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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER:
DECEMBER 31, 1996 0-21626
ELECTROGLAS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
Delaware 77-0336101
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
2901 Coronado Drive, Santa Clara, California 95054 (408) 727-6500
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(TITLE OF CLASS)
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 requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of February 28, 1997, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $337,761,031, based
on the closing sale price as reported on the Nasdaq National Market on such
date. This calculation does not reflect a determination that certain persons are
affiliates of the Registrant for any other purposes.
As of February 28, 1997, the Registrant had outstanding 18,257,353 of
Common Stock.
The Index to Exhibits is located beginning on Page 18.
DOCUMENTS INCORPORATED BY REFERENCE
Part II and Part IV of this Report on Form 10-K incorporate information by
reference from Registrant's 1996 Annual Report to Stockholders. Part III of this
Report on Form 10-K incorporates information by reference from Registrant's
Proxy Statement for its 1997 Annual Meeting of Stockholders.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Electroglas, Inc. ("Electroglas", or "the Company") is a leader in the
development, manufacture, marketing and servicing of automatic wafer probing
equipment for use in the fabrication of semiconductor devices. The Company's
wafer probers position individual semiconductor devices still in wafer form
under contact test probes to facilitate testing of the devices. Electroglas
believes it is one of the largest suppliers of automatic wafer probing equipment
worldwide. The Company has sold over 9,000 wafer probers from among its current
product offerings and believes it supplies more than half of the probers used in
the United States and European market segments. The Company's primary product
offerings are its 2000 Series wafer probers and its Horizon 4000 Series wafer
probers. All of the Company's wafer probers feature the Company's linear motor
technology and offer advanced vision processing, sophisticated system software
and high throughput.
Electroglas was formed on April 1, 1993 to succeed to the wafer
prober business conducted by the Electroglas division of General Signal
Corporation (former "Parent"). Immediately prior to the closing of the initial
public offering of its Common Stock (the "IPO") on July 1, 1993, the Company
assumed the assets and liabilities of the Electroglas division in the asset
transfer and, following the IPO, the Company commenced operations as an
independent corporation. The Company, through its predecessors, has been in the
wafer prober business for more than 30 years.
INDUSTRY BACKGROUND
Semiconductor devices are fabricated by repeating a complex series of
process steps on a wafer substrate, which is usually made of silicon and
measures three to eight inches in diameter. Wafers are typically sent through a
series of 100 to 300 process steps. A finished wafer consists of many integrated
circuits (each referred to as a "device" or "die"), the number depending on the
area of the circuits and the size of the wafer. Manufacturers have increasingly
utilized larger diameter wafers to achieve more cost effective production.
Wafer Probing Process
A wafer prober successively positions each integrated circuit on a
wafer so that the electrical contact points (or "pads") on the die align under
and make contact with the probe pins, which are located on a probe card mounted
on the wafer prober. The probe card, which is generally custom made by other
suppliers for the specific integrated circuit being tested, is connected to a
test system, also supplied by other suppliers, which performs the required
parametric or functional test. Parametric testing is performed during the wafer
fabrication process ("in-line testing") and at the completion of the wafer
fabrication process ("end-of-line testing") to measure electrical parameters
which verify the reliability of the wafer fabrication process, while functional
testing is performed after the completion of wafer fabrication ("wafer sort") to
identify devices which do not conform to particular electrical specifications.
Wafer Prober Market
The automatic wafer probing market can be divided into a United States,
European and Asian market segment, into which the Company sells substantially
all of its products, and a Japanese market segment. The Japanese market segment
is comprised of semiconductor fabrication facilities located in Japan and those
located outside Japan which are controlled by Japanese companies. Semiconductor
manufacturers use automatic wafer probers primarily during wafer sort, which
occurs before the separation and packaging of each individual device. Wafer
probers are being increasingly used during in-line and end-of-line testing and
are also used for research and development, and quality and process control
applications. In-line testing requires special equipment features such as
cleanroom compatibility, as tests are carried out during the manufacturing
process. This testing is done to verify the manufacturing process while wafers
are in an unfinished state where corrective action can occur. The Company
estimates, based upon its experience, that wafer sort applications represent
approximately 80% of the market for automatic wafer probers. The remaining 20%
is approximately equally divided between in-line and end-of-line testing and
laboratory applications.
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Wafer probers are typically purchased by a semiconductor manufacturer
when outfitting a new wafer fabrication facility or expanding an existing
facility. Wafer probers are also purchased to replace equipment in response to
major changes in technology, such as larger wafer sizes and greater device
complexity. A semiconductor fabrication facility typically requires 20 to 80
probers to meet testing requirements on a timely basis. The purchase of
semiconductor manufacturing equipment and spare parts, the integration of such
equipment into production lines and the training of employees on a particular
supplier's equipment require significant expenditures by semiconductor
manufacturers. To maximize the benefits of their investment in machinery, parts,
production line integration and training, semiconductor manufacturers generally
are reluctant to replace existing equipment with equipment from another
supplier.
In order to minimize the total cost of ownership, semiconductor
manufacturers generally evaluate the following features, in addition to price,
when choosing automatic wafer probers:
o Reliability. Semiconductor manufacturers must be highly
confident that the wafer prober will operate reliably over
long periods of constant use. Virtually every wafer must pass
through wafer sort to determine the yield from all prior
manufacturing steps and eliminate the significant cost of
unnecessarily packaging defective devices. Reliable prober
operation prevents probe area bottlenecks and maximizes
utilization of expensive automatic test equipment.
o Productivity. The key parameters for comparisons among wafer
probers are horizontal and vertical positioning speed,
alignment time and wafer handling time. To maximize the number
of wafers processed in any given period and achieve low test
cost per die, it is very important to minimize the time needed
to execute any operation.
o Accuracy. The process of positioning device pads under the
corresponding probe pins requires extreme accuracy and
precision from the positioning system to ensure that the probe
pins make contact only with the safe area on the pads. The
average size of the semiconductor device pads and the distance
between pads continue to decrease, thus necessitating more
accurate probers.
o Advanced Automation. The effort to improve manufacturing
efficiency, reduce production costs and minimize operator
intervention during key process steps has led to increased
automation of probers. Operations such as wafer handling and
prober setup, previously performed manually, are now routinely
done automatically. Important advanced automation features
include probe-to-pad setup, probe-to-pad alignment,
probe-to-pad optimization and networking capabilities. The
Company expects the need for advanced automation to grow in
order to further minimize operator intervention.
o Software Flexibility. Each semiconductor manufacturer has
developed its own methods of wafer production. These
variations in method and variations in devices create
different prober requirements among device manufacturers. To
accommodate such differences, flexible prober software is
often required so that the user can configure the prober in a
way that is optimal for its specific manufacturing conditions.
Software features include recipe creation, control maps,
operator check lists, real-time maps, real-time alarms and a
color graphical user interface. Compatibility with standard
operating systems, such as MS-DOS, and standard network
environments, such as Ethernet, are desirable features.
o Service and Customer Support. Because of the high degree of
technical complexity involved in today's semiconductor testing
operations, customers expect a very high level of service from
the prober manufacturer. Support services include applications
engineering, field service, training, timely spare parts
delivery and continuing product enhancements.
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COMPANY STRATEGY
Electroglas has become a leader in the wafer probing market through a
combination of strengths, including advanced technical capabilities, close
relationships with the leading manufacturers of integrated circuits, a broad
line of high quality products and a well established, highly qualified
distribution organization. Building on these strengths, Electroglas' strategy is
comprised of the following key elements:
o Focus on Technological Innovation. The Company has invested
heavily in engineering, research and development to add
features and functionality to its products. The Company was
the first to introduce automatic wafer probers using a linear
motor positioning system for precise motion control and
digital pattern recognition processors for automatic alignment
and was the first to introduce automatic wafer probers for use
with eight-inch wafers. The Company expects to continue its
emphasis on engineering, research and development in an effort
to anticipate and address technological advances in
semiconductor processing.
o Maintain Strong Customer Relationships. The Company has
long-standing relationships with its customers. The Company's
development of products and product enhancements is market
driven. Engineering, sales and management personnel
collaborate with customer counterparts to determine customers'
needs and specifications. One of the Company's products, the
Horizon 4085X, is available with a Standard Mechanical
Interface ("SMIF") option to address a major customer's need
for wafer loading without exposure to the environment. The
Company expects to continue to strengthen its existing
customer relationships by continuing to provide high levels of
service and support.
o Emphasize Quality Products. The Company believes it has
developed a reputation as a leader in providing high quality
products. The Company was chosen in the most recent customer
survey conducted by VLSI Research Inc as one of the "Ten-Best"
test and measurement equipment manufacturers. The Company has
received quality awards from its customers and the SEMATECH
Partnering for Total Quality award. The Company has a
company-wide quality program in place, headed by a member of
senior management. The Company's quality training program
emphasizes continuous improvement, data driven decisions and
close collaboration among the Company's employees, customers
and suppliers. The Company trains all of its employees in
basic quality skills. The Company also regularly participates
in quality sharing meetings with other equipment manufacturers
and customer quality audits of procedures and personnel.
o Increase Focus on Selected Japanese Market Opportunities. The
Japanese market segment is large and presently served
primarily by Japanese companies. The Company is pursuing this
market segment aggressively through a focused sales and
marketing effort in Japan directed at selected key
manufacturers. The Company's strategy consists of the use of
on-site technically skilled sales and service personnel and
application engineers and emphasizes its Horizon 4000 Series
products. To date, the Company has received purchase orders
from, made sales to, customized its products with features
requested by, and engaged in product evaluation activities
with several Japanese customers which the Company considers
strategic.
o Expand Product Lines and Applications. The Company intends to
capitalize on its market position and technical skills to
further broaden existing product lines through internally
developed products and from time to time through strategic
alliances and acquisitions. The Company also intends to take
advantage of available opportunities to sell its products for
new applications. For example, the Company has sold wafer
probers for use in the manufacture of thin film disk
heads--another industry where devices are fabricated through
iterative processing on base substrates.
In addition, the Company is developing a range of software products
named SORTnet(TM). This product line is designed to be used for the management
and control of information and data gained during the test process. The Company
believes this range of software products will be highly complementary to the
core product lines.
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OVERVIEW OF TECHNOLOGY
The Company believes it has particular expertise in the following
technologies which distinguish its wafer probers from those of its competitors:
Precision Horizontal ("X-Y Stage") Motion Systems
During the test process, a prober must position each die on a wafer
underneath the probe card accurately, reliably and quickly. This can require
thousands of individual movements to test a single wafer. The Company's probers
use a linear motor to control the positioning of the wafer. This linear motor
floats on an air bearing which produces virtually frictionless motion with no
significant wear and provides accurate stepping without adjustment or
calibration. In addition, the high horizontal force and light weight of the
motor system enable high speed movements from die to die. The Company believes
that the linear motor makes its probers faster and more durable than those of
its competitors, which use mechanical screws and bearings. The Company holds
United States and foreign patents for the technology used to adjust the
positioning of the linear motor and has developed an extensive base of know-how
related to the linear motor.
Lightweight, High Force Vertical ("Z-Stage") Motion Systems
Once the die is properly positioned underneath the probe card, it must
be raised to make contact with the probe pins. The vertical motion system must
be quick and mechanically stiff to maintain accurate contact with the probe
card, and lightweight enough to maximize the speed of the horizontal motion
system. The Company's wafer probers use one of three bearing technologies to
offer varying degrees of balance among force, stiffness and weight for
particular probing applications. A lightweight sleeve bearing is used to
minimize weight for low force application where indexing speed is the primary
consideration. An air bearing system is used for high force probing where
stiffness is emphasized to accommodate the probe force. The Company's ball
bearing system, for which a patent has been issued, is used in vertical motion
systems for applications requiring a balanced approach to indexing speed and
probing force.
Machine Vision Systems
As Electroglas probers have evolved, machine vision has been used to
eliminate many functions formerly performed by operators. Machine vision was
first used to automate the alignment of each wafer. Subsequently, the Company
introduced probe mark inspection, ink dot inspection, self-teach auto align (to
automate the selection of an alignment target) and optical character recognition
(to automate the identification of wafers). The Company recently developed new
machine vision technology to automate the alignment of probes to pads during the
initial setup of a new probe card, the last major manual operation in wafer
probing. Electroglas recently developed (and has filed a patent application for)
illumination technology that improves the accuracy of optical character
recognition. Machine vision features under development are designed to further
simplify probe-to-pad alignment.
EGCommander(TM)
EGCommander(TM), the Company's system software featured on its Horizon
4060X, Horizon 4080X and Horizon 4090 products, provides semiconductor
manufacturers with a high degree of user configurability to customize the
probing process. During probing, the wafer is moved to a number of specific
locations on the prober and a series of actions takes place. These actions range
from the simple (perform a single test on a die) to the complex (test the die,
inspect the points where the probe made contact with the wafer, compare test
data from this die to that from the last three die and place an ink dot on the
die). EGCommander(TM) software allows the semiconductor manufacturer to set the
sequence of actions using "recipes" and to specify where on the wafer the events
take place using "maps." The operator interacts with the prober using a color
graphical user interface similar to those for personal computers and
workstations.
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Class 1 Cleanroom Systems
The advanced multi-step processes involved in semiconductor device
production are carried out in highly controlled Class 1 cleanroom conditions.
Probers placed in the Class 1 area such as those used during in-line testing
must be compatible with the controlled environment. To meet the need for clean
probing, the Company has designed the Horizon 4085X to provide Class 1 cleanroom
compatibility. Where it is desirable to locate the prober outside of the
cleanroom to free valuable floor space, it is necessary to create a Class 1
environment inside the prober to isolate the production wafer from the
potentially hazardous external environment during test. To meet this need, the
Company has developed a Clean Air Management System ("CAMS") featured on its
Horizon 4085X prober which provides a source of clean filtered air inside the
prober. A SMIF option available on the Horizon 4085X allows wafers to be loaded
into the prober without contamination.
PRODUCTS
2000 Series
The 2000 Series consists of the 2001CX Base Prober, the 2001CX
Automatic Prober and the 2010CX Automatic Prober. The flexibility and
upgradability inherent in the modular design concept of the 2000 Series is
intended to provide a cost effective solution for all production environments by
extending the operating life of the product. Product enhancements that have been
introduced include multifunctional vision processing, optical character
recognition, multidie probing, temperature controlled chuck top and in-process
inspection features such as probe mark and ink dot inspection. All 2000 Series
probers are hardware and software compatible with a wide array of automatic test
equipment. The Company's 2000 Series products utilize the Company's Prober
Vision system software which was designed by the Company to control wafer
handling, vision functions, motion control and external communications. A color
graphical user interface was introduced in 1990, offering wafer mapping capable
of displaying real-time test results. In addition, all 2000 Series products are
fully compatible with Electroglas network products which further automate wafer
probing by facilitating real-time control and data collection.
Horizon 4000 Series
First delivered in October 1992, the Horizon 4000 Series of automatic
wafer probers consists of four models, Horizon 4060X, Horizon 4080X, Horizon
4085X and Horizon 4090, the latter being introduced in 1996. This product line
is positioned to satisfy high volume semiconductor manufacturing applications.
The Horizon 4000 Series provides many advanced automation capabilities including
automatic probe-to-pad optimization and alignment, in-process inspection and
optical character recognition. Optional for Horizon Series probers is a
temperature controlled chuck top, providing the ability to maintain precisely a
customer-selected wafer temperature during testing. The Horizon 4060X, Horizon
4080X and Horizon 4090 utilize the Company's EGCommander(TM) system software.
This software was developed by the Company and allows significant application
and customer driven customization of the wafer prober and compatibility with the
standard MS-DOS operating system. The user interface features color graphics,
touchscreen programming, probing recipes, control maps and real-time maps.
Accuracy of the Horizon 4000 Series has been enhanced as compared to the 2000
Series probers. The Horizon 4000 Series probers feature a distributed multiple
processor architecture to maximize productivity and expandability.
Network Products
The Electroglas Station Controller and SORTnet(TM) products are a
system of software and hardware components that allows the integration of the
Company's prober products into standard local area networks found in
semiconductor manufacturing operations. The network products allow manufacturers
to monitor the entire probing operation, collect test data on a real-time basis,
control centrally prober setup and facilitate key manufacturing advancements,
including offline inking and inkless probing, which in turn improve overall
productivity.
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ENGINEERING, RESEARCH AND DEVELOPMENT
The market for wafer probing equipment is characterized by continuous
technological development and product innovation. The Company believes that
continued and timely development of new products and enhancements to existing
products is necessary to maintain its competitive position. Accordingly, the
Company devotes a significant portion of its personnel and financial resources
to engineering, research and development programs. The Company uses its close
relationships with key customers to make improvements on its products which
respond to such customers' needs. For example, the Horizon 4085X responds to the
Company's major customers' need for cleanroom compatible probers. In addition,
the Company develops new products to respond to general market requirements. For
example, the EGCommander(TM) was developed to address the market's demand for
increased system software flexibility.
The Company's ongoing engineering, research and development efforts
generally can be classified into three categories: feature enhancements, such as
features to improve accuracy, speed or automation; new products; and customer
driven product enhancements. Engineering, research and development expenses were
$18,672,000, $13,560,000 and $10,149,000 in 1996, 1995 and 1994, respectively,
or 12.3%, 8.0% and 9.0% of net sales, respectively. Engineering, research and
development expenses consist primarily of salaries, project materials and other
costs associated with the Company's ongoing efforts.
MARKETING, SALES AND SERVICE
The Company primarily sells its products directly to end users. The
Company believes that using a direct sales force provides it with a significant
competitive advantage in communicating with customers and responding to market
demands.
The Company generally sells product on net 30-day terms to most
customers. Other, primarily foreign, customers are required to deliver a letter
of credit typically payable upon product delivery. The Company generally
warrants its products for a period of up to 12 months from shipment for material
and labor to repair the product. Installation is customarily included in the
price of the product. The Company's field engineers provide customers with call
out repair and maintenance services for a fee. Customers may enter into repair
and maintenance service contracts covering the Company's products. The Company
trains customer employees to perform routine service for a fee and provides
telephone consultation services generally free of charge.
In the United States, Electroglas maintains sales and service offices
in Arizona, California, New Hampshire and Texas. In Europe, the Company
maintains sales and service locations in France, Germany and the United Kingdom.
In Asia, the Company maintains direct sales and service locations in Japan, Hong
Kong, Korea, People's Republic of China, Singapore and Taiwan. As of December
31, 1996, the Company employed approximately 184 people worldwide in sales,
service, applications, logistics, technical support and customer service.
CUSTOMERS
Electroglas sells its products to leading semiconductor manufacturers
throughout the world. In 1996 and 1994, sales to Intel represented 13% of net
sales. In 1994, sales to Philips represented 12% of net sales. No other customer
exceeded 10% of net sales in 1996 and 1994. No single customer accounted for
more than 10% of net sales in 1995.
International sales represented 45%, 45% and 47% of the Company's net
sales in 1996, 1995 and 1994, respectively. These sales represent the combined
total of export sales made by United States operations and all sales made by
foreign operations.
Export sales made by United States operations were 19% of net sales in
1996 (18% to Asia, 1% to other), 22% of net sales in 1995 (21% to Asia, 1% to
other) and 24% of net sales in 1994 (21% to Asia, 3% to other).
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MANUFACTURING AND SUPPLIERS
The Company's principal manufacturing activities take place in Santa
Clara, California and consist primarily of assembling and testing complete
probing systems that meet specific customer requirements. Most of the
subassemblies used in the probing systems are manufactured by the Company;
however, some are standard products purchased from third parties. While the
Company uses standard components wherever possible, most mechanical parts, metal
fabrications and castings are made to Company specifications. The Company
schedules production based upon firm customer commitments and anticipated orders
during the planning cycle. The Company generally expects to be able to accept a
customer order, build the required machinery and ship to the customer within 12
weeks.
Electroglas maintains manufacturing capability for certain components.
This capacity has proven useful for certain short-run and small lot size
components where economic third party supply is not available. This capacity has
also been used for product development and prototypes. The Company maintains
in-house control of the critical manufacturing processes for its linear motor
positioning system.
Quality control is maintained through incoming inspection of
components, in-process inspection during equipment assembly and final inspection
and operation of all manufactured equipment prior to shipment. Electroglas has a
company-wide quality training program emphasizing continuous improvement, data
driven decisions and close collaboration among the Company's employees and its
customers and suppliers. The Company trains all of its employees in basic
quality skills and regularly participates in quality sharing meetings with other
equipment manufacturers and customer quality audits of procedures and personnel.
Certain of the components and subassemblies included in the Company's
products are obtained from a single source. However, the Company believes that
alternative sources exist or can be developed, if necessary.
BACKLOG
At December 31, 1996, the Company's backlog was approximately $24.3
million as compared to approximately $53.2 million at December 31, 1995. The
Company generally ships orders within six months after receipt of a customer's
purchase order. Due to possible changes in product delivery schedules and
cancellation of product orders and because the Company's sales will often
reflect orders shipped in the same quarter received, the Company's backlog at
any particular date is not necessarily indicative of actual sales for any
succeeding period.
COMPETITION
The semiconductor equipment industry is highly competitive. The
principal competitive factors in the industry are product performance,
reliability, service and technical support, product improvements, price,
established relationships with customers and product familiarity. The Company
believes that its products compete favorably with respect to each of these
factors in the non-Japanese market segment. The Company's major competitors are
Tokyo Electron Labs ("TEL") and Tokyo Seimitsu ("TSK"). Some of the Company's
competitors have greater financial, engineering and manufacturing resources than
the Company and larger service organizations and long-standing customer
relationships. There can be no assurance that levels of competition in the
Company's particular product market will not intensify or that the Company's
technological advantages may not be reduced or lost as a result of technological
advances by competitors or changes in semiconductor processing technology.
PATENTS, TRADEMARKS, COPYRIGHTS AND OTHER INTELLECTUAL PROPERTY
The Company believes that the success of its business depends more on
the technical competence, creativity and marketing abilities of its employees,
rather than on patents, trademarks and copyrights. Nevertheless, the Company has
a policy of seeking patents when appropriate on inventions concerning new
products and improvements as part of its ongoing research, development and
manufacturing activities. The Company owns seven United States patents, which
will expire beginning in 1999 through 2011, and has one patent application
pending in the United States. In addition, the Company owns thirteen foreign
patents, which expire through 2004. The Company also has
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eleven United States and two Japanese registered trademarks, one United States
trademark for which application for registration is pending and two copyrighted
software programs (EGCommander(TM) and Prober Vision).
The Company also relies upon trade secret protection for its
confidential and proprietary information. The Company routinely enters into
confidentiality agreements with its employees. There can be no assurance,
however, that others will not independently gain information and techniques or
otherwise gain access to the Company's trade secrets or that the Company can
meaningfully protect its trade secrets.
EMPLOYEES
As of December 31, 1996, the Company employed approximately 607
persons. Many of the Company's employees are highly skilled, and the Company's
success will depend in part upon its ability to attract and retain such
employees, who are in great demand. The Company has never had a work stoppage or
strike and no employees are represented by a labor union or covered by a
collective bargaining agreement. The Company considers its employee relations to
be good.
FACTORS THAT MAY AFFECT RESULTS AND FINANCIAL CONDITION
The statements contained in this Form 10-K 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 in this document include statements under the heading
"Company Strategy" regarding the Company's expectations regarding continued
emphasis on research and development and strengthening of customer
relationships, intentions regarding broadening existing product lines and the
complementary nature of its SORTnet(TM) products to its core product lines,
among others. 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 or statements. It is important to note that the Company's actual
results could differ materially from those in such forward-looking statements.
The following important factors, among others, in some cases have affected, and
in future could affect, the Company's actual operating results and could cause
the Company's actual consolidated operating results to differ materially from
the expressed in any forward-looking statement made by, or on behalf of, the
Company.
Semiconductor Industry Downturns Adversely Affect Electroglas Revenues and
Operating Results. The Company's business largely depends on capital
expenditures by semiconductor manufacturers, which in turn depend on the current
and anticipated market demand for integrated circuits and products that use
integrated circuits. The semiconductor industry is highly cyclical and has
historically experienced periods of oversupply resulting in significantly
reduced demand for capital equipment. The semiconductor industry is currently
experiencing a downturn which has led many semiconductor manufacturers to delay
or cancel capital expenditures. These delays and cancellations have adversely
affected the Company's revenues, gross profit, gross margin and operating
results. Furthermore, there can be no assurance that the semiconductor industry
will not experience further downturns or slowdowns in the future, which may
materially and adversely affect the Company's business and operating results. In
addition, the need to invest in the engineering, research and development and
marketing required to penetrate targeted foreign markets and maintain extensive
customer service and support capabilities limits the Company's ability to reduce
expenses during such downturns.
Variability and Uncertainty of Quarterly Operating Results. The Company has
experienced and expects to continue to experience significant fluctuations in
its quarterly results. The Company's backlog at the beginning of each quarter
does not necessarily determine actual sales for any succeeding period. The
Company's sales will often reflect orders shipped in the same quarter that they
are received. Moreover, customers may cancel or reschedule shipments, and
production difficulties could delay shipments. Other factors which may influence
the Company's operating results in a particular quarter include the timing of
the receipt of orders from major customers, product mix, competitive pricing
pressures, the relative proportions of domestic and international sales, the
Company's ability to design, manufacture and introduce new products on a
cost-effective and timely basis, the delay between expenses to further develop
marketing and service capabilities and the realization of benefits from those
improved capabilities, and the introduction of new products by the Company's
competitors. Accordingly, the Company's results of operations are subject to
significant variability and uncertainty from quarter to quarter.
Dependence on New Products and Processes. Electroglas believes that its
future success will depend in part upon its ability to continue to enhance its
existing products and to develop and manufacture new products. As a result, the
Company expects to continue to make a significant investment in engineering,
research and development. There can be no assurance that the Company will be
successful in the introduction, marketing and cost effective manufacture of any
of its new products, or that the Company will be able to timely develop and
introduce new products, or to enhance its existing products and processes to
satisfy customer needs or achieve market acceptance. To develop new products
successfully, the Company depends on close relationships with its customers and
the willingness of those customers to share information with the Company. The
failure to develop products and introduce them successfully and in a timely
manner could adversely affect the Company's competitive position and results of
operations.
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Dependence on Principal Customers. For the years ended December 31, 1996
and 1995, five of the Company's customers accounted for 37% and 31%,
respectively, of its net sales. Intel Corporation accounted for 13% of net sales
in the year ended December 31, 1996. No single customer accounted for more
than 10% of net sales in 1995. If one or more of the Company's major
customers ceased or significantly curtailed its purchases, a material adverse
effect on the Company's results of operations could result.
Highly Competitive Industry. The semiconductor equipment industry is highly
competitive. Electroglas faces substantial competition from established
competitors, some of which are part of larger companies that have greater
financial, engineering and manufacturing resources than the Company and have
larger service organizations and long-standing customer relationships. The
Company's competitors can be expected to continue to improve the design and
performance of their products and to introduce new products with competitive
price/performance characteristics. Competitive pressures may force price
reductions which could adversely affect the Company results of operations.
Although the Company believes it has certain technological and other advantages
over its competitors, maintaining and capitalizing on these advantages will
require the Company to continue a high level of investment in engineering,
research and development, marketing and customer service and support. There can
be no assurance that the Company will have sufficient resources to continue to
make these investments or that the Company will be able to make the
technological advances necessary to maintain these such competitive advantages.
Japanese Market Segment and Japanese Competition. Electroglas believes that
competing Japanese companies have a competitive advantage because they dominate
the Japanese market segment (comprised of semiconductor fabrication facilities
located in Japan and those located outside Japan which are controlled by
Japanese companies). Foreign companies find it difficult to penetrate the large
and technically advanced Japanese market, which represents a substantial
percentage of the worldwide wafer prober market. In particular, Tokyo Electron
Limited ("TEL"), a large supplier of wafer probers and other semiconductor
capital equipment in Japan, dominates the Japanese market segment for wafer
probers. TEL dominance of the Japanese market segment and its position as a
large supplier of wafer probers worldwide provide it with a sales and technology
base that enables it to compete throughout the rest of the world. Another
Japanese company, Tokyo Seimitsu Co., Ltd. ("TSK"), also a large supplier of
wafer probers in the Japanese market segment, has recently increased its share
of that market.
Although Electroglas believes it is the largest supplier of wafer probers
in the non-Japanese market segment, Electroglas has not yet established itself
as a significant participant in the Japanese market segment. While Japanese
semiconductor manufacturers in recent years have begun to build semiconductor
fabrication facilities outside Japan, Electroglas has not yet had significant
sales into such facilities. Further, Japanese semiconductor manufacturers have
extended their influence outside Japan by licensing products and process
technologies to non-Japanese semiconductor manufacturers; these licenses
typically include a recommendation to use wafer probers and other semiconductor
equipment manufactured by Japanese companies. In particular, Electroglas may be
at competitive disadvantage with respect to the Japanese semiconductor capital
equipment suppliers who have been engaged for some time in collaborative efforts
with Japanese semiconductor manufacturers. There can be no assurance that
Electroglas will be able to establish a significant presence in or ever compete
successfully in the Japanese market segment. In addition, to the extent that the
slowdown in the Japanese market segment has left the Company's Japanese
competitors with excess inventory or excess capacity, they may offer substantial
discounts on their products, increasing pricing pressure in both the Japanese
market segment and elsewhere. Furthermore, the current weakness of the yen
compared to the dollar may exacerbate this situation.
Patents and Other Intellectual Property. The Company's success depends in
significant part on its intellectual property. While the Company attempts to
protect its intellectual property through patents, copyrights and trade secrets,
it believes that its success will depend more upon innovation, technological
expertise and distribution strength. There can be no assurance that the Company
will successfully protect its technology or that competitors will not be able to
develop similar technology independently. No assurance can be given that the
claims allowed on any patents held by the Company will be sufficiently broad to
protect the Company's technology. In addition, no assurance can be given that
any patents issued to the Company will not be challenged, invalidated or
circumvented or that the rights granted thereunder will provide competitive
advantages to the Company.
Some customers using certain products of Electroglas have received a
notice of infringement from Technivision Corporation and Jerome H. Lemelson
alleging that the manufacture of semiconductor products infringes certain
patents issued to Mr. Lemelson. Certain of these customers have notified
Electroglas that, in the event it is subsequently determined that the customer
infringes certain of the Lemelson patents, they may seek reimbursement from
Electroglas for some damages or expenses resulting from this matter.
Electroglas believes that its products do not infringe the Lemelson patents.
Certain of the Company's customers are currently engaged in litigation with Mr.
Lemelson involving 17 of his patents and the validity of those patents has been
placed in issue. In the future, it is possible that the Company's participation
in the litigation may be required. Electroglas may incur costs with respect to
such participation and cannot predict the outcome of this or similar litigation
or the effect of such litigation upon Electroglas. To the best of the Company's
knowledge, neither it nor any of its products has been identified by Mr.
Lemelson as infringing his patents.
10
<PAGE> 11
Dependence on Certain Suppliers. Electroglas obtains certain of the
components and subassemblies for its systems from a single source or a limited
group of suppliers, most notably all of the vision processor systems used in the
Company's products are supplied by Cognex Corporation ("Cognex"). Although
Electroglas seeks to reduce dependence on its sole and limited source suppliers,
the partial or complete loss of Cognex as a supplier of vision processor
systems, and the loss of certain other limited source suppliers could at least
temporarily adversely affect the Company's results of operations and damage
customer relationships. Further, a significant increase in the price of one or
more of these components could adversely affect the Company's results of
operations.
International Operations. International sales accounted for 45%, 45% and
47% of the Company's net sales for 1996, 1995 and 1994, respectively. The
Company expects international sales to continue to represent a significant
percentage of net sales. A number of factors may adversely affect the Company's
international sales and operations, including the imposition of governmental
controls, fluctuations in the U.S. dollar, which could increase the foreign
sales prices of the Company's products in local currencies, export license
requirements, restrictions on the export of technology, political instability,
trade restrictions, changes in tariffs and difficulties in staffing and managing
international operations. Although these and similar regulatory, geopolitical
and global economic factors have not yet had a material adverse effect on the
Company's operations, there can be no assurance that such factors will not
adversely impact the Company's operations in the future or require the Company
to modify its current business practices. In addition, the laws of certain
foreign countries may not protect the Company's intellectual property rights to
the same extent as do the laws of the United States.
Dependence on Key Employees. The future success of Electroglas partly
depends on its ability to retain key personnel. The Company also needs to
attract additional skilled personnel in all areas of its business to grow. While
many of the Company's current employees have years of service with Electroglas,
there can be no assurance that the Company will be able to retain its existing
personnel or attract additional qualified employees in the future.
Acquisitions. The Company may pursue acquisitions of complementary product
lines, technologies or businesses. Acquisitions by the Company may result in
potentially dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities and amortization expenses related to goodwill and other
intangible assets, which could materially adversely affect any Company
profitability. In addition, acquisitions involve numerous risks, including
difficulties in the assimilation of the operations, technologies and products of
the acquired companies, the diversion of management's attention form other
business concerns, risks of entering markets in which the Company has no or
limited direct prior experience, and the potential loss of key employees of the
acquired company. The Company has entered into an agreement, whereby, if
consummated, the Company will purchase Knights Technology for approximately $30
million in common stock and cash. The acquisition will be accounted for by the
purchase method. There can be no assurances as to the effect thereof of this, or
future, acquisitions on the Company's business or operating results.
11
<PAGE> 12
Possible Volatility of Common Stock Price. The market price of Electroglas
Common Stock could fluctuate significantly in response to variations in
quarterly operating results and other factors, such as announcements of
technological innovations or new products by the Company or by the Company's
competitors, government regulations, developments in patent or other property
rights, and developments in the Company's relationships with its customers. In
addition, the stock market has in recent years experienced significant price
fluctuations. These fluctuations often have been unrelated to the operating
performance of the specific companies whose stock is traded. Broad market
fluctuations, general economic conditions and specific conditions in the
semiconductor industry may adversely affect the market price of the Company's
Common Stock.
Antitakeover Provisions. Certain provisions of the Company's Certificate of
Incorporation and of Delaware law could discourage potential acquisition
proposals and could delay or prevent a change in control of Electroglas. Such
provisions could diminish the opportunities for a stockholders to participate in
tender offers, including tender offers at a price above the then current market
value of Electroglas Common Stock. Such provisions may also inhibit fluctuations
in the market price of Electroglas Common Stock that could result from takeover
attempts. In addition, the Board of Directors, without further stockholder
approval, may issue additional series of preferred stock that could have the
effect of delaying, deterring or preventing a change in control of Electroglas.
The issuance of additional series of preferred stock could also adversely affect
the voting power of the holders of Common Stock, including the loss of voting
control to others. The Company has no plans to issue any Preferred Stock.
ITEM 2. PROPERTIES
The Company's executive office and manufacturing, engineering,
research and development operations are located primarily in four buildings in
Santa Clara, California totaling approximately 150,000 square feet, occupied
under leases expiring in March 2000. The Company owns substantially all of the
machinery and equipment used in its facilities. In March 1997, the Company
entered into an agreement to lease land with an investment value of $12 million,
which, if consummated, will result in an increase in future operating lease
commitments.
The Company also occupies office space in Arizona, California, New
Hampshire, Texas, the United Kingdom, France, Germany, Japan, Hong Kong, Taiwan,
Singapore, Korea and People's Republic of China.
The Company, like all manufacturing companies, is subject to various
federal, state and local environmental statutory requirements. The Company
believes that it is in material compliance with existing applicable
environmental laws and regulations.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any material legal actions.
From time to time, however, the Company may be subject to various claims and
lawsuits by customers and competitors arising in the normal course of business,
including suits charging infringement or violations of antitrust laws. Such
suits may seek substantial damages and, in certain instances, any damages
awarded would be trebled.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the
Company during the fourth quarter ended December 31, 1996.
12
<PAGE> 13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this item is included under "Stockholders'
Information" in the Company's 1996 Annual Report to Stockholders on page 35, and
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included under "Selected
Consolidated Financial Data" in the Company's 1996 Annual Report to Stockholders
on page 14, and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by this item is included under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Company's 1996 Annual Report to Stockholders on pages 15 to 18, and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included in the Company's
1996 Annual Report to Stockholders under the headings listed under Item 14(a)1.
of Part IV of this Report on Form 10-K and under "Unaudited Quarterly
Consolidated Financial Data" in the Company's 1996 Annual Report to Stockholders
on pages 19 to 34 and 14, respectively, and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
13
<PAGE> 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included under "Proposal No.
1 - Election of Directors" and "Other Matters" in the Company's Proxy Statement
to be filed in connection with its 1997 Annual Meeting of Stockholders and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under "Executive
Compensation and Other Information" in the Company's Proxy Statement to be filed
in connection with its 1997 Annual Meeting of Stockholders and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under "Security
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement to be filed in connection with its 1997 Annual Meeting of Stockholders
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under "Certain
Relationships and Related Transactions" in the Company's Proxy Statement to be
filed in connection with its 1997 Annual Meeting of Stockholders and is
incorporated herein by reference.
14
<PAGE> 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. FINANCIAL STATEMENTS AND REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS. The following consolidated financial statements of the
Registrant and Report of Ernst & Young LLP, Independent Auditors, are
contained in the Company's 1996 Annual Report to Stockholders and are
incorporated by reference in Item 8 of Part II of this Report on Form
10-K:
Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994.
Consolidated Balance Sheets as of December 31, 1996 and 1995.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
Report of Ernst & Young LLP, Independent Auditors.
2. FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedule is filed as part of this Report on Form 10-K on page 17:
Schedule II--Valuation and Qualifying Accounts.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
3. EXHIBITS. The exhibits listed in the accompanying Index to Exhibits
are filed or incorporated by reference as part of this Report on Form
10-K.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December
31, 1996.
(c) See Index to Exhibits
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 19, 1997
By /s/ Curtis S. Wozniak
-----------------------------------------
Curtis S. Wozniak
Chief Executive Officer
and Director
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Curtis S. Wozniak Chief Executive Officer and March 19, 1997
- -------------------------------- Director
Curtis S. Wozniak (Principal Executive Officer)
/s/ Armand J. Stegall Vice President, Finance March 19, 1997
- -------------------------------- Chief Financial Officer,
Armand J. Stegall Treasurer and Secretary
(Principal Financial
and Accounting Officer)
/s/ Neil R. Bonke Chairman of the Board March 19, 1997
- -------------------------------
Neil R. Bonke
/s/ Joseph F. Dox Director March 19, 1997
- -------------------------------
Joseph F. Dox
/s/ Roger D. Emerick Director March 19, 1997
- --------------------------------
Roger D. Emerick
/s/ Robert J. Frankenberg Director March 19, 1997
- --------------------------------
Robert J. Frankenberg
</TABLE>
16
<PAGE> 17
SCHEDULE II
ELECTROGLAS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(a) OF PERIOD
----------- --------- -------- ------------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts (deducted from accounts receivable):
Year Ended December 31, 1996 $243 $ 0 $ 38 $205
Year Ended December 31, 1995 248 0 5 243
Year Ended December 31, 1994 188 65 5 248
</TABLE>
(a) Includes write-offs and reversals.
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
------ --------
<S> <C>
3(i) Certificate of Incorporation of Electroglas, Inc., as amended.(1)
3(ii) Bylaws of Electroglas, Inc.(1)
4.1 Reference is made to Exhibits 3(i) and 3(ii).
4.2 Specimen Common Stock Certificate of Electroglas, Inc., a Delaware
corporation.(1)
10.1 Asset Transfer Agreement by and among General Signal Corporation,
General Signal Technology Corporation and Electroglas, Inc., dated
June 23, 1993, with schedules and exhibits thereto.(2)
10.2 Foreign Units Management Service Agreement by and among General Signal
Corporation, General Signal Technology Corporation and Electroglas,
Inc., dated June 23, 1993.(2)
10.3 Registration Rights Agreement by and between General Signal
Corporation and Electroglas, Inc., dated June 23, 1993.(2)
10.4* Electroglas, Inc. 1993 Long-Term Incentive Plan.(2)
10.5* Electroglas, Inc. Amended and Restated 1993 Employee Stock Purchase
Plan. (3)
10.6 Lease between RREEF USA FUND-III, a California Group Trust, and
Electroglas, Inc. dated as of December 20, 1993.(4)
10.7* Change of Control Agreement between Electroglas, Inc. and Neil R.
Bonke dated as of June 9, 1995.
10.8* Change of Control Agreement between Electroglas, Inc. and William J.
Cornwell dated as of June 9, 1995.
10.9* Change of Control Agreement between Electroglas, Inc. and Armand J.
Stegall dated as of June 9, 1995.
10.10* Electroglas, Inc. Restricted Stock Bonus Agreement Between
Electroglas, Inc. and Curtis S. Wozniak (6)
10.11* Change of Control Agreement between Electroglas, Inc. and Curtis S.
Wozniak dated as of April 4, 1996 (6)
10.12* Employment and Consulting Agreement Between Electroglas, Inc. and Neil
R. Bonke (7)
10.13* Electroglas Officers' Retirement Medical and Dental Coverage Policy
(8)
10.14* Severance Agreement between Electroglas, Inc. and William J. Cornwell
dated as of April 1, 1996
13.1 Electroglas, Inc. 1996 Annual Report to Stockholders. This Annual
Report shall not be deemed to be filed except to the extent that the
information is specifically incorporated by reference.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C>
27 Financial Data Schedule
(1) Incorporated by reference to the identically numbered exhibit to the
Company's Registration Statement on Form S-1 (Commission File No.
33-61528), which became effective on June 23, 1993.
(2) Incorporated by reference to the identically numbered exhibit to the
Company's Registration Statement on Form S-1 (Commission File No.
33-74860), which became effective on February 23, 1994.
(3) Incorporated by reference to Exhibit 10.5 of the Company's Annual
Report on Form 10-K, filed with the Securities and Exchange Commission
on March 30, 1995.
(4) Incorporated by reference to Exhibit 10.9 of the Company's Annual
Report on Form 10-K, filed with the Securities and Exchange Commission
on March 31, 1994.
(5) Incorporated by reference to identically numbered exhibit of the
Company's Annual Report on Form 10-K, filed with the Securities and
Exchange Commission on March 31, 1995.
(6) Incorporated by reference to identically numbered exhibit of the
Company's Quarterly Report on Form 10-Q, for the quarter ended June
30, 1996.
(7) Incorporated by reference to Exhibit 10.11 of the Company's Quarterly
Report on Form 10-Q, for the quarter ended September 31, 1996.
(8) Incorporated by reference to Exhibit 10.12 of the Company's Quarterly
Report on Form 10-Q, for the quarter ended September 31, 1996.
</TABLE>
* Management contracts, or Company compensatory plans or arrangements.
19
<PAGE> 1
EXHIBIT 10.14
SEVERANCE AGREEMENT
AND RELEASE OF ALL CLAIMS
This Severance Agreement and Release of All Claims ("Agreement") is made and
entered into by and between William J. Cornwell (hereinafter "Cornwell") and
Electroglas, Inc. (hereinafter the "Company").
W I T N E S S E T H:
WHEREAS, Cornwell is employed by the Company as President and Chief
Operating Officer; and
WHEREAS, Cornwell will accept a special assignment and retire as
provided herein; and
WHEREAS, Cornwell does not have pending against the Company or any
employee, agent, official, or director of the Company any claim, charge, or
action in or with any federal, state or local court or administrative agency;
and
WHEREAS, Cornwell and the Company desire to settle fully and finally
all differences between them, except as otherwise provided in this Agreement,
including, but not limited to, any and all claims Cornwell may have against the
Company in any way connected with Cornwell's employment with the Company and up
to the effective date of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and promises
herein contained and other good and valuable consideration, receipt of which is
hereby acknowledged, and to avoid unnecessary litigation, it is hereby agreed by
and between the parties as follows:
FIRST: This Agreement and compliance with this Agreement shall not be
construed as an admission by the parties of any liability whatsoever, or as an
admission by the parties of any violation of the rights of the other or any
person, or a violation of any order, law, statute, duty, or contract whatsoever
against the parties or any person. Except as otherwise provided in this
Agreement, the parties specifically disclaim any liability to
20
<PAGE> 2
the other or any other person for any alleged violation of the rights of the
other or any person, or for any alleged violation of any order, law, statute,
duty, or contract on the part of the parties, their employees or agents or
related companies or their employees or agents.
SECOND: (a) Cornwell understands and agrees that he has a full
twenty-one (21) days from receipt of this Agreement to consider its terms and
that he should not execute this Agreement without first consulting with an
attorney. Cornwell also understands and agrees that he has a full seven (7) days
following his execution of this Agreement to revoke this Agreement.
(b) Effective April 1, 1996, Cornwell will relinquish his
current position of President and Chief Operating Officer. Effective April 1,
1996, Cornwell shall no longer be covered by the terms and conditions of the
Change of Control Agreement of June 9, 1995, a copy of which is attached hereto
as Attachment A. All of the terms and conditions of said Change of Control
Agreement shall become null and void effective April 1, 1996.
(c) Commencing on April 1, 1996 and continuing through March
31, 1997, the Company will provide a special assignment for Cornwell as Special
Assistant to the Chief Executive Officer, at Cornwell's rate and terms of
compensation, including stock options and all benefits in effect as of the date
of execution of this Agreement, such as vacation, health insurance, company car,
GW and WADE, except as provided herein. Cornwell's current stock options will be
subject to the retirement termination terms as specified in the Individual
Option Grant Agreements, copies of which are attached hereto as Attachment B1,
B2, B3. Cornwell shall not be eligible for any additional stock option grants on
or after April 1, 1996. Further, Cornwell shall receive a 1996 performance bonus
payable on March 1, 1997 in the amount of $50,000 minus all withholdings and
deductions customarily withheld by the Company from bonus payments, such as
taxes, 401(k) contributions, etc. The parties agree that Cornwell shall not be
required to perform any duties on behalf of the Company during this special
assignment period.
(d) Effective April 1, 1997, and continuing thereafter until
Cornwell reaches age 65, the Company shall offer Cornwell and his spouse, at his
own expense, the same medical and dental benefits offered to the Company's
employees. It is expressly understood and agreed by the parties that in the
event Cornwell elects coverage under said benefits, Cornwell shall be
responsible for all costs of such coverage, including but not limited to,
monthly premium payments. Said cost of coverage shall be no greater than that
amount paid by the Company for current employees.
(e) The indemnification provided under the Indemnification
Agreement of August 10, 1993, a copy of which is attached hereto as Attachment
C, shall continue as to Cornwell as provided in section 14 thereof, for any
action taken or not taken while serving in an indemnified capacity pertaining to
an Indemnifiable Event as defined in the Indemnification Agreement even though
he may have ceased to serve in such capacity at the time of any Proceeding as
defined in the Indemnification Agreement. Cornwell further retains any rights
provided under Labor Code Section 2802, Corporations Code Section 317, or any
other basis providing for employee rights of indemnification.
(f) Cornwell agrees that the foregoing payments shall
constitute the entire amount of monetary consideration provided to him under
this Agreement and that he will not seek any further compensation for any other
claimed damage, costs, or attorneys' fees in connection with the matters
encompassed in this Agreement.
(g) Cornwell agrees that on the date of the parties' execution
of this Agreement, he will submit to the Company a letter which shall state that
his retirement from his employment with the Company shall be effective on April
1, 1997. Furthermore, Cornwell agrees that he will not seek nor accept regular
employment with the Company in the future and that the Company is entitled to
reject without cause any application for employment with the Company made by
Cornwell. The parties agree that press releases and internal official Company
announcements concerning Cornwell's employment status and/or retirement shall be
subject to Cornwell's prior approval.
THIRD: The parties represent that they have not filed any complaints,
claims, or actions against the other, their officers, agents, directors,
supervisors, employees, or representatives with any state, federal, or local
agency or court and that they will not do so at any time hereafter based on
matters released herein.
FOURTH: The parties agree that they will keep the fact, terms, and
amount of this Agreement completely confidential and that they will not
hereafter disclose any information concerning this Agreement to anyone, provided
that any party hereto may make such disclosures as are required by law, as are
necessary for
21
<PAGE> 3
legitimate law enforcement or compliance purposes or as may reasonably be
necessary for discussion with tax, financial or legal advisors. Cornwell may
also disclose the terms of this Agreement to his spouse.
FIFTH: The parties hereby agree that all rights under section 1542 of
the Civil Code of the State of California are hereby waived. Section 1542
provides as follows:
A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the release,
which if known by him must have materially affected his settlement with the
debtor.
SIXTH: Notwithstanding the provisions of section 1542 of the Civil
Code of the State of California, the parties irrevocably and unconditionally
release and forever discharge each other and each and all of their officers,
agents, directors, supervisors, employees, representatives, and their successors
and assigns and all persons acting by, through, under, or in concert with any of
them from any and all charges, complaints, claims, and liabilities of any kind
or nature whatsoever, known or unknown, suspected or unsuspected (hereinafter
referred to as "claim" or "claims") which they at any time heretofore had or
claimed to have or which they may have or claim to have regarding events that
have occurred as of the date of this Agreement, including, without limitation,
any and all claims related or in any manner incidental to Cornwell's employment
with the Company or the termination therefrom. It is expressly understood by
Cornwell that among the various rights and claims being waived in this release
are those arising under the Age Discrimination in Employment Act of 1967 (29
U.S.C. Section 621, et seq.). Notwithstanding any other provision or language in
this Severance Agreement, it is the parties' express intention that Cornwell is
not waiving or releasing any rights of indemnification, contribution, or any
other legal right he may have against the Company, its officers, employees,
directors, representatives, agents, predecessors, successors, or assigns,
associated with any criminal or civil proceeding involving Cornwell, whether
formal or informal, actual or threatened, involving or relating to any
allegations of violation of any federal, state or local toxic waste laws or fire
code violations, including, but not limited to Case No. C9562800 now pending in
the Municipal Court of the County of Santa Clara and Citation numbers K002127
and K002128 issued by the Santa Clara Fire Department. The Company expressly
agrees to continue to represent, defend, and indemnify Cornwell in relation to
all such matters.
SEVENTH: The parties understand the word "claims" to include all
actions, claims, and grievances, whether actual or potential, known or unknown,
and specifically, but not exclusively, all claims arising out of Cornwell's
employment with the Company and the termination of his employment with the
Company. All such claims (including related attorneys' fees and costs) are
forever barred by this Agreement and without regard to whether those claims are
based on any alleged breach of a duty arising in a statute, contract, or tort;
any alleged unlawful act, including, without limitation, age discrimination; any
other claim or cause of action; and regardless of the forum in which it might be
brought.
EIGHTH: Cornwell understands and agrees that he:
A. Has had a full twenty-one (21) days within which to
consider this Agreement before executing it.
B. Has carefully read and fully understands all of the
provisions of this Agreement.
C. Is, through this Agreement, releasing the Company from any
and all claims he may have against the Company, including any claims under the
Age Discrimination in Employment Act of 1967 (29 U.S.C. Section 621, et seq.)
which arose before the date this Agreement is executed.
D. Knowingly and voluntarily agrees to all of the terms set
forth in this Agreement.
E. Knowingly and voluntarily intends to be legally bound by
the same.
F. Was advised and hereby is advised in writing to consider
the terms of this Agreement and consult with an attorney of his choice prior to
executing this Agreement.
G. Has a full seven (7) days following the execution of this
Agreement to revoke this Agreement and has been and hereby is advised in writing
that this Agreement shall not become effective or enforceable until the
revocation period has expired.
H. Understands that rights or claims under the Age
Discrimination in Employment Act of 1967 (29 U.S.C. Section 621, et seq.) that
may arise after the date this Agreement is executed are not waived.
NINTH: The parties hereto represent and acknowledge that in executing
this Agreement they do not rely and have not relied upon any representation or
statement made by any of the parties or by any of the parties' agents,
attorneys, or representatives with regard to the subject matter, basis, or
effect of this Agreement or otherwise, other than those specifically stated in
this written Agreement.
22
<PAGE> 4
TENTH: This Agreement shall be binding upon the parties hereto and
upon their heirs, administrators, representatives, executors, successors, and
assigns, and shall inure to the benefit of said parties and each of them and to
their heirs, administrators, representatives, executors, successors, and
assigns. The parties expressly warrant that they have not transferred to any
person or entity any rights, causes of action, or claims released in this
Agreement.
ELEVENTH: Should any provision of this Agreement be declared or be
determined by any court of competent jurisdiction to be wholly or partially
illegal, invalid, or unenforceable, the legality, validity, and enforceability
of the remaining parts, terms, or provisions shall not be affected thereby, and
said illegal, unenforceable, or invalid part, term, or provision shall be deemed
not to be a part of this Agreement.
TWELFTH: This Agreement sets forth the entire agreement between the
parties hereto and fully supersedes any and all prior agreements or
understandings, written or oral, between the parties hereto pertaining to the
subject matter hereof.
THIRTEENTH: This Agreement shall be interpreted in accordance with the
plain meaning of its terms and not strictly for or against any of the parties
hereto.
FOURTEENTH: It is further understood and agreed that if, at any time,
a violation of any term of this Agreement is asserted by any party hereto, that
party shall have the right to seek specific performance of that term and/or any
other necessary and proper relief, including but not limited to damages. The
resolution of such claims shall be decided by binding arbitration conducted
pursuant to the Employment Law Rules of the American Arbitration Association.
The A.A.A. decision shall be final and binding and may be enforced in any court
of competent jurisdiction. Each party shall be responsible for its own
attorney's fees and costs. The costs of the arbitration shall be divided
equally.
FIFTEENTH: This Agreement is being made and delivered, and is intended
to be performed, in the State of California, and shall be construed and enforced
in accordance with, and governed by, the laws of that State.
ELECTROGLAS, INC.
Dated: 4-1-96 By /s/ Fran Keegan
Dated: 4-1-96 By /s/ William J. Cornwell
William J. Cornwell
23
<PAGE> 1
EXHIBIT 13.1
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $151,950 $169,240 $112,319 $ 79,411 $ 55,034
---------- ---------- ---------- ---------- ----------
Gross profit 72,284 92,634 61,921 40,331 26,471
---------- ---------- ---------- ---------- ----------
Engineering, research and development 18,672 13,560 10,149 8,763 8,287
Selling, general and administrative 24,758 25,771 19,272 14,956 11,501
---------- ---------- ---------- ---------- ----------
Operating income 28,854 53,303 32,500 16,612 6,683
---------- ---------- ---------- ---------- ----------
Interest and other income, net 4,847 4,211 2,876 453 344
---------- ---------- ---------- ---------- ----------
Income before income taxes 33,701 57,514 35,376 17,065 7,027
Provision for income taxes(1) 9,242 20,417 13,042 2,405 2,617
---------- ---------- ---------- ---------- ----------
Net income(1) $ 24,459 $ 37,097 $ 22,334 $ 14,660 $ 4,410
- --------------------------------------------------------------------------------------------------------------
Net income per share(1) $1.36 $2.05 $1.31
Pro forma net income per share(1)(2) $ 1.07 $ 0.32
- --------------------------------------------------------------------------------------------------------------
Working capital $159,376 $146,849 $ 96,482 $ 28,991 $ 8,022
Total assets 197,866 191,741 131,901 52,987 20,033
Short-term borrowings 1,790 1,952 -- -- --
Total equity(3) 173,651 157,394 110,755 39,499 10,451
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Unaudited Quarterly Consolidated Financial Data
<TABLE>
<CAPTION>
Quarter
- -------------------------------------------------------------------------------------------------
(in thousands, except per share data) First Second Third Fourth
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996:
Net sales $ 51,835 $ 48,869 $ 31,467 $ 19,779
Gross profit 27,990 24,966 14,453 4,875
Net income(4) 11,224 8,953 4,223 59
Net income per share 0.62 0.50 0.24 0.00
- -------------------------------------------------------------------------------------------------
1995:
Net sales $ 33,922 $ 39,399 $ 45,339 $ 50,580
Gross profit 18,656 21,667 24,938 27,373
Net income 6,961 8,603 9,870 11,663
Net income per share 0.39 0.48 0.54 0.64
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Net income for the year ended December 31, 1994 includes a $941,000
credit for the favorable impact of new California tax legislation. Net
income and net income per share for the year ended December 31, 1994
without the $941,000 credit were $21,393,000 and $1.26, respectively.
Net income for the year ended December 31, 1993 includes a $4,364,000
credit for elimination of the valuation allowance on deferred taxes.
Net income and pro forma net income per share for the year ended
December 31, 1993 without the $4,364,000 credit were $10,296,000 and
$0.75, respectively.
(2) Pro forma net income per share assumes 13,600,000 shares outstanding
through July 1, 1993 (the date of the closing of the Initial Public
Offering ("IPO")).
(3) Total equity through December 31, 1992 reflects the net assets of the
Electroglas division of General Signal. Prior to the closing of the
IPO, substantially all of the cash generated by the division's
operations was regularly remitted to General Signal pursuant to
General Signal's centralized cash management program.
(4) Net income for the fourth quarter includes a pretax adjustment made by
management to reduce employee incentive compensation by $2,300,000 in
light of the decreased operating results for 1996.
24
<PAGE> 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The statements contained in this annual report that are not purely historical
are forward-looking statements, including statements regarding the Company's
expectations, hopes or intentions regarding the future. Forward-looking
statements include, but are not limited to, statements about gross profits,
current levels of taxable income, liquidity, anticipated cash needs and
availability. 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
consult the risk factors listed from time to time in the Company's reports on
SEC forms 10-K, 10-Q, as well as those disclosed in this discussion and analysis
under "Factors That May Affect Results and Financial Condition."
The components of the Company's statements of income, expressed as a percentage
of net sales, are as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 52.4% 45.3% 44.9%
--------- --------- ---------
Gross profit 47.6% 54.7% 55.1%
--------- --------- ---------
Operating expenses:
Engineering, research and development 12.3% 8.0% 9.0%
Selling, general and administrative 16.3% 15.2% 17.2%
--------- --------- ---------
Total operating expenses 28.6% 23.2% 26.2%
--------- --------- ---------
Operating income 19.0% 31.5% 28.9%
--------- --------- ---------
Interest income 3.1% 2.3% 2.1%
Other income, net 0.1% 0.2% 0.5%
--------- --------- ---------
Income before income taxes 22.2% 34.0% 31.5%
Provision for income taxes 6.1% 12.1% 11.6%
--------- --------- ---------
Net income 16.1% 21.9% 19.9%
--------- --------- ---------
</TABLE>
25
<PAGE> 3
Results of Operations
Years ended December 31, 1996, 1995 and 1994
Net Sales
Net sales were $151,950,000, $169,240,000 and $112,319,000 in 1996, 1995 and
1994, respectively. Net sales decreased 10.2% in 1996 compared to 1995
principally due to lower system sales. The decrease reflected the uncertainty in
the semiconductor market during 1996 as semiconductor manufacturers addressed
the supply-demand imbalance for their products by delaying expansion plans.
Net sales increased 50.7% in 1995 versus 1994 primarily due to increased system
sales and increased average selling prices of systems sold. The increase in net
sales reflected the strong global semiconductor equipment market that existed
during 1995, as semiconductor manufacturers responded to increased demand for
semiconductor devices by constructing new and expanding existing fabrication
facilities.
Net sales comprised of the Horizon 4000 Series (58.0%, 59.5% and 41.7% for 1996,
1995 and 1994, respectively), the 2000 Series (26.5%, 27.3% and 36.6% for 1996,
1995 and 1994, respectively) and aftermarket sales, consisting primarily of
service, spare parts and upgrades (15.5%, 13.2% and 21.7% for 1996, 1995 and
1994, respectively).
International sales represented 45%, 45% and 47% of net sales for the years
1996, 1995 and 1994, respectively.
Gross Profit
Gross profit was 47.6%, 54.7% and 55.1% in 1996, 1995 and 1994, respectively.
The absolute dollar decrease in gross profit in 1996 as compared to 1995 was
primarily attributable to the decline in system sales. The associated decline in
production volume resulted in underutilization of manufacturing capacity causing
a decrease in gross profit as a percentage of net sales. In addition, higher
material costs, as a percentage of sales, and increased warranty costs
exacerbated the decrease in gross profit.
The absolute dollar increase in gross profit in 1995 as compared to 1994 was
primarily attributable to increased system sales and increased average selling
prices of systems sold. The decrease in gross profit as a percentage of net
sales was primarily attributable to a change in the sales mix of systems and
increased material costs associated with new features and upgrades, partially
offset by increased manufacturing efficiencies resulting from higher production
levels.
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 and the relatively fixed nature of
manufacturing overhead that typically results in efficiencies when production
volumes are up, and inefficiencies when production volumes are down.
Engineering, Research and Development
Engineering, research and development expenses were $18,672,000, $13,560,000 and
$10,149,000 in 1996, 1995 and 1994, respectively. Engineering, research and
development expenses consist primarily of salaries, project material and other
costs associated with the Company's ongoing efforts in product development and
enhancement, as demonstrated by the addition of the Model 4090 to the Company's
Horizon product line during 1996. Throughout 1995 and the first half of 1996,
the Company continued to increase its investment in engineering by increasing
its workforce, and conducting additional research and development to strengthen
its technology position in the industry by developing new products, improving
existing products and engineering customer-derived product enhancements. During
the latter half of 1996, the Company introduced cost containment programs as a
consequence of the decreasing operating results.
Selling, General and Administrative
Selling, general and administrative expenses were $24,758,000, $25,771,000 and
$19,272,000 in 1996, 1995 and 1994, respectively. In 1996, the Company continued
to increase its sales, marketing and administrative workforce to strengthen its
global customer support operations. The increase in expenses was more than
offset by a decrease in employee incentive compensation due to lower operating
results for 1996 and by management's decision to further reduce this amount by
$2,300,000 in the fourth quarter in light of the decreased operating results.
The increase in expenses in 1995 as compared to 1994 was primarily attributable
to increased investment in the Company's worldwide sales and marketing
infrastructure in support of the larger customer base. In addition, the Company
incurred higher sales commissions due to increased sales volume and increased
employee incentive compensation due to the increased operating income in 1995.
Interest Income
Interest income was $4,771,000, $3,858,000 and $2,285,000 in 1996, 1995 and
1994, respectively. The increase in interest income in each year was principally
the result of increasing cash balances.
26
<PAGE> 4
Income Taxes
Income taxes as a percentage of income before taxes were 27.4%, 35.5% and 36.9%
in 1996, 1995 and 1994, respectively. The tax provision for 1994 included a
benefit of $941,000 for the favorable impact of new California tax legislation.
Excluding the impact of this nonrecurring tax benefit, the Company's annual
effective tax rate for 1994 was 39.5%. The decrease in the effective tax rate in
1996 compared to 1995 was primarily due to the impact of tax exempt investment
income and increased tax benefits received from research and development
expenditures. The decrease in the effective tax rate in 1995 compared to 1994,
excluding the impact of nonrecurring tax benefits, was principally due to
increased tax exempt investment income and utilization of foreign tax credits.
Management has concluded that no valuation allowance is required for the
deferred tax asset based on its assessment that current levels of taxable income
will be sufficient to realize the benefits.
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, 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, and introduction of competitor products
having technological and/or pricing advantages. 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.
Liquidity and Capital Resources
The Company's cash, cash equivalents and short-term investments were
$129,102,000 at December 31, 1996, an increase of $10,858,000 from December 31,
1995. Cash generated from operations was $29,282,000, including net income of
$24,459,000. Working capital items that significantly impacted cash balances
were accounts receivable, other current assets and income taxes. Accounts
receivable decreased $15,418,000 as a result of lower sales volume in the latter
part of the year. The increase in other current assets and decrease in income
taxes payable was due to estimated tax payments in excess of actual tax
liabilities as a result of lower than anticipated earnings during the year,
resulting in an income tax receivable of $7,000,000.
The Company used $16,306,000 of cash for investing activities, including
$7,239,000 for net purchases of investments and $8,010,000 for capital
expenditures on design and test equipment and leasehold improvements to the
Company's facilities.
Cash used in financing activities was $8,598,000. On March 14, 1996, the Company
announced a program to repurchase 1,000,000 shares of the Company's common stock
on the open market. The Company repurchased 674,000 shares at a cost of
$9,751,000, offset by employee stock purchases and stock option exercises
contributing $1,315,000. At December 31, 1996, the Company's Japanese subsidiary
had lines of credit with Japanese banks with a total borrowing capacity of
approximately $5,250,000 (denominated in Yen). Amounts outstanding under these
facilities at December 31, 1996 were $1,790,000. These facilities enable the
Company's Japanese subsidiary to finance its working capital requirements
locally.
In March 1997, the Company entered into an agreement to lease land with an
investment value of $12 million, which, if consummated, will result in an
increase in future operating lease commitments.
In March 1997, the Company entered into an agreement, whereby, if consummated,
the Company will purchase Knights Technology for approximately $30 million in
common stock and cash. The acquisition will be accounted for by the purchase
method.
Historically, the Company has generated cash in an amount sufficient to fund its
operations. The Company believes that cash on hand and cash generated from
operations will be sufficient to meet the Company's working capital and capital
expenditure requirements at least through the end of 1997.
27
<PAGE> 5
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
(in thousands, except per share amounts)
<S> <C> <C> <C>
Net sales $151,950 $169,240 $112,319
Cost of sales 79,666 76,606 50,398
--------- --------- ---------
Gross profit 72,284 92,634 61,921
--------- --------- ---------
Operating expenses:
Engineering, research and development 18,672 13,560 10,149
Selling, general and administrative 24,758 25,771 19,272
--------- --------- ---------
Total operating expenses 43,430 39,331 29,421
--------- --------- ---------
Operating income 28,854 53,303 32,500
--------- --------- ---------
Interest income 4,771 3,858 2,285
Other income, net 76 353 591
--------- --------- ---------
Income before income taxes 33,701 57,514 35,376
Provision for income taxes 9,242 20,417 13,042
--------- --------- ---------
Net income $ 24,459 $ 37,097 $ 22,334
--------- --------- ---------
Net income per share $ 1.36 $ 2.05 $ 1.31
Number of shares used in computing
per share amounts 17,967 18,075 17,019
--------- --------- ---------
</TABLE>
See the accompanying notes to consolidated financial statements.
28
<PAGE> 6
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1996 1995
(in thousands, except share and per share amounts)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 11,141 $ 6,796
Short-term investments 117,961 111,448
Accounts receivable, net of allowance
for doubtful accounts of $205 in 1996
and $243 in 1995 16,663 32,081
Inventories 22,578 22,434
Prepaid expenses and other assets 8,231 1,054
Deferred income taxes 7,017 7,383
---------- ----------
Total current assets 183,591 181,196
Deferred income taxes 2,669 4,821
Equipment and leasehold improvements, net 10,184 5,066
Other assets 1,422 658
---------- ----------
Total assets $197,866 $191,741
---------- ----------
Liabilities and stockholders' equity
Current liabilities:
Short-term borrowings $ 1,790 $ 1,952
Accounts payable 4,754 7,713
Accrued liabilities 17,061 18,663
Income taxes payable 610 6,019
---------- ----------
Total current liabilities 24,215 34,347
Commitments
Stockholders' equity:
Preferred stock, $0.01 par value;
authorized 1,000,000; none outstanding -- --
Common stock, $0.01 par value; authorized
40,000,000; 18,203,000 issued and
outstanding at December 31, 1996, and
18,011,000 at December 31, 1995 182 180
Additional paid-in capital 89,923 87,102
Deferred stock compensation (1,278) --
Retained earnings 94,673 70,214
Net unrealized gains on investments 138 96
Net translation adjustments (236) (198)
---------- ----------
183,402 157,394
Less cost of common stock in treasury;
674,000 at December 31, 1996 9,751 --
---------- ----------
Total stockholders' equity 173,651 157,394
---------- ----------
Total liabilities and stockholders' equity $197,866 $191,741
---------- ----------
</TABLE>
See the accompanying notes to consolidated financial statements.
29
<PAGE> 7
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional Deferred Net Unrealized Net Treasury Stock Total
--------------- Paid-in Stock Retained Gains on Translation --------------- Stockholders'
(in thousands) Shares Amount Capital Compensation Earnings Investments Adjustments Shares Amount Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 13,630 $136 $28,580 $ -- $10,783 $ -- $ -- -- $ -- $ 39,499
Net income -- -- -- -- 22,334 -- -- -- -- 22,334
Issuance of common stock
in public offering, net
of issuance costs 3,400 34 44,071 -- -- -- -- -- -- 44,105
Issuance of common stock
under employee stock plans 411 4 3,427 -- -- -- -- -- -- 3,431
Tax benefit of stock
option exercises -- -- 1,386 -- -- -- -- -- -- 1,386
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 17,441 174 77,464 -- 33,117 -- -- -- -- 110,755
Net income -- -- -- -- 37,097 -- -- -- -- 37,097
Net unrealized gains
on investments -- -- -- -- -- 96 -- -- -- 96
Net translation adjustments -- -- -- -- -- -- (198) -- -- (198)
Issuance of common stock
under employee stock plans 570 6 5,749 -- -- -- -- -- -- 5,755
Tax benefit of stock
option exercises -- -- 3,889 -- -- -- -- -- -- 3,889
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 18,011 180 87,102 -- 70,214 96 (198) -- -- 157,394
Net income -- -- -- -- 24,459 -- -- -- -- 24,459
Deferred compensation related
to grant of restricted stock 100 1 1,424 (1,425) -- -- -- -- -- --
Amortization of
deferred compensation -- -- -- 147 -- -- -- -- -- 147
Net unrealized gains
on investments -- -- -- -- -- 42 -- -- -- 42
Net translation adjustments -- -- -- -- -- -- (38) -- -- (38)
Issuance of common stock
under employee stock plans 92 1 1,314 -- -- -- -- -- -- 1,315
Purchase of treasury stock -- -- -- -- -- -- -- (674) (9,751) (9,751)
Tax benefit of stock
option exercises -- -- 83 -- -- -- -- -- -- 83
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 18,203 $182 $89,923 $(1,278) $94,673 $138 $(236) (674) $(9,751) $173,651
</TABLE>
See the accompanying notes to consolidated financial statements.
30
<PAGE> 8
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 24,459 $ 37,097 $ 22,334
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 2,887 1,521 1,229
Amortization 1,208 704 224
Deferred income taxes 2,518 (1,797) 530
Changes in current assets and liabilities:
Accounts receivable 15,418 (9,902) (13,296)
Inventories (144) (10,343) (3,093)
Prepaid expenses and other current assets (7,177) (268) (454)
Accounts payable (2,959) 2,622 2,132
Accrued liabilities (1,602) 4,938 3,529
Income taxes payable (5,326) 7,578 3,383
---------- ---------- ----------
Cash provided by operating activities 29,282 32,150 16,518
---------- ---------- ----------
Cash flows from investing activities
Capital expenditures (8,010) (3,494) (2,492)
Purchases of investments, held-to-maturity -- (69,202) (51,785)
Purchases of investments, available-for-sale (233,171) (149,945) (85,724)
Maturities of investments, held-to-maturity -- 54,077 10,600
Maturities of investments, available-for-sale 225,932 128,790 50,925
Other assets (1,057) (427) 60
---------- ---------- ----------
Cash used in investing activities (16,306) (40,201) (78,416)
---------- ---------- ----------
Cash flows from financing activities
Short-term borrowings (162) 1,952 --
Sales of common stock, net of issuance costs 1,315 5,755 47,536
Purchase of treasury stock (9,751) -- --
---------- ---------- ----------
Cash provided by (used in) financing activities (8,598) 7,707 47,536
---------- ---------- ----------
Effect of exchange rate changes (33) (207) --
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 4,345 (551) (14,362)
Cash and cash equivalents at beginning of year 6,796 7,347 21,709
---------- ---------- ----------
Cash and cash equivalents at end of year $ 11,141 $ 6,796 $ 7,347
---------- ---------- ----------
Supplemental cash flow disclosure:
Cash paid during the year for income taxes $ 18,916 $ 15,145 $ 9,266
Other noncash changes:
Income tax benefits from employee stock plans $ 83 $ 3,889 $ 1,386
</TABLE>
See the accompanying notes to consolidated financial statements.
31
<PAGE> 9
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the domestic and
foreign business operations of the Company for all periods. Intercompany
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements. Actual results could
differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with minimum yield risks and
maturities of less than 90 days from the date of purchase to be cash
equivalents.
Investments
The Company invests its excess cash in high-quality debt and equity instruments.
Management determines the appropriate classification of the debt securities at
the time of purchase as either held-to-maturity or available-for-sale and
re-evaluates such designation as of each balance sheet date.
Available-for-sale securities are stated at fair market value, with unrealized
gains and losses, net of tax, reported in a separate component of stockholders'
equity.
Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization, as well as any interest on the securities, is included in interest
income.
On November 15, 1995, the FASB staff issued a Special Report, A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities. In accordance with the provisions in that Special Report,
the Company chose to reclassify its debt securities from held-to-maturity to
available-for-sale. At the date of transfer, the amortized cost of those
securities was $111,352,000 and the unrealized gain on those securities was
$96,000, which is included in stockholders' equity.
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are provided using
the straight-line method over the estimated useful lives (three to ten years) of
assets. Leasehold improvements are amortized over the life of the related assets
or the life of the lease, whichever is shorter.
Revenue Recognition
Revenues are recognized as products are shipped and services rendered.
Warranty
The Company generally warrants its products for a period of up to 12 months from
shipment for material and labor to repair the product; accordingly, a provision
for the estimated cost of the warranty is recorded upon shipment.
Engineering, Research and Development Expenses
The Company is actively engaged in basic technology and applied research
programs designed to develop new products and product applications. In addition,
substantial ongoing product and process improvement engineering and support
programs relating to existing products are conducted within engineering
departments. Engineering, research and development costs are charged to
operations as incurred.
Foreign Currency Accounting
The U.S. dollar is the functional currency for all foreign operations, excluding
Japan. Gains or losses that result from the process of remeasuring foreign
currency financial statements into U.S. dollars are immaterial and included in
operations.
The Japanese Yen is the functional currency for the Company's Japanese
subsidiary. Translation gains or losses related to the Japanese subsidiary are
included as a component of stockholders' equity.
32
<PAGE> 10
Net Income Per Share
Net income per share is computed using the weighted average number of common
shares and common stock equivalents using the treasury stock method.
Reclassification
During the year, the Company reclassified certain demonstration equipment from
inventory to fixed assets and other assets to more appropriately reflect the use
of such equipment. For comparative purposes, amounts in prior years have been
reclassified to conform to current-year presentations.
2. Financial Instruments
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of
credit risk consist principally of cash equivalents, investments and trade
receivables.
The Company places its cash equivalents and investments with high credit-quality
financial institutions. The Company invests its excess cash in commercial paper,
readily marketable debt and equity instruments and collateralized funds of U.S.
and state government entities. The Company has established guidelines relative
to credit ratings, diversification and maturities that seek to maintain safety
and liquidity.
The Company sells its systems to semiconductor manufacturers throughout the
world. The Company performs ongoing credit evaluations of its customers'
financial condition and requires collateral, such as letters of credit, whenever
deemed necessary. The write-off of uncollectable amounts has been insignificant.
Fair Value of Financial Instruments
The Company has evaluated the estimated fair value of financial instruments. The
amounts reported for cash and cash equivalents, accounts receivable, short-term
borrowings, accounts payable and accrued expenses approximate the fair value due
to their short maturities. Investment securities are reported at their estimated
fair value based on quoted market prices.
Investments
The following is a summary of the Company's investments:
At December 31, 1996:
<TABLE>
<CAPTION>
Available-for-Sale
- --------------------------------------------------------------------------------------------------
Amortized Gross Gross Estimated
Cost Unrealized Unrealized Fair
(in thousands) Gains Losses Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal bonds $ 78,309 $ 125 $ (10) $ 78,424
Preferred stock 14,600 -- -- 14,600
Floating rate notes 24,914 23 -- 24,937
- --------------------------------------------------------------------------------------------------
$117,823 $ 148 $ (10) $117,961
- --------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1995:
<TABLE>
<CAPTION>
Available-for-Sale
- --------------------------------------------------------------------------------------------------
Amortized Gross Gross Estimated
Cost Unrealized Unrealized Fair
(in thousands) Gains Losses Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal bonds $ 55,404 $ 115 $ (20) $ 55,499
Preferred stock 22,298 1 -- 22,299
Floating rate notes 33,650 -- -- 33,650
- --------------------------------------------------------------------------------------------------
$111,352 $ 116 $ (20) $111,448
- --------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE> 11
The following is a summary of amortized costs and estimated fair values of debt
and preferred stock securities, by contractual maturity:
At December 31, 1996:
<TABLE>
<CAPTION>
Available-for-Sale
- ------------------------------------------------------------------------------
Amortized Estimated
Cost Fair
(in thousands) Value
- ------------------------------------------------------------------------------
<S> <C> <C>
Amounts maturing within one year $ 78,127 $ 78,212
Amounts maturing after one year, within five years 25,096 25,149
Preferred stock 14,600 14,600
- ------------------------------------------------------------------------------
$117,823 $117,961
- ------------------------------------------------------------------------------
</TABLE>
3. Inventories
The following is a summary of inventories by major category at December 31:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 7,671 $ 12,360
Work in process 8,766 6,932
Finished goods 6,141 3,142
- --------------------------------------------------------------------------------------
$ 22,578 $ 22,434
- --------------------------------------------------------------------------------------
</TABLE>
4. Equipment and Leasehold Improvements
The following is a summary of equipment and leasehold improvements by major
categories at December 31:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
Equipment $ 15,989 $ 13,803
Leasehold improvements 6,091 3,206
Office furniture and equipment 3,871 1,158
- --------------------------------------------------------------------------------------
25,951 18,167
- --------------------------------------------------------------------------------------
Accumulated depreciation and amortization (15,767) (13,101)
- --------------------------------------------------------------------------------------
$ 10,184 $ 5,066
- --------------------------------------------------------------------------------------
</TABLE>
5. Accrued Liabilities
The following is a summary of accrued liabilities at December 31:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
Salaries and benefits $ 5,546 $ 9,131
Warranty reserves 6,078 4,980
Deferred revenue 2,363 1,121
Other 3,074 3,431
- --------------------------------------------------------------------------------------
$ 17,061 $ 18,663
- --------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 12
6. Short-term Borrowings
The Company's Japanese subsidiary has credit facilities with a total borrowing
capacity of approximately $5,250,000 (denominated in Yen) with Japanese banks.
One of the facilities is guaranteed by a $1,000,000 standby letter of credit
issued by the Company. As of December 31, 1996, the aggregate amount outstanding
was $1,790,000, denominated in Yen, renewable quarterly at the current bank
interest rate plus .25% per annum (1.625% at December 31, 1996).
7. Stockholders' Equity
Preferred Stock
The Board of Directors has the authority, without any further vote or action by
the stockholders, to provide for the issuance of 1,000,000 shares of preferred
stock from time to time in one or more series with such designations, rights,
preferences and limitations as the Board of Directors may determine, including
the consideration received therefore, the number of shares comprising each
series, dividend rates, redemption provisions, liquidation preferences,
redemption fund provisions, conversion rights and voting rights, all without the
approval of the holders of common stock.
Stock Repurchase Program
On March 14, 1996, the Board of Directors authorized the repurchase of up to
1,000,000 shares of the Company's common stock on the open market. During the
year, the Company repurchased 674,000 shares of its common stock at a cost of
$9,751,000.
Stock Option Plan
Under the Company's 1993 Long Term Stock Incentive Plan, as amended, 3,000,000
shares have been reserved for issuance to eligible employees and to provide for
certain automatic grants of stock options to non-employee directors. Options
under this plan are granted at fair market value, expire ten years from the date
of grant, and generally vest in quarterly installments, commencing one year from
the date of grant.
The following table summarizes option activity and related information:
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
Options Weighted Options Weighted Options Weighted
Average Average Average
(in thousands except per Exercise Exercise Exercise
share amounts) Price Price Price
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning of year 1,210 $19.53 1,099 $11.15 1,159 $ 8.29
Granted 1,548 13.99 623 26.18 325 17.66
Exercised (38) 11.09 (502) 9.56 (355) 8.00
Canceled (1,010) 22.60 (10) 14.23 (30) 8.43
------ ----- -----
Outstanding--end of year 1,710 $13.69 1,210 $19.53 1,099 $11.15
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about outstanding options at December
31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------------------
(in thousands except Outstanding Weighted Weighted Exercisable Weighted
per share amounts) Average Remaining Average Average
Range of Exercise Prices Contractual Life Exercise Price Exercise Price
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 8.00-$10.38 273 6.50 $ 8.01 273 $ 8.01
$12.25-$18.00 1,332 8.58 $14.13 208 $14.24
$18.63-$31.50 105 3.94 $23.05 63 $23.16
----- ---
1,710 544
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
In addition, the Company issued 100,000 shares of restricted stock under the
1993 Long Term Stock Incentive Plan. The Company has recorded a deferred
compensation charge equal to the fair value of the restricted stock at the time
of issuance of $1,425,000. The deferred compensation charge will be amortized
over the five-year vesting period.
On July 1, 1996, the Company repriced 932,370 employee stock options to $14.25,
the closing value at June 28, 1996.
Employee Stock Purchase Plan
The Company's 1993 Employee Stock Purchase Plan (ESPP) provides that eligible
employees may purchase stock at 85% of its fair value on specified dates through
payroll deductions. Under the Plan, the Company sold 55,102 shares, 67,706
shares and 56,198 shares to employees in 1996, 1995 and 1994, respectively.
35
<PAGE> 13
Stock-Based Compensation
As permitted under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (FAS No. 123), the Company has elected
to follow Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), in accounting for stock-based awards to employees.
Under APB 25, the Company generally recognizes no compensation expense with
respect to such awards.
Pro forma information regarding net income and earnings per share is required by
FAS No. 123 for awards granted after December 31, 1994 as if the Company had
accounted for its stock-based awards to employees under the fair value method of
FAS No. 123. The fair value of the Company's stock-based awards to employees was
estimated using a Black-Scholes option pricing model. The Black-Scholes option
pricing model was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. In
addition, option pricing models require the input of highly subjective
assumptions, including the expected volatility of the Company's stock price.
Because the Company's stock-based awards to employees have characteristics
significantly different from those of traded options, and because changes in
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock-based awards to employees.
The fair value of the Company's stock-based awards to employees was estimated
using the following assumptions:
<TABLE>
<CAPTION>
Options ESPP
1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Expected dividend yield 0.0 0.0 0.0 0.0
Expected stock price volatility 0.49 0.49 0.49 0.49
Risk-free interest rate 5.84 6.66 5.63 6.22
Expected life (years) 4.0 4.0 0.5 0.5
- --------------------------------------------------------------------------------------------------------
</TABLE>
For pro forma purposes, the estimated fair value of the Company's stock-based
awards to employees is amortized over the options' vesting period (for options)
and the six-month purchase period (for stock purchases under the ESPP). The
Company's pro forma information follows:
<TABLE>
<CAPTION>
(in thousands except per share amounts) 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income--as reported $ 24,459 $ 37,097
Net income--pro forma 20,655 35,278
Earnings per share--as reported 1.36 2.05
Earnings per share--pro forma 1.16 1.96
- --------------------------------------------------------------------------------------------------
</TABLE>
For pro forma purposes in accordance with FAS No. 123, the repricing of employee
stock options during 1996 is treated as a modification of the stock-based award,
with the original options being repurchased and new options granted. Any
additional compensation arising from the modification is recognized over the
remaining vesting period of the new grant. FAS No. 123 is effective for
stock-based awards granted by the Company commencing January 1, 1995. All
stock-based awards granted before January 1, 1995, have not been valued and no
pro forma compensation expense has been recognized. However, any option granted
before January 1, 1995 that was repriced in 1996 is treated as a new grant
within 1996 and valued accordingly. In addition, because compensation expense is
recognized over the vesting period of the option, which is typically three
years, and pro forma disclosure is only required commencing with 1995, the
initial impact on pro forma income may not be representative of pro forma
compensation expense in future years.
The weighted average fair value of options and stock purchase rights granted
during 1996 was $5.67 and $5.14, respectively.
Incentive Plans
The Company has adopted an Employee Incentive Plan and a Savings Plan covering
substantially all of its United States-resident employees. The Board of
Directors determines annually a formula for setting aside amounts into a profit
sharing pool based upon performance targets. The amounts set aside are applied
to fund the matching Company contribution feature of the Savings Plan and to pay
current bonuses to employees. The charge to income for these plans during 1996,
1995 and 1994 was $1,249,000, $5,930,000 and $3,853,000, respectively.
36
<PAGE> 14
8. Income Taxes
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands)
Federal:
Current $ 5,012 $ 18,000 $ 8,796
Deferred 1,602 (2,678) 1,513
- -----------------------------------------------------------------------------------------------------
6,614 15,322 10,309
State:
Current 227 3,064 2,261
Deferred 916 881 (983)
- -----------------------------------------------------------------------------------------------------
1,143 3,945 1,278
Foreign current 1,485 1,150 1,455
- -----------------------------------------------------------------------------------------------------
Total provision for income taxes $ 9,242 $ 20,417 $ 13,042
- -----------------------------------------------------------------------------------------------------
</TABLE>
The tax benefits associated with exercises of nonqualified stock options and
disqualifying dispositions of stock acquired through the employee stock purchase
plan reduce taxes currently payable for 1996, 1995 and 1994, as shown above by
$83,000, $3,889,000 and $1,386,000, respectively. Such benefits are credited to
additional paid-in capital when realized.
The reconciliation of income tax computed at the U.S. federal statutory rates to
income tax expense is as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
(in thousands) Amount Percent Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax computed at U.S. statutory rate $ 11,795 35.0% $ 20,130 35.0% $ 12,382 35.0%
State income taxes (net of federal benefit) 743 2.2 2,565 4.5 1,772 5.0
Tax exempt investment income (1,532) (4.6) (1,250) (2.2) (472) (1.3)
Impact of law changes (net of federal benefit) -- -- -- -- (941) (2.7)
R&D credit (1,564) (4.6) (55) (0.1) (17) --
Tax exempt foreign sales corporation (622) (1.9) (1,095) (1.9) (597) (1.7)
Other, net 422 1.3 122 0.2 915 2.6
- ---------------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 9,242 27.4% $ 20,417 35.5% $ 13,042 36.9%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The following is a
summary of the deferred tax accounts at December 31:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Warranty reserves $ 2,244 $ 1,841
Inventories 1,809 1,673
Intangible assets 1,864 4,140
Depreciable assets 797 666
Deferred revenue 904 436
Other, including nondeductible accruals 2,068 3,448
- --------------------------------------------------------------------------------------------------
Total deferred tax assets $ 9,686 $ 12,204
- --------------------------------------------------------------------------------------------------
</TABLE>
Management has concluded that no valuation allowance is required based on its
assessment that current levels of taxable income will be sufficient to realize
the benefit of the deferred tax asset.
9. Industry and Geographic Information
The Company operates in one industry segment: the manufacture, sale and
servicing of wafer probers for use in the manufacture of semiconductor devices.
The Company's principal markets are the North American-, European- and
Asian-based semiconductor manufacturing companies.
In 1996 and 1994, one customer comprised 13% of net sales. In 1994, a second
customer comprised 12% of net sales. No other customer exceeded 10% of net sales
in 1996 and 1994. No single customer accounted for more than 10% of net sales in
1995.
International sales represented 45%, 45% and 47% of the Company's net sales in
1996, 1995 and 1994, respectively. These sales represent the combined total of
export sales made by United States operations and all sales made by foreign
operations.
Export sales made by United States operations were 19% of net sales in 1996 (18%
to Asia, 1% to other), 22% of net sales in 1995 (21% to Asia, 1% to other) and
24% of net sales in 1994 (21% to Asia, 3% to other).
37
<PAGE> 15
The following is a summary of the Company's geographic operations:
<TABLE>
<CAPTION>
United Asia Europe Adjustment Consolidated
States and
(in thousands) Eliminations
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Sales to unaffiliated customers $ 112,216 $ 7,844 $ 31,890 $ -- $ 151,950
Transfer between geographic locations 27,057 87 -- (27,144) --
---------------------------------------------------------------------
Total net sales $ 139,273 $ 7,931 $ 31,890 $ (27,144) $ 151,950
Operating income (loss) $ 28,402 $ (4,582) $ 4,827 $ 207 $ 28,854
Identifiable assets $ 187,135 $ 2,741 $ 8,597 $ (607) $ 197,866
- ---------------------------------------------------------------------------------------------------------------------
1995
Sales to unaffiliated customers $ 131,351 $ 9,509 $ 28,380 $ -- $ 169,240
Transfer between geographic locations 25,287 95 -- (25,382) --
---------------------------------------------------------------------
Total net sales $ 156,638 $ 9,604 $ 28,380 $ (25,382) $ 169,240
Operating income (loss) $ 52,205 $ (2,877) $ 4,185 $ (210) $ 53,303
Identifiable assets $ 175,967 $ 3,969 $ 12,619 $ (814) $ 191,741
- ---------------------------------------------------------------------------------------------------------------------
1994
Sales to unaffiliated customers $ 86,878 $ 4,203 $ 21,238 $ -- $ 112,319
Transfer between geographic locations 16,435 16 -- (16,451) --
---------------------------------------------------------------------
Total net sales $ 103,313 $ 4,219 $ 21,238 $ (16,451) $ 112,319
Operating income (loss) $ 31,587 $ (2,483) $ 3,661 $ (265) $ 32,500
Identifiable assets $ 120,048 $ 3,647 $ 8,810 $ (604) $ 131,901
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Sales between geographic areas are accounted for at prices that the Company
believes are at-arm's-length prices.
10. Commitments
The Company leases its facilities and certain equipment under noncancelable
operating leases. As of December 31, 1996, the minimum annual rental commitments
are as follows:
<TABLE>
<CAPTION>
(in thousands)
- -----------------------------------------------------------------------
<S> <C>
1997 $2,623
1998 2,228
1999 1,846
2000 1,020
2001 558
Thereafter 418
- -----------------------------------------------------------------------
$8,693
- -----------------------------------------------------------------------
</TABLE>
Rent expense was approximately $2,616,000, $2,021,000 and $1,690,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
11. Subsequent Events
In March 1997, the Company entered into an agreement to lease land with an
investment value of $12 million, which, if consummated, will result in an
increase in future operating lease commitments.
In March 1997, the Company entered into an agreement, whereby, if consummated,
the Company will purchase Knights Technology for approximately $30 million in
common stock and cash. The acquisition will be accounted for by the purchase
method.
38
<PAGE> 16
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Electroglas, Inc.
We have audited the accompanying consolidated balance sheets of Electroglas,
Inc. as of December 31, 1996 and 1995, and the related consolidated statements
of income and stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Electroglas, Inc.
at December 31, 1996 and 1995, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
San Jose, California
January 21, 1997, except for Note 11,
as to which the date is March 12, 1997
Corporate Directory
Board of Directors Conor P. O'Mahony
Class III VP of Global Customer Operations
Neil R. Bonke
Chairman Joseph A. Savarese
ELECTROGLAS, INC. VP of Business Development
Class III Phillip M. Truckle
Curtis S. Wozniak VP of Marketing
CEO
ELECTROGLAS, INC. Daniel D. Welton
VP of Manufacturing
Class II
Robert J. Frankenberg Joe M. Reid, Jr.
Chairman and CEO (retired) Director of Quality
NOVELL, INC.
Corporate Office
Class II Electroglas, Inc.
Roger D. Emerick 2901 Coronado Drive
Chairman and CEO Santa Clara, California
LAM RESEARCH CORP. (408) 727-6500
Class I
Joseph F. Dox United States Offices
President and COO (retired) Arizona
NOVELLUS SYSTEMS, INC. California
New Hampshire
Corporate Management Texas
Neil R. Bonke
Chairman
International Sales Offices
Curtis S. Wozniak France
CEO Germany
Hong Kong
Armand J. Stegall Japan
VP of Finance, CFO, Korea
Treasurer and Secretary People's Republic of China
Singapore
Timothy J. Boyle Taiwan
VP of Engineering United Kingdom
Stockholders' Information
General Legal Counsel
Morrison & Foerster LLP
Palo Alto, California
Independent Auditors
Ernst & Young LLP
San Jose, California
As of December 31, 1996, the Company had approximately 14,500
stockholders of record and holders in streetname. The Company's Common Stock is
traded on the Nasdaq National Market under the symbol "EGLS."
Registrar and Transfer Agent
Boston EquiServe LP
Boston, Massachusetts
Fiscal Year 1996 Fiscal Year 1995
---------------------- ----------------------
High Low High Low
------ ------ ------ ------
1st Quarter 25 3/4 14 3/8 24 3/8 13 5/8
2nd Quarter 22 1/2 13 3/4 29 7/8 19 3/4
3rd Quarter 15 1/4 12 40 1/4 27 3/8
4th Quarter 19 5/8 12 5/8 37 19 3/4
The preceding table sets forth the high and low sale prices as reported
on the Nasdaq National Market during the last two years.
The Company has never declared or paid cash dividends on its Common
Stock. The Company currently intends to retain all future income for use in the
operation of its business, and, therefore, does not anticipate paying any cash
dividends in the foreseeable future.
Additional copies of this report, as well as of SEC Form 10-K, for the
year ended December 31, 1996, may be obtained from the Company without charge
by writing to:
Electroglas, Inc.
Attn: Investor Relations
3045 Stender Way
Santa Clara, California 95054
The Electroglas logo and SORTnet are registered trademarks and Horizon
4090 is a trademark of Electroglas, Inc. Windows NT is a registered trademark
of Microsoft Corporation.
39
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Electroglas, Inc. of our report dated January 21, 1997 (except for Note 11,
as to which the date is March 12, 1997), included in the 1996 Annual Report to
Stockholders of Electroglas, Inc.
Our audits also included the financial statement schedule of Electroglas, Inc.
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-69668) pertaining to the 1993 Employee Stock Purchase Plan and 1993
Long-Term Stock Incentive Plan and the Registration Statement (Form S-8 No.
33-95052) pertaining to the 1993 Long-Term Stock Incentive Plan of Electroglas,
Inc. of our report dated January 21, 1997 (except for Note 11, as to which the
date is March 12, 1997), with respect to the consolidated financial statements
incorporated herein by reference, and our report included in the preceding
paragraph with respect to the financial statement schedule included in this
Annual Report (Form 10-K) of Electroglas, Inc.
/s/ Ernst & Young LLP
San Jose, California
March 19, 1997
40
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME, 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.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 11,141
<SECURITIES> 117,961
<RECEIVABLES> 16,868
<ALLOWANCES> 205
<INVENTORY> 22,578
<CURRENT-ASSETS> 183,591
<PP&E> 25,951
<DEPRECIATION> 15,767
<TOTAL-ASSETS> 197,866
<CURRENT-LIABILITIES> 24,215
<BONDS> 0
0
0
<COMMON> 182
<OTHER-SE> 173,469
<TOTAL-LIABILITY-AND-EQUITY> 197,866
<SALES> 151,950
<TOTAL-REVENUES> 151,950
<CGS> 79,666
<TOTAL-COSTS> 79,666
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38
<INCOME-PRETAX> 33,701
<INCOME-TAX> 9,242
<INCOME-CONTINUING> 24,459
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,459
<EPS-PRIMARY> 1.36
<EPS-DILUTED> 1.36
</TABLE>
