-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LMNvv1MErA0OtRb/QOzRkP7dASoVPX9Vl5C5IBa9Q5fij0KIPKwbfJ7LQBXYjM5B xN1afa0gfkKaf6EbYjo2aw== 0000891618-99-005132.txt : 19991115 0000891618-99-005132.hdr.sgml : 19991115 ACCESSION NUMBER: 0000891618-99-005132 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELECTROGLAS INC CENTRAL INDEX KEY: 0000902281 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 770336101 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21626 FILM NUMBER: 99749598 BUSINESS ADDRESS: STREET 1: 2901 CORONADO DRIVE CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4087276500 MAIL ADDRESS: STREET 1: 2901 CORONADO DRIVE CITY: SASSANTA CL STATE: CA ZIP: 95054 10-Q 1 FORM 10-Q 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) 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 October 31, 1999, 19,920,707 shares of the Registrant's common stock, $0.01 par value, were issued and outstanding. 2 INDEX ELECTROGLAS, INC.
Page No. -------- 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
-2- 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)
Three months ended Nine months ended September 30, September 30, --------------------- ----------------------- 1999 1998 1999 1998 ------- -------- -------- -------- 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 ======= ======== ======== ========
See accompanying notes to consolidated condensed financial statements -3- 4 ELECTROGLAS, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands, except per share amounts)
September 30, December 31, 1999 1998 ------------- ------------ (Unaudited) (1) 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 ========= =========
- ---------- (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- 5 ELECTROGLAS, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Nine months ended September 30, ------------------------------- 1999 1998 --------- --------- 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 ========= =========
See accompanying notes to consolidated condensed financial statements -5- 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:
September 30, December 31, (in thousands) 1999 1998 - -------------- ------------- ------------ Raw materials $ 3,214 $ 4,502 Work in process 6,088 5,948 Finished goods 4,182 3,978 ------- ------- $13,484 $14,428 ======= =======
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- 7
Three months ended Nine months ended (in thousands, except per share data) September 30, September 30, - ------------------------------------ ---------------------------------------- 1999 1998 1999 1998 ------- ------- ------- ------- 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) ======= ======= ======= =======
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- 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- 9 NOTE: 9 -- SEGMENT INFORMATION The following is a summary of the Company's operating segments:
(in thousands) Prober Three months ended September 30, products All other Total - -------------------------------- -------- --------- -------- 1999 - ---- 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)
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- 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:
Three months ended Nine months ended September 30, September 30, ---------------------- ------------------------ 1999 1998 1999 1998 ----- ----- ----- ----- 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)% ===== ===== ===== =====
-10- 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- 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- 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- 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- 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- 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- 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- 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- 19 INDEX TO EXHIBITS
EXHIBIT DESCRIPTION - ------- ----------- 27 Financial Data Schedule
-19- EX-27 2 FINANCIAL DATA SCHEDULE
5 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. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 51,108 82,082 27,108 447 13,484 178,464 37,191 27,705 193,602 24,992 0 0 0 200 166,372 193,602 81,799 81,799 45,695 45,695 0 0 21 (704) 450 (1,154) 0 0 0 (1,154) (0.06) (0.06)
-----END PRIVACY-ENHANCED MESSAGE-----