UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark One)
T ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended December 31, 2007
OR
£ 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 including Zip Code)
(650)
798-1200
(Registrant's
Telephone Number, Including Area Code)
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock
(Title of
Class)
___________
1
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes £ No T
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15 (d) of the Act. Yes £ No T
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 T No £
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check One).
|
Large
accelerated filer £
|
Accelerated
filer £
|
|
Non-accelerated
filer T
|
Smaller
reporting company £
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No T
The
approximate aggregate market value of the Common Stock held by non-affiliates of
the registrant on June 29, 2007 (based upon the closing sales price of the
Common Stock on the Over-the-Counter Bulletin Market on such date) was $12,873,656.46. For
purposes of this disclosure, Common Stock held by stockholders whose ownership
exceeds five percent of the Common Stock outstanding as of June 29, 2007, and
Common Stock held by officers and directors of the registrant has been excluded
because such persons may be deemed to be "affiliates" as that term is defined in
the rules and regulations promulgated under the Securities Act of 1933, as
amended. This determination is not necessarily conclusive.
The
number of shares of the registrant's Common Stock outstanding on March 1, 2008
was 27,819,622.
DOCUMENTS
INCORPORATED BY REFERENCE
|
Document
Description
|
10-K
Part
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Portions
of the Registrant’s Proxy Statement
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III
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for
the Annual Meeting of Stockholders to
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be
held May 15, 2008
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2
2007
ANNUAL REPORT ON FORM 10-K
Table
of Contents
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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 subsidiary, 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:
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·
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our
strategy, future operations and financial plans
;
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·
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our
revenue expectations;
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·
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the
continued trading of our common stock on the Over-the-Counter Bulletin
Board Market;
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·
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future
applications of thin film coating
technologies;
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·
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our
development of new technologies and products; including the early stage of
our development of products for use in solar power
generation;
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·
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the
properties and functionality of our
products;
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·
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our
expectation for the continued decline in our sales of electronic display
products due to increased price sensitivity in this
market;
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·
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our
expectations for future grants, investment allowances and bank guarantees
from local and federal governments in
Germany;
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·
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our
projected need for additional borrowings and future
liquidity;
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·
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our
ability to implement and maintain effective internal controls and
procedures;
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·
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size
of and the markets into which we sell or intend to sell our
products;
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·
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our
intentions to pursue strategic alliances, acquisitions and business
transactions;
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·
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the
possibility of patent and other intellectual property
infringement;
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·
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our
opinions regarding energy consumption and the loss of energy through
inefficient glass;
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·
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pending
and threatened litigation and its
outcome;
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·
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our
competition; and
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·
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our
projected capital expenditures.
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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. All other trade names and
trademarks referred to in this Annual Report on Form 10-K are the property of
their respective owners.
(dollar
amounts in thousands, except per share data)
Overview
Southwall
is a developer and manufacturer of high performance, energy-saving films and
glass products for both the architectural and automotive domestic and
international markets. Founded in response to the oil embargo of
1973, Southwall remains committed to its mission of developing innovative
products that improve energy efficiency and decrease carbon emissions which
reduce the use of oil and electricity in the heating and cooling of buildings
and vehicles. In addition to our core energy conservation markets, we
continue to explore new markets that can benefit from our 25 years of thin-film
technology and roll-to-roll processing innovation.
In 2007,
our net revenues were $37,733, a 6.2% decline from net revenues of $40,209 in
2006, primarily due to the decline in our sales to the electronics display
market. In 2007, automotive glass products generated 40% of our net
revenue, applied window film products generated 37% of our net revenue,
architectural glass products generated 16% of our net revenue, and electronic
displays generated 7% of our net revenue.
For the
past four years, we have sold a highly specialized electromagnetic interference
(“EMI”) filtering film for use in plasma display panels for televisions under an
exclusive Manufacturing and Supply Agreement to our customer, Mitsui Chemicals,
Inc. Under the terms of this agreement, Mitsui Chemicals has been
obligated to purchase minimum annual amounts of electronic display materials
from us. This agreement was scheduled to expire at the end of 2007. Due to price
sensitivity in the electronic display market, in November 2007, we agreed with
Mitsui Chemicals to terminate this agreement. As consideration for the
termination of this agreement, Mitsui Chemicals paid us $2,959. In
2007 and 2006, Mitsui Chemicals accounted for approximately $2,432 and $9,876 in
revenue, respectively. In 2006, the EMI filtering film revenue
accounted for approximately 27% of our net revenues versus 7.1% of our net
revenues in 2007. Due to ongoing price competition in this market, we
expect revenues attributable to this product line to continue to
decline.
In 2007
we substantially completed the restructuring that commenced in 2006. As part of
the restructuring, all manufacturing was consolidated to our facility in
Dresden, Germany and a significant portion of our engineering development work
was transferred to Dresden, Germany in an effort to improve efficiency and
control costs.
In 2007,
we entered into a new financing arrangement with Bridge Bank, N.A. and retired
our debt with Wells Fargo HSBC. At year end, the line of credit with
Bridge Bank, N.A. had been repaid and no outstanding debt associated with this
credit line existed. Our line of credit with Bridge Bank N.A. expired
on March 28, 2008 and we are currently negotiating a new credit
facility. However, there can be no assurance that we will obtain a
new line of credit and on acceptable terms if at all.
Additional
Information
We
maintain a website with the address of www.southwall.com. We are not including
the information contained on our website as a part of, or incorporating it by
reference into, this Annual Report on Form 10-K. We make available free of
charge through our website our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and current reports on Form 8-K, and amendments,
if any, to these reports, as soon as reasonably practicable after we
electronically file such material with, or furnish such material to, the
Securities and Exchange Commission (“SEC”). In addition, we intend to disclose
on our website any amendments to, or waivers from, our code of business conduct
and ethics that are required to be publicly disclosed pursuant to the rules of
the SEC. You may read and copy any material that we file with the SEC at the
SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site at http://www.sec.gov
that contains reports, proxy and information statements, and other information
regarding issuers, including Southwall, that file electronically with the
SEC.
Industry
Background
Large
area, single layer, thin film coatings were developed in the early 1960s using
vacuum evaporation, a less precise precursor to the process currently used
called sputter coating. As a result of technological developments in the early
1970s, multi-layer coatings for large substrates became possible. Sputter
coating based on these developments is used today in many applications in which
high quality, uniform coatings need to be deposited on large surfaces or on many
smaller surfaces simultaneously. Examples of sputter coating include depositing
various metal and metal oxide layers on wafers in the semiconductor and hard
disk industries, and optical coatings on transparent surfaces in the automotive
glass, architectural glass and electronic display markets.
Thin film
coatings are used in a wide variety of applications to control the flow of
energy and the transmission and reflection of light. Thin film coatings can
modify the transmission, reflection and absorption of both visible and
non-visible light, such as infrared and ultra-violet light, to enhance the
performance and characteristics of the coated material.
Thin
film coating methods
The three
most common methods for commercially producing thin film coatings on glass and
flexible substrates are:
Wet coating. The wet coating
process generally involves depositing a thin layer of material onto glass by a
spin coating technique or onto a flexible substrate, or film, by a number of
different methods. In the case of spin coating, which is sometimes used for
computer display tubes, or CDTs, a small amount of liquid is placed at the
center of a spinning CDT, forcing the liquid from the center towards the outside
edge. Once a uniform thin layer of liquid is applied, the layer is bake-dried at
a moderate temperature. In the case of film coating, a thin layer of liquid
material is applied to the surface of plastic film and then dried by means of
thermal or direct radiation. This process is generally less expensive than
sputter coating, but generally yields coatings with lower quality optical and
mechanical characteristics.
Direct coating onto glass
substrates. Direct coating onto glass can be accomplished by sputtering
and by pyrolytic means. Direct-to-glass sputtering is a mature, well-known
process for applying thin film coatings to glass. This technology is commonly
used to manufacture products that conserve energy in buildings. Pyrolytic
coatings are formed directly on the glass as it is produced on a float line. The
pyrolytic process uses the heat of the molten glass to make a single layer,
metal oxide coating from a solution sprayed onto the glass. Because this
technique produces only single layer coatings, the performance is
limited.
Sputter coating onto flexible film
substrates. The sputter coating process, which is the process we
primarily employ, deposits a thin layer of material, generally metals and metal
oxides, onto the surface of a flexible substrate, usually polyester. The
substrate can then either be laminated in or applied to glass or suspended
between panes of glass. The substrate can be applied to both flat glass and
curved glass, such as is used in automotive applications.
The thin
film coating process begins with a clear base substrate that is typically glass
or a flexible polyester film. When using a flexible film, a hard coat is
sometimes applied to prevent undesired interactions between the materials to be
deposited and the base substrate, as well as improve the mechanical properties
of the coating. Various materials are then deposited in very thin layers on the
substrate. The process of building up the various layers results in a "stack."
The stack consists of layers of materials that produce the desired optical and
performance effects. In some applications, primarily with flexible films,
adhesive or protective layers may be applied to the substrate to improve the
subsequent application of the product onto a rigid substrate, such as
glass.
Markets
The
primary markets for the thin film coated substrates that we manufacture are the
automotive glass, architectural glass and applied window film markets. Advances
in manufacturing processes coupled with improved thin film deposition
technologies are improving performance and reducing production costs, allowing
thin film coated substrates to more cost-effectively address these
markets. We also sell our thin film coated substances in the
electronic display market, but our sales into this market have been decreasing
due primarily to price competition among manufacturers of plasma televisions. As
a result, in November 2007, we reached an agreement with Mitsui Chemicals,
Inc. to terminate our Manufacturing and Supply Agreement with Mitsui
Chemicals. We believe that the low margins in this market will
prevent us from obtaining any new plasma television contracts.
Automotive
glass products
The thin
film coated substrates we sell in this market reflect infrared heat. These
coatings allow automobile and truck manufacturers to use more glass and increase
energy efficiency by reducing the demand on a vehicle's air conditioning system,
as well as improve thermal comfort for passengers in the vehicle. Thin film
coated substrates in this market are sold primarily to original equipment
manufacturers, or OEMs, that produce glass for sale to European manufacturers of
new cars and trucks for worldwide distribution.
Nearly
all automotive glass in the world uses some degree of tint or coloration to
absorb light and solar energy, thus reducing solar transmission into the
vehicle. This tint is usually created through the mixing of inorganic metals and
metal oxides into the glass as the glass is produced. The cost of adding these
materials is very low, but the solar control benefit is limited because solar
energy is absorbed in the glass, causing the glass to heat up, which eventually
increases the temperature inside the vehicle.
Architectural
glass products
Climate
change has become a global concern. Buildings account for a significant amount
of the world’s total energy consumption and carbon emissions, a material amount
of which can be attributed to the energy lost through inefficient glass. Window
glass is a poor thermal barrier; thus, one of the primary sources of heat
build-up and loss in buildings is through the glass windows. The thin film
coated substrates we sell to glass manufacturers in this market are primarily
used to improve insulation performance by controlling the transmission of heat
through window glass, as well as to limit ultra-violet light
damage.
Applied
Window Film products
The thin
film coated substrates we sell in this market are similar to the films sold into
the OEM automotive and architectural glass markets, but include other product
characteristics that allow these film products to be applied to existing
windows. Applied films are used for retrofit application to the
inside surface of architectural and automotive windows and are sold in the
aftermarket through resellers who install the film.
Electronic
display products
The thin
film coated products we have sold in this market primarily enhance the light
output of liquid crystal display (LCD) screens used in notebook personal
computers and increase the performance of high resolution touch panel screens
used in cell phones and personal data assistants (PDAs). Thin film coated
substrates in this market are generally sold to OEMs. Due to price
competition among manufacturers of plasma televisions, our plasma display
revenue has declined and is expected to continue to decline in this
market. In November 2007, we reached an agreement with Mitsui
Chemicals to terminate our Manufacturing and Supply Agreement. We
believe that the low margins in this market will prevent the Company from
seeking or obtaining any new plasma television contracts.
Technology
In a
sputtering process, a solid target and a substrate are placed in a vacuum
chamber. By adding a small amount of process gas, typically argon, to the
chamber and negatively charging the target, the process gas is ionized and a
plasma discharge is formed. The positively charged gas ions strike the solid
target with enough force to eject atoms from its surface. The ejected target
atoms condense on the substrate and a thin film coating is constructed atom by
atom. By placing a magnet behind the target, the electrons in the ionized plasma
are confined to a specific region on the target, enhancing the creation of
ionized gas atoms and increasing the efficiency of the target atom ejection
process. By using different targets as the substrate moves through the vacuum
chamber, we can create a multi-layered coating, or stack.
If the
process gas is inert, such as argon, the coating will have the same composition
as the target material. As an example, many of our coatings have a layer of
silver in the stack. However, by adding a reactive gas such as oxygen or
nitrogen to the process, it is possible to create metal oxide or metal nitride
coatings from a metal target.
The
advantages of our sputtering process include the high density of the formed
coatings and the high degree of uniformity control that we can
achieve.
Intellectual
Property
Protection
of our intellectual property is critical to maintaining our competitive
position. We have 29 issued patents and 12 patent applications pending in the
United States, approximately 34 patent applications pending outside the United
States that cover materials, processes, products and production equipment. Our
issued patents have expiration dates ranging from 2009 to 2020. We
also seek to avoid disclosure of our know-how and trade secrets through a number
of means, including limiting access to our proprietary information to those
persons who need to know the information to perform their tasks and requiring
those persons with access to our proprietary information to execute
nondisclosure agreements with us. We consider our proprietary technology, as
well as our patent protection, to be an important competitive factor in our
business.
Products
The
following table describes the markets into which we sell our products, the
applications our products serve, the categories of our various products, key
features of our various products and representative customers in each of our
markets and for our product categories.
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MARKET
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APPLICATION
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FILM
PRODUCTS
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KEY
FEATURES
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REPRESENTATIVE
CUSTOMERS
|
||||
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Automotive
glass
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Solar
control for windshields,
side
windows, and back windows
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Infrared
Reflective (XIR 70 and
XIR
75)
|
Transmits
70%
or
75% visible light
Reflects
85% of
infrared
heat energy
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Saint
Gobain Sekurit
Pilkington
PLC
AGC
Automotive Americas
Guardian
Glass
|
||||
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Architectural
glass
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New
and retrofit residential and
commercial
windows and doors
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Suspended
Heat Mirror
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Improves
energy efficiency:
cool
in summer; warm in winter
UV
blocking
Noise
reducing
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Kensington
Windows
Gulf
Glass Industries
ECO
Insulating Glass
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Commercial
buildings
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Laminated
(XIR)
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Infrared
reflecting
UV
blocking
Cool
in summer
Noise
reducing
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Gulf
Glass Industries
Cristales
Curvados
Procesadora
de Jalisco SA
|
|||||
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Applied
window film
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Automotive
and architectural
glass
for after-market
installation
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Solis/V-KOOL
Hüper
Optik
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Transmits
up to
75%
visible light
Reflects
up to 85% of
infrared
heat energy
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V-Kool
International
Huper
Optik
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||||
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Solar
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Concentrated
solar thermal
(CSP)
reflector systems
Flexible,
thin film photovoltaic
modules
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Reflective
Silver
Transparent
Conductive (TCO)
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High
reflectivity
Lightweight
High
transparency and
Conductivity
Flexible
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SkyFuel/ReflecTech
Konarka
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||||
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Electronic
display
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Liquid
crystal display (LCD)
monitors
and touch screens for
notebook
PCs, cell phones and
PDAs
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Reflective
Silver
ITO
|
Enhance
light output
High
transparency/conductivity
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Flextronics/Multek
Dontech
|
Automotive
glass products
Direct-to-glass
sputtering for automotive windshields has not historically been well developed
because of the need to bend the glass before it can be coated and then installed
in an automobile. Coating flat glass and then bending it to match complex
automobile designs is less difficult. Therefore, coating flat glass and then
bending it is the method currently used by most windshield glass
producers. Our sputter coated flexible substrates can be applied to
windshields with different curvatures and incorporated into most in-line
windshield production processes used by glass companies today.
Our XIR
coated solar-control films are transparent, sputter-coated, polyester films used
in laminated glass for automobiles. The films have a patented, transparent
solar-control coating on one side and a proprietary adhesion-promotion layer on
the other. We sell our XIR coated solar-control films primarily to
OEMs that produce glass for sale to European manufacturers of new cars and
trucks for worldwide distribution.
Our net
revenues from sales of automotive glass products were $15,113, $13,433 and
$19,647 in 2007, 2006 and 2005, respectively.
Architectural
glass products
Windows
containing our Heat Mirror films have approximately two to five times the
insulating capacity of conventional double-pane windows, helping to lower annual
energy costs and reducing carbon emissions from the building. They also provide
high levels of solar shading while transmitting a high percentage of visible
light. In addition, our products offer ultra-violet protection and reduce noise
and condensation. Our products allow architectural glass manufacturers to
improve insulation without adding the weight of numerous panes of glass that are
impractical to lift and cannot be supported by a structure's frame. This drives
the need for thin film inside the glass that is a high performance insulator at
a fraction of the weight of the glass.
Suspended Heat Mirror
films. Heat Mirror films, which are sold in rolls to window
manufacturers, are suspended in the airspace between sealed double-pane
residential and commercial windows. We have also developed proprietary
film-mounting technology, which we license to window fabricators. We have
licenses with approximately 50 window fabricators in approximately 20 countries
for the sale of our suspended Heat Mirror Films and the license of our
film-mounting technology. We currently offer 11 different Suspended Heat Mirror
films for architectural applications.
Laminated films. Our thin
film coated flexible substrates are laminated between panes of glass and perform
similarly to our XIR solar control films for automobiles. This film is currently
sold primarily to fabricators of laminated window glass for large commercial
building applications such as airports, office buildings, and
museums. We have licenses with approximately 20 fabricators in
approximately 15 countries for the sale of this architectural film
product.
Our net
revenues from sales of architectural products were $5,957, $5,528 and $5,934 in
2007, 2006 and 2005, respectively.
Applied
Window Film Products
Our
aftermarket applied window film is sold pursuant to an exclusive worldwide
license contained in our distribution agreement with V-Kool International and
its subsidiaries, V-KOOL, Hüper Optik and iQue. The automotive glass
and architectural glass aftermarket use our XIR and other patented coating
technologies. These products are applied to existing windows and have a
protective hard coat over the patented, transparent solar-control coating on one
side and an adhesion layer on the other.
Our net
revenues from sales of aftermarket applied window film products were $13,989,
$10,449 and $15,134 in 2007, 2006 and 2005, respectively.
Electronic
display products
Our
sputter coated substrates offer the high optical quality necessary for higher
resolution electronic displays. Our substrates can be easily cut into different
shapes and sizes, providing increased flexibility for our customers. In
addition, our products can effectively reduce undesirable or potentially harmful
emissions without affecting the resolution of the display.
Our net
revenues from sales of electronic display products were $2,674, $10,799 and
$14,039 in 2007, 2006 and 2005, respectively. Due to price
competition among manufacturers of plasma televisions, our revenue from this
market has declined and is expected to continue to decline. For the
past four years, we have sold a highly specialized EMI filtering film for use in
plasma display panels for televisions under an exclusive Manufacturing and
Supply Agreement to our customer, Mitsui Chemicals, Inc. Under the
terms of this agreement, Mitsui Chemicals has been obligated to purchase minimum
annual amounts of electronic display materials from us. As a result
of price sensitivity which led to a decreased demand for our product in the
electronic display market, we agreed with Mitsui Chemicals to terminate this
agreement in November, 2007. In consideration of our termination of their
obligations under this agreement, Mitsui Chemicals paid us $2,959. In
2007 and 2006, Mitsui Chemicals accounted for approximately $2,432 (6.4% of our
revenue) and $9,876 (24.6% of our revenue) of revenue,
respectively. In 2006, the EMI filtering film revenue accounted for
approximately 27% of our net revenues versus 7.1% of our net revenues in
2007. Due to ongoing price competition in this market, we expect
revenues attributable to this product line to continue to decline.
Sales
and Marketing
Distribution
channels
We sell
our automobile and electronic display products primarily to OEMs in North
America, Europe, the Middle East and Asia, principally through our own direct
sales force and sales representatives.
We supply
our Heat Mirror architectural products to approximately 50 insulated glass and
window fabricators and distributors worldwide. Our proprietary mounting
technology is licensed to our customers, who use special equipment for the
manufacture of Heat Mirror-equipped windows. Our field services organization
assists customers in the manufacture of Heat Mirror-equipped windows. In North
America, we also promote our Heat Mirror product line through approximately six
regionally based architectural glass sales representatives.
We sell a
finished, applied window film product to Novamatrix, who markets the product
under three brands: V-KOOL, Hüper Optik and iQue for the automotive
and architectural markets through a worldwide distribution network of companies
owned by or affiliated with V-Kool International.
International
Revenues
International
revenues amounted to approximately 77%, 68% and 74% of our net revenues during
2007, 2006 and 2005, respectively. The principal foreign markets for our
products were Germany and France, accounting for approximately $8,824, $6,781
and $14,701, respectively, in net revenues in 2007, 2006 and 2005 and the
Pacific Rim other than Japan, accounting for $10,925, $7,997 and $10,461 in
2007, 2006, and 2005 respectively.
Customers
We have
created glass products which fill the needs of certain customers who require a
superior quality product. Therefore our customers represent a small
portion of the overall automotive and architectural glass market.
Automotive
Glass and Architectural Glass Market
Our
customers are suppliers in the automotive glass industry, including Saint Gobain
Sekurit, Pilkington PLC, and Asahi India Glass Ltd, who sell glass to OEM
automobile manufacturers, including DaimlerChrysler, Renault, Audi, BMW, Volvo,
Volkswagen and the PSA Group (which includes Peugot and Citroen).
Our
aftermarket applied film in the automotive and architectural glass markets is
sold pursuant to an exclusive worldwide license contained in our distribution
agreement with V-Kool International. Under our agreement, V-Kool International
agreed to purchase a set amount of our products during the term of the agreement
subject to volume and quality standards. Our failure to produce required amounts
of product under the distribution agreement will result in penalties under which
we would be required to reimburse V-Kool International for the full cost of any
product not timely delivered. Each year for the duration of the
agreement, V-Kool International is required to purchase an amount of product
equal to 110% of the amount of product it was required to purchase in the prior
year. V-Kool International was obligated to purchase approximately $12,200 of
products in 2007. During 2007, V-Kool International purchased approximately
$12,100 of product. V-Kool International is obligated to purchase at least
$13,400 from us in 2008.
Customers
for Architectural Glass, New and Retrofit
Our
customers are suppliers to the architectural glass industry,
including: Kensington Windows, Gulf Glass Industries, PFG Building
Glass, Nakajima Glass, ECO Insulating Glass, Alpen Glass and about 60 other
companies worldwide. These customers manufacture and supply insulated glass
units (IGUs) or laminated glass that incorporates our films. Additionally, a
significant portion of the aftermarket applied film that we sell to V-Kool
International under our distribution agreement is installed on architectural
glass in homes and buildings. Our customers represent a small portion of the
worldwide architectural glass market.
Electronic
Displays
Our
customers in the electronic display market had included Mitsui Chemicals and a
number of small accounts. Sales to Mitsui Chemicals represented $2,432 or
6.4% of our net
revenues in 2007, $9,876 or 24.6 % of our net revenues in 2006 and $12,436 or
23% of our net revenues in 2005. Due to the increased price sensitivity in the
plasma television display category, we terminated our Manufacturing and Supply
Agreement with Mitsui Chemicals in November 2007.
A small
number of customers have accounted for a substantial portion of our revenues.
Our ten largest customers accounted for approximately 78%, 77% and 81% of our
net revenues in 2007, 2006 and 2005, respectively. During 2007, V-Kool
International, Saint Gobain Sekurit, Huper Optik International, a subsidiary of
V-Kool International, Pilkington PLC, and Mitsui Chemicals accounted for 32.1%,
11.4%, 11.2%,10.1% and 6.4%, respectively, of our net revenues. During 2006,
Mitsui Chemicals, Saint Gobain Sekurit, V-Kool International and Pilkington PLC
accounted for 24.6%, 8.5%, 20.0% and 9.5%, respectively, of our net revenues.
During 2005, Mitsui Chemicals, Saint Gobain Sekurit, Pilkington PLC and V-Kool
International accounted for 22.7%, 19.8%, 7.1% and 19.5%, respectively, of our
net revenues. Because of our fixed costs, the loss of, or substantial reduction
in orders from, one or more of these customers would have a material adverse
effect on our revenues, profitability and cash flow. The loss of Mitsui
Chemicals as a customer for our electronic display products has had and will
continue to have a material adverse effect on our revenues, profitability and
cash flow.
The
timing and amount of sales to many of our customers depends on sales levels and
shipping schedules for the OEM products into which our products are
incorporated. We have no control over the shipping dates or volume of products
shipped by our OEM customers, and we cannot be certain that they will continue
to ship products that incorporate our products at current levels or at
all. In addition, we rely on our OEM customers to timely inform us of
opportunities to develop new products that serve end-user demands.
Research
and Development
Our
research and development activities are focused on the development of new
proprietary products, thin film materials science, deposition process
optimization and automation and applied engineering. Our research and
development expenditures totaled $4,505, $6,782 and $5,104, or approximately
11.9%, 16.9% and 9.3% of net revenues in 2007, 2006 and 2005,
respectively.
Historically,
our research and development efforts have been driven by customer requests for
the development of new applications for thin film coated substrates. To meet the
future needs of our customers, we continually seek to improve the quality and
functionality of our current products and enhance our core technology. In 2003,
we developed a new conductive film to satisfy Class B infrared shielding
requirements for plasma display. In 2004, the Class B film was sold
in substantial quantities for the first time for use in plasma display panels
for televisions sets. In 2005, we began development and sampling of a new class
of films with improved performance that we believe will be beneficial across our
product lines. In 2007, we successfully introduced a new and enhanced
window film product. We also began developing Indium Tin Oxide (ITO)
conductive coatings for a rapidly expanding touch panel market, and we initiated
research and development into thin film technology that we anticipate will
enable us to introduce products for new applications and markets. We cannot
guarantee that we will be successful in developing or marketing these
applications or that our films will continue to meet the demanding requirements
and the changing technology of the markets we serve.
In 2005,
we invested in additional engineering resources to support our increased focus
on new products and technologies. This investment enabled us to launch in 2007
our new product for the Window Film market and develop a number of promising
technologies for potential new markets. As part of our cost control effort in
2007, we reduced our total research and development costs and narrowed our
development focus to concentrate our resources on the development of products
with lower investment risks. To facilitate this cost reduction and focus, we
reduced our engineering force in Palo Alto and transferred some portion of the
development work to our Dresden facility. We will continue to develop new
products in both Palo Alto and Dresden. There can be no assurance as
to the future revenue or income from new products.
Integration
The
Company is currently pursuing strategic alliances that may result in vertical
integration of our products in the production and distribution
channels. However, there can be no assurances with respect to future
revenue or income pertaining to these alliances, if any at all.
Manufacturing
The table
below provides information about our current production machines and the class
of products that each was tooled to produce in 2007.
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|
Location |
Primary
Markets For
Current
Production
|
Year
Commercial
Production
Initiated
|
Estimated
Annual
Capacity
(Millions
of
Sq. Ft.)
(1)
|
||
|
|
Palo Alto |
Research
and Development
|
1982
|
8.0
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||
|
|
Dresden |
Automotive,
architectural, electronic display
and
window film
|
2000
|
48.0
|
_________________________________
|
|
(1)
|
Estimated
annual capacity represents our estimated yields based on our historical
experience and anticipated product mix. The amount of product for which we
receive orders and which we actually produce in any year may be materially
less than these estimates.
|
On
January 19, 2006, we commenced restructuring actions with the goal of improving
our cost structure for 2006 and beyond. These actions included the closure of
our Palo Alto, California manufacturing facility in the first half of 2006. We
scrapped one and sold two of our production machines (PM 1, PM 4A and PM 4B)
used for manufacturing in Palo Alto. We currently use PM2 for research and
development in Palo Alto. We transferred our U.S. manufacturing operations to
our site located near Dresden, Germany in the first half of 2006.
Although
our production systems are built by outside vendors, we work closely with our
vendors on the design for our production machines. Our experience with designing
production systems is critical for the proper construction of these machines.
Once a new machine is installed and accepted by us, our engineers are
responsible for transitioning the system into commercial production to help
ensure stable manufacturing yields. Currently we have sufficient
production capacity to meet our customers’ requirements.
Dresden,
Germany Facility
We own a
production facility in Großröhrsdorf, Germany, near the city of
Dresden. This facility is ISO 9001/2000 certified. The
facility has three production machines and manufactured approximately 60% of our
products during the first half of 2006 and nearly 100% of our products during
the second half of 2006 and during all of 2007.
Environmental
Matters
We use
potentially hazardous materials in our research and manufacturing operations and
have air and water emissions that require controls. As a result, we are subject
to stringent federal, state and local regulations governing emissions and the
storage, use and disposal of wastes. We contract with outside vendors to collect
and dispose of waste at our facilities in compliance with applicable
environmental laws. In addition, we have in place procedures that we believe
enable us to deal properly with the gasses emitted in our production process,
and we have implemented a program to monitor our past and present compliance
with environmental laws and regulations. Although we believe we are currently in
material compliance with such laws and regulations, current or future laws and
regulations may require us to make substantial expenditures in connection with
our air and water emissions and with our use, treatment and disposal of
hazardous materials. Further, our failure to comply with current or future laws
and regulations could subject us to substantial penalties, fines, costs and
expenses.
Suppliers
and Subcontractors
We
manufacture our products using materials procured from third-party suppliers. We
obtain certain of these materials from limited sources. For example, the
substrate we use in the manufacture of our Heat Mirror products is currently
available from one main qualified source, Teijin Limited. The loss of our
current source of supply would adversely affect our ability to meet our
scheduled product deliveries to customers. Alternative sources of supply are
being pursued; however, it takes approximately 18 to 24 months for us to
qualify a new supplier and we may not be able to successfully develop such
sources. In addition, increases in prices charged by our suppliers
could force us to raise prices on our products or lower our margins, which could
have a material adverse effect on our operating results.
We rely
on third-party subcontractors to add properties, primarily adhesives, to some of
our products. There are only a limited number of qualified subcontractors that
can provide some of the services we require. A significant increase in the price
charged by one or more of our subcontractors could force us to raise prices on
our products or lower our margins, which could have a material adverse effect on
our operating results.
Furthermore,
our production machines are large, complex and difficult to design and produce.
It can take up to a year from the time we order a machine until it is delivered.
Following delivery, it can take us, with the assistance of the manufacturer, up
to six additional months to test and prepare the machine for commercial
production. There are a limited number of companies that are capable of
manufacturing these machines to our specifications. Our inability in the future
to have new production machines manufactured and prepared for commercial
production in a timely manner would have a material adverse effect on our
business.
Backlog
Our
backlog primarily consists of purchase orders for products to be delivered
within 90 days. As of February 29, 2008 and February 28, 2007, we had a
backlog of orders for shipment over the following 12 months of
approximately $10,212 and $7,900, respectively. We expect to ship the entire
backlog listed as of February 29, 2008 during 2008. These are
firm orders and are not subject to cancellation.
Competition
The thin
film coatings industry and the markets in which our customers compete experience
rapid technological change, especially the electronic display market. Adoption
by our competitors of new equipment or process technologies or the development
by our competitors of new products could adversely affect us. We have a number
of present and potential competitors, including our customers who could develop
products and processes that replace ours, many of which have greater financial
resources and greater selling, marketing and technical resources than we
possess.
Automotive glass market.
Large, worldwide glass laminators typically have divisions selling products to
the commercial flat glass industry and provide solar control products in the
automotive OEM market. We face technological competition from companies, such as
PPG Industries, Pilkington PLC, Saint Gobain Sekurit, Asahi, Guardian, and
Glaverbel that have direct-to-glass sputtering capability. We may also be
subject to future competition from companies that are able to infuse glass with
solar control properties. We estimate that in 2007 our coated substrates were
used in less than 1% of the total worldwide automotive OEM glass
produced.
Architectural glass market.
Products that provide solar control and energy conservation have been available
to this market for approximately 25 years. Since our introduction of our
Suspended Heat Mirror film products in 1979, large glass producers, such as
Guardian, PPG Industries, Apogee Enterprises, Pilkington PLC , Saint Gobain
Sekurit, and Asahi, have produced their own direct-to-glass sputtered products
that provide solar control and energy conservation similar to our Suspended Heat
Mirror products. We estimate that in 2007 our coated substrates were used in
less than 1% of the glass used worldwide in residential and commercial
buildings.
Applied window film market.
In the applied film segment of the market, companies such as 3M, Bekeart,
CP Films (a subdivision of Solutia), and Lintec Inc. produce competitive
solar control products that are widely accepted in the market. We
estimate that in 2007 our applied window films were used in less than 1% of the
total worldwide applied film market.
Electronic display market.
The electronics display market, specifically the plasma television
display market, has become a price sensitive low margin market. As a
result, in November, 2007, we reached an agreement with Mitsui Chemicals to
terminate our Manufacturing and Supply Agreement with Mitsui
Chemicals. In 2007 Mitsui Chemicals represented $2,432 of our net
revenue. We estimate that in 2007 our sales to the electronic display
market were less than 1% of the worldwide market share.
Basis
of competition
We
believe we compete principally on the basis of:
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·
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Proprietary
thin film sputtering process knowledge and proprietary control
systems;
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·
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Our
extensive thin film materials expertise and optical design
capabilities;
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·
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Our
state-of-the-art coating facility in a low-cost labor environment, which
receives significant financial support from local and federal governments
in Germany;
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·
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The
quality of our products; and
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·
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Our
ability to easily alter the format of our products, providing our
customers with inventory versatility and higher production
yields.
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Quality
Claims
We accept
sales returns for quality claims on our products. We believe this returns plan
is competitive for the markets in which those products are sold. The nature and
extent of these quality claims depends on the product, the market, and in some
cases the customer being served. We carry liability insurance. However, our
insurance does not cover quality claims.
Employees
As of
December 31, 2007, we had 124 employees, of whom 18 were engaged in engineering,
70 in manufacturing, 16 in sales and marketing, 2 in purchasing and 18 in
general management, finance and administration. We are highly dependent upon the
continuing services of certain technical and management personnel. None of our
employees are represented by labor unions. We consider our employee relations to
be good.
ITEM 1A. RISK
FACTORS
(amounts
in thousands, except per share data)
Financial
Risks
Our
working capital position, financial commitments and historical performance may
raise doubt about our ability to have positive earnings in the future and will
be an impediment to our obtaining financing.
We
incurred net losses in 2006 and we may incur losses in the future. These losses,
together with our working capital position, our debt service and other
contractual obligations at December 31, 2007, our past failure to comply with
covenants in our financing agreements and our voluntary delisting from NASDAQ in
March 2004 will make it difficult for us to secure additional debt financing on
favorable terms or at all. We intend to seek additional borrowings or
alternative sources of financing; however, difficulties in borrowing money or
raising other forms of financing could have a material adverse effect on our
operations, planned capital expenditures and ability to comply with the terms of
government grants.
Covenants
or defaults under our credit and other loan agreements may prevent us from
borrowing or force us to curtail our operations.
As of
December 31, 2007, we had total outstanding obligations under our loan
agreements of $9,426.
Our current credit facilities contain financial covenants that require us to
meet certain financial performance targets and operating covenants that limit
our discretion with respect to business matters. Among other things, these
operating covenants restrict our ability to borrow additional money, create
liens or other encumbrances, and make certain payments including dividends and
capital expenditures. In the past, we have failed to comply with
certain financial performance covenants. Many of these loans contain provisions
that permit the lender to declare the loans immediately due if there is a
material adverse change in our business. These credit facilities also contain
events of default that could require us to pay off indebtedness before its
maturity. The restrictions imposed by these credit facilities or the
failure of lenders to advance funds under these facilities could force us to
curtail our operations or have a material adverse effect on our liquidity. Our
inability to make timely payments of interest or principal under these
facilities or our failure to comply with financial performance or operating
covenants will constitute a default under these facilities and will entitle the
lenders to accelerate the maturity of the outstanding
indebtedness. Any such default will likely prevent us from borrowing
money under existing credit facilities, securing additional borrowings or
functioning as a going concern.
Our ability to borrow is limited by
the nature of our equipment and some of our accounts
receivable.
Our
equipment is custom designed for a special purpose. In addition, a large portion
of our accounts receivable are from foreign sales, which are often more
difficult to collect than domestic accounts receivable. As a result of the
nature of our equipment and accounts receivable, lenders will generally allow us
to borrow less against these items as collateral than they would for other types
of equipment or domestic accounts receivable, or require us to provide
additional credit enhancements.
If we default under our secured
credit facilities and financing arrangements, the lenders could foreclose on the
assets we have pledged to them requiring us to significantly curtail or even
cease our operations.
In
connection with our current borrowing facilities and financing arrangements, we
have granted security interests in and liens on substantially all of our assets,
including our production machines and our Dresden, Germany facility, to secure
the loans. If we default under our secured credit facilities, and our senior
lenders foreclose on one or more of those machines, our ability to produce
product would be materially impaired. Our revenues, gross margins and operating
efficiency would also be materially adversely affected. Our obligations under
our secured credit facilities contain cross-default and cross-acceleration
provisions and provisions that allow the lenders to declare the loans
immediately due if there is a material adverse change in our business. If we
default under the credit facilities or financing arrangements, the lenders could
declare all of the funds borrowed there under, together with all accrued
interest, immediately due and payable. If we are unable to repay such
indebtedness, the lenders could foreclose on the pledged assets. If the lenders
foreclose on our assets, we would be forced to significantly curtail or even
cease our operations.
Our
quarterly revenue and operating results are volatile and difficult to
predict.
Our
quarterly revenue and operating results may vary depending on a number of
factors, including
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•
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fluctuating
customer demand, which is influenced by a number of factors, including
market acceptance of our products and the products of our customers by
end-users, changes in product mix, and the timing, cancellation or delay
of customer orders and shipments;
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•
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the
timing of shipments of our products by us and by independent
subcontractors to our customers;
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•
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manufacturing
and operational difficulties that may arise due to, among other things,
quality control, capacity utilization of our production machines,
unscheduled equipment maintenance and repair, and the hiring and training
of additional staff;
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•
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our
ability to enhance our products, improve our processes and introduce new
products on a timely basis;
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•
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competition,
including the introduction or announcement of new products by competitors,
the adoption of competitive technologies by our customers, the addition of
new production capacity by competitors and competitive pressures on prices
of our products and those of our customers
and
|
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•
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product
returns and customer allowances stemming from product quality defects and
the satisfaction of product warranty
claims.
|
We
expect to be subject to increased foreign currency risk in our international
operations.
In 2007,
2006 and 2005, approximately 42%, 30% and 32% of our net revenues, respectively,
were denominated in euros, including sales to one of our largest
customers, V-Kool International, a global automotive glass manufacturer. In
addition, other customers may request to make payments in foreign currencies.
Also, certain transactions with foreign suppliers are denominated in foreign
currencies, including the Japanese Yen in 2007.
A
strengthening in the dollar relative to the currencies of those countries in
which we do business would increase the prices of our products as stated in
those currencies and could hurt our sales in those countries. Significant
fluctuations in the exchange rates between the U.S. dollar and foreign
currencies could cause us to lower our prices and thus reduce our profitability
and cash flows. These fluctuations could also cause prospective customers to
cancel or delay orders because of the increased relative cost of our products.
During 2007 and 2006 the dollar continued to weaken against selected foreign
currencies which has impacted our cost of doing business.
Our
suppliers and subcontractors may impose more stringent payment terms on
us.
As a
result of our financial performance, our suppliers and creditors may impose more
stringent payment terms on us, which may have a material adverse effect on our
financial performance and our liquidity. For example, one of our
subcontractors has required us to provide it with a security interest in all of
our inventory held by it and has limited the amount of unpaid invoices we may
have outstanding with it at any time.
A
weak economic environment could impact our revenue.
A decline
in the demand for automobiles or weakness in new real estate construction could
reduce the demand for our automotive and architectural products. We sell a
substantial portion of our products to a relatively small number of original
equipment manufacturers, or OEMs. The timing and amount of sales to these
customers ultimately depend on sales levels and shipping schedules for the OEM
products into which our products are incorporated. Failure of our customers to
achieve significant sales of products incorporating our products and
fluctuations in the timing and volume of such sales could be harmful to our
business.
Operational
Risks
We
depend on a small number of customers for nearly all of our revenues, and the
loss of a large customer could materially and adversely affect our revenues or
operating results.
Our ten
largest customers accounted for approximately 78%, 77% and 81% of net revenues
in 2007, 2006 and 2005, respectively. We expect to continue to derive a
significant portion of our net revenues from this relatively small number of
customers. Accordingly, the loss of Mitsui Chemicals (6.4% and 24.6% of revenues
in 2007 and 2006 respectively) has had and will continue to have a material
adverse effect on our business and the loss of any other large customer will
hurt our business. The deferral or loss of anticipated orders from a
large customer or from a number of small customers will materially reduce our
revenue and operating results.
Some
of our largest automotive glass customers have the resources to develop products
competitive with ours; if they do so, our revenues and operating results would
be materially and adversely affected.
Some of
our largest automotive glass customers have used a technology—direct-to-glass
sputtering—as an alternative to our window films. The continued or expanded use
of this technology by our automotive glass customers would have a material
adverse effect on our results of operations and financial
position. Many of our customers also have the financial and technical
resources to develop products competitive with ours. If any of our
customers develop any such competitive products, our revenues and operating
results would be materially and adversely affected.
We
must continue to develop new products or enhance existing products on a timely
basis to compete successfully in a rapidly changing marketplace.
Our
future success depends upon our ability to introduce new products, improve
existing products and processes to keep pace with technological and market
developments, and to address the increasingly sophisticated and demanding needs
of our customers, especially in the automotive and architectural markets.
Technological changes, process improvements or operating improvements that could
adversely affect us include:
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•
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changes
in the way coatings are applied to alternative substrates such as
tri-acetate cellulose, or TAC;
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the
development of new technologies that improve the manufacturing efficiency
of our competitors;
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•
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the
development of new materials that improve the performance of products that
could compete with our products;
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•
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improvements
in the efficiency and resulting product quality of alternatives to the
sputtering technology we use to produce our products, such as plasma
enhanced chemical vapor deposition, or PECVD
and
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•
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the
development of competing technologies to our anti-reflective and silver
reflector films for liquid crystal displays in the flat panel display
industry.
|
Our
research and development efforts may not be successful in developing products in
the time, or with the characteristics, necessary to meet customer needs. If we
do not adapt to technological changes or implement process or operating
improvements, our competitive position, operations and prospects would be
materially adversely affected.
Our
ability to successfully identify suitable target companies and integrate
acquired companies or technologies may affect our future growth.
A
potential part of our continuing business strategy is to consider acquiring
companies, products, and technologies that complement our current products,
enhance our market coverage, technical capabilities or production capacity, or
offer other growth opportunities. Our ability to successfully complete
acquisitions requires that we identify suitable target companies, agree on
acceptable terms, and obtain acquisition financing on acceptable terms. In
connection with these acquisitions, we could incur debt, amortization expenses
relating to identified intangibles, impairment charges relating to goodwill or
merger related charges. We might also issue shares of capital stock as partial
or full payment of the purchase price for a target company that would dilute our
current shareholders' interest as a percentage of ownership or in net book value
per share. Given our current level of indebtedness and our current overall
financial condition, there can be no assurance that we will be able to secure
any acquisition financing upon acceptable terms, if at all. Even if
we successfully identify, finance the acquisition price and acquire suitable
target companies or products, the success of any acquisitions will depend upon
our ability to integrate acquired operations, retain and motivate acquired
personnel, and increase the customer base of the combined businesses. We may not
be able to accomplish any or all of these goals. Any future acquisitions would
involve certain additional risks, including:
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•
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difficulty
integrating the purchased operations, technologies, or
products;
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•
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unanticipated
costs, which would reduce our
profitability;
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diversion
of management's attention from our core
business;
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potential
entrance into markets in which we have limited or no prior experience;
and
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•
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potential
loss of key employees, particularly those of the acquired
business.
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If
one of our customers is able to enforce a European automotive film patent, we
may be restricted from using the methods present in such patent to produce some
of our products or we could be required to pay license fees that would
substantially increase our costs.
On March
3, 2005, the European Patent Office allowed a European patent owned by
Pilkington Automotive GmBH entitled "Method for producing a laminated glass pane
free of optical obstruction caused by warping, use of a particular carrier film
for the production of the laminated glass pane and carrier films particularly
suitable for the method of use." This European patent may cover certain
laminated films and methods of using them. If enforced by Pilkington, this
European patent may prevent us from producing certain films designed for the
automotive markets or may require us to negotiate a license for the right to use
the technology covered by the patent. Our inability to use this technology could
adversely affect our ability to provide a full range of products to the
automotive film market, or if we are required to pay a license fee for the use
of the technology covered by this patent, our costs will increase and our
results of operations will be adversely affected. We participated in opposing
the European patent and have appealed the European Patent Office
decision.
Failure
to meet the volume requirements of our customers may result in a loss of
business or contractual penalties.
Our
long-term competitive position will depend to a significant extent on our
manufacturing capacity. While we currently have sufficient manufacturing
capacity to meet our foreseeable needs, if we lose the use of any of our
production machines for any extended period, due to failures of such production
machines or unanticipated maintenance and repairs, our production capacity will
be compromised. The failure to have sufficient capacity, to fully utilize
capacity when needed or to successfully integrate and manage additional capacity
in the future could adversely affect our relationships with our customers and
cause our customers to buy similar products from our competitors if we are
unable to meet their needs. Our failure to produce required amounts of products
under some of our contracts will result in price reductions on future sales
under such contracts or penalties under which we would be required to reimburse
the customer for the full cost of any product not delivered in a timely manner,
either of which would reduce our gross margins and adversely affect our results
of operations.
Our
major customers are suppliers to OEMs; we therefore are dependent upon the end
customers’ demand for products supplied by these OEMs.
We sell a
substantial portion of our products to a relatively small number of suppliers to
original equipment manufacturers, or OEMs. The timing and amount of sales
to these customers ultimately depend on sales levels and shipping schedules for
the OEM products into which our products are incorporated. We have no control
over the volume of products shipped by OEM customers or shipping dates, and we
cannot be certain that these suppliers to OEM customers will continue to ship
products that incorporate our products at current levels or at
all. We currently have long-term contracts with only one of our
suppliers to OEM customers. Failure of this customer to achieve significant
sales of products incorporating our products and fluctuations in the timing and
volume of such sales could be harmful to our business. Failure of our supplier
to OEM customers to inform us of changes in their production needs in a timely
manner could also adversely affect our ability to effectively manage our
business.
We
rely upon our OEM customers for information relating to the development of new
products so that we are able to meet end-user demands.
We rely
on our OEM customers to inform us of opportunities to develop new products that
serve end-user demands. If our OEM customers do not present us with market
opportunities early enough for us to develop products to meet end-user needs in
a timely fashion, or if the OEMs fail to accurately anticipate end-user
needs , we may fail to develop needed new products or modify our existing
products for the end-user markets for our products, or we may spend resources on
developing products that are not commercially successful.
We
depend on one distributor for the sale of our after-market
products.
We
primarily use one independent distributor to sell our after-market products. We
have a distribution agreement with V-Kool International Holdings Pte. Ltd.,
or V-Kool International, under which we granted V-Kool International an
exclusive worldwide license to distribute our after-market applied film in the
automotive and architectural glass markets. Failure of V-Kool International to
achieve significant sales of products incorporating our products and
fluctuations in the timing and volume of such sales could be harmful to our
business. Further, the termination of our distribution agreement with V-Kool
International would have a material adverse affect on our business.
We
face intense competition, which could affect our ability to increase our
revenue, maintain our margins and increase our market share.
The
market for each of our products is intensely competitive and we expect
competition to increase in the future. We compete based on the functionality and
the quality of our product. Our competitors vary in size and in the
scope and breadth of the products they offer. Many of our current and potential
competitors have significantly greater financial, technical, marketing and other
resources than we have. In addition, many of our competitors have
well-established relationships with our current and potential customers and have
extensive knowledge of our industry. If our competitors develop new
technologies or new products, improve the functionality or quality of their
current products, or reduce their prices, and if we are unable to
respond to such competitive developments quickly either because our research and
development efforts do not keep pace with our competitors or because of our lack
of financial resources, we may be unable to compete effectively.
We
are dependent on key suppliers of materials, which may prevent us from
delivering product in a timely manner.
We
manufacture all of our products using materials procured from third-party
suppliers. We do not have long-term contracts with our third-party suppliers.
Certain of the materials we require are obtained from a limited number of
sources. Interruptions in our supply of material or increases in the prices for
such materials would delay or increase the costs of our shipments to our
customers. Delays or reductions in product shipments could damage our
relationships with customers. Further, a significant increase in the price of
one or more of the materials used in our products, if we are unable to pass
these price increases along to our customers, would have a material adverse
effect on our cost of goods sold and operating results.
We
are dependent on a few qualified subcontractors to add properties to some of our
products.
We rely
on third-party subcontractors to add properties, such as adhesives, to some of
our products. There are only a limited number of qualified subcontractors that
can provide some of the services we require, and we do not have long-term
contracts with any of them. Qualifying additional subcontractors could take a
great deal of time or cause us to change product designs. The loss of a
subcontractor could adversely affect our ability to meet our scheduled product
deliveries to customers, which could damage our relationships with customers. If
our subcontractors do not produce a quality product, our yield will decrease and
our margins will be lower. Further, a significant increase in the price charged
by one or more of our subcontractors could force us to raise prices on our
products or lower our margins, which could have a material adverse effect on our
operating results.
We
are dependent on key suppliers of production machines. Our inability to obtain
new production machines on a timely basis from such suppliers may prevent us
from delivering an acceptable product on a timely basis and limit our capacity
for revenue growth.
Our
production machines are large, complex and difficult to design and manufacture.
It can take up to a year from the time we order a machine until it is delivered.
Following delivery, it can take us, with the assistance of the manufacturer, up
to six additional months to test and prepare the machine for commercial
production. There are a very limited number of companies that are capable of
manufacturing these machines. While we currently have sufficient manufacturing
capacity with our existing production machines, our inability in the future to
have new production machines designed, manufactured and prepared for commercial
production in a timely manner would prevent us from delivering product on a
timely basis and limit our capacity for revenue growth.
Fluctuations
or slowdowns in the overall electronic display industry have and continue to
adversely affect our revenues.
The
electronics display industry is intensely competitive and price
sensitive. Due to price competition among manufacturers of plasma
televisions, in November, 2007, we reached an agreement to terminate our
Manufacturing and Supply Agreement with Mitsui Chemicals. Mitsui
Chemicals accounted for 6.4% of our 2007 net revenue and 24.6% of our 2006 net
revenue. We believe that the low margins in this market
will prevent the Company from obtaining any new plasma television contracts and
our electronic display sales will continue to decline.
If
we are unable to adequately protect our intellectual property, third parties may
be able to duplicate our products or develop functionally equivalent or superior
technology.
Our
success depends in large part upon our proprietary technology. We rely on our
know-how, as well as a combination of patent, trademark and trade secret
protection, to establish and protect our intellectual property rights. Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt
to copy aspects of our products or to obtain and use information that we regard
as proprietary. Policing unauthorized use of our intellectual property is
difficult and can be expensive. Our means of protecting our proprietary rights
may not be adequate. In addition, the laws of some foreign countries do not
protect our proprietary rights to the same extent as do the laws of the United
States. One of our U.S. patents relating to our architectural products,
Suspended Heat Mirror, expired in 2006. Expiration of our other patents, which
will occur from 2009 to 2020, or our failure to adequately protect our
proprietary rights may allow third parties to duplicate our products or develop
functionally equivalent or superior technology. In addition, our competitors may
independently develop similar technology or design around our proprietary
intellectual property.
The
sale of our products and the use of our technology may inadvertently infringe
upon the intellectual property rights of others. In such event, we
may be prevented from the continued sale of such products or the continued use
of such technology, or we may be required to pay substantial license fees to the
owner of such other intellectual property.
In
addition to the European patent owned by Pilkington Automotive GmbH referred to
above which may prevent us from producing certain films designed for the
automotive markets or may require us to negotiate a license for the right to use
the technology covered by that European patent, the sale of our products and the
use of our technology may inadvertently otherwise infringe upon the intellectual
property rights of others. In such event, we may be prevented from
the continued sale of such products or the continued use of such technology, or
we may be required to pay substantial license fees to the owner of such other
intellectual property. This could have a material adverse affect on
our business and results of operations.
Performance,
reliability or quality problems with our products may cause our customers to
reduce or cancel their orders.
We
manufacture our products according to specific, technical requirements of each
of our customers. We believe that future orders of our products will depend in
part on our ability to satisfy the performance, reliability and quality
standards required by our customers. If our products have performance,
reliability or quality problems, then we may experience:
|
|
•
|
delays
in collecting accounts receivable;
|
|
|
•
|
higher
manufacturing costs;
|
|
|
•
|
additional
warranty and service expenses; and
|
|
|
•
|
reduced
or cancelled orders.
|
If we fail to recruit and retain a
significant number of qualified technical personnel we may not be able to
improve our products or processes or develop and introduce new products on a
timely basis, and our business will be harmed.
We
require the services of a substantial number of qualified technical personnel.
Intense competition and aggressive recruiting, as well as a high-level of
employee mobility, characterize the market for skilled technical personnel.
These characteristics make it particularly difficult for us to attract and
retain the qualified technical personnel we require. We have experienced, and we
expect to continue to experience, difficulty in hiring and retaining highly
skilled employees with appropriate technical qualifications. It is especially
difficult for us to recruit qualified personnel to move to the location of our
Palo Alto, California offices because of the high-cost of living there compared
with many other parts of the country. If we are unable to recruit and retain a
sufficient number of qualified technical employees, we may not be able to
enhance our products or develop new products or processes in a timely manner. As
a result, our business may be harmed and our operating results may
suffer.
We
may be unable to attract or retain the other highly skilled management personnel
that are necessary for the success of our business.
In
addition to our dependence on our technical personnel, our success also depends
on our continuing ability to attract and retain other highly skilled employees.
We depend on the continued services of our senior management. Our officers have
technical and industry knowledge that cannot easily be replaced. Competition for
similar personnel in the industry in which we operate is intense. We have
experienced, and we expect to continue to experience, difficulty in hiring and
retaining highly skilled management personnel with appropriate qualifications.
If we do not succeed in attracting and retaining the necessary management
personnel, our business could be adversely affected.
Our
business is susceptible to numerous risks associated with international
operations.
Revenues
from international sales amounted to approximately 77%, 68% and 74% of our net
revenues during 2007, 2006 and 2005, respectively. To achieve acceptance in
international markets, our products must be modified to address a variety of
factors specific to each particular country, as well as local regulations within
each country. We may also be subject to a number of other risks associated with
international business activities. These risks include:
|
|
•
|
unexpected
changes in and the burdens and costs of compliance with a variety of
foreign laws and regulatory
requirements;
|
|
|
•
|
potentially
adverse tax consequences;
|
|
|
•
|
global
economic turbulence and political instability, and general economic
conditions within each region or
country;
|
|
|
•
|
our
ability to adapt to cultural differences that may affect our sales and
marketing strategies; and
|
|
|
•
|
currency
fluctuations.
|
If
we fail to comply with environmental regulations, our operations could be
suspended and we could be subject to substantial fines and remediation
costs.
We use
hazardous chemicals in producing our products and have air and water emissions
that require controls. As a result, we are subject to a variety of local, state
and federal governmental regulations relating to the storage, discharge,
handling, emission, generation, manufacture and disposal of toxic or other
hazardous substances used to manufacture our products, compliance with which is
expensive. Our failure to comply with current or future regulations could result
in the imposition of substantial fines on us, suspension of production,
alteration of our manufacturing processes, increased costs or cessation of
operations. We might also be required to incur substantial expenses
to comply with changes in such local, state and federal governmental
regulations.
We
rely on our domestic sales representatives for the sale of our architectural
products. The failure of our domestic sales representatives to sell
our architectural products in sufficient quantities will adversely affect our
revenues.
We use
independent sales representatives to promote our Heat Mirror products to
architects in the United States. If some or all of our sales representatives
experience financial difficulties, otherwise become unable or unwilling to
promote our products, or fail to sell our products in sufficient quantities, our
business could be harmed. These sales representatives could reduce or
discontinue promotion of our products. They may not devote the resources
necessary to provide effective marketing support to us. In addition, we depend
upon the continued viability and financial resources of these representatives,
many of which are small organizations with limited working capital. These
representatives, in turn, depend substantially on general economic conditions
and other factors affecting the markets for the products they promote. We
believe that our success in this market will continue to depend upon these sales
representatives.
We
may experience unanticipated warranty or other claims with respect to our
products, which may lead to extensive litigation costs and
expenses.
In the
ordinary course of business, we have periodically become engaged in litigation
principally as a result of disputes with customers of our architectural
products. We may become engaged in similar or other lawsuits in the future. Some
of our products that have been the basis for lawsuits against us could be the
basis for future lawsuits. An adverse outcome in the defense of a warranty or
other claim could subject us to significant liabilities to third parties. Any
litigation, regardless of the outcome, could be costly and require significant
time and attention of key members of our management and technical
personnel. It is our policy to satisfy claims from our
customers that are covered by our product warranties. Unanticipated
warranty claims that do not result in litigation may still expose us to
substantial costs and expenses.
Market
Risks
A
few stockholders own a majority of our shares and will be able to exert control
over us and over significant corporate decisions.
As a result of the
consummation of the financing transactions in December 2003 and February 2004
with Needham & Company, Inc. and its affiliates and Dolphin Direct Equity
Partners, L.P., these shareholders at December 31, 2007 owned common stock and
securities convertible into common stock, constituting in the aggregate 63.7% of
our outstanding common stock. As our largest stockholder, Needham could prevent
us from seeking additional borrowings or alternative sources of financing that
we require for future operations, could delay or prevent a change of control of
our company, control corporate decisions, or otherwise control the company in
ways that might have a material adverse effect on our company or our other
shareholders. Needham & Company, Inc. and it affiliates, together
with Dolphin Direct Equity Partners, L.P., have sufficient beneficial ownership
of our outstanding common stock to be able to control all corporate decisions
requiring majority approval.
If
we fail to meet the expectations of public market analysts or investors, the
market price of our common stock may decrease significantly.
Our
quarterly revenue and operating results have varied significantly in the past
and will likely vary significantly in the future. Our revenue and operating
results may fall below the expectations of securities analysts or investors in
future periods. Our failure to meet these expectations would likely adversely
affect the market price of our common stock.
ITEM 1B. UNRESOLVED STAFF
COMMENTS
None
(dollar
amounts in thousands, except per share data)
Our
administrative, sales, marketing, research and development facilities are
located in one location totaling approximately 30,174 square feet in Palo Alto,
California. This location is covered under two leases, both of which
expire on June 30, 2011. A second building also was located in
Palo Alto, California, consisting of approximately 9,000 square feet, was
surrendered to the landlord in 2006.
On
January 19, 2006, we commenced restructuring actions to attempt to improve our
cost structure for 2006 and beyond. These actions included the closure of our
Palo Alto, California manufacturing facility during 2006. We accrued $1,509 for
the closure of our manufacturing facility and an additional $153 in the fourth
quarter of 2007 as a leasehold asset retirement obligation in connection with
the surrender of our manufacturing facility to the landlord. In
January 2008, a $1,000 letter of credit and $100 cash security deposit were
released to the landlord, and in February 2008, we entered into a settlement
agreement with the landlord under which we paid the landlord an additional $400,
and we were released from any further rent or building restoration obligations
under the lease for that specific manufacturing facility.
In
connection with our 2006 restructuring, we transferred our U.S. manufacturing
operations to our European site located near Dresden, Germany where we own a
60,000 square foot building.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our
common stock is traded on the Over-the-Counter Bulletin Board Market under the
symbol "SWTX.OB". Over-the-counter market quotations reflect inter-dealer prices
without retail mark-up, mark-down, or commission and may not necessarily
represent actual transactions. Prices in the following table
represent the high and low closing sales prices per share for our common stock
as reported by Over-the-Counter Bulletin Board Market during the periods
indicated.
|
High
|
Low
|
|||||||
|
2007
|
||||||||
|
1st
Quarter
|
$ | 0.73 | $ | 0.38 | ||||
|
2nd
Quarter
|
1.14 | 0.63 | ||||||
|
3rd
Quarter
|
1.26 | 0.59 | ||||||
|
4th
Quarter
|
0.90 | 0.55 | ||||||
|
High
|
Low
|
|||||||
|
2006
|
||||||||
|
1st
Quarter
|
$ | 0.88 | $ | 0.59 | ||||
|
2nd
Quarter
|
0.92 | 0.63 | ||||||
|
3rd
Quarter
|
0.68 | 0.47 | ||||||
|
4th
Quarter
|
0.63 | 0.37 | ||||||
On March
3, 2008, the last reported sale price for our common stock as reported on the
Over-the-Counter Bulletin Board Market was $0.75 per share. On such date, there
were approximately 290 holders of record of our common stock, and we believe
there were approximately 3,000 beneficial owners of our common
stock.
Dividends
We have
never declared or paid any cash dividends on our common stock, and we do not
anticipate paying cash dividends in the foreseeable future. Our Series A
10% cumulative convertable Preferred Stock (the "Series A Preferred Stock") is
entitled to cumulative dividends of 10% per year, payable at the discretion of
our Board of Directors. However, we have not paid dividends on the Series A
Preferred Stock, nor do we intend to pay dividends on the Series
A Preferred Stock in the foreseeable future. We currently
intend to retain future earnings, if any, to fund the expansion and growth of
our business. Furthermore, payment of cash dividends on our common stock is
prohibited without the consent of our holders of Series A 10% Preferred
stock.
Comparison
of Cumulative Total Stockholder Return
The
following performance graph assumes an investment of $100 on December 31, 2002
and compares the changes thereafter in the market price of our common stock with
a broad market index, Composite Market Index, and an industry index, General
Building Materials Index. We paid no dividends during the periods shown; the
performance of the indexes is shown on a total return (dividend reinvestment)
basis. The graph lines merely connect fiscal year-end dates and do not reflect
fluctuations between those dates.
* $100
invested on 12/31/02 in stock or index- including reinvestment of dividends.
Fiscal year ending December 31.
| 12/02 | 12/03 | 12/04 | 12/05 | 12/06 | 12/07 | |||||||||||||||||||
|
Southwall
Technologies Inc.
|
$ | 100.00 | $ | 30.67 | $ | 54.95 | $ | 19.49 | $ | 14.70 | $ | 25.56 | ||||||||||||
|
Composite
Market
|
100.00 | 131.81 | 148.18 | 157.42 | 181.49 | 192.04 | ||||||||||||||||||
|
General
Building Materials
|
100.00 | 134.15 | 167.80 | 180.86 | 230.48 | 233.69 |
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The
following selected consolidated financial data as of and for each of the five
years ended December 31, 2007 is derived from our audited consolidated
financial statements. This information should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes included
elsewhere in this report.
Consolidated
Statements of Operations Data:
|
Years Ended
December 31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||||||
|
Net
revenues
|
$ | 37,733 | $ | 40,209 | $ | 54,754 | $ | 57,573 | $ | 53,326 | ||||||||||
|
Cost
of revenues
|
23,907 | 24,746 | 37,241 | 36,787 | 45,914 | |||||||||||||||
|
Gross
profit
|
13,826 | 15,463 | 17,513 | 20,786 | 7,412 | |||||||||||||||
|
Gross
profit %
|
36.6 | % | 38.5 | % | 32.0 | % | 36.1 | % | 13.9 | % | ||||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Research
and development
|
4,505 | 6,782 | 5,104 | 3,199 | 6,714 | |||||||||||||||
|
Selling,
general and administrative
|
9,843 | 12,005 | 8,332 | 10,217 | 12,348 | |||||||||||||||
|
Contract
termination settlement
|
(2,959 | ) | -- | -- | -- | -- | ||||||||||||||
|
Restructuring
costs (recoveries), net
|
56 | 915 | -- | -- | (65 | ) | ||||||||||||||
|
Impairment
charge (recoveries) for long lived assets, net
|
(32 | ) | (214 | ) | (170 | ) | (1,513 | ) | 27,990 | |||||||||||
|
Total
operating expenses
|
11,413 | 19,488 | 13,266 | 11,903 | 46,987 | |||||||||||||||
|
Income
(loss) from operations
|
2,413 | (4,025 | ) | 4,247 | 8,883 | (39,575 | ) | |||||||||||||
|
Interest
expense, net
|
(692 | ) | (737 | ) | (973 | ) | (2,206 | ) | (1,590 | ) | ||||||||||
|
Costs
of warrants issued
|
-- | -- | -- | (6,782 | ) | (865 | ) | |||||||||||||
|
Other
income, net
|
2,346 | 210 | 75 | 534 | 419 | |||||||||||||||
|
Income
(loss) before provision for income taxes
|
4,067 | (4,552 | ) | 3,349 | 429 | (41,611 | ) | |||||||||||||
|
Provision
for income taxes
|
510 | 958 | 29 | 614 | 681 | |||||||||||||||
|
Net
income (loss)
|
3,557 | (5,510 | ) | 3,320 | (185 | ) | (42,292 | ) | ||||||||||||
|
Deemed
dividend on preferred stock
|
489 | 489 | 490 | -- | -- | |||||||||||||||
|
Net
income (loss) attributable to common stockholders
|
$ | 3,068 | $ | (5,999 | ) | $ | 2,830 | $ | (185 | ) | $ | (42,292 | ) | |||||||
|
Net
income (loss) per share:
|
||||||||||||||||||||
|
Basic
|
$ | 0.11 | $ | (0.22 | ) | $ | 0.11 | $ | (0.01 | ) | $ | (3.37 | ) | |||||||
|
Diluted
|
$ | 0.11 | $ | (0.22 | ) | $ | 0.10 | $ | (0.01 | ) | $ | (3.37 | ) | |||||||
|
Weighted
average shares used in computing net income (loss) per
share:
|
||||||||||||||||||||
|
Basic
|
27,576 | 26,949 | 26,743 | 14,589 | 12,537 | |||||||||||||||
|
Diluted
|
33,240 | 26,949 | 32,895 | 14,589 | 12,537 | |||||||||||||||
Consolidated
Balance Sheet Data:
|
As of December 31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Cash,
cash equivalents and restricted cash
|
$ | 6,786 | $ | 5,733 | $ | 7,002 | $ | 5,233 | $ | 1,891 | ||||||||||
|
Working
capital (deficit)
|
7,879 | 3,686 | 8,691 | 6,528 | (4,210 | ) | ||||||||||||||
|
Property,
plant and equipment
|
17,071 | 17,232 | 16,857 | 21,110 | 21,787 | |||||||||||||||
|
Total
assets
|
37,267 | 35,501 | 39,641 | 44,947 | 41,721 | |||||||||||||||
|
Term
debt and capital leases including current portion
|
9,426 | 9,627 | 10,107 | 13,107 | 15,700 | |||||||||||||||
|
Total
liabilities
|
20,574 | 23,655 | 23,702 | 30,374 | 40,000 | |||||||||||||||
|
Preferred
stock
|
4,810 | 4,810 | 4,810 | 4,810 | -- | |||||||||||||||
|
Total
stockholders' equity
|
11,883 | 7,036 | 11,129 | 9,763 | 1,721 | |||||||||||||||
Selected
Cash Flow Data:
|
Years Ended
December 31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Net
cash provided by (used in) operating activities
|
$ | 5,695 | $ | 748 | $ | 4,006 | $ | 3,830 | $ | (2,990 | ) | |||||||||
|
Net
cash provided by (used in) investing activities
|
(757 | ) | (505 | ) | (342 | ) | 1,261 | (2,775 | ) | |||||||||||
|
Net
cash provided by (used in) financing activities
|
(4,033 | ) | (1,533 | ) | (1,566 | ) | (2,249 | ) | 5,548 | |||||||||||
Quarterly
Financial Data:
The
following table sets forth consolidated statements of operations data for the
eight fiscal quarters ended December 31, 2007. This information has been
derived from our unaudited condensed consolidated financial statements and has
been prepared on the same basis as our audited consolidated financial statements
contained in this report. It includes all adjustments, consisting only of normal
recurring adjustments that we consider necessary for a fair presentation of such
information when read in conjunction with our audited financial statements and
related notes. Operating results for any quarter are not necessarily indicative
of results for any future period. This information should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes included
elsewhere in this report.
Selected
Quarterly Financial Information (Unaudited):
|
Quarters Ended
|
||||||||||||||||
|
March 31,
|
June 30,
|
Sept. 30,
|
Dec. 31,
|
|||||||||||||
|
2007
|
2007
|
2007
|
2007
|
|||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||
|
Net
revenues
|
$ | 10,505 | $ | 9,250 | $ | 9,249 | $ | 8,729 | ||||||||
|
Cost
of revenues
|
6,095 | 6,507 | 6,070 | 5,235 | ||||||||||||
|
Gross
profit
|
4,410 | 2,743 | 3,179 | 3,494 | ||||||||||||
|
Income
before provision for income taxes
|
413 | 467 | 462 | 2,725 | ||||||||||||
|
Net
income
|
232 | 462 | 250 | 2,613 | ||||||||||||
|
Deemed
dividend on preferred stock
|
122 | 122 | 122 | 123 | ||||||||||||
|
Net
income attributable to common stockholders
|
$ | 110 | $ | 340 | $ | 128 | $ | 2,490 | ||||||||
|
Net
income per share:
|
||||||||||||||||
|
Basic
|
$ | 0.00 | $ | 0.01 | $ | 0.00 | $ | 0.09 | ||||||||
|
Diluted
|
$ | 0.00 | $ | 0.01 | $ | 0.00 | $ | 0.08 | ||||||||
|
Weighted
average shares used in computing net income per share:
|
||||||||||||||||
|
Basic
|
27,139 | 27,513 | 27,820 | 27,820 | ||||||||||||
|
Diluted
|
27,566 | 28,498 | 28,867 | 33,344 | ||||||||||||
|
Quarters Ended
|
||||||||||||||||
|
Mar. 31,
|
Jun. 30,
|
Sep. 30,
|
Dec. 31,
|
|||||||||||||
|
2006
|
2006
|
2006
|
2006
|
|||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||
|
Net
revenues
|
$ | 10,034 | $ | 11,337 | $ | 9,597 | $ | 9,241 | ||||||||
|
Cost
of revenues
|
6,366 | 7,268 | 5,667 | 5,445 | ||||||||||||
|
Gross
profit
|
3,668 | 4,069 | 3,930 | 3,796 | ||||||||||||
|
Income
(loss) before provision for (benefit from) income taxes
|
(1,034 | ) | (1,154 | ) | (2,528 | ) | 164 | |||||||||
|
Net
loss
|
(1,327 | ) | (1,387 | ) | (2,721 | ) | (75 | ) | ||||||||
|
Deemed
dividend on preferred stock
|
122 | 122 | 123 | 122 | ||||||||||||
|
Net
loss attributable to common stockholders
|
$ | (1,449 | ) | $ | (1,509 | ) | $ | (2,844 | ) | $ | (197 | ) | ||||
|
Net
loss per share:
|
||||||||||||||||
|
Basic
|
$ | (0.05 | ) | $ | (0.06 | ) | $ | (0.11 | ) | $ | (0.01 | ) | ||||
|
Diluted
|
$ | (0.05 | ) | $ | (0.06 | ) | $ | (0.11 | ) | $ | (0.01 | ) | ||||
|
Weighted
average shares used in computing net loss per share:
|
||||||||||||||||
|
Basic
|
26,825 | 26,939 | 26,957 | 27,073 | ||||||||||||
|
Diluted
|
26,825 | 26,939 | 26,957 | 27,073 | ||||||||||||
Our
results of operations have varied significantly from quarter to quarter, and we
expect them to continue to do so in the future. As a result of our high fixed
costs, if revenues fall below our expectations, we may not be able to reduce our
spending sufficiently to prevent a loss from operations. We anticipate that our
sales will continue to have long sales cycles. Therefore, the timing
of future customer contracts could be difficult to predict, making it very
difficult to predict revenues in future quarters, and our operating results may
continue to vary significantly.
Other
factors that could affect our quarterly operating results include those
described elsewhere in this report and the following fluctuating customer
demand, which is influenced by a number of factors, including market acceptance
of our products and the products of our customers by end-users, changes in
product mix, and the timing, cancellation or delay of customer orders and
shipments;
|
|
·
|
timing
of shipments of our products by us and by independent subcontractors to
our customers;
|
|
|
·
|
manufacturing
and operational difficulties that may arise due to, among other things,
quality control, capacity utilization of our production machines,
unscheduled equipment maintenance and repair, and the hiring and training
of additional staff;
|
|
|
·
|
our
ability to enhance our existing products, improve our processes and
introduce new products on a timely
basis;
|
|
|
·
|
competition,
including the introduction or announcement of new products by competitors,
the adoption of competitive technologies by our customers, the addition of
new production capacity by competitors and competitive pressures on prices
of our products and those of our customers;
and
|
|
|
·
|
product
returns and customer allowances stemming from product quality defects and
the satisfaction of product warranty
claims.
|
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(amounts
in thousands, except per share data)
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with Item 6, "Selected Consolidated
Financial Data", our consolidated financial statements and notes thereto
appearing elsewhere in this report and the risk factors set forth in Item 1A,
“Risk Factors”. This discussion and analysis contains forward-looking statements
that involve risks and uncertainties. You should not place undue reliance on
these forward-looking statements. Our actual results may differ materially from
those anticipated in these forward-looking statements. A brief description of
the forward-looking statements appears immediately preceding Item 1, “Business”,
and a discussion of certain factors that may cause our
actual results to differ from those anticipated in the forward-looking
statements appears in Item 1A, “Risk Factors”.
Overview
Demand
for our customers' products, which has a significant effect on our results, has
changed rapidly from time to time in the past and may do so in the future. For
example, as a result of changing demand in the plasma display industry
from 1999 through 2007, our electronic display revenues declined from
approximately $26,600 in 2002 to $19,000 in 2003, increased to $20,600 in 2004,
decreased to $14,039 in 2005, to $10,799 in 2006 and to $2,674 in
2007. In 2007 we terminated an agreement with Mitsui Chemicals, Inc.
which accounted for approximately $2,432 of revenue in 2007.
For the
past four years, we have sold a highly specialized EMI filtering film for use in
plasma display panels for televisions under an exclusive Manufacturing and
Supply Agreement to our customer, Mitsui Chemicals, Inc. Under the terms of this
agreement, Mitsui Chemicals Inc. has been obligated to purchase minimum annual
amounts of electronic display materials from us. .As a result of price
sensitivity which led to a decreased demand for our product in the electronic
display market, we agreed with Mitsui Chemicals to terminate this agreement in
November, 2007. As consideration for their obligations under this agreement,
Mitsui Chemicals paid us $2,959. In 2007 and 2006, Mitsui Chemicals
accounted for approximately $2,432 and $9,876 in revenue,
respectively. In 2006, the EMI filtering film revenue accounted for
approximately 27% of our net revenues versus 7.1% of our net revenues in
2007. Due to ongoing price competition in this market, we expect
revenues attributable to this product line to continue to decline.
Our
research and development expenditures decreased from $6,782 in 2006 to $4,505 in
2007. In 2005, we began development and sampling of a new class of films with
improved performance that we believe will be beneficial across our product
lines. We also continued significant research and development into thin film
technology that we anticipate will enable us to produce products for new
applications and markets. In 2005, we invested in additional engineering
resources to support our increased focus on new products and
technologies.
In
January 2006, we commenced restructuring actions to improve our cost structure
for 2006 and beyond. These actions included the closure of our Palo Alto,
California manufacturing facility and a reduction in force at our Palo Alto site
during 2006. Also during 2006, we transferred our U.S. manufacturing operations
to our European site located near Dresden, Germany. As a result of these
restructuring actions, our gross margins increased from approximately 36% in the
first half of 2006 to approximately 41% in the second half of
2006. Our gross margin in 2007 was 37%.
Financing
and Related Transactions
During
2003, we experienced a significant decline in sales which led to a significant
deterioration in our working capital position, which raised concerns about our
ability to fund our operations and continue as a going concern in the short term
and our ability to meet obligations coming due over the following few
years.
On
December 18, 2003, in order to raise cash to fund our operations and continue as
a going concern, we entered into an investment agreement with Needham &
Company, Inc., Needham Capital Partners II, L.P., Needham Capital Partners II
(Bermuda), L.P., Needham Capital Partners III, L.P., Needham Capital Partners
IIIA, L.P., Needham Capital Partners III (Bermuda), L.P., (together referred to
as “Needham Company and its Affiliates”) and Dolphin Direct Equity Partners, LP
(collectively with Needham Company and its Affiliates, “the Investors”).
Through a series of transactions, an aggregate of 4,893 shares of Series A
Preferred Stock were issued. Needham and its Affiliates received
3,262 shares and Dolphin Direct Equity Partners, LP received 1,631
shares.
Each
share of the Series A Preferred Stock is convertible into common stock at
any time at a conversion price of $1.00 per share, subject to certain
adjustments at any time at the option of the holder.
At
December 31, 2007, Needham and certain of its affiliates and Dolphin Direct
Equity Partners, LP own 40.7% and 16.6%, respectively, of our outstanding common
stock. In addition, if Needham and its affiliates and Dolphin Direct
Equity Partners, LP had converted Series A shares into common stock at December
31, 2007, they would have owned 44.6% and 19.1%, respectively, of our
outstanding common stock. In 2007, 2006 and 2005, we accrued, in the
aggregate, $1,468 of deemed dividends on preferred stock with respect to
Series A shares.
Each
share of the Series A Preferred Stock shares has a stated value of $1.00
and is entitled to a cumulative dividend of 10% per year, payable at the
discretion of the Board of Directors. Dividends on the Series A Preferred
Stock accrue daily commencing on the date of issuance and are deemed to
accrue whether or not earned or declared and whether or not there are profits,
surplus or other funds legally available for the payment of dividends.
Accumulated dividends, when and if declared by the Board of Directors, will be
paid in cash. In 2007, 2006 and 2005, we accrued, in the aggregate, $1,468
of deemed dividends on the Preferred Stock with respect to Series A
shares.
Liquidation
Preference. Upon a liquidation or dissolution of Southwall,
the holders of Series A shares are entitled to be paid a liquidation preference
out of assets legally available for distribution to our stockholders before any
payment may be made to the holders of common stock. The liquidation preference
is equal to the stated value of the Series A shares, which is $1.00 per share,
plus any accumulated but unpaid dividends. Mergers, the sale of all or
substantially all of our assets, or the acquisition of Southwall by another
entity and certain other similar transactions may be deemed to be liquidation
events for these purposes.
Agreements
with Major Creditors
Judd Properties, L.P. Judd
Properties, L.P. was our landlord for our manufacturing facility in Palo Alto,
California. In 2006, we closed this manufacturing facility and and
began the process of surrendering the property to the
landlord. At December 31, 2007, December 31, 2006 and December
31, 2005, our accrued liability to Judd Properties L.P. was approximately
$1,662, $1,509 and $1,192, respectively. On January 31, 2006, we paid
our accrued rent liability of $1,192 and we continued to pay our monthly rent
obligation to the landlord. In connection with the surrender plan with the
landlord, $1,509 was accrued in July 2006 as a leasehold asset retirement
obligation. In the fourth quarter of 2007, we reserved an additional
$153 for costs associated with vacating the location. On January 31, 2008 the
landlord drew down a letter of credit in the amount of $1,000 and released our
$100 security deposit. We subsequently paid the landlord $400
pursuant to a settlement agreement signed on February 22, 2008. The settlement
agreement terminated our rent and building restoration obligations under the
lease. The remaining accrued obligation of $153 represents costs
associated with environmental sampling and legal costs.
Portfolio Financial Servicing
Company, Bank of America and Lehman Brothers. On February 20, 2004, we
entered into a settlement agreement with Portfolio Financial Servicing, Bank of
America and Lehman Brothers, which extinguished a claim arising out of
sale-leaseback agreements, which we entered into in connection with the
acquisition of two of our production machines. As part of the settlement, we
agreed to pay a total of $2,000 plus interest over a period of 6 years. The
settlement required us to make an interest payment in 2004, and beginning in
2005, to make quarterly principal and interest payments until 2010. We also
agreed to return the production machines in question. If we fail to
make the required payments, Portfolio Financial Services, Bank of America and
Lehman Brothers may enter a confession of judgment against us in the amount of
$5,900. In 2007, we paid Portfolio Financial Servicing $389 in
principal and interest payments. As of December 31, 2007 the principal amount
outstanding under the settlement is $1,300 with an additional amount of $2,354
in accrued interest.
Other
Factors Affecting Our Financial Condition and Results of Operations
Restructuring activities. On
January 19, 2006, we announced restructuring activities that included the
closure of our Palo Alto, California manufacturing plant and a reduction in the
work force of approximately 22% of our worldwide personnel. For 2007 and 2006,
the Company incurred restructuring charges of approximately $56 and $915
respectively.
Demand for our customers'
products. We derive significant benefits from our relationships with a
few large customers. 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
customers include, Pilkington PLC, Saint Gobain Sekurit and V-Kool International
Holdings Pte. Ltd., or V-Kool International, which collectively accounted
for approximately 50.0%, 35.5% and 43.3% of our total revenues in 2007, 2006 and
2005, respectively.
Under our
amended agreement with V-Kool International, for each year through 2011, V-Kool
International is required to purchase an amount of product equal to 110% of the
amount of product it was required to purchase in the prior year. V-Kool
International was obligated to purchase approximately $12,200 of products in
2007. During 2007, V-Kool International purchased approximately $12,100 of
product. For the year ending December 31, 2008, V-Kool International is
obligated to purchase approximately $13,400 of our products.
During
2003, as a result of market conditions, we agreed to amend our agreement with
V-Kool International to reduce substantially the annual purchases required of
V-Kool International. It is possible that due to market and other
conditions, V-Kool International may again request a reduction of its minimum
annual purchase requirements.
Sales returns and
allowances. Our gross margins and profitability have been
adversely affected at from time to time by product quality and warranty
claims. From 2003 to 2007, returns and allowances have averaged 2.8%
of gross sales. The rate of returns and allowances in 2007 was 3.6%
of gross sales ($1,360). This increase was driven by a manufacturing
process change that was implemented by one of our subcontracting
companies. The change in process caused a one time product quality
problem and resulted in a sales return credit of $506 (1.3% of gross sales)
being provided to the customer in June 2007. Southwall together
with our subcontractor quickly implemented a solution to this quality problem
and have not seen a recurrence of it to date.
Impairment charge for long-lived
assets. In 2006, we incurred approximately $305 in impairment
charges for long-lived assets and realized recoveries of approximately
$519. In 2007 the amount of recoveries was de minimous.
Critical
Accounting Policies and Estimates
The
preparation of our consolidated financial statements requires us to make
estimates and assumptions that affect the amounts of assets and liabilities we
report, our disclosure of contingencies, and the amounts of revenue and expenses
we report in our consolidated financial statements. If we used different
judgments or estimates, there might be material differences in the amount and
timing of revenues and expenses we report. See Note 1 of our
Notes to Consolidated Financial Statements (Item 8. “Financial Statements and
Supplementary Data”) for details regarding our accounting policies. The critical
accounting policies, judgments and estimates which we believe have the most
significant effect on our consolidated financial statements, are set forth
below:
|
|
.
|
Revenue
recognition;
|
|
|
.
|
Stock-based
compensation;
|
|
|
.
|
Allowances
for doubtful accounts and sales
returns;
|
|
|
.
|
Valuation
of inventories;
|
|
|
.
|
Assessment
of the probability of the outcome of current
litigation;
|
|
|
.
|
Restructuring
costs;
|
|
|
.
|
Valuation
of long-lived assets; and
|
|
|
.
|
Accounting
for income taxes.
|
Revenue recognition. We
recognize revenue when persuasive evidence of an arrangement exists, delivery
has occurred or services have been provided, the sale price is fixed or
determinable, and the receipt of payment is reasonably assured. Accordingly, we
generally recognize revenue from product sales when the terms of sale transfer
title and risk of loss, which occurs either upon shipment or upon receipt by
customers. We account for estimated returns and allowances. We adjust these
allowances periodically to reflect our actual and anticipated experience. If any
of these conditions to recognize revenue are not met, we defer revenue
recognition.
Stock-Based Compensation.
Effective January 1, 2006, we adopted the fair value recognition
provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”),
using the modified prospective transition method and therefore have not restated
results for prior periods. Under this transition method, stock-based
compensation expense in fiscal 2007 and 2006 included stock-based compensation
expense for all share-based payment awards granted prior to, but not yet vested
as of January 1, 2006, based on the grant-date fair value estimated in
accordance with the original provision of SFAS No. 123, “Accounting for
Stock-Based Compensation” (“SFAS 123”). Stock-based compensation expense for all
share-based payment awards granted after January 1, 2006, is based on the
grant-date fair value estimated in accordance with the provisions of SFAS 123R.
SFAS 123R requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option pricing model. We use the
Black-Scholes option pricing model. The value portion of the award
that is ultimately expected to vest is recognized as compensation expense on a
straight-line basis over the requisite service period of the award, which is
generally the option vesting term of four years. Prior to the adoption of SFAS
123R, we recognized stock-based compensation expense in accordance with
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued
to Employees” (“APB 25”). In March 2005, the Securities and Exchange Commission
(the “SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the
SEC’s interpretation of SFAS 123R and the valuation of share-based payments for
public companies. We applied the provisions of SAB 107 in our adoption of SFAS
123R.
In
November 2005, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) No. FAS 123R-3, “Transition Election Related To
Accounting for Tax Effects of Share-Based Payment Awards” (“FSP 123R-3”). We
elected to adopt the alternative transition method provided in the FSP 123R-3
for calculating the tax effects of stock-based compensation pursuant to SFAS
123R. The alternative transition method includes simplified methods to establish
the beginning balance of the additional paid-in capital pool (“APIC pool”)
related to the tax effects of employee stock-based compensation, and to
determine the subsequent impact on the APIC pool and Consolidated Statements of
Cash Flows of the tax effects of employee stock-based compensation awards that
are outstanding upon adoption of SFAS 123R.
Allowances for doubtful accounts and
sales returns. We establish allowances for doubtful accounts and sales
returns for specifically identified, as well as anticipated, doubtful accounts
and product quality and warranty claims based on credit profiles of our
customers, current economic trends, contractual terms and conditions, and
historical payment, sales returns and claims experience. As of December 31,
2007, our consolidated balance sheet included allowances for doubtful accounts
and sales returns of $66 and $1,102, respectively. As of December 31,
2006, our consolidated balance sheet included allowances for doubtful accounts
and sales returns of $102 and $1,415, respectively. During 2007, 2006 and 2005,
we recorded sales return costs of $1,360, $603 and $720, respectively. We
incurred a credit to bad debt expense of $2, $43 and $84 in 2007, 2006 and 2005,
respectively. These credits are incurred as a result of our customers
paying written-off receivable balances. If our actual bad debt and product
quality and warranty costs differ from our estimates or if we adjust our
estimates in future periods, our operating results, cash flows and financial
position could be materially adversely affected.
Valuation of inventories. We
state inventories at the lower of cost or market. We establish provisions for
excess and obsolete inventories after periodic evaluation of historical sales,
current economic trends, forecasted sales, predicted lifecycle and current
inventory levels. During 2007 and 2006, we charged $1,109 and $1,546 against
cost of sales for excess and obsolete inventories. In 2005, we charged
approximately $1,710. If our actual experience of excess and obsolete
inventories differs from our estimates or if we adjust our estimates, or if
changes occur in forecasted sales and expected product lifecycle, our operating
results, cash flows and financial position could be materially adversely
affected.
Assessment of the probability of the
outcome of current litigation. In the ordinary course of business, we
have periodically become engaged in litigation principally as a result of
disputes with customers of our architectural products. We have relied upon
insurance coverage to fund the defense of these actions and significant portions
of the settlements that were reached. Based on our review of pending litigation,
we record accruals for loss contingencies when we believe that a liability is
likely of being incurred and we can reasonably estimate the amount of our share
of the loss.
Restructuring costs. We have
recorded reserves/accruals for restructuring costs related to the restructuring
of operations. The restructuring reserves include payments to employees for
severance, termination fees associated with leases and other contracts, and
other costs related to the closure of facilities. After the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 146, “Accounting for
Costs Associated with Exit or Disposal Activities” (“SFAS 146”) on January 1,
2003, the reserves have been recorded when management has approved a plan to
restructure operations and a liability has been incurred rather than the date
upon which management has approved and announced a plan. The restructuring
reserves are based upon management estimates at the time they are recorded.
These estimates can change depending upon changes in facts and circumstances
subsequent to the date the original liability was recorded. Accruals for
facility leases under which we ceased using the benefits conveyed to us under
the lease may change if market conditions for subleases change or if we later
negotiate a termination of the lease. Prior to the adoption of SFAS 146,
restructuring reserves were recorded at the time we announced a plan to exit
certain activities and were based on estimates of the costs and length of time
to exit those activities. See Note 3 – Balance Sheet Detail of the Notes to the
Consolidated Financial Statements (Item 8) for a complete discussion of our
restructuring actions and all related restructuring reserves by type as of
December 31, 2007.
Valuation of long-lived
assets. We assess the valuation of long-lived assets if events or changes
in circumstances indicate that the carrying value may not be recoverable.
Factors that could trigger an impairment review include the following: (i)
significant negative industry or economic trends; (ii) exiting an activity in
conjunction with a restructuring of operations; (iii) current, historical or
projected losses that demonstrate continuing losses associated with an asset; or
(iv) a significant decline in our market capitalization, for an extended period
of time, relative to net book value. When we determine that there is an
indicator that the carrying value of long-lived assets may not be recoverable,
we measure impairment based on estimates of future cash flows. These estimates
include assumptions about future conditions such as future revenues, gross
margins, operating expenses, the fair values of certain assets based on
appraisals, and industry trends.
Accounting for income taxes.
In preparing our consolidated financial statements, we estimate our income taxes
for each of the jurisdictions in which we operate. We include differences
between our deferred tax assets, such as net operating loss carry forwards, and
deferred tax liabilities in our consolidated balance sheet. We must then assess
the likelihood that our deferred tax assets will be recovered from future
taxable income, and to the extent we believe that recovery is not likely, we
must establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in any period, we must include an expense
within the tax provision in our statement of operations. To date, we have
recorded a full allowance against our U.S. deferred tax assets. The valuation
allowances were $18,204, $19,083 and $21,718 at December 31, 2007, 2006 and
2005, respectively, which fully reserved our U.S. net deferred tax assets
related to temporary differences, net operating loss carry forwards and other
tax credits. Future income tax liabilities may be reduced to the extent
permitted under federal and applicable state income tax laws, when the future
tax benefit can be utilized by applying it against future income.
Significant
management judgment is required in determining our provisions for income taxes,
our deferred tax assets and liabilities and our future taxable income for
purposes of assessing our ability to utilize any future tax benefit from our
deferred tax assets. If actual results differ from these estimates or we adjust
these estimates in future periods, our financial position, cash flows and
results of operations could be materially affected.
In June
2006, the FASB issued Interpretation No. 48 “Accounting for Uncertainty in
Income Taxes—an interpretation of FASB Statement 109” (“FIN 48”). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB Statement No. 109
“Accounting for Income Taxes”. It prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. FIN 48 was adopted on
January 1, 2007 and the adoption of FIN 48 did not have a material impact
on our financial positions, results of operations or cash flows. See Note 8
of the accompanying consolidated financial statements included in Item 8 for
additional information on FIN 48.
Recently
issued accounting pronouncements
In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements – An amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 amends ARB 51 to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a non-controlling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. The amount of net income attributable
to the noncontrolling interest will be included in consolidated net income on
the face of the income statement. SFAS 160 clarifies that changes in a parent’s
ownership interest in a subsidiary that do not result in deconsolidation are
equity transactions if the parent retains its controlling financial interest. In
addition, SFAS 160 requires that a parent recognize a gain or loss in net income
when a subsidiary is deconsolidated. SFAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. The Company is currently evaluating the impact of the adoption of SFAS 160
on its consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R retains the fundamental requirements in
Statement 141 that the acquisition method of accounting (which Statement 141
called the purchase method) be used for all business combinations and for an
acquirer to be identified for each business combination. SFAS 141R requires an
acquirer to recognize the assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exceptions specified in the
Statement. That replaces Statement 141’s 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. SFAS 141R retains the
guidance in Statement 141 for identifying and recognizing intangible assets
separately from goodwill. SFAS 141R will now require acquisition costs to be
expensed as incurred, restructuring costs associated with a business combination
must generally be expensed subsequent 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. SFAS 141R 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 SFAS 141R will have an impact on our
accounting for future business combinations once adopted, but the effect is
dependent upon the acquisitions that are made in the future.
In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities” (SFAS 159”), including an
amendment of FASB Statement No. 115, which allows an entity to elect to
record financial assets and liabilities at fair value upon their initial
recognition on a contract-by-contract basis. Subsequent changes in fair value
would be recognized in earnings as the changes occur. SFAS 159
also establishes additional disclosure requirements for these items stated at
fair value. SFAS 159 is effective as of the beginning of an
entity’s first fiscal year that begins after November 15,
2007. The Company is currently evaluating the impact of the adoption
of SFAS 159 on its consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosure of fair value
measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements and accordingly, does not require any
new fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the impact of the adoption of SFAS 157 on its
consolidated financial statements.
Results
of Operations
Consolidated
Statements of Operations Data:
|
Years Ended
December 31,
|
||||||||||||||||||||
|
Percent
|
Percent
|
|||||||||||||||||||
|
2007
|
Change
|
2006
|
Change
|
2005
|
||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||
|
Net
revenues, by product:
|
||||||||||||||||||||
|
Automotive
glass
|
$ | 15,113 | 13 | % | $ | 13,433 | (32 | )% | $ | 19,647 | ||||||||||
|
Electronic
display
|
2,674 | (75 | ) | 10,799 | (23 | ) | 14,039 | |||||||||||||
|
Architectural
|
5,957 | 8 | 5,528 | (7 | ) | 5,934 | ||||||||||||||
|
Window
film
|
13,989 | 34 | 10,449 | (31 | ) | 15,134 | ||||||||||||||
|
Total
net revenues
|
37,733 | (6 | ) | 40,209 | (27 | ) | 54,754 | |||||||||||||
|
Cost
of sales
|
23,907 | (3 | ) | 24,746 | (34 | ) | 37,241 | |||||||||||||
|
Gross
profit
|
13,826 | (11 | ) | 15,463 | (12 | ) | 17,513 | |||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Research
and development
|
4,505 | (34 | ) | 6,782 | 33 | 5,104 | ||||||||||||||
|
Selling,
general and administrative
|
9,843 | (18 | ) | 12,005 | 44 | 8,332 | ||||||||||||||
|
Contract
termination settlement
|
(2,959 | ) | -- | -- | -- | -- | ||||||||||||||
|
Restructuring
expenses
|
56 | (94 | ) | 915 | -- | -- | ||||||||||||||
|
Recoveries
for long-lived assets, net
|
(32 | ) | (85 | ) | (214 | ) | 26 | (170 | ) | |||||||||||
|
Total
operating expenses
|
11,413 | (41 | ) | 19,488 | 47 | 13,266 | ||||||||||||||
|
Income
(loss) from operations
|
2,413 |
nm*
|
(4,025 | ) |
nm*
|
4,247 | ||||||||||||||
|
Interest
expense, net
|
(692 | ) | (6 | ) | (737 | ) | (24 | ) | (973 | ) | ||||||||||
|
Other
income, net
|
2,346 |
nm*
|
210 | 180 | 75 | |||||||||||||||
|
Income
(loss) before provision for income taxes
|
4,067 |
nm*
|
(4,552 | ) |
nm*
|
3,349 | ||||||||||||||
|
Provision
for income taxes
|
510 | (47 | ) | 958 |
nm*
|
29 | ||||||||||||||
|
Net
income (loss)
|
3,557 |
nm*
|
(5,510 | ) |
nm*
|
3,320 | ||||||||||||||
|
Deemed
dividend on preferred stock
|
489 | -- | 489 | -- | 490 | |||||||||||||||
|
Net
income (loss) attributable to common stockholders
|
$ | 3,068 |
nm*
|
$ | (5,999 | ) |
nm*
|
$ | 2,830 | |||||||||||
* not meaningful
The
following table sets forth our results of operations expressed as a percentage
of total revenues:
|
Year Ended
December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Net
Revenues:
|
||||||||||||
|
Automotive
glass
|
40.0 | % | 33.4 | % | 35.9 | % | ||||||
|
Electronic
display
|
7.1 | 26.9 | 25.6 | |||||||||
|
Architectural
|
15.8 | 13.7 | 10.8 | |||||||||
|
Window
film
|
37.1 | 26.0 | 27.7 | |||||||||
|
Total
net revenues
|
100.0 | 100.0 | 100.0 | |||||||||
|
Cost
of sales
|
63.4 | 61.5 | 68.0 | |||||||||
|
Gross
profit
|
36.6 | 38.5 | 32.0 | |||||||||
|
Research
and development
|
11.9 | 16.9 | 9.3 | |||||||||
|
Selling,
general and administrative
|
26.1 | 29.9 | 15.2 | |||||||||
|
Restructuring
expenses
|
0.1 | 2.3 | -- | |||||||||
|
Contract
termination settlement
|
(7.8 | ) | -- | -- | ||||||||
|
Recoveries
for long-lived assets, net
|
(0.1 | ) | (0.5 | ) | (0.3 | ) | ||||||
|
Total
operating expenses
|
30.2 | 48.5 | 24.2 | |||||||||
|
Income
(loss) from operations
|
6.4 | (10.0 | ) | 7.8 | ||||||||
|
Interest
expense
|
(1.8 | ) | (1.8 | ) | (1.8 | ) | ||||||
|
Other
income, net
|
6.2 | 0.5 | 0.1 | |||||||||
|
Income
(loss) before provision for income taxes
|
10.8 | (11.3 | ) | 6.1 | ||||||||
|
Provision
for income taxes
|
1.4 | 2.4 | 0.1 | |||||||||
|
Net
income (loss)
|
9.4 | (13.7 | ) | 6.1 | ||||||||
|
Deemed
dividend on preferred stock
|
1.3 | 1.2 | 0.9 | |||||||||
|
Net
income (loss) attributable to common stockholders
|
8.1 | % | (14.9 | ) % | 5.2 | % | ||||||
Net revenues
Net
revenues were $37,733 in 2007, $40,209 in 2006 and $54,754 in 2005. Net revenues
for 2007 decreased by $2,476, or 6.2% from 2006. Net revenues for
2006 decreased by $14,545, or 26.6% from 2005.
Our net
revenues in the automotive market increased by $1,680, or 12.5 %, from $13,433
in 2006 to $15,113 in 2007. The increase was primarily due to increased average
selling prices for some of our products and the Euro exchange rate, as many of
our customers are billed in Euros. Our net revenues in the automotive
market decreased by $6,214, or 32%, from $19,647 in 2005 to $13,433 in
2006. The decrease was primarily due to a reduction in demand
throughout 2006 by a major customer as a result of their large inventory build
up at the end of 2005 and the ongoing “de-contenting” (a change by auto
manufacturers to make the parts in which our products are found optional
features rather than standard features to control their costs) trend in the
automotive industry.
Our net
revenues in the electronic display market decreased by $8,125, or 75%, from
$10,799 in 2006 to $2,674 in 2007. The decrease was primarily due to economic
changes for plasma display panel products for televisions, resulting in price
pressures on all suppliers in the market. For the past four years, we have
sold a highly specialized EMI filtering film for use in plasma display panels
for televisions under an exclusive Manufacturing and Supply Agreement to our
customer, Mitsui Chemicals, Inc.. Under the terms of this agreement,
Mitsui Chemicals Inc. has been obligated to purchase minimum annual amounts of
electronic display materials from us. As a result of price sensitivity which led
to a decreased demand for our product in the electronic display market, we
agreed with Mitsui Chemicals to terminate this agreement in November, 2007. As
consideration for the their obligations under this agreement, Mitsui Chemicals
paid us $2,959. In 2007 and 2006, Mitsui Chemicals accounted for $2,432
and $9,876 in revenue, respectively. In 2006, the EMI filtering film
revenue accounted for approximately 27% of our net revenues versus 7.1% of our
net revenues in 2007. Our net revenues in the electronic display
market decreased by 23% or $3,240 in 2006 when compared to 2005 as a result of
decreased sales to Mitsui Chemicals in the plasma display market and decreased
sales to Mitsubishi as Mitsubishi ceased production of their 17-inch CRT
monitor. Due to ongoing price competition in this market, we expect
revenues attributable to this product line to continue to decline.
Our net
revenues in the architectural market increased in 2007 to $5,957 from $5,528 in
2006. The $429 increase was due to 12 new architectural accounts added in 2007,
which contributed $587 in revenue. Our net revenues in the architectural market
decreased 6.8% or $406 in 2006 when compared to 2005 due to a decrease in sales
to our customers in all regions.
Our net
revenues in our window film market increased 34 % or $3,540 from $10,449 in 2006
to $13,989 in 2007. The increase was primarily due to increased demand from
Globalmatrix. Our net revenues in our window film market decreased
31% or $4,685 in 2006 when compared to 2005.
This
decline was due to the fact that in 2005, we stopped converting (cutting the
film to the customer’s specification) one of our window film product models and
agreed with our customers that they would complete this process. This
resulted in lower revenues on our TX products in 2006 compared to 2005, as our
customers bought more products to fill their distribution pipelines in
2005.
Cost of Revenue
Cost
of revenue decreased 3 % or $839 in 2007 from 2006. As a percent
of net revenues, cost of revenue was 63.4 % in 2007 compared to 61.5% in
2006. Facility costs, depreciation expense and labor costs have historically
comprised the majority of our manufacturing expenses. Since these costs are
relatively fixed and do not fluctuate proportionately with net revenues, the
increase in the cost of revenue as a percent of net revenues was due
primarily to our decrease in net revenues. Cost of revenue decreased 34% or
$12,495 in 2006 from 2005. As a percent of net revenues, cost of revenue
was 61.5% in 2006 compared to 68% in 2005. The decrease in cost of revenue
in 2006 from 2005 was primarily due to the transfer of production to our lower
cost German manufacturing facility, manufacturing savings as a result of closing
our Palo Alto manufacturing facility, partially offset by inventory reserves for
our window film products.
Gross
margin
Gross
margin decreased from 38.5% in 2006 to 36.6% in 2007. The decrease in gross
margin was largely the result of the following: a slight decrease in
production volume due to a reduction in demand for the plasma display panel
product line; a large amount of disposed of or impaired inventory resulting from
a unique quality problem with Window Film and the impact of the decline in value
of the U.S. dollar and rising gold and silver prices. These factors
were partially offset by increases in prices and a change in product mix with
higher margin window film products replacing the lower margin plasma display
panel products. Gross margin increased from 32% in 2005 to 38.5% in
2006. This increase in gross margin was largely the result of transferring all
of our manufacturing operations to our lower cost production facility in
Germany.
Operating
expenses
After an
33% increase in 2006 as compared to 2005 the company was able to reduce research
and development expenses by 34% or $2,277 in 2007 compared to 2006. The decrease
was the result of a decision to move a portion of our research and development
effort to our German production facility resulting in a savings of approximately
$1,200. In addition, a reduction in machine time and material costs
relating to research and development accounted for approximately $1,000 in
additional cost reductions. Research and development expenses increased 33% or
$1,678 in 2006 compared to 2005. The increase was due to the expansion of our
engineering organization in the second half of 2005.
Our
selling, general and administrative expenses decreased 18% or approximately
$2,162 in 2007 from 2006. The decrease in selling, general and administrative
expenses in 2007 was primarily due to the following expenses in 2006 that were
either reduced or eliminated in 2007 or incurred at a lesser amount: accruals
for leasehold asset retirement obligations of approximately $1,709 in 2006
compared to $453 in 2007, severance costs of $344 related to our former CEO,
costs related to the settlement of a former employee lawsuit of $320, higher
marketing expenses of $179 and increased facility expenses of
$200. The reduction in these expenses from 2006 to 2007 was partially
offset by higher internal control expenses related to Sarbanes-Oxley compliance
of $162 in 2007. Our selling, general and administrative expenses
increased 44% or $3,673 in 2006 from 2005 for the same reasons stated
above.
Restructuring
costs
In 2007,
we recorded a charge to operating expenses of $56 as a result of further costs
for the closure of our Palo Alto manufacturing facility. During 2006, we
incurred restructuring costs of $915 primarily related to the consolidation of
our manufacturing from Palo Alto, California to Dresden, Germany and the related
reductions in workforce in Palo Alto.
Contract
Termination Settlement
In
November, 2007 we reached an agreement with Mitsui Chemicals, Inc. to terminate
our Manufacturing and Supply Agreement. This was a one-time credit of
$2,959 to expense from operations and was included in the fourth quarter of
2007.
Recoveries
for long-lived assets
In June
2004, we had a recovery for long-lived assets as a result of selling a
production machine from our Tempe manufacturing facility to a third party. The
sale value was approximately $1,700, which included the price of the production
machine, other miscellaneous hardware, training to be provided by us and
operating software to run the machine. All of our obligations were
completed and we recognized a gain of approximately $1,500, representing 90% of
the sale value, less book value of the machine of $100. Collection of
the final 10% was contingent on installation of the machine by a third party or
120 days after shipment. We collected the final 10% in January
2005 and recognized the gain in the amount of approximately $200 in the first
quarter of 2005. In 2006, we incurred approximately $305 in
impairment charges for long-lived assets and realized recoveries of
approximately $519. In 2007 we realized a very minimal amount of
recoveries.
Income
(loss) from operations
Income
from operations increased from a loss of $4,025 in 2006 to an income of $2,413
in 2007. The increase was a result of lower operating costs in 2007
and the classification of the $2,959 termination payment from Mitsui Chemicals
as an offset to operating expense. Income from operations decreased from $4,247
in 2005 to a loss of $4,025 in 2006. The decrease was a result of
lower revenues, higher research and development expenses, an increase in
selling, general and administrative costs and restructuring
charges.
Interest
expense, net
Interest expense, net, remained at
approximately $700 in 2006 and 2007. Interest expense, net, decreased
from $973 in 2005 to $737 in 2006. The decrease in interest expense, net, was
primarily attributable to less outstanding debt in 2006 compared to
2005.
Other
income, net
Other
income, net, increased from $210 in 2006 to $2,346 in 2007. The
primary factor contributing to the increase of other income was the receipt of
$2,500 in milestone payments under a technology transfer and service agreement
with Sunfilm AG. We expect to receive the final milestone payment
from Sunfilm in the first half of 2008. Other income, net, also
includes the reversal of interest and penalties reserved for the audit by the
Saxony government. We had accrued potential interest and penalties
associated with the audit. Based on the audit settlement with the
Saxony Government, the Company was able to reverse the remaining reserves of
approximately 206 Euros ($300) in October, 2007 when we paid the Saxony
government.
Income
(loss) before provision for income taxes
The
pre-tax income increase from a loss of $4,552 in 2006 to income of $4,067 in
2007 was a result of lower operating expenses and income from the contract
termination settlement with Mitsui and income from a technology transfer
agreement with Sunfilm. The pre-tax income decrease from $3,349 in 2005 to a
loss of $4,552 in 2006 was a result of lower revenues and higher operating
expenses.
Provision
for income taxes
The
provision for income taxes in 2007, 2006 and 2005 was primarily related to our
German subsidiary, Southwall Europe GmBH (“SEG”). In 2007, our provision for
German income taxes decreased to $433 from $887 in the prior year. The decrease
relates to lower taxable income in our German subsidiary and a lower book loss
of approximately $900 as well as subsidies received from the German
government. In 2006, our provision for German income taxes increased
to approximately $887, which was the result of an increase in book and taxable
income in Germany of approximately $900 in 2006 as compared to
2005. There were also additional taxes paid in 2006 of approximately
$55 relating to an income tax audit for years 1999 to 2002 at SEG.
In 2005,
the Company released approximately $390 of tax reserves related to German tax
positions taken in previous years on statutory tax returns specifically dealing
with transfer pricing and contract manufacturing rate of return. The
German taxing authorities conducted an audit of the years
1999-2002. This audit was substantially completed at the end of the
2005 and the aforementioned issues were cleared and thus the Company released
the related reserves.
In 2006,
the Company trued up the amount of foreign tax credits reflected in the income
tax provision for US purposes to the amount reflected in filed tax
returns. The impact of this was a reduction to the amount of foreign
tax credits reflected in the deferred tax asset disclosure in the footnote by
approximately $115. This amount is the result of a change in
estimate. Additionally, the adjustment impacts the disclosure only
and has no impact on the financial statement since the respective deferred tax
asset has a full valuation allowance provided against it.
The
foreign tax rate differential reflected in the worldwide effective tax rate
reconciliation compares the US statutory rate of 35% to the actual foreign tax
provision. The material portion of the foreign provision is from
German operations in the amounts of $416, $887 and $433 for the calendar years
ended December 31, 2005, 2006 and 2007 respectively. The additional
amount of foreign provision booked in such years is related to Belgium branch
taxes in the amounts of $18, $34 and $34, respectively.
The
German effective tax reconciliations for tax years December 31, 2005, 2006 and
2007 are as follows:
|
German
Effective Tax reconciliation
|
2005
|
2006
|
2007
|
|||||||||
|
%
|
%
|
%
|
||||||||||
|
German
statutory income tax rate
|
38.39 | % | 38.39 | % | 38.39 | % | ||||||
|
Tax
exempt subsidies
|
-14.25 | % | -7.76 | % | -12.37 | % | ||||||
|
Non
deductible business exp.
|
0.47 | % | 0.16 | % | 0.03 | % | ||||||
|
Add
back 50% of interest expenses
|
2.87 | % | 1.97 | % | 2.62 | % | ||||||
|
Taxes
- Prior year result from German Tax Audit
|
0.00 | % | 2.58 | % | 0.00 | % | ||||||
| Foreign payable release | -25.6 | % | 0.0 | % | 0.0 | % | ||||||
|
Other
|
-0.15 | % | 0.84 | % | -1.45 | % | ||||||
|
German
income tax rate
|
1.73 | % | 36.17 | % | 27.22 | % | ||||||
The
German reconciliation reflects various permanent differences between the German
statutory rate and the German effective tax rate reflected for US GAAP
purposes. The material difference primarily relates to benefits
associated with tax subsidies received from the German government resulting from
research and development efforts in Germany and benefits received as a result of
additional investments in their German manufacturing facilities.
The
Company underwent a German tax audit for the years 1999-2002. While
most of the issues were resolved in 2005 including transfer pricing, the final
determination from the audit was received in 2006 which included approximately
$55 of additional assessments related to various items, none of which were
deemed material on their own. This assessment was against the German
entity and the cost incurred by the German company. As such, the
amount was reflected in the German tax provision and reflected in the above 2006
German rate reconciliation as 2.5% effective tax rate item.
Net
income (loss)
The
increase in net income to $3,557 in 2007 from a net loss of $5,510 in 2006 was a
result of transfer of production to our lower cost German manufacturing
facility, lower operating expenses as well as income generated by the Sunfilm
agreement and the Mitsui settlement. The decrease from $3,320 net income in 2005
to a net loss of $5,510 in 2006 was the result of lower revenues, higher
operating expense, recognition of stock based compensation expense in 2006, upon
adoption of SFAS 123R and a higher provision for incomes taxes.
Deemed
dividend on preferred stock
We
accrued $489 of deemed dividend on preferred stock in each of the
years 2007, 2006 and 2005 as a result of the conversion of our
secured convertible promissory notes into shares of Series A preferred stock in
December 2004. The Series A preferred stock carries a 10% cumulative dividend
rate.
Liquidity
and capital resources
Liquidity
Our
principal liquidity requirements are for working capital, consisting primarily
of accounts receivable and inventories. We believe that because of the
relatively long production cycle of certain of our products, our inventories
will continue to represent a significant portion of our working capital. We had
a net loss in 2006 and we incurred net income in 2007 and 2005. We had positive
cash flow from operations in 2007, 2006 and 2005.
For the
quarter ending December 31, 2006 and December 31, 2007, the Company’s DSO was 36
days and 45 days, respectively. The primary cause for the increase in accounts
receivable year over year was the loss of sales to Mitsui Chemicals. Mitsui
Chemicals’ payment terms were net 15 days, and the customer consistently paid on
time. New sales generated in 2007 were primarily with new and
existing customers whose payment terms averaged 45 to 60 days. The
fundamental change in the structure of our customer base negatively impacted our
accounts receivable balance in 2007. Our write off of bad debt for the
year ending December 31, 2006 was $43. In 2007, the Company’s
bad debt write off was de minimis.
Our cash
and cash equivalents increased by $968 from $5,524 at December 31, 2006 to
$6,492 at December 31, 2007. Cash provided by operating activities increased by
$4,947 from $748 in 2006 to $5,695 in 2007. The increase in cash
provided by operating activities during 2007 was primarily the result of net
income for the year of $3,557, non-cash depreciation of $2,812, a stock-based
compensation charge of $342 partially offset by an increase in accounts
receivable of $767, and a decrease in accounts payable and accrued liabilities
of $98. Cash used in investing activities in 2007 was $757 compared to $505 used
in investing activities in 2006. The increase in cash used in
investing activities from 2006 to 2007 was mainly due to higher proceeds from
the sale of fixed assets in 2006. Cash used in financing activities
increased by $2,500 from $1,533 used in financing activities in 2006
to $4,033 used in financing activities in 2007. The increase was primarily the
result of the Company’s pay down of the line of credit with Bridge Bank, N.A. in
December, 2007.
Our cash
and cash equivalents decreased by $1,076 from $6,600 at December 31, 2005 to
$5,524 at December 31, 2006. Cash provided by operating activities decreased by
$3,258 from $4,006 in 2005 to $748 in 2006. The decrease in cash
provided by operating activities during 2006 was primarily the result of the net
loss for the year of $5,510, impairment recoveries from long-lived assets
of $214 and an increase in other current and non-current assets of
$81 partially offset by deferred income taxes of $51, non-cash depreciation of
$2,406, a stock-based compensation charge of $551, a decrease in accounts
receivable of $3,136, a decrease in inventories of $281 and a an increase in
accounts payable and accrued liabilities of $128. Cash used in investing
activities in 2006 was $505 compared to $342 used in investing activities in
2005. The increase in cash used in investing activities from 2005 to 2006 was
due to increased expenditures for property, plant and equipment and other assets
partially offset by proceeds from sale of fixed assets. Cash used in financing
activities decreased by $33 from $1,566 used in financing activities in 2005 to
$1,533 used in financing activities in 2006. The decrease was the result of less
debt outstanding in 2006, which resulted in lower principal
repayments.
We
entered into an agreement with the Saxony government in Germany in May 1999
under which we receive investment grants. As of December 31, 2007, we had
received approximately 5,000 Euros, or $5,023, at a historical conversion rate
of 1.0046 Euros to the Dollar, of the grants and accounted for these grants by
applying the proceeds received to reduce the cost of our fixed assets at our
Dresden manufacturing facility. As of December 31, 2007 all government grants
had been applied or repaid leaving nothing held as restricted cash.
Borrowing
arrangements
On April
28, 2005, we entered into a credit agreement (the “Initial Credit Agreement”)
with Wells Fargo HSBC Trade Bank, N.A.. The credit facility consisted of two
revolving line of credit under which we were able from time to time borrow up to
$3,000, subject to satisfaction of certain conditions. Amounts borrowed under
the first facility bore interest at the prime rate minus 1.75% per annum or
LIBOR plus 1% per annum, at our option. We borrowed approximately $3,000 from
this facility on April 28, 2005. We did not borrow any amounts under
the second line of credit. On March 29, 2007 we repaid this Initial Credit
Agreement with proceeds from a new credit facility with Bridge Bank
N.A.
On March
29, 2007, we entered into a new Credit Agreement (”Bridge Bank Agreement”) with
Bridge Bank, N.A. (“Bank”). The Bridge Bank Agreement provides for
two facilities. The first facility is a revolving line of credit for the lesser
of $3,000 or the face value of a standby letter of credit used to support the
facility (described below). The proceeds of the first revolving line of credit
facility were used to pay off the initial line of credit from Wells Fargo HSBC
Trade Bank. Amounts borrowed under the first facility bear interest at the prime
rate minus 1.75% and were collateralized by a $3,000 standby letter of credit
from Needham & Company, Inc.(“Needham”). At December 31, 2007, Needham and
its affiliates owned 40.7% of our outstanding common stock and Series A 10%
Cumulative Convertible Preferred Stock convertible into another approximately 4%
of our outstanding common stock. Needham provided the standby letter
of credit pursuant to an agreement requiring us to pay Needham interest on the
$3,000 supporting the standby letter of credit at an annual rate of 12.8% if the
standby letter of credit was not released by the Bank by August 1,
2007. The standby letter of credit provided by Needham was not
released by August 1, 2007 as required; therefore, we accrued interest pursuant
to the terms set forth in the agreement with Needham amounting to $134 in the
aggregate during 2007. We paid the total interest liability in
January, 2008. The standby letter of credit was released by the bank
on December 5, 2007, and we have no further obligations in connection with
it.
The
second facility is a $3,000 revolving line of credit under which we may
borrow from time to time, up to 80% of eligible accounts receivables (net
of pre-paid deposits, pre-billed invoices, deferred revenue, offsets, and
contras related to each specific account debtor and other requirements in the
lender’s discretion). Amounts borrowed under the second facility bear
interest at the prime rate plus 1.75% annualized on the average daily amount
outstanding. The second facility also provides for a $2,000 letter of credit sub
facility.
All
borrowings under both facilities with the Bank are collateralized by all of our
assets and are subject to certain financial and operating
covenants. These covenants include (a) maintaining a minimum current
ratio of 1.00 to 1.00 for each month through May 31, 2007 and maintaining a
current ratio of 1.25 to 1.00 each month thereafter; and (b) limiting our
quarterly net loss (including the deemed dividend on our Series A Preferred
Stock) so as not to exceed $400,000 for any quarter after September 30,
2007.
The terms
of the Bridge Bank Agreement, among other things, limit our ability to (i)
incur, assume or guarantee additional indebtedness (other than pursuant to the
Bridge Bank Agreement), (ii) incur liens upon the collateral pledged to the
Bank, (iii) merge, consolidate, sell or otherwise dispose of substantially all
or a substantial or material portion of our assets, and (iv) pay
dividends.
The
Bridge Bank Agreement provides for events of default, which include, among
others, (a) nonpayment of amounts when due (with no grace periods), (b) the
breach of our representations, covenants or other agreements in the Bridge
Bank Agreement or related documents, (c) defaults or accelerations of our
other indebtedness, (d) a failure to pay certain judgments, (e) the occurrence
of any event or condition that the Bank believes impairs or is substantially
likely to impair the prospects of payment or performance by us, and (f) certain
events of bankruptcy, insolvency or reorganization. Generally, if an event of
default occurs, the Bank may declare all outstanding indebtedness under the
Bridge Bank Agreement to be due and payable. The maturity date of the
facilities was March 28, 2008. We are currently negotiating a
new credit facility, however, there can be no assurance that we will be
successful in negotiations with the Bank or that we will be able to secure
alternative financing. However, the Company expects that its cash
will be sufficient to meet its working capital and capital expenditure needs
through December 31, 2008. The Bridge Bank Agreement expired on March 28,
2008. We are currently negotiating a new credit facility; however,
there can be no assurance that we will obtain a new line of credit or
on acceptable terms, if at all.
The
foregoing description 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 the material terms
thereof.
Our
borrowing arrangements with various German banks as of December 31, 2007 are
described in Note 6 of the Notes to Consolidated Financial Statements (Item
8. “Financial Statements and Supplementary Data”) set forth herein.
We are in compliance with all of the covenants of the German bank loans, and we
have classified $849 and $7,277 outstanding under the German bank loans as a
short-term liability and long-term liability, respectively, at December 31,
2007. We are obligated to pay an aggregate of approximately $849 in
principal amount under our German bank loans in 2008.
As of
December 31, 2003, 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. At December 31, 2007, the carrying
value of the liability was $3,654 ($1,300 of principal, plus $2,354 of accrued
interest). We paid an aggregate of approximately $300 under this agreement in
2007 and are required to pay $300 in 2008.
As of
December 31, 2007, we were in compliance with all financial covenants
under all financial instruments.
Capital
expenditures
We spent
approximately $710 and $1,192 in capital expenditures in 2007 and 2006,
respectively, primarily to maintain and upgrade our production facilities. In
2007, we spent $710 for maintenance of the production machines and research and
development tools. We expect to spend approximately $1,000 in 2008 on
maintenance of the production machines and research and development
tools.
Future
Obligations
Our
future payment obligations on our borrowings pursuant to our term debt,
non-cancelable operating leases and other non-cancelable contractual commitments
are as follows at December 31, 2007 (in thousands):
|
Less
|
Greater
|
|||||||||||||||||||
|
Than
|
Than
|
|||||||||||||||||||
|
Total
|
1 Year
|
1-3 Years
|
3-5 Years
|
5 Years
|
||||||||||||||||
|
Contractual
Obligations:
|
||||||||||||||||||||
|
Term
debt (1)
|
$ | 9,426 | $ | 1,149 | $ | 5,148 | $ | 736 | $ | 2,393 | ||||||||||
|
Term
debt Interest (1)
|
2,261 | 596 | 721 | 392 | 552 | |||||||||||||||
|
Other
Obligations (2)
|
1,468 | -- | -- | -- | 1,468 | |||||||||||||||
|
Operating
Leases (3)
|
1,690 | 509 | 941 | 240 | -- | |||||||||||||||
|
Total
Contractual Cash Obligations
|
$ | 14,845 | $ | 2,254 | $ | 6,810 | $ | 1,368 | $ | 4,413 | ||||||||||
________________
|
(1)
|
Represents
the principal and interest allocations of loan agreements with Portfolio
Financing Servicing Company and several German
Banks.
|
|
(2)
|
Represents accumulated dividends accrual on Series A 10% cumulative convertible preferred stock (greater than five years). |
|
(3)
|
Represents
the remaining rents owed on buildings we rent in Palo Alto,
California.
|
Interest
obligations relating to term debt declined for the year ended December 31, 2007
to $692 from $737 for the year ended December 31, 2006.
As of
December 31, 2007, we maintained 30,174 square feet of office and warehouse
space at 3780-3788 Fabian Way, Palo Alto, California 94303. The terms
of the leases for these facilities continue through June 30,
2011. The monthly rent expense for this facility is $27 through May
31, 2008. The monthly payment will increase to $28 for the remainder
of 2008. In 2009, the monthly rent payments will increase to $38 and
increase annually at a rate of 3% through the expiration of the
lease.
As of
December 31, 2007, we also had a lease obligation for 9,200 square feet at 3961
East Bayshore Road, Palo Alto, California 94303. This manufacturing
space is currently being subleased to another party. The monthly rent
payments for this facility are $9.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We are
exposed to the impact of interest rate changes, foreign currency fluctuations,
and changes in the market values of our investments.
Financing
risk: Our exposure to market rate risk for changes in interest rates relates
primarily to our line of credit which bears an interest rate equal to 1.0% above
the bank LIBOR rate (which was 5.75% at December 31, 2007) and is calculated
based on amounts borrowed under the facility. In addition, the interest rate on
one of our German loans has been reset to the prevailing market rate of 5.75%
and another of our German loans will have its interest rate reset to the
prevailing market rate in 2009. Fluctuations or changes in interest rates may
adversely affect our expected interest expense. The effect of a 10% adverse
fluctuation in the interest rate on our line of credit and bank loans would have
had an effect of about $100 on our interest expense for 2007.
Investment
risk: We invest our excess cash in select money market accounts and, by
practice, limit the amount of exposure to any one institution. 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 of any of our floating rate
securities would have had an adverse effect of less than $10 for
2007.
Foreign
currency risk: International revenues (primarily defined as sales to customers
located outside of the United States) accounted for approximately 77% of our
total sales in 2007. Approximately 50% of our international revenues were
denominated in Euros relating to sales from our Dresden operation in 2007. Of
the approximately 50% of Euro denominated revenues, less than 5% are
attributable to companies in the United States whose billings are denominated in
Euros. The other 50% of our international sales were denominated in
US dollars. In addition, certain transactions with foreign suppliers are
denominated in foreign currencies (principally Japanese Yen). The effect of a
10% fluctuation in the Euro exchange rate would have had an effect of
approximately $1,600 on net revenues for 2007 and the effect on expenses of a
10% fluctuation in the Yen exchange rate would have been
immaterial.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE
OF CONTENTS
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
56
|
|
Consolidated
Balance Sheets
|
57
|
|
Consolidated
Statements of Operations
|
58
|
|
Consolidated
Statements of Stockholders’ Equity
|
59
|
|
Consolidated
Statements of Cash Flows
|
60
|
|
Notes
to Consolidated Financial Statements
|
61
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Southwall
Technologies Inc.
We have
audited the accompanying consolidated balance sheets of Southwall Technologies
Inc. and its subsidiary as of December 31, 2007 and 2006, and the related
consolidated statements of operations, stockholders’ equity and cash flows for
each of the three years in the period ended December 31, 2007. Our
audits also included the financial statement schedule listed in the Index at
Item 15(a)(2). These consolidated financial statements and financial
statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Company is not
required to have, nor have we been engaged to perform, an audit of the Company’s
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Southwall
Technologies Inc. and its subsidiary as of December 31, 2007 and 2006, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2007, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
As
discussed in Note 1 to the consolidated financial statements, on January 1, 2006
the Company changed its method of accounting for stock-based compensation as a
result of adopting Statement of Financial Accounting Standards No. 123 (revised
2004), “Share-Based Payment” applying the modified prospective
method.
|
/s/ Burr, Pilger & Mayer
LLP
|
|
|
Palo
Alto, California
|
|
|
March
28, 2008
|
|
SOUTHWALL
TECHNOLOGIES INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except per share data)
|
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
ASSETS
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 6,492 | $ | 5,524 | ||||
|
Restricted
cash
|
294 | 209 | ||||||
|
Accounts
receivable, net of allowance for doubtful accounts of $66 and $102 in 2007
and 2006, respectively
|
4,346 | 3,608 | ||||||
|
Inventories,
net
|
5,640 | 5,598 | ||||||
|
Other
current assets
|
837 | 1,064 | ||||||
|
Total
current assets
|
17,609 | 16,003 | ||||||
|
Property,
plant and equipment, net
|
17,071 | 17,232 | ||||||
|
Restricted
cash loans
|
1,242 | 1,111 | ||||||
|
Other
assets
|
1,345 | 1,155 | ||||||
|
Total
assets
|
$ | 37,267 | $ | 35,501 | ||||
|
LIABILITIES,
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Current
portion of long term debt
|
$ | 1,149 | $ | 1,059 | ||||
|
Short
term obligations
|
-- | 2,996 | ||||||
|
Accounts
payable
|
964 | 955 | ||||||
|
Accrued
compensation
|
1,267 | 859 | ||||||
|
Other
accrued liabilities
|
6,350 | 6,448 | ||||||
|
Total
current liabilities
|
9,730 | 12,317 | ||||||
|
Term
debt
|
8,277 | 8,568 | ||||||
|
Government
grants advanced
|
-- | 220 | ||||||
|
Other
long term liabilities
|
2,567 | 2,550 | ||||||
|
Total
liabilities
|
20,574 | 23,655 | ||||||
|
Commitments
and contingencies (Note 11)
|
||||||||
|
Series
A convertible preferred stock, $0.001 par value; 5,000 shares authorized,
4,893 shares outstanding at December 31, 2007 and 2006, respectively
(Liquidation preference: $6,277 and $5,788 at 2007 and 2006,
respectively)
|
4,810 | 4,810 | ||||||
|
Stockholders'
Equity:
|
||||||||
|
Common
stock, $0.001 par value; 50,000 shares authorized, and 27,820 and 27,139
shares outstanding at December 31, 2007 and 2006,
respectively
|
28 | 27 | ||||||
|
Capital
in excess of par value
|
78,290 | 78,081 | ||||||
|
Accumulated
other comprehensive income:
|
||||||||
|
Translation
gain on subsidiary
|
4,776 | 3,696 | ||||||
|
Accumulated
deficit
|
(71,211 | ) | (74,768 | ) | ||||
|
Total
stockholders' equity
|
11,883 | 7,036 | ||||||
|
Total
liabilities, preferred stock and stockholders' equity
|
$ | 37,267 | $ | 35,501 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
SOUTHWALL
TECHNOLOGIES INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share data)
|
Years Ended
December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Net
revenues
|
$ | 37,733 | $ | 40,209 | $ | 54,754 | ||||||
|
Cost
of revenues
|
23,907 | 24,746 | 37,241 | |||||||||
|
Gross
profit
|
13,826 | 15,463 | 17,513 | |||||||||
|
Operating
expenses (income):
|
||||||||||||
|
Research
and development
|
4,505 | 6,782 | 5,104 | |||||||||
|
Selling,
general and administrative
|
9,843 | 12,005 | 8,332 | |||||||||
|
Restructuring
expenses, net
|
56 | 915 | -- | |||||||||
|
Contract
termination settlement
|
(2,959 | ) | -- | -- | ||||||||
|
Recoveries
for long-lived assets, net
|
(32 | ) | (214 | ) | (170 | ) | ||||||
|
Total
operating expenses
|
11,413 | 19,488 | 13,266 | |||||||||
|
Income
(loss) from operations
|
2,413 | (4,025 | ) | 4,247 | ||||||||
|
Interest
expense, net
|
(692 | ) | (737 | ) | (973 | ) | ||||||
|
Other
income, net
|
2,346 | 210 | 75 | |||||||||
|
Income
(loss) before provision for income taxes
|
4,067 | (4,552 | ) | 3,349 | ||||||||
|
Provision
for incomes taxes
|
510 | 958 | 29 | |||||||||
|
Net
income (loss)
|
3,557 | (5,510 | ) | 3,320 | ||||||||
|
Deemed
dividend on preferred stock
|
489 | 489 | 490 | |||||||||
|
Net
income (loss) attributable to common stockholders
|
$ | 3,068 | $ | (5,999 | ) | $ | 2,830 | |||||
|
Net
income (loss) per share:
|
||||||||||||
|
Basic
|
$ | 0.11 | $ | (0.22 | ) | $ | 0.11 | |||||
|
Diluted
|
$ | 0.11 | $ | (0.22 | ) | $ | 0.10 | |||||
|
Weighted
average shares used in computing net income (loss) per
share:
|
||||||||||||
|
Basic
|
27,576 | 26,949 | 26,743 | |||||||||
|
Diluted
|
33,240 | 26,949 | 32,895 | |||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
SOUTHWALL
TECHNOLOGIES INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(in
thousands)
|
Accumulated
|
||||||||||||||||||||||||||||
|
Other
|
Total
|
|||||||||||||||||||||||||||
|
Capital
in
|
Comprehensive
|
Stock--
|
Comprehensive
|
|||||||||||||||||||||||||
|
Common Stock
|
Excess
of
|
Income
|
Accumulated
|
holders’
|
Income
|
|||||||||||||||||||||||
|
Shares
|
Amount
|
Par Value
|
(Loss)
|
Deficit
|
Equity
|
(Loss)
|
||||||||||||||||||||||
|
Balances,
December 31, 2004
|
26,488 | $ | 26 | $ | 77,957 | $ | 4,358 | $ | (72,578 | ) | $ | 9,763 | $ | 974 | ||||||||||||||
|
Issuance
of shares to employees under stock purchase plan
|
13 | 1 | 11 | -- | -- | 12 | ||||||||||||||||||||||
|
Issuance
of shares on stock option exercise
|
38 | -- | 19 | -- | -- | 19 | ||||||||||||||||||||||
|
Issuance
of shares to directors
|
24 | -- | 15 | -- | -- | 15 | ||||||||||||||||||||||
|
Issuance
of shares under executive performance bonus plan
|
230 | -- | 271 | -- | -- | 271 | ||||||||||||||||||||||
|
Compensation
expense for vesting modification
|
-- | -- | 45 | -- | -- | 45 | ||||||||||||||||||||||
|
Dividend
accrual on Series A Preferred Stock
|
-- | -- | (490 | ) | -- | -- | (490 | ) | ||||||||||||||||||||
|
Foreign
currency translation adjustment
|
-- | -- | -- | (1,826 | ) | -- | (1,826 | ) | (1,826 | ) | ||||||||||||||||||
|
Net
income
|
-- | -- | -- | -- | 3,320 | 3,320 | 3,320 | |||||||||||||||||||||
|
Balances,
December 31, 2005
|
26,793 | 27 | 77,828 | 2,532 | (69,258 | ) | 11,129 | 1,494 | ||||||||||||||||||||
|
Issuance
of shares to employees under stock purchase plan
|
13 | -- | 10 | -- | -- | 10 | ||||||||||||||||||||||
|
Issuance
of shares on stock options exercise
|
233 | -- | 113 | -- | -- | 113 | ||||||||||||||||||||||
|
Issuance
of shares under executive performance bonus plan
|
100 | -- | 68 | -- | -- | 68 | ||||||||||||||||||||||
|
Employee
stock--based compensation expense
|
-- | -- | 551 | -- | -- | 551 | ||||||||||||||||||||||
|
Dividend
accrual on Series A Preferred Stock
|
-- | -- | (489 | ) | -- | -- | (489 | ) | ||||||||||||||||||||
|
Foreign
currency translation adjustment
|
-- | -- | -- | 1,164 | -- | 1,164 | 1,164 | |||||||||||||||||||||
|
Net
loss
|
-- | -- | -- | -- | (5,510 | ) | (5,510 | ) | (5,510 | ) | ||||||||||||||||||
|
Balances,
December 31, 2006
|
27,139 | 27 | 78,081 | 3,696 | (74,768 | ) | 7,036 | (4,346 | ) | |||||||||||||||||||
|
Issuance
of shares to employees under stock purchase plan
|
3 | -- | 1 | -- | -- | 1 | ||||||||||||||||||||||
|
Issuance
of shares on stock options exercise.
|
678 | 1 | 355 | -- | -- | 356 | ||||||||||||||||||||||
|
Employee
stock-based compensation expense
|
-- | -- | 342 | -- | -- | 342 | ||||||||||||||||||||||
|
Dividend
accrual on Series A Preferred Stock
|
-- | -- | (489 | ) | -- | -- | (489 | ) | ||||||||||||||||||||
|
Foreign
currency translation adjustment
|
-- | -- | -- | 1,080 | -- | 1,080 | 1,080 | |||||||||||||||||||||
|
Net
income
|
-- | -- | -- | -- | 3,557 | 3,557 | 3,557 | |||||||||||||||||||||
|
Balances,
December 31, 2007
|
||||||||||||||||||||||||||||
| 27,820 | $ | 28 | $ | 78,290 | $ | 4,776 | $ | (71,211 | ) | $ | 11,883 | $ | 4,637 | |||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
SOUTHWALL
TECHNOLOGIES INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
Years Ended
December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Cash
flows provided by operating activities:
|
||||||||||||
|
Net
income (loss)
|
$ | 3,557 | $ | (5,510 | ) | $ | 3,320 | |||||
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||||||
|
Deferred
income tax
|
(126 | ) | 51 | (508 | ) | |||||||
|
Impairment
recoveries for long-lived assets, net
|
(32 | ) | (214 | ) | (170 | ) | ||||||
|
Depreciation
and amortization
|
2,812 | 2,406 | 2,195 | |||||||||
|
Stock-based
compensation charge
|
342 | 551 | 45 | |||||||||
|
Common
stock issued for services
|
-- | -- | 15 | |||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
(767 | ) | 3,136 | (914 | ) | |||||||
|
Inventories
|
(33 | ) | 281 | 2,476 | ||||||||
|
Other
current and non-current assets
|
40 | (81 | ) | 898 | ||||||||
|
Accounts
payable and accrued liabilities
|
(98 | ) | 128 | (3,351 | ) | |||||||
|
Net
cash provided by operating activities
|
5,695 | 748 | 4,006 | |||||||||
|
Cash
flows used in investing activities:
|
||||||||||||
|
Restricted
cash
|
(79 | ) | 168 | 254 | ||||||||
|
Proceeds
from sale of property, plant and equipment
|
32 | 519 | 170 | |||||||||
|
Expenditures
for property, plant and equipment and other assets
|
(710 | ) | (1,192 | ) | (766 | ) | ||||||
|
Net
cash used in investing activities
|
(757 | ) | (505 | ) | (342 | ) | ||||||
|
Cash
flows used in financing activities:
|
||||||||||||
|
Principal
payments on borrowings
|
(1,148 | ) | (1,434 | ) | (1,532 | ) | ||||||
|
Borrowings
on line of credit
|
4 | -- | 2,996 | |||||||||
|
Repayments
of line of credit
|
(3,000 | ) | -- | (2,975 | ) | |||||||
|
Repayments
under capital lease
|
-- | -- | (44 | ) | ||||||||
|
Use
of investment allowances
|
(246 | ) | (222 | ) | (42 | ) | ||||||
|
Proceeds
from stock option, warrant and employee stock purchase plan
exercises
|
357 | 123 | 31 | |||||||||
|
Net
cash used in financing activities
|
(4,033 | ) | (1,533 | ) | (1,566 | ) | ||||||
|
Effect
of foreign exchange rate changes on cash
|
63 | 214 | (45 | ) | ||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
968 | (1,076 | ) | 2,053 | ||||||||
|
Cash
and cash equivalents, beginning of year
|
5,524 | 6,600 | 4,547 | |||||||||
|
Cash
and cash equivalents, end of year
|
$ | 6,492 | $ | 5,524 | $ | 6,600 | ||||||
|
Supplemental
cash flow disclosures:
|
||||||||||||
|
Interest
paid
|
$ | 837 | $ | 944 | $ | 854 | ||||||
|
Income
taxes paid
|
$ | 462 | $ | 836 | $ | 764 | ||||||
|
Supplemental
schedule of non-cash investing and financing activities:
|
||||||||||||
|
Dividends
accrued
|
$ | 489 | $ | 489 | $ | 490 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
SOUTHWALL
TECHNOLOGIES INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands, except per share data)
NOTE
1 - THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING
POLICIES:
The
Company
Southwall
Technologies Inc. (“Southwall”, “we”, “us”, “our”, and the “Company” refer to
Southwall Technologies Inc. and its subsidiary) is a developer, manufacturer and
marketer of thin film coatings on flexible substrates for the automotive glass,
electronic display, window film, and architectural glass international markets.
We have developed a variety of products that control sunlight in automotive
glass, reduce light reflection, reduce electromagnetic radiation and improve
image quality in electronic display products and conserve energy in
architectural products. Our products consist of transparent solar-control films
for automotive glass; anti-reflective films for computer screens, including flat
panel displays, plasma displays, and transparent conductive films for use in
touch screen and liquid crystal displays; energy control films for architectural
glass; and various other coatings.
Principles
of consolidation
The
consolidated financial statements include the accounts of Southwall and its
wholly-owned subsidiary. All inter-company balances and transactions have been
eliminated in consolidation.
Foreign
currency translation
The
Company's German subsidiary uses the Euro as its functional currency.
Accordingly, the financial statements of this subsidiary are translated into
U.S. dollars in accordance with Statement of Financial Accounting Standards
("SFAS") No. 52, "Foreign Currency Translation." Assets and liabilities are
translated at exchange rates in effect at the balance sheet date and revenue and
expense accounts at average exchange rates during the period. Exchange gains or
losses from the translation of assets and liabilities of $1,080 in 2007 are
included in the cumulative translation adjustment component of accumulated other
comprehensive income (loss). Gains and (losses) arising from transactions
denominated in currencies other than the functional currency were ($62), $36,
and ($320) in 2007, 2006 and 2005, respectively, and are included in other
income, net.
Management
estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The estimates included in preparing our
financial statements include: allowance for doubtful accounts, the
accrual for sales returns and warranties, quarterly taxes, inventory valuations
(including reserves for excess and obsolete and impaired inventories), reserves
for decommissioning costs associated with leasehold asset retirement
obligations. Actual results could differ from those
estimates.
Cash
and cash equivalents
The
Company considers all highly liquid instruments with an original maturity of
three months or less from the date of purchase to be cash
equivalents.
Restricted
cash
Restricted
cash consists of deposits made on precious metals used during the manufacturing
process.
Revenue
recognition
We
recognize revenue when persuasive evidence of an arrangement exists, delivery
has occurred or services have been provided, the sale price is fixed or
determinable, and collectibility is reasonably assured. Accordingly, we
generally recognize revenue from product sales when the terms of sale transfer
title and risk of loss, which occurs either upon shipment or upon receipt by
customers. In connection with product sales, we make allowances for estimated
returns and warranties. We adjust these allowances periodically to reflect our
actual and anticipated experience. If any of these conditions to recognize
revenue is not met, we defer revenue recognition. At December 31, 2007, deferred
revenues associated with funded development projects were $76 and are included
in other accrued liabilities in the accompanying balance sheet.
The
Company has agreements under which it receives fees for certain licensing rights
to technology and products. The Company does not allocate cost of sales to
license revenues because such costs are insignificant. License revenues
associated with these agreements are recognized ratably over the period of the
contract when collection of the resulting receivable is probable. License
revenues were $0, $64 and $57 in 2007, 2006 and 2005, respectively.
Accounts
receivable and allowances for doubtful accounts
Accounts
receivable are recorded at the invoiced amount and are not interest
bearing. We establish allowances for doubtful accounts for
specifically identified, as well as anticipated, doubtful accounts based on
credit profiles of our customers, current economic trends, contractual terms and
conditions and historical payment. As of December 31, 2007 and 2006, our
balance sheets included allowances for doubtful accounts of $66 and $102,
respectively.
Accrual
for sales returns and warranties
We
establish allowances for sales returns for specifically identified product
quality claims as well as estimated potential future claims based on our sales
returns and warranty experience. We offer a ten-year, five-year and less than
one year quality claim periods for our products. As of December 31,
2007 and 2006, our balance sheets included accrual for sales returns and
warranties of $1,102 and $1,415, respectively.
Concentrations
of risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and cash equivalents and trade
accounts receivable.
The
Company invests in selected financial instruments such as different types of
money market funds. By policy, the Company limits the amount of credit exposure
to any one financial institution or commercial issuer. For US funds, we have
$5,817 in excess of $100 of FDIC coverage. We also have approximately $1,059 in
foreign banks.
The
Company sells its products throughout the world. The Company performs ongoing
credit evaluations of its customers' financial condition and, generally,
requires no collateral from its customers. The Company maintains an allowance
for doubtful accounts based upon anticipated collectability of all accounts
receivable.
Our ten
largest customers accounted for approximately 78%, 77% and 81% of our net sales
in 2007, 2006 and 2005, respectively. During 2007, Mitsui Chemicals, Saint
Gobain Sekurit, Huper Optik, V-Kool and Pilkington PLC accounted for 6.4%,
11.4%, 11.2%, 32.1% and 10.1%, respectively, of our net revenues. During 2006,
Mitsui Chemicals, Saint Gobain Sekurit, V-Kool and Pilkington PLC accounted
for 24.6%, 8.5%, 20.0% and 9.5%, respectively, of our net revenues. During 2005,
Mitsui Chemicals, Saint Gobain Sekurit, V-Kool and Pilkington PLC accounted for
22.7%, 19.8%, 19.5% and 7.1%, respectively, of our net revenues.
The
Company expects to continue to derive a significant portion of its net product
revenues from a relatively small number of customers. Accordingly, the loss of a
large customer could materially hurt the Company's business, and the deferral or
loss of anticipated orders from a small number of customers could materially
reduce our revenue, operating results and cash flows in any
period. In November 2007, we reached an agreement with Mitsui
Chemicals, Inc., a large Electronic Display customer, to terminate our
Manufacturing and Supply Agreement. We believe that the low margins
in this market will prevent the Company from seeking or obtaining any new plasma
television contracts.
At
December 31, 2007, receivables from three customers represented 37%, 22% and 10%
of the Company's total accounts receivable. At December 31, 2006, receivables
from three customers represented 29%, 18% and 14% of the Company's total
accounts receivable.
The
Company manufactures its products using materials procured from third-party
suppliers. We obtain certain of these materials from limited sources. For
example, the substrate we use in the manufacture of our Heat Mirror products is
currently available from one main qualified source, Teijin Limited. The loss of
our current source of supply would adversely affect our ability to meet our
scheduled product deliveries to customers. Alternative sources of supply are
being pursued; however, it takes approximately 18 to 24 months for us to
qualify a new supplier and we may not be able to successfully develop such
sources.
We rely
on third-party subcontractors to add properties, primarily adhesives, to some of
our products. There are only a limited number of qualified subcontractors that
can provide some of the services we require. The loss of a
subcontractor could adversely affect our ability to meet our scheduled product
deliveries to customers, which could damage our relationships with customers. If
our subcontractors do not produce a quality product, our yield will decrease and
our margins will be lower.
Furthermore,
our production machines are large, complex and difficult to design and produce.
It can take up to a year from the time we order a machine until it is delivered.
Following delivery, it can take us, with the assistance of the manufacturer, up
to six additional months to test and prepare the machine for commercial
production. There are a limited number of companies that are capable of
manufacturing these machines to our specifications. Our inability in the future
to have new production machines manufactured and prepared for commercial
production in a timely manner would have a material adverse effect on our
business.
Inventories
Inventories
are stated at the lower of standard cost (determined by the average cost method)
or market (net realizable value). In January 2006, the Company
changed its inventory valuation method from the first-in, first-out method to
the average cost method. With the closing of the Company’s Palo Alto, California
manufacturing facility and all production now being performed in our German
subsidiary’s facility, the use of the average cost method was deemed preferable
as it both accommodates our German subsidiary’s statutory reporting requirements
and fairly approximates actual costs. The impact of the change was not
material. Standard costs, which approximate actual, include
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
sales.
Property,
plant and equipment
Property,
plant and equipment are stated at cost. The Company uses the units-of-production
method for calculating depreciation on certain of its production machines and
the straight-line method for all other property and equipment. Estimated useful
lives of the assets range from five to ten years. On its large-scale production
machines for which the units-of- production depreciation method is used, the
Company records minimum annual depreciation of at least one-half of the
depreciation that would have been recorded utilizing the straight-line
depreciation method over a ten-year life. Leasehold improvements are amortized
using the term of the related lease or the economic life of the improvements, if
shorter.
Additions,
major improvements and enhancements are included in the asset accounts at cost.
Ordinary maintenance and repairs are charged to expense as incurred. Gains or
losses from disposal are included in operating expenses in selling, general and
administrative expenses.
Depreciation
and amortization expense related to property and equipment for 2007, 2006 and
2005 was $2,812, $2,406 and $2,195, respectively.
Impairment
of long-lived assets
Long-lived
assets held and used by the Company are reviewed for impairment whenever events
or circumstances indicate that the carrying amount of an asset may not be
recoverable. Factors that could trigger an impairment review include the
following: (i) significant negative industry or economic trends; (ii) exiting an
activity in conjunction with a restructuring of operations; (iii) current,
historical or projected losses that demonstrate continuing losses associated
with an asset; or (iv) a significant decline in our market capitalization, for
an extended period of time, relative to net book value. When we determine that
there is an indicator that the carrying value of long-lived assets may not be
recoverable, we measure impairment based on estimates of future cash flows.
These estimates include assumptions about future conditions such as future
revenues, gross margins, operating expenses within our company, the fair values
of certain assets based on appraisals, and industry trends. All long-lived
assets to be disposed of are reported at the lower of carrying amount or fair
market value, less expected selling costs. As a result of our decision to cease
manufacturing in Palo Alto, California, we recorded a $305 impairment charge
related to a production machine which was decommissioned in the second quarter
of 2006. In addition for 2006, we recorded the recovery of $519 of previously
recorded impairment charges related to long-lived assets which were impaired in
prior and current years.
Fair
value disclosures of financial instruments
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 have determined that the book
value of those instruments at December 31, 2007 and 2006 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.
Derivative
financial instruments
The
Company accounts for derivative financial instruments under SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 133
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. As of December 31, 2007, we did not have any derivative financial
instruments or hedging activities.
Research
and development expense
Research
and development costs are expensed as incurred. Costs included in research and
development expense are salaries, building costs, utilities, administrative
expenses and allocated costs.
Comprehensive
income (loss)
The
Company has adopted the provisions of SFAS No. 130 "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and display in
the financial statements of total net income (loss) and the components of all
other non-owner changes in equity, referred to as comprehensive income (loss).
Accordingly, the Company has reported the translation gain (loss) from the
consolidation of its foreign subsidiary in comprehensive income
(loss).
Restructuring
costs
The
Company records restructuring reserves when management has approved a plan to
restructure operations and a liability has been incurred in accordance with SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities".
Stock-Based
Compensation
Effective January 1,
2006, the Company adopted the fair value recognition provisions of SFAS No. 123
(revised 2004), “Share-Based Payment” (“SFAS 123R”), using the modified
prospective transition method and therefore has not restated results for prior
periods. Under this transition method, stock-based compensation expense in
fiscal 2007 and 2006 included stock-based compensation expense for all
share-based payment awards granted prior to, but not yet vested as of January 1,
2006, based on the grant-date fair value estimated in accordance with the
original provision of SFAS No. 123, “Accounting for Stock-Based Compensation”
(“SFAS 123”). Stock-based compensation expense for all share-based payment
awards granted after January 1, 2006, is based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123R. SFAS 123R
requires companies to estimate the fair value of the share-based payment awards
on the date of grant using an option pricing model. The Company uses the
Black-Scholes option model. The value portion of the award that is ultimately
expected to vest is recognized as compensation expense on a straight-line basis
over the requisite service period of the award, which is generally the option
vesting term of four years. Prior to the adoption of SFAS 123R, the Company
recognized stock-based compensation expense in accordance with Accounting
Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”). In March 2005, the Securities and Exchange Commission
(the “SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the
SEC’s interpretation of SFAS 123R and the valuation of share-based payments for
public companies. The Company applied the provisions of SAB 107 in its adoption
of SFAS 123R.
In
November 2005, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) No. FAS 123R-3, “Transition Election Related To
Accounting for Tax Effects of Share-Based Payment Awards” (“FSP 123R-3”). The
Company elected to adopt the alternative transition method provided in the FSP
123R-3 for calculating the tax effects of stock-based compensation pursuant to
SFAS 123R. The alternative transition method includes simplified methods to
establish the beginning balance of the additional paid-in capital pool (“APIC
pool”) related to the tax effects of employee stock-based compensation, and to
determine the subsequent impact on the APIC pool and Consolidated Statements of
Cash Flows of the tax effects of employee stock-based compensation awards that
are outstanding upon adoption of SFAS 123R.
Income
taxes
The
Company accounts for deferred income taxes under the liability approach whereby
the expected future tax consequences of temporary differences between the book
and tax basis of assets and liabilities are recognized as deferred tax assets
and liabilities. A valuation allowance is established for any deferred tax
assets for which realization is uncertain. In June 2006, the
FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement 109” (“FIN 48”). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB Statement No. 109 “Accounting
for Income Taxes”. It prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. FIN 48 was
adopted on January 1, 2007 and the adoption of FIN 48 did not have a
material impact on the Company’s financial positions, results of operations or
cash flows. See Note 8 for additional information on FIN 48.
Net
income (loss) per share
Basic net
income (loss) per share is computed by dividing net income (loss) attributable
to common stockholders (numerator) by the weighted average number of common
shares outstanding (denominator) for the period. Diluted net income (loss) per
share gives effect to all dilutive common shares potentially outstanding during
the period, including stock options, warrants to purchase common stock and
convertible preferred stock. Preferred stock dividends are added back to net
income attributable to common stockholders since they would not have been
accrued if the preferred stock had been converted to common stock at the
beginning of the period.
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. Accordingly, at December 31, 2007 and
December 31, 2005 respectively, stock options to purchase 4,325 and 2,284 shares
at a weighted average price of $1.32 and $2.83 per share were excluded from the
computation of diluted weighted average shares outstanding.
In net
loss periods, the basic and diluted weighted average shares of common stock and
common stock equivalents are the same because inclusion of common stock
equivalents would be anti-dilutive. Accordingly, at December 31, 2006 there was
no difference between the denominators used for the calculation of basic and
diluted net income (loss) per share. At December 31, 2006, there were
5,519 anti-dilutive options, respectively, excluded from the net loss per share
calculation.
Tables
summarizing net income (loss) attributable to common stockholders, for diluted
net income (loss) per share, and shares outstanding are shown below (in
thousands):
|
Years Ended
December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Net
income (loss) attributable to common stockholders-basic
|
$ | 3,068 | $ | (5,999 | ) | $ | 2,830 | |||||
|
Add:
Deemed dividend on preferred stock
|
489 | 489 | 490 | |||||||||
|
Net
income (loss) attributable to common stockholders-diluted
|
$ | 3,557 | $ | (5,510 | ) | $ | 3,320 | |||||
|
Weighted
average common shares outstanding-basic
|
27,576 | 26,949 | 26,743 | |||||||||
|
Dilutive
effect of warrants
|
354 | -- | 356 | |||||||||
|
Dilutive
effect of performance shares
|
-- | -- | 38 | |||||||||
|
Dilutive
effect of Series A preferred shares
|
4,893 | -- | 4,893 | |||||||||
|
Dilutive
effect of stock options
|
417 | -- | 865 | |||||||||
|
Weighted
average common shares outstanding – diluted
|
33,240 | 26,949 | 32,895 | |||||||||
Recent
Pronouncements
In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements – An amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 amends ARB 51 to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a non-controlling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. The amount of net income attributable
to the noncontrolling interest will be included in consolidated net income on
the face of the income statement. SFAS 160 clarifies that changes in a parent’s
ownership interest in a subsidiary that do not result in deconsolidation are
equity transactions if the parent retains its controlling financial interest. In
addition, SFAS 160 requires that a parent recognize a gain or loss in net income
when a subsidiary is deconsolidated. SFAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. The Company is currently evaluating the impact of the adoption of SFAS 160
on its consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R retains the fundamental requirements in
Statement 141 that the acquisition method of accounting (which Statement 141
called the purchase method) be used for all business combinations and for an
acquirer to be identified for each business combination. SFAS 141R requires an
acquirer to recognize the assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exceptions specified in the
Statement. That replaces Statement 141’s 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. SFAS 141R retains the
guidance in Statement 141 for identifying and recognizing intangible assets
separately from goodwill. SFAS 141R 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. SFAS 141R 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 SFAS 141R will have an impact on our
accounting for future business combinations once adopted, but the effect is
dependent upon the acquisitions that are made in the future.
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115” (“SFAS 159”). The objective of this statement is
to improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS 159 is effective as of the beginning of an entity’s
first fiscal year that begins after November 15, 2007. The Company is
currently evaluating the effect that the adoption of SFAS 159 will have on its
financial position and results of operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosure of fair value
measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements and accordingly, does not require any
new fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the impact that the adoption of SFAS 157 will
have on its consolidated financial statements.
NOTE
2 – STOCK-BASED COMPENSATION
Prior to
January 1, 2006, the Company accounted for its stock option plans under the
recognition and measurement provisions of APB 25. Accordingly, the Company
generally recognized compensation expense only when it granted options with a
discounted exercise price. Any resulting compensation expense was recognized
ratably over the associated service period, which was generally the option
vesting term. Prior to January 1, 2006, the Company provided pro-forma
disclosure amounts in accordance with SFAS No. 148, “Accounting for Stock-Based
Compensation-Transition and Disclosure” (“SFAS 148”), as if the fair value
method defined by SFAS 123 had been applied to its stock-based compensation. As
a result of adopting SFAS 123R, income before income taxes in fiscal 2007 was
lower, by $342, than if we had continued to account for stock-based compensation
under APB 25. The impact on both basic and diluted income per share in fiscal
2007 was $0.01 per share.
Effective
January 1, 2006, the Company adopted the provisions of SFAS 123R requiring it to
recognize expense related to the fair value of its stock-based compensation
awards. The Company elected to use the modified prospective transition method as
permitted by SFAS 123R and therefore has not restated its financial results for
prior periods. Under this transition method, stock-based compensation expense
for the fiscal years 2007 and 2006 includes compensation expense for all
stock-based compensation awards granted prior to, but not yet vested as of
January 1, 2006, based on the grant date fair value estimated in accordance with
the original provisions of SFAS 123. Stock-based compensation expense
for all stock-based compensation awards granted subsequent to January 1, 2006
was based on the grant-date fair value estimated in accordance with the
provisions of SFAS 123R. SFAS 123R requires companies to estimate the fair value
of the share-based payment awards on the date of grant using an option pricing
model. The Company uses the Black-Scholes option pricing model. The value
portion of the award that is ultimately expected to vest is recognized as
compensation on a straight line basis over the requisite service period of the
award, which is generally four years.
The
following table sets forth the total stock-based compensation expense resulting
from stock options included in the consolidated statements of operations in 2007
and 2006:
|
2007
|
2006
|
|||||||
|
Cost
of sales
|
$ | 5 | $ | 53 | ||||
|
Research
and development
|
80 | 142 | ||||||
|
Selling,
general and administrative
|
257 | 356 | ||||||
|
Stock-based
compensation expense before income taxes
|
342 | 551 | ||||||
|
Income
tax benefit
|
-- | -- | ||||||
|
Total
stock-based compensation expense after income taxes
|
$ | 342 | $ | 551 | ||||
Cash
proceeds from the exercise of stock options in 2007 and 2006 were $356 and $113
respectively. There were immaterial cash proceeds from the exercise of stock in
2005. No income tax benefit was realized from stock option exercises for 2007,
2006 and 2005. In accordance with SFAS 123R, the Company presents excess tax
benefits from the exercise of stock options, if any, as financing cash flows
rather than operating cash flows.
Prior to
the adoption of SFAS 123R, the Company applied SFAS 123, amended by SFAS No.
148, which allowed companies to apply the existing accounting rules under APB
25, and related interpretations. In general, as the exercise price of options
granted under the Company’s stock option plans was equal to the market price of
the underlying common stock on the grant date, no stock-based employee
compensation cost was recognized in the Company's net income (loss). As required
by SFAS 148 prior to the adoption of SFAS 123R, the Company provided pro forma
net income (loss) and pro forma net income (loss) per common share disclosures
for stock-based awards, as if the fair-value-based method defined in SFAS 123
had been applied.
The
following table illustrates the effect on net income and net income per share if
the Company had applied the fair value recognition provisions of SFAS 123 and
SFAS 148 to stock-based employee compensation:
|
Year
Ended
|
||||
|
December 31,
|
||||
|
2005
|
||||
|
Net
income attributable to common stockholders
|
||||
|
As
reported
|
$ | 2,830 | ||
|
Add:
Stock-based employee compensation expense included in reported net income,
net of related tax effects
|
45 | |||
|
Deduct:
Total stock-based employee compensation determined under fair value based
method for all awards, net of related tax effects
|
(686 | ) | ||
|
Pro
forma net income
|
$ | 2,189 | ||
|
Net
income per share:
|
||||
|
As
reported – basic
|
$ | 0.11 | ||
|
As
reported – diluted
|
$ | 0.10 | ||
|
Pro
forma – basic
|
$ | 0.08 | ||
|
Pro
forma – diluted
|
$ | 0.08 | ||
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 1997 Stock Incentive Plan and the
1998 Stock Option Plan for employees, board members and consultants. The Board
of Directors adopted the 1997 and 1998 Stock Option Plans and the Long Term
Incentive Plan on May 12, 1997, August 6, 1998, and April 30, 2007
respectively. The Compensation Committee of the Board of Directors administers
the plans and agreements. The exercise price of options granted under the 1997
and 1998 plans must be at least 85% of the fair market value of the stock at the
date of grant. Options granted under the 1998 plan prior to October 2004
generally vest at a rate of 25% per year, are non-transferable and expire over
terms not exceeding ten years from the date of grant or three months after the
optionee terminates his relationship with the Company. Options granted under the
1997 plan prior to October 2004 generally vest at a rate of 25% per year, are
non-transferable and expire over terms not exceeding ten years from the date of
grant or eighteen months after the optionee terminates his relationship with the
Company. Grants issued from and after October 2004 until April 2006
under both plans vest at a rate of 25% after six months and then evenly monthly
thereafter for the remaining 42 months. Grants issued from and after April 2006
under both plans vest at a rate of 25% per year on each anniversary of the grant
date.
On April
30, 2007 the Company’s Shareholders approved the Company’s Long Term Incentive
Plan, which authorizes the granting of up to 10,000,000 shares of Common Stock.
Under the terms of this 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 options within a period of three months after such
termination of service occurs. The plan provides for longer
expiration periods for employees who terminate 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 will be extended anywhere from 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
December 31, 2007, there were 9,860 shares of common stock available for
grant under the 2007 stock option plan, 214 shares under the 1998 stock option
plan and zero shares under the 1997 stock option plan.
The
activity under the option plans, combined, was as follows:
|
Weighted
|
|||||||||||||||||
|
Range
of
|
Average
|
||||||||||||||||
|
Exercise
|
Exercise
|
||||||||||||||||
|
Options
|
Price
|
Price
|
|||||||||||||||
|
Options
outstanding at January 1, 2005
|
4,039 | $ | 2.13 |
-
|
$ | 15.00 | $ | 4.19 | |||||||||
|
Granted
Adjustments
|
10 | $ | 0.50 |
-
|
$ | 11.50 | 1.54 | ||||||||||
|
Granted
|
2,327 | $ | 0.57 |
-
|
$ | 1.65 | 0.79 | ||||||||||
|
Exercised
|
(38 | ) | $ | 0.50 |
-
|
$ | 1.05 | 0.51 | |||||||||
|
Cancelled
or expired
|
(766 | ) | $ | 0.50 |
-
|
$ | 11.50 | 2.82 | |||||||||
|
Options
outstanding at December 31, 2005
|
5,572 | $ | 0.50 |
-
|
$ | 15.00 | 1.53 | ||||||||||
|
Granted
|
1,322 | $ | 0.38 |
-
|
$ | 0.82 | 0.61 | ||||||||||
|
Exercised
|
(233 | ) | $ | 0.50 |
-
|
$ | 0.50 | 0.50 | |||||||||
|
Cancelled
or expired
|
(824 | ) | $ | 0.50 |
-
|
$ | 15.00 | 2.07 | |||||||||
|
Options
outstanding at December 31, 2006
|
5,837 | $ | 0.38 |
-
|
$ | 9.90 | 1.28 | ||||||||||
|
Granted
|
1,473 | $ | 0.45 |
-
|
$ | 1.08 | 0.49 | ||||||||||
|
Exercised
|
(678 | ) | $ | 0.50 |
-
|
$ | 0.71 | 0.53 | |||||||||
|
Cancelled
or expired
|
(1,423 | ) | $ | 0.41 |
-
|
$ | 9.90 | 1.55 | |||||||||
|
Options
outstanding at December 31, 2007
|
5,209 | $ | 0.38 |
-
|
$ | 9.90 | $ | 1.08 | |||||||||
The fair
value of stock-based awards was estimated using the Black-Scholes model with the
following weighted-average assumptions for 2007, 2006 and 2005:
|
2007
|
2006
|
2005
|
||||||||||
|
Expected life (in years)
|
6.00 | 4.3 | 2.17 | |||||||||
|
Risk-free interest rate
|
4.67 | % | 4.80 | % | 4.20 | % | ||||||
|
Volatility
|
80 | % | 109 | % | 117 | % | ||||||
|
Dividend
|
n/a | n/a | n/a | |||||||||
|
Weighted-average fair value at grant
date
|
$ | 0.35 | $ | 0.37 | $ | 0.46 | ||||||
The
Company's computation of expected volatility for 2007 is based on historical
volatility. The Company's computation of expected life is 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. We
have not issued or declared any dividends on our common stock. Additional
information regarding options outstanding, exercisable and expected to vest as
of December 31, 2007 is as follows:
|
Shares
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Contractual Term (in
years)
|
Aggregate
Intrinsic Value
|
|||||||||||||
|
Outstanding
at December 31, 2007
|
5,209 | $ | 1.08 | 5.92 | $ | 849 | ||||||||||
|
Vested
and expected to vest at December 31, 2007
|
4,330 | $ | 1.19 | 5.38 | $ | 624 | ||||||||||
|
Exercisable
at December 31, 2007
|
3,340 | $ | 1.37 | 4.45 | $ | 370 | ||||||||||
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 fiscal 2007 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 December 31, 2007. This amount changes based
on the fair market value of Southwall's stock. Total intrinsic value of options
exercised was $178 for 2007 and immaterial for 2006 and 2005. As of December 31,
2007, $341 of total unrecognized compensation cost related to stock options, net
of forfeitures, was expected to be recognized over a weighted-average period of
approximately 2.47 years.
The
following table summarizes information about stock options outstanding at
December 31, 2007:
|
Options Outstanding
|
Options Exercisable
|
|||||||||||||||||||||
|
Weighted
|
||||||||||||||||||||||
|
Average
|
||||||||||||||||||||||
|
Remaining
|
Weighted
|
Weighted
|
||||||||||||||||||||
|
Range
of
|
Number
|
Contractual
|
Average
|
Average
|
||||||||||||||||||
|
Exercise
|
Out-
|
Life
|
Exercise
|
Number
|
Exercise
|
|||||||||||||||||
|
Prices
|
standing
|
(years)
|
Price
|
Exercisable
|
Price
|
|||||||||||||||||
| $ |
0.38
-- $0.41
|
313 | 8.84 | $ | 0.41 | 303 | $ | 0.41 | ||||||||||||||
| $ |
0.45
-- $0.45
|
|
989 | 8.95 | 0.45 | 0 | 0.00 | |||||||||||||||
| $ |
0.50
-- $0.54
|
592 | 5.71 | 0.51 | 452 | 0.50 | ||||||||||||||||
| $ |
0.58
-- $0.60
|
529 | 5.66 | 0.58 | 361 | 0.58 | ||||||||||||||||
| $ |
0.62
-- $0.71
|
585 | 7.85 | 0.67 | 228 | 0.67 | ||||||||||||||||
| $ |
0.73
-- $0.96
|
533 | 6.46 | 0.83 | 456 | 0.84 | ||||||||||||||||
| $ |
0.98
-- $1.22
|
583 | 4.30 | 1.15 | 488 | 1.15 | ||||||||||||||||
| $ |
1.28
-- $1.81
|
674 | 2.92 | 1.68 | 641 | 1.70 | ||||||||||||||||
| $ |
1.92
-- $8.00
|
378 | 0.75 | 3.95 | 378 | 3.95 | ||||||||||||||||
| $ |
9.90
-- $9.90
|
33 | 1.09 | 9.90 | 33 | 9.90 | ||||||||||||||||
| $ |
0.38
-- $9.90
|
5,209 | 3,340 | |||||||||||||||||||
Employee
Stock Purchase Plan
In
March 1997, the Company adopted the 1997 Employee Stock Purchase Plan ("the
1997 Plan"). Employees, subject to certain limitations, may purchase
shares at 85% of the lower of the fair market value of the Common Stock at the
beginning of the six-month offering period, or the last day of the purchase
period. During 2007, 2006 and 2005, 3, 13 and 13 shares, respectively, were sold
under the 1997 Plan. At December 31, 2007, there were no shares
available for issuance under the 1997 Plan, as the plan was
suspended.
NOTE
3 - BALANCE SHEET DETAIL
|
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Inventories,
net:
|
||||||||
|
Raw
materials
|
$ | 3,076 | $ | 3,850 | ||||
|
Work-in-process
|
787 | 221 | ||||||
|
Finished
goods
|
1,777 | 1,527 | ||||||
| $ | 5,640 | $ | 5,598 | |||||
|
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Property,
plant and equipment, net:
|
||||||||
|
Land,
buildings and leasehold improvements
|
$ | 8,203 | $ | 7,507 | ||||
|
Machinery
and equipment
|
31,391 | 28,914 | ||||||
|
Furniture
and fixtures
|
2,437 | 1,364 | ||||||
| 42,031 | 37,785 | |||||||
|
Less
- accumulated depreciation and amortization
|
(24,960 | ) | (20,553 | ) | ||||
| $ | 17,071 | $ | 17,232 | |||||
|
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Other
Accrued Liabilities:
|
||||||||
|
Accrued
asset retirement obligations
|
$ | 2,162 | $ | 1,710 | ||||
|
Accrued
sales returns and warranties
|
1,102 | 1,415 | ||||||
|
Accrued
dividend payable – Series A Preferred Stock
|
1,468 | 979 | ||||||
|
Income
tax payable
|
297 | 171 | ||||||
|
Accrued
accounting and tax fees
|
252 | 225 | ||||||
|
Deferred
revenue
|
-- | 240 | ||||||
|
Interest
risk provision – SEG grants
|
221 | 425 | ||||||
|
Other
accrued liabilities
|
848 | 1,283 | ||||||
| $ | 6,350 | $ | 6,448 | |||||
Restructuring
costs.
In
December 2002, we implemented a reduction in force at our Palo Alto
location and elected to vacate certain buildings in Palo Alto. As a result
of these actions, we incurred a restructuring charge of $2,624 in 2002 relating
to employee severance packages and the remaining rents due on excess facilities
in Palo Alto that we no longer occupy. In 2003, we recorded a credit to
operating expenses of $65 as a result of modifications to the severance packages
of certain employees. In 2006, we incurred a restructuring charge of
$915 relating to the closure of the Palo Alto manufacturing facility and the
related severance and incentive payout to terminated employees. A manufacturing
asset was also decommissioned in 2006. In 2007, we reserved an additional $56
for additional costs associated with our Palo Alto manufacturing
facility.
The
following tables set forth the beginning and ending liability balances relating
to the above described restructuring activities as well as activity during 2007,
2006 and 2005:
|
Workforce
|
Facilities
|
|||||||||||
|
Reduction
|
Related
|
Total
|
||||||||||
|
Balance
at January 1, 2005
|
$ | -- | $ | 274 | $ | 274 | ||||||
|
Provisions
|
-- | -- | -- | |||||||||
|
Adjustment
to reserve
|
-- | -- | -- | |||||||||
|
Cash
payments
|
-- | (75 | ) | (75 | ) | |||||||
|
Balance
at December 31, 2005
|
$ | -- | $ | 199 | $ | 199 | ||||||
|
Provisions
|
375 | 812 | 1,187 | |||||||||
|
Adjustment
to reserve
|
(7 | ) | (265 | ) | (272 | ) | ||||||
|
Cash
payments
|
(349 | ) | (644 | ) | (993 | ) | ||||||
|
Balance
at December 31, 2006
|
$ | 19 | $ | 102 | $ | 121 | ||||||
|
Provisions
|
-- | 56 | 56 | |||||||||
|
Cash
payments
|
(19 | ) | (102 | ) | (121 | ) | ||||||
|
Balance
at December 31, 2007
|
$ | -- | $ | 56 | $ | 56 | ||||||
At
December 31, 2007, $56 was included in other accrued liabilities in the
accompanying consolidated balance sheet.
Guarantees.
The
Company establishes a reserve for sales returns and warranties for specifically
identified, as well as, anticipated sales return and warranty claims based on
experience. As of December 31, 2006 our reserve for sales returns and
warranties was as follows:
|
Balance
at
|
Balance
at
|
|||||||||||||||
|
December 31,
|
December 31,
|
|||||||||||||||
|
2005
|
Provision
|
Utilized
|
2006
|
|||||||||||||
|
Accrued
sales returns and warranties
|
$ | 1,556 | $ | 603 | $ | (744 | ) | $ | 1,415 | |||||||
As of
December 31, 2007, our reserve for sales returns and warranties was as
follows:
|
Balance
at
|
Balance
at
|
|||||||||||||||
|
December 31,
|
December 31,
|
|||||||||||||||
|
2006
|
Provision
|
Utilized
|
2007
|
|||||||||||||
|
Accrued
sales returns and warranties
|
$ | 1,415 | $ | 1,360 | $ | (1,673 | ) | $ | 1,102 | |||||||
These
amounts are included in other accrued liabilities in the accompanying
consolidated balance sheets.
Indemnification
obligations.
The
Company's By-Laws require it to indemnify its officers and directors, as well as
those who act as directors and officers of other entities, against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
in connection with any proceedings arising out of their services to the Company.
The indemnification obligations are more fully described in the Company’s
By-Laws. The Company purchases insurance to cover claims made against its
directors and officers, senior management and certain agents. Since a maximum
obligation is not explicitly stated in the Company's By-Laws and will depend on
the facts and circumstances that arise out of any future claims, the overall
maximum amount of the obligations cannot be reasonably estimated and therefore
no liability has been accrued at December 31, 2007. Historically, the Company
has not made payments related to these indemnifications.
As
is customary in the Company's industry and as provided for in local law in the
U.S. and other jurisdictions, many of the Company's standard contracts provide
remedies to customers and other third parties with whom the Company enters into
contracts, such as defense, settlement, or payment of judgment for intellectual
property claims related to the use of its products. From time to time, the
Company indemnifies customers, as well as suppliers, contractors, lessors,
lessees, and others with whom it enters into contracts, against combinations of
loss, expense, or liability arising from various triggering events related to
the sale and the use of the Company's products and services, the use of their
goods and services, the use of facilities and state of Company-owned facilities,
and other matters covered by such contracts, usually up to a specified maximum
amount. In addition, from time to time, the Company sometimes also provides
protection to these parties against claims related to undiscovered liabilities,
additional product liability, or environmental obligations. To date, claims made
under such indemnifications have been insignificant and therefore no liability
has been accrued at December 31, 2007.
NOTE
4 – FINANCING AGREEMENTS/SERIES A PREFERRED STOCK
During
2003, we experienced a significant decline in sales which led to a significant
deterioration in our working capital position, which raised concerns about our
ability to fund our operations and continue as a going concern in the short term
and our ability to meet obligations coming due over the following few
years.
On
December 18, 2003, in order to raise cash to fund our operations and continue as
a going concern, we entered into an investment agreement with Needham &
Company, Inc., Needham Capital Partners II, L.P., Needham Capital Partners II
(Bermuda), L.P., Needham Capital Partners III, L.P., Needham Capital Partners
IIIA, L.P., Needham Capital Partners III (Bermuda), L.P., (together referred to
as “Needham Company and its Affiliates”) and Dolphin Direct Equity Partners, LP
(collectively with Needham Company and its Affiliates, “the
Investors”). On
December 31, 2004, Needham and its Affiliates and Dolphin elected to convert all
outstanding principal of, and accrued but unpaid interest on, their secured
convertible promissory notes of the Company into shares of the Company’s Series
A 10% Cumulative Preferred Stock. The Convertible Notes by their
terms were convertible at the option of the holders into Series A Stock at a
rate of one share for each $1.00 of principal or interest
converted. The aggregate principal amount of the Convertible Notes
converted by the Note Holders was $4,500 and interest accrued thereon as of the
time of conversion was $393. The aggregate number of shares of Series
A Stock issued as a result of the conversion was 4,893. In
particular, Needham and its Affiliates received 3,262 shares and Dolphin
received 1,631 shares.
At
December 31, 2007, Needham and certain of its affiliates
and Dolphin Direct Equity Partners, LP own 40.7% and 16.6%, respectively, of our
outstanding common stock. In addition, if Needham and its affiliates
and Dolphin Direct Equity Partners, LP had converted Series A shares into common
stock at December 31, 2007, they would have owned 44.6% and 19.1%, respectively,
of our outstanding common stock. In 2007, 2006 and 2005, we accrued,
in the aggregate, $1,468 of deemed dividends on preferred stock with respect to
Series A shares, and it is included in other accrued liabilities in the
accompanying consolidated balance sheet.
Material
Terms of the Series A Preferred Shares
|
|
.
|
Dividends. Each
of the Series A shares have a stated value of $1.00 and are entitled to a
cumulative dividend of 10% per year, payable at the discretion of the
Board of Directors. Dividends on the Series A shares accrue daily
commencing on the date of issuance and are deemed to accrue whether or not
earned or declared and whether or not there are profits, surplus or other
funds legally available for the payment of dividends. Accumulated
dividends, when and if declared by the Board, will be paid in
cash.
|
|
|
.
|
Liquidation
Preference. Upon a liquidation or dissolution of Southwall,
the holders of Series A shares are entitled to be paid a liquidation
preference out of assets legally available for distribution to our
stockholders before any payment may be made to the holders of common
stock. The liquidation preference is equal to the stated value of the
Series A shares, which is $1.00 per share, plus any accumulated but unpaid
dividends. Mergers, the sale of all or substantially all of our assets or
the acquisition of Southwall by another entity and certain other similar
transactions may be deemed to be liquidation events for these
purposes.
|
|
.
|
Restrictions.
So long as any Series A
shares are outstanding, unless all accrued dividends on all Series A
shares have been paid, we are prohibited from taking certain actions,
including redeeming or purchasing shares of our common stock and paying
dividends on our common
stock.
|
|
.
|
General
Voting Rights. Except under
certain circumstances or as otherwise provided by law, the holders of
Series A shares have no voting rights. The approval of the holders of a
majority of the Series A shares voting separately as a class will be
required to effect certain corporate
actions.
|
|
.
|
Conversion.
Each of the Series A shares is convertible
into common stock at any time at the option of the holder. Each of the
Series A shares is convertible into a number of shares of common stock
equal to the sum of its stated value plus any accumulated but unpaid
dividends, divided by the conversion price of the Series A shares. The
conversion price of the Series A shares is $1.00 per share and is subject
to adjustment in the event of any stock dividend, stock split, reverse
stock split or combination affecting such shares. The Series A shares also
have anti-dilution protection that adjusts the conversion price downwards
using a weighted-average calculation in the event we issue certain
additional securities at a price per share less than the closing price per
share of our common stock on any stock exchange on which our common stock
is listed. Each Series A share is initially convertible into one share of
common stock. If the closing price of our common stock on any stock
exchange on which our common stock is listed is $4.00 or more per share
(subject to appropriate adjustment if a stock split, reverse split or
similar transaction is affected) for 30 consecutive days, all outstanding
Series A shares shall automatically be
converted.
|
|
.
|
Redemption.
The Series A
shares are not
redeemable.
|
NOTE
5 - LINE OF CREDIT
On April
28, 2005, we entered into a credit agreement (the “Initial Credit Agreement”)
with Wells Fargo HSBC Trade Bank, N.A.. The credit facility was a revolving line
of credit under which we were able to, from time to time, borrow up to $3,000,
subject to satisfaction of certain conditions. Amounts borrowed under the first
facility bore interest at the prime rate minus 1.75% per annum or LIBOR plus 1%
per annum, at our option. We borrowed approximately $3,000 from this facility on
April 28, 2005. On March 29, 2007 we repaid this Initial Credit
Agreement with proceeds from a new credit facility with Bridge Bank
N.A.
On March
29, 2007, we entered into a new Credit Agreement (”Bridge Bank Agreement”) with
Bridge Bank, N.A. (“Bank”). The Bridge Bank Agreement provides for
two facilities. The first facility is a revolving line of credit for the lesser
of $3,000 or the face value of a standby letter of credit used to support the
facility (described below). The proceeds of the first revolving line of credit
facility were used to pay off Wells Fargo HSBC Trade Bank. Amounts borrowed
under the first facility bear interest at the prime rate minus 1.75% and were
collateralized by a $3,000 standby letter of credit from Needham & Company,
Inc.(“Needham”). At December 31, 2007, Needham and its affiliates owned 40.7% of
our outstanding common stock and Series A 10% Cumulative Convertible Preferred
Stock convertible into another approximately 4% of our outstanding common
stock. Needham provided the standby letter of credit pursuant to an
agreement requiring us to pay Needham interest on the $3,000 supporting the
standby letter of credit at an annual rate of 12.8% if the standby letter of
credit was not released by the Bank by August 1, 2007. The standby
letter of credit provided by Needham was not released by August 1, 2007 as
required; therefore, we accrued interest pursuant to the terms set forth in the
agreement with Needham amounting to $134 in the aggregate during
2007. We paid the total interest liability in January
2008. The standby letter of credit was released by the bank on
December 5, 2007, and we have no further obligations in connection with
it.
The
second facility is a $3,000 revolving line of credit under which we may, from
time to time, borrow up to 80% of eligible accounts receivables (net of pre-paid
deposits, pre-billed invoices, deferred revenue, offsets, and contras related to
each specific account debtor and other requirements in the lender’s
discretion). Amounts borrowed under the second facility bear interest
at the prime rate plus 1.75% annualized on the average daily amount outstanding.
The second facility also provides for a $2,000 letter of credit sub
facility.
We have
no amounts outstanding under our line of credit as of December 31,
2007.
All
borrowings under both the facilities with the Bank are collateralized by all of
our assets and are subject to certain financial and operating
covenants. These covenants include (a) maintaining a minimum current
ratio of 1.00 to 1.00 for each month through May 31, 2007 and maintaining a
current ratio of 1.25 to 1.00 each month thereafter; and (b) limiting our
quarterly net loss (including deemed dividend) so as not to exceed $400,000 for
any quarter after September 30, 2007.
The terms
of the Bridge Bank Agreement, among other things, limit our ability to (i)
incur, assume or guarantee additional indebtedness (other than pursuant to the
new Credit Agreement), (ii) incur liens upon the collateral pledged to the Bank,
(iii) merge, consolidate, sell or otherwise dispose of substantially all or a
substantial or material portion of our assets, and (iv) pay
dividends.
The
Bridge Bank Agreement provides for events of default, which include, among
others, (a) nonpayment of amounts when due (with no grace periods), (b) the
breach of our representations, covenants or other agreements in the Bridge Bank
Agreement or related documents, (c) defaults or accelerations of our other
indebtedness, (d) a failure to pay certain judgments, (e) the occurrence of any
event or condition that the Bank believes impairs or is substantially likely to
impair the prospects of payment or performance by us, and (f) certain events of
bankruptcy, insolvency or reorganization. Generally, if an event of default
occurs, the Bank may declare all outstanding indebtedness under the Bridge Bank
Agreement to be due and payable. The maturity date of the
facilities was March 28, 2008. However, we expect that our cash
will be sufficient to meet our working capital and capital expenditure
needs through December 31, 2008. We are currently negotiating a new credit
facility; however, there can be no assurance that we will obtain a new line
of credit or on acceptable terms, if at all.
The
foregoing description 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 the material terms
thereof.
As of
December 31, 2007, the Company was in compliance with all financial covenants
under all financial instruments.
NOTE
6 - TERM DEBT
The
Company's term debt consisted of the following:
|
Balance
at
|
||||||||||||
|
December 31,
|
Due
in
|
|||||||||||
|
Description
|
Rate
|
2007
|
2008
|
|||||||||
|
Term
debt:
|
||||||||||||
|
German
bank loan dated May 12, 1999
|
6.13 | % | $ | 1,007 | $ | 502 | ||||||
|
German
bank loan dated May 28, 1999
|
7.10 | %(1) | 3,681 | -- | ||||||||
|
German
bank loan dated May 28, 2000
|
7.15 | %(2) | 954 | 347 | ||||||||
|
German
bank loan dated August 14, 1999 (due June 30,
2009)
|
5.75 | % | 2,484 | -- | ||||||||
|
Settlement
agreement dated February 20, 2004
|
(3)
|
1,300 | 300 | |||||||||
|
Total
term debt
|
9,426 | $ | 1,149 | |||||||||
|
Less
current portion
|
1,149 | |||||||||||
|
Term
debt, non-current
|
$ | 8,277 | ||||||||||
|
(1)
|
Interest
rate will be reset to the then prevailing market rate in
2009.
|
|
(2)
|
Interest
rate is fixed at 7.15% until final repayment in
2010.
|
|
(3)
|
Interest
rate was 6% for 2007, and will increase by one percentage point per year
until 2010.
|
Settlement
agreement
During
1999, Southwall entered into a master equipment sale-leaseback agreement with a
leasing company, Matrix Funding Corporation ("lessor"). The Company was in
dispute with the lessor over the interpretation of certain terms of the lease
agreement and withheld lease payments due from March 2001 until February
2004. The lessor notified the Company that it considered the Company to be in
default and in January 2002 drew down on a letter of credit in the amount
of $500 that collateralized the Company's obligations. In May 2002, a suit was
filed against the Company by an agent of the successor to the lease demanding
payment of unpaid lease payments and alleged residual values. In February 2004,
the Company entered into a settlement agreement with the agents pursuant to
which the Company agreed to pay an aggregate of $2,000 bearing interest at a
stepped rate. The settlement required the Company to make an interest payment in
2004, and beginning in 2005, to make quarterly principal payments of between $75
and $125, plus interest payments until 2010. At December 31, 2007, the carrying
value of the liability was $3,654 ($1,300 of principal, plus $2,354 of accrued
interest). 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.
The
Company performed an assessment under SFAS 15 (“Accounting by Debtors and
Creditors for Troubled Debt Restructurings”) and EITF 02-04 (“Determining
Whether a Debtors’ Modification or Exchange of Debt Instruments Is Within The
Scope of FASB Statement No. 15”) to assess whether this debt restructuring
constituted a troubled debt restructuring. The Company concluded
that the debt restructuring was in fact a troubled debt restructuring as the
Company was in financial difficulty and the lessors had granted a concession to
the Company, under the definitions of such conditions as set forth in EITF
02-04. The reduction in the amount of the debt indicated that a concession had
been granted. SFAS 15 requires an assessment of the total future cash payments
specified by the new terms of the debt, including principal, interest and
contingent payments. If the payments are less than the carrying amount of the
payable, the Company should reduce the carrying amount to an amount equal to the
total future cash payments specified by the new terms and should recognize a
gain on restructuring of payables equal to the amount of the reduction. In its
assessment, management factored in the $5,900 confession of judgment as a
contingent payment, thereby eliminating any potential gain on restructuring. The
carrying value of the debt remains on the consolidated balance sheet and the
liability will be reduced as payments are made, with a potential gain to be
recorded at the date of the final payment and the expiry of the confession of
judgment. Based on a SFAS 5 determination, when the Company considers default
probable, the liability would be increased to the $5,900 confession of judgment
value. The excess of the carrying value over the original $2,000 settlement was
$2,354 and was recorded in other long-term liabilities in the consolidated
balance sheet. The remaining principal balance at December 31, 2007 is
$1,300.
Loans
from German Banks
On
May 12, 1999, the Company entered into a loan agreement with a German bank
that provided for borrowings up to 3,100 Euros ($3,900). Under the terms of this
agreement, the funds were used solely for the purpose of capital investment by
Southwall's German subsidiary. The term of the loan is for a period of
10 years and the principal is repayable in Euros after the end of one year
in 36 quarterly payments. The loan bears interest at 6.125% per annum until
December 31, 2009. Of the borrowings outstanding of $1,007 under this bank loan
at December 31, 2007, $505 was classified as non-current in the
accompanying consolidated balance sheet. The interest rate was 6.13% in
2007.
On
May 28, 1999, the Company entered into a general loan agreement with a
German bank. Under the terms of the loan agreement, funds were made available in
three tranches, and were used solely for the purpose of capital investment by
the Company's German subsidiary. The agreement contains various covenants with
which the Company was in compliance at December 31, 2007; the Company is
current with respect to all principal and interest payments due under the loan
agreement. Under the first tranche, the Company borrowed 2,500 Euros ($3,200)
for a term of twenty years beginning on May 28, 1999. The principal is
repayable in Euros beginning after ten years in twenty equal, semi-annual
payments. The loan bears fixed interest of 7.1% per annum for the first ten
years, after which time the rate will be adjusted to a current prevailing rate.
Of the borrowings outstanding under this tranche of $3,681 at December 31,
2007, $3,681 was classified as non-current in the accompanying consolidated
balance sheet. Under the second tranche, the Company borrowed 1,700 Euros
($2,100) for a term of seven years beginning May 28, 1999 and the principal
is repayable after one year in twelve equal, semi-annual payments. The loan bore
fixed interest at 3.75% per annum for the period of seven years. At
December 31, 2007, the amount due under this second tranche was $0. Under
the third tranche, the Company borrowed 2,100 Euros ($2,700) for a term of ten
years beginning on May 28, 2000, and the principal is repayable after one year,
in 36 equal quarterly payments. The loan bears fixed interest of 7.15% per annum
until the final payment in 2010. At December 31, 2007, the amount due under
this tranche was $954; of this amount, $607 was classified as non-current in the
accompanying consolidated balance sheet.
On
August 14, 1999, the Company entered into a loan agreement with a German
bank that provided for borrowings up to 1,700 Euros ($2,300). As required by
this agreement, the funds were used solely for the purpose of capital investment
by the Company's German subsidiary. The principal balance is due in a single
payment on June 30, 2009 and bears interest at a rate of 5.75% per annum.
The interest is payable quarterly in Euros. Fifty percent of the loan proceeds
are restricted in an escrow account for the duration of the loan period and are
classified as a non-current asset "Restricted cash loans" in the accompanying
consolidated balance sheet. The amount due under this bank loan at
December 31, 2007 was $2,484, which was classified as a non-current
liability in the accompanying consolidated balance sheet.
The
preceding German bank loans are collateralized by the production equipment,
building and land owned by the Company's German subsidiary. The dollar
equivalent value of the remaining balances for the preceding German bank loans
has been calculated using the Euro exchange rate as of December 31,
2007.
Scheduled
principal payments of term debt for the next five years and thereafter, are as
follows:
|
Amount
|
||||
|
2008
|
$ | 1,149 | ||
|
2009
|
4,020 | |||
|
2010
|
1,128 | |||
|
2011
|
368 | |||
|
2012
|
368 | |||
|
Thereafter
|
2,393 | |||
|
Total
|
$ | 9,426 | ||
The
Company incurred total interest on indebtedness of $972, $944 and $1,156 in
2007, 2006 and 2005, respectively.
As of
December 31, 2007, the Company was in compliance with all its financial
covenants under all its financial instruments.
NOTE
7 - GOVERNMENT GRANTS AND INVESTMENT ALLOWANCES
The
Company has an agreement to receive cash grant awards (the "Grant"), which was
approved by the Saxony government in May 1999. As of December 31,
2007, the Company had received approximately 5,000 Euros ($5,000) under this
Grant since 1999 and accounted for the Grant by applying the proceeds received
to reduce the cost of fixed assets of the Dresden, Germany manufacturing
facility.
Giving
effect to an amendment of the terms of the Grant in 2002, the Grant was subject
to the following requirements:
|
|
(a)
|
The
grant was earmarked to co-finance the costs of the construction of a
facility to manufacture XIR® film for the automotive glass
industry.
|
|
|
(b)
|
The
construction period for the project was from March 15, 1999 to
June 30, 2006.
|
|
|
(c)
|
The
total investment during the construction period should be at least 33,728
Euros ($33,883).
|
|
|
(d)
|
The
project must create at least one hundred fifteen permanent jobs and five
apprenticeships by June 30,
2006.
|
We
believe we have met the above requirements at June 30, 2006. We
reached a settlement with the Saxony government regarding the unused grants, and
in October 2007, we repaid 128 Euros ($185) to the Saxony Government consisting
of: 113 Euros ($163) of prepaid grants with 15 Euros ($22) of corresponding
interest.
In
addition to the Grant, the Company is further eligible for cash investment
allowances from the Saxony government calculated based on the total projected
capital investment by the Company in its Dresden facility of 33,728 Euros
($33,883), subject to European Union regulatory approval. During 2000, 2001,
2002, 2003, 2004, 2005 and 2006 the Company received 1,200 Euros ($1,500), 2,500
Euros ($3,200), 1,200 Euros ($1,500), 1,300 Euros ($1,600), 400 Euros ($500),
158 Euros ($190) and 38 Euros ($49), respectively, in investment allowances from
the Saxony government, and those proceeds were applied to reduce the capitalized
construction cost of the Dresden facility. These investment allowances are
subject to the following requirements:
|
|
(a)
|
The
movable and immovable assets, the acquisition costs of which are taken
into account in determining the investment allowance, shall be employed
within the subsidized territory for a period of at least five years
following the acquisition or production;
and
|
|
|
(b)
|
The
movable assets, the acquisition costs of which are taken into account in
determining the increased investment allowance, shall remain in a business
that is engaged in the processing industry, or in a similar production
industry, for a period of at least five years following the acquisition or
production.
|
If the
Company fails to meet the above requirements, the Saxony government has the
right to demand repayment of the allowances. The Grants and investment
allowances, if any, that the Company is entitled to seek from the Saxony
government vary from year to year based upon the amount of capital expenditures
that meet the above requirements. Generally, Southwall is not eligible to seek
total investment grants for any year in excess of 33% of its eligible capital
expenditures for that year. The Company cannot guarantee that it will be
eligible for or receive additional grants or allowances in the future. As of
December 31, 2007, we were in compliance with the requirements mentioned
above. The Company has accrued 150 Euros ($221) in the event
that that the number of qualified employee does not meet the grant
specifications and has included this amount in other accrued liabilities in the
consolidated balance sheet at December 31, 2007.
NOTE
8 - INCOME TAXES
The
provision for income taxes for the years then ended December 31, 2007, 2006 and
2005 consist of the following:
|
2007
|
2006
|
2005
|
||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 42 | $ | -- | $ | -- | ||||||
|
State
|
1 | 37 | (17 | ) | ||||||||
|
Foreign
|
593 | 870 | 554 | |||||||||
|
Total
current
|
$ | 636 | $ | 907 | $ | 537 | ||||||
|
Deferred:
|
||||||||||||
|
Federal
|
$ | -- | $ | -- | $ | -- | ||||||
|
State
|
-- | -- | -- | |||||||||
|
Foreign
|
(126 | ) | 51 | (508 | ) | |||||||
|
Total
deferred
|
$ | (126 | ) | $ | 51 | $ | (508 | ) | ||||
|
Total
provision
|
$ | 510 | $ | 958 | $ | 29 | ||||||
The
income tax provision relates primarily to foreign taxes, foreign withholding
taxes on royalty payments and state minimum tax obligations.
The
effective income tax rate differs from the federal statutory rate as a result of
foreign taxes and valuation allowances established for deferred tax
assets. The effective tax rate reconciliations for the years ended
December 31, 2007, 2006 and 2005 are as follows:
|
2007
|
2006
|
2005
|
||||||||||
|
Tax
at Federal Statutory Rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State,
Net of Federal Benefit
|
0.0 | % | 0.0 | % | 21.3 | % | ||||||
|
Foreign
Rate differential
|
-6.0 | % | -1.4 | % | -3.1 | % | ||||||
|
Permanent
Items
|
1.4 | % | -2.2 | % | 0.0 | % | ||||||
|
R&D
Credit
|
-0.5 | % | 1.2 | % | -0.8 | % | ||||||
|
Foreign
tax credit
|
0.0 | % | -2.5 | % | 0.0 | % | ||||||
|
Increase
(Decrease) in valuation allowance
|
-17.4 | % | -50.4 | % | -39.4 | % | ||||||
|
Foreign
Payable Release
|
0.0 | % | 0.0 | % | -12.3 | % | ||||||
|
Other
|
0.0 | % | -0.8 | % | 0.3 | % | ||||||
|
Provision
for Taxes
|
12.5 | % | -21.1 | % | 0.9 | % | ||||||
U.S. and
foreign pre-tax income are broken-down as follows:
|
2007
|
2006
|
2005
|
||||||||||
|
U.S.
|
$ | 2,037 | $ | (7,340 | ) | $ | 1,826 | |||||
|
Foreign
|
2,030 | 2,788 | 1,523 | |||||||||
|
Total
|
$ | 4,067 | $ | (4,552 | ) | $ | 3,349 | |||||
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of
the Company’s deferred tax assets are as follows:
|
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Deferred
Tax Assets:
|
||||||||
|
Federal
and state net operating losses
|
$ | 13,203 | $ | 13,723 | ||||
|
Research,
MIC, and other tax credits
|
1,340 | 1,715 | ||||||
|
Accruals
|
3,363 | 3,049 | ||||||
|
Depreciation
and amortization
|
105 | 470 | ||||||
|
Stock-based
compensation
|
193 | 126 | ||||||
|
Foreign
Accruals
|
259 | 105 | ||||||
|
Gross
deferred tax assets
|
18,463 | 19,188 | ||||||
|
Deferred
tax assets valuation allowance
|
(18,204 | ) | (19,083 | ) | ||||
|
Total
deferred tax asset
|
$ | 259 | $ | 105 | ||||
|
Deferred
Tax Liabilities:
|
||||||||
|
Foreign
Accruals
|
$ | 80 | $ | 0 | ||||
|
Total
Deferred Tax Liabilities
|
80 | 0 | ||||||
|
Net
Deferred Tax Asset
|
$ | 179 | $ | 105 | ||||
The net
deferred tax asset is included in other assets on the consolidated balance
sheets.
Realization
of deferred tax assets is dependent upon future earnings, if any, the timing and
amount of which are uncertain. Accordingly, the net deferred tax
assets have been offset by a valuation allowance of $18,204. The
valuation allowance decreased by $879 for the period ended December 31,
2007.
As of
December 31, 2007, the Company has net operating loss carry forwards for federal
income tax purposes of approximately $36,341 which expire beginning in the year
2008 through 2026. The Company also has California net operating loss
carry forwards of approximately $8,432 which expire beginning in the year 2008
through 2016.
The
Company has federal and California research and development tax credits of $121
and $1,421 respectively. The federal research credits will begin to
expire in the year 2019 and the California research credits have no expiration
date. The Company also has a California Manufacturers’ Investment
Credit of $166, a portion of which is currently expiring yearly.
Utilization
of the Company’s net operating loss may be subject to substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code and similar state provisions. Such an annual limitation
could result in the expiration of the net operating loss before
utilization.
In June
2006, the FASB issued FIN 48. FIN 48 establishes a single model to address
accounting for uncertain tax positions. FIN 48 clarifies the accounting for
income taxes by prescribing a minimum recognition threshold a tax position is
required to meet before being recognized in the financial statements. FIN 48
also provides guidance on derecognition, measurement classification, interest
and penalties, accounting in interim periods, disclosure and transition. The
Company adopted FIN 48 on January 1, 2007. As a result of the
implementation of FIN 48, the Company did not recognize any increase or decrease
in the liability for unrecognized tax benefits. In 2007, there
was no change in the liability for unrecognized tax benefits. At
December 31, 2007, the Company did not have any unrecognized tax
benefits.
Upon
adoption of FIN 48, the Company’s policy to include interest and penalties
related to unrecognized tax benefits with the Company’s provision for (benefit
from) income taxes did not change. The Company had no accrued
interest or penalties related to unrecognized tax benefits as of December 31,
2007.
NOTE
9 – WARRANTS
As of
December 31, 2007 and 2006, we had the following outstanding
warrants:
|
12/31/2007
|
12/31/2006
|
|||||||||||||
|
Number
of Shares
|
Number
of Shares
|
|||||||||||||
|
Exercisable to
|
Exercisable to
|
|||||||||||||
|
Warrant Holder
|
Issue Date
|
Common Stock
|
Common Stock
|
Exercise Price
|
Expiration Date
|
|||||||||
|
Pacific
Business Funding, A division of Cupertino National
Bank:
|
12/18/2003
|
250,000 | 250,000 | $ | 0.01 |
12/18/2008
|
||||||||
|
1/19/2004
|
75,000 | 75,000 | $ | 0.01 |
1/19/2009
|
|||||||||
|
1/30/2004
|
35,000 | 35,000 | $ | 0.01 |
1/30/2009
|
|||||||||
| 360,000 | 360,000 | (1) | ||||||||||||
(1) Warrants issued in connection with financial debt
instruments
NOTE
10 - SEGMENT REPORTING
Southwall
operates in one segment.
The total
net revenues for the automotive glass, electronic display, architectural and
window film product lines were as follows:
|
2007
|
2006
|
2005
|
||||||||||
|
Automotive
glass
|
$ | 15,113 | $ | 13,433 | $ | 19,647 | ||||||
|
Electronic
display
|
2,674 | 10,799 | 14,039 | |||||||||
|
Architectural
|
5,957 | 5,528 | 5,934 | |||||||||
|
Window
film
|
13,989 | 10,449 | 15,134 | |||||||||
|
Total
net revenues
|
$ | 37,733 | $ | 40,209 | $ | 54,754 | ||||||
The
following is a summary of net revenue by geographic area (based on location of
customer):
|
2007
|
2006
|
2005
|
||||||||||
|
United
States
|
$ | 8,786 | $ | 12,850 | $ | 14,362 | ||||||
|
Europe:
France,Germany
|
8,824 | 6,781 | 14,701 | |||||||||
|
Asia
Pacific: Japan, Pacific
Rim
|
13,624 | 18,194 | 22,960 | |||||||||
|
Rest of the world
|
6,499 | 2,384 | 2,731 | |||||||||
|
Total
|
$ | 37,733 | $ | 40,209 | $ | 54,754 | ||||||
Southwall
operates from facilities located in the United States and Germany. Long-lived
assets were as follows:
|
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
United
States
|
$ | 577 | $ | 754 | ||||
|
Germany
|
16,494 | 16,478 | ||||||
|
Consolidated
|
$ | 17,071 | $ | 17,232 | ||||
NOTE
11 - COMMITMENTS AND CONTINGENCIES
Commitments
The
Company leases certain property and equipment as well as its facilities under
noncancellable operating and capital leases. These leases expire at various
dates through 2011. As of December 31, 2007, the future minimum payments
under these leases are as follows:
|
Year
Ending December 31,
|
Operating Leases |
|||
|
2008
|
$ | 509 | ||
|
2009
|
464 | |||
|
2010
|
477 | |||
|
2011
|
240 | |||
|
Future
minimum lease payments
|
$ | 1,690 | ||
Rent
expense under operating leases was approximately $825, $713 and $861 in 2007,
2006 and 2005, respectively.
On
February 19, 2004, the Company entered into the second amendment to the lease
for its Palo Alto, California manufacturing facility. This amendment reflected a
payment schedule for a rent deferral for this facility. In January 2006, the
Company paid in full approximately $1,192 for this deferred rent.
On
January 19, 2006, the Company announced its plans to close its Palo Alto
manufacturing facility. As a result of this decision, the Company is in
negotiation with its landlord to decommission and surrender these premises. The
Company accrued $1,509 as a current leasehold asset retirement obligation in the
third quarter of 2006 and in the fourth quarter of 2007, the Company accrued an
additional $153. Both amounts are included in other accrued liabilities in the
accompanying consolidated balance sheets. The method and timing of payments were
finalized with the landlord on February 22, 2008 (see Note 15, Subsequent
Events). Further environmental studies are currently being performed on this
property as agreed to by Southwall and the landlord and therefore this estimate
of our liability could differ from the actual future settlement
amount.
In
January 2006, the Company renewed a lease agreement for its research and
development facility. Under this lease agreement, the Company accrued $200 as a
current leasehold retirement obligation in the first quarter of
2006. In the fourth quarter of 2007, the Company increased the
accrual to $500 which is included in other accrued liabilities in the
accompanying 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.
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
12 - IMPAIRMENT OF LONG-LIVED ASSETS
During
2003, the Company experienced shortfalls in revenue compared to its budgeted and
forecast revenues. In addition, in the third quarter of 2003, the Company
determined that, due to reduced demand for its products, anticipated revenues
through the remainder of 2003 and 2004 would be substantially below expected as
well as historical levels. The Company believed that the reduced demand for its
products was caused by the decline in PC sales worldwide, competition from
alternative technologies in the automotive glass segment, as well as declines in
certain residential and commercial construction markets as a result of the
economic recession in the U.S. As the Company's U.S. operations have a higher
operating cash break-even points compared to its Dresden operations, it believed
that the lower anticipated revenues indicated that an impairment analysis of the
assets of its U.S. operations was necessary at September 28, 2003. As a result
of the Company's decision to close the Tempe operations in the fourth quarter,
it concluded that a further impairment analysis of the long-lived assets of the
U.S. operations was necessary at December 31, 2003. The Company, therefore,
performed an evaluation of the recoverability of long-lived assets related to
its U.S. business at September 28, 2003 and December 31, 2003 in accordance with
the SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
For long-lived assets to be held and used, the determination of recoverability
is based on an estimate of undiscounted cash flows expected to result from the
use and eventual disposition of the assets. The Company's evaluation concluded
that the undiscounted expected future cash flows were less than the carrying
values of these assets, and an impairment charge was required. The impairment
charge represents the amount required to write-down long-lived assets to the
Company's best estimate of fair value. For long-lived assets to be disposed of
by sale or abandonment, principally the long-lived assets located at the Tempe
operation, the impairment loss is estimated as the excess of the carrying value
of the assets over fair value. As a result of the Company's assessment it
recorded non-cash, impairment charges of $19,380 and $8,610 for the periods
ended September 28, 2003 and December 31, 2003, respectively. The factors
considered by the Company in performing this assessment included current
operating results, trends, and prospects, the closure of its Tempe operation, as
well as the effects of obsolescence, demand, competition, and other economic
factors.
During
2006 and 2005, the Company recovered $32 and $214, respectively, from the sales
of previously written-down equipment and production machines. In
2006, the Company incurred impairment charges of $305 and recoveries of
$519.
NOTE
13 – SAVINGS PLAN (401-K PLAN)
In 1998,
the Company sponsored a 401(k) defined contribution plan covering eligible
employees who elect to participate. Southwall is allowed to make discretionary
profit sharing and 401(k) matching contributions as defined in the plan and as
approved by the board of directors. The Company matches 25% of each eligible
participant's 401(k) contribution up to a maximum of 20% of the participant's
compensation, not to exceed $15 per year. Southwall's actual contribution may be
reduced by certain available forfeitures, if any, during the plan year. No
discretionary or profit sharing contributions were made for the years ending
December 31, 2007, 2006 and 2005. Matching contributions during 2007, 2006
and 2005 were $55, $69 and $80, respectively.
NOTE
14 – NONRECURRING ITEMS
As part
of a Technology Transfer and Service agreement executed with Sunfilm AG on March
14, 2007, we recognized income of $2,500 attributed to the achievement of
certain milestones set forth in the agreement. This amount is
included in “Other Income, Net” in the accompanying consolidated statements of
operations. As of December 31, 2007 one milestone remained open, and
a total of $500 is expected to be achieved in 2008.
For the
past four years, we have sold a highly specialized EMI filtering film for use in
plasma display panels for televisions under an exclusive Manufacturing and
Supply Agreement to our customer, Mitsui Chemicals, Inc.. Under the terms of
this agreement, Mitsui Chemicals Inc. has been obligated to purchase minimum
annual amounts of electronic display materials from us. As a result of
price sensitivity which led to a decreased demand for our product in
the electronic display market, we agreed with Mitsui Chemicals to terminate this
agreement in November, 2007. As consideration for their obligations under this
agreement, Mitsui Chemicals paid us $2,959. This is shown as
“Contract Termination Settlement” in the accompanying consolidated statements of
operations.
NOTE
15 – SUBSEQUENT EVENTS
In
connection with the lease surrender plan with Judd Properties, Inc., the
landlord of one of our leased facilities, we had accrued a total of $1,662 as a
leasehold asset retirement obligation. Subsequent to year end, we entered into a
settlement agreement with our landlord. In exchange for our release
from the building restoration obligation, on January 31, 2008 the landlord drew
down the letter of credit in the amount of $1,000 and released the $100 security
deposit. On February 22, 2008, we paid the landlord $400 pursuant to
the settlement agreement signed on February 22, 2008. The remaining accrued
obligation of $153 represents additional environmental sampling costs and legal
fees estimated to be incurred in 2008.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9AT. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and
Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports we file under the Exchange
Act is recorded, processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to our management, including our President (Principal Executive
Officer) and our Chief Accounting Officer (Principal Financial Officer), as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, as ours are designed to do, and management necessarily was required
to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
As of
December 31, 2007, we carried out an evaluation, under the supervision and with
the participation of our management, including our Principal Executive Officer,
and Chief Accounting Officer (Principal Financial Officer) 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 Exchange Act. Based upon that
evaluation, our Principal Executive Officer, and Chief Accounting Officer
(Principal Financial Officer) concluded that our disclosure controls and
procedures are effective in enabling us to record, process, summarize, and
report information required to be included in our periodic SEC filings within
the required time period.
Report of Management on Internal
Control over Financial Reporting
We are
responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is defined in
Rule 13a-15(f) and 15d-15(f) under the Exchange Act, as a process designed by,
or under the supervision of our principal executive and principal financial
officers and effected by our board of directors, management and other personnel
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and
procedures that:
|
|
§
|
pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and disposition of our
assets;
|
|
|
§
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being
made only in accordance with authorization of our management and
directors; and
|
|
|
§
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial
statements.
|
Our
internal control system was designed to provide reasonable assurance to our
management and board of directors regarding the preparation and fair
presentation of published financial statements. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods
are subject to the risks that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
Our
management, with the participation of our Principal Executive Officer and
Principal Financial Officer, conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”). Based on our evaluation under the
framework in Internal Control—Integrated Framework, our management concluded
that our internal control over financial reporting was effective as of December
31, 2007.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only management's report in this annual report.
Changes
in Internal Control Over Financial Reporting
As part
of management’s assessment of internal controls over financial reporting under
section 404 of the Sarbanes-Oxley Act of 2002, certain enhancements have been
made to our internal control process.
ITEM 9B. OTHER INFORMATION
Not
applicable.
Certain
information required by Part III is omitted from this annual report as we intend
to file a proxy statement (the “Proxy Statement”) for our Annual Meeting of
Stockholders, pursuant to Regulation 14A of the Securities Exchange Act of 1934,
as amended, not later than 120 days after the end of the fiscal year covered by
this Report, and certain information included in that proxy statement is
incorporated herein by reference.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF REGISTRANT
AND CORPORATE GOVERNANCE
The
remaining information required by this item will be contained in the Proxy
Statement, which will be filed with the SEC within 120 days of the year
ended December 31, 2007 and is incorporated herein by reference. Information
relating to certain filings on Forms 3, 4, and 5 is contained in the Proxy
Statement and is incorporated herein by reference. Information required by this
item pursuant to Items 407 of Regulation S-K relating to board meetings, our
nominating committee, audit committee and compensation committee and shareholder
communications will be contained in the Proxy Statement and is incorporated
herein by reference.
We have
adopted a written code of conduct that applies to all of our employees,
including our principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions and can be found on our website, www.southwall.com.
ITEM 11. EXECUTIVE COMPENSATION
Information
regarding the Company’s compensation of its named executive officers will be set
forth in the Proxy Statement, which will be filed within 120 days with
the SEC of the year ended December 31, 2007 which information is
incorporated herein by reference. Information regarding the Company’s
compensation of its directors will be set forth in the Proxy Statement, which
information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information
regarding security ownership of certain beneficial owners, directors and
executive officers will be set forth under in the Proxy Statement, which will be
filed with the SEC within 120 days of the year ended December 31, 2007
and which information is incorporated herein by reference.
Information
regarding the Company’s equity compensation plans, including both stockholder
approved plans and non-stockholder approved plans, will be set forth in the
Proxy Statement, which will be filed within 120 days of the year ended December
31, 2007 and which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
Information
regarding certain relationships and related transactions will be set forth in
the Proxy Statement, which will be filed within 120 days with the SEC of
the year ended December 31, 2007 and which information is incorporated herein by
reference. Information regarding director independence will be set forth in the
Proxy Statement, which will be filed within 120 days of the year ended December
31, 2007 and which information will be incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information
regarding principal auditor fees and services will be set forth in the Proxy
Statement, which will be filed within 120 days of the year ended December 31,
2007 and which
information is incorporated herein by reference.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The
following documents are filed as part of this Form 10-K:
|
(a)(1)
|
Financial Statements.
The following Financial Statements of Southwall Technologies Inc. are
filed as part of this
Form 10-K:
|
|
Page
Number
|
|
|
Report
of Independent Registered Public Accounting Firm
|
56
|
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
57
|
|
Consolidated
Statements of Operations for the years ended December 31, 2007, 2006 and
2005
|
58
|
|
Consolidated
Statements of Stockholders' Equity for the years ended December 31, 2007,
2006 and 2005
|
59
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2006 and
2005
|
60
|
|
Notes
to Consolidated Financial Statements
|
61
|
(2)
Financial Statement
Schedule.
Schedule
II - Valuation and qualifying accounts and reserves (amounts in
thousands):
|
Balance
|
||||||||||||||||
|
at
|
Balance
|
|||||||||||||||
|
Beginning
|
at
End
|
|||||||||||||||
|
Description
|
of Year
|
Additions
|
Deductions
|
of Year
|
||||||||||||
|
2007
|
||||||||||||||||
|
Inventory
reserves
|
$ | 410 | $ | 1,109 | $ | 847 | (2) | $ | 672 | |||||||
|
Allowance
for Doubtful Accounts
|
$ | 102 | $ | (36 | ) | $ | -- | (2) | $ | 66 | ||||||
|
Reserves
for warranty and sales returns
|
$ | 1,415 | $ | 1,360 | (1) | $ | 1,673 | (2) | $ | 1,102 | ||||||
|
Tax
valuation allowance
|
$ | 19,083 | $ | -- | $ | 879 | (2) | $ | 18,204 | |||||||
|
2006
|
||||||||||||||||
|
Inventory
reserves
|
$ | 759 | $ | 1,546 | $ | 1,895 | (2) | $ | 410 | |||||||
|
Allowance
for Doubtful Accounts
|
$ | 208 | $ | (63 | ) | $ | 43 | (2) | $ | 102 | ||||||
|
Reserves
for warranty and sales returns
|
$ | 1,556 | $ | 603 | (1) | $ | 744 | (2) | $ | 1,415 | ||||||
|
Tax
valuation allowance
|
$ | 21,718 | $ | -- | $ | 2,635 | (2) | $ | 19,083 | |||||||
|
2005
|
||||||||||||||||
|
Inventory
reserves
|
$ | 1,254 | $ | 1,710 | $ | 2,205 | (2) | $ | 759 | |||||||
|
Allowance
for Doubtful Accounts
|
$ | 292 | $ | -- | $ | 84 | (2) | $ | 208 | |||||||
|
Reserves
for warranty and sales returns
|
$ | 2,701 | $ | 720 | (1) | $ | 1,865 | (2) | $ | 1,556 | ||||||
|
Tax
valuation allowance
|
$ | 22,348 | $ | -- | $ | 630 | (2) | $ | 21,718 | |||||||
(1)
Charged against revenue.
(2)
Reserves utilized during the year.
(3) Exhibits.
Reference
is made to the Exhibit Index, which follows the signature pages of this
Form 10-K.
Pursuant
to the requirements of Section 13 or 15(d) 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, as of the day of March 31,
2008.
|
SOUTHWALL
TECHNOLOGIES INC.
|
|||
|
By:
|
/s/ Raymond Eugene Goodson
|
||
|
R.
Eugene Goodson
|
|||
|
Executive
Chairman
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant in the
capacities indicated, as of March 31, 2008.
|
Signature
|
Title
|
|
/s/Raymond
Eugene Goodson
R.
Eugene Goodson
|
Executive
Chairman (Principal Executive Officer)
|
|
/s/Mallorie
Burak
Mallorie
Burak
|
Chief
Accounting Officer (Principal Financial
Officer)
|
|
/s/William
A. Berry
William
A. Berry
|
Director
|
|
/s/
Dennis Bunday
Dennis
Bunday
|
Director
|
|
/s/George
Boyadjieff
George
Boyadjieff
|
Director
|
|
/s/Jami
K. Nachtsheim
Jami
K. Nachtsheim
|
Director
|
|
/s/Andre
R. Horn
Andre
R. Horn
|
Director
|
|
/s/Peter
E. Salas
Peter
E. Salas
|
Director
|
EXHIBIT
INDEX
|
Exhibit No.
|
Exhibit
|
|
3.1(1)
|
Restated
Certificate of Incorporation of the Company.
|
|
3.1.1(30)
|
Amendment
to Amended and Restated Certificate of Incorporation of the
Company
|
|
3.2(1)
|
By-laws
of the Company.
|
|
3.3(26)
|
Amended
and Restated Certificate of Designation, Preferences and Rights of Series
A 10% Cumulative Preferred Stock of the Company filed with the Secretary
of State of Delaware on January 30, 2004.
|
|
10.35.1(11)
|
Lease
Agreement for the facilities at 3941 East Bayshore Road, dated October 7,
1999, between the Company and Straube Associates, Inc.
|
|
10.36(1)
|
Lease
Agreement for the facilities at 3961 East Bayshore Road, dated March 20,
1979, between the Company and Allan F. Brown and Robert V.
Brown.
|
|
10.36.1(11)
|
Amendment,
dated October 12, 1999, between the Company and Brown Investment Company
to the Lease Agreement for the facilities at 3961 East Bayshore Road,
dated March 20, 1979, between the Company and Allan F. Brown and Robert V.
Brown.
|
|
10.59(3)
|
Lease
Agreement for the facilities at 3969-3975 East Bayshore Road Palo Alto,
California, dated January 1, 1989, between the Company and Bay Laurel
Investment Company.
|
|
10.59.1(11)
|
Amendment,
effective January 1, 2000, between the Company and Judd Properties, LLC to
the Lease Agreement for the facilities at 3969-3975 East Bayshore Road
Palo Alto, California, dated January 1, 1989, between the Company and Bay
Laurel Investment Company.
|
|
10.59.2(27)
|
Second
Amendment to Lease for the facilities at 3969-3975 East Bayshore Road Palo
Alto, California, dated February 19, 2004, between the Company and Judd
Properties, LLC.
|
|
10.60.1(11)
|
Amendment,
effective January 1, 2000, between the Company and Judd Properties, LLC to
the Lease Agreements for the facilities at 3977-3995 East Bayshore Road
Palo Alto, California, dated January 1, 1989, between the Company and Bay
Laurel Investment Company.
|
|
10.60.2(27)
|
Surrender
and Termination Agreement for the facilities at 3977- 3995 East Bayshore
Road Palo Alto, California, dated February 19, 2004, between the Company
and Judd Properties, LLC.
|
|
10.71(4)
|
Lease
Agreement for the facilities at 3780 Fabian Way, Palo Alto, California,
dated June 11, 1990, between the Company and The Fabian
Building.
|
|
10.72(4)
|
License
Agreement between Mitsui and the Company, dated December 28,
1990.
|
|
10.72.1(19)
|
Amendment
to the License Agreement dated as of December 28, 1990 between Mitsui and
the Company, dated August 2000.
|
|
10.78(5)
|
Amendment
to property lease dated February 2, 1994 to extend lease period on
building at 3961 E. Bayshore Road, Palo Alto, California. Original lease
filed as Exhibit No. 10.36 above.
|
|
10.92(9)*
|
The
Company's 1997 Stock Incentive Plan.
|
|
10.93(10)*
|
The
Company's 1997 Employee Stock Purchase Plan, as
amended.
|
|
10.94(12)*
|
The
Company's October 22, 1999 Severance Policy in the Event of a
Merger.
|
|
10.99(15)*
|
1998
Stock Plan for Employees and Consultants.
|
|
10.103(15)
|
German
bank loan dated May 12, 1999.
|
|
10.104(15)
|
German
bank loan dated May 28, 1999.
|
|
10.105(22)
|
German
bank loans dated May 28, 1999 and December 1, 1999.
|
|
10.106(15)
|
German
bank loan due June 30, 2009.
|
|
10.107(15)
|
German
bank loan dated June 29, 2000.
|
|
10.108(15)
|
German
bank loan dated July 10, 2000.
|
|
10.109(15)
|
German
bank loans dated December 18, 2000 and December 19,
2000.
|
|
10.111(19)
|
Master
Lease Agreement between Matrix Funding Corporation and the Company, dated
July 19, 1999.
|
|
10.116(18)
|
Distribution
Agreement between V-Kool International Holdings Pte. Ltd. and the Company,
dated as of January 1, 2002 (portions of this exhibit have been omitted
based on a request for confidential treatment; the non-public information
has been filed with the Commission).
|
|
10.116.1(27)
|
Letter
Agreement dated August 28, 2003 between V-Kool International Holdings Pte.
Ltd. and the Company amending the Distribution Agreement between the
parties dated January 1, 2002.
|
|
10.116.2(27)
|
Letter
Agreement dated December 17, 2003 between V-Kool International Holdings
Pte. Ltd. and the Company amending the Distribution Agreement between the
parties dated January 1, 2002.
|
|
10.117(17)
|
Teijin
Waiver Letter dated May 9, 2002.
|
|
10.120(19)
|
Guarantee
Agreement Regarding 10 million US$ Credit Facility between Teijin Limited
and the Company, dated May 6, 1997.
|
|
10.120.1(21)
|
Memorandum
Amendment to the Guarantee Agreement between Teijin Limited and the
Company, dated August 1999.
|
|
10.121.
(23)
|
Pilkington
Supply and Purchase Agreement dated September 1,
2002.
|
|
10.122.
(23)
|
Xinyi
Group (Glass) Co. LTD. Purchase Agreement dated September 5,
2002.
|
|
10.127
(24)
|
Manufacturing
and Supply Agreement between the Company and Mitsui Chemicals, Inc. dated
July 19, 2003 (portions of this exhibit have been omitted based on a
request for confidential treatment; the non-public information has been
filed with the Commission).
|
|
10.128(27)
|
Guaranteed
Loan Agreement dated January 19, 2004, between Teijin Limited and the
Company.
|
|
10.128.1(29)
|
Amendment
No. 1, dated June 9, 2004, to Guaranteed Loan Agreement by and between
Southwall and Teijin, Limited.
|
|
10.129(27)
|
Guaranty
Agreement dated January 19, 2004, between Teijin Limited and Southwall
Europe GmbH.
|
|
10.130(27)
|
Supply
Agreement between Saint Gobain Sekurit France and the Company, effective
January 1, 2004 (portions of this exhibit have been omitted based on a
request for confidential treatment; the non-public information has been
filed with the Commission).
|
|
10.131
(26)
|
Amended
and Restated Investment Agreement, dated February 20, 2004, by and among
the Company and Needham & Company, Inc., Needham Capital Partners II,
L.P., Needham Capital Partners II (Bermuda), L.P., Needham Capital
Partners III, L.P., Needham Capital Partners IIIA, L.P., Needham Capital
Partners III (Bermuda), L.P., and Dolphin Direct Equity Partners, LP
(collectively, the "Investors").
|
|
10.132
(26)
|
Amended
and Restated Registration Rights Agreement, dated February 20, 2004, by
and among the Company, Pacific Business Funding, Judd Properties, LLC, and
the Investors.
|
|
10.133
(26)
|
Form
of Secured Convertible Promissory Note issued by the Company to the
Investors.
|
|
10.134
(26)
|
Pledge
Agreement, dated February 20, 2004, between the Company and Needham &
Company, Inc.
|
|
10.135
(25)
|
Form
of Warrant to purchase shares of the Company's common
stock.
|
|
10.138(27)
|
Mutual
Release and Settlement Agreement dated February 20, 2004, by and among the
Company and Bank of America, N.A., Portfolio Financial Servicing Company
and Lehman Brothers. Agreement relates to the Master Lease Agreement
between Matrix Funding Corporation and the Company filed as Exhibit
10.111.
|
|
10.139(28)
|
Third
Amendment to Domestic Factoring Agreement, dated April 29,
2004.
|
|
10.140
(31)
|
Lease
agreement for the facilities at 3780 Fabian Way, Palo Alto, CA, dated
October 04, 2005 between the Company, Richard Christina and Diane
Christina.
|
|
10.142
(32)
|
Sublease
dated June 13, 2006, by and between the Registrant and Maxspeed
Corporation.
|
|
10.142
(32)
|
Amendment
to lease dated June 21, 2006, by and between the Registrant and Richard A.
Christina and Diane L. Christina, Trustees of the Richard A. Christina and
Diane L. Christina Trust.
|
|
10.143
|
Technology
Transfer and Service Agreement between Sunfilm AG and the Company dated
03/14/07.
|
|
10.144
|
Business
Financing Agreement dated 03/29/07 between the Company and
Bridge Bank NA.
|
|
10.145(33)
|
Amendment
to Agreement with Mitsui Chemicals,Inc.
|
|
14(27)
|
Code
of Ethics.
|
|
21(15)
|
List
of Subsidiaries of the Company.
|
|
Consent
of Independent Registered Public Accounting Firm (Burr, Pilger & Mayer
LLP).
|
|
|
Certification pursuant to
Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive
Officer
|
|
|
Certification pursuant to
Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial
Officer
|
|
|
Certification pursuant to 18
U.S.C. Section 1350 of the Chief Executive
Officer
|
|
|
Certification pursuant to 18
U.S.C. Section 1350 of the Chief Financial
Officer
|
_____
* Relates
to management contract or compensatory plan or arrangement.
(1) Filed
as an exhibit to the Registration Statement on Form S-1 filed with the
Commission on April 27, 1987 (Registration No. 33- 13779) (the
"Registration Statement") and incorporated herein by reference.
(2) Filed
as an exhibit to the Form 10-Q Quarterly Report for Quarter Ended
June 30, 1988, filed with the Commission on August 15, 1988 and
incorporated herein by reference. Our 1934 Act registration number is
000-15930.
(3) Filed
as an exhibit to the Form 10-Q Quarterly Report for Quarter Ended
July 2, 1989, filed with the Commission on August 16, 1989 and
incorporated herein by reference.
(4) Filed
as an exhibit to the Form 10-K Annual Report 1990, filed with the
Commission on March 25, 1991 and incorporated herein by
reference.
(5) Filed
as an exhibit to the Form 10-K Annual Report 1992, filed with the
Commission on March 15, 1993 and incorporated herein by
reference.
(6) Filed
as an exhibit to the Form 10-Q Quarterly Report for Quarter Ended
July 3, 1994, filed with the Commission on August 15, 1994 and
incorporated herein by reference.
(7) Filed
as an exhibit to the Form 10-K Annual Report 1996, filed with the
Commission on March 27, 1997 and incorporated herein by
reference.
(8) Filed
as an exhibit to the Form 10-Q Quarterly Report for Quarter Ended
June 29, 1997, filed with the Commission on August 14, 1997 and
incorporated herein by reference.
(9) Filed
as Proposal 3 included in the 1997 Proxy statement filed with the Commission on
April 14, 1997 and incorporated herein by reference.
(10)
Filed as Proposal 3 included in the 2002 Proxy statement filed with the
Commission on April 22, 2002 and incorporated herein by
reference.
(11)
Filed as an exhibit to the Form 10-K Annual Report 1999, filed with the
Commission on April 6, 2000 and incorporated herein by
reference.
(12)
Filed as an exhibit to the Form 10-K Annual Report 2000, filed with the
Commission on April 9, 2001 and incorporated herein by
reference.
(13)
Filed as an exhibit to the Form 10-Q Quarterly Report for Quarter Ended
September 30, 2001, filed with the Commission on November 12, 2001 and
incorporated herein by reference.
(14)
Filed as an exhibit to the Form 10-Q Quarterly Report for the Quarter Ended
April 1, 2001, filed with the Commission on May 16, 2001 and
incorporated herein by reference.
(15)
Filed as an exhibit to the Form 10-K Annual Report 2001, filed with the
Commission on April 1, 2002 and incorporated herein by
reference.
(16)
Filed as an exhibit to the Form 10-K/A Annual Report 2001, filed with the
Commission on June 14, 2002 and incorporated herein by
reference.
(17)
Filed as an exhibit to the Form 10-Q Quarterly Report for the Quarter Ended
March 31, 2002, filed with the Commission on May 17, 2002 and
incorporated herein by reference.
(18)
Filed as an exhibit to the Form 10-Q/A Quarterly Report for the Quarter
Ended March 31, 2002, filed with the Commission on June 19, 2002 and
incorporated herein by reference.
(19)
Filed as an exhibit to Amendment No. 3 to the Registration Statement on
Form S-1 filed with the Commission on June 25, 2002 (Registration
No. 333-85576) and incorporated herein by reference.
(20)
Filed as an exhibit to the Registration Statement on Form S-1 filed with
the Commission on April 5, 2002 (Registration No. 333- 85576) and
incorporated herein by reference.
(21)
Filed as an exhibit to Amendment No. 1 to the Registration Statement on
Form S-1 filed with the Commission on May 31, 2002 (Registration
No. 333-85576) and incorporated herein by reference.
(22)
Filed as an exhibit to the Form 10-K/A Annual Report 2001, filed with the
Commission on June 27, 2002 and incorporated herein by
reference.
(23)
Filed as an exhibit to the Form 10-K Annual Report 2002, filed with the
Commission on March 31, 2003 and incorporated herein by reference.
(24)
Filed as an exhibit to the Form 10-Q Quarterly Report for the Quarter Ended
June 29, 2003, filed with the Commission on August 15, 2003 and incorporated
herein by reference.
(25)
Filed as an exhibit to the Form 8-K Current Report, filed with the Commission on
December 23, 2003 and incorporated herein by reference.
(26)
Filed as an exhibit to the Form 8-K/A Current Report, filed with the Commission
on March 3, 2004 and incorporated herein by reference.
(27)
Filed as an exhibit to Form 10-K Annual Report 2003, filed with the Commission
on April 14, 2004 and incorporated herein by reference.
(28)
Filed as an exhibit to the Form 10-Q Quarterly Report, filed with the Commission
on May 17, 2004, and incorporated herein by reference.
(29)
Filed as an exhibit to the Form 10-Q Quarterly Report, filed with the Commission
on August 11, 2004, and incorporated herein by reference.
(30)
Filed as an exhibit to the Form 10-Q Quarterly Report, filed with the Commission
on November 8, 2004, and incorporated herein by reference.
(31)
Filed as an exhibit to the form 10-K Annual Report, filed with the Commission on
March 29, 2006, and incorporated herein by reference.
(32)
Filed as an exhibit to the Form 10-Q Quarterly Report, filed with the Commission
on August 11, 2006, and incorporated herein by reference.
(33) Filed
as an exhibit to the Form 10-Q/A Quarterly Report, filed with the Commission on
February 5, 2008 and incorporated herein by reference.
97