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 Ended June 30, 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 July 30, 2004, 21,595,000 shares of the Registrant’s common stock, $0.01 par value, were outstanding (excluding 155,000 shares held by the Company as Treasury Stock).
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 June 30, 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 charges as of June 30, 2004 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 belief that customers are beginning to resume their capital spending in response to indications of a market recovery; |
| • | Our assertion that sales often reflect orders shipped in the same quarter as they are received; |
| • | 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 June 30, |
Six months ended June 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| Sales |
$ | 16,103 | $ | 8,029 | $ | 29,424 | $ | 17,058 | ||||||||
| Sales to related parties |
1,619 | 2,306 | 4,346 | 2,742 | ||||||||||||
| Net sales |
17,722 | 10,335 | 33,770 | 19,800 | ||||||||||||
| Cost of sales |
11,573 | 10,524 | 20,986 | 19,140 | ||||||||||||
| Gross profit (loss) |
6,149 | (189 | ) | 12,784 | 660 | |||||||||||
| Operating expenses: |
||||||||||||||||
| Engineering, research and development |
4,492 | 6,501 | 8,503 | 13,318 | ||||||||||||
| Sales, general and administrative |
4,540 | 7,211 | 8,999 | 22,575 | ||||||||||||
| Restructuring charges |
— | 2,296 | — | 2,364 | ||||||||||||
| Impairment charges |
— | 88 | — | 117 | ||||||||||||
| Total operating expenses |
9,032 | 16,096 | 17,502 | 38,374 | ||||||||||||
| Operating loss |
(2,883 | ) | (16,285 | ) | (4,718 | ) | (37,714 | ) | ||||||||
| Interest income |
52 | 176 | 130 | 389 | ||||||||||||
| Interest expense |
(607 | ) | (580 | ) | (1,193 | ) | (2,198 | ) | ||||||||
| Other income (expense), net |
(24 | ) | 202 | (141 | ) | (179 | ) | |||||||||
| Loss before income taxes |
(3,462 | ) | (16,487 | ) | (5,922 | ) | (39,702 | ) | ||||||||
| Provision (benefit) for income taxes |
27 | (702 | ) | 71 | (659 | ) | ||||||||||
| Net loss |
$ | (3,489 | ) | $ | (15,785 | ) | $ | (5,993 | ) | $ | (39,043 | ) | ||||
| Basic and diluted net loss per share |
$ | (0.16 | ) | $ | (0.74 | ) | $ | (0.28 | ) | $ | (1.83 | ) | ||||
| Shares used in basic and diluted calculations |
21,496 | 21,315 | 21,481 | 21,297 | ||||||||||||
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)
| June 30, 2004 |
December 31, 2003 |
|||||||
| (unaudited) | (1) | |||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 26,152 | $ | 26,081 | ||||
| Short-term investments |
3,730 | 5,801 | ||||||
| Accounts receivable, net of allowances of $718 and $1,003 |
11,505 | 9,472 | ||||||
| Accounts receivable from related party |
1,963 | 2,557 | ||||||
| Inventories |
17,407 | 14,383 | ||||||
| Prepaid expenses and other current assets |
2,020 | 1,913 | ||||||
| Total current assets |
62,777 | 60,207 | ||||||
| Property, plant and equipment, net |
39,348 | 41,395 | ||||||
| Goodwill |
2,099 | 2,099 | ||||||
| Other assets |
6,312 | 6,971 | ||||||
| Total assets |
$ | 110,536 | $ | 110,672 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 10,775 | $ | 6,819 | ||||
| Accrued liabilities |
11,363 | 9,942 | ||||||
| Total current liabilities |
22,138 | 16,761 | ||||||
| Convertible subordinated notes |
33,872 | 33,630 | ||||||
| Non-current liabilities |
10,009 | 10,016 | ||||||
| Total liabilities |
66,019 | 60,407 | ||||||
| Commitments and contingencies |
||||||||
| Stockholders’ equity: |
||||||||
| Preferred stock, $0.01 par value; 1,000 shares authorized; none issued and outstanding |
— | — | ||||||
| Common stock, $0.01 par value; 40,000 shares authorized; 21,686 and 21,602 shares issued and 21,531 and 21,447 shares outstanding |
217 | 216 | ||||||
| Additional paid-in capital |
159,063 | 158,863 | ||||||
| Accumulated deficit |
(112,467 | ) | (106,474 | ) | ||||
| Accumulated other comprehensive loss |
— | (44 | ) | |||||
| Cost of common stock in treasury; 155 shares |
(2,296 | ) | (2,296 | ) | ||||
| Total stockholders’ equity |
44,517 | 50,265 | ||||||
| Total liabilities and stockholders’ equity |
110,536 | $ | 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)
| Six months ended June 30, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from operating activities |
||||||||
| Net loss |
$ | (5,993 | ) | $ | (39,043 | ) | ||
| Charges to net loss not affecting cash |
4,425 | 6,619 | ||||||
| Changes in operating assets and liabilities |
591 | 1,139 | ||||||
| (977 | ) | (31,285 | ) | |||||
| Cash flows from investing activities |
||||||||
| Capital expenditures |
(287 | ) | (37,566 | ) | ||||
| Proceeds from long-term lease receivable and release of restricted cash |
— | 48,300 | ||||||
| Purchases of investments |
(5,912 | ) | (9,085 | ) | ||||
| Maturities of investments |
7,991 | 18,388 | ||||||
| Other |
85 | 97 | ||||||
| 1,877 | 20,134 | |||||||
| Cash flows from financing activities |
||||||||
| Repayment of interest on convertible notes |
(971 | ) | (853 | ) | ||||
| Sales of common stock |
103 | 108 | ||||||
| (868 | ) | (745 | ) | |||||
| Effect of exchange rate changes on cash |
39 | (79 | ) | |||||
| Net increase (decrease) in cash and cash equivalents |
71 | (11,975 | ) | |||||
| Cash and cash equivalents at beginning of period |
26,081 | 35,727 | ||||||
| Cash and cash equivalents at end of period |
$ | 26,152 | $ | 23,752 | ||||
| Supplemental cash-flow disclosure: |
||||||||
| Cash paid (received) for income taxes, net |
$ | 10 | $ | (64 | ) | |||
| Non-cash flow disclosure: |
||||||||
| Inventories |
$ | 606 | $ | 43 | ||||
| Property, plant and equipment, net |
(606 | ) | (43 | ) | ||||
| Net adjustment |
$ | — | $ | — | ||||
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 and six month periods ended June 30, 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 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 |
June 30, 2004 |
December 31, 2003 | ||||
| Raw materials |
$ | 8,425 | $ | 7,099 | ||
| Work in process |
6,056 | 6,437 | ||||
| Finished goods |
2,926 | 847 | ||||
| $ | 17,407 | $ | 14,383 | |||