<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
----------
Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarter Ended September 30, 1999
Commission File Number 0-21626
ELECTROGLAS, INC.
(exact name of registrant as specified in its charter)
<TABLE>
DELAWARE 77-0336101
- ------------------------------- ----------------------
<S> <C>
(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, 1999, 19,920,707 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, 1999 and September 30, 1998............. 3
Consolidated Condensed Balance Sheets -- September 30, 1999
and December 31, 1998....................................................... 4
Consolidated Condensed Statements of Cash Flows -- Nine
months ended September 30, 1999 and September 30, 1998...................... 5
Notes to Consolidated Condensed Financial Statements --
September 30, 1999.......................................................... 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.................. 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................ 17
SIGNATURES........................................................................... 18
</TABLE>
-2-
<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,
--------------------- -----------------------
1999 1998 1999 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $34,710 $ 22,497 $ 81,799 $ 86,900
Cost of sales 17,851 15,156 45,695 56,986
------- -------- -------- --------
Gross profit 16,859 7,341 36,104 29,914
------- -------- -------- --------
Operating expenses:
Engineering, research and development 6,846 7,956 19,955 24,419
Selling, general and administrative 7,833 8,084 21,241 26,091
------- -------- -------- --------
Total operating expenses 14,679 16,040 41,196 50,510
------- -------- -------- --------
Operating income (loss) 2,180 (8,699) (5,092) (20,596)
Interest income 1,548 1,383 4,555 4,094
Other income (expense), net 31 (43) (167) (129)
------- -------- -------- --------
Income (loss) before income taxes 3,759 (7,359) (704) (16,631)
Provision (benefit) for income taxes 150 (1,613) 450 (5,322)
------- -------- -------- --------
Net income (loss) $ 3,609 $ (5,746) $ (1,154) $(11,309)
======= ======== ======== ========
Basic net income (loss) per share $ 0.18 $ (0.30) $ (0.06) $ (0.58)
======= ======== ======== ========
Diluted net income (loss) per share $ 0.18 $ (0.30) $ (0.06) $ (0.58)
======= ======== ======== ========
Shares used in basic calculations 19,595 19,467 19,542 19,429
======= ======== ======== ========
Shares used in diluted calculations 20,385 19,467 19,542 19,429
======= ======== ======== ========
</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,
1999 1998
------------- ------------
(Unaudited) (1)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 51,108 $ 12,966
Short-term investments 82,082 100,858
Accounts receivable, net 26,661 11,945
Inventories 13,484 14,428
Prepaid expenses and other current assets 3,017 2,050
Income taxes receivable 2,112 10,860
--------- ---------
Total current assets 178,464 153,107
Restricted cash -- 17,712
Equipment and leasehold improvements, net 9,486 11,768
Other assets 5,652 1,654
--------- ---------
Total assets $ 193,602 $ 184,241
========= =========
Liabilities and stockholders' equity
Current liabilities:
Short-term borrowings $ 2,299 $ 566
Accounts payable 8,568 2,738
Accrued liabilities 14,125 13,160
--------- ---------
Total current liabilities 24,992 16,464
Deferred revenue and
other non-current liabilities 2,038 110
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 20,014 at
September 30, 1999 and 19,860
at December 31, 1998 200 199
Additional paid-in capital 132,731 130,927
Deferred stock compensation (467) (688)
Retained earnings 37,024 38,178
Accumulated other comprehensive loss (620) (128)
--------- ---------
168,868 168,488
Less cost of common stock in treasury;
155 at September 30, 1999 and 62
at December 31, 1998 2,296 821
--------- ---------
Total stockholders' equity 166,572 167,667
--------- ---------
Total liabilities and stockholders' equity $ 193,602 $ 184,241
========= =========
</TABLE>
- ----------
(1) The information in this column was derived from the Company's audited
consolidated financial statements for the year ended December 31, 1998.
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,
-------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,154) $ (11,309)
Changes to income not affecting cash 5,438 9,405
Changes in assets and liabilities 2,742 14,395
--------- ---------
Cash provided by operating activities 7,026 12,491
Cash flow from investing activities:
Capital expenditures (2,732) (2,828)
Proceeds from equipment disposals 414 --
Purchases of investments (198,273) (140,713)
Maturities of investments 216,121 145,403
Decrease in restricted cash 17,712 --
Investment in, and license with Cascade (4,530) --
Other assets (6) (391)
--------- ---------
Cash provided by investing activities 28,706 1,471
Cash flow from financing activities:
Proceeds from short-term borrowings 1,733 1,708
Sales of common stock, net of issuance costs 1,805 2,683
Purchases of treasury stock (1,029) (4,092)
--------- ---------
Cash provided by financing activities 2,509 299
Effect of exchange rate changes (99) 43
--------- ---------
Net increase in cash and cash equivalents 38,142 14,304
Cash and cash equivalents at beginning of period 12,966 20,259
--------- ---------
Cash and cash equivalents at end of period $ 51,108 $ 34,563
========= =========
</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 adjustments) 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, 1998, included in the Company's Annual Report on Form 10-K.
Operating results for the nine month period ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
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) 1999 1998
- -------------- ------------- ------------
<S> <C> <C>
Raw materials $ 3,214 $ 4,502
Work in process 6,088 5,948
Finished goods 4,182 3,978
------- -------
$13,484 $14,428
======= =======
</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:
-6-
<PAGE> 7
<TABLE>
<CAPTION>
Three months ended Nine months ended
(in thousands, except per share data) September 30, September 30,
- ------------------------------------ ----------------------------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 3,609 $(5,746) $(1,154) $11,309)
======= ======= ======= =======
Denominator:
Denominator for basic net income (loss) per share --
weighted average shares 19,595 19,467 19,542 19,429
------- ------- ------- -------
Effect of dilutive securities:
Employee stock options 570 -- -- --
Restricted stock 100 -- -- --
Stock in escrow from acquisitions 120 -- -- --
------- ------- ------- -------
Dilutive potential common shares 790 -- -- --
------- ------- ------- -------
Denominator for diluted net income (loss) per share --
adjusted weighted average shares 20,385 19,467 19,542 19,429
======= ======= ======= =======
Basic net income (loss) per share $ 0.18 $ (0.30) $ (0.06) $ (0.58)
======= ======= ======= =======
Diluted net income (loss) per share $ 0.18 $ (0.30) $ (0.06) $ (0.58)
======= ======= ======= =======
</TABLE>
Options to purchase 2,436,000 shares 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 prior acquisitions, 164,000 and 120,000 shares of common
stock, were in escrow as of September 30, 1998, and September 30, 1999,
respectively, subject to certain representations and warranties, and were not
included in the computation of diluted net loss per share in the three and nine
month periods in 1998 and nine month period in 1999, respectively, as the effect
would be antidilutive (see Note 6).
NOTE: 4 -- LEASE AGREEMENT
In March 1997, the Company entered into a $12.0 million five-year operating
lease for approximately 21.5 acres of land in San Jose, California. On July 1,
1998, the lease agreement was amended to provide a construction allowance of
$43.0 million for certain buildings currently under construction on the land.
The monthly payments are based on the London Interbank Offering Rate (LIBOR). At
current interest rates and based on the lease amount of $32.5 million at
September 30, 1999, the annual lease payments currently represent approximately
$2.2 million, which will increase as the construction funding increases
throughout the remaining construction period of approximately three months. At
the end of the lease, the Company has the option to purchase the land and
buildings at approximately $55.0 million. The guaranteed residual payment on the
lease is approximately $55.0 million.
The lease contains certain restrictive covenants. At September 30, 1999, the
Company was in compliance with these covenants. In addition, the Company was in
compliance with its lease collateral requirements and was no longer required to
collateralize the lease. The Company voluntarily collateralized $32.5 million as
of September 30, 1999, which was included in cash and cash equivalents since it
can withdraw the cash with 10 days notice. The amount of collateralization will
increase as funding increases over the construction period.
-7-
<PAGE> 8
NOTE: 5 -- ENVIRONMENTAL REMEDIATION
The Company has been performing environmental remediation activities on its
leased property in Santa Clara, California, in cooperation with the California
Regional Water Quality Board. In 1997, the Company accrued $1.6 million, which
was the Company's best estimate of its obligation and has since incurred actual
costs of $0.8 million. During the second quarter of 1999, the Company
reevaluated the on-going remediation efforts and determined that its remaining
liability to be approximately $0.1 million. As a result, the Company reduced
accrued environmental remediation expenses of $0.7 million in the second quarter
of 1999, which was included in the statement of operations as a reduction of
selling, general and administrative expenses.
NOTE: 6 -- STOCKHOLDERS EQUITY
Stock repurchase program. On May 19, 1998, the Board of Directors authorized the
repurchase of 1,000,000 shares of the Company's stock to reduce the dilution
resulting from its employee stock option and stock purchase plans. During the
nine months ended September 30, 1999, the Company repurchased 71,000 shares of
its common stock at a cost of $1.0 million.
Stock option plan. On May 18, 1999, 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 1,050,000 to 1,350,000.
Escrow shares. In connection with the Knights acquisition in May 1997, 131,000
shares of common stock were placed into escrow subject to certain
representations and warranties. In the second quarter of 1999, the Company
reached a final settlement with Knights' shareholders, in which 22,000 shares of
the Company's common stock at a cost of $0.4 million were returned to the
Company and placed into Treasury. The remaining escrow shares were released to
Knights' shareholders.
NOTE: 7 -- COMPREHENSIVE INCOME (LOSS)
For the quarter ended September 30, 1999, comprehensive income was $3.5 million
compared to a comprehensive loss of $5.6 million for the same quarter last year.
For the nine months ended September 30, 1999 and 1998, comprehensive losses
amounted to $1.6 million and $11.2 million, respectively.
NOTE: 8 -- INCOME TAXES
The Company's tax provision for the three and nine months ended September 30,
1999 included the impact of estimated state and foreign income and withholding
taxes. A full valuation allowance has been established for the current year net
operating losses.
-8-
<PAGE> 9
NOTE: 9 -- SEGMENT INFORMATION
The following is a summary of the Company's operating segments:
<TABLE>
<CAPTION>
(in thousands) Prober
Three months ended September 30, products All other Total
- -------------------------------- -------- --------- --------
1999
- ----
<S> <C> <C> <C>
Sales to unaffiliated customers $ 32,507 $ 2,203 $ 34,710
Operating income (loss) $ 4,356 $ (2,176) $ 2,180
1998
- ----
Sales to unaffiliated customers $ 19,467 $ 3,030 $ 22,497
Operating loss $ (7,513) $ (1,186) $ (8,699)
(in thousands) Prober
Three months ended September 30, products All other Total
- -------------------------------- -------- --------- --------
1999
- ----
Sales to unaffiliated customers $ 74,081 $ 7,718 $ 81,799
Operating loss $ (594) $ (4,498) $ (5,092)
1998
- ----
Sales to unaffiliated customers $ 77,058 $ 9,842 $ 86,900
Operating loss $(15,960) $ (4,636) $(20,596)
</TABLE>
NOTE: 10 -- INVESTMENT IN CASCADE MICROTECH
On July 21, 1999, the Company entered into an agreement to purchase a minority
equity interest in Cascade Microtech, Inc. (Cascade). In addition, the Company
entered into an agreement to license certain technology from Cascade. The
purchase price for the equity investment and license was approximately $4.5
million and was paid in cash in July 1999.
-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 which are not purely historical are
forward-looking statements, including statements regarding the Company's
beliefs, expectations, hopes, plans or intentions regarding the future.
Forward-looking statements include, but are not limited to statements regarding:
expected state and federal taxes, cash flow, liquidity, anticipated cash needs
and availability, the impact of Year 2000 issues, the Company's Year 2000
readiness, the Company's expectation that its carriers will be Year 2000 ready,
the installation of Year 2000 upgrades for the Company's customers and the
impact of the introduction of the Euro and costs related thereto. 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 also consult the risk
factors described from time to time in the Company's Annual Report on Form 10-K,
and those disclosed in this discussion and analysis particularly those under the
sections titled "Year 2000 Update," "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,
---------------------- ------------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 51.4 67.4 55.9 65.6
----- ----- ----- -----
Gross profit 48.6 32.6 44.1 34.4
----- ----- ----- -----
Operating expenses:
Engineering, research and development 19.7 35.4 24.4 28.1
Selling, general and administrative 22.6 35.9 25.9 30.0
----- ----- ----- -----
Total operating expenses 42.3 71.3 50.3 58.1
----- ----- ----- -----
Operating income (loss) 6.3 (38.7) (6.2) (23.7)
Interest income 4.4 6.1 5.5 4.7
Other income (expense), net 0.1 (0.1) (0.2) (0.1)
----- ----- ----- -----
Income (loss) before income taxes 10.8 (32.7) (0.9) (19.1)
Provision (benefit) for income taxes 0.4 (7.2) 0.5 (6.1)
----- ----- ----- -----
Net income (loss) 10.4% (25.5)% (1.4)% (13.0)%
===== ===== ===== =====
</TABLE>
-10-
<PAGE> 11
RESULTS OF OPERATIONS
Net Sales
As a result of continued improvement in the overall semiconductor business, net
sales for the third quarter of 1999 increased 16.6% from the second quarter of
1999.
Net sales for the quarter ended September 30, 1999 were $34.7 million, a 54.3%
increase from net sales of $22.5 million in the comparable quarter last year.
The increase was driven primarily by higher prober system unit sales. Net sales
for the first nine months of 1999 were $81.8 million, a 5.9% decrease from net
sales of $86.9 million for the same period a year ago. The decrease was a result
of lower inspection products and prober system unit sales, offset by an increase
in yield management software sales.
For the quarters ended September 30, 1999 and 1998, net sales were comprised of
prober systems ($26.3 million and $15.6 million, respectively), yield management
software and inspection products ($2.2 million and $3.0 million, respectively),
and aftermarket sales, consisting primarily of service, spare parts and upgrades
($6.2 million and $3.9 million, respectively) in support of the prober system
business.
For the nine months ended September 30, 1999 and 1998, net sales were comprised
of prober systems ($58.8 million and $62.0 million, respectively), yield
management software and inspection products ($7.7 million and $9.8 million,
respectively), and aftermarket sales, consisting primarily of service, spare
parts and upgrades ($15.3 million and $15.1 million, respectively) in support of
the prober system business.
For the quarter ended September 30, 1999, international sales accounted for
35.5% of net sales as compared to 34.2% for the same quarter last year. The
increase in the percentage of international sales was due principally to higher
Asian Pacific sales in 1999 from 1998. The Company experienced sales increases,
in absolute dollars, across all its major geographic markets.
For the first nine months of 1999, international sales accounted for 37.8% of
net sales as compared to 40.5% for the same period last year. The decrease in
the percentage of international sales was attributable primarily to lower
European and Asian Pacific sales in 1999 from 1998. In absolute dollars, the
Company experienced sales declines across its major geographic markets.
Demand for the Company's products can change from period to period due to
volatility in product demand and pricing. As a result of the uncertainties in
this market environment, any rescheduling or cancellation of planned capital
purchases by semiconductor manufacturers will cause the Company's sales to
fluctuate on a quarterly basis.
Gross Profit
For the third quarter of 1999, gross profit, as a percentage of sales, was 48.6%
compared to 32.6% for the same quarter last year. The increase was due primarily
to manufacturing efficiencies from larger production volume and to a lesser
extent, the favorable effects of the Company's manufacturing restructuring
program established in the current quarter. In addition, the year ago quarter
was negatively impacted by the disposal of obsolete and excess inventories in
the prober business.
-11-
<PAGE> 12
For the first nine months of 1999, gross profit, as a percentage of sales, was
44.1% compared to 34.4% for the same period last year. The increase was due
primarily to inventory items recorded in 1998 that negatively impacted the year
ago nine month period. These items consisted of the disposal of obsolete and
excess inventories in the prober business, including a $2.5 million inventory
adjustment resulting from rapid product transition from the older 4000 series
models to the newer 4090 model, and lower gross margins on inspection systems as
a result of $1.2 million of capitalized profit in inventory arising from the
acquisition of Techne that was recorded in cost of sales in the second quarter
of 1998 when the systems were shipped.
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, changes in product mix, level of software sales, and excess
manufacturing capacity costs.
Engineering, Research and Development
Engineering, research and development expenses were $6.8 million in the third
quarter of 1999, down 14.0% from $8.0 million in the comparable quarter last
year. As a percentage of sales, these expenses decreased to 19.7% in the third
quarter of 1999 from 35.4% in the same quarter last year. The decrease, in
absolute dollars, was mainly attributable to savings achieved from cost
reduction actions taken in the second half of 1998.
For the first nine months of 1999, these expenses were $20.0 million, down 18.3%
from $24.4 million in the comparable period of a year ago. As a percentage of
sales, these expenses decreased to 24.4% in the first nine months of 1999 from
28.1% in the same period last year. The decrease, in absolute dollars, was
primarily a result of savings from 1998 cost reduction measures and lower
development expenses in the current period compared to the accelerated spending
on the 300mm and the 4090u (micro) programs in the first quarter of 1998.
Engineering, research and development expenses consist primarily of salaries,
project materials, consultant fees, 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 $7.8 million in the third
quarter of 1999, down 3.1% from $8.1 million in the comparable quarter last
year.
For the first nine months of 1999, these expenses were $21.2 million, down 18.6%
from $26.1 million in the comparable period of a year ago. The decrease was
primarily due to workforce reductions from prior year levels and spending
reduction programs initiated during the industry downturn in 1998. In addition,
the first nine months were benefited by a reduction of accrued environmental
remediation expenses of $0.7 million that were no longer required based on the
Company's reassessment of the on-going remediation efforts, and a settlement of
$0.4 million for a purchase price contingency related to a past acquisition.
Interest Income
For the third quarter of 1999, interest income was $1.5 million compared to $1.4
million for the same quarter last year. For the first nine months of 1999,
interest income was $4.6 million compared to $4.1 million for the same period
last year. For both periods, the increase in interest income, relative to the
Company's cash balances, was principally the result of a shift from tax-exempt
investments to higher yielding taxable instruments.
-12-
<PAGE> 13
Income Taxes
For the three and nine months ended September 30, 1999, the Company recorded
income tax provisions of $0.2 million and $0.5 million, respectively,
representing foreign income and withholding taxes. Federal and state taxes for
1999 are expected to be immaterial due to the Company's loss position. For the
three and nine months ended September 30, 1998, the tax benefit rates of 21.9%
and 32.0%, respectively, reflected the impact of estimated refundable taxes
available in the carryback period due to the estimated losses incurred. As of
September 30, 1999, there were no additional refundable taxes available to the
Company. Management concluded that a full valuation allowance against its net
deferred tax assets is required due to uncertainties surrounding their
realization.
FACTORS THAT MAY AFFECT RESULTS 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, 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, availability of skilled employees, timing of orders received,
fluctuations in foreign exchange rates, introduction of competitors' products
having technological and/or pricing advantages, and the continued 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.
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.
-13-
<PAGE> 14
Information Technology Systems
A Year 2000 ready upgrade to the Company's enterprise resource planning system
was completed in the third quarter of 1998. Other core business applications and
operating systems upgrades were completed in June 1999. The Company completed
the remediation and testing of all of its critical business systems and core
applications upgrades in the third quarter of 1999, and believes that they are
Year 2000 ready. Major national and international carriers provide the Company's
wide-area network requirements, 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. The Company completed the remediation and testing of its critical
desktop applications in the third quarter of 1999, and believes that they are
substantially Year 2000 ready. Over the past several years, the Company has
replaced or upgraded its local PBX and voice mail systems to Year 2000 ready
systems. In the third quarter of 1999, the Company completed the remediation and
testing of these systems in its domestic and international sales offices.
Suppliers
During fiscal 1998, the Company sent Year 2000 Readiness Questionnaires to its
suppliers. To date, the Company has received responses from 100% of its major
suppliers, stating that they have completed all known Y2K upgrades to be Year
2000 ready. The Company will continue to follow up with the small number of
second tier suppliers that did not respond to the Year 2000 Readiness
Questionnaire. 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 notified its customers of known risk areas and proposed
remediation plans during the fourth quarter of 1998. The Company made Year 2000
upgrades available to customers during the first quarter of 1999, and plans 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.
-14-
<PAGE> 15
Facilities and Infrastructure
The Company has completed the assessment and remediation of its Year 2000 risk
with respect to building automation, electronic security, water and utility
systems. The Company is primarily an assemble-to-order manufacturing operation.
There is no significant automated assembly equipment on its manufacturing shop
floor. The Company completed the assessment and remediation of its manufacturing
operations during the first quarter of 1999.
Costs to Address Year 2000 Issues
The Company is in the process of identifying for its customers the corrective
measures that are necessary to ensure that its installed products are Year 2000
ready. In this regard, the Company is incurring, and will continue to incur
throughout 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, costs
incurred to date have not been material and the Company believes that the
potential future financial impact of assuring such Year 2000 readiness will not
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
In the third quarter of 1999, the Company completed contingency plans for the
Year 2000 readiness issues noted above. The contingency plans implemented by the
Company are intended to ensure that temporary disruptions to regional and global
infrastructure systems will have no materially adverse effect on the Company's
operations and financial performance. However, extended disruptions in these
systems beyond the Company's control could impact our ability to deliver product
and services to customers on schedule and to maintain Company operations, and
could, thereby, potentially have a materially adverse effect on the Company's
business, operating results and financial condition.
EURO
The Company has established a team to address the issues raised by the
introduction of the Single European Currency ("Euro") on January 1, 1999 and
during the transition period through January 1, 2002. The Company's internal
systems that are affected by the initial introduction of the Euro have been made
Euro capable without material system modification costs. Further internal
systems changes will be made during the three-year transition phase in
preparation for the ultimate withdrawal of the legacy currencies in July 2002,
and the costs of these changes are not expected to be material. The Company does
not presently expect that the introduction and use of the Euro will materially
affect the Company's foreign exchange activities, or will result in any material
increase in costs to the Company. While the Company will continue to evaluate
the impact of the Euro introduction over time, 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 overall
trends in results of operations.
-15-
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents, short-term investments, and restricted
cash were $133.2 million at September 30, 1999, an increase of $1.7 million from
$131.5 million at December 31, 1998.
Cash provided by operating activities was $7.0 million during the first nine
months of 1999. This was due to noncash charges to income of $5.4 million, an
increase in deferred revenue of $1.9 million, and a decrease in net current
assets of $0.8 million, offset by a net loss of $1.2 million. The positive
effect from the changes in net current assets was due primarily to a decrease of
$8.7 million in income taxes receivable, an increase of $5.8 million in accounts
payable, and a reduction in inventories of $0.9 million. This was offset
partially by an increase of $14.7 million in accounts receivable resulting from
a higher level of shipments towards the end of the current quarter.
Cash provided by investing activities was $28.7 million due primarily from net
maturities of investments of $17.8 million, and restricted cash of $17.7 million
that was no longer required to collateralize the construction of the Company's
San Jose campus. This was offset partially by an equity investment in, and
license agreement with Cascade Microtech of $4.5 million and capital
expenditures of $2.7 million.
Cash provided by financing activities was $2.5 million. This resulted from the
sale of common stock of $1.8 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 71,000 shares of the Company's common
stock at a cost of $1.0 million.
At September 30, 1999, the Company's Japanese subsidiary had lines of credit
with Japanese banks with a total borrowing capacity of approximately $5.6
million (denominated in Yen). Amounts outstanding under these facilities at
September 30, 1999 were $2.3 million. These facilities enable the Company's
Japanese subsidiary to finance its working capital requirements locally.
In March 1997, the Company entered into a $12.0 million five-year operating
lease for approximately 21.5 acres of land in San Jose, California. On July 1,
1998, the lease agreement was amended to provide a construction allowance of
$43.0 million for certain buildings currently under construction on the land.
The monthly payments are based on the London Interbank Offering Rate (LIBOR). At
current interest rates and based on the lease amount of $32.5 million at
September 30, 1999, the annual lease payments currently represent approximately
$2.2 million, which will increase as the construction funding increases
throughout the remaining construction period of approximately three months. At
the end of the lease, the Company has the option to purchase the land and
buildings at approximately $55.0 million. The guaranteed residual payment on the
lease is approximately $55.0 million.
The lease contains certain restrictive covenants. At September 30, 1999, the
Company was in compliance with these covenants. In addition, the Company was in
compliance with its lease collateral requirements and was no longer required to
collateralize the lease. The Company voluntarily collateralized $32.5 million as
of September 30, 1999, which was included in cash and cash equivalents since it
can withdraw the cash with 10 days notice. The amount of collateralization will
increase as funding increases over the construction period.
-16-
<PAGE> 17
On July 21, 1999, the Company entered into an agreement to purchase a minority
equity interest in Cascade Microtech, Inc. (Cascade). In addition, the Company
entered into an agreement to license certain technology from Cascade. The
purchase price for the equity investment and license was approximately $4.5
million and was paid in cash in July 1999.
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.
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, 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
For financial market risks related to changes in interest rates and foreign
currency exchange rates, refer to Part II, Item 7A, "Quantitative and
Qualitative Disclosure About Market Risk," in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
-17-
<PAGE> 18
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 11, 1999 BY: /s/ Armand J. Stegall
----------------- ------------------------------------
Armand J. Stegall
Chief Financial Officer
-18-
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
-19-
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 51,108
<SECURITIES> 82,082
<RECEIVABLES> 27,108
<ALLOWANCES> 447
<INVENTORY> 13,484
<CURRENT-ASSETS> 178,464
<PP&E> 37,191
<DEPRECIATION> 27,705
<TOTAL-ASSETS> 193,602
<CURRENT-LIABILITIES> 24,992
<BONDS> 0
0
0
<COMMON> 200
<OTHER-SE> 166,372
<TOTAL-LIABILITY-AND-EQUITY> 193,602
<SALES> 81,799
<TOTAL-REVENUES> 81,799
<CGS> 45,695
<TOTAL-COSTS> 45,695
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21
<INCOME-PRETAX> (704)
<INCOME-TAX> 450
<INCOME-CONTINUING> (1,154)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,154)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
