form10q.htm
UNITED
STATES
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
|
|
For
the quarterly period ended September 30, 2009
or
|
|
o
|
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 incorporation or organization)
|
|
(I.R.S.
Employer Identification Number)
|
|
|
|
3788
Fabian Way, Palo Alto, California
|
|
94303
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Registrant's
telephone number, including area code: (650) 798-1200
___________________
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
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
One).
Large
accelerated filer o Accelerated
filer o Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
As of
October 30, 2009, there were 28,767,839 shares of the registrant's Common Stock
outstanding.
INDEX
|
PART
I – FINANCIAL INFORMATION
|
Page |
|
|
|
Item
1
|
|
|
|
|
3 |
|
|
4 |
|
|
5 |
|
|
6 |
Item
2
|
|
15 |
Item
3
|
|
22 |
Item
4
|
|
22 |
|
|
|
|
PART
II – OTHER INFORMATION
|
|
|
|
|
Item
1
|
|
23 |
Item
1A
|
|
23 |
Item
2
|
|
23 |
Item
3
|
|
23 |
Item
4
|
|
23 |
Item
5
|
|
23 |
Item
6
|
|
23 |
|
|
24 |
Item
1--Financial Statements:
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In
thousands, except per share data)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
12,845
|
|
|
$
|
10,768
|
|
Restricted
cash
|
|
|
-
|
|
|
|
282
|
|
Accounts
receivable, net of allowance for doubtful accounts of $117 at September
30, 2009 and $185 at December 31, 2008
|
|
|
4,799
|
|
|
|
3,709
|
|
Inventories,
net
|
|
|
4,677
|
|
|
|
5,965
|
|
Other
current assets
|
|
|
1,302
|
|
|
|
745
|
|
Total
current assets
|
|
|
23,623
|
|
|
|
21,469
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
14,233
|
|
|
|
15,012
|
|
Other
assets
|
|
|
407
|
|
|
|
804
|
|
Total
assets
|
|
$
|
38,263
|
|
|
$
|
37,285
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES,
PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of long term debt and capital lease
obligations
|
|
$
|
1,141
|
|
|
$
|
1,767
|
|
Accounts
payable
|
|
|
1,190
|
|
|
|
596
|
|
Accrued
compensation
|
|
|
958
|
|
|
|
1,372
|
|
Other
accrued liabilities
|
|
|
5,085
|
|
|
|
5,127
|
|
Total
current liabilities
|
|
|
8,374
|
|
|
|
8,862
|
|
|
|
|
|
|
|
|
|
|
Term
debt and capital lease obligations
|
|
|
3,639
|
|
|
|
4,501
|
|
Other
long term liabilities
|
|
|
84
|
|
|
|
2,514
|
|
Total
liabilities
|
|
|
12,097
|
|
|
|
15,877
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A 10% cumulative convertible preferred stock, $0.001 par value; $1.00
stated value; 5,000 shares authorized, 4,893 shares outstanding at
September 30, 2009 and December 31, 2008 (Liquidation preference: $7,132
and $6,766 at September 30, 2009 and December 31, 2008,
respectively)
|
|
|
4,810
|
|
|
|
4,810
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value per share; 50,000 shares authorized, 28,768 shares
outstanding at September 30, 2009 and 28,707 shares outstanding at
December 31, 2008
|
|
|
29
|
|
|
|
29
|
|
Capital
in excess of par value
|
|
|
78,292
|
|
|
|
78,323
|
|
Accumulated
other comprehensive income
|
|
|
4,565
|
|
|
|
4,269
|
|
Accumulated
deficit
|
|
|
(61,530
|
)
|
|
|
(66,023
|
)
|
Total
stockholders’ equity
|
|
|
21,356
|
|
|
|
16,598
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities, preferred stock and stockholders’ equity
|
|
$
|
38,263
|
|
|
$
|
37,285
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except per share data)
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$ |
8,600 |
|
|
$ |
10,632 |
|
|
$ |
23,430 |
|
|
$ |
34,887 |
|
Cost
of revenues
|
|
|
4,867 |
|
|
|
6,383 |
|
|
|
13,554 |
|
|
|
20,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
3,733 |
|
|
|
4,249 |
|
|
|
9,876 |
|
|
|
14,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
771 |
|
|
|
976 |
|
|
|
2,118 |
|
|
|
2,372 |
|
Selling,
general and administrative
|
|
|
1,960 |
|
|
|
1,852 |
|
|
|
5,810 |
|
|
|
6,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
2,731 |
|
|
|
2,828 |
|
|
|
7,928 |
|
|
|
8,542 |
|
Income
from operations
|
|
|
1,002 |
|
|
|
1,421 |
|
|
|
1,948 |
|
|
|
6,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(321
|
) |
|
|
(170
|
) |
|
|
(492
|
) |
|
|
(433 |
) |
Other
income (expense), net
|
|
|
12 |
|
|
|
(238
|
) |
|
|
3,211 |
|
|
|
(123 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes
|
|
|
693 |
|
|
|
1,013 |
|
|
|
4,667 |
|
|
|
5,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for (benefit from) income taxes
|
|
|
(17
|
) |
|
|
5 |
|
|
|
174 |
|
|
|
326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
710 |
|
|
|
1,008 |
|
|
|
4,493 |
|
|
|
5,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed
dividend on preferred stock
|
|
|
122 |
|
|
|
122 |
|
|
|
366 |
|
|
|
367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to common stockholders
|
|
$ |
588 |
|
|
$ |
886 |
|
|
$ |
4,127 |
|
|
$ |
5,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
0.14 |
|
|
$ |
0.18 |
|
Diluted
|
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
0.13 |
|
|
$ |
0.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in computing net income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
28,728 |
|
|
|
28,409 |
|
|
|
28,715 |
|
|
|
28,099 |
|
Diluted
|
|
|
34,685 |
|
|
|
34,681 |
|
|
|
34,085 |
|
|
|
34,016 |
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
Nine
months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
4,493
|
|
|
$
|
5,400
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Gain
on settlement of liability
|
|
|
(2,359
|
)
|
|
|
-
|
|
Deferred
income tax
|
|
|
(77
|
)
|
|
|
(49
|
)
|
Gain
on disposal of property, plant and equipment
|
|
|
(24
|
)
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
1,911
|
|
|
|
2,054
|
|
Stock-based
compensation
|
|
|
294
|
|
|
|
162
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(1,072
|
)
|
|
|
(840
|
)
|
Inventories,
net
|
|
|
1,336
|
|
|
|
(304
|
)
|
Other
current and non-current assets
|
|
|
(65
|
)
|
|
|
827
|
|
Accounts
payable and accrued liabilities
|
|
|
(258
|
)
|
|
|
(870
|
)
|
Net
cash provided by operating activities
|
|
|
4,179
|
|
|
|
6,380
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Decrease
in restricted cash
|
|
|
261
|
|
|
|
-
|
|
Proceeds
from sale of property, plant and equipment
|
|
|
34
|
|
|
|
-
|
|
Expenditures
for property, plant and equipment
|
|
|
(975
|
)
|
|
|
(1,047
|
)
|
Net
cash used in investing activities
|
|
|
(680
|
)
|
|
|
(1,047
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayments
of term debt and capital lease obligations
|
|
|
(1,719
|
)
|
|
|
(883
|
)
|
Proceeds
from exercise of stock options
|
|
|
42
|
|
|
|
293
|
|
Borrowings
from equipment financing
|
|
|
26
|
|
|
|
603
|
|
Investment
credit in Germany
|
|
|
221
|
|
|
|
-
|
|
Net
cash (used in) provided by financing activities
|
|
|
(1,430
|
)
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
|
8
|
|
|
|
(165
|
)
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
2,077
|
|
|
|
5,181
|
|
Cash
and cash equivalents, beginning of period
|
|
|
10,768
|
|
|
|
6,492
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
12,845
|
|
|
$
|
11,673
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar
and share amounts in thousands, except per share data)
Note
1—Basis of Presentation:
Southwall
Technologies Inc., including its wholly owned subsidiaries, Southwall Europe
GmbH and Southwall IG Holdings, Inc., are hereafter referred to as the
“Company,” “Southwall,” “We,” “Our” or “Us.”
The
accompanying interim condensed consolidated financial statements of Southwall
Technologies Inc. are unaudited and have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP)
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with GAAP have been condensed or omitted. In the opinion of management, the
unaudited condensed consolidated financial statements reflect all adjustments,
consisting only of normal recurring adjustments, considered necessary to present
fairly the financial position, results of operations and cash flows of Southwall
for all periods presented. The year-end consolidated balance sheet data was
derived from audited financial statements, but does not include all disclosures
required by GAAP. The Company suggests that these condensed consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes thereto contained in the Company's Form 10-K for the year
ended December 31, 2008 filed with the Securities and Exchange Commission on
March 26, 2009. The results of operations for the interim periods presented are
not necessarily indicative of the operating results to be expected for any
future periods.
The
preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions, based on all known facts
and circumstances that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the periods. Management makes these estimates using the best
information available at the time of the estimates. The estimates
included in preparing our financial statements include: the accrual
for product returns and warranties, allowance for doubtful accounts, quarterly
income taxes, inventory valuations (including reserves for excess and obsolete
and impaired inventories), reserves for decommissioning costs associated with
leasehold asset retirement obligations and the valuation of stock-based
compensation. Actual results could differ from those
estimates.
Note
2–Fair Value Measurements:
The
Company has estimated the fair value amounts of its financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities using available market information and valuation
methodologies considered to be appropriate and has determined that the book
value of those instruments at September 30, 2009 approximates fair
value.
Based on
borrowing rates currently available to the Company for debt with similar terms,
the carrying value of our term debt approximates fair value.
Southwall
invests its cash and cash equivalents primarily in money market
funds. We utilize the market approach to measure fair value of our
financial assets.
Cash and
cash equivalents are summarized as follows:
|
|
September 30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
|
Book
Value
|
|
Money
Market Funds, Level I
|
|
$
|
6,046
|
|
|
$
|
6,046
|
|
Certificates
of Deposit, Level I
|
|
|
3,750
|
|
|
|
3,750
|
|
Total
cash equivalents
|
|
|
9,796
|
|
|
|
9,796
|
|
Cash
|
|
|
3,049
|
|
|
|
3,049
|
|
Total
cash and cash equivalents
|
|
$
|
12,845
|
|
|
$
|
12,845
|
|
|
|
December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
|
Book
Value
|
|
Money
Market Funds, Level I
|
|
$
|
4,119
|
|
|
$
|
4,119
|
|
Certificates
of Deposit, Level I
|
|
|
4,845
|
|
|
|
4,845
|
|
Total
cash equivalents
|
|
|
8,964
|
|
|
|
8,964
|
|
Cash
|
|
|
1,804
|
|
|
|
1,804
|
|
Total
cash and cash equivalents
|
|
$
|
10,768
|
|
|
$
|
10,768
|
|
The
Company’s financial assets and liabilities are valued using market prices on
active markets (Level 1). Level 1 instrument valuations are obtained
from real-time quotes for transactions in active exchange markets involving
identical assets. As of September 30, 2009, the Company did not have
any Level 2 instrument valuations which were obtained from readily available
pricing sources for comparable instruments or any Level 3 instruments without
observable market values that would require a high level of judgment to
determine fair value.
Note
3—Inventories, Net:
Inventories
are stated at the lower of cost (determined by the average cost method) or
market. Cost includes materials, labor and manufacturing overhead.
The
Company establishes provisions for excess and obsolete inventories to reduce
such inventories to their estimated net realizable value. Such provisions are
charged to cost of revenues.
At
September 30, 2009 and December 31, 2008, inventories consisted of the
following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Raw
materials
|
|
$
|
2,313
|
|
|
$
|
3,143
|
|
Work-in-process
|
|
|
905
|
|
|
|
460
|
|
Finished
goods
|
|
|
1,459
|
|
|
|
2,362
|
|
|
|
$
|
4,677
|
|
|
$
|
5,965
|
|
Note
4--Net Income Per Common Share:
Basic net
income per common share is computed by dividing net income attributable to
common stockholders (numerator) by the weighted average number of common shares
outstanding (denominator) for the period. Diluted net income per common share
gives effect to all dilutive common shares potentially outstanding during the
period, including stock options and convertible preferred stock. The
Company excludes options from the computation of diluted weighted average shares
outstanding if the exercise price of the options is greater than the average
market price of the shares because the inclusion of these options would be
anti-dilutive to earnings per share. The Company also excludes preferred shares
convertible into common stock from the computation of diluted weighted average
shares outstanding, when the effect would be anti-dilutive.
At
September 30, 2009 and 2008, 2,411 and 2,122 outstanding options, respectively,
were excluded from the dilutive net income per common share calculation, as they
were anti-dilutive because the option prices were higher than the average market
prices during each of the nine month periods.
The
Company has accrued a deemed dividend on preferred stock of $122 for each of the
three month periods ended September 30, 2009 and 2008. The dilutive
effect of convertible securities shall be reflected in diluted net income per
share by application of the if-converted method. Under this method, if an entity
has convertible preferred stock outstanding, the preferred dividends applicable
to convertible preferred stock shall be added back to the numerator unless their
effect is anti-dilutive.
Tables
summarizing net income attributable to common stockholders, basic and diluted
net income per common share, and weighted shares outstanding are shown
below:
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
income attributable to common stockholders-basic
|
|
$
|
588
|
|
|
$
|
886
|
|
|
$
|
4,127
|
|
|
$
|
5,033
|
|
Add: Deemed
dividend on preferred stock
|
|
|
122
|
|
|
|
122
|
|
|
|
366
|
|
|
|
367
|
|
Net
income attributable to common stockholders-diluted
|
|
$
|
710
|
|
|
$
|
1,008
|
|
|
$
|
4,493
|
|
|
$
|
5,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding-basic
|
|
|
28,728
|
|
|
|
28,409
|
|
|
|
28,715
|
|
|
|
28,099
|
|
Dilutive
effect of Series A preferred shares
|
|
|
4,893
|
|
|
|
4,893
|
|
|
|
4,893
|
|
|
|
4,893
|
|
Dilutive
effect of stock options
|
|
|
1,064
|
|
|
|
1,379
|
|
|
|
477
|
|
|
|
1,024
|
|
Weighted
average common shares outstanding - diluted
|
|
|
34,685
|
|
|
|
34,681
|
|
|
|
34,085
|
|
|
|
34,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per common share
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
$
|
0.14
|
|
|
$
|
0.18
|
|
Diluted
net income per common share
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
$
|
0.13
|
|
|
$
|
0.16
|
|
Note
5 – Product Reporting:
Southwall
operates in one segment. The total net revenues for the automotive
glass, window film, architectural and electronic display product lines for the
three and nine month periods ended September 30, 2009 and 2008 were as
follows:
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Automotive
glass
|
|
$
|
4,096
|
|
|
$
|
4,399
|
|
|
$
|
10,872
|
|
|
$
|
16,680
|
|
Window
film
|
|
|
2,175
|
|
|
|
4,338
|
|
|
|
7,265
|
|
|
|
12,913
|
|
Architectural
|
|
|
2,243
|
|
|
|
1,848
|
|
|
|
5,043
|
|
|
|
4,839
|
|
Electronic
display
|
|
|
86
|
|
|
|
47
|
|
|
|
250
|
|
|
|
455
|
|
Total
net revenues
|
|
$
|
8,600
|
|
|
$
|
10,632
|
|
|
$
|
23,430
|
|
|
$
|
34,887
|
|
The
following is a summary of net revenues by geographic area (based on the location
of the Company's customers) for the three and nine month periods ended September
30, 2009 and 2008:
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
France,
Germany
|
|
$
|
3,521
|
|
|
$
|
3,907
|
|
|
$
|
10,015
|
|
|
$
|
13,520
|
|
Japan
and Pacific Rim
|
|
|
3,210
|
|
|
|
3,771
|
|
|
|
6,670
|
|
|
|
11,076
|
|
United
States
|
|
|
1,040
|
|
|
|
2,118
|
|
|
|
4,632
|
|
|
|
6,521
|
|
Rest
of the world
|
|
|
829
|
|
|
|
836
|
|
|
|
2,113
|
|
|
|
3,770
|
|
Total
net revenues
|
|
$
|
8,600
|
|
|
$
|
10,632
|
|
|
$
|
23,430
|
|
|
$
|
34,887
|
|
Note
6--Commitments and Contingencies:
Commitments
The
Company leases certain property and equipment as well as its facilities under
noncancellable operating leases. These leases expire at various dates through
2011.
In
January 2006, the Company renewed a lease agreement for its research and
development facility in Palo Alto, California, and it was renewed again in
January 2009 for an additional twelve months. Under this lease agreement, the
Company had accrued $500 for leasehold retirement obligations, which is included
in other accrued liabilities in the accompanying condensed consolidated balance
sheet. The method and timing of payments are not yet finalized, and therefore,
this estimate of our liability could differ from the actual future settlement
amount.
Term
Debt and Capital Lease Obligations
As of
September 30, 2009, the Company's term debt and capital lease obligations
consisted of the following:
Description
|
|
Rate
|
|
|
|
|
Term
Debt
Balance
at
September 30,
2009
|
|
|
Capital
Lease
Balance
at
September 30,
2009
|
|
|
Total
Debt
Balance
at
September 30,
2009
|
|
|
Due
Over
Next
12
Months
|
|
|
Balance
at
December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
German
bank loan dated May 12, 1999 (10 year)
|
|
|
6.13 |
% |
|
|
|
$ |
130 |
|
|
$ |
-- |
|
|
$ |
130 |
|
|
$ |
130 |
|
|
$ |
485 |
|
German
bank loan dated May 28, 1999 (20 year)
|
|
|
5.73 |
% |
(1)) |
|
|
|
3,649 |
|
|
|
-- |
|
|
|
3,649 |
|
|
|
365 |
|
|
|
3,524 |
|
German
bank loan dated May 28, 2000 (10 year)
|
|
|
7.15 |
% |
(2) |
|
|
|
344 |
|
|
|
-- |
|
|
|
344 |
|
|
|
344 |
|
|
|
582 |
|
Settlement
agreement dated February 20, 2004
|
|
|
(3 |
) |
|
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
1,000 |
|
Total
Term Debt
|
|
|
|
|
|
|
|
|
4,123 |
|
|
|
-- |
|
|
|
4,123 |
|
|
|
839 |
|
|
|
5,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
German
bank financed lease dated June 1, 2008
|
|
|
7.518 |
% |
(4) |
|
|
|
-- |
|
|
|
358 |
|
|
|
358 |
|
|
|
200 |
|
|
|
437 |
|
US
financing agreement dated May 20, 2008
|
|
|
19.80 |
% |
(5) |
|
|
|
-- |
|
|
|
421 |
|
|
|
421 |
|
|
|
102 |
|
|
|
318 |
|
Total
Capital Leases
|
|
|
|
|
|
|
|
|
-- |
|
|
|
779 |
|
|
|
779 |
|
|
|
302 |
|
|
|
755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
interest on capital leases
|
|
|
|
|
|
|
|
|
-- |
|
|
|
122 |
|
|
|
122 |
|
|
|
-- |
|
|
|
78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
term debt and capital lease obligations
|
|
|
|
|
|
|
|
|
4,123 |
|
|
|
657 |
|
|
|
4,780 |
|
|
|
1,141 |
|
|
|
6,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
current portion
|
|
|
|
|
|
|
|
|
839 |
|
|
|
302 |
|
|
|
1,141 |
|
|
|
-- |
|
|
|
1,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
term debt and capital lease obligations, non-current
|
|
|
|
|
|
|
|
$ |
3,284 |
|
|
$ |
355 |
|
|
$ |
3,639 |
|
|
$ |
1,141 |
|
|
$ |
4,501 |
|
(1)
Interest rate was reset on September 16, 2009 to 5.73%.
(2)
Interest rate is fixed at 7.15% until final repayment in 2010.
(3)
Interest rate was 7% for 2008.
(4)
Interest rate is fixed at 7.518% until payoff.
(5)
Implied interest rate based on a lease rate factor.
Contingencies
We are
involved in certain other legal actions arising in the ordinary course of
business. We believe, however, that none of these actions, either individually
or in the aggregate, will have a material adverse effect on our business, our
consolidated financial position, results of operations or cash
flows.
Note
7--Stock-Based Compensation:
The
Company has a stock-based compensation program that provides its Board of
Directors broad discretion in creating employee equity incentives. The Company
has granted stock options under various option plans and agreements in the past
and currently grants stock options under the 2007 Long Term Incentive Plan
(“2007 Plan”) which authorizes the granting of up to 10,000 shares of common
stock. Under the terms of the 2007 Plan, the Company can grant both incentive
stock options and nonstatutory stock options. Grants issued under the
2007 Plan vest and become exercisable at a rate of 25% on each anniversary of
the date of grant and become fully vested on the fourth anniversary of the date
of grant provided that the participant remains an employee or service provider
of the Company or a related company. Each option granted under the
plan is non-transferable and expires over terms not exceeding ten years from the
date of grant or 30 days after an option holder’s voluntary termination from the
Company. If an option holder’s employment is terminated involuntarily
for misconduct, the option will terminate immediately and may no longer be
exercised. Involuntary termination not for misconduct allows for the
option holder to exercise vested options within a period of three months after
such termination of service occurs. The 2007 Plan provides for longer
expiration periods for employees who are terminated, but who were employed with
the Company in excess of five years. Pursuant to the provisions set
forth in the 2007 Plan, the option expiration is three months to one year,
dependent upon the employee’s years of service. These provisions
apply to options that expire as the result of involuntary termination not for
misconduct. As of September 30, 2009, there were 7,639 shares of common stock
available for grant under the 2007 Plan.
The
following table sets forth the total stock-based compensation expense resulting
from stock options included in the condensed consolidated statements of
operations:
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
7
|
|
|
$
|
10
|
|
Research
and development
|
|
|
17
|
|
|
|
20
|
|
|
|
49
|
|
|
|
21
|
|
Selling,
general and administrative
|
|
|
85
|
|
|
|
62
|
|
|
|
238
|
|
|
|
131
|
|
Stock-based
compensation expense before income taxes
|
|
|
104
|
|
|
|
85
|
|
|
|
294
|
|
|
|
162
|
|
Provision
for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
stock-based compensation expense
|
|
$
|
104
|
|
|
$
|
85
|
|
|
$
|
294
|
|
|
$
|
162
|
|
There
were $42 and $293 cash proceeds from the exercises of stock options for the nine
month periods ended September 30, 2009 and 2008, respectively. The
Company presents excess tax benefits from the exercise of stock options, if any,
as financing cash flows.
The fair
value of stock-based awards was estimated using the Black-Scholes model with the
following weighted-average assumptions for stock options granted during the
three month and nine month periods ended September 30, 2009 and 2008,
respectively:
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Expected
life (in years)
|
|
|
5.0
|
|
|
|
-
|
|
|
|
5.17
|
|
|
|
5.67
|
|
Risk-free
interest rate
|
|
|
2.39
|
%
|
|
|
-
|
|
|
|
2.00
|
%
|
|
|
3.08
|
%
|
Volatility
|
|
|
106.54
|
%
|
|
|
-
|
|
|
|
107.69
|
%
|
|
|
81.0
|
%
|
Dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Per
share weighted-average fair value at grant date
|
|
$
|
0.78
|
|
|
$
|
-
|
|
|
$
|
0.51
|
|
|
$
|
0.53
|
|
The
Company’s computation of expected volatility was based on historical volatility.
The Company’s computation of expected life was based on historical exercise
patterns. The interest rate for periods within the expected life of the award is
based on the U.S. Treasury yield in effect at the time of grant.
The
Company has not in the past and does not plan to issue dividends in the
future.
For the
three and nine month periods ended September 30, 2009 and 2008, a 23.13%
forfeiture rate was used by the Company in calculating the option
expense.
Stock
option activity for the nine months ended September 30, 2009 was as
follows:
|
|
Weighted-Average
Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted-Average
Remaining Contractual Term
(in
years)
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2008
|
|
|
4,805
|
|
|
$
|
0.91
|
|
|
|
|
|
|
|
Grants
|
|
|
1,059
|
|
|
|
0.64
|
|
|
|
|
|
|
|
Exercises
|
|
|
(61
|
)
|
|
|
0.68
|
|
|
|
|
|
|
|
Forfeitures
or expirations
|
|
|
(126
|
)
|
|
|
4.91
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2009
|
|
|
5,677
|
|
|
|
0.78
|
|
|
|
6.97
|
|
|
$
|
2,604
|
|
Vested
and expected to vest at September 30, 2009
|
|
|
4,868
|
|
|
|
0.79
|
|
|
|
6.65
|
|
|
$
|
2,199
|
|
Exercisable
at September 30, 2009
|
|
|
3,066
|
|
|
|
0.85
|
|
|
|
5.56
|
|
|
$
|
1,267
|
|
The
aggregate intrinsic value in the table above represents the total pretax
intrinsic value (i.e. the difference between Southwall’s closing stock price on
the last trading day of its third quarter of 2009 and the exercise price, times
the number of shares) that would have been received by the option holders had
all option holders exercised their options on September 30,
2009. This amount changes based on the fair market value of
Southwall’s stock. Total intrinsic value of options exercised was $19
for the three month and nine month periods ended September 30, 2009. Total fair
value of options granted was $42 and $536 for the three and nine month periods
ended September 30, 2009.
As of
September 30, 2009, $532 of total unrecognized compensation cost, net of
forfeitures, related to stock options was expected to be recognized over a
weighted-average period of approximately 2.76 years.
Note
8 - Warranties:
The
Company establishes a reserve for sales returns and warranties for specifically
identified, as well as anticipated sales returns and warranties based on
historical experience. The activity in the reserve for sales returns and
warranties account during the nine month periods ended September 30, 2009 and
2008 was as follows:
|
|
Balance
at
|
|
|
|
|
|
|
|
|
Balance
at
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
Provision
|
|
|
Utilized
|
|
|
2008
|
|
Accrued
sales returns and warranty
|
|
$
|
1,102
|
|
|
$
|
1,098
|
|
|
$
|
(728
|
)
|
|
$
|
1,472
|
|
|
|
Balance
at
|
|
|
|
|
|
|
|
|
|
Balance
at
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
Provision
|
|
|
Utilized
|
|
|
2009
|
|
Accrued
sales returns and warranty
|
|
$
|
1,321
|
|
|
$
|
(215
|
)
|
|
$
|
(372
|
)
|
|
$
|
734
|
|
These
amounts are included in other accrued liabilities in the condensed consolidated
balance sheets.
Note
9 – Comprehensive Income (Loss):
The
Company has adopted the provisions of Accounting Standards Codification (“ASC”)
220, “Comprehensive Income.” ASC 220 establishes standards for
reporting and display in the financial statements of total net income and the
components of all other non-owner changes in equity, referred to as
comprehensive income. Accordingly, the Company has reported the translation gain
(loss) from the consolidation of its foreign subsidiary in comprehensive income
(loss).
The
components of comprehensive income (loss) for the three and nine month periods
ended September 30, 2009 and September 30, 2008 were as follows:
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
710
|
|
|
$
|
1,008
|
|
|
$
|
4,493
|
|
|
$
|
5,400
|
|
Foreign
currency translation adjustment
|
|
|
501
|
|
|
|
(1,246
|
)
|
|
|
296
|
|
|
|
(371
|
)
|
Comprehensive
income (loss)
|
|
$
|
1,211
|
|
|
$
|
(238
|
)
|
|
$
|
4,789
|
|
|
$
|
5,029
|
|
Note
10 - Income Tax:
The
decrease in the provision for income taxes in the nine months ended September
30, 2009 compared to the same period in 2008 is primarily related to the
utilization of foreign tax credits against alternative minimum tax (“AMT”) and
the benefit of claiming the refundable research and development credit; thus
reducing the U.S. provision. The major component of the provision for
income taxes relates to the operations of our wholly-owned German
subsidiary.
For the
nine months ended September 30, 2009, the Company’s effective tax rate was
3.7%. We use the actual effective tax rate for the nine months ended
September 30, 2009 as our best estimate for the tax rate for the year ending
December 31, 2009, as a reliable estimate for the full year cannot be made at
this time. In addition, to the extent our expected profitability
changes during the year, the effective tax rate would be revised to reflect any
changes in the projected profitability. This rate differs from the statutory
federal rate of 34% primarily due to the reversal of a portion of the Company’s
valuation allowance upon the utilization of a portion of the Company’s net
operating loss carryforward to offset income generated by the U.S. operations
through the first nine months of 2009.
Realization
of deferred tax assets is dependent upon the existence of sufficient taxable
income. The Company continues to maintain a valuation allowance
against its remaining net deferred tax assets in the United States, as
management does not believe the realization of those net deferred tax assets is
“more likely than not”. Management has made this determination based
upon a number of factors, including the reversal of existing taxable temporary
differences, historical earnings, expected future taxable income, and the
availability of tax planning strategies.
Note
11-Joint Venture
On April
8, 2008, Southwall IG Holdings, Inc., a wholly owned subsidiary of Southwall
Technologies Inc., entered into a Joint Venture Agreement with Sound Solutions
Window & Doors, LLC, creating Southwall Insulating Glass, LLC
(“SIG”). Southwall Technologies Inc. has a 50% interest in the newly
formed entity. SIG manufactures insulated glass units for the
domestic market. The joint venture is being accounted for under the
equity method of accounting. As of September 30, 2009, the results of
operations and the financial position of this joint venture were not material to
the consolidated financial statements of the Company. For the three
and nine months ended September 30, 2009, our share of its net losses of
approximately $148 and $537, respectively, is included in “other income, net” in
the accompanying condensed consolidated statements of operations. As
of September 30, 2009, Southwall IG Holdings, Inc. had invested an aggregate
amount of $920 in SIG, with a remaining book value of $162 at September 30,
2009, which is included in other assets in the accompanying condensed
consolidated balance sheet. In addition, Southwall IG Holdings, Inc.
has advanced a total of $300 to Sound Solutions during the first nine months of
2009, which is included in other current assets in the accompanying condensed
consolidated balance sheet.
Note
12 – Gain on Settlement of Contingency
As of
December 31, 2002, we were in default under a master sale-leaseback agreement
with respect to two of our production machines. We had withheld lease payments
in connection with a dispute with the leasing company, Matrix Funding
Corporation. In February 2004, we reached a settlement agreement for
approximately $2,000 to be repaid over six years at a stepped rate of interest,
and we returned the equipment in question. The agreement included a
confession of judgment, whereby the Company acknowledged that it would owe
damages of $5,900 in the event of payment defaults under the settlement
agreement. At December 31, 2004, the carrying value of the liability was
$4,354. In its assessment of the restructured debt, management
factored in the $5,900 confession of judgment as a contingent payment, thereby
eliminating any potential gain on restructuring at the time. The carrying value
of the debt remained on the consolidated balance sheet and the liability was to
be reduced as payments were made, with a potential gain to be recorded at the
date of the final payment and the expiry of the confession of
judgment. At December 31, 2008, the carrying value of the liability
was $3,354. On January 21, 2009, we paid $995, which constituted full
and final payment of principal and interest on the note, pursuant to the terms
of a settlement agreement resulting from a master sale-leaseback
agreement. Upon final payment of principal and interest, a formal
release of the obligation under the 2004 settlement agreement was obtained from
Portfolio Financial Servicing Company, the successor to Matrix Funding
Corporation, on January 21, 2009 and a gain of $2,359 was recognized in the
first quarter of 2009 in other income in the accompanying condensed consolidated
statements of operations.
Note
13 – Credit Agreement with Wells Fargo Bank
In June
2009, we entered into a new Credit Agreement with Wells Fargo Bank
(“Bank”). The Credit Agreement provides for a $3,000 revolving line
of credit. Advances under the line exceeding $1,500 will be limited
to 80% of eligible accounts receivable. The Company will not be
eligible for additional borrowings if the Company’s consolidated cash balance
falls below $3,000. Amounts borrowed under the facility bear interest
at either Prime plus 0.75% or LIBOR plus 3.5%, determined at the discretion of
the Company, and is annualized on the average daily financed amount
outstanding. All borrowings under the facilities are collateralized
by our assets in the United States and are subject to certain covenants
including minimum quarterly net income and minimum liquid asset
requirements.
Generally,
if any event of default occurs, the Bank may declare all outstanding
indebtedness under the Credit Agreement to be due and payable. The
maturity date of the facility is June 2010. The foregoing does not
purport to be a complete statement of the parties’ rights and obligations under
the Credit Agreement, and the transactions contemplated thereby or a complete
explanation of material terms thereof. As of September 30, 2009, we
had no balance outstanding on our line of credit.
Note
14 – Subsequent events
The
Company has evaluated the occurrence of subsequent events from the balance sheet
date through November 11, 2009, the day prior to issuing our unaudited condensed
consolidated financial statements.
Subsequent
to period end, on October 28, 2009, the Company entered in to a settlement
agreement related to various patent matters with Pilkington Automotive
Deutschland GmbH, Witten (“Pilkington”). Under the terms of this
agreement, the Company agreed to pay Pilkington an aggregate amount of $583 (400
Euros) as a full and final settlement of all claims.
Note
15 – Recent Accounting Pronouncements:
In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement No.
168, “The FASB Accounting Codification and Hierarchy of Generally Accepted
Accounting Principles - a replacement of FASB No. 162” or ASC 105. The
FASB Accounting Standards Codification (“Codification”) does not
change U. S. GAAP, but combines all authoritative standards such as those issued
by the FASB, AICPA, and EITF, into a comprehensive, topically organized online
database. The Codification was released on July 1, 2009 and is now
the single source of authoritative U. S. GAAP applicable for all nongovernmental
entities, except for rules and interpretive releases of the SEC. The
Codification is effective for all interim periods and year ends subsequent to
September 15, 2009. The Company adopted this statement on September 30,
2009. The adoption of this statement affected the Company’s financial
statement disclosure references, since all references to authoritative
accounting literature are now references under the Codification, but it did not
have an impact on the Company’s financial condition and results of
operations.
In
October 2009, the FASB issued Accounting Standards Update No. 2009-13, “Revenue
Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements, a consensus
of the FASB Emerging Issue Task Force” (“ASU 2009-13”). ASU 2009-13 requires
companies to allocate revenue in multiple-element arrangements based on an
element’s estimated selling price if vendor-specific or other third party
evidence of value is not available. This statement is effective for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Early adoption is permitted. The Company is
currently evaluating the timing and impact of adopting this
statement.
In August
2009, the FASB issued Accounting Standards Update No. 2009-04 “Accounting
for Redeemable Equity Instruments - Amendment to Section 480-10-S99” (“ASU
2009-04”). This Accounting Standards Update represents an update to
Section 480-10-S99, "Distinguishing Liabilities from Equity," per EITF Topic
D-98, "Classification and Measurement of Redeemable Securities." ASU
2009-04 is effective for the first reporting period beginning after August
2009. The Company will adopt ASUC 2009-04 effective for the quarter
beginning October 1, 2009. The adoption of ASU 2009-04 is not expected to have a
material impact on the Company’s financial condition and results of
operations.
In August
2009, the FASB issued Accounting Standards Update No. 2009-05, “Fair Value
Measurements and Disclosures – Measuring Liabilities at Fair Value (“ASU
2009-05”). The update provides clarification for circumstances in
which a quoted price in an active market for an identical liability is not
available. ASU 2009-05 is effective for the first reporting period beginning
after August 2009. The Company will adopt ASU 2009-05 effective for
the quarter beginning October 1, 2009. The adoption of ASU 2009-05 is not
expected to have a material impact on the Company’s financial condition and
results of operations.
In June
2009, the FASB issued Statement of Financial Accounting Standards No. 167,
“Amendments to FASB Interpretation No. 46(R)," or ASC 810. This
section of ASC 810, among other things, requires a qualitative rather than a
quantitative analysis to determine the primary beneficiary of a variable
interest entity ("VIE"); requires continuous assessments of whether an
enterprise is the primary beneficiary of a VIE; enhances disclosures about an
enterprise's involvement with a VIE; and amends certain guidance for determining
whether an entity is a VIE. The amendments to ASC 810 will be effective for our
Company on January 1, 2010, and will be applied prospectively. Under ASC 810, a
VIE must be consolidated if the enterprise has both (a) the power to direct the
activities of the VIE that most significantly impact the entity's economic
performance, and (b) the obligation to absorb losses or the right to receive
benefits from the VIE that could potentially be significant to the VIE. The
Company is evaluating the impact that the adoption of this section of ASC 810
will have on our consolidated financial statements. Based on our
initial assessment, we anticipate that certain entities not currently
consolidated under the provisions of ASC 810, "Consolidation of Variable
Interest Entities," may be consolidated subsequent to the adoption of the new
provisions under ASC 810.
In May
2009, the FASB issued Statement No. 165, “Subsequent Events,” or ASC 855. ASC
855 is intended to establish general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. It requires the disclosure
of the date through which an entity has evaluated subsequent events and the
basis for selecting that date, that is, whether that date represents the date
the financial statements were issued or were available to be issued. ASC 855 is
effective for interim or annual financial periods ending after June 15,
2009. The Company adopted this statement on June 30, 2009. The
adoption of ASC 855 did not have a material impact on the Company’s financial
condition and results of operations
In April
2009, the FASB issued FASB Staff Position (“FSP”) FAS No. 107-1 and APB 28-1,
“Interim Disclosures about Fair Value of Financial Instruments” or ASC 825. Thi
section of ASC 825 requires disclosures about fair value of financial
instruments for interim reporting periods as well as in annual financial
statements. Under ASC 825, a publicly traded company shall include disclosures
about the fair value of its financial instruments whenever it issues summarized
financial information for interim reporting periods. In addition, an entity
shall disclose in the body or in the accompanying notes of its summarized
financial information for interim reporting periods and in its financial
statements for annual reporting periods the fair value of all financial
instruments for which it is practicable to estimate that value, whether
recognized or not recognized in the statement of financial position. ASC 825 was
effective for us in the quarter ended June 30, 2009. The adoption of ASC 825 did
not have a material impact on our consolidated financial position and results of
operations.
In April
2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability have Significantly Decreased
and Identifying Transactions that Are Not Orderly,” or ASC 820. This section of
ASC 820 provides guidance on (1) estimating the fair value of an asset or
liability (financial and nonfinancial) when the volume and level of activity for
the asset or liability have significantly decreased and (2) identifying
transactions that are not orderly. ASC 820 does not change the objective of fair
value measurements when market activity declines (i.e., an exit price notion in
an orderly transaction between market participants as of the measurement date
under current market conditions). ASC 820 must be applied prospectively and
retrospective application is not permitted. This section of ASC 820 is effective
for interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. The adoption of this section
of ASC 820 did not have a material impact on our consolidated financial position
and result of operations.
In April
2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments,” or ASC 320. This
section of ASC 320 provides a new model for other-than-temporary impairments
(OTTI) for debt securities only. ASC 320 shifts the focus for debt
securities from (1) an entity’s intent to hold until recovery to (2) its intent
to sell, and provides for a cumulative-effect adjustment to reclassify the
noncredit portion of previously recognized OTTI losses from retained earnings to
accumulated other comprehensive income. This section of ASC 320 is effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. The adoption of this section
of ASC 320 did not have a material impact on our consolidated financial position
and result of operations.
In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” or ASC 820, and
was effective upon issuance. This section of ASC 820 clarifies the
application of fair value measurements in a market that is not active. We held
no financial assets classified as Level 3 (non-active level) as of September 30,
2009, or at any point in 2009 to date, and therefore, this section of ASC 820
did not have a material impact on our consolidated financial
statements.
In June
2008, the Financial Accounting Standards Board (“FASB”)
ratified Emerging Issues Task Force (“EITF”) Issue No. 07-5,
"Determining Whether an Instrument (or an Embedded Feature) is Indexed to an
Entity's Own Stock," or ASC 815. This section of ASC 815 establishes
an overall framework for determining whether an instrument is indexed to an
entity's own stock. This issue is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years. The adoption of ASC 815 effective January 1, 2009 did not have a
material impact on our consolidated financial position and results of
operations.
In June
2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities” or ASC 260.
This section of ASC 260 addresses whether instruments granted in share-based
payment transactions are participating securities prior to vesting and,
therefore, need to be included in the earnings allocation in computing earnings
per share under the two-class method described in ASC 260, “Earnings Per
Share”. This section of ASC 260 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those years. All prior-period earnings per share data presented shall be
adjusted retrospectively. The adoption of this section of ASC 260, effective
January 1, 2009, did not have a material impact on our consolidated financial
statements.
In April
2008, the FASB issued FSP FAS 142-3, “Goodwill and Other Intangible Assets,” or
ASC 350. This section of ASC 350 is intended to improve the consistency between
the useful life of a recognized intangible asset and the period of expected cash
flows used to measure the fair value of the asset under other accounting
principles generally accepted in the United States of America. This
section of ASC 350 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. Early adoption is prohibited. The guidance for determining the useful
life of a recognized intangible asset shall be applied prospectively to
intangible assets acquired after the effective date. Certain disclosure
requirements shall be applied prospectively to all intangible assets recognized
as of, and subsequent to, the effective date. The adoption of this section of
ASC350 effective January 1, 2009 did not have a material impact on our
consolidated financial statements.
In
February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement
No. 157,” or ASC 820. The provisions of ASC 820 with respect to nonfinancial
assets and nonfinancial liabilities that are measured at fair value on a
nonrecurring basis subsequent to initial recognition were deferred until fiscal
years beginning after November 15, 2008. Items in this classification include
goodwill, asset retirement obligations, rationalization accruals, intangible
assets with indefinite lives, guarantees and certain other items. The adoption
of this section of ASC 820 did not have a material impact on our consolidated
financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations,” or ASC 805. ASC 805 retains that the acquisition method of
accounting, referred to as the purchase method, be used for all business
combinations and for an acquirer to be identified for each business combination.
ASC 805 requires an acquirer to recognize the assets acquired, the liabilities
assumed, and any non-controlling interest in the acquiree at the acquisition
date, measured at their fair values as of that date, with limited exceptions as
specified in the ASC 805. It replaces the cost-allocation process, which
required the cost of an acquisition to be allocated to the individual assets
acquired and liabilities assumed based on their estimated fair values. ASC 805
retains the guidance for identifying and recognizing intangible assets
separately from goodwill. ASC 805 will now require acquisition costs
to be expensed as incurred, restructuring costs associated with a business
combination must generally be expensed prior to the acquisition date and changes
in deferred tax asset valuation allowances and income tax uncertainties after
the acquisition date generally will affect income tax expense. ASC
805 applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. We expect ASC 805 will have an impact
on our accounting for future business combinations, but the effect is dependent
upon the acquisitions that are made, if any, in the future.
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements and notes thereto appearing elsewhere in this
report. This discussion and analysis contains forward-looking statements that
involve risks and uncertainties, including those discussed below under
"Forward-Looking Statements" and in "Risk Factors”, as set forth in Part I, Item
1A, of our Annual Report on Form 10-K for the year ended December 31, 2008 and
in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2009. You should not place undue reliance on these forward-looking
statements. Actual results may differ materially from those anticipated in the
forward-looking statements. These forward-looking statements represent our
judgment as of the date of the filing of this Form 10-Q.
Forward
Looking Statements
Cautionary
Statement For the Purpose of the “Safe Harbor” Provisions of the Private
Securities Litigation Reform Act of 1995
As used
in this report, the terms "we," "us," "our," "Southwall" and the "Company" mean
Southwall Technologies Inc. and its subsidiaries, unless the context indicates
another meaning. This report contains forward-looking statements as that term is
defined in the Private Securities Litigation Reform Act of 1995 that are subject
to a number of risks and uncertainties. All statements other than statements of
historical facts are forward-looking statements. These statements are identified
by terminology such as "may," "will," "could," "should," "expects," "plans,"
"intends," "seeks," "anticipates," "believes," "estimates," "potential," or
"continue," or the negative of such terms or other comparable terminology, or
similar terminology, although not all forward-looking statements contain these
identifying words. Forward-looking statements are only predictions and include,
without limitation, statements relating to:
|
·
|
our
strategy, expected future operations and financial
plans;
|
|
·
|
our
revenue expectations and potential financial
results;
|
|
·
|
impact
of current economic conditions on our
business;
|
|
·
|
the
continued trading of our common stock on the Over-the-Counter Bulletin
Board Market;
|
|
·
|
future
applications of thin film coating
technologies;
|
|
·
|
our
development of new technologies and
products;
|
|
·
|
the
properties and functionality of our
products;
|
|
·
|
our
projected need for additional borrowings and future
liquidity;
|
|
·
|
our
ability to implement and maintain effective internal controls and
procedures;
|
|
·
|
the
size of and the markets into which we sell or intend to sell our
products;
|
|
·
|
our
intentions to pursue strategic alliances, acquisitions and business
transactions;
|
|
·
|
the
possibility of patent and other intellectual property
infringement;
|
|
·
|
our
opinions regarding energy consumption and the loss of energy through
inefficient glass;
|
|
·
|
pending
and threatened litigation and its
outcome;
|
|
·
|
our
competition and our ability to compete in the markets we serve;
and
|
|
·
|
our
projected capital expenditures.
|
You
should not place undue reliance on our forward-looking
statements. Actual events or results may differ
materially. In evaluating these statements, you should specifically
consider various factors, including the risks outlined under "Risk Factors"
below. These and other factors may cause our actual results to differ materially
from any forward-looking statement. Although we believe the
expectations reflected in our forward-looking statements are reasonable as of
the date they are being made, we cannot guarantee our future results, levels of
activity, performance or achievements. Moreover, we do not assume any
responsibility for the future accuracy and completeness of these forward-looking
statements.
XIR®,
XUV®, Triangle Design®, Superglass®, Heat Mirror®, California Series®, Solis®,
ETCH-A-FLEX®, and Southwall® are registered trademarks of Southwall. V-KOOL® is
a registered trademark of V-Kool International Holdings Pte. Ltd., a distributor
of the Company’s products. All other trade names and trademarks
referred to in this Quarterly Report on Form 10-Q are the property of their
respective owners.
Overview
As a
manufacturer of energy saving films for the domestic and international
automotive and architectural markets as well as a glass products manufacturer
for the architectural markets, the Company is dependent upon car sales and new
commercial and residential real estate construction. Both the
automotive and building industries are experiencing material sales declines
resulting from the current global economic weakness. The financial
conditions of many companies in these industries are
deteriorating. These sales declines and the financial condition of
these companies could materially reduce our revenue and income for the remainder
of 2009 and beyond. In addition, the weak economic climate could
affect our suppliers which could have an adverse impact on our ability to
manufacture products and our costs of such manufacturing.
The
current global economic and financial market crisis has caused, among other
things, a general tightening in the credit markets, lower levels of liquidity,
increases in the rates of default and bankruptcy, lower consumer and business
spending, and lower consumer net worth, all of which have had and could continue
to have a negative effect on our business, results of operations, financial
condition and liquidity. Many of our customers, distributors and
suppliers have been or may be severely affected by the current economic
conditions. Current or potential customers and suppliers and subcontractors may
no longer be in business, may be unable to fund purchases or determine to reduce
purchases, all of which could lead to reduced demand for our products, reduced
gross margins, and increased customer payment delays or
defaults. Further, suppliers and subcontractors may not be able to
supply us with needed raw materials on a timely basis, may increase prices or go
out of business, which could result in our inability to meet consumer demand or
affect our gross margins. Our suppliers and subcontractors may also
impose more stringent payment terms on us. The timing and nature of
any recovery in the credit and financial markets remains uncertain, and there
can be no assurance that market conditions will improve in the near future or
that our results will not be materially and adversely affected.
Global
production of automobiles and commercial and residential real estate
construction declined significantly in 2008 and has declined further in
2009. As a manufacturer of energy saving films and glass products for
the domestic and international automotive and architectural markets, we are
dependent upon automobile sales, and new commercial and residential real estate
construction. We sell a substantial portion of our products to a
relatively small number of OEMs, and the timing and amount of our sales to these
customers ultimately depend on sales levels and shipping schedules for the OEM
products, such as automobiles and commercial and residential real estate
construction, into which our products are incorporated. Continuing
declines in the automobile and commercial and residential real estate markets
could adversely impact our sales volume, and could cause certain of our
customers and suppliers to experience liquidity problems, potentially resulting
in our write-off of amounts due from these customers and cost impacts of
changing suppliers. Additionally, a change in our suppliers or other
delays or problems suffered by our suppliers could have an adverse impact on our
ability to manufacture our products on a timely basis, if at all. If
our significant customers or suppliers fail or significantly reduce their
operations or purchases from us, our business will be negatively
impacted. As a result, our revenues, income and financial condition
have declined during the first nine months of 2009 and may continue to do so for
the remainder of 2009 and beyond.
In April
2008, the Company formed Southwall Insulating Glass, LLC, (“SIG”) a joint
venture with Chicago-based manufacturer, Sound Solutions Windows & Doors,
LLC. SIG markets, produces and sells dual-pane insulated glass units
which are primarily used in the production of completed window units for the
residential housing and commercial building industries. SIG incorporates
automated manufacturing in its production of insulated glass units to improve
cost-competitiveness and establish broader adoption of its Heat Mirror® insulating
glass. The joint venture is intended to expand the markets for the
Company’s Heat Mirror® products and increase the Company’s product
offerings. SIG was formed in response to the demand for higher energy
efficiency in residential and commercial buildings. The joint venture combines
the Company’s experience in developing advanced coated films and suspended film
technology with the insulating glass production experience of Sound Solutions
Windows & Doors, LLC. SIG is located in Chicago and began
production of Heat Mirror insulating glass units and other high performance
insulated glass units in the second half of 2008. Our investment in the joint
venture is accounted for under the equity method of accounting, with our share
of its net loss included in “other income, net” in the accompanying condensed,
consolidated financial statements.
Demand for our customers'
products. We derive significant benefits from our relationships with a
few large customers and suppliers. Our revenues and gross profit can
increase or decrease rapidly, reflecting underlying demand for the products of
one or a small number of our customers. We may also be unable to
replace a customer when a relationship ends or demand for our product declines
as a result of evolution of our customers' products.
Our three
largest customers in the automotive glass and window film market, and
architectural glass markets include: Saint Gobain Sekurit, Pilkington PLC and
Globamatrix Holdings Pte. Ltd., or Globamatrix, which collectively accounted for
approximately 60% and 66% of our total revenues during the first nine months of
2009 and 2008, respectively.
Under our
agreement with Globamatrix, as amended, Globamatrix agreed to a 2004 minimum
purchase commitment of $9,000 of product. For each
year after 2004 through the term of the contract, Globamatrix contracted to
purchase an amount of product equal to 110% of the amount of product it was
required to purchase in the prior year. It is unlikely that
Globamatrix will fulfill its 2009 contractual obligation.
Sales returns and allowances.
Our gross margins and profitability have been adversely affected from time to
time by product quality claims. For the nine months ended September 30, 2009,
our sales returns provision increased net revenue by approximately 0.9% due to a
decline in the amount of claims received. From 2004 to 2008, our sales returns
reserve has averaged approximately 3.4% of gross revenues. The sales
returns and allowances reserve as of September 30, 2009 was 2.4% of gross sales
based on a rolling twelve month average.
Critical
Accounting Policies and Estimates
The
accompanying discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States (GAAP). The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. These estimates form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. We base our estimates and judgments on historical
experience and on various other assumptions that we believe are reasonable under
the circumstances. However, future events cannot be forecasted with certainty,
and the best estimates and judgments routinely require adjustment. We are
required to make estimates and judgments in many areas, including those related
to: the accrual for product returns and warranties, allowance for
doubtful accounts, quarterly income taxes, inventory valuations (including
reserves for excess and obsolete and impaired inventories), reserves for
decommissioning costs associated with leasehold asset retirement obligations and
valuation of stock-based compensation. We believe these policies are the most
critical to our financial statements because their application places the most
significant demands on management’s judgment. Senior management has discussed
the development, selection and disclosure of these estimates with the Audit
Committee of our Board of Directors.
We
believe there have been no significant changes during the first nine months of
fiscal 2009 to the items that we disclosed as our critical accounting policies
and estimates in our discussion and analysis of financial condition and results
of operations in our 2008 Form 10-K.
Three
Months Ended September 30, 2009 compared with Three Months Ended September 30,
2008
Results
of Operations
Net revenues. Our net
revenues for the quarter ended September 30, 2009 were $8,600, a decrease of
$2,032, or 19.1%, compared to $10,632 for the same period ended September 30,
2008, primarily due to a decline in sales of window film products due to the
global economic downturn.
Net
revenues in the automotive market decreased by $303, or 6.9%, to $4,096 compared
to $4,399 for the third quarters ended September 30, 2009 and 2008,
respectively. The decrease was primarily due to the impact of the U.S. Dollar to
Euro exchange rate.
Window
film net revenues decreased by $2,163, or 49.9%, to $2,175 from $4,338 for the
third quarters ended September 30, 2009 and 2008, respectively. This
was primarily due to decreased overall demand for the window film business in
the Asian markets.
Architectural
net revenues increased by $395, or 21.4%, to $2,243 from $1,848 for the third
quarters ended September 30, 2009 and 2008, respectively. This was
primarily due to increased demand in certain markets, including
China.
Cost of
revenues. Cost of revenues decreased $1,516, or 23.8%, to
$4,867 compared with $6,383 for the third quarters ended September 30, 2009 and
2008, respectively. This was primarily due to lower variable costs
associated with the third quarter of 2009 as compared to the third quarter of
2008.
Gross profit. Third quarter
2009 gross profit decreased $516, or 12.1%, to $3,733 from $4,249 in the third
quarter of 2008. As a percentage of sales, gross profit increased to
43.4% compared to 40.0% in the third quarter of 2008. This was
primarily due to lower production costs in the third quarter of 2009 as a result
of lower sales volume as well as lower credits issued for returns and
allowances.
Operating
expenses
Research and development.
Research and development (“R&D”) expenses decreased $205, or 21.0%, to $771
for the third quarter ended September 30, 2009 compared to $976 for the third
quarter ended September 30, 2008. This decrease was primarily
due to the timing of project spending and lower patent fees.
Selling, general and
administrative. Selling, general and administrative expenses consist
primarily of corporate and administrative overhead, selling commissions and
occupancy costs. Selling, general and administrative expenses increased $108, or
5.8%, to $1,960
compared to $1,852 for the third quarters ended September 30, 2009 and 2008,
respectively. In general, selling, general and administrative
expenses remained relatively flat year over year. However, third
quarter of 2008 expenses were slightly lower due to the reversal of the unused
portion of an estimated lease obligation for a former manufacturing facility in
Palo Alto that was recorded in the third quarter of 2008.
Income from
operations. Income from operations decreased $419, or 29.5%,
to an operating income of $1,002 compared to operating income of $1,421 for the
third quarters ended September 30, 2009 and 2008, respectively. This
decrease was primarily due to lower sales volume.
Interest expense, net.
Interest expense increased $151, or 88.8%, to $321 compared to $170 for the
third quarters ended September 30, 2009 and 2008, respectively. This
increase in net interest was primarily due to interest associated with the
settlement agreement with Pilkington.
Other income (expense),
net. Other income, net increased $250 to income of $12
compared to expense of $238 for the third quarters ended September 30, 2009 and
2008, respectively, primarily due to a foreign exchange gain relating to
transactions with foreign customers that were denominated in foreign currencies,
principally the Euro. In the third quarter of 2008, a foreign
exchange loss was recorded.
Income before provision for income
taxes. Pre-tax income decreased $320 to $693 in the third
quarter ended September 30, 2009 compared to $1,013 for the third quarter ended
September 30, 2008. This decrease was primarily due to a significant decrease in
operating income resulting from lower sales volume.
Provision for income
taxes. The decrease in the provision for income taxes in the
three months ended September 30, 2009 compared to the same period in 2008 is
primarily related to the utilization of foreign tax credits against alternative
minimum tax (“AMT”) and the benefit of claiming the refundable R&D credit;
thus reducing the U.S. provision. The major component of provision
for income taxes relates to the operations of our wholly-owned German
subsidiary.
For the
nine months ended September 30, 2009, the Company’s effective tax rate was
3.7%. We use the actual effective tax rate for the nine months ended
September 30, 2009 as our best estimate for the tax rate for the year ending
December 31, 2009, as a reliable estimate for the full year cannot be made at
this time. In addition, to the extent our expected profitability
changes during the year, the effective tax rate would be revised to reflect any
changes in the projected profitability. This rate differs from the statutory
federal rate of 34% primarily due to the reversal of a portion of the Company’s
valuation allowance upon the utilization of a portion of the Company’s net
operating loss carry forward to offset income generated by the U.S. operations
through the first nine months of 2009.
Realization
of deferred tax assets is dependent upon the existence of sufficient taxable
income. The Company continues to maintain a valuation allowance
against its remaining net deferred tax assets in the United States, as
management does not believe the realization of those net deferred tax assets is
“more likely than not”. Management has made this determination based
upon a number of factors, including the reversal of existing taxable temporary
differences, historical earnings, expected future taxable income, and the
availability of tax planning strategies.
Deemed dividend on preferred
stock. We accrued $122 of deemed dividend on preferred stock in the third
quarters of 2009 and 2008, respectively. The holders of our secured
convertible promissory notes converted those notes to shares of Series A
preferred stock in December 2004. The Series A Preferred Stock accrues
cumulative dividends at the rate of 10% per annum.
Nine
months Ended September 30, 2009 compared with Nine months Ended September 30,
2008
Results
of Operations
Net revenues. Our net
revenues for the nine months ended September 30, 2009 were $23,430, a decrease
of $11,457, or 32.8%, compared to $34,887 for the same period ended September
30, 2008 primarily due to a decline in sales of automotive and window film
products and the impact of generally lower demand across all markets due to the
global economic downturn. Although demand for essentially all of our
products was lower in the nine month period ended September 30, 2009 compared to
the nine month period ended September 30, 2008, pricing has remained unchanged
and the Company believes its market share has not changed
materially.
Net
revenues in the automotive market decreased by $5,808, or 34.8%, to $10,872
compared to $16,680 for the nine months ended September 30, 2009 and 2008,
respectively. The decrease was primarily due to decreased demand by several of
our large customers.
Window
film net revenues decreased by $5,648, or 43.7%, to $7,265 from $12,913 for the
nine month periods ended September 30, 2009 and 2008,
respectively. This was primarily due to decreased overall demand for
the window film business in the Asian markets.
Architectural
net revenues increased by $204, or 4.2%, to $5,043 from $4,839 for the nine
month periods ended September 30, 2009 and 2008, respectively. This
was primarily due to increased worldwide demand in certain markets, including
China.
Cost of
revenues. Cost of revenues decreased $6,509, or 32.4%, to
$13,554 compared with $20,063 for the nine month periods ended September 30,
2009 and 2008, respectively. This was primarily due to lower variable
costs in 2009 as compared to 2008.
Gross profit. Nine months
ended September 30, 2009 gross profit decreased $4,948, or 33.4%, to $9,876
compared with $14,824 for the nine month period ended September 30,
2008. As a percentage of sales, gross profit decreased to 42.2%
compared to 42.5% for the nine months ended September 30, 2008. This was
primarily due to fixed production costs not declining at the same rate as sales
volume.
Operating
expenses
Research and development.
Research and development expenses decreased $254, or 10.7%, to $2,118 compared
to $2,372 for the nine month periods ended September 30, 2009 and 2008,
respectively. This decrease was primarily due to a lower bonus accrual, a
decrease in the U.S. Dollar to Euro exchange rate affecting the expenses
recorded at our subsidiary in Germany, and a reduction in workforce in the first
quarter of 2008.
Selling, general and
administrative. Selling, general and administrative expenses consist
primarily of corporate and administrative overhead, selling commissions and
occupancy costs. Selling, general and administrative expenses decreased $360, or
5.8%, to $5,810 compared to $6,170 for the nine month periods ended September
30, 2009 and 2008, respectively. This decrease was primarily due to lower sales
and marketing costs due to the closure of our Japan office, lower bad debt
expense, lower accrued bonus expense and cost reduction measures. The
reduced expense was partially offset by a settlement agreement with
Pilkington.
Income from
operations. Income from operations decreased $4,334 to an
operating income of $1,948 compared to operating income of $6,282 for the nine
month periods ended September 30, 2009 and 2008, respectively. This
decrease was primarily due to lower sales volume.
Interest expense, net.
Interest expense increased $59, or 13.6%, to $492 compared to $433 for the nine
month periods ended September 30, 2009 and 2008, respectively. This
increase in net interest was primarily due to interest associated with the
settlement agreement with Pilkington, which was partially offset by the decline
in interest payments resulting from the reduction in total debt outstanding in
2009 compared to 2008.
Other income (expense),
net. Other income, net increased $3,334 to income of
$3,211 in the first nine months of 2009 compared to an expense of $123 for the
first nine months of 2008 primarily due to a gain from the reversal of the
Matrix debt settlement of $2,359 in the first quarter of 2009, the reversal of a
reserve associated with government grants in Germany, receipt of the final
milestone payment under the Technology and Services Agreement with Sunfilm and a
foreign exchange gain relating to transactions with foreign customers that were
denominated in foreign currencies, principally the Euro. In addition,
in February 2009, the Company sold precious metal targets that remained after
our Palo Alto, California manufacturing facility was closed in 2006 and
production was moved to Germany. The targets had previously been expensed in
2006, and therefore, the sale resulted in a net gain of $346 to other income in
the first quarter of 2009. These gains were partially offset by an
increase in total losses of $405, representing our 50% share of net losses
incurred by our joint venture, Southwall Insulating Glass, LLC.
Income before provision for income
taxes. Pre-tax income decreased $1,059 to $4,667 in the nine
month period ended September 30, 2009 compared to $5,726 for the nine month
period ended September 30, 2008. This decrease was primarily due to a decrease
in operating income resulting from lower sales volume, offset by an increase in
other income resulting from the reversal of the long term reserve associated
with the Matrix debt settlement and the receipt of the final milestone payment
due from Sunfilm.
Provision for income
taxes. The decrease in the provision for income taxes in the
nine months ended September 30, 2009 compared to the same period in 2008 is
primarily related to the utilization of foreign tax credits against alternative
minimum tax (“AMT”) and the benefit of claiming the refundable R&D credit;
thus reducing the U.S. provision. The major component of provision
for income taxes relates to the operations of our wholly-owned German
subsidiary.
For the
nine months ended September 30, 2009, the Company’s effective tax rate was
3.7%. We use the actual effective tax rate for the nine months ended
September 30, 2009 as our best estimate for the tax rate for the year ending
December 31, 2009, as a reliable estimate for the full year cannot be made at
this time. In addition, to the extent our expected profitability
changes during the year, the effective tax rate would be revised to reflect any
changes in the projected profitability. This rate differs from the statutory
federal rate of 34% primarily due to the reversal of a portion of the Company’s
valuation allowance upon the utilization of a portion of the Company’s net
operating loss carry forward to offset income generated by the U.S. operations
through the first nine months of 2009.
Realization
of deferred tax assets is dependent upon the existence of sufficient taxable
income. The Company continues to maintain a valuation allowance
against its remaining net deferred tax assets in the United States, as
management does not believe the realization of those net deferred tax assets is
“more likely than not”. Management has made this determination based
upon a number of factors, including the reversal of existing taxable temporary
differences, historical earnings, expected future taxable income, and the
availability of tax planning strategies.
Deemed dividend on preferred
stock. We accrued $366 and $367 of deemed dividends on preferred stock in
the nine month periods of 2009 and 2008, respectively. The holders of
our secured convertible promissory notes converted those notes to shares of
Series A preferred stock in December 2004. The Series A Preferred Stock accrues
cumulative dividends at the rate of 10% per annum.
Liquidity
and Capital Resources
Liquidity
Our
principal liquidity requirements are for working capital, consisting primarily
of accounts receivable and inventories, debt repayments and capital
expenditures. Our cash and cash equivalents increased $2,077 from
$10,768 at December 31, 2008 to $12,845 at September 30, 2009. The
increase in cash is primarily due to net income and a decrease in
inventories.
Cash
provided by operating activities of $4,179 for the first nine months of 2009 was
primarily the result of net income of $4,493, non-cash depreciation of $1,911,
non-cash stock compensation expense of $294 and a decrease in inventory of
$1,336 partially offset by a non-cash gain on the settlement of the Matrix
obligation of $2,359, an increase in accounts receivable of $1,072 resulting
from the timing of third quarter 2009 sales when compared to fourth quarter 2008
sales, a decrease in accounts payable and accrued liabilities of $258, an
increase in other current and non-current assets of $65, an increase in deferred
income tax of $77 and a gain from the disposal of property, plant and equipment
of $24.
Cash used
in investing activities for the first nine months of 2009 was $680 and was the
net result of capital expenditures of $975 partially offset by a first quarter
2009 reclassification of $261 from restricted cash to cash and cash equivalents
associated with the expiration of contractual obligations relating to consigned
precious metals in Germany, which required a cash deposit, and proceeds from
sale of property, plant and equipment of $34.
Cash used
in financing activities for the first nine months of 2009 was $1,430, which
included the final debt payment with Matrix Funding Corporation of $995 and $724
associated with scheduled payments related to other term debt and capital lease
obligations. This was partially offset by investment tax credits received for
fixed asset purchases in Germany of $221, borrowings from equipment financing of
$26 and cash proceeds from the exercise of stock options of $42.
We
entered into an agreement with the Saxony government in May 1999, under which we
receive investment grants. As of September 30, 2009, we had received grants of
5,000 Euros or $5,000, at the historical exchange rate, and accounted for these
grants by applying the proceeds received to reduce the cost of our fixed assets
in our Dresden manufacturing facility. As of September 30, 2009, all government
grants had been applied for or repaid.
Borrowing
arrangements
Credit
Agreement with Wells Fargo Bank
In June
2009, we entered into a new Credit Agreement with Wells Fargo Bank
(“Bank”). The Credit Agreement provides for a $3,000 revolving line
of credit. Advances under the line exceeding $1,500 will be limited
to 80% of eligible accounts receivable. The Company will not be
eligible for additional borrowings if the Company’s consolidated cash balance
falls below $3,000. Amounts borrowed under the facility bear interest
at either Prime plus 0.75% or LIBOR plus 3.5%, determined at the discretion of
the Borrower, and is annualized on the average daily financed amount
outstanding. All borrowings under the facilities are collateralized
by our assets in the United States and are subject to certain covenants
including minimum quarterly net income and minimum liquid asset
requirements.
Generally,
if any event of default occurs, the Bank may declare all outstanding
indebtedness under the Credit Agreement to be due and payable. The
maturity date of the facility is June 2010. As of September 30, 2009,
we had no balance outstanding on our line of credit.
The
foregoing does not purport to be a complete statement of the parties’ rights and
obligations under the Credit Agreement, and the transactions contemplated
thereby or a complete explanation of material terms thereof. We are
in compliance with all covenants, and as of September 30, 2009, no amounts under
this Credit Agreement were outstanding.
Borrowing
Arrangements with German Banks
Our
borrowing arrangements with various German banks as of September 30, 2009 are
described in Note 6 of the Notes to Unaudited Condensed Consolidated Financial
Statements (Item 1. “Financial Statements”) set forth herein. We are in
compliance with all of the covenants of the German bank loans and capital
leases, and we have classified $1,039 and $3,417 outstanding under the German
bank loans as a short-term liability and long-term liability, respectively, at
September 30, 2009.
As of
September 30, 2009, we were in compliance with all financial covenants under all
financial instruments.
Capital
expenditures
We expect
to spend approximately $1,800 in 2009 on upgrades and refurbishment of our
production machines and research and development tools. To date, we have spent
approximately $473 and $975 in capital expenditures, respectively, during the
three and nine month periods ended September 30, 2009.
Future
payment obligations
Our
future payment obligations on our borrowings pursuant to our term debt,
non-cancelable operating and capital leases and other non-cancelable contractual
commitments were as follows at September 30, 2009:
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
Greater
|
|
|
|
|
|
|
Than
|
|
|
|
|
|
|
|
|
Than
|
|
|
|
Total
|
|
|
1
Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
5
Years
|
|
Contractual
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
debt (1)
|
|
$
|
4,123
|
|
|
$
|
839
|
|
|
$
|
730
|
|
|
$
|
730
|
|
|
$
|
1,824
|
|
Capital
lease obligations (1)
|
|
|
657
|
|
|
|
302
|
|
|
|
355
|
|
|
|
--
|
|
|
|
--
|
|
Term
debt and capital lease obligation interest ( 1)
|
|
|
1,184
|
|
|
|
287
|
|
|
|
385
|
|
|
|
345
|
|
|
|
167
|
|
Other
obligations (2)
|
|
|
2,324
|
|
|
|
--
|
|
|
|
--
|
|
|
|
-
--
|
|
|
|
2,324
|
|
Operating
leases (3)
|
|
|
837
|
|
|
|
480
|
|
|
|
357
|
|
|
|
-
-
|
|
|
|
--
|
|
Total
Contractual Cash Obligations
|
|
$
|
9,125
|
|
|
$
|
1,908
|
|
|
$
|
1,827
|
|
|
$
|
1,075
|
|
|
$
|
4,315
|
|
(1)
|
Represents
the principal and interest allocations of loan and capital lease
agreements with Varilease Finance Inc. and several German
Banks.
|
(2)
|
Represents
accumulated dividends accrual on Series A Preferred Stock (greater than
five years).
|
(3)
|
Represents
the remaining rents owed on buildings we rent in Palo Alto,
California.
|
As of
September 30, 2009, we maintained 30,174 square feet of office and warehouse
space at 3780-3788 Fabian Way, Palo Alto, California 94303. In
2009, the monthly rent payments are $38 and will increase annually at a rate of
3% through the expiration of the lease.
As of
September 30, 2009, we also had a lease obligation for 9,200 square feet at 3961
East Bayshore Road, Palo Alto, California 94303. The monthly rent
payments for this facility are $6.
We are
exposed to the impact of interest rate changes, foreign currency fluctuations,
and changes in the market values of our investments.
Financing
risk: The interest rate on one of our German loans has been reset to the
prevailing market rate of 6.13% and another of our German loan’s interest rate
was reset to the prevailing market rate of 5.73% on September 16,
2009. Fluctuations or changes in interest rates may adversely affect
our expected interest expense. The effect of a 10% fluctuation in the interest
rate on our line of credit and term debt would have had an immaterial effect on
our interest expense for the first nine months of 2009.
Investment
risk: We invest our excess cash in money market accounts and, by
practice, make every effort to limit the amount of exposure by investing with
strong, well-known institutions. Investments in both fixed rate and floating
rate interest earning instruments carry a degree of interest rate risk. Fixed
rate securities may have their fair market value adversely affected due to a
rise in interest rates, while floating rate securities may produce less income
than expected if interest rates fall. The effect of a 10% fluctuation in the
interest rate on our excess cash investments would not have had a material
effect on our interest income in the first nine months of 2009.
Foreign currency
risk: International revenues (defined as sales to customers located
outside of the United States) accounted for approximately 88% of our total sales
in the third quarter of 2009. Approximately 48% of our international
revenues were denominated in Euros in the third quarter of 2009. The remaining
52% of our international sales were denominated in US dollars. In
addition, certain transactions with foreign suppliers are denominated in foreign
currencies. The effect of a 10% fluctuation in the Euro exchange rate would have
had an effect of approximately $373 on net revenues for the third quarter of
2009.
|
(a)
|
Evaluation and Disclosure
Controls and Procedures. Under the supervision and with
the participation of our management, including our Principal Executive
Officer and Principal Financial Officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended. Based on this
evaluation, our Principal Executive Officer and Principal Financial
Officer concluded as of the end of the period covered by this report, that
our disclosure controls and procedures were effective, such that the
information relating to our company, including our consolidated
subsidiaries, required to be disclosed in our Securities and Exchange
Commission (“SEC”) reports (i) is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms, and
(ii) is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required
disclosure.
|
|
(b)
|
Changes in Internal
Controls. There were no changes during the three and
nine month periods ended September 30, 2009 in our internal controls over
financial reporting that have materially affected, or are reasonably
likely to materially affect, the internal controls over financial
reporting.
|
Internal
control systems, no matter how well designed and operated, have inherent
limitations. Consequently, even a system which is determined to be
effective cannot provide absolute assurance that all control issues have been
detected or prevented. Our systems of internal controls are designed
to provide reasonable assurance with respect to financial statement preparation
and presentation.
PART
II--OTHER INFORMATION
We may be
a party to various pending judicial and administrative proceedings arising in
the ordinary course of business. While the outcome of the pending
proceedings cannot be predicted with certainty, based on our review, we believe
that any unrecorded liability that may result is not likely to have a material
effect on our liquidity, financial condition or results of
operations.
The
following information updates should be read in conjunction with the information
disclosed in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the
year ended December 31, 2008, filed with the SEC on March 26, 2009.
Financial
Risks
There
have been no significant changes in financial risk factors for the nine month
period ended September 30, 2009. See the information set forth in the
section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2008.
Operational
Risks
There
have been no significant changes in operational risk factors for the nine month
periods ended September 30, 2009. See the information set forth in
the section entitled “Risk Factors” in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2008.
Market
Risks
There
have been no significant changes in market risk factors for the nine month
periods ended September 30, 2009. See the information set forth in
the section entitled “Risk Factors” in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2008.
None.
None.
None.
Subsequent
to period end, on October 28, 2009, the Company entered in to a settlement
agreement related to various patent matters with Pilkington Automotive
Deutschland GmbH, Witten (“Pilkington”). Under the terms of this
agreement, the Company agreed to pay Pilkington an aggregate amount of $583 (400
Euros) as a full and final settlement of all claims.
(a)
Exhibits
Exhibit
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Number
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Item
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Certification
of Principal Executive Officer pursuant to Exchange Act Rules 13a-14 and
15d-14
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Certification
of Principal Financial Officer pursuant to Exchange Act Rules 13a-14 and
15d-14
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Certification
of Principal Executive Officer pursuant to 18 U.S.C Section
1350
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Certification
of Principal Financial Officer pursuant to 18 U.S.C Section
1350
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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: November
10, 2009
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Southwall
Technologies Inc.
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By:
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/s/
Dennis F. Capovilla
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Dennis
F. Capovilla
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Chief
Executive Officer
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By:
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/s/
Mallorie Burak
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Mallorie
Burak
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Chief
Accounting Officer
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