowings, German government grants and cash
from operations to fund our capital expenditures. During 1999, we invested
approximately $24.0 million in capital expenditures, including approximately
$13.5 million of progress payments for our new manufacturing facility and first
production machine (PM 8) in Dresden, approximately $7.5 million for two new
production machines (PM 6 and PM 7) and leasehold improvements for our Tempe
facility, and approximately $2.5 million for the upgrade of two production
machines (PM 1 and PM 2) in Palo Alto. These investments were financed by $10.5
million of short and long-term debt, $6.6 million in sales-leaseback financings,
$4.9 million in German government grants, and $4.3 million of cash from
operations. The German government grants subject us to a number of covenants
(See Note 6 of Item 1). The German government may reclaim the grants if we fail
to meet any of the covenants. For the quarter ended April 2, 2000, we invested
approximately $4.3 million in capital expenditures, primarily to expand
production capacity in our Tempe manufacturing facility and to open and equip
our Dresden facility.
We anticipate spending approximately $14.0 million for capital
expenditures in 2000, approximately $12.0 million of which will consist of final
progress payments on our two new production machines (PM 8 and PM 9) in Dresden
and the completion of our Dresden facility. We expect to finance our capital
expenditures in Germany primarily through the receipt of grants from the German
government, additional bank loans and the release of $3.1 million of cash
currently restricted by the German government to use in the financing the
completion of our Dresden facility.
We expect to limit spending for capital expenditures on PM 7 and
leasehold improvements at Tempe. We anticipate these expenditures will only
commence with an increased line of credit, additional equipment financing or
sufficient cash generated from operations.
LIQUIDITY
Operating activities used approximately $1.5 million in the first three
months of 1999 and $2.9 million for the same period in 2000. This increase in
the amount of cash used in operating activities in 2000 was
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<PAGE>
primarily due to receivables and inventory growth to support increased sales of
electronic display products. Capital expenditures were approximately $2.5
million and $4.3 million for the first quarter of 1999 and the first quarter of
2000, respectively.
The following table sets forth the material terms of our short and
long-term indebtedness at April 2, 2000:
<TABLE>
<CAPTION>
Balance at
Description April 2, 2000 Interest Rate Maturity
----------- ------------- ------------- --------
<S> <C> <C> <C>
Financing Line of Credit.................... $ 7,930 0.088% Monthly June 2001
=====
Long-term debt
Promissory note dated December 16, 1996. 961 9.7 (1)
Promissory note dated May 6, 1997....... 10,000 LIBOR + .4375 (2)
Sales-leaseback agreement dated July 19, 1999 2,934 13.0 (3)
Sales-leaseback agreement dated October 19, 1999 3,600 13.0 (4)
German bank loan dated May 28, 1999..... 3,794 7.1 (5)
German bank loan dated May 12, 1999..... 2,479 7.1 (6)
German bank loan dated August 14, 1999 1,612 5.8 June 2009
Other equipment financings.............. 143 --- ---
------
Total long-term debt............... 25,523
Less current portion............... 15,523
------
$ 10,000
</TABLE>
(1) We are required to make 48 equal monthly payments through December
2000.
(2) We are required to make equal semi-annual repayments from November 2000
through November 2002.
(3) We are required to make equal monthly principal payments over the
36-month term of this financing.
(4) We are required to make equal monthly principal payments over the
24-month term of this financing.
(5) We are required to make equal semi-annual principal payments beginning
ten years from the date of the loan through May 2019.
(6) We are required to make equal semi-annual principal payments beginning
five years from the date of the loan through May 2009.
We have granted the lender of the financing line of credit a security
interest in our receivables, inventory and other assets not otherwise
collateralized. Our loans from German banks also subject us to covenants,
including covenants relating to the progress of the development of our Dresden
facility and the minimum number of our employees at Dresden by 2003. We have
granted the German banks security interests in our Dresden facility and the
assets located at the facility.
The promissory note dated December 16, 1996 is payable to a leasing
company. The borrowings are collateralized by certain production equipment and
subject us to certain financial covenants. At April 2, 2000, we were not in
compliance with certain of these financial covenants. We received a waiver from
the leasing company for failure to comply with these covenants through the
remaining term of the loan.
The promissory note dated May 6, 1997 is payable to a bank and
guaranteed by Teijin Limited, a stockholder and one of our suppliers. The Teijin
guarantee is secured by PM 5 and our inventory to the extent
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necessary to cover 120% of the outstanding loan balance based on the net book
value of the inventory. The guarantee subjects us to certain financial and other
covenants, including covenants relating to our tangible net worth, our debt to
tangible net worth, and the ratio of our cash, cash equivalents and short term
investments to our total current liabilities. At April 2, 2000, we were not in
compliance with the financial covenants relating to the ratio of our debt to
equity and the ratio of our cash, cash equivalents and short-term investments to
current liabilities. Teijin delivered to us a waiver of these covenants at April
2, 2000 and through October 1, 2001.
We have provided the lessor under our sales-leaseback financings a $0.5
million irrevocable standby letter of credit to collateralize our obligations
under the sales-leaseback agreements. The letter of credit will not expire
before January 1, 2002. In addition, $1.0 million of the amount received from
the lessor is in an escrow account and will be released upon our meeting certain
financial conditions.
Loan Covenants
Pursuant to the loan and or lease agreements listed above, and related
terms, conditions and covenants we requested and received waivers from the
financial institutions, except the German bank loans and sale-leaseback
agreements as discussed below, related to the Company's default or event of
default pursuant to these respective agreements or otherwise arising in
connection with the Company's requirement to restate prior financial periods,
the financial position of the Company reflected in such restated financial
statements, the Company's failure to file its Form 10-Q for the second quarter
of 2000 in a timely manner and trading halts or other actions taken or
threatened to be taken by NASDAQ, or any law suits filed or threatened to be
filed in connection with such restatements or late filings.
The Company has received from the German banks a waiver of the Events
of Default pursuant to the agreements but the German banks did not provide a
waiver of the Events of Default or any rights it may have with respect to any
further material adverse change in the financial condition of the Company
resulting from the Events of Default and the German banks have reserved the
right to terminate the loan agreements after the third and fourth quarter of
2000 if the expectations relating to turnover and profit as provided by the
Company don't occur and provide a cause for termination. The Company cannot
currently determine with reasonable certainty whether it will be able to comply
with these provisions and accordingly has reclassified these loans from
long-term to current liabilities in the balance sheet.
Also the Company is in discussions with the leasing company for the
sale-leaseback agreements dated July 19, 1999 and October 19, 1999 concerning a
waiver of Events of Default related to the material adverse change discussed
above. The Company cannot currently determine with reasonable certainty whether
it will obtain such waiver and accordingly has reclassified these agreements
from long-term to current liabilities in the balance sheet.
Going Concern
On July 12, 2000, the Company's receivable financing line of credit was
increased to $12.0 million. This increase will expire September 30, 2000, at
which time the credit limit will be reduced to $10.0 million. The Company is
exploring other potential revolving credit arrangements, although no assurance
can be given that it will succeed. In addition, the Company's promissory note
dated December 16, 1996 will be fully
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<PAGE>
repaid by November 2000. The Company is seeking new equipment financing to
replace this loan, using its underlying security as collateral.
These consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has experienced
recurring losses from operations, has significant current and long-term debt
containing certain covenants with which the Company has not complied requiring
the Company to obtain waivers and to classify as a current liability the debt
for which waivers have not been obtained, and on-going capital commitments for
debt service, manufacturing facilities and equipment that raise substantial
doubt about its ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty. As a result of this uncertainty, the Company may not be able to
carry out all of its proposed capital expenditures or to otherwise finance its
operations as currently proposed. The Company believes that it will need
additional financing to meet its operating cash requirements through 2000 and
beyond. However, the Company can give no assurances it will be successful in
obtaining the required additional financing and cash from operations.
SAS 71 REVIEW
The interim financial statements contained in this Form 10-Q have not
been reviewed by our independent auditors, in accordance with the procedures set
forth in SAS 71.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
Disclosure about market risk is contained in the Company's Form 10-K\A
for the year ended December 31, 1999 filed on October 2, 2000. Subsequent to
such filing, no material developments have occurred with respect to the risks
described therein.
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PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS AND OTHER MATTERS
Certain litigation filed against the Company was described under Item 3
in the Company's Form 10-K\A filed on October 2, 2000. Subsequent to such
filing, no material developments have occurred with respect to the litigation
described therein.
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 April 2, 2000.
ITEM 5 OTHER INFORMATION
Not applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
Exhibit 27.1 Financial Data Schedule
(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 2, 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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