Southwall Announces Proposed Bank Guarantee and Equity Financing with Needham & Company

"As we noted in our news release on third-quarter 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 our proposed financing with Needham, in conjunction with internal actions designed to reduce our expenses, will address our cash requirements and offer the most appropriate financing alternative currently available."

If all of the transactions contemplated by the letter agreement between Southwall and Needham were consummated, Southwall would receive guarantees with respect to an additional $2,000,000 of borrowing under its factoring agreement with Pacific Business Funding(1) and $3,000,000 in cash, in exchange for warrants to purchase an aggregate number of shares of Southwall common stock equal to approximately 19% of the total shares outstanding before such issuance and 3,000,000 shares of a newly issued convertible preferred stock. This preferred stock would be convertible into a number of shares of Southwall common stock equal to approximately 24% of the total shares outstanding before such issuance. If Needham 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 it would own approximately 6,864,000 shares of Southwall common stock, or about 38% of the total shares outstanding.

Under the letter agreement, Needham would issue the guarantees of the Company's bank line in two separate pieces of $1.5 million and $500,000 and would purchase the equity in two separate tranches of $1.0 million and $2.0 million following the issuance of the guarantees. The issuance of each guarantee and the purchase of each equity tranche would be subject to the satisfaction, in Needham's reasonable discretion, of certain conditions, including, among other things, the receipt of concessions from creditors and landlords, the achieving of cash flow break-even at quarterly revenue levels below third quarter 2003 levels and the naming of a new chairman of the board.

The company has nominated George Boyadjieff for this role. Boyadjieff is the chairman emeritus and recently retired chief executive officer of Varco International, Inc. (NYSE:VRC), a diversified oil service company with over $1.4 billion in annual revenues. In addition, Needham would receive board observer rights.

Southwall and Needham have agreed to negotiate in good faith definitive agreements with respect to the proposed guarantees and equity financing. There is no assurance, however, that the parties will enter into definitive agreements (which will include representations, warranties, covenants, and closing conditions customary for transactions of this type) or that even if the parties do reach definitive agreements that the transactions contemplated by such agreements would be consummated fully or partially. Moreover, the extension of guaranties will require that Pacific Business Funding, the Company and Needham enter into agreements and, similarly, there is no assurance that the parties will be able to reach such agreements on commercially reasonable terms, if at all. If the parties have not entered into definitive agreements by November 30, 2003, the letter agreement will terminate and Needham will have no obligation to extend the guarantees or purchase the shares of preferred stock, as described above.

In connection with the execution of the letter agreement, Southwall issued to Needham a warrant to purchase 1,254,235 shares of common stock, approximately 10% of the total shares currently outstanding. The warrant, exercisable at $0.01 per share, will expire on the earlier of five years from its issuance or the execution of the definitive agreements. The number of shares issuable upon exercise of the warrant will increase in an amount equal to 10% of any securities issued in connection with a financing or capital raising, other than with Needham, occurring before the end of Southwall's first fiscal quarter of 2004. Southwall granted certain registration rights to Needham with respect to the shares issuable upon exercise of the warrant.

For a complete description of the letter agreement and the warrant issued to Needham, please refer to the Southwall's Form 8-K to be filed Wednesday, November 12, 2003, with the Securities and Exchange Commission, which includes as exhibits copies of the letter agreement and the warrant. The descriptions in this release of those documents are qualified in their entirety by reference to the actual documents.