<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
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Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarter Ended September 30, 1998
Commission File Number 0-21626
ELECTROGLAS, INC.
(exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 77-0336101
(state or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
</TABLE>
2901 Coronado Drive
Santa Clara, CA 95054
Telephone: (408) 727-6500
-------------------------
(address of principal executive
offices and telephone number)
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
requirement for the past 90 days.
Yes [X] No [ ]
As of October 31, 1998, 19,724,172 shares of the Registrant's common stock,
$0.01 par value, were issued and outstanding.
<PAGE> 2
INDEX
ELECTROGLAS, INC.
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Statements of Operations -- Three
months and nine months ended September 30, 1998 and
September 30, 1997................................................... 3
Consolidated Condensed Balance Sheets -- September 30, 1998
and December 31, 1997................................................ 4
Consolidated Condensed Statements of Cash Flows -- Nine
months ended September 30, 1998 and September 30, 1997............... 5
Notes to Consolidated Condensed Financial Statements --
September 30, 1998................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 10
Item 3. Quantitative and Qualitative Disclosure About Market Risks........... 18
PART II. OTHER INFORMATION
Item 5. Other Information.................................................... 19
Item 6. Exhibits and Reports on Form 8-K..................................... 19
SIGNATURES...................................................................... 20
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements
ELECTROGLAS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
September 30, September 30,
1998 1997 1998 1997
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 22,497 $ 44,263 $ 86,900 $ 105,889
Cost of sales 15,156 24,556 56,986 60,434
---------- --------- ---------- ----------
Gross profit 7,341 19,707 29,914 45,455
---------- --------- ---------- ----------
Operating expenses:
Engineering, research and development 7,956 5,678 24,419 15,473
Selling, general and administrative 8,084 8,758 26,091 22,683
In-process research and development -- -- -- 23,500
---------- --------- ---------- ----------
Total operating expenses 16,040 14,436 50,510 61,656
---------- --------- ---------- ----------
Operating income (loss) (8,699) 5,271 (20,596) (16,201)
Interest income 1,383 1,463 4,094 3,931
Other expense, net (43) (32) (129) (332)
---------- --------- ---------- ----------
Income (loss) before income taxes (7,359) 6,702 (16,631) (12,602)
Provision (benefit) for income taxes (1,613) 1,015 (5,322) 2,400
---------- --------- ---------- ----------
Net income (loss) $ (5,746) $ 5,687 $ (11,309) $ (15,002)
========== ========= ========== ==========
Basic net income (loss) per share $ (0.30) $ 0.30 $ (0.58) $ (0.82)
========== ========= ========== ==========
Diluted net income (loss) per share $ (0.30) $ 0.29 $ (0.58) $ (0.82)
========== ========= ========== ==========
Shares used in basic calculations 19,467 19,067 19,429 18,218
========== ========= ========== ==========
Shares used in diluted calculations 19,467 19,918 19,429 18,218
========== ========= ========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements
-3-
<PAGE> 4
ELECTROGLAS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
(Unaudited) (1)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 34,563 $ 20,259
Short-term investments 99,348 104,719
Accounts receivable, net 18,051 35,852
Inventories 16,702 26,032
Prepaid expenses and other current assets 10,809 4,577
Deferred income taxes 7,613 7,613
------------ ------------
Total current assets 187,086 199,052
Deferred income taxes 1,214 1,214
Equipment and leasehold improvements, net 13,252 16,392
Intangible assets, net 10,656 12,525
Other assets 773 950
------------ ------------
Total assets $ 212,981 $ 230,133
============ ============
Liabilities and stockholders' equity
Current liabilities:
Short-term borrowings $ 2,868 $ 1,160
Accounts payable 4,675 7,424
Accrued liabilities 14,290 18,045
------------ ------------
Total current liabilities 21,833 26,629
Deferred income taxes 3,779 3,770
Stockholders' equity:
Preferred stock, $0.01 par value;
authorized 1,000; none outstanding -- --
Common stock, $0.01 par value;
authorized 40,000; issued and outstanding
19,787 at September 30, 1998 and 20,543
at December 31, 1997 198 205
Additional paid-in capital 130,200 133,600
Deferred stock compensation (762) (983)
Retained earnings 58,454 78,736
Accumulated other comprehensive income (loss) 100 (32)
------------ -------------
188,190 211,526
Less cost of common stock in treasury;
62 at September 30, 1998 and 800 at
December 31, 1997 821 11,792
------------ ------------
Total stockholders' equity 187,369 199,734
------------ ------------
Total liabilities and stockholders' equity $ 212,981 $ 230,133
============ ============
</TABLE>
(1) The information in this column was derived from the Company's audited
consolidated financial statements for the year ended December 31, 1997.
See accompanying notes to consolidated condensed financial statements
-4-
<PAGE> 5
ELECTROGLAS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
-----------------
September 30,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (11,309) $ (15,002)
Changes to income not affecting cash 9,405 29,073
Changes in current assets and current liabilities
net of effects from acquisition 14,395 (13,796)
------------ ------------
Cash provided by operating activities 12,491 275
Cash flow from investing activities:
Capital expenditures (2,828) (7,055)
Purchases of investments (140,713) (157,529)
Maturities of investments 145,403 172,917
Other assets (391) (225)
Cash acquired in acquisition -- 973
------------ ------------
Cash provided by investing activities 1,471 9,081
Cash flow from financing activities:
Proceeds from short-term borrowings 1,708 1,575
Payments of short-term borrowings -- (1,250)
Sales of common stock, net of issuance costs 2,683 6,288
Purchases of treasury stock (4,092) (473)
------------ ------------
Cash provided by financing activities 299 6,140
Effect of exchange rate changes 43 5
------------ ------------
Net increase in cash and cash equivalents 14,304 15,501
Cash and cash equivalents at beginning of period 20,259 11,141
------------ ------------
Cash and cash equivalents at end of period $ 34,563 $ 26,642
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements
-5-
<PAGE> 6
ELECTROGLAS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE: 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete consolidated
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for fair presentation have
been included. These consolidated condensed financial statements should be read
in conjunction with the audited consolidated financial statements for the year
ended December 31, 1997, included in the Company's Annual Report on Form 10-K.
Operating results for the nine month period ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
The Company's fiscal year end is December 31. The Company's fiscal quarters end
on the Saturday nearest the end of the calendar quarters. For convenience, the
Company has indicated that its quarters end on March 31, June 30 and September
30.
USE OF ESTIMATES - The preparation of the accompanying unaudited consolidated
condensed financial statements requires management to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual
results could differ from those estimates.
NOTE: 2 - INVENTORIES
Inventories were comprised of the following:
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands) 1998 1997
- -------------- ------------- ------------
<S> <C> <C>
Raw materials $ 6,286 $ 11,571
Work in process 6,013 8,499
Finished goods 4,403 5,962
--------- --------
$ 16,702 $ 26,032
========= ========
</TABLE>
NOTE: 3 - NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share and diluted net (loss) per share amounts were
computed using the weighted average number of shares of common stock outstanding
during the period. Diluted net income per share was calculated using the
weighted average number of common shares, including the effect of dilutive
securities attributable to stock options, restricted stock, and stock placed in
escrow related to acquisitions, outstanding during the period. The following
table sets forth the computation of basic and diluted net income (loss) per
share:
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<PAGE> 7
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
September 30, September 30,
(in thousands, except per share data) 1998 1997 1998 1997
- ------------------------------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ (5,746) $ 5,687 $ (11,309) $ (15,002)
========== ========= ========== ==========
Denominator:
Denominator for basic net income (loss)
per share - weighted average shares 19,467 19,067 19,429 18,218
---------- --------- ---------- ----------
Effect of dilutive securities:
Employee stock options -- 616 -- --
Restricted stock -- 100 -- --
Stock in escrow from acquisitions -- 135 -- --
---------- --------- ---------- ----------
Dilutive potential common shares -- 851 -- --
---------- --------- ---------- ----------
Denominator for diluted net income (loss)
per share - adjusted weighted
average shares 19,467 19,918 19,429 18,218
========== ========= ========== ==========
Basic net income (loss) per share $ (0.30) $ 0.30 $ (0.58) $ (0.82)
========== ========= ========== ==========
Diluted net income (loss) per share $ (0.30) $ 0.29 $ (0.58) $ (0.82)
=========== ========= ========== ==========
</TABLE>
Options to purchase 2,436,000 shares of common stock and 100,000 shares of
restricted common stock were outstanding at September 30, 1998, but were not
included in the computation of diluted net loss per share as the effect would be
antidilutive.
In connection with the acquisition of Techne Systems, Inc., 120,000 shares of
common stock have been placed in escrow through December 1999 subject to certain
representations and warranties. Related to the Knights acquisition, 44,000
shares of common stock remain in escrow. The escrow shares related to both
acquisitions were not included in the computation of diluted net loss per share
as the effect would be antidilutive.
NOTE: 4 - LEASE AGREEMENT
In March 1997, the Company entered into a five-year operating lease for
approximately 21.5 acres of undeveloped land in San Jose, California. The lease
documentation includes terms and provisions for further funding for construction
of buildings.
On July 1, 1998, the Company and a bank signed an agreement committing the
latter party to provide a construction allowance of $43.0 million and committing
both parties to certain revisions to the financial covenants set forth in the
lease dated March 31, 1997. The monthly payments are based on the London
Interbank Offering Rate (LIBOR). At current rates, the annual lease payments
represent approximately $0.8 million on the current lease amount of $14.2
million and such annual lease payments will increase as construction funding
increases throughout the estimated construction period of 18 to 24 months. At
the end of the lease, the Company has the option to acquire the property
(parcels of land and buildings) at its projected cost of approximately $55.0
million. Construction began on August 5, 1998.
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<PAGE> 8
The guaranteed residual payment on the lease is approximately $55.0 million. The
lease contains certain restrictive covenants. The Company was in compliance with
these covenants at September 30, 1998. The lease also contains a collateral
option which would allow the Company to reduce lease expense. The Company has
exercised the collateral option and at September 30, 1998, the Company had
pledged cash of $12.0 million which is included in cash and cash equivalents,
since the Company can withdraw the cash within ten days notice.
NOTE: 5 - ENVIRONMENTAL REMEDIATION
In 1997, the Company performed an environmental investigation on its leased
property in Santa Clara, California, in cooperation with the California Regional
Water Quality Board, and will be performing clean up activities on the
property's soil. In the fourth quarter of 1997, the Company accrued $1.6 million
for environmental remediation costs which was the Company's best estimate of its
obligation. The Company has since incurred actual costs of $0.8 million. It is
possible that the Company's recorded estimate of its obligations may change in
the near term.
NOTE: 6 - STOCKHOLDERS EQUITY
Stock repurchase program. On March 14, 1996, the Board of Directors authorized
the repurchase of up to 1,000,000 shares of the Company's stock on the open
market. The Company has since completed the repurchase program and retired the
1,000,000 shares of its common stock held in treasury at a cost of $15.1
million. On May 19, 1998, the Board of Directors authorized the repurchase of an
additional 1,000,000 shares of the Company's stock beyond the initial program to
reduce the dilution resulting from its employee stock option and stock purchase
plans. During the quarter ended September 30, 1998, the Company repurchased
62,400 shares of its common stock at a cost of $0.8 million.
Stock option plan. On May 19, 1998, the Company's stockholders approved an
amendment to the Company's 1997 Stock Incentive Plan to increase the number of
shares reserved for issuance from 750,000 to 1,050,000.
Employee stock purchase plan. On May 19, 1998, the Company's stockholders
approved the 1998 Employee Stock Purchase Plan replacing the 1993 Employee Stock
Purchase Plan that expired in June 1998. Under the new plan, 500,000 shares were
reserved for issuance to eligible employees who may purchase stock at 85% of its
fair value on specified dates through payroll deductions.
NOTE: 7 - COMPREHENSIVE INCOME (LOSS)
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components. SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale investments and foreign currency translation adjustments,
which prior to adoption were reported separately in stockholders' equity, to be
included in other comprehensive income (loss). Prior year financial statements
have been reclassified to conform to the requirements of SFAS 130.
For the quarters ended September 30, 1998 and 1997, total comprehensive income
(loss) amounted to $(5.6) million and $5.7 million, respectively. For the nine
months ended September 30, 1998 and 1997, total comprehensive loss amounted to
$(11.2) million and $(15.2) million, respectively.
-8-
<PAGE> 9
NOTE: 8 - INCOME TAXES
The difference between the federal statutory rate of 35.0% and the benefit rate
of 32.0% for the nine months ended September 30, 1998, resulted primarily from
the benefit of tax exempt income, offset by non-deductible goodwill amortization
and valuation allowances for net operating losses, foreign tax credits, and
alternative minimum tax credit carryforwards.
NOTE: 9 - ACCOUNTING FOR LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121 (SFAS
121), "Accounting for the Impairment of Long-Lived Assets," the Company reviews
long-lived assets held and used by the Company for impairment whenever events or
changes in circumstances indicate that assets may be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets.
-9-
<PAGE> 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this Form 10-Q that are not purely historical are
forward-looking statements, including statements regarding the Company's
expectations, hopes or intentions regarding the future. Forward-looking
statements include, but are not limited to, statements about gross profits, cash
flow, liquidity, anticipated cash needs and availability. All forward-looking
statements included in this document are made as of the date hereof, based on
information available to the Company as of the date hereof, and Electroglas
assumes no obligation to update any forward-looking statement. It is important
to note that the Company's actual results could differ materially from those in
such forward-looking statements. You should consult the risk factors listed from
time to time in the Company's Annual Report on Form 10-K, as well as those
disclosed in this discussion and analysis included under the sections titled
"Factors That May Affect Results and Financial Condition" and "Volatility of
Stock Price."
The components of the Company's statements of operations, expressed as a
percentage of net sales, are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
September 30, September 30,
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 67.4 55.5 65.6 57.1
----- ----- ----- -----
Gross profit 32.6 44.5 34.4 42.9
----- ----- ----- -----
Operating expenses:
Engineering, research and development 35.4 12.8 28.1 14.6
Selling, general and administrative 35.9 19.8 30.0 21.4
In-process research and development -- -- -- 22.2
----- ----- ----- -----
Total operating expenses 71.3 32.6 58.1 58.2
----- ----- ----- -----
Operating income (loss) (38.7) 11.9 (23.7) (15.3)
Interest income 6.1 3.3 4.7 3.7
Other expense, net (0.1) (0.1) (0.1) (0.3)
----- ----- ----- -----
Income (loss) before income taxes (32.7) 15.1 (19.1) (11.9)
Provision (benefit) for income taxes (7.2) 2.3 (6.1) 2.3
----- ----- ----- -----
Net income (loss) (25.5)% 12.8% (13.0)% (14.2)%
===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
Net Sales
The Company, along with the semiconductor equipment industry in general, is
currently experiencing a downturn caused by a number of factors, including
economic conditions in Asia, excess capacity in the fabrication process,
semiconductor pricing pressures, and the growth of the sub-$1000 PC. These
factors, among others, have all combined to reduce customer spending on new
capital equipment which has affected the Company's sales during the current
quarter and nine months ended September 30, 1998.
-10-
<PAGE> 11
Net sales for the quarter ended September 30, 1998 were $22.5 million, a 49.2%
decline from net sales of $44.3 million in the comparable period last year. The
decrease was due primarily to lower prober system unit sales impacted by the
current industry downturn. Net sales for the first nine months of 1998 were
$86.9 million, a 17.9% decrease from net sales of $105.9 million for the same
period last year. The decrease was due principally to lower prober system unit
sales of the older Horizon 4000 models, offset partially by incremental revenues
generated from the yield management and inspection system businesses that were
acquired in May 1997 and December 1997, respectively.
For the quarters ended September 30, 1998 and 1997, net sales comprised of
prober systems ($15.6 million and $36.4 million, respectively), aftermarket
sales, consisting primarily of service, spare parts and upgrades ($3.9 million
and $6.4 million, respectively) in support of the prober system business, and
Knights software and Techne inspection systems ($3.0 million and $1.5 million,
respectively).
For the nine months ended September 30, 1998 and 1997, net sales comprised of
prober systems ($62.0 million and $85.1 million, respectively), aftermarket
sales ($15.1 million and $18.0 million, respectively) in support of the prober
system business, and Knights software and Techne inspection systems ($9.8
million and $2.8 million, respectively).
For the quarter ended September 30, 1998, international sales accounted for
34.2% of net sales as compared to 41.6% for the same period last year. The
decrease in the percentage of international sales from 1997 was due to lower
Asian Pacific sales, mainly from reduced spending in Korea and Taiwan. During
the current quarter, the Company experienced sales declines, in absolute
dollars, across all its major geographic markets.
For the first nine months of 1998, international sales accounted for 40.5% of
net sales as compared to 41.2% for the same period last year. The decrease in
the percentage of international sales from 1997 was attributable primarily to
lower Asian Pacific sales, offset partially by an increase in European sales.
Except for the increase in European sales, the Company experienced sales
declines, in absolute dollars, across its major geographic markets.
The Company's international sales will likely continue to account for a
significant portion of net sales in 1998. However, current Asian economic
conditions may continue to have an adverse impact on international sales for the
year.
The ongoing uncertainty surrounding the Asian financial conditions, along with
volatility in product demand and pricing, have caused semiconductor
manufacturers to exercise caution in making capital equipment decisions. As a
result of the uncertainties in this market environment, any rescheduling or
cancellations of planned capital purchases by semiconductor manufacturers will
cause the Company's sales to fluctuate on a quarterly basis.
Gross Profit
Gross profit, as a percentage of sales, was 32.6% for the third quarter of 1998,
compared to 44.5% for the third quarter of 1997. Gross profit was negatively
impacted primarily by reduced leveraging of fixed overhead costs from lower
sales and the disposal of obsolete and excess inventories in the prober
business.
-11-
<PAGE> 12
For the first nine months of 1998, gross profit, as a percentage of sales, was
34.4% compared to 42.9% for the same period last year. Gross profit was
negatively impacted by manufacturing capacity underutilization from lower sales
and the disposal of obsolete and excess inventories in the prober business,
including an inventory adjustment of $2.5 million, recorded in the second
quarter of 1998, due to a rapid product transition from the older Horizon 4000
models to the newer 4090 models. In addition, gross profit was reduced by $1.2
million in the second quarter of 1998 related to capitalized profit in inventory
on shipped inspection systems. These decreases in gross profit were offset
partially by higher margin yield management software sales, and the transfer of
labor and related overhead to support research and development efforts for the
next-generation prober.
The Company believes that its gross profit will continue to be affected by a
number of factors, including competitive pressures, changes in demand for
semiconductors, economic conditions in Asia, changes in product mix, level of
software sales, and excess manufacturing capacity costs.
Engineering, Research and Development
Engineering, research and development expenses were $8.0 million in the third
quarter of 1998, up 40.1% from $5.7 million in the third quarter of 1997. As a
percentage of sales, these expenses increased to 35.4% in the third quarter of
1998 from 12.8% in the same period last year. The increase was due mainly to
continuing investment in critical development programs in the prober business
during the current downturn. In addition, fixed assets of $0.4 million were
written off in the prober engineering unit. Incremental research and development
costs related to the inspection products business acquired in December 1997 also
contributed to the increase.
For the first nine months of 1998, these expenses were $24.4 million, up 57.8%
from $15.5 million in the comparable period of a year ago. As a percentage of
sales, these expenses increased to 28.1% in the first nine months of 1998 from
14.6% in the same period last year. The increase was a result of accelerated
spending, primarily in the first quarter of 1998, which consisted of project
materials and absorbed manufacturing labor and related overhead in the 300mm and
the Horizon 4090u (micro) programs. In addition, incremental research and
development costs related to the acquired yield management software and
inspection products businesses contributed to the increase.
Engineering, research and development expenses consist primarily of salaries,
project materials, and other costs associated with the Company's ongoing efforts
in hardware and software product development and enhancement.
Selling, General and Administrative
Selling, general and administrative expenses were $8.1 million for the third
quarter of 1998, down 7.7% from $8.8 million in the comparable quarter last
year. This decrease was due primarily to spending reduction programs initiated
during the current downturn, including reducing incentive compensation and
requiring mandatory days off from the Company's employees. This was offset
partially by a charge of $0.3 million associated with severance compensation in
the third quarter of 1998, and incremental selling, general and administrative
costs related to the inspection products business acquired in December 1997.
-12-
<PAGE> 13
For the first nine months of 1998, these expenses were $26.1 million, up 15.0%
from $22.7 million in the comparable period of a year ago. This increase was due
primarily to higher incremental operational expenses and goodwill amortization
related to the acquired yield management software and inspection products
businesses. In addition, $0.6 million of costs associated with severance
compensation and facilities consolidation were charged during the first nine
months of 1998.
Acquired In-Process Research and Development
Acquired in-process research and development costs of $23.5 million in the
second quarter of 1997 were attributable to the Company's purchase of Knights
Technology, Inc.
Impairment of Long-Lived Assets
During the third quarter of 1998, there were changes in circumstances that
indicated the long-lived assets, including goodwill acquired in connection with
the 1997 acquisitions of Techne Inspection Products and Knights Technology,
Inc., may be impaired. The carrying value of these assets at September 30, 1998
was approximately $11.0 million.
During the quarter, certain expected orders for inspection products were
postponed and the Company did not receive any orders for a new inspection
product being developed. Consequently, there were no inspection products in
backlog at the end of the quarter and there is significant uncertainty as to
future orders. In light of this, the Company reevaluated its forecast for such
products. The Company believes that it may ship a demonstration unit of its new
product during the fourth quarter 1998, which may result in subsequent orders.
The outcome of this uncertainty will have a significant impact on its forecast
for inspection products and consequently, if such orders are not received, the
Company may not be able to recover the carrying value of the long-lived assets
related to Techne, and will recognize an impairment loss in a future quarter.
In addition, the Company experienced a reduction in sales of Knights' products,
which resulted in an operating loss for Knights during the quarter. The Company
believes that this was a result of the continuing downturn in the semiconductor
industry. In light of this, the Company reevaluated its forecast for Knights
products. Due to the uncertainty as to when the semiconductor industry is likely
to recover from the current downturn, the Company was unable to prepare a
forecast with enough certainty to determine whether it will be able to prepare a
forecast with greater certainty. Consequently, depending on the Company's
assessment of the uncertainty in the semiconductor equipment market in the
fourth quarter, the Company may not be able to recover the carrying value of the
long-lived assets related to Knights, and will recognize an impairment loss in
the fourth quarter.
-13-
<PAGE> 14
Income Taxes
The Company's estimated effective tax rates for the three and nine months ended
September 30, 1998 were benefit rates of 21.9% and 32.0% compared to the tax
rates of 15.1% and 22.0%, before the in-process research and development
write-off, for the comparable periods of 1997. The Company's benefit rate for
1998 included the impact of estimated refundable taxes available in the
carryback period due to the Company's projected losses for the year, offset by
decreased benefits for tax exempt investment income and increased valuation
allowances for various credit carryforwards. Compared to 1998, the 1997 tax rate
of 22.0%, before the in-process R&D write-off, reflected lower foreign and state
taxes offset by greater benefits for tax exempt investment income, tax exempt
foreign sales, and research and development credits. The 1997 charge for the
in-process research and development was a non-deductible expense for tax
purposes. Management concluded that a valuation allowance of approximately $3.0
million is required for acquired net operating losses that are significantly
limited due to change of ownership rules, 1998 net operating loss carryforwards,
and various tax credit carryforwards.
FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company's future operating results may be affected by inherent uncertainties
that exist in the worldwide semiconductor equipment industry. Such uncertainties
include, but are not limited to, unexpected additional environmental remediation
expenses in the event the current remediation efforts need to be expanded or
ongoing investigation reveals additional contamination, timely availability and
acceptance of new hardware and software products, capital expenditures of
semiconductor manufacturers, changes in demand for semiconductor products,
competitive pricing pressures, product volume and mix, development of new
products, enhancement of existing products, global economic conditions,
availability of needed components, the level of success and expenditures for the
Company's Year 2000 and Euro efforts, availability of skilled employees, timing
of orders received, fluctuations in foreign exchange rates, financial
instability in Asian markets, introduction of competitors' products having
technological and/or pricing advantages, and integration of the businesses of
Knights and Techne into the Company. In addition, the Company has experienced,
and may in the future experience, significant fluctuations in its quarterly
financial results. Accordingly, recent historical operating results should only
be one source of information when evaluating the future financial performance of
the Company.
YEAR 2000 UPDATE
The Company is aware of the issues associated with the programming code in
computer systems as the Year 2000 approaches. The Year 2000 problem is pervasive
and complex, as virtually every computer operation will be affected in some way
by the rollover of the two-digit year value to 00. Systems that do not properly
recognize date-sensitive information when the year changes to 2000 could
generate erroneous data or cause a system to fail. Significant uncertainty
exists in the software industry concerning the potential effects associated with
the Year 2000 problem.
The Company currently is in the process of auditing its own information
technology infrastructure for Year 2000 readiness, including reviewing what
actions are required to make all software systems Year 2000 ready as well as
actions needed to mitigate the risks of Year 2000. Such actions include a review
of vendors' contracts, attention to Year 2000 issues in future contracts with
vendors, and formal communications with suppliers requesting that they certify
that their products are Year 2000 ready.
-14-
<PAGE> 15
State of Readiness
The Company has been actively addressing the Year 2000 issues. The following
sections broadly address Year 2000 matters with respect to the Company's (a)
information technology systems, (b) suppliers, (c) products, and (d) facilities
and infrastructure for Year 2000 readiness assessment.
Information Technology Systems
The Company has upgraded, or is in the process of upgrading or replacing, many
of its core business applications systems. A Year 2000 ready upgrade to the
Company's enterprise resource planning system was completed in the third quarter
of 1998. Year 2000 ready upgrades exist for most of the Company's remaining core
applications systems, and the Company plans on upgrading these systems by June
1999. The Company's wide-area network requirements are provided by major
national and international carriers, and the Company expects these carriers to
be Year 2000 ready. During fiscal 1997 and 1998, the Company invested in a
desktop upgrade program. The standard personal computers, servers and laptop
computers installed during this period are Year 2000 ready to the extent the
vendors have affirmed. Although not every desktop application has been fully
tested as of the filing date, the Company believes that the number of non-ready
systems is small. The Company expects it will complete its assessment and
replacement of these systems by June 1999. Over the past several years, the
Company has replaced or upgraded its local PBX and voice mail systems to Year
2000 ready systems. The Company is in the process of verifying Year 2000
readiness of these systems in the Company's domestic and international sales
offices, and intends to complete its assessment by March 1999.
Suppliers
During fiscal 1998, the Company sent Year 2000 Readiness Questionnaires to its
suppliers. To date, the Company has received responses from over one half of its
major suppliers, most stating that they will be Year 2000 ready. The Company
expects to initiate follow up communications in the fourth quarter of 1998 with
the suppliers that did not respond to the Year 2000 Readiness Questionnaire.
Supplier responses to the Questionnaire will be closely monitored. In some
cases, alternate suppliers may need to be identified by the Company. There can
be no assurance that the Company will be able to find suitable alternate
suppliers and contract with them on reasonable terms, or at all, and such
inability could have a material and adverse impact on the Company's business and
results of operations.
Products
The Company's Year 2000 product testing is ongoing. The Company is using two
nationally- and industry-recognized test procedures to verify that the Company's
products are Year 2000 ready. They are the YMARK2000 program (NSTL), for
PC-based products, and the SEMATECH Year 2000 Readiness Test Scenarios for all
products. The Company is planning to notify customers of known risk areas and
proposed remediation plans during the fourth quarter of 1998. The Company plans
to make Year 2000 upgrades available to customers during the first quarter of
1999, and to have upgrades installed in the field in 1999. There can be no
assurance that the Company's products will contain all necessary date code
changes. Any failure of the Company's products to perform, including system
malfunctions due to the onset of Year 2000, could result in claims against the
Company, which could have a material adverse effect on the Company's business,
financial condition and results of operations. Moreover, the Company's customers
could choose to convert to other Year 2000 ready products in order to avoid such
malfunctions, either of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
-15-
<PAGE> 16
Facilities and Infrastructure
The Company is in the process of assessing its Year 2000 risk with respect to
building automation, electronic security, water and utility systems. The Company
plans to send formal queries to landlords, local fire departments, and water and
utility providers in the fourth quarter of 1998.
The Company is primarily an assemble-to-order manufacturing operation. There is
no significant automated assembly equipment on its manufacturing shop floor. The
Company is in the process of reviewing its manufacturing operations for
potential Year 2000 issues and plans to complete such assessment by the end of
December 1998.
Costs to Address Year 2000 Issues
The Company is in the process of identifying for its customers the corrective
measures necessary to ensure that its installed products are Year 2000 ready. In
this regard, the Company is incurring, and will continue to incur throughout
1998 and 1999, various costs to provide customer support regarding Year 2000
issues, and certain of such costs are expected to be borne not by the Company
but, instead, to be passed on to the customers. The full cost of these
activities, including corrective measures, is not fully known. However, the
Company believes that the potential future financial impact of assuring such
Year 2000 readiness is not expected to be material. The Company is continuing
its assessments and developing alternatives that will necessitate refinement of
this estimate over time. There can be no assurance, however, that there will not
be a delay in, or increased costs associated with, the efforts described in this
section. Since the efforts described in this section are ongoing, all potential
Year 2000 complications have not yet been identified. Therefore, the potential
impact of these complications on the Company's financial condition and results
of operations cannot be determined at this time. If computer systems used by the
Company or its suppliers, the product integrity of products provided to the
Company by suppliers, or the software applications used in systems manufactured
and sold by the Company, fail or experience significant difficulties related to
the Year 2000, the Company's results of operations and financial condition could
be materially affected.
Contingency Plans
The Company currently is in the process of preparing contingency plans for the
Year 2000 readiness issues noted above and the Company anticipates completing
those plans by December 1999. There can be no assurance that such measures will
prevent the occurrence of Year 2000 problems, which could have a material
adverse effect upon the Company's business, operating results and financial
condition.
EURO
The Company has established a team to address issues raised by the introduction
of the Single European Currency ("Euro") for initial implementation as of
January 1, 1999, and through the transition period to January 1, 2002. The
Company expects to be able to meet related legal requirements by January 1,1999,
and through the transition period. The Company does not expect the cost of any
system modifications to be material and does not currently expect that
introduction and use of the Euro will materially affect its foreign exchange
activities or will result in any material increase in transaction costs. The
Company will continue to evaluate the impact over time of the introduction of
the Euro; however, based on currently available information, management does not
believe that the introduction of the Euro will have a material adverse impact on
the Company's financial condition or the overall trends in results of
operations.
-16-
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments were $133.9
million at September 30, 1998, an increase of $8.9 million from $125.0 million
at December 31, 1997.
Operating activities generated cash of $12.5 million during the first nine
months of 1998. This was due to a decrease in net current assets of $14.4
million and noncash charges to income of $9.4 million, offset by a net loss of
$11.3 million. Accounts receivable decreased by $17.8 million due primarily to a
decline in sales from the December 1997 quarter. Inventories were reduced by
$9.3 million due to lower production levels and inventory adjustments in the
first nine months of 1998. These cash generating assets were partially offset by
a decrease in accrued liabilities and accounts payable of $3.8 million and $2.7
million, respectively, and an increase in income taxes receivable of $5.0
million.
Cash provided by investing activities was $1.5 million due primarily from net
maturities of investments of $4.7 million, offset partially by capital
expenditures of $2.8 million for engineering design and test equipment,
manufacturing leasehold improvements, and enhancement of the Company's
information technology infrastructure.
Cash provided by financing activities was $0.3 million. This resulted from the
sale of common stock of $2.7 million under employee stock plans and additional
short-term borrowings of $1.7 million by the Company's Japanese subsidiary,
offset by the repurchase of an additional 262,400 shares of the Company's common
stock at a cost of $4.1 million.
At September 30, 1998, the Company's Japanese subsidiary had lines of credit
with Japanese banks with a total borrowing capacity of approximately $4.4
million (denominated in Yen). Amounts outstanding under these facilities at
September 30, 1998 were $2.9 million. These facilities enable the Company's
Japanese subsidiary to finance its working capital requirements locally.
On July 1, 1998, the Company amended its lease agreement dated March 31, 1997 to
provide a construction allowance of $43.0 million to build its new campus in San
Jose. Based on current rates, the annual lease payments represent approximately
$0.8 million on the current lease amount of $14.2 million and such annual lease
payments will increase as construction funding increases throughout the
estimated construction period of 18 to 24 months. At the end of the lease, the
Company has the option to acquire the property (parcels of land and buildings)
at its projected cost of approximately $55.0 million.
In July 1998, the Company repurchased 62,400 shares of its common stock at a
cost of $0.8 million.
Historically, the Company has generated cash in an amount sufficient to fund its
operations. The Company anticipates that its existing capital resources and cash
flow generated from future operations will enable it to maintain its current
level of operations and its planned operations including capital expenditures
for the foreseeable future.
-17-
<PAGE> 18
VOLATILITY OF STOCK PRICE
The Company believes that any of the following factors can cause the price of
the Company's Common Stock to fluctuate, perhaps substantially: announcements of
developments related to the Company's business, fluctuations in the Company's
operating results, sales of substantial amounts of securities of the Company in
the marketplace, general conditions in the semiconductor industry or worldwide
economy, particularly softness in demand for semiconductor equipment related to
continued or worsened economic conditions in Asia, a shortfall in revenue or
earnings from or changes in analysts' expectations, announcements of
technological innovations or new products or enhancements by the Company or its
competitors, developments in patents or other intellectual property rights, and
changes in the Company's relationships with certain customers and suppliers. In
addition, in recent years, the stock market in general, and the market for the
shares of small capitalization stocks in particular, including the Company's,
have experienced extreme price fluctuations which have often been unrelated to
the operating performance of affected companies. There can be no assurance that
the market price of the Company's Common Stock will not continue to experience
significant fluctuations in the future, including fluctuations that are
unrelated to the Company's performance.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Not Applicable.
-18-
<PAGE> 19
PART II. OTHER INFORMATION
Item 5. Other Information
Any stockholder proposal submitted outside of the processes of Rule 14a-8 under
the Securities Exchange Act of 1934 for presentation to the Registrant's 1999
Annual Meeting of Stockholders will be considered untimely for the purposes of
Rules 14a-4 and 14a-5 if notice thereof is received by the Registrant after
February 22, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
None
-19-
<PAGE> 20
SIGNATURES
Pursuant to the requirements 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.
ELECTROGLAS, INC.
DATE: November 12, 1998 By: /s/ Armand J. Stegall
-----------------------
Armand J. Stegall
Chief Financial Officer
-20-
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
-21-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS, THE CONSOLIDATED BALANCE SHEETS, AND THE
ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 34,563
<SECURITIES> 99,348
<RECEIVABLES> 18,506
<ALLOWANCES> 455
<INVENTORY> 16,702
<CURRENT-ASSETS> 187,086
<PP&E> 36,026
<DEPRECIATION> 22,774
<TOTAL-ASSETS> 212,981
<CURRENT-LIABILITIES> 21,833
<BONDS> 0
0
0
<COMMON> 198
<OTHER-SE> 187,171
<TOTAL-LIABILITY-AND-EQUITY> 212,981
<SALES> 86,900
<TOTAL-REVENUES> 86,900
<CGS> 56,986
<TOTAL-COSTS> 56,986
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18
<INCOME-PRETAX> (16,631)
<INCOME-TAX> (5,322)
<INCOME-CONTINUING> (11,309)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,309)
<EPS-PRIMARY> (0.58)
<EPS-DILUTED> (0.58)
</TABLE>
