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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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, 2002

Commission File Number 0-21626

ELECTROGLAS, INC.

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 September 30, 2002, 21,237,000 shares of the Registrant’s common stock, $0.01 par value, were issued and outstanding.

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FORWARD LOOKING STATEMENTS

The following discussion should be read in conjunction with our accompanying Financial Statements 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 or incorporated by reference 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. The forward looking statements in this Quarterly Report 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 and include, without limitation, statements regarding:

•		Further restructuring charges for workforce reduction, idled facilities and obsolete equipment in connection with the move of our manufacturing facility to Singapore;
•		Our expectation that there will not be a significant technological change in our legacy products in the next eighteen months;
•		Our valuation of the inventory based on our rolling forecast beyond twelve months;
•		How demand for our products fluctuates with the semiconductor business cycles and is expected to continue to fluctuate from period to period;
•		Our intention to control discretionary expenses and continue investing in our new product development programs during the current business cycle downturn;
•		Our anticipation that our existing capital resources and cash flows generated from future operations will enable us to maintain our current level of operations, planned operations and planned capital expenditures for the foreseeable future, including our significant contractual obligations and commercial commitments;
•		Our ability to continue to collect our receivables without significant delays in payments or product concessions;
•		Our expectations regarding the number of additional layoffs and that the cost of additional layoffs in the fourth quarter of 2002 will be approximately $1.5 million to $2.0 million;
•		Our belief that we will be in compliance with the restrictive covenants contained in the amended lease agreement through the remainder of the lease term;
•		Our consideration of options available upon termination of the lease on July 1, 2003, including but not limited to a purchase of the land and buildings for the $48.3 million lease balance, a financing with a conventional mortgage after purchase, and a sale-leaseback arrangement;
•		Our expectation that FASB’s adoption of Consolidation of Certain Special-Purpose Entities, an Interpretation of ARB No. 51, will not have an impact on our liquidity;
•		Our plan to perform a transitional impairment review of long-lived assets by the end of the fourth quarter for fiscal 2002;
•		Our expectation to continue to experience significant fluctuations in our quarterly results;
•		Our belief that we have and can maintain certain technological and other advantages over our competitors; and
•		Our expectation that international sales will continue to represent a significant percentage of net sales.

All forward looking statements included in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward looking statement or statements. The reader should also consult the cautionary statements and risk factors listed from time to time in our Reports on Forms 10-Q, 8-K, and our most recent Annual Report on Form 10-K for the year ended December 31, 2001.

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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

ELECTROGLAS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data, unaudited)

			Three months ended								Nine months ended
			September 30,								September 30,
			2002				2001				2002				2001
Net sales			$	11,731			$	9,454			$	43,931			$	71,452
Cost of sales				11,012				9,574				41,498				51,204
Gross profit				719				(120	)			2,433				20,248
Operating expenses:
	Engineering, research and development			7,659				7,478				24,424				24,191
	Selling, general and administrative			9,920				9,000				29,775				29,633
	In-process research and development			—				—				—				281
	Restructuring charges			663				—				1,331				—
Total operating expenses				18,242				16,478				55,530				54,105
Operating loss				(17,523	)			(16,598	)			(53,097	)			(33,857	)
Interest income				470				1,602				1,890				5,980
Gain on revaluation of warrants				2,264				—				2,264				—
Other income (expense), net				(956	)			78				(700	)			100
Loss before income taxes				(15,745	)			(14,918	)			(49,643	)			(27,777	)
Provision (benefit) for income taxes				15				(502	)			(1,230	)			15,692
Net loss			$	(15,760	)		$	(14,416	)		$	(48,413	)		$	(43,469	)
Basic and diluted net loss per share			$	(0.75	)		$	(0.69	)		$	(2.30	)		$	(2.08	)
Shares used in basic and diluted calculations				21,102				20,929				21,052				20,897

See accompanying Notes to Consolidated Condensed Financial Statements.

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ELECTROGLAS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except per share data)

				September 30,				December 31,
				2002				2001
				(Unaudited)				(1)
Assets
Current assets:
	Cash and cash equivalents			$	44,756			$	40,565
	Short-term investments				21,092				46,219
	Accounts receivable, net				12,571				12,053
	Inventories				35,435				40,249
	Prepaid expenses and other current assets				2,650				1,572
		Total current assets			116,504				140,658
Restricted cash					7,245				48,300
Long-term lease receivable					41,055				—
Equipment and leasehold improvements, net					18,953				16,100
Goodwill, net					2,099				1,849
Other intangible assets, net					1,305				2,218
Other assets					9,388				4,746
Total assets				$	196,549			$	213,871
Liabilities and stockholders’ equity
Current liabilities:
	Short-term borrowings			$	466			$	1,171
	Accounts payable				4,729				3,461
	Accrued liabilities				13,623				16,829
		Total current liabilities			18,818				21,461
Convertible subordinated notes					33,040				—
Non-current liabilities					11,819				12,594
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: 21,392 and 21,236				214				212
	Additional paid-in capital				157,604				155,836
	Retained earnings (deficit)				(22,284	)			26,129
	Accumulated other comprehensive loss				(366	)			(65	)
	Cost of common stock in treasury: 155 shares				(2,296	)			(2,296	)
		Total stockholders’ equity			132,872				179,816
Total liabilities and stockholders’ equity				$	196,549			$	213,871

(1)

The information in this column was derived from the Company’s audited consolidated financial statements for the year ended December 31, 2001.

See accompanying Notes to Consolidated Condensed Financial Statements.

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ELECTROGLAS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)

			Nine months ended September 30,
			2002				2001
Cash flows from operating activities:
	Net income (loss)		$	(48,413	)		$	(43,469	)
	Charges to income not affecting cash			5,535				5,818
	Deferred income taxes			—				18,943
	Changes in operating assets and liabilities			877				3,504
				(42,001	)			(15,204	)
Cash flows from investing activities:
	Capital expenditures			(8,958	)			(5,958	)
	Purchases of investments			(8,243	)			(113,624	)
	Maturities of investments			32,865				140,269
	Increase in restricted cash			—				(48,300	)
	Acquisition, net of cash acquired			—				(561	)
	Other assets			(2,307	)			(521	)
				13,357				(28,695	)
Cash flows from financing activities:
	Net proceeds from issuance of convertible subordinated notes			32,615				—
	Net payments of short-term borrowings			(1,171	)			335
	Sales of common stock			1,400				918
				32,844				1,253
Effect of exchange rate changes				(9	)			(22	)
Net increase (decrease) in cash and cash equivalents				4,191				(42,668	)
Cash and cash equivalents, beginning of period				40,565				59,648
Cash and cash equivalents, end of period			$	44,756			$	16,980
Supplemental cash flow disclosures:
	Gross proceeds from issuance of convertible subordinated notes		$	35,500				—
	Fees paid to placement agent			(2,485	)			—
	Fees paid in connection with debt offering			(400	)			—
	Net proceeds from issuance of convertible subordinated notes		$	32,615				—
	Non-cash flow disclosure
	Long-term lease receivable		$	41,055				—
	Restricted cash		$	(41,055	)			—
	Net adjustment		$	—				—

See accompanying Notes to Consolidated Condensed Financial Statements.

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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, 2001, included in the Company’s Annual Report on Form 10-K.

Operating results for the three and nine month periods ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.

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 financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform with the current year presentation.

INVENTORIES

The following is a summary of inventories by major category (in thousands):

The Company periodically reviews the carrying value of its inventories by evaluating material usage and requirements to determine inventory obsolescence and excess quantities, and reduces the value when appropriate.

GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 142, “Goodwill and Intangible Assets” (SFAS 142), which was issued by the Financial Accounting Standards Board in July 2001. Under this standard, the Company ceased amortizing goodwill, assigned entirely to the EGsoft reporting unit, effective January 1, 2002. In addition, the Company reclassified assembled workforce and acquired customer list, which are no longer defined as acquired intangibles under SFAS 141, to goodwill. Accordingly, there was no amortization of assembled workforce or acquired customer list recognized during the three or nine months ended September 30, 2002. In the second quarter of fiscal 2002, in accordance with SFAS

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142, the Company completed the transitional impairment test of goodwill as of January 1, 2002 and concluded that no impairment existed.

The following table presents a reconciliation of previously reported net loss and net loss per share to the amounts adjusted to exclude goodwill, assembled workforce and acquired customer list amortization (in thousands, except per share data):

			Three months ended								Nine months ended
			September 30,								September 30,
			2002				2001				2002				2001
	Net loss, as reported		$	(15,760	)		$	(14,416	)		$	(48,413	)		$	(43,469	)
	Goodwill amortization			—				115				—				347
	Assembled workforce amortization			—				12				—				35
	Acquired customer list amortization			—				20				—				59
Adjusted net loss			$	(15,760	)		$	(14,269	)		$	(48,413	)		$	(43,028	)
	Net loss per share, as reported		$	(0.75	)		$	(0.69	)		$	(2.30	)		$	(2.08	)
	Goodwill amortization			—				0.01				—				0.02
	Assembled workforce amortization			—				—				—				—
	Acquired customer list amortization			—				—				—				—
Basic and diluted adjusted net loss per share			$	(0.75	)		$	(0.68	)		$	(2.30	)		$	(2.06	)
Shares used in basic and diluted calculations				21,102				20,929				21,052				20,897

Amortization expense for other intangible assets was $0.2 million and $0.7 million for the three and nine months ended September 30, 2002. The estimated annual amortization expense for other intangible assets is $0.9 million, $0.8 million, and $0.2 million for the years ended December 31, 2002, 2003, and 2004, respectively.

Other intangible assets subject to amortization were as follows (in thousands):