"As noted in our news release on third-quarter 2003 results, we recognize the urgent need to reduce our spending and raise additional cash," said Thomas G. Hood, Southwall's president and chief executive officer. "We believe that this agreement, led by Needham, in conjunction with significant internal changes already in progress, will enable Southwall to achieve quarterly cash break-even in 2004 and begin generating positive cash flow from operations as soon as possible after that. We expect that the Needham led financing will give us the additional time we need to achieve production qualification for the exciting design-ins we have been actively working in the electronic display market."
If all of the transactions contemplated by the agreement between Southwall and the Needham led group are completed, Southwall will receive up to $3,000,000 in new borrowings from Pacific Business Funding(1) (which are to be guaranteed by Needham) and up to $4,500,000 in cash in exchange for 4,500,000 shares of a newly issued convertible preferred stock. As part of the guarantee and equity purchases, if any, the investors will also receive warrants to purchase common stock. If Needham and its affiliated entities were to exercise all such warrants and convert all such shares of preferred stock, while maintaining its current position of approximately 1,481,000 shares of common stock, then the firm and its affiliated entities would own approximately 6,865,000 shares of Southwall common stock, or about 31% of the total shares outstanding. Dolphin currently does not own any shares of common stock but upon exercise of its warrants would own approximately 2,692,000 shares of Southwall common stock, or about 12% of the total shares outstanding.
Under the terms of the agreement, Needham will issue the guarantees of Southwall's bank line of credit facility in two separate pieces of $2.25 million and $750,000, respectively, and Needham and Dolphin will purchase the equity in two separate tranches of $1.5 million and $3.0 million, respectively, following the extensions of credit under the new facility. The new borrowings and the purchase of each equity tranche would be subject to Southwall's satisfaction, in Needham's reasonable discretion, of certain conditions. These conditions would include, among other things, the receipt of concessions from creditors and landlords, completion of certain restructuring actions and the achievement of cash flow break-even at quarterly revenue levels below those of third quarter 2003. There is no assurance, however, that any of these conditions will be satisfied.
The board has appointed George Boyadjieff to succeed Joseph B. Reagan as Southwall chairman effective on Dec. 18, 2003. Dr. Reagan will remain on the board. Mr. Boyadjieff is the chairman emeritus and recently retired chief executive officer of Varco International, Inc. (NYSE:VRC), a diversified oilfield equipment manufacturer and service provider with over $1.3 billion in fiscal 2002 revenues.
For a complete description of the Needham bank guarantee and equity financing package, please refer to Southwall's Form 8-K, to be filed with the Securities and Exchange Commission on or about Dec. 22, 2003, which will include as exhibits the investment agreement and loan documents. The descriptions of those documents in this press release are qualified in their entirety by reference to the actual documents.