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Southwall Announces Third-Quarter 2003 Results

PALO ALTO, Calif.--Oct. 21, 2003--

  Selected Highlights  

-- Third-quarter net revenues of $11.9 million, compared with $16.3 million for third-quarter 2002.

-- Preliminary third-quarter net loss, subject to subsequent adjustment for the impairment charge discussed below, of $3.4 million, or loss of $0.27 per diluted share, compared with net income of $0.1 million, or $0.01 per diluted share, for third-quarter 2002.

-- Expected impairment charge related to U.S. production facilities, with potential impact on third-quarter results, to be finalized and reported in Form 10-Q filing in mid-November.

-- Management plans to reduce spending and raise cash immediately, and to downsize U.S. production facilities in fourth-quarter.

-- Realization of initial orders for new generation of products for LCD market. Product development activities now clearly focused on LCD and PDP display market opportunities.

Southwall Technologies Inc. , a global developer, manufacturer and marketer of thin-film coatings for the automotive glass, electronic display and architectural markets, today reported its preliminary financial results for the third quarter ended September 28, 2003.

Net revenues were $11.9 million, compared with $16.3 million for the same quarter a year ago and with $15.3 million for the second quarter of 2003. The company attributed the sequential decline to lower than expected sales across the automotive, electronic display and architectural segments of its business.

Southwall's preliminary third quarter net loss was $3.4 million, or a loss of $0.27 per share, compared with net income of $0.1 million, or $0.01 per share, for the same quarter a year ago and with a net loss of $1.7 million, or a loss of $0.14 per share, for the second quarter of 2003. Southwall is in the early stages of an evaluation of its long-lived assets for impairment. The company expects to complete this evaluation prior to the filing of its Quarterly Report on Form 10-Q in mid-November. If an impairment adjustment is required, Southwall expects to revise the third-quarter results reported in this press release to include a non-cash charge for an impairment of value related principally to its U.S. production facilities. Consequently, Southwall's final net loss and net loss per share for the third quarter may be significantly higher than the preliminary results announced today.

"In addition to the anticipated non-cash impairment charge, we expect our downsizing actions to result in restructuring charges for severance, facilities and additional impairment to be recorded in the fourth quarter of 2003," said Michael E. Seifert, senior vice president and chief financial officer. "We currently believe that the combination of the impairment charge in the third quarter and the restructuring and additional impairment charges in the fourth quarter could exceed $20 million."

Southwall's balance sheet at September 28, 2003 included cash and cash equivalents of $0.6 million, compared with $2.0 million at December 31, 2002 and with $2.4 million at June 29, 2003. "Given our present cash burn rate and available cash resources, we recognize the urgent need to immediately reduce spending and obtain additional cash. During the next few weeks, we intend to downsize our U.S. production facilities (Palo Alto and Tempe), lower overall employee headcount, and raise additional financing for Southwall," said Thomas G. Hood, president and chief executive officer for Southwall. "We have been working very closely with the investment community to raise additional financing for Southwall in the form of debt and/or equity. With the support of investment advisors, we are also pursuing strategic investors as sources of capital to fund the pursuit of targeted new business opportunities," added Mr. Hood.

Southwall's third-quarter sales of automotive products were $5.8 million, compared with $7.0 million for the third quarter of 2002 and with $6.6 million for the second quarter of 2003. The sequential decline was due primarily to seasonality in Europe. Sales of electronic display products were $3.3 million, compared with $5.0 million for the same quarter of 2002 and with $6.1 million for the second quarter of 2003. This trend resulted principally from a continued decrease in shipments of anti-reflective films deployed in cathode ray tube (CRT) monitors. This decrease was partially offset by increased sales of electronic and infrared shielding films for the plasma display panel (PDP) and liquid crystal display (LCD) segments. Sales of architectural products were $2.8 million, compared with $4.3 million for the third quarter of 2002 and with $2.6 million for the second quarter of 2003.

"While we met our expectations for the third quarter, the outlook for the fourth quarter and the near-term has changed significantly from our previously stated expectations," Hood continued. "We now anticipate revenue levels at or below $11-12 million for each of the next two to three quarters, with fourth-quarter 2003 net revenues being relatively flat on a sequential basis. As a result, our current estimates for full-year 2003 net revenues range from $52 million to $54 million, lower than our previously stated estimates. We are reassessing our business model and taking the necessary actions in an attempt to achieve cash break-even by no later than the end of the first quarter of 2004. At the same time, we have not lost sight of and will continue to focus on the core strength of the company, which is the delivery of innovative optical thin film technology solutions for growing markets. We intend to preserve this capability and apply it to targeted market opportunities. We remain convinced that our recent bolstering of the sales and marketing organizations will help bring the company closer to our customers and to spur future revenue growth."

"In addition to actively servicing the existing automotive and architectural markets, we are sharpening the company's focus on the development of new products for the dramatically expanding LCD and PDP display markets, which are forecasted to grow 70% annually by industry sources," Hood added. "We believe that Southwall is one of the few U.S.-based companies that is well-positioned to take advantage of the growth opportunity in succeeding generations of advanced display technology. We have recently been successful in capturing initial orders for a new generation of products for LCD applications. Southwall also continues to work closely with Mitsui Chemicals toward a low-cost product solution for consumer PDP televisions, which would complement our existing products that serve the commercial PDP market. Together, these two markets fit well with our technology portfolio and represent our most important future growth opportunities."

Third-Quarter Results Teleconference

Southwall management plans to hold a teleconference on third quarter 2003 results at 2:00 p.m. PT / 5:00 p.m. ET today. This call will be open to all investors at (877) 481-7179 for U.S. callers and at (706) 634-0663 for international callers, using access code number 3243560. A live webcast will be accessible on the Investor Relations page of the Southwall website at www.southwall.com. In addition, both phone and webcast replays will be available for approximately one week after the teleconference. The phone replay will be accessible at either (800) 642-1687 or (706) 645-9291, code number 3243560.

About Southwall Technologies Inc.

Southwall Technologies Inc. designs and produces thin-film coatings that selectively absorb, reflect or transmit light. Southwall products are used in a number of automotive, electronic display and architectural glass products to enhance optical and thermal performance characteristics, improve user comfort and reduce energy costs. Southwall is an ISO 9001:2000-certified manufacturer and exports advanced thin-film coatings to over 25 countries around the world. Southwall's customers include Audi, BMW, DaimlerChrysler, Hewlett-Packard, Mitsubishi Electric, Mitsui Chemicals, Peugeot-Citroen, Pilkington, Renault, Saint-Gobain SEKURIT, and Volvo.

                     SOUTHWALL TECHNOLOGIES INC.
           CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                (in thousands, except per-share data)
                             (Unaudited)

                               Three Months Ended   Nine Months Ended
                               Sept. 28, Sept. 29, Sept. 28, Sept. 29,
                                   2003      2002      2003      2002
                                --------   -------  --------   -------

Net revenues                   $ 11,902  $ 16,290  $ 42,451  $ 55,235
Cost of sales                    10,238    11,682    34,826    37,061
                               -------- --------- -------- --------
Gross profit                      1,664     4,608     7,625    18,174
                                --------   -------  --------   -------
Operating expenses
     Research and development     1,592     1,888     4,777     5,725
     Selling, general and
      administrative              2,896     2,385     8,707     9,127
                                --------   -------  --------   -------
          Total operating
           expenses               4,488     4,273    13,484    14,852
                                --------   -------  --------   -------

Income (loss) from operations    (2,824)      335    (5,859)    3,322
Interest expense, net              (325)     (413)     (834)   (1,405)
Other income (expense), net        (155)      215       208       682
                               -------- --------- -------- --------
Income (loss) before provision
 for income taxes                (3,304)      137    (6,485)    2,599

Provision for income taxes           97        12       288      (101)
                                --------   -------  --------   -------

Net income (loss)               ($3,401)  $   125   ($6,773)  $ 2,700
                                ========   =======  ========   =======

Net income (loss) per share:
     Basic                       ($0.27)  $  0.01    ($0.54)  $  0.28
     Diluted                     ($0.27)  $  0.01    ($0.54)  $  0.26

Weighted average shares of
 common stock and dilutive 
 potential common stock:
     Basic                       12,532    12,094    12,530     9,712
     Diluted                     12,532    12,169    12,530    10,338


                     SOUTHWALL TECHNOLOGIES INC.
                CONDENSED CONSOLIDATED BALANCE SHEETS
                (in thousands, except per-share data)
                             (Unaudited)

                                                  Sept. 28,   Dec. 31,
                                                      2003       2002
                                                   --------   --------
ASSETS
Current assets
     Cash and cash equivalents                    $    590   $  1,998
     Restricted cash                                   542        531
     Accounts receivable, net of allowance for
      bad debts of $722 and $552 at September 28, 
      2003 and December 31, 2002, respectively       7,541      8,995
     Inventories, net                                6,410      8,537
     Other current assets                            2,815      4,310
                                                   --------   --------
          Total current assets                      17,898     24,371

Property, plant and equipment, net                  48,173     50,251
Restricted loan proceeds                               963        885
Other assets                                           982      1,075
                                                   --------   --------
          Total assets                            $ 68,016   $ 76,582
                                                   ========   ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Current portion term debt                    $  6,096   $  7,499
     Line of credit                                  3,119          -
     Accounts payable                                4,783      9,244
     Accrued compensation                            1,321      1,254
     Other accrued liabilities                       6,624      5,886
                                                   --------   --------
          Total current liabilities                 21,943     23,883

Term debt                                            9,171      9,253
Government grants advanced                             596        604
Other                                                1,458      2,368
                                                   --------   --------
          Total liabilities                         33,168     36,108
                                                   --------   --------

Stockholders' equity:
     Common stock, $0.001 par value, 20,000
      shares authorized; issued and 
      outstanding 12,542 and 12,527 at
      September 28, 2003
      and December 31, 2002                             13         12
     Capital in excess of par value                 69,708     69,658
     Notes receivable and accrued interest               -       (126)
     Other comprehensive income
         Translation gain on subsidiary              2,002      1,032
     Accumulated deficit                           (36,875)   (30,102)
                                                   --------   --------
          Total stockholders' equity                34,848     40,474
                                                   --------   --------
          Total liabilities and stockholders'
           equity                                 $ 68,016   $ 76,582
                                                   ========   ========


                     SOUTHWALL TECHNOLOGIES INC.
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (in thousands)
                             (Unaudited)

                                                   Three Months Ended
                                                  Sept. 28,  Sept. 29,
                                                      2003       2002
                                                   --------   --------

Cash flows used in operating activities:
     Net income (loss)                             ($3,401)  $    125
     Adjustments to reconcile net income (loss)
       to net cash used in operating activities:
     Depreciation and amortization                   1,617      1,490
     Interest on employee notes receivable               -         (2)
Change in assets and liabilities:
     Accounts receivable, net                         (133)    (1,067)
     Inventories, net                                 (186)        71
     Other current and non-current assets              582        220
     Accounts payable, and accrued liabilities      (1,253)    (1,256)
                                                   --------   --------

Cash used in operating activities                   (2,774)      (419)
                                                   --------   --------
Cash flows used in investing activities:
     Restricted cash                                     -         91
     Expenditures for property, plant and
      equipment and other assets                      (214)    (4,351)
                                                   --------   --------

Net cash used in investing activities                 (214)    (4,260)
                                                   --------   --------
Cash flows provided by financing activities:
     Proceeds from grants and investment
      allowances                                     1,495          -
     Principal payments on borrowings                 (289)      (648)
     Borrowings (payments) on line of credit           116     (3,386)
     Proceeds from sale of stock, net                    -     15,128
     Proceeds from stock options and employee
      stock purchases plan exercises                     -         85
                                                   --------   --------
Net cash provided by financing activities            1,322     11,179
                                                   --------   --------
     Effect of foreign exchange rate 
      changes on cash                                 (147)     1,600
                                                  --------  --------
Net increase (decrease) in cash and
 cash equivalents                                   (1,813)     8,100

Cash and cash equivalents, beginning of period       2,403      1,561
                                                   --------   --------
Cash and cash equivalents, end of period          $    590   $  9,661
                                                   ========   ========