0000891618-01-501904.txt : 20011107 0000891618-01-501904.hdr.sgml : 20011107 ACCESSION NUMBER: 0000891618-01-501904 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011102 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: 1934 Act SEC FILE NUMBER: 000-21626 FILM NUMBER: 1774459 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 f76703e10-q.txt FORM 10-Q PERIOD END 9/30/01 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 Quarterly Period Ending September 30, 2001 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) 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, 2001, 21,080,000 shares of the Registrant's common stock, $0.01 par value, were issued and outstanding. 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, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- (Restated) (Restated) Net sales $ 9,454 $ 59,359 $ 71,452 $ 166,054 Cost of sales 9,574 31,215 51,204 85,421 ------ ------- -------- ------- Gross profit (120) 28,144 20,248 80,633 ------ ------- -------- ------- Operating expenses: Engineering, research and development 7,478 7,108 24,191 20,930 Selling, general and administrative 9,000 10,665 29,633 31,425 In-process research and development -- -- 281 -- ------ ------- -------- ------- Total operating expenses 16,478 17,773 54,105 52,355 ------ ------- -------- ------- Operating income (loss) (16,598) 10,371 (33,857) 28,278 Interest income 1,602 2,806 5,980 7,248 Other income (expense), net 78 (103) 100 (292) ------ ------- -------- ------- Income (loss) before income taxes (14,918) 13,074 (27,777) 35,234 Provision (benefit) for income taxes (502) 1,138 15,692 2,889 ------ ------- -------- ------- Income (loss) before cumulative effect of change in accounting principle (14,416) 11,936 (43,469) 32,345 Cumulative effect of change in accounting principle, net of $0 tax -- -- -- (2,029) ------ ------- -------- ------- Net income (loss) $ (14,416) $ 11,936 $ (43,469) $ 30,316 ====== ======= ======== ======= Basic net income (loss) per share before cumulative effect of change in accounting principle $ (0.69) $ 0.58 $ (2.08) $ 1.58 Cumulative effect of change in accounting principle -- -- -- (0.10) ------ ------- -------- ------- Basic net income (loss) per share $ (0.69) $ 0.58 $ (2.08) $ 1.48 ====== ======= ======== ======= Diluted net income (loss) per share before cumulative effect of change in accounting principle $ (0.69) $ 0.57 $ (2.08) $ 1.53 Cumulative effect of change in accounting principle -- -- -- (0.10) ------ ------- -------- ------- Diluted net income (loss) per share $ (0.69) $ 0.57 $ (2.08) $ 1.43 ====== ======= ======== ======= Shares used in basic calculations 20,929 20,671 20,897 20,514 ====== ======= ======== ======= Shares used in diluted calculations 20,929 21,081 20,897 21,190 ====== ======= ======== =======
See accompanying Notes to Consolidated Condensed Financial Statements. -2- ELECTROGLAS, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands, except per share amounts)
September 30, December 31, ------------- ------------ 2001 2000 ---------------- ---------------- (Unaudited) (1) Assets Current assets: Cash and cash equivalents $ 16,980 $ 59,648 Short-term investments 78,417 104,825 Accounts receivable, net 14,549 53,324 Inventories 41,781 32,751 Prepaid expenses and other current assets 7,783 8,513 ---------------- ---------------- Total current assets 159,510 259,061 Restricted cash 48,300 -- Equipment and leasehold improvements, net 15,304 13,418 Other assets 8,837 18,951 ---------------- ---------------- Total assets $ 231,951 $ 291,430 ================ ================ Liabilities and stockholders' equity Current liabilities: Short-term borrowings $ 1,727 $ 1,232 Accounts payable 4,460 17,929 Accrued liabilities 18,399 24,271 ---------------- ---------------- Total current liabilities 24,586 43,432 Non-current liabilities 12,938 13,969 Stockholders' equity: Preferred stock, $0.01 par value; authorized shares 1,000; none outstanding -- -- Common stock, $0.01 par value; authorized shares 40,000; issued and outstanding shares 21,235 at September 30, 2001, and 21,006 at December 31, 2000 212 210 Additional paid-in capital 155,824 152,337 Retained earnings 40,729 84,198 Accumulated other comprehensive loss (42) (420) Cost of common stock in treasury; 155 shares at September 30, 2001 and December 31, 2000 (2,296) (2,296) ---------------- ---------------- Total stockholders' equity 194,427 234,029 ---------------- ---------------- Total liabilities and stockholders' equity $ 231,951 $ 291,430 ================ ================
(1) The information in this column was derived from the Company's audited consolidated financial statements for the year ended December 31, 2000. Certain amounts have been reclassified to conform with the current period's presentation. See accompanying Notes to Consolidated Condensed Financial Statements. -3- ELECTROGLAS, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands, Unaudited)
Nine months ended September 30, 2001 2000 ---------------- ---------------- (Restated) Cash flows from operating activities: Net income (loss) $ (43,469) $ 30,316 Charges to income not affecting cash 5,818 5,539 Deferred income taxes 18,943 (1,936) Changes in operating assets and liabilities net of effects from acquisition 3,504 (8,034) ---------------- ---------------- (15,204) 25,885 ----------------- ---------------- Cash flows from investing activities: Capital expenditures (5,958) (8,950) Purchases of investments (113,624) (155,882) Maturities of investments 140,269 131,561 Increase in restricted cash (48,300) -- Acquisition, net of cash acquired (561) -- Other assets (521) (372) ---------------- ---------------- (28,695) (33,643) ---------------- ---------------- Cash flows from financing activities: Net payments of short-term borrowings 335 (81) Sales of common stock 918 10,843 ---------------- ---------------- 1,253 10,762 ---------------- ---------------- Effect of exchange rate changes (22) 1 ----------------- ---------------- Net increase (decrease) in cash and cash equivalents (42,668) 3,005 Cash and cash equivalents at beginning of period 59,648 60,732 ---------------- ---------------- Cash and cash equivalents at end of period $ 16,980 $ 63,737 ================ ================
See accompanying Notes to Consolidated Condensed Financial Statements. -4- ELECTROGLAS, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements have been prepared 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 and footnotes thereto for the year ended December 31, 2000, included in the Company's Annual Report on Form 10-K. In fiscal year 2000, the Company adopted SEC Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." Financial statements and data for the quarter and nine months ended September 30, 2000 have been restated in accordance with SAB 101. In accordance with guidance provided in SAB 101, the Company recorded a non-cash charge of $2.0 million, which included deferred revenue of $4.2 million, to reflect the cumulative effect of the accounting change as of the beginning of fiscal year 2000. For the quarter and nine month periods ended September 30, 2000, the Company recognized revenue of $0.9 million and $1.6 million, respectively, that was included in the cumulative effect adjustment as of January 1, 2000. For the quarter and nine month periods ended September 30, 2001, the Company recognized revenue of $0 and $0.7 million, respectively, that was included in the cumulative effect adjustment as of January 1, 2000. Operating results for the three and nine month periods ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. 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. INVENTORIES The following is a summary of inventories by major category (in thousands):
September 30, December 31, ------------- ------------ 2001 2000 ---- ---- Raw materials $ 23,724 $ 18,330 Work in process 10,883 10,712 Finished goods 7,174 3,709 ----------------- ----------------- $ 41,781 $ 32,751 ================= =================
NET INCOME (LOSS) PER SHARE Basic 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 for the three and nine month periods ended September 30, 2000 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 (in thousands, except per share data): -5-
Three months ended Nine months ended --------------------------- ------------------------ September 30, September 30, --------------------------- ------------------------ 2001 2000 2001 2000 Numerator: ---------- --------- --------- -------- Net income (loss) $ (14,416) $ 11,936 $ (43,469) $ 30,316 ========== ========= ========== ======== Denominator: Denominator for basic net income (loss) per share - weighted average shares 20,929 20,671 20,897 20,514 ---------- --------- --------- -------- Effect of dilutive securities: Employee stock options -- 290 -- 556 Contingently issued shares -- 120 -- 120 ---------- --------- --------- -------- Dilutive potential common shares -- 410 -- 676 ---------- --------- --------- -------- Denominator for diluted net income (loss) per share - adjusted weighted average shares 20,929 21,081 20,897 21,190 ========== ========= ========== ======== Basic net income (loss) per share $ (0.69) $ 0.58 $ (2.08) $ 1.48 ========== ========= ========== ======== Diluted net income (loss) per share $ (0.69) $ 0.57 $ (2.08) $ 1.43 ========== ========= ========== ========
Options to purchase 3,397,000 shares of common stock were outstanding at September 30, 2001, but were not included in the computations of diluted net loss per share as the effect would be antidilutive. In connection with previous acquisitions, 130,000 shares of common stock were in escrow as of September 30, 2001. These shares were subject to certain representations and warranties, and were not included in the computations of diluted net loss per share as the effect would be antidilutive. 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. The lease agreement was further amended and, effective June 30, 2001, required a mandatory collateralization of $48.3 million, which was included in other assets as restricted cash. This amendment also included an adjustment to the interest rate and certain restrictions on the repurchase of the Company's common stock. The monthly lease payments are based on the London Interbank Offering Rate (LIBOR). At current interest rates, as amended, and based on the lease amount of $48.3 million as of September 30, 2001, the annual lease payments are approximately $2.0 million. These interest rates are sensitive to inflation and other economic factors, and a significant increase in rates may have a negative impact on the earnings of the Company. At September 30, 2001, the Company is in compliance with the restrictive covenants contained in the lease agreement. 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 on September 30, 2001 is approximately $41.1 million. ACQUISITION OF STATWARE On January 12, 2001, the Company acquired Statware, Inc. (Statware), a developer of process optimization software technologies, for the following amounts (in thousands): Cash $ 600 Common stock issued, 161,940 shares 2,571 Acquisition costs 211 ------------ $ 3,382 ============
-6- The Statware acquisition was recorded under the purchase method of accounting and, accordingly, the results of operations of Statware are included in the accompanying financial statements subsequent to the acquisition. The purchase price was allocated, based on an independent appraisal obtained by the Company, to the tangible and intangible assets acquired and liabilities assumed based on their respective fair values on the date of acquisition as follows (in thousands): Cash $ 39 Other assets, net 69 Identified intangibles: Developed technology 705 Customer base 235 Assembled workforce 140 Deferred tax liability (399) Goodwill 2,312 In-process research and development 281 ------------ $ 3,382 ============
To determine the value of in-process research and development of the acquired business, the Company considered, among other factors, the stage of development of each project, expected income, target markets, and associated risks. Associated risks included inherent difficulties and uncertainties in completing the project and, thereby, achieving technical feasibility and risks related to the viability of and potential changes in future target markets. This analysis resulted in a valuation of $281,000 for in-process research and development that had not reached technical feasibility and did not have alternative future uses and, in accordance with generally accepted accounting principles, was expensed in the quarter ended March 31, 2001. To determine the value of developed technology, the expected future cash flows of each software product was discounted, taking into account risks related to the characteristics and applications of each product, existing and future markets, and assessments of the life cycle stage of each product. This analysis resulted in a valuation for completed software that had reached technological feasibility and, therefore, was capitalizable. Intangible assets will be amortized on a straight-line basis over estimated useful lives ranging from three to five years. Goodwill, which represents the excess of the purchase price of an investment in an acquired business over the fair value of the underlying net identifiable assets, is being amortized on a straight line basis over its estimated remaining useful life of five years. In connection with the Statware acquisition, 70,262 shares of the Company's common stock, included as consideration, were deposited into escrow accounts of one to five years to indemnify the Company for any breach of the representations and warranties of Statware. The operating results of Statware were immaterial and would not have materially altered the results of the Company if presented on a pro forma basis. STOCKHOLDERS' EQUITY On May 31, 2001, the Company's stockholders approved an amendment to the Amended and Restated Electroglas, Inc. 1997 Stock Incentive Plan to increase the number of shares reserved for issuance by 700,000. COMPREHENSIVE INCOME (LOSS) For the quarter and nine months ended September 30, 2001, comprehensive loss was $14.1 million and $43.1 million compared to comprehensive income of $12.1 million and $30.3 million for the same periods of the prior year. -7- SEGMENT INFORMATION The Company has four operating segments comprising its prober products, inspection products, yield management software, and process optimization 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. The aggregated prober products and inspection products businesses are the only segments that are reportable based on the quantitative guidelines provided in the Statement of Financial Accounting Standards No. 131 ("FAS 131"). The yield management software and process optimization businesses are outside the quantitative guidelines in FAS 131 and are included with certain corporate charges and expenses under the heading "All Other." The following is a summary of the Company's operating segments (in thousands):
Prober and Inspection Three months ended September 30: Products All Other Consolidated -------------------------------- -------------- ----------- ------------- 2001 ---- Sales to unaffiliated customers $ 7,625 $ 1,829 $ 9,454 Operating loss $ (15,107) $ (1,491) $ (16,598) 2000 ---- Sales to unaffiliated customers $ 57,138 $ 2,221 $ 59,359 Operating income (loss) $ 11,988 $ (1,617) $ 10,371
Prober and Inspection Nine months ended September 30: Products All Other Consolidated ------------------------------- ------------- ----------- --------------- 2001 ---- Sales to unaffiliated customers $ 65,825 $ 5,627 $ 71,452 Operating loss $ (28,946) $ (4,911) $ (33,857) 2000 ---- Sales to unaffiliated customers $ 159,660 $ 6,394 $ 166,054 Operating income (loss) $ 34,071 $ (5,793) $ 28,278
INCOME TAXES The Company's provision for income taxes for the nine months ended September 30, 2001 was $15.7 million which represents current foreign, state and withholding taxes and the establishment of a valuation allowance against its net deferred tax assets in the amount of $15.6 million. Realization of the deferred tax assets is dependent on the Company generating sufficient taxable income in future years in appropriate tax jurisdictions. Due to the uncertainty of the timing and amount of such realization, management concluded that a full valuation allowance was required on September 30, 2001. CONTINGENCIES In connection with the formation of the Company in 1993, the Company agreed to share with its former parent certain tax benefits arising from the increase in the aggregate tax basis of the assets transferred. The accompanying financial statements reflect an accrual of approximately $9.5 million, which is based on the Company's best estimate of the amount payable under the agreement. However, the actual amount payable and the timing of the payment are dependent on the ultimate tax benefits realized and the timing of the realization of these tax benefits. -8- RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2002. Application of the nonamortization provisions of the Statements is not expected to have a material impact on net income. During fiscal 2002, the Company will perform the first of the required impairment tests of goodwill, indefinite lived intangible assets and long-lived assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," effective for fiscal years beginning after December 15, 2001. SFAS No. 144 addresses the financial accounting and reporting requirements for disposal of long-lived assets and discontinued operations. SFAS No. 144 applies to all recorded long-lived assets that are held for use or that will be disposed of, but excludes goodwill and other intangible assets that are not amortized. The Company is assessing the impact on the financial statements resulting from adoption of this Standard. 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. This Quarterly Report on Form 10-Q contains forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All statements included in this Quarterly Report, other than statements that are purely historical, are forward-looking statements. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" and similar expressions also identify forward-looking statements. These forward-looking statements, which include statements regarding product sales, product demand, gross profits, engineering research and development expenses, cash flow, liquidity and anticipated cash needs and availability are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. Forward-looking statements in this Quarterly Report, include, without limitation: the Company's expectation is that the Company will continue to experience a decline in quarterly orders, rescheduling of shipments to future quarters, and cancellation of orders which will adversely impact sales into 2002; the Company's expectation that demand for the Company's products will continue to fluctuate from period to period; the Company's belief that continued weak demand and changes in market conditions may require additional provisions for excess and obsolete inventory that may negatively impact gross profit in future periods; the Company's belief that its gross profit will continue to be affected by a number of factors, including competitive pressures, changes in demand for semiconductors, product mix, the proportion of international sales, the level of software sales, and excess manufacturing capacity costs; the Company's intention to continue investing in its new product development programs during the current business cycle downturn; and the Company's anticipation 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. -9- 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 integration of the business of Statware 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. All forward-looking statements included in this Quarterly Report are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. You are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report. You should also consult the cautionary statements and risk factors described in this Quarterly Report and listed from time to time in the Company's Reports on Forms 10-Q, 8-K, 10-K and its Annual Reports to Stockholders, including the Company's most recent Annual Report on Form 10-K for the year ended December 31, 2000. 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, ------------ ----------- ------------ ---------- 2001 2000 2001 2000 ------------ ----------- ------------ ---------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 101.3 52.6 71.7 51.4 ------------ ----------- ------------ ---------- Gross profit (1.3) 47.4 28.3 48.6 ------------ ----------- ------------ ---------- Operating expenses: Engineering, research and development 79.1 12.0 33.8 12.6 Selling, general and administrative 95.2 18.0 41.5 19.0 In-process research and development -- -- 0.4 -- ------------ ----------- ------------ ---------- Total operating expenses 174.3 30.0 75.7 31.6 ------------ ----------- ------------ ---------- Operating income (loss) (175.6) 17.4 (47.4) 17.0 Interest income 17.0 4.7 8.4 4.4 Other income (expense), net 0.8 (0.1) 0.2 (0.2) ------------ ----------- ------------ ----------- Income (loss) before income taxes (157.8) 22.0 (38.8) 21.2 Provision for income taxes (5.3) 1.9 22.0 1.7 ----------- ----------- ------------ ---------- Income (loss) before cumulative effect of change in accounting principle (152.5) 20.1 (60.8) 19.5 Cumulative effect of change in accounting principle, net of $0 tax -- -- -- (1.2) ------------ ----------- ------------ ----------- Net income (loss) (152.5)% 20.1% (60.8)% 18.3% ============ ============ ============ ============
-10- Results of Operations Net Sales Net sales for the quarter ended September 30, 2001 were $9.5 million, a 84.1% decrease from net sales of $59.4 million in the comparable quarter last year. Net sales for the first nine months of 2001 were $71.5 million, a 57.0% decrease from net sales of $166.1 million for the same period a year ago. The decreases for the quarter and nine months ended September 30, 2001 were due primarily to lower system unit sales of the Company's core prober business as customers continued to curtail their capital spending in response to persisting excess production capacity conditions. The Company continued to experience a decline in quarterly orders as a result of a record downturn in the semiconductor industry that reduced demand for equipment purchases in the Company's customer base. These conditions will adversely impact the Company's sales for the remainder of 2001 and are expected to continue into 2002. The Company continues to have poor visibility with respect to the level of orders for the coming quarters. For the quarters ended September 30, 2001 and 2000, net sales were comprised of prober and inspection systems ($3.2 and $51.0 million, respectively), yield management and process optimization software ($1.8 and $2.2 million, respectively), and aftermarket sales, consisting primarily of service, spare parts and upgrades in support of the prober and inspection businesses ($4.4 and $6.1 million, respectively). For the nine months ended September 30, 2001 and 2000, net sales were comprised of prober and inspection systems ($46.1 and $140.3 million, respectively), yield management and process optimization software ($5.6 and $6.4 million, respectively), and aftermarket sales, consisting primarily of service, spare parts and upgrades in support of the prober and inspection businesses ($19.7 and $19.3 million, respectively). For the quarter and nine months ended September 30, 2001, international sales accounted for 35.1% and 47.6% of net sales as compared to 54.7% and 50.1% for the same periods last year. During the current quarter and nine month periods, the Company experienced weakness across all geographic regions. For the quarter and nine months ended September 30, 2001, the decrease in the percentage of international sales from the same periods last year was due to a greater decline, in absolute dollars, in total European and Asian-Pacific region sales, relative to the decline in North American sales. In accordance with guidance provided in SAB 101, the Company recorded a non-cash charge of $2.0 million, which included deferred revenue of $4.2 million, to reflect the cumulative effect of the accounting change as of the beginning of fiscal year 2000. For the quarter and nine month periods ended September 30, 2000, the Company recognized revenue of $0.9 million and $1.6 million, respectively, that was included in the cumulative effect adjustment as of January 1, 2000. For the quarter and nine month periods ended September 30, 2001, the Company recognized revenue of $0 and $0.7 million, respectively, that was included in the cumulative effect adjustment as of January 1, 2000. Historically, the semiconductor and semiconductor manufacturing equipment industries have been cyclical; therefore, the Company's results of operations for the three and nine month periods ended September 30, 2001 may not necessarily be indicative of future operating results. Demand for the Company's products has declined in the recent quarter and is expected to continue to fluctuate from period to period. 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 and nine months ended September 30, 2001, gross profit, as a percentage of sales, was (1.3%) and 28.3% as compared to 47.4% and 48.6% for the same periods last year. The decreases for the quarter and nine months ended September 30, 2001 as compared to the prior year were primarily due to reduced unit sales volume and high factory fixed costs as a percentage of total costs. In addition, provisions for excess and obsolete inventory of $0.6 million and $4.2 million were recorded in the quarter and nine months ended September 30, 2001, respectively. -11- 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, product mix, the proportion of international sales, the level of software sales, and excess manufacturing capacity costs. Continued weak demand and changes in market conditions may cause orders to be below forecasts as was experienced by the Company in the first three quarters of fiscal 2001, which may result in excess inventory. Consequently, additional reserves may be required, which may negatively impact gross profit in future periods. Engineering, Research and Development Engineering, research and development expenses were $7.5 million in the third quarter of 2001, up 5.2% from $7.1 million in the comparable quarter last year. As a percentage of sales, these expenses increased to 79.1% in the third quarter, up from 12.0% in the same quarter of last year. For the first nine months of 2001, these expenses were $24.2 million, up 15.6% from $20.9 million in 2000. As a percentage of sales, these expenses increased to 33.8% in the first nine months, up from 12.6% in the same period last year. The increases for both periods, as a percentage of sales, were due mainly to the lower volume of sales in 2001 and increased prototype expenses in 2001 related to new product development programs. During the current business cycle downturn, the Company intends to control discretionary expenses and continue investing in its new product development programs. 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 $9.0 million in the third quarter of 2001, down 15.6% from $10.7 million in the comparable quarter last year. For the first nine months of 2001, these expenses were $29.6 million, down 5.7% from $31.4 million in 2000. These decreases for both periods were due to reduced employee incentives and sales commissions, workforce reductions, mandatory vacations, and curtailed discretionary spending. Interest Income Interest income was $1.6 million for the third quarter of 2001 as compared to $2.8 million for the same quarter last year. For the first nine months of 2001 and 2000, interest income was $6.0 and $7.2 million, respectively. These decreases in interest income were principally due to declining interest rates Income Taxes The Company's provision for income taxes for the nine months ended September 30, 2001 was $15.7 million which represents current foreign, state and withholding taxes and the establishment of a valuation allowance against its net deferred tax assets in the amount of $15.6 million. Realization of the deferred tax assets is dependent on the Company generating sufficient taxable income in future years in appropriate tax jurisdictions. Due to the uncertainty of the timing and amount of such realization, management concluded that a full valuation allowance was required at September 30, 2001. The estimated tax rate for the nine months ended September 30, 2000 was 8.2%, restated in accordance with SAB 101, and included a partial release of the valuation allowance related to net operating losses and tax credit carryforwards and the utilization of the year's estimated research and development tax credits. Liquidity and Capital Resources The Company's cash, cash equivalents, short-term investments, and restricted cash were $143.7 million at September 30, 2001, a decrease of $20.8 million from $164.5 million at December 31, 2000. -12- Cash used in operating activities was $15.2 million during the first nine months of 2001. This included a net loss of $43.5 million, offset by a decrease in operating assets of $3.5 million, a decrease in net deferred tax assets of $18.9 million and noncash charges to income of $5.8 million. The decrease in operating assets was due primarily to decreases of $13.5 million in accounts payable and $5.9 million in accrued liabilities, and increases of $6.2 million in estimated income taxes receivable included in other current assets, $9.0 million in inventories and deferred software revenue of $1.0 million. This was offset partially by a decrease of $39.1 million in accounts receivable, resulting from lower sales in the current quarter relative to the fourth quarter of 2000. Cash used in investing activities was $28.7 million due primarily to an increase in restricted cash investments of $48.3 million; capital expenditures of $5.9 million principally on network infrastructure and capitalized costs of purchasing and implementing the Company's ERP system; a cash payment of $0.6 million, net of cash acquired, in the Statware acquisition; and other investments of $0.5 million. This was offset partially by net investment maturities of $26.6 million. Cash from financing activities was comprised of a $0.3 million borrowing on a bank loan in Japan, offset by the repayment of a bank loan assumed by the Company in connection with the Statware acquisition, as well as $0.9 million from the sale of common stock under employee stock plans. The Company's Japanese subsidiary has credit facilities with a total borrowing capacity of approximately $3.1 million (denominated in yen) with two Japanese banks. As of September 30, 2001, $1.7 million was outstanding under these facilities which are used by the Company's Japanese subsidiary to finance its working capital requirements. 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. The lease agreement was further amended and, effective June 30, 2001, required a mandatory collateralization of $48.3 million, which was included in other assets as restricted cash. This amendment also included an adjustment to the interest rate and certain restrictions on the repurchase of the Company's common stock. The monthly lease payments are based on the London Interbank Offering Rate (LIBOR). At current interest rates, as amended, and based on the lease amount of $48.3 million as of September 30, 2001, the annual lease payments are approximately $2.0 million. These interest rates are sensitive to inflation and other economic factors, and a significant increase in rates may have a negative impact on the earnings of the Company. At September 30, 2001, the Company is in compliance with the restrictive covenants contained in the lease agreement. 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 on September 30, 2001 is approximately $41.1 million. Demand for the Company's products fluctuate with the semiconductor business cycles and is expected to continue to fluctuate from period to period. These fluctuations could have a negative impact on the Company's operating results. There can be no assurance that the Company will continue to be in compliance with certain restrictive covenants related to its facilities lease. In the event of non-compliance, the Company has the option of renegotiating the lease at higher annual lease payments or purchasing the land and buildings for approximately $48.3 million. Historically, the Company has generated cash in an amount sufficient to fund its operations. The Company anticipates that its existing capital resources and cash flow generated from future operations will enable it to maintain its current level of operations and its planned operations, including capital expenditures, for the foreseeable future. -13- Recently Issued Accounting Pronouncements In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2002. Application of the nonamortization provisions of the Statements is not expected to have a material impact on net income. During fiscal 2002, the Company will perform the first of the required impairment tests of goodwill, indefinite lived intangible assets and long-lived assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," effective for fiscal years beginning after December 15, 2001. SFAS No. 144 addresses the financial accounting and reporting requirements for disposal of long-lived assets and discontinued operations. SFAS No. 144 applies to all recorded long-lived assets that are held for use or that will be disposed of, but excludes goodwill and other intangible assets that are not amortized. The Company is assessing the impact on the financial statements resulting from adoption of this Standard. Volatility of Stock Price 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 DISCLOSURES ABOUT MARKET RISK For financial market risks related to changes in interest rates and foreign currency exchange rates, refer to Part II: Item 7a, "Quantitative and Qualitative Disclosures About Market Risk," in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. PART II. OTHER INFORMATION Item 4. None -14- 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: October 31, 2001 BY: /s/ Thomas E. Brunton ____________________ __________________________________ Thomas E. Brunton Chief Financial Officer, Principal Financial and Accounting Officer -15-