(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 June 27, 2004 | |
¨ | 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 |
DELAWARE (State or other jurisdiction of incorporation or organization) | 94_2551470 (I.R.S. Employer Identification Number) |
3975 East Bayshore Road, Palo Alto, California (Address of principal executive offices) | 94303 (Zip Code) |
Page | ||
PART I—FINANCIAL INFORMATION | ||
Item 1 | Financial Statements: | |
Unaudited Condensed Consolidated Balance Sheets—June 27, 2004 and December 31, 2003 | 3 | |
Unaudited Condensed Consolidated Statements of Operations—Three and six month periods ended June 27, 2004 and June 29, 2003 | 4 | |
Unaudited Condensed Consolidated Statements of Cash Flows—Six month period ended June 27, 2004 and June 29, 2003 | 5 | |
Notes to Unaudited Condensed Consolidated Financial Statements | 6-17 | |
Item 2 | Management's Discussion and Analysis of Financial Condition and Results of Operations | 18-32 |
Item 3 | Quantitative and Qualitative Disclosures about Market Risk | 32 |
Item 4 | Controls and Procedures | 33-40 |
PART II—OTHER INFORMATION | ||
Item 1 | Legal Proceedings | 41 |
Item 2 | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities | 41 |
Item 3 | Defaults upon Senior Securities | 41 |
Item 4 | Submission of Matters to a Vote of Security Holders | 41 |
Item 5 | Other Information | 41 |
Item 6 | Exhibits and Reports on Form 8_K | 41 |
Signatures |
2 | ||
June 27, | December 31, | ||||||
2004 | 2003 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 1,424 | $ | 1,152 | |||
Restricted cash | 557 | 739 | |||||
Accounts receivable, net of allowance for bad debt of $511 at June 27, 2004 | |||||||
and $778 at December 31, 2003 | 5,715 | 7,096 | |||||
Inventories, net | 6,671 | 6,830 | |||||
Other current assets | 3,420 | 2,617 | |||||
Total current assets | 17,787 | 18,434 | |||||
Property, plant & equipment, net | 19,988 | 21,787 | |||||
Restricted cash loans | 1,024 | 1,066 | |||||
Other assets | 1,240 | 434 | |||||
Total assets | $ | 40,039 | $ | 41,721 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Current portion of long term debt and capital leases | $ | 1,235 | $ | 2,042 | |||
Line of credit | 4,549 | 6,844 | |||||
Accounts payable | 3,509 | 6,315 | |||||
Accrued compensation | 1,007 | 1,392 | |||||
Other accrued liabilities | 6,902 | 6,051 | |||||
Total current liabilities | 17,202 | 22,644 | |||||
Term debt and capital leases | 11,625 | 13,658 | |||||
Convertible promissory notes | 3,303 | -- | |||||
Government grants advanced | 558 | 614 | |||||
Other long term liabilities | 12,729 | 3,084 | |||||
Total liabilities | 45,417 | 40,000 | |||||
Contingencies (See note 10) | - | - | |||||
Stockholders’ equity (deficit): | |||||||
Preferred stock, $1.00 stated value, authorized 5,000; issued and outstanding | - | - | |||||
Common stock, $0.001 par value per share; 20,000 shares authorized, and 12,550 and | |||||||
12,548 shares outstanding at June 27, 2004 and December 31, 2003, respectively | 13 | 13 | |||||
Capital in excess of par value | 69,795 | 70,861 | |||||
Accumulated other comprehensive income: | |||||||
Translation gain on subsidiary | 2,711 | 3,240 | |||||
Accumulated deficit | (77,897 | ) | (72,393 | ) | |||
Total stockholders’ equity (deficit) | (5,378 | ) | 1,721 | ||||
Total liabilities and stockholders’ equity | $ | 40,039 | $ | 41,721 |
3 | ||
Three months ended | Six months ended | ||||||||||||
June 27, | June 29, | June 27, | June 29, | ||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||
Net revenues | $ | 14,548 | $ | 15,328 | $ | 25,615 | $ | 30,549 | |||||
Cost of sales | 8,936 | 12,405 | 17,402 | 24,588 | |||||||||
Gross profit | 5,612 | 2,923 | 8,213 | 5,961 | |||||||||
Operating expenses: | |||||||||||||
Research and development | 771 | 1,517 | 1,581 | 3,185 | |||||||||
Selling, general and administrative | 2,520 | 3,000 | 5,583 | 5,876 | |||||||||
Restructuring expenses | - | - | - | (65 | ) | ||||||||
Impairment recoveries for long-lived assets | (1,428 | ) | - | (1,428 | ) | - | |||||||
Total operating expenses | 1,863 | 4,517 | 5,736 | 8,996 | |||||||||
Income (loss) from operations | 3,749 | (1,594 | ) | 2,477 | (3,035 | ) | |||||||
Interest expense | (635 | ) | (217 | ) | (1,240 | ) | (509 | ) | |||||
Cost of warrants issued | (1,473 | ) | - | (6,291 | ) | - | |||||||
Other income (loss), net | (112 | ) | 274 | 248 | 363 | ||||||||
Income (loss) before provision for income taxes | 1,529 | (1,537 | ) | (4,806 | ) | (3,181 | ) | ||||||
Provision for income taxes | 343 | 176 | 698 | 191 | |||||||||
Net income (loss) | $ | 1,186 | $ | (1,713 | ) | $ | (5,504 | ) | $ | (3,372 | ) | ||
Net income (loss) per share: | |||||||||||||
Basic | $ | 0.09 | $ | (0.14 | ) | $ | (0.44 | ) | $ | (0.27 | ) | ||
Diluted | $ | 0.04 | $ | (0.14 | ) | $ | (0.44 | ) | $ | (0.27 | ) | ||
Weighted average shares of common stock and dilutive | |||||||||||||
potential common stock: | |||||||||||||
Shares used in computation, basic and diluted | |||||||||||||
Basic | 12,548 | 12,532 | 12,548 | 12,530 | |||||||||
Diluted | 31,416 | 12,532 | 12,548 | 12,530 |
4 | ||
Six months ended | |||||||
June 27, | June 29, | ||||||
2004 | 2003 | ||||||
Cash flows provided from operating activities: | |||||||
Net income (loss) | $ | (5,504 | ) | $ | (3,372 | ) | |
Adjustments to reconcile net income (loss) to net cash provided by | |||||||
operating activities: | |||||||
Depreciation and amortization | 1,218 | 3,307 | |||||
Charges related to warrants issued to investors and creditors | 6,291 | - | |||||
Amortization of debt issuance costs | 59 | - | |||||
Unamortized debt discount | 116 | - | |||||
(Loss) from impairment recoveries from long-lived assets | (1,428 | ) | 133 | ||||
Stock compensation charge | - | 33 | |||||
Interest on note receivable | - | (4 | ) | ||||
Officer loan forgiveness | - | 131 | |||||
Change in assets and liabilities: | |||||||
Accounts receivable, net | 1,381 | 1,587 | |||||
Inventories, net | 159 | 2,313 | |||||
Other current and non current assets | (1,316 | ) | 969 | ||||
Accounts payable and accrued liabilities | (2,556 | ) | (3,313 | ) | |||
Cash (used) provided by operating activities | (1,580 | ) | 1,784 | ||||
Cash flows used in investing activities: | |||||||
Restricted cash | 147 | (77 | ) | ||||
Proceeds from sale of fixed assets | 1,180 | - | |||||
Expenditures for property, plant and equipment and other assets | (512 | ) | (2,247 | ) | |||
Net cash provided (used) in investing activities | 815 | (2,324 | ) | ||||
Cash flows provided by financing activities: | |||||||
Principal payment on borrowings | (1,600 | ) | (1,944 | ) | |||
Borrowings (payments) on line of credit | (2,295 | ) | 3,003 | ||||
Proceeds from sale of convertible promissory notes | 4,500 | - | |||||
Proceeds from stock options and employee stock purchase plan exercises | - | 18 | |||||
Net cash provided by financing activities | 605 | 1,077 | |||||
Effect on cash of foreign exchange rate charges on cash | 433 | (132 | ) | ||||
Net increase in cash and cash equivalents | 273 | 405 | |||||
Cash and cash equivalents, beginning of year | 1,152 | 1,998 | |||||
Cash and cash equivalents, end of period | $ | 1,425 | $ | 2,403 | |||
Supplemental cash flow disclosures: | |||||||
Cash paid for interest | $ | 630 | $ | 555 | |||
Cash paid for income taxes | $ | 117 | $ | 150 | |||
5 | ||
6 | ||
June 27, | December 31, | ||||||
2004 | 2003 | ||||||
Raw materials | $ | 4,103 | $ | 2,677 | |||
Work-in-process | 1,618 | 3,148 | |||||
Finished goods | 950 | 1,005 | |||||
$ | 6,671 | $ | 6,830 |
June 27, | December 31 | ||||||
2004 | 2003 | ||||||
Warrants | $ | 7,627 | $ | - | |||
Liabilities associated with Settlement Agreement (Note 5) | 2,354 | 1,591 | |||||
Deferred tax liability | 1,342 | 1,177 | |||||
Embedded derivative (Note 9) | 973 | - | |||||
Long-term restructuring costs (Note 12) | 259 | 293 | |||||
Other | 174 | 22 | |||||
$ | 12,729 | $ | 3,084 |
7 | ||
Remaining | ||||||||||
Balance at | Principal | |||||||||
June 27, | Due in | |||||||||
Description | Rate | 2004 | 2004 | |||||||
Term debt: | ||||||||||
Teijin loan dated January 19, 2004 | 0.00 | % | $ | 709 | - | |||||
German bank loan dated May 12, 1999 | 6.13% (1 | ) | 2,276 | $ | 207 | |||||
German bank loan dated May 28, 1999 | 7.10% (2 | ) | 3,035 | - | ||||||
German bank loan dated May 28, 1999 | 3.75 | % | 866 | 173 | ||||||
German bank loan dated July 25, 2000 | 7.15% (3 | ) | 1,789 | 143 | ||||||
German bank loan dated | ||||||||||
August 14, 1999 (due June 30, 2009) | 5.75 | % | 2,048 | - | ||||||
German bank loan dated December 18, 2000 | 7.50 | % | 45 | 45 | ||||||
German bank loan dated December 19, 2000 | 8.0 | % | 52 | 52 | ||||||
Settlement agreement dated February 20, 2004 | (4 | ) | 2,000 | - | ||||||
Total term debt | $ | 12,820 | $ | 620 | ||||||
Capital leases | ||||||||||
Other equity financings | ||||||||||
Total capital leases | 41 | 41 | ||||||||
Total term debt and capital leases | $ | 12,861 | $ | 661 | ||||||
Less: current portion | 1,236 | |||||||||
Term debt, non-current | $ | 11,625 |
(1) | Interest rate will remain fixed until December 31, 2004 and will be reset to the then prevailing market rate. |
(2) | Interest rate will be reset to the then prevailing market rate in 2009. |
(3) | Interest rate will be reset to the then prevailing market rate in 2005. |
(4) | Stepped interest rate starting at 3% for 2004, which will increase by one percentage point per year until 2010. |
8 | ||
9 | ||
10 | ||
Amount | |||||
Balance of 2004 | $ | 661 | |||
2005 | 1,221 | ||||
2006 | 1,558 | ||||
2007 | 1,211 | ||||
2008 | 1,211 | ||||
Thereafter | 6,998 | ||||
Total | $ | 12,860 |
Balance at | |||||
June 27, | |||||
Description | 2004 | ||||
Needham Capital Partners and affiliates | $ | 3,000 | |||
Dolphin Direct Equity Partners | 1,500 | ||||
Total face value of convertible promissory notes | $ | 4,500 | |||
Less: | |||||
Unamortized debt discount | (1,197 | ) | |||
Total convertible promissory note | $ | 3,303 |
a) | The Grant was earmarked to co-finance the costs of the construction of a facility to manufacture XIR® film for the automotive glass industry; |
b) | The construction period for the project is from March 15, 1999 to June 30, 2006; |
c) | The total investment during the construction period should be at least €47.0 million ($56.8 million); and |
d) | The project must create at least 143 permanent jobs and 7 apprenticeships by June 30, 2006. |
11 | ||
a) | The movable and immovable assets, the acquisition costs of which 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, the acquisition costs of which 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. |
Three months ended | Six months ended | ||||||||||||
June 27, | June 29, | June 27, | June 29, | ||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||
Automotive glass | $ | 5,627 | 6,556 | $ | 10,028 | $ | 11,765 | ||||||
Electronic display | 5,796 | 6,092 | 9,215 | 12,694 | |||||||||
Window film | 1,805 | 1,315 | 3,649 | 3,325 | |||||||||
Architectural | 1,320 | 1,365 | 2,723 | 2,765 | |||||||||
Total net revenues | $ | 14,548 | $ | 15,328 | 25,615 | 30,549 |
Three months ended | Six months ended | ||||||||||||
June 27, | June 29, | June 27, | June 29, | ||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||
United States | $ | 2,966 | $ | 1,256 | $ | 4,447 | $ | 2,770 | |||||
Japan | 5,285 | 5,783 | 8,259 | 11,606 | |||||||||
France | 2,471 | 2,199 | 4,719 | 5,274 | |||||||||
Pacific Rim | 1,520 | 1,090 | 3,190 | 3,226 | |||||||||
Rest of the world | 833 | 2,658 | 2,104 | 4,205 | |||||||||
Germany | 1,473 | 2,342 | 2,896 | 4,205 | |||||||||
Total net revenues | $ | 14,548 | $ | 15,328 | $ | 25,615 | $ | 30,549 |
12 | ||
13 | ||
14 | ||
Number of | |||||||
Shares Issued | Value of | ||||||
Under | Warrants | ||||||
Description | Warrant | Issued | |||||
Warrants issued in connection with investment agreement | 11,010 | $ | 4,754 | ||||
Warrants issued for Needham loan guarantees | 1,882 | 720 | |||||
Warrants associated with discount on promissory note | 941 | 414 | |||||
Warrants issued to PBF | 360 | 152 | |||||
Warrants issued in association with letter of intent | - | 100 | |||||
Discount associated with embedded derivative | - | 820 | |||||
Re-measurement of financial instruments in the first six months | - | 1,640 | |||||
Total | 14,193 | $ | 8,600 | ||||
15 | ||
Three months ended | Six months ended | ||||||||||||
June 27, | June 29, | June 27, | June 29, | ||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||
Net income (loss) | |||||||||||||
As reported | $ | 1,186 | $ | (1,713 | ) | $ | (5,504 | ) | $ | (3,372 | ) | ||
Add: Stock-based employee compensation | |||||||||||||
in reported net income (loss), net of | |||||||||||||
related tax effects | - | - | - | - | |||||||||
Deduct: Total stock-based employee | |||||||||||||
compensation determined under fair | |||||||||||||
value based method for all awards, net of | |||||||||||||
related tax effects | (194 | ) | (262 | ) | (202 | ) | (499 | ) | |||||
Pro forma | $ | 992 | (1,975 | ) | $ | (5,706 | ) | $ | (3,871 | ) | |||
As reported - basic | $ | 0.09 | $ | (0.14 | ) | $ | (0.44 | ) | $ | (0.27 | ) | ||
Pro forma - basic | $ | 0.08 | $ | (0.16 | ) | $ | (0.46 | ) | $ | (0.31 | ) | ||
As reported - diluted | $ | 0.04 | $ | (0.14 | ) | $ | (0.44 | ) | $ | (0.27 | ) | ||
Pro forma - diluted | $ | 0.04 | $ | (0.16 | ) | $ | (0.46 | ) | $ | (0.31 | ) |
16 | ||
Workforce | Excess | |||||||||
Reduction | Facilities | Total | ||||||||
Balance at January 1, 2003 | $ | 125 | $ | 2,281 | $ | 2,406 | ||||
Provisions | - | - | - | |||||||
Adjustment to reserve | (65 | ) | - | (65 | ) | |||||
Cash payments | (41 | ) | - | (41 | ) | |||||
Balance at June 29, 2003 | $ | 19 | $ | 2,281 | $ | 2,300 | ||||
Workforce | Excess | |||||||||
Reduction | Facilities | Total | ||||||||
Balance at January 1, 2004 | $ | - | $ | 1,569 | $ | 1,569 | ||||
Provisions | - | - | - | |||||||
Adjustment to reserve | - | (144 | ) | (144 | ) | |||||
Cash payments | - | (569 | ) | (659 | ) | |||||
Balance at June 27, 2004 | $ | - | $ | 856 | $ | 856 |
Note 13 - Guarantees:
Balance at | Balance at | ||||||||||||
December 31, | June 27, | ||||||||||||
2003 | Provision | Utilized | 2004 | ||||||||||
Accrued warranty | $ | 1,850 | $ | 578 | $ | (434 | ) | $ | 1,994 | ||||
Balance at | Balance at | ||||||||||||
December 31, | June 29, | ||||||||||||
2002 | Provision | Utilized | 2003 | ||||||||||
Accrued warranty | $ | 2,069 | $ | 570 | $ | (586 | ) | $ | 2,053 |
17 | ||
18 | ||
3. | Long-lived assets to be disposed of by sale—those assets that we did not intend to use in the future but intended to put up for sale and for which we expect some value to be recovered. |
September 28, | December 31, | ||||||
2003 | 2003 | ||||||
Held for Use | $ | 15,000(1 | ) | $ | 3,000 | ||
Abandoned | 4,400(2 | ) | 3,600(3 | ) | |||
Disposed by Sale | - | 2,000(4 | ) | ||||
Total Impairment | $ | 19,000 | $ | 8,600 |
19 | ||
1) | Includes $10.4 million for our Production Machines 1,2, and 4, located in Palo Alto, and our Production Machines 5 and 6, located in Tempe. |
2) | Represents amounts for our Production Machine 7, located in Tempe. |
3) | Includes $3.6 million for the balance of our Production Machines 6 and 7. |
4) | Includes $1.7 million for the balance of our Production Machine 5. |
1. | Our weighted average cost of capital, calculated with reference to— |
a. | The desired return on equity, which was based on information received from our investment banker. |
b. | The desired return on debt, which was based on the average interest rate for tour term debt. |
c. | Total debt amount, which consisted of the outstanding balance on our line of credit and term debt at September 28, 2003 and December 31, 2003. |
d. | Equity, which consisted of common stock, additional paid in capital and net deficit at September 28, 2003 and December 31, 2003. |
e. | Projected revenue, which was only for display products, which will be the only products we continue to produce in the U.S. |
2. | Our cost of goods sold, which was derived by historical and projected manufacturing costs. |
3. | Our operating expenses, which were determined using our 2004 budget. |
4. | Our cash flows, which included days sale outstanding assumptions based on historical results and days paymentsoutstanding based on our historical payment schedule. |
5. | The net present value, which was calculated based on the net present value of the projected cash outflows subtracted from cash inflows from the first quarter of 2004 through the first quarter of 2005. Our U.S. based liabilities, which were measured at September 28, 2003 and December 31, 2003 and represents total liabilities, less current and long-term portion of term debt. |
6. | During the third quarter 2003 analysis we had assumed that we return to profitability by the second half of 2004. |
7. | During the fourth quarter analysis we had assumed that we return to profitability by the second half of 2005. |
20 | ||
21 | ||
· | are convertible, at each holder’s option, into our Series A shares at a conversion price of $1.00 per share; |
· | accrue interest at an annual rate of 10%, compounded daily, payable each December 31, which interest if accrued but unpaid is also convertible into Series A shares; |
· | are secured by a pledge of a portion of the stock of our subsidiary, Southwall Europe GmbH; and |
· | are due and payable on February 20, 2009 or earlier under certain circumstances. For instance, the failure of our stockholders to approve Proposal 1 (the amendment of our charter) will result in the acceleration of the convertible notes. |
22 | ||
· | the authorization or issuance of shares of any class or series of stock having any preference or priority as to dividends or redemption rights, liquidation preferences, conversion rights, or voting rights, superior to or on a parity with any rights of the Series A shares; |
· | the reclassification of any shares of capital stock into shares having any preference or priority as to dividends or redemption rights, liquidation preferences, conversion rights, or voting rights, superior to or on a parity with any rights of the Series A shares; |
· | the authorization or issuance of any debt or other obligations convertible into or exchangeable for any shares of stock having any preference or priority as to dividends or redemption rights, liquidation preferences, conversion rights, or voting rights, superior to or on a parity with any rights of the Series A shares; |
· | declaring or paying dividends on or making any distributions with respect to our common stock; |
· | increasing or decreasing the authorized number of Series A shares; |
· | amending or repealing any provision of, or adding any provision to, our certificate of incorporation or bylaws if such action would alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of, any Series A shares; |
· | increasing the number of shares of common stock reserved for issuance under our stock option plans, other than the annual increase currently provided in such plans and other than a further increase of not more than 1,000,000 shares; |
· | engaging in any transaction or series of related transactions constituting a liquidation or dissolution of Southwall, the sale of all or substantially all of our assets, or the acquisition of Southwall by another entity; or |
· | making any material change to our line of business. |
23 | ||
24 | ||
25 | ||
26 | ||
27 | ||
28 | ||
Cost of sales. Cost of sales decreased $7.2 million, or 29% from $24.6 million in the first six months of 2003 to $17.4 million in the same period of 2004. Facility costs, depreciation expense and labor costs have historically comprised the majority of our manufacturing expenses, and these costs are relatively fixed and do not fluctuate proportionately with net revenue. The reduction in cost of goods sold was the result of a reduction of material and converting costs of $5.4 million due to the decline in revenue year to year, the increased production from our Dresden facility, and lower fixed costs (primarily a depreciation expense of $1.7 million) in the United States as a result of our restructuring actions taken in 2003. Furthermore, as a result of migrating most of our manufacturing production to our Dresden facility, we have reduced our headcount in the U.S. by 92, thereby lowering our labor costs by $1.8 million. Our Dresden plant generally has had lower manufacturing costs than our United States facilities as a result of lower payroll costs, lower operating expenses, and lower depreciation charges. Depreciation expense is lower by $26,000 for our Dresden plant due to the grants and investment allowances for plant and equipment provided to us by the Saxony government. The grants and allowances are recorded as a reduction of property and equipment costs, thereby lowering the depreciable base of those assets.
29 | ||
Other income, net. Other income, decreased by $0.1 million from $0.4 million for the six months ended June 29, 2003, to $0.3 million for the same period in 2004. The decrease in other income was partially the result of foreign currency gain of $0.1 million during the first six months of 2004 as compared to gain$0.4 million for the same period in 2003. In addition, in the fourth quarter of 2003, an accounting misclassification resulted in an overstatement of our cost of sales by $0.2 million for the year ended December 31, 2003. We identified and corrected the error in the first quarter of 2004, and re corded it as a gain to other income. We determined that the correction of the error was immaterial to net income and elected to record the adjustment to other income rather than to cost of goods sold in order to better present the operating results for the quarter.
30 | ||
· | approximately $2.2 million was spent during February and March of 2004, in the normal course of our business for general corporate purposes, including purchases of raw materials, payments to subcontractors and suppliers of approximately $1.0 million, payroll costs of approximately $0.8 million, and rent and lease payments; |
· | approximately $0.8 million was paid between February 24, 2004 and March 30, 2004, to Judd Properties, LLC, the landlord of our Palo Alto executive offices and manufacturing facilities, in connection with the settlement and restructuring of our lease obligations to Judd Properties, LLC; and |
· | approximately $1.0 million has been put up to support a letter of credit in favor of Judd Properties as security for our obligations to depart from and properly restore the property pursuant to our settlement and restructuring with Judd. We have agreed with Judd that, following stockholder approval to increase the number of available authorized shares, we may substitute a warrant exercisable for 1,437,396 shares of our common stock for the letter of credit as security for our obligations, in which event we will have access to the $1.0 million that currently supports the letter of credit. We expect that that $1.0 million, if we were to substitute the warrant as security for our obligations to Judd, would be used for working capital and general corporate purposes. |
31 | ||
32 | ||
· | our ability to remain as a going concern; |
· | our strategy, future operations and financial plans, including, without limitation, our plans to install and commercially produce products on new machines; |
· | the success of our restructuring activities; |
· | the continued trading of our common stock on the Over-the-Counter Bulletin Board; |
· | our projected need for, and ability to obtain, additional borrowings and our future liquidity; |
· | future applications of thin-film technologies and our development of new products; |
· | our competition; |
· | statements about the future size of markets; |
· | our expectations with respect to future grants, investment allowances and bank guarantees from the Saxony government; |
· | our expected results of operations and cash flows; |
· | pending and threatened litigation and its outcome; and |
· | our projected capital expenditures. |
33 | ||
34 | ||
• | fluctuating customer demand, which is influenced by a number of factors, including market acceptance of our products and the products of our customers and end-users, changes in product mix, and the timing, cancellation or delay of customer orders and shipments; |
• | the timing of shipments of our products by us and by independent subcontractors to our customers; |
• | manufacturing and operational difficulties that may arise due to, among other things, quality control, capacity utilization of our production machines, unscheduled equipment maintenance, and the hiring and training of additional staff; |
• | our ability to introduce new products on a timely basis; and |
• | competition, including the introduction or announcement of new products by competitors, the adoption of competitive technologies by our customers, the addition of new production capacity by competitors and competitive pressures on prices of our products and those of our customers. |
35 | ||
• | the development of competing technologies to our anti-reflective and silver reflector films for liquid crystal displays in the flat panel display industry; |
• | changes in the way coatings are applied to alternative substrates such as tri-acetate cellulose, or TAC; |
• | the development of new technologies that improve the manufacturing efficiency of our competitors; |
• | the development of new materials that improve the performance of products that could compete with our products; and |
• | improvements in the alternatives to the sputtering technology we use to produce our products, such as plasma enhanced chemical vapor deposition, or PECVD. |
• | difficulty integrating the purchased operations, technologies, or products; |
• | unanticipated costs, which would reduce our profitability; |
• | diversion of management's attention from our core business; |
• | potential entrance into markets in which we have limited or no prior experience; and |
• | potential loss of key employees, particularly those of the acquired business. |
36 | ||
37 | ||
• | delays in collecting accounts receivable; |
• | higher manufacturing costs; |
• | additional warranty and service expenses; and |
• | reduced or cancelled orders. |
38 | ||
• | unexpected changes in and the burdens and costs of compliance with a variety of foreign laws and regulatory requirements; |
• | potentially adverse tax consequences; and |
• | global economic turbulence and political instability. |
39 | ||
(a) | Evaluation of Disclosure Controls and Procedures. As of June 27, 2004, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer of the Company, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and 15d-15(e). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer of the Company concluded that as of the date of such evaluation, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company (including its consolidated subsidiaries) is recorded, processed, summarized and reported within the time periods specified b y the Securities and Exchange Commission’s rules and forms, particularly during the period for which this quarterly report has been prepared. The Company notes, however, that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and the Company cannot assure you that any system of internal controls will succeed in achieving its stated goals under all potential future conditions. As we reported in our Form 10-K/A for the year ended December 31, 2003, in connection with the audit of our financial statements for that year, PricewaterhouseCoopers LLP identified significant deficiencies, which represented a material weakness, caused by a reduction in force that was initiated in the second and fourth quarters of 2003 and related to the inadequacy of review and supervision of the preparation of accounting records and the untimely reconciliation of certain accounts. Although we reported this material weakness in our Form 10-K/A under "Changes in in ternal controls over financial reporting," the material weakness also affected the effectiveness, as of December 31, 2003, of our disclosure controls and procedures. See the discussion below as to improvements we have made since December 31, 2003 in our internal controls. |
(b) | Changes in internal controls over financial reporting. As described in section (a) above, we reported a material weakness as of December 31, 2003. The Company has taken steps to attempt to improve its internal controls and its control environment. The Company has hired a new Corporate Controller, a new Director of Financial Planning and Analysis, a new Senior Cost Accountant, and a new Senior Accountant for the Company’s Germany subsidiary; appointed a new Plant Manager for the Company’s U.S. manufacturing operations; initiated re-training of personnel on the correct use of the Company’s new ERP system; initiated procedures to attempt to ensure all accounts are reconciled and reviewed on a timely basis; and, is in the process of documenting its procedures and reviewing its internal controls to ensure compliance under section 404 o f the Sarbanes-Oxley Act. The Company believes the corrective steps described herein have enabled management to conclude that the internal controls over its financial reporting are effective. The Company will continue its efforts to identify, assess and correct any additional material weaknesses in its internal controls. |
40 | ||
(a) | Exhibits |
Exhibit Number | Item |
10.128.1 | Amendment No. 1, dated June 9, 2004 to Guaranteed Loan Agreement by and between Southwall and Teijin, Limited. |
31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 | Certification of Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
41 | ||
SOUTHWALL TECHNOLOGIES INC. | ||
By: /s/ Thomas G. Hood | ||
Thomas G. Hood | ||
President and Chief Executive Officer |
By: /s/ Maury Austin | ||
Maury Austin | ||
Vice President and Chief Financial Officer |