<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, 2000
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>
6024 Silver Creek Valley Road
San Jose, CA 95138
Telephone: (408) 528-3000
(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, 2000, 20,798,507 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 (Unaudited)
Consolidated Condensed Statements of Operations -- Three months
and nine months ended September 30, 2000 and September 30, 1999 ....... 3
Consolidated Condensed Balance Sheets -- September 30, 2000
and December 31, 1999 ................................................. 4
Consolidated Condensed Statements of Cash Flows -- Nine months
ended September 30, 2000 and September 30, 1999 ....................... 5
Notes to Consolidated Condensed Financial Statements --
September 30, 2000 .................................................... 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 ............ 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ...................................... 15
SIGNATURES ..................................................................... 16
</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,
------------------------ -------------------------
2000 1999 2000 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales ................................. $ 58,015 $ 34,710 $ 170,470 $ 81,799
Cost of sales ............................. 30,747 17,851 88,065 45,695
-------- -------- --------- --------
Gross profit .............................. 27,268 16,859 82,405 36,104
-------- -------- --------- --------
Operating expenses:
Engineering, research and development... 7,108 6,846 20,930 19,955
Selling, general and administrative .... 10,665 7,833 31,425 21,241
-------- -------- --------- --------
Total operating expenses .................. 17,773 14,679 52,355 41,196
-------- -------- --------- --------
Operating income (loss) ................... 9,495 2,180 30,050 (5,092)
Interest income ........................... 2,806 1,548 7,248 4,555
Other income (expense), net ............... (103) 31 (292) (167)
-------- -------- --------- --------
Income (loss) before income taxes ......... 12,198 3,759 37,006 (704)
Provision for income taxes ................ 1,586 150 4,811 450
-------- -------- --------- --------
Net income (loss) ......................... $ 10,612 $ 3,609 $ 32,195 $ (1,154)
======== ======== ========= ========
Basic net income (loss) per share ......... $ 0.51 $ 0.18 $ 1.57 $ (0.06)
======== ======== ========= ========
Diluted net income (loss) per share ....... $ 0.50 $ 0.18 $ 1.52 $ (0.06)
======== ======== ========= ========
Shares used in basic calculations ......... 20,671 19,595 20,514 19,542
======== ======== ========= ========
Shares used in diluted calculations ....... 21,081 20,385 21,190 19,542
======== ======== ========= ========
</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>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited) (1)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ........................... $ 63,737 $ 60,732
Short-term investments .............................. 104,510 80,127
Accounts receivable, net ............................ 47,355 28,992
Inventories ......................................... 24,745 14,867
Prepaid expenses and other current assets ........... 1,807 3,946
--------- ---------
Total current assets .............................. 242,154 188,664
Equipment and leasehold improvements, net .............. 12,478 8,193
Other assets ........................................... 5,154 5,334
--------- ---------
Total assets ........................................... $ 259,786 $ 202,191
========= =========
Liabilities and stockholders' equity
Current liabilities:
Short-term borrowings ............................... $ 1,543 $ 1,624
Accounts payable .................................... 14,688 9,074
Accrued liabilities ................................. 17,847 12,235
--------- ---------
Total current liabilities ......................... 34,078 22,933
Non-current liabilities ................................ 4,947 1,920
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 20,953 at
September 30, 2000 and 20,241 at December 31, 1999 209 202
Additional paid-in capital .......................... 147,508 136,672
Deferred stock compensation ......................... -- (393)
Retained earnings ................................... 75,949 43,754
Accumulated other comprehensive loss ................ (609) (601)
--------- ---------
223,057 179,634
Less cost of common stock in treasury;
155 at September 30, 2000 and December 31, 1999 ... 2,296 2,296
--------- ---------
Total stockholders' equity ........................ 220,761 177,338
--------- ---------
Total liabilities and stockholders' equity ............. $ 259,786 $ 202,191
========= =========
</TABLE>
(1) The information in this column was derived from the Company's audited
consolidated financial statements for the year ended December 31, 1999.
See accompanying notes to consolidated condensed financial statements
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<PAGE> 5
ELECTROGLAS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................... $ 32,195 $ (1,154)
Changes to income not affecting cash ................. 5,525 5,438
Changes in operating assets and liabilities .......... (11,835) 2,742
--------- ---------
Cash provided by operating activities ........... 25,885 7,026
Cash flow from investing activities:
Capital expenditures ................................. (8,950) (2,732)
Proceeds from equipment disposals .................... -- 414
Purchases of investments ............................. (155,882) (198,273)
Maturities of investments ............................ 131,561 216,121
Maturities of restricted cash ........................ -- 17,712
Other assets ......................................... (372) (4,536)
--------- ---------
Cash provided by (used in) investing activities.. (33,643) 28,706
Cash flow from financing activities:
Net proceeds (payments) from short-term borrowings ... (81) 1,733
Sales of common stock ................................ 10,843 1,805
Purchases of treasury stock .......................... -- (1,029)
--------- ---------
Cash provided by financing activities ........... 10,762 2,509
Effect of exchange rate changes ...................... 1 (99)
--------- ---------
Net increase in cash and cash equivalents ............ 3,005 38,142
Cash and cash equivalents at beginning of period ..... 60,732 12,966
--------- ---------
Cash and cash equivalents at end of period ........... $ 63,737 $ 51,108
========= =========
</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, 1999, included in the Company's Annual Report on Form 10-K.
Operating results for the three and nine month periods ended September 30, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
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
The following is a summary of inventories by major category:
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
(in thousands) 2000 1999
-------------- ------- -------
<S> <C> <C>
Raw materials ...... $10,136 $ 4,686
Work in process .... 8,740 6,986
Finished goods ..... 5,869 3,195
------- -------
$24,745 $14,867
======= =======
</TABLE>
NOTE: 3 - NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share and diluted net income (loss) per share
amounts were computed using the weighted average number of shares of common
stock outstanding during the period. The computation of diluted net income per
share included the effect of dilutive securities attributable to stock options
and contingently issued shares 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) 2000 1999 2000 1999
------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) ................................. $ 10,612 $ 3,609 $ 32,195 $ (1,154)
======== ======== ======== ========
Denominator:
Denominator for basic net income (loss) per share -
weighted average shares ........................... 20,671 19,595 20,514 19,542
-------- -------- -------- --------
Effect of dilutive securities:
Employee stock options ........................ 290 570 556 --
Contingently issued shares .................... 120 220 120 --
-------- -------- -------- --------
Dilutive potential common shares .................. 410 790 676 --
-------- -------- -------- --------
Denominator for diluted net income (loss) per share -
adjusted weighted average shares .................. 21,081 20,385 21,190 19,542
======== ======== ======== ========
Basic net income (loss) per share ...................... $ 0.51 $ 0.18 $ 1.57 $ (0.06)
======== ======== ======== ========
Diluted net income (loss) per share .................... $ 0.50 $ 0.18 $ 1.52 $ (0.06)
======== ======== ======== ========
</TABLE>
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 for
certain buildings 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 $48.3 million at September 30, 2000, the annual lease payments
currently represent approximately $3.3 million. These rates are sensitive to
inflation and other economic factors. A significant increase in interest rates
may have a negative impact on the earnings of the Company. At the end of the
lease, the Company has the option to purchase the land and buildings for
approximately $48.3 million. The guaranteed residual payment on the lease is
approximately $41.1 million.
The lease contains certain restrictive covenants. At September 30, 2000, the
Company was in compliance with these covenants. The Company was also in
compliance with its lease collateral requirements and was not required to
collateralize the lease. The Company voluntarily collateralized $48.3 million as
of September 30, 2000, which was included in cash and cash equivalents since it
can be withdrawn with 10 days notice.
NOTE: 5 - STOCKHOLDERS' EQUITY
Stock option plan. On May 16, 2000, 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 1,350,000 to 2,350,000.
NOTE: 6 - COMPREHENSIVE INCOME (LOSS)
For the quarters ended September 30, 2000 and 1999, comprehensive income was
$10.8 million and $3.5 million, respectively. For the nine months ended
September 30, 2000, comprehensive income was $32.2 million compared to a
comprehensive loss of $1.6 million for the same period in 1999.
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<PAGE> 8
NOTE: 7 - SEGMENT INFORMATION
The Company has three operating segments comprising its prober products,
inspection products and yield management software businesses. The Company's
management has determined the operating segments based upon how the business is
managed and operated. The Company evaluates performance and allocates resources
based on operating income (loss), excluding unusual or infrequent occurring
items. There are no significant inter-segment sales or transfers.
During the quarter ended September 30, 2000, the Company changed the
presentation of its segments from the prior fiscal year. The Company has
aggregated the prober products and inspection products businesses into one
reportable segment based on the aggregation criteria in Statement of Financial
Accounting Standard No. 131 (FAS 131). Previously, only the prober products
business was presented as a reportable segment. The Company changed its
reportable segments because inspection products exceeded the quantitative
thresholds in FAS 131. The segment information for prior periods has been
restated to reflect the new presentation.
The aggregated prober products and inspection products businesses are the only
segment that is reportable based on the quantitative guidelines provided in FAS
131. The yield management software business is below the quantitative guidelines
and is included with certain corporate charges and expenses under the heading
"All Other."
The following is a summary of the Company's operating segments:
<TABLE>
<CAPTION>
Prober and
(in thousands) Inspection
Three months ended September 30, Products All Other Total
-------------------------------- ---------- --------- -----
<S> <C> <C> <C>
2000
----
Sales to unaffiliated customers .... $ 55,794 $ 2,221 $ 58,015
Operating income (loss) ............ $ 11,112 $ (1,617) $ 9,495
1999
----
Sales to unaffiliated customers .... $ 32,520 $ 2,190 $ 34,710
Operating income (loss) ............ $ 2,843 $ (663) $ 2,180
</TABLE>
<TABLE>
<CAPTION>
(in thousands) Prober and
-------------- Inspection
Nine months ended September 30, Products All Other Total
------------------------------- ---------- --------- -----
<S> <C> <C> <C>
2000
----
Sales to unaffiliated customers .... $ 164,076 $ 6,394 $ 170,470
Operating income (loss) ............ $ 35,843 $ (5,793) $ 30,050
1999
----
Sales to unaffiliated customers .... $ 74,215 $ 7,584 $ 81,799
Operating loss ..................... $ (4,784) $ (308) $ (5,092)
</TABLE>
NOTE: 8 - INCOME TAXES
The 13% estimated annual effective tax rate for the year 2000 reflects
utilization of the current year research and development tax credit in addition
to a partial release of the valuation allowance set up in prior years. The
Company has concluded that a valuation allowance is necessary in 2000 against
certain deferred tax assets due to uncertainties surrounding their realization.
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<PAGE> 9
NOTE: 9 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." In March 2000, SAB 101 was amended by SAB 101A which delayed the
implementation date of SAB 101 for calendar year end reporting companies,
including Electroglas, to the quarter ending June 30, 2000. In June 2000, SAB
101 was amended a second time by SAB 101B further delaying the implementation
date to no later than the quarter ending December 31, 2000. The Company is
currently evaluating SAB 101 and is uncertain as to what impact, if any, SAB 101
will have on its revenues and results of operations. The impact of SAB 101, if
any, will be reported as a change in accounting principle in accordance with
FASB Statement No. 3. This may result in a significant cumulative effect change
in accounting adjustment that would be reflected in the Company's results of
operations for the year ending December 31, 2000.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions Involving
Stock Compensation - an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of the previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities." FAS 133 establishes accounting methods for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. The Company will be required to
implement FAS 133 at the beginning of fiscal 2002. Because the Company does not
currently hold any derivative instruments and does not engage in hedging
activities, the Company does not expect that the adoption of FAS 133 will have a
material impact on its financial position, results of operations or cash flows.
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<PAGE> 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the accompanying
Financial Statements of Electroglas and the related notes thereto. 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
estimated taxes, cash flow, liquidity and 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 due to risks and
uncertainties such as: 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
Inspection Products into the Company. In addition, the Company has experienced,
and may in the future experience, significant fluctuations in its quarterly
financial results. You should also consult the risk factors described from time
to time in the Company's Annual Report on Form 10-K for the year ended December
31, 1999 and those disclosed in this discussion and analysis.
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,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ................................. 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales ............................. 53.0 51.4 51.7 55.9
---- ---- ---- ----
Gross profit .............................. 47.0 48.6 48.3 44.1
---- ---- ---- ----
Operating expenses:
Engineering, research and development... 12.2 19.7 12.3 24.4
Selling, general and administrative .... 18.4 22.6 18.4 25.9
---- ---- ---- ----
Total operating expenses .................. 30.6 42.3 30.7 50.3
---- ---- ---- ----
Operating income (loss) ................... 16.4 6.3 17.6 (6.2)
Interest income ........................... 4.8 4.4 4.3 5.5
Other income (expense), net ............... (0.2) 0.1 (0.2) (0.2)
---- ---- ---- ----
Income (loss) before income taxes ......... 21.0 10.8 21.7 (0.9)
Provision for income taxes ................ 2.7 0.4 2.8 0.5
---- ---- ---- ----
Net income (loss) ......................... 18.3 % 10.4 % 18.9 % (1.4) %
==== ==== ==== ====
</TABLE>
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<PAGE> 11
RESULTS OF OPERATIONS
Net Sales
Net sales for the quarter ended September 30, 2000 were $58.0 million, a 67.1%
increase from net sales of $34.7 million in the comparable quarter last year.
Net sales for the first nine months of 2000 were $170.5 million, a 108.4%
increase from net sales of $81.8 million for the same period a year ago. The
increases for both periods were due primarily to higher prober system unit sales
as customers continued to spend for capacity expansion. Within the quarter ended
September 30, 2000, prober manufacturing operations experienced materials
shortages from some vendors that did not get corrected in time to meet scheduled
customer shipments. The rapid growth of shipments has stretched the Company's
vendor base. The Company has instituted plans to address the capability of its
vendor base in the coming quarter.
For the quarters ended September 30, 2000 and 1999, net sales were comprised of
prober and inspection systems ($49.7 million and $26.3 million, respectively),
yield management software ($2.2 million and $2.2 million, respectively), and
aftermarket sales, consisting primarily of service, spare parts and upgrades
($6.1 million and $6.2 million, respectively) in support of the prober system
business.
For the nine months ended September 30, 2000 and 1999, net sales were comprised
of prober and inspection systems ($144.8 million and $58.9 million,
respectively), yield management software ($6.4 million and $7.6 million,
respectively), and aftermarket sales, consisting primarily of service, spare
parts and upgrades ($19.3 million and $15.3 million, respectively) in support of
the prober system business.
For the quarter ended September 30, 2000, international sales accounted for
53.5% of net sales as compared to 35.5% for the same quarter last year. For the
nine months ended September 30, 2000, international sales accounted for 50.9% of
net sales as compared to 37.8% for the same period last year. During the current
three and nine month periods, the Company experienced sales growth, in absolute
dollars, across all its major geographic markets. For both periods, the increase
in the percentage of international sales from 1999 was due to a larger
percentage increase in both Asian Pacific and European sales, relative to the
increase in North American sales. Sales to Japan were primarily denominated in
Japanese yen. Sales to Europe were primarily denominated in U.S. dollars, except
for France in which the invoiced currency was a mix between U.S. dollar and
French franc.
Historically, the semiconductor and semiconductor manufacturing equipment
industries have been cyclical; therefore, the Company's results of operations
for the three and nine months ended September 30, 2000 may not necessarily be
indicative of future operating results. 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 quarter ended September 30, 2000, gross profit, as a percentage of
sales, was 47.0% compared to 48.6% for the same quarter last year. The decrease
was due primarily to higher material costs, offset partially by increased
capacity utilization from higher unit volume.
For the nine months ended September 30, 2000, gross profit, as a percentage of
sales, was 48.3% compared to 44.1% for the same period last year. The increase
was due primarily to increased capacity utilization from higher unit volume,
offset partially by higher material costs and lower selling prices from changes
in product mix.
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, changes in the proportion of
international sales, level of software sales, and excess manufacturing capacity
costs.
-11-
<PAGE> 12
Engineering, Research and Development
Engineering, research and development expenses were $7.1 million in the third
quarter of 2000, up 3.8% from $6.8 million in the comparable quarter last year.
For the first nine months of 2000, these expenses were $20.9 million, up 4.9%
from $20.0 million in the comparable period of a year ago. The increases for
both periods were due primarily to an increase in workforce to support both the
hardware and software businesses. As a percentage of sales, these expenses
decreased to 12.2% in the third quarter of 2000 from 19.7% in the same quarter
last year, and decreased to 12.3% in the first nine months of 2000 from 24.4% in
the same period last year. The decreases were attributed to expenses increasing
at a slower pace relative to higher 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 $10.7 million in the third
quarter of 2000, up 36.2% from $7.8 million in the comparable quarter last year.
For the first nine months of 2000, these expenses were $31.4 million, up 47.9%
from $21.2 million in the comparable period of a year ago. The increases for
both periods were primarily due to accrued employee incentive compensation as
the Company returned to profitability, additional occupancy costs related to the
Company's move to its new facilities, and higher sales commissions. In addition,
during the first nine months of 1999, the Company benefited from a reduction of
accrued environmental remediation expenses of $0.7 million, and a settlement of
$0.4 million for a purchase price contingency related to a past acquisition.
Interest Income
For the third quarter of 2000, interest income was $2.8 million compared to $1.5
million for the same quarter last year. For the first nine months of 2000,
interest income was $7.2 million compared to $4.6 million for the same period
last year. For both periods, the increase in interest income was principally due
to higher yielding taxable instruments and higher average cash balances, and to
a lesser extent, interest of $0.2 million related to tax refunds received in the
current quarter.
Income Taxes
For the nine months ended September 30, 2000, the Company's estimated effective
tax rate was 13% compared to an income tax provision of $0.5 million for the
nine months ended September 30, 1999. The Company's estimated tax rate for 2000
includes the partial release of the valuation allowance related to net operating
losses and tax credit carryforwards and the utilization of the current year
estimated research and development tax credit. The tax provision for the nine
months ended September 30, 1999 represented foreign income and withholding taxes
only as the Company's federal and state taxes were estimated to be immaterial
due to its loss position at the time. Management has concluded that a valuation
allowance is necessary against certain deferred tax assets due to uncertainties
surrounding their realization.
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<PAGE> 13
Other Issues
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." In March 2000, SAB 101 was amended by SAB 101A which delayed the
implementation date of SAB 101 for calendar year end reporting companies,
including Electroglas, to the quarter ending June 30, 2000. In June 2000, SAB
101 was amended a second time by SAB 101B further delaying the implementation
date to no later than the quarter ending December 31, 2000. The Company is
currently evaluating SAB 101 and is uncertain as to what impact, if any, SAB 101
will have on its revenues and results of operations. The impact of SAB 101, if
any, will be reported as a change in accounting principle in accordance with
FASB Statement No. 3. This may result in a significant cumulative effect change
in accounting adjustment that would be reflected in the Company's results of
operations for the year ending December 31, 2000.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions Involving
Stock Compensation - an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of the previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities." FAS 133 establishes accounting methods for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. The Company will be required to
implement FAS 133 at the beginning of fiscal 2002. Because the Company does not
currently hold any derivative instruments and does not engage in hedging
activities, the Company does not expect that the adoption of FAS 133 will have a
material impact on its financial position, results of operations or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents, and short-term investments were $168.2
million at September 30, 2000, an increase of $27.3 million from $140.9 million
at December 31, 1999.
Cash provided by operating activities was $25.9 million during the first nine
months of 2000. This was due to net income of $32.2 million and noncash charges
to income of $5.5 million, offset by an increase in operating assets of $11.8
million. The negative effect from the changes in operating assets was due to an
increase of $18.4 million in accounts receivable resulting from a higher level
of shipments towards the end of the current quarter, and an increase of $9.9
million in inventories attributable primarily to production of new products for
future market introduction, and delayed prober shipments due to materials
shortages. This was offset partially by increases of $5.6 million in accrued
liabilities, $5.6 million in accounts payable, $3.0 million in non-current
liabilities, and a decrease of $2.1 million in prepaid expenses and other
current assets.
Cash used in investing activities was $33.6 million due primarily from net
purchases of investments of $24.3 million, and capital expenditures of $9.0
million to equip the Company's new facilities.
Cash provided by financing activities was $10.8 million from the sale of common
stock under employee stock plans.
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The Company's Japanese subsidiary has credit facilities with a total borrowing
capacity of approximately $5.6 million (denominated in Yen) with two Japanese
banks. As of September 30, 2000, the amount outstanding was $1.5 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 for
certain buildings 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 $48.3 million at September 30, 2000, the annual lease payments
currently represent approximately $3.3 million. These rates are sensitive to
inflation and other economic factors. A significant increase in interest rates
may have a negative impact on the earnings of the Company. At the end of the
lease, the Company has the option to purchase the land and buildings for
approximately $48.3 million. The guaranteed residual payment on the lease is
approximately $41.1 million.
The lease contains certain restrictive covenants. At September 30, 2000, the
Company was in compliance with these covenants. The Company was also in
compliance with its lease collateral requirements and was not required to
collateralize the lease. The Company voluntarily collateralized $48.3 million as
of September 30, 2000, which was included in cash and cash equivalents since it
can be withdrawn with 10 days notice.
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 Risks," in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
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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
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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 9, 2000 BY: /s/ Armand J. Stegall
--------------------------------- -------------------------------------
Armand J. Stegall
Chief Financial Officer and
Duly Authorized Officer
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
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