ELECTROGLAS INC - 10-Q Quarterly Report

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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 March 31, 2004

Commission File Number 0-21626

ELECTROGLAS, INC.

(Exact Name of Registrant as Specified in Its Charter)


DELAWARE		77-0336101
(State of Incorporation)		(I.R.S. Employer 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 ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of April 27, 2004, 21,672,653 shares of the Registrant’s common stock, $0.01 par value, were issued and outstanding.

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 include, without limitation, statements regarding:

•

Our belief that we have and can maintain certain technological and other advantages over our competitors;

•

Our expectation that international sales will continue to represent a significant percentage of net sales;

•

Our intention to control discretionary expenses and continue investing in our new product programs during the current business cycle;

•

Our anticipation that our future cash from operations, available cash and cash equivalents at March 31, 2004, and proceeds from additional borrowings should be sufficient to meet our anticipated needs for working capital and capital expenditures for the next twelve months;

•

Our belief that our 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, our share of the available market, and excess manufacturing capacity costs;

•

Our anticipation that we will continue to experience significant fluctuations in our quarterly results;

•

Our belief that it is improbable that we will be required to pay any amounts for indemnification under our software license agreements or for our guarantee instruments to certain third parties;

•

Our anticipation that outstanding restructuring balances as of December 31, 2003 will be substantially paid in 2004;

•

Our belief that our products do not infringe the Lemelson patents;

•

Our expectation that until we can sustain an appropriate level of profitability, we will not recognize any significant tax benefits in our results of operations and we will continue to record a full valuation allowance on domestic tax benefits;

•

Our expectation that external financing vehicles will continue to be available to us;

•

Our expectation to continue investing in selective new wafer prober product development programs; and

•

Our expectation that engineering, research and development expenses will decrease in 2004 due to the sales of our inspection and software product lines.

The forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those stated or implied by the forward looking statements. These risks and uncertainties include:

•

Continued cyclicality in the semiconductor industry;

•

The ability to secure additional funding, if needed;

•

The ability to achieve broad market acceptance of existing and future products; and

•

Loss of one or more of our customers.

For a detailed description of these and other risks associated with our business that could cause actual results to differ from those stated or implied in such forward-looking statements, see the disclosure contained under the heading “Factors that May Affect Results and Financial Condition” in this Quarterly Report on Form 10-Q. 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 in our Reports on Forms 10-K, 10-Q, 8-K and other reports filed from time to time with the Securities and Exchange Commission.

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ELECTROGLAS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data, unaudited)


	Three months ended March 31,
	2004			2003
Sales	$	13,610		$	9,029
Sales to related parties		2,438			436

Net sales		16,048			9,465
Cost of sales		9,413			8,616

Gross profit		6,635			849
Operating expenses:
Engineering, research and development		4,011			6,817
Sales, general and administrative		4,459			15,364
Restructuring charges		—			97
Impairment charges		—			299

Total operating expenses		8,470			22,577

Operating loss		(1,835	)		(21,728	)
Interest income		78			213
Interest expense		(586	)		(1,618	)
Other income (expense), net		(116	)		(82	)

Loss before income taxes		(2,459	)		(23,215	)
Provision for income taxes		44			43

Net loss	$	(2,503	)	$	(23,258	)

Basic and diluted net loss per share	$	(0.12	)	$	(1.09	)

Shares used in basic and diluted calculations		21,466			21,279

See the accompanying notes to condensed consolidated financial statements.

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ELECTROGLAS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)


	March 31, 2004			December 31, 2003
	(unaudited)			(1)
ASSETS
Current assets:
Cash and cash equivalents	$	23,760		$	26,081
Short-term investments		6,503			5,801
Accounts receivable, net of allowances of $995 and $1,003		12,690			9,472
Accounts receivable from related party		3,748			2,557
Inventories		17,215			14,383
Prepaid expenses and other current assets		1,995			1,913

Total current assets		65,911			60,207
Property, plant and equipment, net		40,160			41,395
Goodwill		2,099			2,099
Other assets		6,575			6,971

Total assets	$	114,745		$	110,672

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	12,003		$	6,819
Accrued liabilities		11,038			9,942

Total current liabilities		23,041			16,761
Convertible subordinated notes		33,750			33,630
Non-current liabilities		10,015			10,016

Total liabilities		66,806			60,407

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $0.01 par value; 1,000 shares authorized; none outstanding		—			—
Common stock, $0.01 par value; 40,000 shares authorized; 21,668 and 21,602 shares issued and outstanding		216			216
Additional paid-in capital		159,035			158,863
Accumulated deficit		(108,977	)		(106,474	)
Accumulated other comprehensive loss		(39	)		(44	)
Cost of common stock in treasury; 155 shares		(2,296	)		(2,296	)

Total stockholders’ equity		47,939			50,265

Total liabilities and stockholders’ equity	$	114,745		$	110,672

(1) The information in this column was derived from the Company’s audited consolidated financial statements for the year ended December 31, 2003.

See the accompanying notes to condensed consolidated financial statements.

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ELECTROGLAS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)


	Three months ended March 31,
	2004			2003
Cash flows from operating activities
Net loss	$	(2,503	)	$	(23,258	)
Charges to net loss not affecting cash		2,224			3,235
Changes in operating assets and liabilities		(1,506	)		(321	)

		(1,785	)		(20,344	)
Cash flows from investing activities
Capital expenditures		(110	)		(37,251	)
Proceeds from long-term lease receivable and and release of restricted cash		—			48,300
Purchases of investments		(5,412	)		(4,200	)
Maturities of investments		4,716			11,764
Other		236			70

		(570	)		18,683
Cash flows from financing activities
Sales of common stock		75			108

		75			108
Effect of exchange rate changes on cash		(41	)		71

Net decrease in cash and cash equivalents		(2,321	)		(1,482	)
Cash and cash equivalents at beginning of period		26,081			35,727

Cash and cash equivalents at end of period	$	23,760		$	34,245

See the accompanying notes to condensed consolidated financial statements.

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ELECTROGLAS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated 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 condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto for the year ended December 31, 2003, included in the Company’s Annual Report on Form 10-K. Operating results for the three-month period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

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 period amounts have been reclassified to conform to the current period presentation.

INVENTORIES

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

Inventories are stated at the lower of cost or market (estimated net realizable value) using the first-in, first-out (FIFO) method. The Company may record charges to write down inventory due to excess, obsolete and slow moving inventory and lower of cost or market based on an analysis of the impact of changes in technology on the Company’s products (including engineering design changes), the timing of these changes and estimates of future sales volumes. These projections of changes in technology and forecasts of future sales are estimates. If there is weak demand in the semiconductor equipment markets and orders fall below its forecasts, additional write downs of inventories may be required which may negatively impact gross margins in future periods. The following is a summary of inventories by major category:


In thousands	March 31, 2004		December 31, 2003
Raw materials	$	6,668	$	7,099
Work in process		6,715		6,437
Finished goods		3,832		847

	$	17,215	$	14,383

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STOCK BASED COMPENSATION AND EMPLOYEE STOCK OPTION PLANS

The Company uses the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employee” (APB 25), to account for stock options issued to its employees under its stock option plans, if any, over the vesting period of the options. Compensation expense resulting from the issuance of fixed term stock option awards is measured as the difference between the exercise price of the option and the fair market value of the underlying share of company stock subject to the option on the award’s grant date. The Company has elected to make pro forma fair value disclosures as permitted by Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). The Company estimates the fair value of its options using the Black-Scholes option value model, which is one of several methods that can be used to estimate option values. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The Company’s options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimates. The fair value of options granted and employee purchase plan shares were estimated at the date of grant with the following weighted average assumptions:


	Option Plans		Employee Stock Purchase Plan
	Three months ended March 31,		Three months ended March 31,
	2004	2003	2004	2003
Expected dividend yield	—	—	—	—
Expected stock price volatility	88.9%	75.8%	109.7%	104.0%
Risk-free interest rate	2.4%	2.5%	1.0%	1.2%
Expected life (years)	3.3	4.0	0.5	0.5

No stock-based employee compensation cost is reflected in net loss for the three months ended March 31, 2004 and 2003 as all options granted under these plans had an exercise price equal to the fair market value of the underlying common stock on the date of grant. Compensation costs for the Company’s Industry/Technology Advisory Board of $0.1 million was reflected in the net loss for the first quarter 2004. For pro forma disclosures, the estimated fair value of the options is amortized over the vesting period from eighteen months to four years, and the estimated fair value of the stock purchases under the Employee Stock Purchase Plan is amortized over the six-month purchase period.

The following table illustrates the effect on net loss and net loss per share if the Company had accounted for its stock option plans under the fair value method of accounting under Statement 123, as amended by Statement 148:


	Three months ended March 31,
In thousands, except per share data	2004			2003
Net loss—as reported	$	(2,503	)	$	(23,258	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,415	)		(1,526	)

Pro forma net loss	$	(3,918	)	$	(24,784	)

Loss per share:
Basic and diluted—as reported	$	(0.12	)	$	(1.09	)

Basic and diluted—pro forma	$	(0.18	)	$	(1.16	)

On July 16, 2003, the Company filed a Schedule TO with the Securities and Exchange Commission in connection with its Option Exchange Program pursuant to which eligible employees had the opportunity to make a one-time election to cancel certain outstanding grants of stock options under the Electroglas, Inc. 1993 Long-Term Incentive Plan, the Electroglas, Inc. 1997 Stock Incentive Plan and the Electroglas, Inc. 2001 Non-Officer Employee Stock Incentive Plan and exchange them for a lesser number of new options at a new exercise price and with a new vesting schedule. The Company initiated this program to increase the motivational and retention value of its stock option program and to decrease the potentially

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dilutive effect of the large number of options held by employees that had exercise prices substantially above the current market price of the Company’s common stock. During the third quarter of 2003, 727,475 shares were surrendered and cancelled pursuant to the Option Exchange Program. On February 17, 2004, 263,840 shares were granted under the Option Exchange Program at a price of $5.78, the closing market price of that day with a vesting period of eighteen months and an option life of three years.

NET LOSS PER SHARE

Basic and diluted net loss per share amounts were computed using the weighted average number of shares of common stock outstanding during the period.

The following shares were excluded from the net loss per share calculations because the Company was in a net loss position and the effect of their inclusion would have been anti-dilutive:


	Three months ended March 31,
In thousands	2004	2003
Shares excluded from calculations:
Stock options (weighted average shares)	3,401	4,193
Shares held in escrow in connection with acquisitions	26	26

	3,427	4,219

CONVERTIBLE SUBORDINATED NOTES AND WARRANTS

In June 2002, the Company completed a $35.5 million private placement of 5.25% fixed rate convertible subordinated notes due 2007 and warrants to purchase 714,573 shares of common stock. The net proceeds from this placement were $32.5 million. Interest on the notes is payable each year on the fifteenth of June and December. Annual interest payments are $1.9 million, and will result in a charge to interest expense until the end of the term of the notes. The convertible notes initially enabled the holders to convert principal amounts owed under the notes into an aggregate of 2,598,448 shares of common stock at a conversion price of $13.662 per share. The notes contain a beneficial conversion feature, which was triggered on February 21, 2003. As a result, the conversion price was lowered to $10.2465 per share and an additional 866,150 common shares will be issuable upon conversion of the notes. This adjustment to the conversion price resulted in a $1.0 million non-cash interest charge to the Company’s operating results for the first quarter of 2003.

In connection with the issuance of the convertible notes the Company also issued warrants for the purchase of 714,573 shares of common stock that are exercisable at a price of $15.444 per share. The original value of the warrants was determined to be $2.6 million using the Black-Scholes option pricing model, with a volatility factor of 62%, a risk-free interest rate of 4%, and an expected term of 5 years with a fair value of the underlying common stock of $10.00. In accordance with the provisions of EITF 00-19, “Accounting for