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 June 29, 1997
/_/ 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
--------------
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 June 29, 1997 there were 7,366,596 shares of the Registrant's Common Stock
outstanding.
This report, including all attachments, contains 13 pages.
1
SOUTHWALL TECHNOLOGIES INC.
INDEX
Page Number
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PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheet - June 29, 1997
and December 31, 1996.......................................... 3
Consolidated Statement of Operations -
three month and six month periods ended
June 29, 1997 and June 30, 1996................................ 4
Consolidated Statement of Cash Flows -
six months ended June 29, 1997
and June 30, 1996 ............................................. 5
Consolidated Statement of Stockholders' Equity -
six months ended June 29, 1997................................. 6
Notes to Consolidated Financial Statements..................... 7
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of Operations .............. 9
PART II OTHER INFORMATION
Item 1 Legal Proceedings.............................................. 13
Item 2 Changes in Securities.......................................... 13
Item 3 Defaults Upon Senior Securities................................ 13
Item 4 Submission of Matters to a Vote of Stockholders................ 13
Item 5 Other Information.............................................. 13
Item 6 Exhibits and Reports on Form 8-K............................... 13
Signatures .................................................... 14
2
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
June 29, 1997 December 31, 1996
------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 10,057 $ 7,419
Short-term investments 7 7
Accounts receivable, net of allowance
for doubtful accounts of $819 and $682 9,706 7,097
Inventories 9,364 8,406
Other current assets 960 828
-------- --------
Total current assets 30,094 23,757
Property and equipment, net 21,954 17,223
Other assets 1,488 1,529
-------- --------
Total assets $ 53,536 $ 42,509
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,458 $ 2,635
Accrued compensation 1,617 2,141
Other accrued liabilities 1,537 1,954
Current portion of long-term debt 1,191 1,181
-------- --------
Total current liabilities 7,803 7,911
Long-term debt 10,986 6,591
Deferred income taxes 410 410
-------- --------
Total liabilities 19,199 14,912
-------- --------
Commitments
Stockholders' equity:
Common stock, $.001 par value,
20,000 shares authorized:
Issued and outstanding: 7,636 and 6,917 8 7
Capital in excess of par value 51,767 46,673
Notes receivable (436) (596)
Accumulated deficit (15,544) (16,912)
Less treasury stock of 330 and 390 (1,458) (1,575)
-------- --------
Total stockholders' equity 34,337 27,597
-------- --------
Total liabilities and
stockholders' equity $ 53,536 $ 42,509
======== ========
See accompanying notes to consolidated financial statements.
3
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
---- ---- ---- ----
Net revenues $ 11,684 $ 10,990 $ 22,539 $ 21,627
-------- -------- -------- --------
Costs and expenses:
Cost of sales 7,609 7,548 14,589 14,957
Tempe start up costs 370 -- 548 --
Research & development 727 575 1,434 1,151
Selling, general and
administrative 2,384 2,107 4,545 4,207
-------- -------- -------- --------
Total costs and expenses 11,090 10,230 21,116 20,315
-------- -------- -------- --------
Income from operations 594 760 1,423 1,312
Interest income (expense) net 48 (10) 15 (32)
-------- -------- -------- --------
Income before income taxes 642 750 1,438 1,280
Provision for income taxes 40 46 70 65
-------- -------- -------- --------
Net income $ 602 $ 704 $ 1,368 $ 1,215
======== ======== ======== ========
Net income per share $ 0.08 $ .10 $ .18 $ .18
======== ======== ======== ========
Weighted average shares of common
stock and common stock equivalents 7,766 7,107 7,485 6,934
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
4
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended
----------------
June 29, 1997 June 30, 1996
------------- -------------
Cash flows from operating activities:
Net income $ 1,368 $ 1,215
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 1,256 1,144
Decrease (increase) in accounts receivable (2,609) (2,221)
Decrease (increase) in inventories (958) (130)
Decrease (increase) in other current assets (132) 445
(Decrease) increase in accounts payable
and accrued liabilities (25) 654
-------- --------
Cash provided by (used in) operating
activities (1,100) 1,107
-------- --------
Cash flows from investing activities:
Decrease (increase) in short-term investments -- 1,127
Expenditures for property and equipment
and other assets (5,946) (1,482)
-------- --------
Net cash (used in) provided by investing
activities (5,946) (355)
-------- --------
Cash flows from financing activities:
Increase in (reduction of) long-term debt 4,405 (71)
Collection of stock option loans 160 --
Sale of common stock, net 4,931 --
Issuance of treasury stock, net 188 672
-------- --------
Net cash (used in) provided by financing activities 9,684 601
-------- --------
Net increase (decrease) in cash and cash
equivalents 2,638 1,353
Cash and cash equivalents, beginning of year 7,419 1,434
-------- --------
Cash and cash equivalents, end of period $ 10,057 $ 2,787
======== ========
Supplemental schedule of non-cash investing
and financing activities:
Treasury stock used for payment of interest $ 93 $ 93
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six Months Ended June 29, 1997
(in thousands)
(Unaudited)
Common Stock Capital in Total
------------ excess of Notes Accumulated Treasury Stockholders'
Shares Amount par value Receivable Deficit Stock Equity
------ ------ --------- ---------- ------- ----- ------
Balance; December 31, 1996 6,917 $7 $46,673 $(596) $(16,912) $(1,575) $27,597
Interest paid with stock 31 62 93
Exercise of options 52 124 1 125
Stock option loans 160 160
Sale of stock, net 667 1 4,930 4,931
Sales to employees under 9 54 63
Stock Purchase Plan
Net income 1,368 1,368
----- -- ------- ------ --------- -------- -------
Balance; June 29, 1997 7,636 $8 $51,767 $(436) $(15,544) $(1,458) $34,337
===== == ======= ====== ========= ======== =======
<FN>
See accompanying notes to consolidated financial statements.
</FN>
6
SOUTHWALL TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(Unaudited)
Note 1 - Interim Period Reporting:
While the information presented in the accompanying consolidated
financial statements is unaudited, it includes all adjustments
(consisting only of normal recurring adjustments) which, in the opinion
of management, are necessary to present fairly the Company's financial
position and results of operations, and changes in financial position
as of the dates and for the periods indicated.
Certain information and footnote disclosures normally contained in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these consolidated financial statements be read in conjunction
with the financial statements contained in the Company's Form 10-K for
the year ended December 31, 1996. The results of operations for the
interim periods presented are not necessarily indicative of the
operating results of the full year.
Note 2 - Inventories:
Inventories are stated at the lower of cost (determined by the
first-in, first-out method) or market. Inventories at June 29, 1997 and
December 31, 1996, consisted of the following:
June 29, 1997 December 31, 1996
------------- -----------------
Raw materials $3,862 $2,869
Work-in-process 2,406 1,848
Finished goods 3,096 3,689
------ ------
Total $9,364 $8,406
====== ======
Note 3 - Commitments:
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 to supply the
minimum quantities required by this agreement.
The Company began occupying a new leased facility located in Tempe,
Arizona, on June 27, 1997, and is currently installing the equipment
required for the manufacturing of anti-reflective film. The Company
estimates that it will cost approximately $14.5 million to equip this
facility.
The Company has also secured financing from a combination of borrowing
from lending institutions and an equity sale to a major investor to
finance this expansion and anticipated related working capital
requirements. On December 16, 1996, the Company borrowed $5 million
from an institutional lender. On April 9, 1997, the Company signed an
agreement with Teijin Limited of Japan
7
(Teijin), a major raw material supplier of the Company, which included
arrangements for additional financing for the new manufacturing
facility and for related potential working capital growth. Teijin
purchased 667,000 shares of the Company's common stock at a price of
$7.50 per share, and guaranteed a loan through Sanwa Bank for an
additional $10 million. Teijin also received warrants to purchase
158,000 shares of common stock at a price of $9.00 per share at any
time within three years of the date of the agreement. The stock
purchase transaction of approximately $5 million was completed on April
28, 1997. In addition, a loan agreement with Sanwa Bank was signed on
May 2, 1997, and the Company received the first $5 million of funding
on May 6, 1997. The remaining $5 million of loan funding is scheduled
for November 6, 1997. The loan is for a period of seven and one half
(7.5) years, with a four (4) year interest only grace period, payable
semi annually at an interest rate of BBA Libor, fixed semi annually,
plus seven sixteenths percent. In addition, a loan guarantee fee of
nine sixteenths percent (.5625%) per annum is payable to Teijin on the
same payment schedule as the loan interest payments.
8
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Except for the historical information contained herein, the matters
discussed in this Form 10-Q Report are forward-looking statements that
involve risks and uncertainties, including those discussed below and in
the Company's Annual Report on Form 10-K. Actual results may differ
materially from those projected. These forward-looking statements
represent the Company's judgment as of the date of the filing of this
From 10-Q Report. The Company disclaims, however, any intent or
obligation to update these forward-looking statements.
General
The Company has experienced significant fluctuations in quarterly
results of operations. Revenues have varied from quarter to quarter due
to the seasonal buying patterns for the Company's Heat Mirror(TM)
products, which typically have been strongest in the second and third
quarters. Sales of the Company's energy conservation products are
significantly influenced by the residential and commercial construction
industries, and reduction in construction has generally resulted in a
reduction in the sales of the Company's Heat Mirror products. In
addition, operating results have historically varied from quarter to
quarter as a function of the utilization of the Company's production
machines. Manufacturing inefficiencies have resulted from the
development and introduction of new products and the changing mix of
products manufactured. Primarily as a result of these factors and in
view of the Company's strategy of developing additional applications
for its thin-film technology, and its ongoing practice of upgrading its
manufacturing processes, the Company may continue to experience
quarterly fluctuations in its results of operations.
The Company believes that it must continue to increase revenues to
remain profitable. Although the Company is in the process of expanding
it's capacity and is seeking to expand existing applications, to
develop new applications and to continue to expand international
marketing and sales efforts, there can be no assurance that the Company
will be able to continue to increase revenues. Additionally, there is
significant risk inherent in the expansion project currently in process
and there can be no assurances that the Company will be successful in
completing this project when scheduled or that start-up costs and
initial production will be completed in accordance with the Company's
current plans.
Six Months Ended June 29, 1997 and June 30, 1996
Net revenue increased to $22.5 million for the first six months of
1997, compared to $21.6 million for the similar period of 1996. The
increase was due primarily to a $1.5 million increase in sales of
anti-reflective film compared to the similar period last year. Net
sales of energy conservation products decreased by $.6 million compared
to the same period last year, primarily due to discontinued products
which were sold during the first quarter of 1996.
Cost of sales, including Tempe start up costs, for the first half of
1997 was 67% of net revenue, compared to 69% for the similar period of
1996. Cost for 1997 includes approximately $.5 million or 2% of net
revenues for start up costs of a new manufacturing facility in Tempe,
Arizona. The percentage decrease was primarily attributable to
production efficiency improvements which have resulted in increased
throughputs and improved yields from major production equipment on most
products. Most of these improvements have taken place cumulatively over
the nine month period beginning in October 1996
9
through June 30, 1997. There were also some operational problems that
occurred during the first quarter of 1996, and higher cost of certain
metals used in the coating process for most of the Company's products
during the first half of 1996.
Research and development expenses, as a percent of net revenue, were 6%
for the first six months of 1997, compared to 5% for the similar period
in 1996. The absolute dollars increased to $1.4 million in 1997 from
$1.2 million in 1996. The increase was primarily attributable to higher
new product development, primarily in film for laminated glass
products, including film for the automotive and California Series
commercial and residential markets.
Selling, general and administrative expense, as a percent of net
revenue, increased to 20% in the first six months of 1997, from 19% for
the similar period in 1996. The absolute dollars increased to $4.5
million in 1997 from $4.2 million in 1996. The increase was primarily
attributable to increased headcount to broaden selling coverage and to
handle increased order processing requirements, accompanied by
increased advertising and promotions expense.
Net interest income increased in 1997 compared to 1996 due to an
increased amount of money invested and to capitalization of interest
expense related to the construction in progress of the new
manufacturing facility in Tempe.
As a result of the factors discussed above, the Company reported
pre-tax income of $1.4 million for the first six months of 1997,
compared to pre-tax income of $1.3 million for the similar period in
1996.
Three Months Ended June 29, 1997 and June 30, 1996
Net product sales increased to $11.7 million for the second quarter of
1997, compared to $11.0 million for the similar period of 1996. The
increase was due primarily to a $.5 million increase in sales of
anti-reflective film and small increases in several other electronics
products totaling $.2 million. Sales of energy conservation products
was essentially flat with the same period last year.
Cost of sales for the second quarter of 1997 was 68% of net revenue,
compared to 69% for the similar period of 1996. Cost for 1997 includes
approximately $.4 million or 3% of net revenues for start up costs of a
new manufacturing facility in Tempe, Arizona. Start up costs are
expected to increase in the third quarter 1997, and initial production
inefficiencies are also anticipated through the end of the year. The
percentage decrease in cost of sales from 1996, excluding start up
costs, was primarily attributable to production efficiency improvements
which have resulted in increased throughputs and higher yields from
major production equipment on most products. Most of these improvements
have taken place cumulatively over the nine month period beginning in
October 1996 through June 30, 1997. During the second quarter 1997, the
Company absorbed some higher costs from inefficiencies and waste
resulting from the scale up for production of new variations of its
Heat Mirror XIR(TM) product being sold into the automotive window films
market, which partially offset the improvements mentioned above. These
scale up inefficiencies are anticipated to continue to some extent at
least into the third and fourth quarters of 1997.
Research and development expenses, as a percent of net revenue, were 6%
for the second quarter of 1997, compared to 5% for the similar period
in 1996. The absolute dollars increased to $.7 million in 1997 from $.6
million in 1996. The increased expense was primarily attributable to
higher new product
10
development, primarily in film for laminated glass products, including
film for the automotive and California Series commercial and
residential markets.
Selling, general and administrative expense, as a percent of net
revenue, increased to 20% in the second quarter of 1997, from 19% for
the similar period in 1996. The absolute dollar increase from $2.1
million in 1996 to $2.4 million in 1997, is primarily attributable to
increased headcount to broaden selling coverage and to handle increased
order processing requirements, accompanied by increased advertising and
promotions expense.
Net interest income increased in 1997 compared to 1996 due to an
increased amount of money invested and to capitalization of interest
expense related to the construction in progress of the new
manufacturing facility.
As a result of the factors discussed above, the Company reported
pre-tax income of $.6 million for the second quarter of 1997, compared
to pre-tax income of $.8 million for the similar period in 1996.
Liquidity and Capital Resources
At June 29, 1997, the Company's net working capital was $22.3 million
compared with $15.8 million at December 31, 1996. On December 16, 1996,
the Company borrowed $5 million from an institutional lender for
partial financing of the new manufacturing facility in Tempe, Arizona.
On April 9, 1997, the Company signed an agreement with Teijin Limited
of Japan (Teijin), a major raw material supplier of the Company, which
included arrangements for additional financing for the new
manufacturing facility and for related potential working capital
growth. Teijin purchased 667,000 shares of the Company's common stock
at a price of $7.50 per share, and guaranteed a loan through Sanwa Bank
for an additional $10 million. Teijin also received warrants to
purchase 158,000 shares of common stock at a price of $9.00 per share
at any time within three years of the date of the agreement. The stock
purchase transaction of approximately $5 million was completed on April
28, 1997. In addition, a loan agreement with Sanwa Bank was signed on
May 2, 1997, and the Company received the first $5 million of funding
on May 6, 1997. The remaining $5 million of loan funding is scheduled
for November 6, 1997. The new manufacturing facility is currently in
process and is on schedule for startup in late September or early
October 1997, and will be dedicated initially to the production of
anti-reflective film product to fulfill the supply requirements of the
supply agreement with Sony. Prior to the borrowing required to finance
the new facility, the Company had financed itself through cash flow
from operations and its existing cash balances.
From December 31, 1996, to June 29, 1997, cash and short-term
investments increased by $2.6 million. Major increases were derived
primarily from financing activities, as stated above, totaling $9.7
million, net of debt repayments, and net income of $1.4 million. Major
uses of cash were capital expenditures of $5.9 million and increased
accounts receivable by $2.6 million. The increase in accounts
receivable is primarily attributable to the increase in shipments
billed in June 1997 by $2.0 million compared to December 1996.
Additions to property and equipment were approximately $4.6 million
during the second quarter of 1997, including $4.1 million on capital
plant and equipment for the new manufacturing facility mentioned above.
This brings the total capital investment to date on the new
manufacturing facility to $7.5 million, and the Company currently has
additional commitments for expenditures of approximately $4 million
during 1997 on this project, which when completed is expected to cost a
total of approximately $14.5 million. The Company
11
anticipates total capital expenditures of approximately $2.5 million
during 1997 for general replacements and discretionary improvements of
current facilities.
At June 29, 1997, the Company had $10.1 million of cash and short-term
investments and a $6 million revolving line of credit, which is subject
to certain financial covenants, which at June 29, 1997 restricted the
amount available to the Company to $3.7 million. The revolving line of
credit expires June 5, 1998, but may be extended for additional one
year terms with the bank's approval. As of June 29, 1997, 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 1997.
Debt and equity financing concluded in December 1996 and during April
and May 1997, mentioned above, are expected to be adequate to satisfy
capital and operating requirements of the new manufacturing facility at
least through 1997.
12
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 June 29, 1997.
Item 5 Other Information
Not applicable
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits -
10.88 Basic Agreement dated April 9, 1997, for the
sale of 667,000 shares of the Company's stock
to Teijin Limited, a Japanese corporation,
and for mutually beneficial cooperation and
collaboration between Teijin and Southwall
Technologies Inc.
10.89 Credit Agreement dated May 6, 1997, between
Sanwa Bank, Limited and Southwall
Technologies Inc.
10.90 Reimbursement and Security Agreement dated
May 6, 1997, between Teijin Limited, a
Japanese corporation, and Southwall
Technologies Inc.
10.91 Promissory Note dated May 6, 1997 obligating
Southwall Technologies Inc. to Sanwa Bank,
Limited in the amount of $10 million.
b) Reports of Form 8-K - None
13
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: August 13, 1997
Southwall Technologies Inc.
By:/s/Martin M. Schwartz
---------------------
Martin M. Schwartz
President and
Chief Executive Officer
By:/s/L. Ray Christie
------------------
L. Ray Christie
Vice President and
Chief Financial Officer
14