<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 June 30, 1999
Commission File Number 0-21626
ELECTROGLAS, INC.
(exact name of registrant as specified in its charter)
DELAWARE 77-0336101
(state or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
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 July 31, 1999, 19,797,329 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>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Statements of Operations -- Three months
and six months ended June 30, 1999 and June 30, 1998 3
Consolidated Condensed Balance Sheets -- June 30, 1999
and December 31, 1998 4
Consolidated Condensed Statements of Cash Flows -- Six months
ended June 30, 1999 and June 30, 1998 5
Notes to Consolidated Condensed Financial Statements --
June 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 4. Submission of Matters to a Vote of Security-Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</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 June 30, Six months ended June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 29,757 $ 27,538 $ 47,089 $ 64,403
Cost of sales 16,802 20,652 27,844 41,830
---------- ---------- ---------- ----------
Gross profit 12,955 6,886 19,245 22,573
---------- ---------- ---------- ----------
Operating expenses:
Engineering, research and development 6,890 7,948 13,109 16,463
Selling, general and administrative 6,163 8,935 13,408 18,007
---------- ---------- ---------- ----------
Total operating expenses 13,053 16,883 26,517 34,470
---------- ---------- ---------- ----------
Operating loss (98) (9,997) (7,272) (11,897)
Interest income 1,414 1,350 3,007 2,711
Other income (expense), net (71) 68 (198) (86)
---------- ---------- ---------- ----------
Income (loss) before income taxes 1,245 (8,579) (4,463) (9,272)
Provision (benefit) for income taxes 152 (3,432) 300 (3,709)
---------- ---------- ---------- ----------
Net income (loss) $ 1,093 $ (5,147) $ (4,763) $ (5,563)
========== ========== ========== ==========
Basic net income (loss) per share $ 0.06 $ (0.26) $ (0.24) $ (0.29)
========== ========== ========== ==========
Diluted net income (loss) per share $ 0.05 $ (0.26) $ (0.24) $ (0.29)
========== ========== ========== ==========
Shares used in basic calculations 19,517 19,450 19,516 19,411
========== ========== ========== ==========
Shares used in diluted calculations 20,090 19,450 19,516 19,411
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements
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<PAGE> 4
ELECTROGLAS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
(Unaudited) (1)
Assets
Current assets:
Cash and cash equivalents $ 23,410 $ 12,966
Short-term investments 69,829 100,858
Accounts receivable, net 23,407 11,945
Inventories 14,413 14,428
Prepaid expenses and other current assets 2,527 2,050
Income taxes receivable 9,231 10,860
------------ ------------
Total current assets 142,817 153,107
Restricted cash 27,978 17,712
Equipment and leasehold improvements, net 10,891 11,768
Other assets 1,267 1,654
------------ ------------
Total assets $ 182,953 $ 184,241
============ ============
Liabilities and stockholders' equity
Current liabilities:
Short-term borrowings $ 1,206 $ 566
Accounts payable 6,480 2,738
Accrued liabilities 13,025 13,160
------------ ------------
Total current liabilities 20,711 16,464
Deferred income taxes 97 110
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 19,950 at June 30, 1999 and
19,860 at December 31, 1998
199 199
Additional paid-in capital 131,875 130,927
Deferred stock compensation (541) (688)
Retained earnings 33,415 38,178
Accumulated other comprehensive loss (507) (128)
------------ ------------
164,441 168,488
Less cost of common stock in treasury;
155 at June 30, 1999 and 62 at
December 31, 1998 2,296 821
------------ ------------
Total stockholders' equity 162,145 167,667
------------ ------------
Total liabilities and stockholders' equity $ 182,953 $ 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
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ELECTROGLAS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,763) $ (5,563)
Changes to income not affecting cash 3,523 5,999
Changes in current assets and current liabilities (6,688) 9,299
---------- ----------
Cash provided by (used in) operating activities (7,928) 9,735
Cash flow from investing activities:
Capital expenditures (2,230) (1,862)
Purchases of investments (156,559) (76,459)
Maturities of investments 186,812 74,058
Investment in restricted cash (10,266) --
Other assets 45 (138)
---------- ----------
Cash provided by (used in) investing activities 17,802 (4,401)
Cash flow from financing activities:
Proceeds from short-term borrowings 640 1,059
Sales of common stock, net of issuance costs 948 2,669
Purchases of treasury stock (1,029) (3,271)
---------- ----------
Cash provided by financing activities 559 457
Effect of exchange rate changes 11 69
---------- ----------
Net increase in cash and cash equivalents 10,444 5,860
Cash and cash equivalents at beginning of period 12,966 20,259
---------- ----------
Cash and cash equivalents at end of period $ 23,410 $ 26,119
========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements
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<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 six month period ended June 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>
June 30, December 31,
(in thousands) 1999 1998
------------ ------------
<S> <C> <C>
Raw materials $ 4,125 $ 4,502
Work in process 7,034 5,948
Finished goods 3,254 3,978
------------ ------------
$ 14,413 $ 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:
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<PAGE> 7
<TABLE>
<CAPTION>
Three months ended Six months ended
(in thousands, except per share data) June 30, June 30,
-------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 1,093 $ (5,147) $ (4,763) $ (5,563)
=========== =========== =========== ==========
Denominator:
Denominator for basic net income (loss) per share - weighted
average shares 19,517 19,450 19,516 19,411
----------- ----------- ----------- ----------
Effect of dilutive securities:
Employee stock options 353 -- -- --
Restricted stock 100 -- -- --
Stock in escrow from acquisitions 120 -- -- --
----------- ----------- ----------- ----------
Dilutive potential common shares 573 -- -- --
----------- ----------- ----------- ----------
Denominator for diluted net income (loss) per share - adjusted
weighted average shares
20,090 19,450 19,516 19,411
=========== =========== =========== ==========
Basic net income (loss) per share $ 0.06 $ (0.26) $ (0.24) $ (0.29)
=========== =========== =========== ==========
Diluted net income (loss) per share $ 0.05 $ (0.26) $ (0.24) $ (0.29)
=========== =========== =========== ==========
</TABLE>
Options to purchase 2,305,000 shares, and 100,000 shares of restricted common
stock, were outstanding at June 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 Knights Technology Inc. and Techne
Systems, Inc., 120,000 and 44,000 shares of common stock, respectively, were in
escrow as of June 30, 1998 subject to certain representations and warranties.
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
(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 $28.0 million at June
30, 1999, the annual lease payments currently represent approximately $1.8
million, which will increase as the construction funding increases throughout
the remaining construction period of approximately six 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 June 30, 1999, the Company
was in compliance with these covenants. In connection with the lease collateral
requirements, the Company was required to collateralize the lease. At June 30,
1999, the Company collateralized $28.0 million, which was included in other
assets as restricted cash. The amount of collateralization will increase as
funding increases over the construction period.
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<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 current quarter, 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 current quarter, which
is 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
six months ended June 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 June 30, 1999, comprehensive income was $1.0 million
compared to a comprehensive loss of $5.2 million for the same quarter last year.
For the six months ended June 30, 1999 and 1998, comprehensive loss amounted to
$5.1 million and $5.5 million, respectively.
NOTE: 8 - INCOME TAXES
The Company's tax provision for the three and six months ended June 30, 1999
included the impact of foreign income and withholding taxes. A full valuation
allowance has been established for the current year net operating losses.
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<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 June 30, products All other Total
- ------------------------- -------- --------- -----
<S> <C> <C> <C>
1999
Sales to unaffiliated customers $ 27,010 $ 2,747 $ 29,757
Operating income (loss) $ 908 $ (1,006) $ (98)
1998
Sales to unaffiliated customers $ 22,768 $ 4,770 $ 27,538
Operating loss $ (8,662) $ (1,335) $ (9,997)
</TABLE>
<TABLE>
<CAPTION>
(in thousands) Prober
Six months ended June 30, products All other Total
- ------------------------- -------- --------- -----
<S> <C> <C> <C>
1999
Sales to unaffiliated customers $ 41,574 $ 5,515 $ 47,089
Operating loss $ (4,950) $ (2,322) $ (7,272)
1998
Sales to unaffiliated customers $ 57,591 $ 6,812 $ 64,403
Operating loss $ (8,447) $ (3,450) $ (11,897)
</TABLE>
NOTE: 5 - SUBSEQUENT EVENT
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 $5.0
million and was paid in cash in July 1999.
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<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 gross profits, cash
flow, liquidity, anticipated cash needs and availability, the impact of Year
2000 issues and the Company's Year 2000 readiness, 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 consult the risk factors described
from time to time in the Company's Annual Report on Form 10-K, as well as those
disclosed in this discussion and analysis particularly those 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 June 30, Six months ended June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 56.5 75.0 59.1 65.0
---------- ---------- ---------- ----------
Gross profit 43.5 25.0 40.9 35.0
---------- ---------- ---------- ----------
Operating expenses:
Engineering, research and development 23.1 28.9 27.8 25.6
Selling, general and administrative 20.7 32.4 28.5 27.9
---------- ---------- ---------- ----------
Total operating expenses 43.8 61.3 56.3 53.5
---------- ---------- ---------- ----------
Operating loss (0.3) (36.3) (15.4) (18.5)
Interest income 4.7 4.9 6.4 4.2
Other income (expense), net (0.2) 0.2 (0.5) (0.1)
---------- ---------- ---------- ----------
Income (loss) before income taxes 4.2 (31.2) (9.5) (14.4)
Provision (benefit) for income taxes 0.5 (12.5) 0.6 (5.8)
---------- ---------- ---------- ----------
Net income (loss) 3.7% (18.7)% (10.1)% (8.6)%
========== ========== ========== ==========
</TABLE>
RESULTS OF OPERATIONS
Net Sales
Net sales for the second quarter of 1999 increased 71.7% from the first quarter
of 1999 as a result of an improvement in the overall semiconductor business from
the depressed levels of the last four quarters.
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<PAGE> 11
Net sales for the quarter ended June 30, 1999 were $29.8 million, an 8.1%
increase from net sales of $27.5 million in the comparable quarter last year.
The increase was due primarily to higher prober system unit sales, offset
partially by lower inspection products sales. Net sales for the first six months
of 1999 were $47.1 million, a 26.9% decrease from net sales of $64.4 million for
the same period a year ago. The decrease was a result of lower prober system
unit sales in the first quarter of 1999 from the first quarter of 1998 in which
the Company experienced a brief recovery from an industry downturn.
For the quarters ended June 30, 1999 and 1998, net sales were comprised of
prober systems ($21.8 million and $17.3 million, respectively), yield management
software and inspection products ($2.7 million and $4.8 million, respectively),
and aftermarket sales, consisting primarily of service, spare parts and upgrades
($5.2 million and $5.5 million respectively) in support of the prober system
business.
For the six months ended June 30, 1999 and 1998, net sales were comprised of
prober systems ($31.3 million and $46.3 million, respectively), yield management
software and inspection products ($5.5 million and $6.8 million, respectively),
and aftermarket sales, consisting primarily of service, spare parts and upgrades
($10.3 million and $11.3 million respectively) in support of the prober system
business.
For the quarter ended June 30, 1999, international sales accounted for 40.1% of
net sales as compared to 43.7% for the same quarter last year. The decrease in
the percentage of international sales was due principally to lower Asian Pacific
sales in 1999 from 1998. Except for a decrease in Asian Pacific sales, the
Company experienced sales increases, in absolute dollars, across its major
geographic markets.
For the first six months of 1999, international sales accounted for 39.5% of net
sales as compared to 42.7% for the same period last year. The decrease in the
percentage of international sales was attributable primarily to lower Asian
Pacific sales in 1999 from 1998. In absolute dollars, the Company experienced
sales declines across its major geographic markets.
Although Asian economies have stabilized to some degree compared to 1998, the
Company remains cautious about general economic developments in Asia. Negative
economic developments in Asia may continue to have an adverse impact on
international sales for the year.
Demand for the Company's products can change from period to period due to
uncertainties surrounding the Asian financial conditions, along with 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 second quarter of 1999, gross profit, as a percentage of sales, was
43.5% compared to 25.0% for the same quarter last year. For the first six months
of 1999, gross profit, as a percentage of sales, was 40.9% compared to 35.0% for
the same period last year. The increases in gross profit percentage were due
primarily to inventory items recorded in the second quarter of 1998 that
negatively impacted the year ago three and six month periods. These items
consisted of 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. To a
lesser extent, the current 1999 three and six month periods benefited from an
increase in higher margin yield management software sales.
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<PAGE> 12
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 $6.9 million in the second
quarter of 1999, down 13.3% from $7.9 million in the comparable quarter last
year. As a percentage of sales, these expenses decreased to 23.1% in the second
quarter of 1999 from 28.9% in the same quarter last year. The decrease was
mainly attributable to savings achieved from cost reduction actions taken in the
second half of 1998.
For the first six months of 1999, these expenses were $13.1 million, down 20.4%
from $16.5 million in the comparable period of a year ago. The decrease 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 4090(u) (micro) programs in the first quarter of 1998. As a
percentage of sales, these expenses increased to 27.8% in the first six months
of 1999 from 25.6% in the same period last year due chiefly to lower sales.
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 $6.2 million in the second
quarter of 1999, down 31.0% from $8.9 million in the comparable quarter last
year. For the first six months of 1999, these expenses were $13.4 million, down
25.5% from $18.0 million in the comparable period of a year ago.
The decreases for both periods were primarily due to workforce reductions from
prior year levels and spending reduction programs initiated during the downturn.
In addition, both the current quarter and first six 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 second quarter of 1999, interest income was $1.4 million compared to
$1.4 million for the same quarter last year. For the first six months of 1999,
interest income was $3.0 million compared to $2.7 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 six months ended June 30, 1999, the Company recorded income
tax provisions of $0.2 million and $0.3 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
six months ended June 30, 1998, the tax benefit rate of 40.0% reflected the
impact of estimated refundable taxes available in the carryback period due to
the estimated losses incurred. As of June 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, financial instability in Asian markets,
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.
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<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 is in the
process of testing all of its critical business systems and plans to be
completed by September 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 plans to complete its assessment and
remediation of these systems by September 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 and remediation by September
1999.
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 is in the process of assessing its Year 2000 risk with respect to
building automation, electronic security, water and utility systems and has sent
formal queries to landlords, local fire departments, and water and utility
providers. 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 its 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 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
The Company currently is in the process of preparing contingency plans for the
Year 2000 readiness issues areas 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 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 $121.2 million at June 30, 1999, a decrease of $10.3 million from
$131.5 million at December 31, 1998.
Cash used in operating activities was $7.9 million during the first six months
of 1999. This was due to an increase in net current assets of $6.7 million and a
net loss of $4.8 million, offset by noncash charges to income of $3.5 million.
The negative effect from the changes in net current assets was due primarily to
an increase of $11.5 million in accounts receivable resulting from a higher
level of shipments towards the end of the current quarter. This was offset
partially by an increase of $3.7 million in accounts payable and a decrease of
$1.6 million in income taxes receivable.
Cash provided by investing activities was $17.8 million due primarily from net
maturities of investments of $30.3 million, offset partially by $10.3 million of
restricted cash required to collateralize the construction of the Company's San
Jose campus, and capital expenditures of $2.2 million.
Cash provided by financing activities was $0.6 million. This resulted from the
sale of common stock of $0.9 million under employee stock plans and additional
short-term borrowings of $0.6 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 June 30, 1999, the Company's Japanese subsidiary had lines of credit with
Japanese banks with a total borrowing capacity of approximately $5.0 million
(denominated in Yen). Amounts outstanding under these facilities at June 30,
1999 were $1.2 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 $28.0 million at June
30, 1999, the annual lease payments currently represent approximately $1.8
million, which will increase as the construction funding increases throughout
the remaining construction period of approximately six 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 June 30, 1999, the Company
was in compliance with these covenants. In connection with the lease collateral
requirements, the Company was required to collateralize the lease. At June 30,
1999, the Company collateralized $28.0 million, which was included in other
assets as restricted cash. The amount of collateralization will increase as
funding increases over the construction period.
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 $5.0
million and was paid in cash in July 1999.
-16-
<PAGE> 17
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, 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
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.
-17-
<PAGE> 18
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders
At the Company's Annual Meeting of Stockholders held on May 18, 1999, the
stockholders:
(1) elected Neil R. Bonke and Curtis S. Wozniak as Class III directors. Neil
R. Bonke received 17,564,700 affirmative votes, 114,145 negative votes
and no abstentions. Curtis S. Wozniak received 17,557,984 affirmative
votes, 120,861 negative votes and no abstentions. The following
directors continued in office after the meeting: Joseph F. Dox, Roger D.
Emerick, and Robert J.
Frankenberg.
(2) ratified and approved an amendment to the Company's 1997 Stock Incentive
Plan to increase the number of shares reserved for issuance thereunder
from 1,050,000 to 1,350,000, with 11,036,152 affirmative votes,
5,689,811 negative votes, 797,573 abstentions and 155,309 broker
non-votes.
(3) ratified the appointment of Ernst & Young LLP as the Company's
independent auditors for the year ending December 31, 1999, with
17,578,138 affirmative votes, 76,586 negative votes and 24,121
abstentions.
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 21, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
-18-
<PAGE> 19
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: August 11, 1999 BY: /s/ Armand J. Stegall
------------------------- ------------------------------------
Armand J. Stegall
Chief Financial Officer
-19-
<PAGE> 20
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
27 Financial Data Schedule
-20-
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 23,410
<SECURITIES> 69,829
<RECEIVABLES> 23,878
<ALLOWANCES> 471
<INVENTORY> 14,413
<CURRENT-ASSETS> 142,817
<PP&E> 38,662
<DEPRECIATION> 27,771
<TOTAL-ASSETS> 182,953
<CURRENT-LIABILITIES> 20,711
<BONDS> 0
0
0
<COMMON> 199
<OTHER-SE> 161,946
<TOTAL-LIABILITY-AND-EQUITY> 182,953
<SALES> 47,089
<TOTAL-REVENUES> 47,089
<CGS> 27,844
<TOTAL-COSTS> 27,844
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> (4,463)
<INCOME-TAX> 300
<INCOME-CONTINUING> (4,763)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,763)
<EPS-BASIC> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
