2003 10-K Exhibit 10.138





Exhibit 10.138

MUTUAL RELEASE AND SETTLEMENT AGREEMENT


This Mutual Release and Settlement Agreement (the
"Agreement") is dated as of this 20 day of February, 2004 and
entered into by and between Bank of America, N.A.
("Bank"), Portfolio Financial Servicing Company
("PFSC") (Bank and PFSC referred to collectively as
"Plaintiffs") and Lehman Brothers
("Lehman") (Bank, PFSC and Lehman referred to collectively as
"Claimants"), on the one hand, and Southwall Technologies,
Inc. ("Southwall"), on the other hand. Claimants and
Southwall may be referred to herein collectively as the "Parties".

R E C I T A L S

WHEREAS, Southwall and Matrix Funding Corporation
("Matrix") entered into Master Lease Agreement No. R0825 (the
"Master Lease"), dated July 19, 1999, Lease Schedule No. 1 

("Lease Schedule 1"), dated July 19, 1999, and Lease Schedule
No. 2 ("Lease Schedule 2'), dated 

October 14, 1999 (collectively, the "Lease Agreements");

WHEREAS, pursuant to the Master Lease and Lease Schedule 1, Matrix leased to
Southwall certain equipment identified as a PM7 Microwave Plasma Enhanced
Chemical Vapor Deposited Optical Coating System and a Pac West Telecomm Inc.
System 2000 telephone system ("PM7") and, pursuant to the
Master Lease and Lease Schedule 2, Matrix leased to Southwall certain equipment
identified as a PM6 Multi Layer Vacuum Metalizer Sputter Web Coating System
("PM6")(the PM7 and PM6 collectively referred to as the
"Equipment").  Under the terms of the Lease Agreements,
Claimants ownership interest in the Equipment includes all additional equipment
affixed, attached or incorporated into the Equipment.  The Equipment is located
at premises leased by Southwall at 8175 S. Hardy, Tempe, Arizona  85284 (the
"Premises").

WHEREAS, Plaintiffs represent and warrant that through a series of
transactions and agreements, Matrix's rights under the Lease Agreements and to
the Equipment were assigned to them and acknowledge that Southwall is explicitly
relying on that representation in entering into the Agreement;

WHEREAS, a dispute exists concerning the amount of payments, if any, due the
Claimants from Southwall under the Lease Agreements;

WHEREAS, Plaintiffs commenced an action against Southwall entitled
Portfolio Financial Servicing Company, et al. v. Southwall Technologies,
Inc. in the Third Judicial District Court in and for Salt Lake County, State
of Utah, Case No. 020904393 (the "Action");

WHEREAS, the Equipment is no longer necessary to the effective operation of
Southwall's business because Southwall is terminating its operations at the
Premises and Southwall has offered to voluntarily surrender the Equipment to
Claimants.  Claimants are willing to take back the Equipment from Southwall and
to accept the surrender of the same;

WHEREAS, Claimants and Southwall desire to compromise, settle and release all
claims of whatever kind or description which they may have against one another,
to effect the total resolution and compromise of all claims, liabilities,
obligations and causes of action arising out of or relating to the Lease
Agreements;

NOW, THEREFORE, in consideration of the mutual promises contained herein, and
other good and valuable consideration, the Parties, intending to be legally
bound, hereby agree as follows:

1.Payment by Southwall.  Southwall shall pay Claimants a total of
$2,000,000, plus interest (the "Agreed Obligation"), payable as
follows:
a.$60,000 on or before December 31, 2004, representing 3% interest for
2004.

b.payments in arrears on or before the last day of each calendar quarter
in 2005, consisting of principal in the amount of $25,000 and all accrued
interest on the Agreed Obligation at the rate of 4% per annum;

c.payments in arrears on or before the last day of each calendar quarter
in 2006, consisting of principal in the amount of $75,000 and all accrued
interest on the Agreed Obligation at the rate of 5% per annum;

d.payments in arrears on or before the last day of each calendar quarter
in 2007, consisting of principal in the amount of $75,000 and all accrued
interest on the Agreed Obligation at the rate of 6% per annum;

e.payments in arrears on or before the last day of each calendar quarter
in 2008, consisting of principal in the amount of $75,000 and all accrued
interest on the Agreed Obligation at the rate of 7% per annum;

f.payments in arrears on or before the last day of each calendar quarter
in 2009, consisting of principal in the amount of $125,000 and all accrued
interest on the Agreed Obligation at the rate of 8% per annum;

g.payments in arrears on or before the last day of each calendar quarter
in 2010, consisting of principal in the amount of $125,000 and all accrued
interest on the Agreed Obligation at the rate of 9% per annum;

h.Any unpaid balance, together with interest thereon, to be paid in full
by December 31, 2010.









Claimants agree that receipt of all payments for the Agreed Obligation from
Southwall will constitute full satisfaction of the amounts owed by Southwall to
Claimants.

2.Abandonment of Equipment by Southwall.  Southwall hereby
abandons and voluntarily surrenders to Claimants possession, custody and control
of the Equipment.  Southwall makes this surrender in recognition of PFSC's
rights as the owner of the Equipment.  Southwall acknowledges and agrees that
the Lease Agreements are "true leases" within the meaning of
applicable law, and that the Lease Agreements do not constitute disguised
security agreements or other financing arrangements with respect to the
Equipment.  Southwall also acknowledges and agrees that it asserts no ownership
or other rights in the Equipment other than its rights as a lessee of the
Equipment under the Lease Agreements.

Southwall hereby represents and warrants that it has not assigned its
leasehold interest in the Equipment to any other individual or entity, that
Southwall's leasehold interest in the Equipment is free and clear of any and all
liens, and that Southwall may immediately deliver possession of the Equipment to
Claimants.

Southwall understands and agrees that its voluntary surrender of the
Equipment to Claimants shall in no way modify or discharge any of its
liabilities and obligations to Claimants under this Agreement.  Southwall's
voluntary surrender of the Equipment to Claimants is not made in full
satisfaction of Southwall's obligations under this Agreement, and Southwall will
be responsible to make payments to Claimants as identified herein to fully
satisfy its obligations to Claimants.  Claimants acknowledge and agree that (i)
Southwall shall bear no cost or expense that Claimants may incur in taking
possession of or removing or disposing of the Equipment, except that Claimants
may offset any cost or expense incurred in taking possession of, removing, and
disposing of the Equipment against any amount received from the disposition of
the Equipment, and (ii) Claimants shall be liable to the owner of the Premises
for any damage to the Premises caused by the removal of the Equipment.

3.Condition of Equipment.  Southwall represents and warrants that
it has not, within the four (4) month period preceding the date of this
Agreement, removed from the Equipment any device or piece of equipment attached
or affixed thereto or incorporated therein.  Southwall covenants, represents,
warrants and agrees that it will not remove from the Equipment any device or
piece of equipment currently attached or affixed thereto or incorporated
therein.  Southwall agrees that, in the event that a court finds that the Lease
Agreements are security agreements and not true leases, the Equipment, as well
as any device or piece of equipment attached or affixed to the Equipment shall
be included as security for Southwall's obligations under the Lease
Agreements.

4.Transition Obligations.  Southwall covenants and agrees to pay
all rent for the Premises as it comes due through and including March, 2004.
Southwall further covenants and agrees to pay all 2003 personal property taxes
related to the Equipment as they come due and to insure the Equipment against
catastrophic loss through March 31, 2004.  For purposes of this provision,
"catastrophic loss" shall be defined as the complete or partial
destruction of the Equipment or any part of the Equipment such that the
Equipment is rendered inoperable.  Such insurance shall be in an amount not less
than the current in-place appraised value of the Equipment.  Claimants will be
responsible for payment of all property taxes related to the Equipment that
accrue in 2004 and thereafter.

5.Confession of Judgment.  In conjunction with the execution of
this Agreement, Southwall agrees to confess to a judgment in favor of Claimants
in the amount of $5,900,000, which represents the amount of damages claimed by
Claimants.  The judgment by confession (the "Judgment") shall
be in form substantially similar to that attached hereto as Exhibit
"A."  Southwall also agrees to execute all documents reasonably
necessary to effectuate entry of the Judgment by the Court, including without
limitation, a Verified Statement in Support of Judgment by Confession and
Attorney's Certification in the form attached hereto as Exhibit "B."
Claimants shall hold Exhibit A and Exhibit B and shall not file these documents
with any court until and unless Southwall defaults on the payment terms
described in section 1 above and fails to cure the default pursuant to the
provisions of section 6 below.  If all payments required by this Agreement are
timely made, the Judgment and Verified Statement in Support of Judgment by
Confession shall be destroyed and shall be of no force or effect.

In the event the Judgment is entered, Claimants agree to apply any proceeds
received from the sale or other disposition of the Equipment, minus all expenses
and costs incurred in disposing of the Equipment, in partial satisfaction of the
Judgment and to reduce the amount of the Judgment accordingly.

If Southwall fails to make any payment as set forth in paragraph 1 above and
fails to cure any such failure as set forth in paragraph 6, Claimants shall be
entitled to retain any payments previously made by Southwall under the Agreement
and shall apply any payment received to the Judgment entered in accordance with
this paragraph as a partial satisfaction of the Judgment.  

In the event Southwall files for bankruptcy protection, Southwall agrees that
Claimants may assert a claim against Southwall for $5,900,000, less the net
amount received by Claimants in disposing of the Equipment and any payments
received by Southwall under the Agreement.  Southwall agrees that the compromise
made by Claimants in this Agreement as reflected in the Agreed Obligation
constitutes a contemporaneous exchange of "new value" within the
meaning of 11 USC section 547(a)(2) and that, as a consequence, any and all
payments of the Agreed Obligation by Southwall to the Claimants are not
preferential transfers and that Claimants may retain any and all payments
received from Southwall under this Agreement.

6.Default and Cure.  Failure by Southwall to make all payments
contemplated in the amounts and at the times set forth above shall constitute an
event of default.  If such event of default has not been cured by Southwall
within 30 days after receipt by Southwall of written notice by Claimants that an
event of default has occurred, Southwall agrees that Claimants can commence an
action against Southwall and submit the Judgment, along with the necessary
supporting documents executed by Southwall, for entry by a court of competent
jurisdiction and immediately commence any proceedings to enforce the Judgment
and collect the amounts due under the Judgment.  Such written notice shall be
sent by overnight mail or similar courier service.  The Parties agree to a
tolling of any applicable statute of limitations during the term of this
Agreement.

7.Conditional Release by Claimants.  Claimants hereby
conditionally release and forever discharge Southwall from all obligations which
may exist, whether known or unknown, relating to the Lease Agreements.
Plaintiffs agree to dismiss their claims asserted in the Action against
Southwall without prejudice.  Claimants' release is expressly conditioned upon
receiving all payments from Southwall in accordance with paragraph 1 above.
However, nothing in this paragraph shall preclude Claimants from retaining any
and all payments made by Southwall prior to Southwall's breach.  Excluding
claims for breach or enforcement of this Agreement, Claimants, for themselves,
and all present and former parent companies, affiliates, subsidiaries,
divisions, officers, directors, employees, agents, representatives and the
predecessors, heirs, successors, and assigns of each of them, hereby
conditionally release and forever discharge Southwall and its legal
representatives, agents, assigns, successors in interest, heirs, personal
representatives and attorneys, with respect to the Action and all liabilities,
obligations and causes of action arising out of or relating to the Lease
Agreements, and from any and all claims, actions, causes of action, defenses,
suits, debts, covenants, contracts, controversies, agreements, promises, losses,
damages, costs, expenses, attorneys' fees, judgments, obligations, demands,
accounting, and liabilities, of whatever kind of character, at law or in equity,
direct or indirect, known or unknown, suspected or unsuspected, matured or
unmatured (collectively, "Claims") that any of the Claimants
ever had, now have, or might have arising out of or related to the Lease
Agreements, and the Equipment and any and all damages that could be alleged in
association therewith, including incidental and consequential damages.

8.Release by Southwall.  Excluding claims for breach or
enforcement of this Agreement, Southwall, for itself and its legal
representatives, agents, assigns, successors in interest, heirs, personal
representatives, and attorneys, hereby irrevocably and unconditionally release
and forever discharge the Claimants with respect to the Action and all
liabilities, obligations and causes of action arising out of or relating to the
Lease Agreements, from any and all claims, actions, causes of action, defenses,
suits, debts, covenants, contracts, controversies, agreements, promises, losses,
damages, costs, expenses, attorneys' fees, judgments, obligations, demands,
accounting, and liabilities, of whatever kind of character, at law or in equity,
direct or indirect, known or unknown, suspected or unsuspected, matured or
unmatured (collectively, "Claims") that Southwall ever had, now
has, or might have arising out of or related to the Lease Agreements, and the
Equipment and any and all damages that could be alleged in association
therewith, including incidental and consequential damages.

9.General Release.  All Parties hereby acknowledge and agree that
this release of claims is a general release and further expressly waive and
assume the risk of any and all claims for damages which exist as of this date
arising out of the Lease Agreements or the Equipment but which they do not know
of or suspect to exist, whether through ignorance, oversight, error, negligence,
or otherwise and which, if known would materially affect its decision to enter
into this Agreement.  All Parties further agree that the payment of the sum
specified in this Agreement constitutes a complete compromise of matters
involving disputed issues of law and fact in the Action and they fully assume
the risk that the facts or law may be otherwise than they believe. Each party to
this Agreement acknowledges that they have been advised by their respective
attorneys concerning, and are familiar with, the provisions of California Civil
Code section 1542, which provides:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW
OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF
KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

Each party to this Agreement acknowledges that they may have sustained
damages, losses, fees, costs, or expenses that are presently unknown and
unsuspected, and that such damages, losses, fees, costs, or expenses as the
party may have sustained might give rise to additional damages, losses, fees,
costs, or expenses in the future.  Each party to this Agreement nevertheless
acknowledges and agrees that this Agreement has been negotiated and agreed upon
in light of such possible damages, losses, fees, and costs, or expenses, and
each party hereto expressly waives any and all rights under California Civil
Code section 1542 and under any other statute or common law principle of any
state, federal, or foreign jurisdiction of similar effect.

10.Agreement Not An Admission.  The Parties hereby acknowledge
that neither this Agreement nor any consideration made hereunder may be treated
as an admission of any legal responsibility, liability, wrongdoing, or fault of
any kind whatsoever, such responsibility, liability, wrongdoing and fault being
expressly denied.

11.Notice  Any Notice required to be given or related to matters
arising under this Agreement shall be provided by overnight mail or similar
courier service, to:

If to Southwall, to:
Thomas G. Hood, President and CEO

Southwall Technologies

3975 East Bayshore Road

Palo Alto, California  94303








If to Claimants, to:


 

Either party may change their address by giving written notice to the other
party in accordance with the provision of this section.

12.Advice of Counsel.  Each party confirms and represents to the
other party that it (a) has read this Agreement, (b) understands the terms
hereof, (c) has sought the advice of legal counsel, (d) finds it to be a fair
and reasonable compromise of disputed Claims, defenses, and issues, (e) is
executing this Agreement as a voluntary act, and (f) agrees to be bound by and
to faithfully execute the terms of the Agreement.

13.Construction.  This Agreement has resulted from negotiation by
parties represented by counsel, and in the event of any ambiguity or otherwise,
it shall not be construed against or in favor of any party on the grounds that
counsel for such party was the draftsman of the Agreement or any particular part
of it.

14.Successors and Assigns.  All covenants, agreements, warranties,
and provisions of this Agreement shall be binding upon and inure to the benefit
of the Parties and their respective successors and assigns, including any
trustees in bankruptcy.

15.Costs and Attorneys' Fees.  Each party shall bear its own costs
and attorneys' fees in connection with all matters prior to the execution of
this Agreement.

16.Breach of the Agreement.  In the event of a breach of this
Agreement, the party in default will pay all costs incurred by the other
parties, or by any of them, in enforcing this Agreement, including reasonable
attorneys' fees.  This Agreement may be used as evidence in a subsequent
proceeding in which any of the Parties allege a breach of the Agreement.

17.Entire Agreement.  This Agreement represents the entire
understanding of the Parties on the matters discussed herein and supersedes all
prior agreements, negotiations, draft agreements, and oral communications on the
same subject.

18.Amendments.  This Agreement may not be amended except by a
writing executed by all Parties.

19.Applicable Law and Waiver of Jury Trial.  The Terms of this
Agreement shall be governed by and construed in accordance with the laws of the
State of California.  THE PARTIES WAIVE THEIR RIGHT TO A JURY TRIAL IN THE
EVENT ANY ACTION IS BROUGHT TO ENFORCE THE TERMS OF THIS AGREEMENT OR EITHER
PARTY'S OBLIGATIONS UNDER THE LEASE AGREEMENT.

20.No Prior Assignments.  Each party represents and warrants
to the other that it has not assigned or transferred to any other person or
entity, either directly or indirectly, voluntarily or involuntarily, any of the
Claims released hereunder.

21.Authorization.  The persons executing this Agreement on behalf
of the Parties hereby represent and warrant that they are duly authorized and
appointed representatives, they have carefully read this Agreement, and they
have the full right, power, and authority to execute this Agreement.

22.Counterparts.  This Agreement  may be executed in counterparts,
each of which shall be deemed an original, and all such counterparts shall
constitute one and the same agreement.

IN WITNESS WHEREOF, the Parties, by their duly authorized representatives,
have executed this Mutual Release and Settlement Agreement as of the date first
set forth above.



BANK OF AMERICA, N.A.



By:  _____________________

Its:_____________________________________


STATE OF ______________)

:ss.

COUNTY OF ____________)

On the _____ day of ______________, 2004, personally appeared
before me ____________________, who being by me duly sworn did say that he/she
is the ___________________ of Bank of America, N.A., the corporation that
executed the above and foregoing instrument and that said instrument was signed
in behalf of said corporation by authority of its articles of incorporation and
said ____________________ acknowledged to me that said corporation executed the
same.

_______________________________________

NOTARY PUBLIC


PORTFOLIO FINANCIAL SERVICING COMPANY



By:  ____________________

Its:_____________________________________

STATE OF ______________)

:ss.

COUNTY OF ____________)

On the _____ day of ____________________, 2004, personally
appeared before me ___________________, who being by me duly sworn did say that
he/she is the ___________________ of Portfolio Financial Servicing Company, the
corporation that executed the above and foregoing instrument and that said
instrument was signed in behalf of said corporation by authority of its articles
of incorporation and said _____________________ acknowledged to me that said
corporation executed the same.

_______________________________________

NOTARY PUBLIC



 

 

 

 

 

 

 

 

 

 

 

 

LEHMAN BROTHERS



By:  ______________________

Its:_____________________________________


STATE OF ______________)

:ss.

COUNTY OF ____________)

On the _____ day of _________________, 2004, personally
appeared before me ______________________, who being by me duly sworn did say
that he/she is the ___________________ of Lehman Brothers, the corporation that
executed the above and foregoing instrument and that said instrument was signed
in behalf of said corporation by authority of its articles of incorporation and
said _____________________ acknowledged to me that said corporation executed the
same.

_______________________________________

NOTARY PUBLIC


 

SOUTHWALL TECHNOLOGIES, INC.



By:  ____________________________________

Its:_____________________________________


STATE OF ______________)

:ss.

COUNTY OF ____________)

On the _____ day of __________________, 2004, personally
appeared before me __________________, who being by me duly sworn did say that
he/she is the ___________________ of Southwall Technologies, Inc., the
corporation that executed the above and foregoing instrument and that said
instrument was signed in behalf of said corporation by authority of its articles
of incorporation and said _________________________ acknowledged to me that said
corporation executed the same.

_______________________________________

NOTARY PUBLIC