SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the quarterly period ended March 31, 1996
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[ ] 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.
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 962-9111
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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
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As of March 31, 1996 there were 5,981,617 shares of the Registrant's Common
Stock outstanding.
This report, including all attachments, contains 12 pages.
1
SOUTHWALL TECHNOLOGIES INC.
INDEX
Page Number
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PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheet - March 31, 1996
and December 31, 1995.......................................... 3
Consolidated Statement of Operations -
three months ended March 31, 1996
and April 2, 1995 ............................................. 4
Consolidated Statement of Cash Flows -
three months ended March 31, 1996
and April 2, 1995 ............................................. 5
Consolidated Statement of Stockholders' Equity -
three months ended March 31, 1996.............................. 6
Notes to Consolidated Financial Statements..................... 7
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of Operations............... 7
PART II OTHER INFORMATION
Item 1 Legal Proceedings.......... ................................... 10
Item 2 Changes in Securities.......................................... 10
Item 3 Defaults Upon Senior Securities................................ 10
Item 4 Submission of Matters to a Vote of Stockholders................ 10
Item 5 Other Information.............................................. 10
Item 6 Exhibits and Reports on Form 8-K............................... 10
Signatures..................................................... 11
2
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
- ----------------------------
CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
March 31, 1996 December 31, 1995
-------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,390 $ 1,434
Short-term investments 1,679 2,132
Accounts receivable, net of allowance
for doubtful accounts of $620 and $534 7,235 5,288
Inventories 6,771 6,624
Other current assets 1,003 1,166
-------- --------
Total current assets 18,078 16,644
Property and equipment, net 15,530 15,518
Other assets 1,778 1,943
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Total assets $ 35,386 $ 34,105
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,943 $ 3,236
Accrued compensation 1,435 1,413
Other accrued liabilities 2,088 2,170
Current portion of long-term debt 102 101
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Total current liabilities 7,568 6,920
Long-term debt 2,829 2,890
Deferred income taxes 381 381
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Total liabilities 10,778 10,191
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Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value,
20,000 shares authorized:
Issued and outstanding: 6,917 and 6,917 7 7
Capital in excess of par value 47,204 47,206
Accumulated deficit (18,828) (19,339)
Less treasury stock of 935
and 981 (3,775) (3,960)
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Total stockholders' equity 24,608 23,914
-------- --------
Total liabilities and
stockholders' equity $ 35,386 $ 34,105
======== ========
See accompanying notes to financial statements.
3
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
March 31, 1996 April 2, 1995
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Net product sales $10,533 $6,691
Other revenues 104 10
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Net revenues 10,637 6,701
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Costs and expenses:
Cost of product sales 7,409 4,602
Research & development 576 625
Selling, general and
administrative 2,100 1,844
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Total costs and expenses 10,085 7,071
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Income (loss) from operations 552 (370)
Interest income 43 54
Interest expense (65) (54)
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Income (loss) before income taxes 530 (370)
Provision for income taxes 19 -
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Net income (loss) $ 511 $ (370)
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Net income (loss) per share $.08 $ (.06)
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Weighted average shares of common
stock and common stock equivalents 6,690 5,847
======= ======
See accompanying notes to financial statements.
4
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended
-------------------
March 31, 1996 April 2, 1995
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Cash flows from operating activities:
Net income (loss) $ 511 $ (370)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 568 499
Decrease (increase) in accounts receivable (1,947) (921)
Decrease (increase) in inventories (147) (1,210)
Decrease (increase) in other current assets 163 (86)
(Decrease) increase in accounts payable
and accrued liabilities 740 1,204
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Cash provided by (used in) operating
activities (112) (884)
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Cash flows from investing activities:
Decrease (increase) in short-term investments 453 1,000
Expenditures for property and equipment
and other assets (415) (610)
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Net cash (used in) provided by investing
activities 38 390
------- -------
Cash flows from financing activities:
Proceeds from issuance of stock, net of
related costs 0 0
Increase in(reduction of) long-term debt (60) (46)
(Purchase) issuance of treasury stock, net 90 0
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Net cash (used in) provided by financing activities 30 (46)
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Net increase (decrease) in cash and cash
equivalents ( 44) (540)
Cash and cash equivalents, beginning of year 1,434 1,144
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Cash and cash equivalents, end of period $ 1,390 $ 604
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Supplemental schedule of non-cash
investing and financing activities:
Treasury stock used for payment of interest $ 93 $ --
See accompanying notes to financial statements.
5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three Months Ended March 31, 1996
(in thousands)
(Unaudited)
Common Stock Capital in Total
---------------- excess of Accumulated Treasury Stockholders'
Shares Amount par value Deficit Stock Equity
------ ------ --------- ----------- -------- ------------
Balance; December 31, 1995 6,917 $7 $47,206 $(19,339) $(3,960) $23,914
Interest paid with Treasury stock 5 88 93
Exercise of Options (7) 97 90
Net income (loss) 511 511
----- -- ------- -------- ------- -------
Balance; April 2, 1995 6,917 $7 $47,204 $(18,828) $(3,775) $24,608
===== == ======= ======== ======= =======
See accompanying notes to financial statements.
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SOUTHWALL TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(Unaudited)
Note 1 - Interim Period Reporting:
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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, 1995. The results of operations for the interim periods
presented are not necessarily indicative of the operating results of the
full year.
Note 2 - Inventories:
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Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market. Inventories at March 31, 1996 and December
31, 1995, consisted of the following:
March 31, 1996 December 31, 1995
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Raw materials $2,570 $2,696
Work-in-process 1,303 989
Finished goods 2,898 2,939
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Total $6,771 $6,624
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Note 3 - Commitments:
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During the first quarter of 1996, the Company and SONY Corporation signed
an Addendum #1 to Supply Agreement. Under the terms of the Amended
Agreement, among other things, SONY has agreed to increase its minimum
order of anti-reflective film beginning July 1, 1997 and extending through
December 31, 2000 and Southwall has agreed to install any necessary
additional manufacturing capacity by July 1, 1997.
The Company is currently planning and negotiating to equip a new facility
for the manufacturing of anti-reflective film. The Company estimates that
it will cost approximately $14 million to equip this facility. The Company
is also in negotiations with lending institutions to finance this
expansion.
Item 2 - Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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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 From 10-Q Report.
The Company disclaims, however, any intent or obligation to update these
forward-looking statements.
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Three Months Ended March 31, 1996 and December 31, 1995
-------------------------------------------------------
Net product sales increased to $10.5 million for the first three months of
1996, compared to $6.7 million for the similar period of 1995. Most of the
increase was due to $2.4 million of sales of our new anti-reflective film.
In addition, net product sales of energy conservation products was up by
$2.1 million and electronics products increased by approximately $.1
million, more than offsetting a $.7 million dollar decline in silver
reflector film sales and a $.2 million decrease in our discontinued
aerospace product sales.
Cost of product sales for the first quarter of 1996 was 70% of net product
sales, compared to 69% for the similar period of 1995. This percentage
increase was primarily attributable to some operational problems that
occurred during the quarter. These problems have been corrected and are
not expected to recur.
Research and development expenses, as a percent of net product sales, were
5% for the first three months of 1996, compared to 9% for the similar
period in 1995. The percentage decrease was primarily attributable to the
increase in net product sales. The absolute dollar decrease in 1996 is
attributable to lower new product development.
Selling, general and administrative expense, as a percent of net product
sales, decreased to 20% in the first three months of 1996, from 28% for the
similar period in 1995. The percentage decrease was primarily attributable
to the increase in net product sales. The absolute dollar increase from
$1.8 million in 1995 to $2.1 million in 1996, is attributable to increased
sales and marketing expenses associated with the introduction of new
products and expansion into the Pacific Rim.
Interest income, decreased in 1996 compared to 1995 due primarily to a
decrease in monies invested.
As a result of the factors discussed above, the Company reported a pre-tax
profit of $.5 million for the first three months of 1996, compared to a
pre-tax loss of ($.4 million) for the similar period in 1995.
The Company believes that it must continue to increase revenues to improve
profitability. Although the Company is 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 able to increase revenues and remain profitable.
Effective March 31, 1996, the Company terminated its lease of equipment and
facilities in Southern California to laminate glass located. The Company
will continue to market its California Series/TM/ clear solar shading
laminated glass products, which will be laminated by a sub-contractor, but
will no longer market other laminated products.
The termination of this lease and discontinuance of the marketing of
certain products, as well as the discontinuance of the aerospace product
line discussed above, is not expected to have any adverse effect on future
financial results.
Liquidity and Capital Resources
-------------------------------
At March 31, 1996, the Company's net working capital was $10.5 million
compared with $9.7 million at December 31, 1995. The Company has financed
itself through cash flow from operations and its existing cash balances.
8
From December 31, 1995, to March 31, 1996, cash and short-term investments
decreased by $.5 million, while accounts receivable increased by $1.9
million. The increase in accounts receivable is primarily attributable to
the increase in net revenues from $9.1 million in the fourth quarter of
1995 to $10.6 million in the first quarter of 1996, most of which occurred
during the later portion of the quarter.
Additions to property and equipment were approximately $.6 million during
the first quarter of 1996. The Company anticipates total capital
expenditures of approximately $2.5 million during 1996 for general
replacements and discretionary improvements of current facilities. The
Company also anticipates making commitments for an amount yet to be
determined, but believed to be approximately $14 million to equip a new
facility to be dedicated to the production of anti-reflective product and
to fulfill the supply requirements of a supply agreement.
At March 31, 1996, the Company had $3.1 million of cash and short-term
investments and a $6 million revolving line of credit, which is subject to
certain financial covenants, and which expires in February 1997, but may be
extended for additional one year terms with the bank's approval. As of
March 31, 1996, there were no borrowings under this line of credit.
Existing working capital and cash generated from operations are expected to
be adequate to satisfy the Company's capital and operating requirements of
existing facilities at least through 1996.
The Company is seeking financing for the planned new facility; however,
there is no assurance that the Company will be successful.
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PART II OTHER INFORMATION
Item 1 Legal Proceedings and Other Matters
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 in federal court alleges certain
contractual violations by the Company and seeks relief in an aggregate
amount in excess of $35 million. The Company believes that this lawsuit is
without merit and intends to defend against it vigorously.
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 March 31, 1996.
Item 5 Other Information
Not applicable
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
1) Addendum #1 to Supply Agreement, between Southwall
Technologies Inc. and Sony Corporation, entered into as of
April 1, 1996.
2) Report of First Amendment to Loan and Security Agreement,
dated March 22, 1996
(b) Reports of Form 8-K - None
10
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: May 9, 1996
By:/s/Martin M. Schwartz
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Martin M. Schwartz
President and
Chief Executive Officer
By:/s/Alfred V. Larrenaga
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Alfred V. Larrenaga
Sr. Vice President and
Chief Financial Officer
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